CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30,
2017
,
2016
and
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
47.0
|
|
|
$
|
11.3
|
|
|
$
|
58.7
|
|
Adjustments to reconcile net income to net cash provided from operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
117.8
|
|
|
119.3
|
|
|
122.3
|
|
Goodwill impairment charge
|
|
—
|
|
|
12.5
|
|
|
—
|
|
Non-cash excess inventory write-down
|
|
—
|
|
|
22.5
|
|
|
—
|
|
Non-cash restructuring and asset impairment charges
|
|
—
|
|
|
7.6
|
|
|
7.6
|
|
Deferred income taxes
|
|
41.6
|
|
|
0.8
|
|
|
60.4
|
|
Net pension expense
|
|
48.4
|
|
|
53.8
|
|
|
44.5
|
|
Payments from qualified pension plan associated with restructuring charges
|
|
—
|
|
|
9.4
|
|
|
8.3
|
|
Stock-based compensation expense
|
|
13.0
|
|
|
8.7
|
|
|
10.0
|
|
Net loss on disposal of property and equipment
|
|
2.5
|
|
|
0.6
|
|
|
1.2
|
|
Loss on divestiture of business
|
|
3.2
|
|
|
—
|
|
|
—
|
|
Changes in working capital and other:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(34.6
|
)
|
|
48.2
|
|
|
25.4
|
|
Inventories
|
|
(74.6
|
)
|
|
1.6
|
|
|
36.0
|
|
Other current assets
|
|
2.8
|
|
|
(2.1
|
)
|
|
(0.3
|
)
|
Accounts payable
|
|
42.5
|
|
|
(7.6
|
)
|
|
(59.9
|
)
|
Accrued liabilities
|
|
25.6
|
|
|
(14.0
|
)
|
|
(12.1
|
)
|
Pension plan contributions
|
|
(100.0
|
)
|
|
—
|
|
|
(7.2
|
)
|
Other postretirement plan contributions
|
|
(3.2
|
)
|
|
(13.0
|
)
|
|
(13.2
|
)
|
Other, net
|
|
(2.7
|
)
|
|
(2.7
|
)
|
|
0.9
|
|
Net cash provided from operating activities
|
|
129.3
|
|
|
256.9
|
|
|
282.6
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchases of property, equipment and software
|
|
(98.5
|
)
|
|
(95.2
|
)
|
|
(170.5
|
)
|
Proceeds from disposals of property and equipment and assets held for sale
|
|
2.5
|
|
|
1.4
|
|
|
0.2
|
|
Acquisition of business
|
|
(35.3
|
)
|
|
—
|
|
|
—
|
|
Proceeds from maturities of marketable securities
|
|
0.9
|
|
|
0.9
|
|
|
0.3
|
|
Net proceeds from divestiture of business
|
|
12.0
|
|
|
—
|
|
|
—
|
|
Proceeds from note receivable from the sale of equity method investment
|
|
6.3
|
|
|
—
|
|
|
—
|
|
Proceeds received from sale of equity method investment
|
|
—
|
|
|
6.3
|
|
|
—
|
|
Other
|
|
—
|
|
|
4.0
|
|
|
—
|
|
Net cash used for investing activities
|
|
(112.1
|
)
|
|
(82.6
|
)
|
|
(170.0
|
)
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Credit agreement borrowings
|
|
122.1
|
|
|
77.0
|
|
|
545.1
|
|
Credit agreement repayments
|
|
(122.1
|
)
|
|
(77.0
|
)
|
|
(545.1
|
)
|
Dividends paid
|
|
(34.1
|
)
|
|
(34.8
|
)
|
|
(37.9
|
)
|
Payments of debt issue costs
|
|
(1.4
|
)
|
|
—
|
|
|
—
|
|
Purchases of treasury stock
|
|
—
|
|
|
(123.9
|
)
|
|
(124.5
|
)
|
Payments on seller financed debt related to purchase of software
|
|
—
|
|
|
(4.9
|
)
|
|
—
|
|
Tax benefits on share-based compensation
|
|
0.5
|
|
|
—
|
|
|
0.7
|
|
Proceeds from stock options exercised
|
|
2.2
|
|
|
0.5
|
|
|
2.3
|
|
Net cash used for financing activities
|
|
(32.8
|
)
|
|
(163.1
|
)
|
|
(159.4
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(0.1
|
)
|
|
0.8
|
|
|
(3.2
|
)
|
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
(15.7
|
)
|
|
12.0
|
|
|
(50.0
|
)
|
Cash and cash equivalents at beginning of year
|
|
82.0
|
|
|
70.0
|
|
|
120.0
|
|
Cash and cash equivalents at end of year
|
|
$
|
66.3
|
|
|
$
|
82.0
|
|
|
$
|
70.0
|
|
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30,
2017
and
2016
|
|
|
|
|
|
|
|
|
|
($ in millions, except share data)
|
|
2017
|
|
2016
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66.3
|
|
|
$
|
82.0
|
|
Accounts receivable, net of allowance for doubtful accounts of $2.6 million and $4.1 million at June 30, 2017 and 2016, respectively
|
|
290.4
|
|
|
253.6
|
|
Inventories
|
|
690.4
|
|
|
628.7
|
|
Other current assets
|
|
46.5
|
|
|
46.4
|
|
Total current assets
|
|
1,093.6
|
|
|
1,010.7
|
|
Property, plant and equipment, net
|
|
1,316.8
|
|
|
1,351.4
|
|
Goodwill
|
|
263.4
|
|
|
244.8
|
|
Other intangibles, net
|
|
64.9
|
|
|
63.2
|
|
Deferred income taxes
|
|
7.6
|
|
|
8.2
|
|
Other assets
|
|
131.8
|
|
|
116.0
|
|
Total assets
|
|
$
|
2,878.1
|
|
|
$
|
2,794.3
|
|
LIABILITIES
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Current portion of long term debt
|
|
$
|
55.0
|
|
|
$
|
—
|
|
Accounts payable
|
|
201.1
|
|
|
159.6
|
|
Accrued liabilities
|
|
139.9
|
|
|
139.2
|
|
Total current liabilities
|
|
396.0
|
|
|
298.8
|
|
Long-term debt, net of current portion
|
|
550.0
|
|
|
611.3
|
|
Accrued pension liabilities
|
|
378.3
|
|
|
509.3
|
|
Accrued postretirement benefits
|
|
122.6
|
|
|
116.6
|
|
Deferred income taxes
|
|
184.8
|
|
|
102.4
|
|
Other liabilities
|
|
47.8
|
|
|
51.0
|
|
Total liabilities
|
|
1,679.5
|
|
|
1,689.4
|
|
|
|
|
|
|
Contingencies and commitments (see Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
Common stock — authorized 100,000,000 shares; issued 55,349,658 shares at June 30, 2017 and 55,254,569 shares at June 30, 2016; outstanding 46,753,180 shares at June 30, 2017 and 46,600,125 shares at June 30, 2016
|
|
276.7
|
|
|
276.3
|
|
Capital in excess of par value
|
|
284.8
|
|
|
273.5
|
|
Reinvested earnings
|
|
1,321.8
|
|
|
1,308.9
|
|
Common stock in treasury (8,596,478 shares and 8,654,444 shares at June 30, 2017 and 2016, respectively), at cost
|
|
(341.6
|
)
|
|
(343.9
|
)
|
Accumulated other comprehensive loss
|
|
(343.1
|
)
|
|
(409.9
|
)
|
Total equity
|
|
1,198.6
|
|
|
1,104.9
|
|
Total liabilities and equity
|
|
$
|
2,878.1
|
|
|
$
|
2,794.3
|
|
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended June 30,
2017
,
2016
and
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
($ in millions, except
per share data)
|
|
Par
Value
of $5
|
|
Capital in
Excess of
Par Value
|
|
Reinvested
Earnings
|
|
Common
Stock in
Treasury
|
Accumulated Other Comprehensive (Loss) Income
|
Total Equity
|
|
|
Balances at June 30, 2014
|
|
$
|
275.8
|
|
|
$
|
263.5
|
|
|
$
|
1,311.6
|
|
|
$
|
(101.4
|
)
|
|
$
|
(245.2
|
)
|
|
$
|
1,504.3
|
|
|
Net income
|
|
|
|
|
|
|
|
58.7
|
|
|
|
|
|
|
|
|
58.7
|
|
|
Pension and postretirement benefits loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.1
|
)
|
|
(20.1
|
)
|
|
Net loss on derivative instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36.1
|
)
|
|
(36.1
|
)
|
|
Unrealized gain on marketable securities, net of tax
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
0.1
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26.9
|
)
|
|
(26.9
|
)
|
|
Cash Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.72 per share
|
|
|
|
|
|
|
|
(37.9
|
)
|
|
|
|
|
|
|
|
(37.9
|
)
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
(124.5
|
)
|
|
|
|
(124.5
|
)
|
|
Share-based compensation plans
|
|
|
|
|
2.1
|
|
|
|
|
|
4.8
|
|
|
|
|
|
6.9
|
|
|
Stock options exercised
|
|
0.4
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
2.3
|
|
|
Tax shortfall on share-based compensation
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
Balances at June 30, 2015
|
|
276.2
|
|
|
266.6
|
|
|
1,332.4
|
|
|
(221.1
|
)
|
|
(328.2
|
)
|
|
1,325.9
|
|
|
Net income
|
|
|
|
|
|
|
|
11.3
|
|
|
|
|
|
|
|
|
11.3
|
|
|
Pension and postretirement benefits loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87.5
|
)
|
|
(87.5
|
)
|
|
Net gain on derivative instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.7
|
|
|
6.7
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
(0.9
|
)
|
|
Cash Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.72 per share
|
|
|
|
|
|
|
|
(34.8
|
)
|
|
|
|
|
|
|
|
(34.8
|
)
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(123.9
|
)
|
|
|
|
|
(123.9
|
)
|
|
Share-based compensation plans
|
|
|
|
|
7.7
|
|
|
|
|
|
1.1
|
|
|
|
|
|
8.8
|
|
|
Stock options exercised
|
|
0.1
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
|
Tax shortfall on share-based compensation
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.2
|
)
|
|
Balances at June 30, 2016
|
|
276.3
|
|
|
273.5
|
|
|
1,308.9
|
|
|
(343.9
|
)
|
|
(409.9
|
)
|
|
1,104.9
|
|
|
Net income
|
|
|
|
|
|
|
|
47.0
|
|
|
|
|
|
|
|
|
47.0
|
|
|
Pension and postretirement benefits gain, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45.3
|
|
|
45.3
|
|
|
Net gain on derivative instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.5
|
|
|
19.5
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
2.0
|
|
|
Cash Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.72 per share
|
|
|
|
|
|
|
|
(34.1
|
)
|
|
|
|
|
|
|
|
(34.1
|
)
|
|
Share-based compensation plans
|
|
|
|
|
10.4
|
|
|
|
|
|
2.3
|
|
|
|
|
|
12.7
|
|
|
Stock options exercised
|
|
0.4
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
Tax shortfall on share-based compensation
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
Balances at June 30, 2017
|
|
$
|
276.7
|
|
|
$
|
284.8
|
|
|
$
|
1,321.8
|
|
|
$
|
(341.6
|
)
|
|
$
|
(343.1
|
)
|
|
$
|
1,198.6
|
|
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
For the Years Ended June 30, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Issued
|
|
Treasury
|
|
Net Outstanding
|
Balances at June 30, 2014
|
|
55,161,875
|
|
|
(2,024,731
|
)
|
|
53,137,144
|
|
Purchases of treasury stock
|
|
—
|
|
|
(2,995,272
|
)
|
|
(2,995,272
|
)
|
Stock options exercised
|
|
73,067
|
|
|
—
|
|
|
73,067
|
|
Share-based compensation plans
|
|
—
|
|
|
103,305
|
|
|
103,305
|
|
Balances at June 30, 2015
|
|
55,234,942
|
|
|
(4,916,698
|
)
|
|
50,318,244
|
|
Purchases of treasury stock
|
|
—
|
|
|
(3,762,200
|
)
|
|
(3,762,200
|
)
|
Stock options exercised
|
|
19,627
|
|
|
—
|
|
|
19,627
|
|
Share-based compensation plans
|
|
—
|
|
|
24,454
|
|
|
24,454
|
|
Balances at June 30, 2016
|
|
55,254,569
|
|
|
(8,654,444
|
)
|
|
46,600,125
|
|
Stock options exercised
|
|
95,089
|
|
|
—
|
|
|
95,089
|
|
Share-based compensation plans
|
|
—
|
|
|
57,966
|
|
|
57,966
|
|
Balances at June 30, 2017
|
|
55,349,658
|
|
|
(8,596,478
|
)
|
|
46,753,180
|
|
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions are eliminated. Investments in companies in which the Company exercises significant influence, but which it does not control (generally a
20
to
50 percent
ownership interest), are accounted for by the equity method of accounting and the Company’s share of their income or loss is included in other income(expense), net in the consolidated statements of income. During fiscal year 2016, the Company sold its only equity method investment in exchange for
$6.3 million
in cash and
$12.6 million
in a note receivable. During fiscal year 2017 the Company received
$6.3 million
related to the note receivable.
Revenue Recognition
Revenue, net of related discounts, rebates, returns and allowances of
$23.8 million
,
$29.8 million
and
$27.4 million
for the years ended
June 30, 2017
,
2016
and
2015
, respectively, is recognized when persuasive evidence of arrangement exists, title and risk of loss has transferred to the customer, collectability is reasonably assured and pricing is fixed and determinable. These criteria are generally met upon shipment or delivery of the product based on the applicable shipping terms. Shipping terms may vary for products shipped outside the United States depending on the mode of transportation, the country where the material is shipped and any agreements made with the customers.
Freight and Handling Fees and Costs
Freight and handling costs billed separately to customers are included as part of net sales, and freight and handling costs expensed are included as part of cost of sales on the consolidated statements of income.
Research and Development
Research and development expenditures, which amounted to
$16.9 million
,
$16.3 million
and
$18.7 million
in fiscal years
2017
,
2016
and
2015
, respectively, are expensed as incurred and are generally reported in cost of sales in the consolidated statements of income. The research and development expenditures consist principally of salaries and benefits, building costs, utilities and administrative expenses. Substantially all development costs are related to developing new products or designing significant improvements to existing products or processes.
Cash Equivalents
Cash equivalents consist of highly liquid instruments with original maturities of three months or less. Cash equivalents are stated at cost, which approximates market.
Accounts Receivable
Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of outstanding amounts. Trade credit is extended based upon periodic evaluation of each customer’s ability to perform its obligations. The Company determines accounts receivable allowances based on an aging of accounts and a review of specific accounts identified as collection risks. The Company does not require collateral to secure accounts receivable.
Inventories
Inventories are valued at the lower of cost or market. Cost for inventories is principally determined by the LIFO method.
The Company also uses the FIFO and average cost methods. As of June 30, 2017 and 2016,
$107.3 million
and
$118.4 million
of inventory, respectively, was accounted for using a method other than the LIFO method.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment and Depreciation
Fixed assets are stated at historical cost less accumulated depreciation. Depreciation for financial reporting purposes is computed by the straight-line method over the estimated useful lives of the assets. Depreciation for income tax purposes is computed using accelerated methods. Upon disposal, assets and related depreciation are removed from the accounts and the differences between the net amounts and proceeds from disposal are generally included in cost of goods sold in the consolidated statement of income.
Computer Software and Amortization
Computer software is included in other assets on the consolidated balance sheet, and is amortized for financial reporting purposes on a straight-line basis over the respective estimated useful lives ranging from
3
to
15
years. Amortization expense charged to operations related to capitalized software amounted to
$5.2 million
,
$5.5 million
and
$6.1 million
for the years ended
June 30, 2017
,
2016
and
2015
, respectively. The carrying value of computer software net of accumulated amortization at June 30, 2017 and 2016 was
$71.0 million
and
$49.3 million
, respectively.
Goodwill
Goodwill, net of accumulated impairment losses, representing the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses, is stated at cost. Goodwill is not amortized but instead is annually tested for impairment (in the fourth quarter), or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. Such events or circumstances include a decline in general economic conditions, adverse changes in the industry and markets, poor financial performance effecting earnings and cash flows and a trend of negative or declining cash flows over multiple periods. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value, including goodwill. The fair value is estimated using discounted cash flows and the use of market multiples valuation techniques. These valuation techniques require the use of estimates and assumptions related to projected operating results, capital expenditures and working capital levels as well as the cost of capital. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting unit’s goodwill to its implied fair value.
Intangible assets
The costs of intangible assets, consisting principally of trademarks, trade names, non-compete arrangements, technology and customer relationships are amortized on a straight-line basis over the estimated useful lives ranging from
5
to
30
years.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment and intangible assets, subject to amortization 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 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 discounted future cash flows.
Environmental Expenditures
Environmental expenditures that pertain to current operations or to future revenues are expensed or capitalized consistent with the Company’s capitalization policy for property, plant and equipment. Expenditures that result from the remediation of an existing condition caused by past operations and that do not contribute to current or future revenues are expensed. Liabilities are recognized for remedial activities when the remediation is probable and the cost can be reasonably estimated. Most estimated liabilities are not discounted to present value due to the uncertainty as to the timing and duration of expected costs. For
one
former operating facility site, due to the routine nature of the expected costs, the liability for future costs is discounted to present value over
20
years assuming a discount rate of approximately
3 percent
as of June 30, 2017 and 2016. The liabilities, net of present value discount, for this former operating site were
$11.0 million
and
$10.9 million
, as of
June 30,
2017
and
2016
, respectively.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Financial Instruments
All derivative financial instruments are recorded on the balance sheet at their fair value and changes in fair value are recorded each period in current earnings or other comprehensive income. The Company enters into derivative financial instruments to hedge certain anticipated transactions, firm commitments or assets and liabilities denominated in foreign currencies. In addition, the Company utilizes interest rate swaps to convert fixed rate debt to floating rate.
At least quarterly, the Company determines hedge effectiveness utilizing regression analysis for measuring the probable high correlation of the expected future cash flows of the hedged item and the derivative hedging instrument. The ineffective portion of hedges is immediately recorded in the consolidated statement of income. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, future gains or losses on the derivative instrument are recorded in the consolidated statement of income.
Foreign Currency Translation
Assets and liabilities of most international operations are translated into U.S. dollars at exchange rates in effect at year-end, and their income statements are translated at the average monthly exchange rates prevailing during the year. The resulting translation gains and losses are recorded each period as a component of accumulated other comprehensive (loss) income until the international entity is sold or liquidated. Gains and losses from transactions denominated in foreign currencies are reported in other income (expense), net in the consolidated statement of income.
Income Taxes
Deferred income taxes are recognized by applying enacted statutory tax rates, applicable to future years, to temporary differences between the tax bases and financial statement carrying values of the Company’s assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets to amounts that are more likely than not to be realized.
Significant judgments, estimates and assumptions are required in determining tax return reporting positions and in calculating provisions for income tax, which are based on interpretations of tax regulations and accounting pronouncements. Liabilities are established for uncertain tax positions when it is more likely than not that such positions, if challenged, would not be sustained upon review by taxing authorities. These liabilities are re-evaluated as tax regulations and facts and circumstances change, such as the closing of a tax audit or the expiration of the statute of limitations for a specific exposure.
Earnings per Share
The Company calculates basic and diluted earnings per share using the
two
class method. Under the two class method, earnings are allocated to common stock and participating securities (restricted stock units that receive non-forfeitable dividends) according to their participation rights in dividends and undistributed earnings. The earnings available to each class of stock are divided by the weighted average number of shares for the period in each class. Diluted earnings per share assume the issuance of common stock for all potentially dilutive share equivalents outstanding.
Concentration of Credit Risk
Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and cash equivalents, investments in marketable securities and trade receivables. Investment and cash management policies have been implemented that limit deposit concentrations and limit investments to investment grade securities. The risk with respect to trade receivables is mitigated by monitoring payment terms and periodic credit evaluations we perform on our customers, the short duration of our payment terms and by the diversification of our customer base. During fiscal year 2017 and 2016, one customer, Arconic, Inc., accounted for approximately
11 percent
and
13 percent
, respectively, of total net sales. No single customer accounted for 10 percent or more of total net sales during fiscal year 2015. No single customer accounted for
10 percent
or more of accounts receivable outstanding at June 30, 2017. Approximately
22 percent
of the accounts receivable outstanding at June 30, 2016 was due from two customers, Alcoa Inc. and Precision Castparts Corporation.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of 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.
Reclassifications
The Company changed the presentation of borrowings and repayments made under the credit agreement in the consolidated statements of cash flows. Prior year amounts have been reclassified to conform to fiscal year 2017 presentation.
2.
Acquisition and Divestiture
On February 28, 2017, the Company acquired substantially all the assets of Puris LLC (“Puris”), for a cash purchase price of
$35.3 million
. The acquisition provides the Company with immediate entry into the rapidly growing titanium powder market, an expanded presence in additive manufacturing and strengthens the Company’s capabilities as a solutions provider for customers across its end-use markets. The purchase price allocation was completed in the fourth quarter of fiscal year 2017 and resulted in the purchase price being allocated to
$1.7 million
of working capital,
$6.5 million
of property and equipment,
$8.5 million
of identifiable intangible assets and
$18.6 million
of goodwill.
On June 29, 2017, the Company divested the Specialty Steel Supply (“SSS”) business. The divestiture was completed in
two
separate transactions for total cash proceeds of
$12.0 million
. In connection with the divestiture, the Company recorded a pretax loss of
$3.2 million
. The operations of the SSS business were historically included in our Performance Engineered Products (“PEP”) segment. The Company does not have any significant continuing involvement in the operations of SSS after the divestiture.
|
|
3
.
|
Restructuring Charges and Asset Impairment Charges
|
There were
no
restructuring or asset impairment charges during fiscal year 2017. Restructuring and asset impairment charges for the years ended June 30, 2016 and 2015 were
$18.0 million
and
$29.1 million
, respectively.
Fiscal Year 2016
During the year ended June 30, 2016, the Company recorded
$10.4 million
of pre-tax charges, consisting of
$9.4 million
associated with an early retirement incentive funded by the Company’s qualified pension plan,
$0.7 million
of other severance costs paid by the Company in fiscal year 2016 and
$0.3 million
of other severance related costs paid by the Company in fiscal year 2017. At this time, the Company does not expect any additional charges related to these restructuring actions in the future.
As a result of the prolonged weakness in oil and gas drilling and exploration activities and the impact this weakness had on certain reporting units in the PEP segment, the Company recognized non-cash impairment pre-tax charges of
$7.6 million
on certain long-lived assets, including
$6.5 million
related to property, plant and equipment and
$1.1 million
associated with certain definite lived intangible assets during the year ended June 30, 2016.
Fiscal Year 2015
In fiscal year 2015, the Company implemented a restructuring plan aimed at reducing fixed costs by approximately
$30 million
annually across the Company. In connection with this restructuring plan, the Company recorded a pre-tax charge of
$12.7 million
during the year ended June 30, 2015 consisting primarily of various personnel-related costs for severance payments, medical coverage and related items. Of this charge,
$2.5 million
was paid by the Company in fiscal year 2015,
$8.3 million
was paid from the Company’s qualified pension plan in fiscal year 2015,
$0.4 million
was recorded as non-cash forfeiture income related to stock-based compensation in fiscal year 2015 and the remaining balance was paid by the Company in fiscal year 2016.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded a pre-tax charge of
$13.4 million
during the year ended June 30, 2015 to exit a materials development program. This includes an
$8.0 million
cash payment during the year ended June 30, 2015 to exit a licensing agreement and non-cash asset impairment charges totaling
$5.4 million
.
The Company recorded a pre-tax charge of
$3.0 million
during the year ended June 30, 2015 to reflect site closure costs consisting of
$0.4 million
cash payments and
$2.6 million
non-cash write-downs of inventory, property and equipment and related items.
Activity and reserve balances for restructuring charges at June 30, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
Reserve balance beginning of year
|
|
$
|
0.3
|
|
|
$
|
2.3
|
|
Restructuring charges and asset impairment charges
|
|
—
|
|
|
18.0
|
|
Cash payments
|
|
(0.3
|
)
|
|
(3.0
|
)
|
Payments from qualified pension plan associated with restructuring charges
|
|
—
|
|
|
(9.4
|
)
|
Non-cash asset impairment charges and other
|
|
—
|
|
|
(7.6
|
)
|
Reserve balance end of year
|
|
$
|
—
|
|
|
$
|
0.3
|
|
4.
Earnings per Common Share
The calculations of basic and diluted earnings from continuing operations per common share for the years ended
June 30, 2017
,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
(in millions, except per share data)
|
|
2017
|
|
2016
|
|
2015
|
Net income
|
|
$
|
47.0
|
|
|
$
|
11.3
|
|
|
$
|
58.7
|
|
Less: earnings and dividends allocated to participating securities
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
Earnings available for common shareholders used in calculation of basic earnings per share
|
|
$
|
46.7
|
|
|
$
|
11.2
|
|
|
$
|
58.6
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, basic
|
|
47.0
|
|
|
48.1
|
|
|
52.6
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.99
|
|
|
$
|
0.23
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
47.0
|
|
|
$
|
11.3
|
|
|
$
|
58.7
|
|
Less: earnings and dividends allocated to participating securities
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
Earnings available for common shareholders used in calculation of diluted earnings per share
|
|
$
|
46.7
|
|
|
$
|
11.2
|
|
|
$
|
58.6
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, basic
|
|
47.0
|
|
|
48.1
|
|
|
52.6
|
|
Effect of shares issuable under share-based compensation plans
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, diluted
|
|
47.1
|
|
|
48.2
|
|
|
52.7
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.99
|
|
|
$
|
0.23
|
|
|
$
|
1.11
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following awards issued under share-based compensation plans were excluded from the calculations of diluted earnings per share above because their effects were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
(in millions)
|
|
2017
|
|
2016
|
|
2015
|
Stock options
|
|
1.9
|
|
|
1.5
|
|
|
0.8
|
|
5.
Inventories
Inventories consisted of the following components at
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
Raw materials and supplies
|
|
$
|
152.8
|
|
|
$
|
137.6
|
|
Work in process
|
|
365.6
|
|
|
298.9
|
|
Finished and purchased products
|
|
172.0
|
|
|
192.2
|
|
Total inventory
|
|
$
|
690.4
|
|
|
$
|
628.7
|
|
If the FIFO method of inventory had been used instead of the LIFO method, inventories would have been
$106.1 million
and
$98.2 million
higher as of
June 30, 2017
and
2016
, respectively. Current cost of LIFO-valued inventories was
$689.2 million
at
June 30, 2017
and
$608.5 million
at
June 30, 2016
. The reductions in LIFO-valued inventories increased cost of sales by
$0.0 million
during fiscal year
2017
and
$0.0 million
during fiscal year
2016
and
$1.6 million
during fiscal year
2015
.
During fiscal year 2016, the Company recorded a
$22.5 million
charge for excess inventory adjustments in certain reporting units in the PEP segment due to the prolonged weakness in oil and gas businesses.
6.
Property, Plant and Equipment
Property, plant and equipment consisted of the following components at
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
Land
|
|
$
|
34.1
|
|
|
$
|
33.0
|
|
Buildings and building equipment
|
|
495.7
|
|
|
484.1
|
|
Machinery and equipment
|
|
2,082.4
|
|
|
2,038.3
|
|
Construction in progress
|
|
56.3
|
|
|
52.3
|
|
Total at cost
|
|
2,668.5
|
|
|
2,607.7
|
|
Less: accumulated depreciation and amortization
|
|
1,351.7
|
|
|
1,256.3
|
|
Total property, plant, and equipment
|
|
$
|
1,316.8
|
|
|
$
|
1,351.4
|
|
The estimated useful lives of depreciable assets are as follows:
|
|
|
|
Asset Category
|
|
Useful Life
(in Years)
|
Buildings and building equipment
|
|
10 – 45
|
Machinery and equipment
|
|
3 – 30
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the prolonged weakness in oil and gas drilling and exploration activities and the impact this weakness had on certain reporting units in the PEP segment, the Company recorded an impairment charge related to property, plant and equipment of
$6.5 million
during fiscal year 2016.
Depreciation for the years ended
June 30, 2017
,
2016
and
2015
was
$105.8 million
,
$106.5 million
and
$107.2 million
, respectively.
7.
Goodwill and Other Intangible Assets, Net
Goodwill
The Company conducts goodwill impairment testing at least annually as of June 30, or more often if events, changes or circumstances indicate that the carrying amount may not be recoverable.
The Company has determined there was
no
goodwill impairment for the year ended June 30, 2017. As a result of prolonged weakness in oil and gas drilling and exploration activity, the Company determined that the goodwill associated with
2
reporting units was impaired and recorded an impairment charge of
$12.5 million
during the year ended June 30, 2016 which represented the entire balance of the goodwill recorded for these reporting units.
The changes in the carrying amount of goodwill by reportable segment for fiscal years
2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
June 30, 2015
|
|
Impairment
|
|
Other
|
|
June 30, 2016
|
|
Acquisition
|
|
June 30, 2017
|
Goodwill
|
|
$
|
292.1
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
292.0
|
|
|
$
|
18.6
|
|
|
$
|
310.6
|
|
Accumulated impairment losses
|
|
(34.7
|
)
|
|
(12.5
|
)
|
|
—
|
|
|
(47.2
|
)
|
|
—
|
|
|
(47.2
|
)
|
Total goodwill
|
|
$
|
257.4
|
|
|
$
|
(12.5
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
244.8
|
|
|
$
|
18.6
|
|
|
$
|
263.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations
|
|
$
|
195.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
195.5
|
|
|
$
|
—
|
|
|
$
|
195.5
|
|
Performance Engineered Products
|
|
61.9
|
|
|
(12.5
|
)
|
|
(0.1
|
)
|
|
49.3
|
|
|
18.6
|
|
|
67.9
|
|
Total goodwill
|
|
$
|
257.4
|
|
|
$
|
(12.5
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
244.8
|
|
|
$
|
18.6
|
|
|
$
|
263.4
|
|
The amounts included in “other” in the above table represent foreign exchange impacts on the amounts recorded in goodwill.
Other Intangible Assets, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
($ in millions)
|
|
Useful Life
(in Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
Trademarks and trade names
|
|
15 - 30
|
|
$
|
33.5
|
|
|
$
|
(21.9
|
)
|
|
$
|
11.6
|
|
|
$
|
32.4
|
|
|
$
|
(20.7
|
)
|
|
$
|
11.7
|
|
Customer relationships
|
|
10 - 15
|
|
73.3
|
|
|
(25.8
|
)
|
|
47.5
|
|
|
73.0
|
|
|
(22.2
|
)
|
|
50.8
|
|
Non-compete agreements
|
|
5
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
5.4
|
|
|
(4.7
|
)
|
|
0.7
|
|
Technology
|
|
15
|
|
5.7
|
|
|
(0.1
|
)
|
|
5.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
|
$
|
112.7
|
|
|
$
|
(47.8
|
)
|
|
$
|
64.9
|
|
|
$
|
110.8
|
|
|
$
|
(47.6
|
)
|
|
$
|
63.2
|
|
As a result of the prolonged weakness in oil and gas drilling and exploration activities and the impact this weakness had on certain reporting units in the PEP segment, the Company recorded an impairment charge of
$1.1 million
related to definite lived intangible assets during fiscal year 2016.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded
$6.8 million
of amortization expense related to intangible assets during fiscal year
2017
,
$7.3 million
during fiscal year
2016
and
$9.0 million
during fiscal year
2015
. The estimated annual amortization expense related to intangible assets for each of the succeeding five fiscal years is
$6.6 million
in fiscal years
2018
,
2019
,
2020
,
2021
and
2022
.
8.
Accrued Liabilities
Accrued liabilities consisted of the following as of
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
Accrued compensation and benefits
|
|
$
|
59.1
|
|
|
$
|
41.8
|
|
Accrued postretirement benefits
|
|
15.5
|
|
|
13.8
|
|
Derivative financial instruments
|
|
13.1
|
|
|
31.6
|
|
Accrued interest expense
|
|
11.2
|
|
|
11.2
|
|
Deferred revenue
|
|
9.8
|
|
|
8.9
|
|
Accrued income taxes
|
|
5.1
|
|
|
1.5
|
|
Accrued pension liabilities
|
|
3.3
|
|
|
10.1
|
|
Other
|
|
22.8
|
|
|
20.3
|
|
Total accrued liabilities
|
|
$
|
139.9
|
|
|
$
|
139.2
|
|
9
. Debt
On March 31, 2017, the Company entered into a
$400.0 million
syndicated credit facility (“Credit Agreement”) that extends to March 2022. The Credit Agreement replaced the Company’s previous revolving credit facility, dated June 28, 2013, which had been set to expire in June 2018. Interest on the borrowings under the Credit Agreement accrue at variable rates, based upon
LIBOR
or a defined “
Base Rate
,” both determined based upon the rating of the Company’s senior unsecured long-term debt (the “Debt Rating”). The applicable margin to be added to LIBOR ranges from
1.00%
to
1.75%
(
1.50%
as of
June 30, 2017
), and for Base Rate-determined loans, from
0.00%
to
0.75%
(
0.50%
as of
June 30, 2017
). The Company also pays a quarterly commitment fee ranging from
0.125%
to
0.400%
(
0.275%
as of
June 30, 2017
), determined based upon the Debt Rating, of the unused portion of the
$400.0 million
commitment under the Credit Agreement. In addition, the Company must pay certain letter of credit fees, ranging from
1.00%
to
1.75%
(
1.50%
as of
June 30, 2017
), with respect to letters of credit issued under the Credit Agreement. The Company has the right to voluntarily prepay and re-borrow loans and to terminate or reduce the commitments under the facility. As of
June 30, 2017
, the Company had
$6.1 million
of issued letters of credit under the Credit Agreement, with the balance of
$393.9 million
available to the Company.
The Company is subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio of
3.50
to
1.00
. The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense (“EBITDA”) to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than
55
percent. The debt to capital ratio is defined in the Credit Agreement as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. As of
June 30, 2017
, the Company was in compliance with all of the covenants of the Credit Agreement.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt outstanding as of
June 30, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
Medium-term notes, Series B at 6.97% to 7.10% due from April 2018 to May 2018 (face value of $55.0 million at June 30, 2017 and 2016)
|
|
$
|
55.0
|
|
|
$
|
55.0
|
|
Senior unsecured notes, 5.20% due July 2021 (face value of $250.0 million at June 30, 2017 and 2016)
|
|
251.2
|
|
|
257.8
|
|
Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at June 30, 2017 and 2016)
|
|
298.8
|
|
|
298.5
|
|
Total
|
|
605.0
|
|
|
611.3
|
|
Less: amounts due within one year
|
|
(55.0
|
)
|
|
—
|
|
Long-term debt, net of current portion
|
|
$
|
550.0
|
|
|
$
|
611.3
|
|
Aggregate maturities of long-term debt for the
five
years subsequent to
June 30, 2017
, are
$55.0 million
in fiscal year
2018
,
$0.0 million
in
2019
, 2020, 2021,
$250.0 million
in 2022, and
$300.0 million
thereafter.
For the years ended
June 30, 2017
,
2016
and
2015
, interest costs totaled
$31.1 million
,
$29.9 million
and
$30.4 million
, respectively, of which
$1.3 million
,
$1.9 million
and
$2.7 million
, respectively, were capitalized as part of the cost of property, plant, equipment and software.
10
. Pension and Other Postretirement Benefits
The Company provides several noncontributory defined benefit pension plans to certain employees. The plans provide defined benefits based on years of service and final average salary.
In September 2016, the Company announced changes to retirement plans it offers to certain employees. The Company froze benefits accrued to eligible participants of its largest qualified defined benefit pension plan and certain non-qualified benefit plans effective December 31, 2016. The Company recognized the plan freeze during fiscal year 2017 as a curtailment, since it eliminated the accrual of defined benefits for future services for a significant number of participants. The impact of the curtailment included a one-time accelerated recognition of outstanding unamortized prior service costs of
$0.5 million
. The curtailment event triggered a re-measurement for the affected benefit plans as of August 31, 2016 using a weighted average discount rate of
3.57 percent
. The re-measurement resulted in a reduction of accrued pension liabilities of
$18.7 million
.
In October 2016, the Company made a voluntary pension contribution of
$100.0 million
to its largest qualified defined benefit pension plan.
The Company also provides other postretirement benefit plans to certain of its employees. The postretirement benefit plans consist of health care and life insurance plans. Plan assets are maintained in a Voluntary Employee Benefit Association (“VEBA”) Trust. During fiscal year 2017, the Company funded benefit payments using assets in the VEBA Trust. Prior to fiscal year 2017, benefit payments for these plans were funded by the Company assets.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
($ in millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
1,404.4
|
|
|
$
|
1,323.1
|
|
|
$
|
246.0
|
|
|
$
|
236.8
|
|
Service cost
|
|
20.5
|
|
|
31.2
|
|
|
3.6
|
|
|
3.3
|
|
Interest cost
|
|
50.3
|
|
|
58.0
|
|
|
9.2
|
|
|
10.4
|
|
Benefits paid
|
|
(92.0
|
)
|
|
(126.1
|
)
|
|
(12.7
|
)
|
|
(13.3
|
)
|
Actuarial loss
|
|
39.3
|
|
|
108.8
|
|
|
(1.7
|
)
|
|
8.8
|
|
Special termination benefits
|
|
0.6
|
|
|
9.4
|
|
|
—
|
|
|
—
|
|
Curtailment gain
|
|
(72.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Plan amendments
|
|
18.6
|
|
|
—
|
|
|
10.7
|
|
|
—
|
|
Projected benefit obligation at end of year
|
|
1,369.1
|
|
|
1,404.4
|
|
|
255.1
|
|
|
246.0
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
885.1
|
|
|
985.8
|
|
|
115.6
|
|
|
111.6
|
|
Actual return
|
|
91.1
|
|
|
22.2
|
|
|
10.9
|
|
|
4.3
|
|
Benefits paid
|
|
(92.0
|
)
|
|
(126.1
|
)
|
|
(12.7
|
)
|
|
(13.3
|
)
|
Contributions
|
|
103.4
|
|
|
3.2
|
|
|
3.2
|
|
|
13.0
|
|
Fair value of plan assets at end of year
|
|
987.6
|
|
|
885.1
|
|
|
117.0
|
|
|
115.6
|
|
Funded status of the plans
|
|
$
|
(381.5
|
)
|
|
$
|
(519.3
|
)
|
|
$
|
(138.1
|
)
|
|
$
|
(130.4
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets - noncurrent
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued liabilities - current
|
|
(3.3
|
)
|
|
(10.1
|
)
|
|
(15.5
|
)
|
|
(13.8
|
)
|
Accrued pension liabilities - noncurrent
|
|
(378.3
|
)
|
|
(509.3
|
)
|
|
—
|
|
|
—
|
|
Accrued postretirement benefits - noncurrent
|
|
—
|
|
|
—
|
|
|
(122.6
|
)
|
|
(116.6
|
)
|
|
|
$
|
(381.5
|
)
|
|
$
|
(519.3
|
)
|
|
$
|
(138.1
|
)
|
|
$
|
(130.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
($ in millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
451.3
|
|
|
$
|
547.7
|
|
|
$
|
52.2
|
|
|
$
|
61.1
|
|
Prior service cost (credit)
|
|
18.3
|
|
|
2.0
|
|
|
(28.2
|
)
|
|
(45.4
|
)
|
Total
|
|
$
|
469.6
|
|
|
$
|
549.7
|
|
|
$
|
24.0
|
|
|
$
|
15.7
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
|
$
|
(59.1
|
)
|
|
$
|
152.8
|
|
|
$
|
(5.7
|
)
|
|
$
|
11.3
|
|
Amortization of net loss
|
|
(37.8
|
)
|
|
(27.3
|
)
|
|
(3.2
|
)
|
|
(2.6
|
)
|
Prior service cost
|
|
18.6
|
|
|
—
|
|
|
10.7
|
|
|
—
|
|
Amortization of prior service (cost) benefit
|
|
(1.8
|
)
|
|
(0.4
|
)
|
|
6.5
|
|
|
6.5
|
|
Total, before tax effect
|
|
$
|
(80.1
|
)
|
|
$
|
125.1
|
|
|
$
|
8.3
|
|
|
$
|
15.2
|
|
Additional information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation for all pension plans
|
|
$
|
1,362.8
|
|
|
$
|
1,319.7
|
|
|
N/A
|
|
|
N/A
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is additional information related to plans with projected benefit obligations in excess of plan assets as of
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
($ in millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Projected benefit obligation
|
|
$
|
1,369.0
|
|
|
$
|
1,404.3
|
|
|
$
|
255.1
|
|
|
$
|
246.0
|
|
Fair value of plan assets
|
|
$
|
987.4
|
|
|
$
|
884.9
|
|
|
$
|
117.0
|
|
|
$
|
115.6
|
|
The following additional information is for plans with accumulated benefit obligations in excess of plan assets as of
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
($ in millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Accumulated benefit obligation
|
|
$
|
1,362.7
|
|
|
$
|
1,319.6
|
|
|
$
|
255.1
|
|
|
$
|
246.0
|
|
Fair value of plan assets
|
|
$
|
987.4
|
|
|
$
|
884.9
|
|
|
$
|
117.0
|
|
|
$
|
115.6
|
|
The components of the net periodic benefit cost related to the Company’s pension and other postretirement benefits for the years ended
June 30, 2017
,
2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
20.5
|
|
|
$
|
31.2
|
|
|
$
|
32.2
|
|
|
$
|
3.6
|
|
|
$
|
3.3
|
|
|
$
|
4.4
|
|
Interest cost
|
|
50.3
|
|
|
58.0
|
|
|
54.1
|
|
|
9.2
|
|
|
10.4
|
|
|
11.8
|
|
Expected return on plan assets
|
|
(65.1
|
)
|
|
(66.1
|
)
|
|
(68.8
|
)
|
|
(6.9
|
)
|
|
(7.0
|
)
|
|
(6.6
|
)
|
Amortization of net loss
|
|
37.8
|
|
|
27.4
|
|
|
16.7
|
|
|
3.2
|
|
|
2.7
|
|
|
2.0
|
|
Amortization of prior service cost (benefit)
|
|
1.8
|
|
|
0.4
|
|
|
0.3
|
|
|
(6.5
|
)
|
|
(6.5
|
)
|
|
—
|
|
Curtailment loss (gain)
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.6
|
)
|
Net periodic benefit costs
|
|
$
|
45.8
|
|
|
$
|
50.9
|
|
|
$
|
34.5
|
|
|
$
|
2.6
|
|
|
$
|
2.9
|
|
|
$
|
10.0
|
|
The service cost component of the Company’s net pension expense, which represents the estimated cost of future pension liabilities earned associated with active employees, is included in the operating income of the business segments. The residual net pension expense, which is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans, and amortization of actuarial gains and losses and prior service costs, is included under the heading “Pension earnings, interest & deferrals” in the segment data presented in Note
19
.
During the year ended June 30, 2016, the Company offered an early retirement incentive to certain employees. As a result of the incentive,
$9.4 million
was paid from the Company’s qualified pension plan consisting of various personnel-related costs to cover severance payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine benefit obligations at fiscal year end
|
|
Pension Plans
|
Other Postretirement Plans
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Discount rate
|
|
3.92
|
%
|
|
3.92
|
%
|
|
3.89
|
%
|
|
3.86
|
%
|
|
Rate of compensation increase
|
|
3.50
|
%
|
|
3.49
|
%
|
|
N/A
|
|
|
N/A
|
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic benefit cost for the fiscal year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Discount rate
|
|
3.91
|
%
|
|
4.50
|
%
|
|
4.48
|
%
|
|
3.86
|
%
|
|
4.50
|
%
|
|
4.26
|
%
|
Expected long-term rate of return on plan assets
|
|
6.88
|
%
|
|
6.92
|
%
|
|
6.92
|
%
|
|
6.25
|
%
|
|
6.25
|
%
|
|
6.25
|
%
|
Long-term rate of compensation increase
|
|
3.50
|
%
|
|
3.49
|
%
|
|
3.52
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
The following table shows the expected health care rate increase and the future rate and time at which it is expected to remain constant:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
Assumed health care cost trend rate
|
|
7.00
|
%
|
|
7.50
|
%
|
Rate to which the cost trend rate is assumed to decline and remain (the ultimate trend rate)
|
|
5.00
|
%
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
2022
|
|
|
2022
|
|
Assumed health care cost trend rates have an effect on the amounts reported for other postretirement benefits. A one percentage point increase in the assumed health care cost trend rate would increase service and interest cost by
$0.1 million
and increase the postretirement benefit obligation by
$3.3 million
. A one percentage point decrease in the assumed health care cost trend rate would decrease service and interest cost by
$0.1 million
and decrease the postretirement benefit obligation by
$2.9 million
.
Amounts in other comprehensive loss that are expected to be recognized as components of net periodic benefit cost in the year ended
June 30,
2018
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Pension Plans
|
|
Other Postretirement Plans
|
|
Total
|
Amortization of prior service cost (benefit)
|
|
$
|
2.1
|
|
|
$
|
(5.2
|
)
|
|
$
|
(3.1
|
)
|
Amortization of net actuarial loss
|
|
13.5
|
|
|
2.9
|
|
|
16.4
|
|
Amortization of accumulated other comprehensive loss (gain)
|
|
$
|
15.6
|
|
|
$
|
(2.3
|
)
|
|
$
|
13.3
|
|
The Company’s U.S. pension plans’ weighted-average asset allocations at
June 30, 2017
and
2016
, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Equity securities
|
|
55.0
|
%
|
|
55.4
|
%
|
Fixed income securities
|
|
45.0
|
|
|
44.2
|
|
Cash and cash equivalents
|
|
—
|
|
|
0.4
|
|
Total
|
|
100.0
|
%
|
|
100.0
|
%
|
The Company’s policy for developing a pension plan investment strategy includes the periodic development of an asset and liability study by an independent investment consultant. Management considers this study in establishing an asset allocation that is presented to and approved by the Company’s Retirement Plan Committee.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the current funding level, the allocation policy for the Company’s largest 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 plans 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 assets related to the Company’s other postretirement benefit plans were invested in approximately
75 percent
U.S. equities and
25 percent
fixed income securities as of
June 30, 2017
. Management establishes the expected long-term rate of return assumption by reviewing historical trends and analyzing the current and projected market conditions in relation to the plan’s asset allocation and risk management objectives. In determining the expected long-term rate of return, the Company considered historical returns for individual asset classes and the impact of active portfolio management.
The fair values of the Company’s pension plan assets as of
June 30, 2017
and
2016
, by asset category and by the levels of inputs used to determine fair value were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Fair Value
Measurements Using
Input Type
|
|
|
|
|
($ in millions)
|
|
Level 1
|
|
Level 2
|
|
Net Asset Value
|
|
Total
|
Short-term investments
|
|
$
|
9.4
|
|
|
$
|
14.6
|
|
|
$
|
—
|
|
|
$
|
24.0
|
|
Domestic and international equities
|
|
148.3
|
|
|
—
|
|
|
—
|
|
|
148.3
|
|
Commingled funds
|
|
—
|
|
|
—
|
|
|
376.6
|
|
|
376.6
|
|
Limited partnerships
|
|
—
|
|
|
—
|
|
|
42.3
|
|
|
42.3
|
|
Government agency bonds
|
|
3.4
|
|
|
151.0
|
|
|
—
|
|
|
154.4
|
|
Corporate bonds
|
|
—
|
|
|
236.2
|
|
|
—
|
|
|
236.2
|
|
Mutual funds
|
|
—
|
|
|
—
|
|
|
1.8
|
|
|
1.8
|
|
Mortgage/asset backed securities and other
|
|
—
|
|
|
4.0
|
|
|
—
|
|
|
4.0
|
|
|
|
$
|
161.1
|
|
|
$
|
405.8
|
|
|
$
|
420.7
|
|
|
$
|
987.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Fair Value
Measurements Using
Input Type
|
|
|
|
|
($ in millions)
|
|
Level 1
|
|
Level 2
|
|
Net Asset Value
|
|
Total
|
Short-term investments
|
|
$
|
—
|
|
|
$
|
15.3
|
|
|
$
|
—
|
|
|
$
|
15.3
|
|
Domestic and international equities
|
|
139.4
|
|
|
—
|
|
|
—
|
|
|
139.4
|
|
Commingled funds
|
|
—
|
|
|
—
|
|
|
338.2
|
|
|
338.2
|
|
Limited partnerships
|
|
—
|
|
|
—
|
|
|
38.5
|
|
|
38.5
|
|
Government agency bonds
|
|
0.7
|
|
|
141.0
|
|
|
—
|
|
|
141.7
|
|
Corporate bonds
|
|
—
|
|
|
197.3
|
|
|
—
|
|
|
197.3
|
|
Mutual funds
|
|
—
|
|
|
—
|
|
|
1.9
|
|
|
1.9
|
|
Mortgage/asset backed securities and other
|
|
—
|
|
|
12.8
|
|
|
—
|
|
|
12.8
|
|
|
|
$
|
140.1
|
|
|
$
|
366.4
|
|
|
$
|
378.6
|
|
|
$
|
885.1
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the Company’s other postretirement benefit plans as of
June 30, 2017
and
2016
, by asset category and by the level of inputs used to determine fair value, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Fair Value
Measurements Using
Input Type
|
|
|
|
|
($ in millions)
|
|
Level 1
|
|
Level 2
|
|
Net Asset Value
|
|
Total
|
Commingled fund
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73.0
|
|
|
$
|
73.0
|
|
Short-term investments
|
|
—
|
|
|
22.4
|
|
|
—
|
|
|
22.4
|
|
Government agency bonds
|
|
—
|
|
|
12.2
|
|
|
—
|
|
|
12.2
|
|
Corporate bonds and other
|
|
—
|
|
|
8.2
|
|
|
—
|
|
|
8.2
|
|
Mortgage backed securities
|
|
—
|
|
|
1.2
|
|
|
—
|
|
|
1.2
|
|
|
|
$
|
—
|
|
|
$
|
44.0
|
|
|
$
|
73.0
|
|
|
$
|
117.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Fair Value
Measurements Using
Input Type
|
|
|
|
|
($ in millions)
|
|
Level 1
|
|
Level 2
|
|
Net Asset Value
|
|
Total
|
Commingled fund
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64.0
|
|
|
$
|
64.0
|
|
Short-term investments
|
|
—
|
|
|
23.8
|
|
|
—
|
|
|
23.8
|
|
Government agency bonds
|
|
—
|
|
|
16.1
|
|
|
—
|
|
|
16.1
|
|
Corporate bonds and other
|
|
—
|
|
|
9.9
|
|
|
—
|
|
|
9.9
|
|
Mortgage backed securities
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
|
|
$
|
—
|
|
|
$
|
51.6
|
|
|
$
|
64.0
|
|
|
$
|
115.6
|
|
|
|
|
|
|
|
|
|
|
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Investments in domestic and international equities are generally valued at the closing price reported on the active market on which they are traded. Commingled funds, limited partnerships and mutual funds are valued based on the net asset value (“NAV”) established for the fund at each valuation date. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units/shares outstanding. Corporate and government agency bonds and other fixed income securities are valued using closing bid prices on an active market when possible, otherwise using evaluated bid prices.
Cash Flows — Employer Contributions
The Company made contributions to the qualified US pension plans of
$100.0 million
,
$0.0 million
and
$7.2 million
during fiscal years
2017
,
2016
and
2015
, respectively. The Company currently expects to make
$6.7 million
in required cash pension contributions to the qualified defined benefit pension plans during fiscal year
2018
. During the years ended
June 30, 2017
,
2016
and
2015
, the Company made contributions of
$3.5 million
,
$3.2 million
and
$3.3 million
to other non-qualified pension plans, respectively.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid. Pension benefits are currently paid from plan assets and other benefits are currently paid from corporate assets.
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Pension
Benefits
|
|
Other
Benefits
|
2018
|
|
$
|
80.9
|
|
|
$
|
15.5
|
|
2019
|
|
$
|
81.5
|
|
|
$
|
15.5
|
|
2020
|
|
$
|
82.1
|
|
|
$
|
15.6
|
|
2021
|
|
$
|
82.6
|
|
|
$
|
15.5
|
|
2022
|
|
$
|
82.7
|
|
|
$
|
15.5
|
|
2023-2027
|
|
$
|
406.4
|
|
|
$
|
75.9
|
|
Other Benefit Plans
Carpenter also maintains defined contribution retirement and savings plans for substantially all domestic employees. Company contributions to the plans were
$16.7 million
in fiscal year
2017
,
$11.8 million
in fiscal year
2016
and
$12.0 million
in fiscal year
2015
.
11
. Contingencies and Commitments
Environmental
The Company is subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of the Company’s operations, compliance costs to date have not been material. The Company has environmental remediation liabilities at some of its owned operating facilities and has been designated as a potentially responsible party (“PRP”) with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. Additionally, the Company has been notified that it may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against the Company. Neither the exact amount of remediation costs nor the final method of their allocation among all designated 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 by management on a quarterly basis. The Company accrues amounts for environmental remediation costs that represent management’s best estimate of the probable and reasonably estimable future costs related to environmental remediation. During fiscal year
2017
, the Company decreased the liability for a company-owned former operating site by
$0.1 million
. During fiscal years
2016
and
2015
, the Company increased the liability for a company-owned former operating site by
$0.3 million
and
$0.4 million
, respectively. 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, 2017
and
2016
were
$16.1 million
and
$16.2 million
, respectively.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other
The Company is defending various routine claims and legal actions that are incidental to its business and common to its operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. Like many other manufacturing companies in recent years, the Company, from time to time, has been named as a defendant in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace. The Company provides for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on the Company’s future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, management believes that the total liability from these matters will not have a material effect on the Company’s financial position, results of operations or cash flows over the long-term. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to the Company’s financial position, results of operations or cash flows in a particular future quarter or year.
The Company has entered into purchase agreements 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. Raw material prices as of
June 30, 2017
were used for commitments with variable pricing. The purchase commitments covered by these agreements aggregate to
$127.8 million
as of
June 30, 2017
, all of which relates to fiscal year 2018.
12. Share Repurchase Program
In October 2014, the Company’s Board of Directors authorized a share repurchase program. The program authorizes the purchase of up to
$500.0 million
of the Company’s outstanding common stock and expired in October 2016.The shares were repurchased from time to time at the Company’s discretion based on capital needs of the business, general market conditions and market price of the stock. During the year ended
June 30, 2017
, the Company did
not
purchase shares of its common stock on the open market.
13.
Operating Leases
The Company leases certain facilities and equipment under operating leases. Total rent expense was
$13.2 million
,
$11.3 million
and
$12.0 million
for the fiscal years ended
June 30, 2017
,
2016
and
2015
, respectively.
Future minimum payments for non-cancellable operating leases in effect at
June 30, 2017
are:
$8.7 million
in fiscal year
2018
,
$6.6 million
in fiscal year
2019
,
$5.1 million
in fiscal year
2020
,
$3.1 million
in fiscal year
2021
,
$1.9 million
in fiscal year
2022
and
$5.0 million
thereafter.
14.
Fair Value Measurements
The fair value hierarchy has three levels based on the inputs used to determine fair value. Level 1 refers to quoted prices in active markets for identical assets or liabilities. Level 2 refers to observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 refers to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Fair Value Measurements
Using Input Type
|
($ in millions)
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
+C5
|
|
Municipal auction rate securities
|
|
$
|
3.4
|
|
|
$
|
3.4
|
|
Derivative financial instruments
|
|
14.5
|
|
|
14.5
|
|
Total assets
|
|
$
|
17.9
|
|
|
$
|
17.9
|
|
Liabilities:
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
19.1
|
|
|
$
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Fair Value Measurements
Using Input Type
|
($ in millions)
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
Municipal auction rate securities
|
|
$
|
4.1
|
|
|
$
|
4.1
|
|
Derivative financial instruments
|
|
11.8
|
|
|
11.8
|
|
Total assets
|
|
$
|
15.9
|
|
|
$
|
15.9
|
|
Liabilities:
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
43.9
|
|
|
$
|
43.9
|
|
The Company’s derivative financial instruments consist of commodity forward contracts, foreign currency forward contracts, interest rate swaps and forward interest rate swaps. These instruments are measured at fair value using the market method valuation technique. The inputs to this technique utilize information related to foreign exchange rates, commodity prices and interest rates published by third party leading financial news and data providers. This is observable data; however, the valuation of these instruments is not based on actual transactions for the same instruments and, as such, they are classified as Level 2. The Company’s use of derivatives and hedging policies are more fully discussed in Note
16
.
The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States of America.
The carrying amounts of other financial instruments not listed in the table below approximate fair value due to the short-term nature of these items. The carrying amounts and estimated fair values of the Company’s financial instruments not recorded at fair value in the financial statements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
($ in millions)
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Long-term debt, including current portion
|
|
$
|
605.0
|
|
|
$
|
622.5
|
|
|
$
|
611.3
|
|
|
$
|
597.7
|
|
Company-owned life insurance
|
|
$
|
15.9
|
|
|
$
|
15.9
|
|
|
$
|
14.0
|
|
|
$
|
14.0
|
|
The carrying amount of company-owned life insurance reflects cash surrender values based upon the market values of underlying securities, using Level 2 inputs, net of any outstanding policy loans. The carrying value associated with the cash surrender value of these policies is recorded in other assets in the accompanying consolidated balance sheets.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of long-term debt as of
June 30, 2017
and
June 30, 2016
were determined by using current interest rates for debt with terms and maturities similar to the Company’s existing debt arrangements and accordingly would be classified as Level 2 inputs in the fair value hierarchy.
For purposes of performing Step 1 of goodwill impairment testing, the Company uses certain nonrecurring fair value measurements using significant unobservable inputs (Level 3). Fair value of each reporting unit for purposes of the goodwill impairment test is based on a weighting of an income approach and a market approach. Under the income approach, fair value is determined based on a discounted cash flow analysis that uses estimates of cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. Under the market approach, a market-based value is derived by relating multiples for earnings and cash flow measures for a group of comparable public companies to the same measure for each reporting unit to estimate fair value. The assumptions used by the Company to determine fair value of the reporting units are similar to those that would be used by market participants performing valuations.
15.
Share-Based Compensation
The Company has
two
share-based compensation plans: Amended and Restated Stock-Based Incentive Compensation Plan for Officers and Key Employees (the “Omnibus Plan”) and the Stock-Based Compensation Plan for Non-Employee Directors (“Director's Plan”). The Company recognizes compensation cost based on the fair value of the awards on the date of grant. The compensation cost is recognized over the requisite service period of the award, which is generally the shorter of the vesting period that the holder is required to provide service, or the period from the grant date to the date on which the employee is eligible to retire. Upon retirement, as defined in the Company’s share-based compensation plans, outstanding awards are subject to certain accelerated vesting terms.
Awards granted under the share-based compensation plans are paid from shares held in treasury and newly issued shares. The total compensation cost that has been charged against income related to these share-based compensation plans was
$13.0 million
,
$8.7 million
and
$10.0 million
for the years ended
June 30, 2017
,
2016
and
2015
, respectively.
Omnibus Plan
The Omnibus Plan provides that the Board of Directors or a designated committee may grant stock options, restricted stock and restricted stock units, and determine the terms and conditions of each grant. The Omnibus Plan provides the Chief Executive Officer with limited authority to grant awards. As of
June 30, 2017
,
3,614,109
shares were available for awards which may be granted under this plan.
Director’s Plan
The Director’s Plan provides for the granting of stock options and stock units to non-employee directors. As of
June 30, 2017
,
550,691
shares were available for awards which may be granted under this plan.
Stock Options (all plans)
Stock options granted under the plans above are granted with an exercise price equal to at least the fair market value of the Company’s common stock on the date of grant. The options are typically exercisable after
one
to
three
years of service and expire no longer than
ten
years from the grant date.
The fair value of stock options awarded in fiscal years
2017
,
2016
and
2015
were estimated on the date of each grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
Expected volatility
|
|
37
|
%
|
|
33
|
%
|
|
36
|
%
|
Dividend yield
|
|
1.8
|
%
|
|
2.0
|
%
|
|
1.6
|
%
|
Risk-free interest rate
|
|
1.1
|
%
|
|
1.5
|
%
|
|
1.4
|
%
|
Expected term (in years)
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assumptions are based on multiple factors, including historical exercise patterns of employees in relatively homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and the implied volatility of our stock price based on historical performance for the same expected term of the options granted. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of each grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Awards
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
($ in millions)
|
Outstanding at June 30, 2014
|
|
1,063,895
|
|
|
$
|
42.69
|
|
|
|
|
|
|
Granted
|
|
702,411
|
|
|
$
|
48.28
|
|
|
|
|
|
|
Exercised
|
|
(73,067
|
)
|
|
$
|
31.53
|
|
|
|
|
|
|
Cancelled
|
|
(185,361
|
)
|
|
$
|
52.67
|
|
|
|
|
|
|
Outstanding at June 30, 2015
|
|
1,507,878
|
|
|
$
|
44.61
|
|
|
|
|
|
|
Granted
|
|
277,769
|
|
|
$
|
36.31
|
|
|
|
|
|
|
Exercised
|
|
(19,627
|
)
|
|
$
|
25.12
|
|
|
|
|
|
|
Cancelled
|
|
(64,518
|
)
|
|
$
|
47.98
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
1,701,502
|
|
|
$
|
43.35
|
|
|
|
|
|
|
Granted
|
|
907,141
|
|
|
$
|
38.98
|
|
|
|
|
|
|
Exercised
|
|
(95,289
|
)
|
|
$
|
23.21
|
|
|
|
|
|
|
Cancelled
|
|
(80,926
|
)
|
|
$
|
44.35
|
|
|
|
|
|
|
Expired
|
|
(40,000
|
)
|
|
$
|
55.12
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
2,392,428
|
|
|
$
|
42.27
|
|
|
7.1 years
|
|
$
|
2.8
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2017
|
|
1,350,727
|
|
|
$
|
44.70
|
|
|
5.7 years
|
|
$
|
2.7
|
|
Outstanding and Exercisable Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
Range
|
|
Number Outstanding at June 30, 2017
|
|
Weighted
Average
Remaining
Contractual
Term (in Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number Exercisable at June 30, 2017
|
|
Weighted
Average
Exercise
Price
|
$14.17 - $20.00
|
|
55,214
|
|
|
2.1
|
|
$
|
17.29
|
|
|
55,214
|
|
|
$
|
17.29
|
|
$20.01 - $30.00
|
|
82,277
|
|
|
1.7
|
|
$
|
23.16
|
|
|
82,277
|
|
|
$
|
23.16
|
|
$30.01 - $40.00
|
|
1,193,588
|
|
|
8.5
|
|
$
|
38.16
|
|
|
182,685
|
|
|
$
|
35.28
|
|
$40.01 - $50.00
|
|
385,566
|
|
|
6.0
|
|
$
|
43.01
|
|
|
385,566
|
|
|
$
|
43.01
|
|
$50.01 - $63.54
|
|
675,783
|
|
|
6.2
|
|
$
|
53.49
|
|
|
644,985
|
|
|
$
|
53.46
|
|
|
|
2,392,428
|
|
|
|
|
$
|
42.27
|
|
|
1,350,727
|
|
|
$
|
44.70
|
|
The weighted average grant date fair value of options awarded during fiscal years
2017
,
2016
and
2015
was
$10.81
,
$9.27
and
$11.78
, respectively. Share-based compensation charged against income related to stock options for the years ended
June 30, 2017
,
2016
and
2015
was
$4.7 million
,
$3.1 million
and
$6.8 million
, respectively. As of
June 30, 2017
,
$6.2 million
of compensation cost related to nonvested stock options will be recognized over a weighted average remaining life of
1.9
years.
Of the options outstanding at
June 30, 2017
,
2,136,406
relate to the Omnibus Plan and
256,022
relate to the Directors’ Plan.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Unit Awards (Omnibus Plan)
Restricted stock unit awards are granted to employees with performance and/or service conditions. Earned restricted stock unit awards receive non-forfeitable cash dividends during the restriction period. The fair value of the restricted stock unit awards is determined based on the close price of the Company’s stock on the grant date.
Performance-based restricted stock unit awards are earned dependent upon how certain performance goals are achieved during a specified performance period according to the terms determined at the date of the grant. These shares typically vest
zero
to
two
years from the date of the attainment of the specified performance goals. Compensation cost is determined and charged to expense beginning in the performance period through the vesting period.
Time-based restricted stock unit awards typically vest
three
years from the date of grant. Compensation cost related to time-based stock unit awards is recognized over the vesting period of the award.
Amounts charged to compensation expense for restricted stock unit awards were
$5.0 million
,
$2.4 million
and
$1.3 million
for the years ended
June 30, 2017
,
2016
and
2015
, respectively. As of
June 30, 2017
,
$8.2 million
of compensation cost related to restricted stock unit awards remains to be recognized over a weighted average remaining life of
1.3
years.
|
|
|
|
|
|
|
|
|
|
|
Number of Awards
|
|
Weighted Average Grant Date Fair Value
|
Restricted Balance at June 30, 2014
|
|
113,563
|
|
|
$
|
44.99
|
|
Time-based granted
|
|
97,168
|
|
|
$
|
42.65
|
|
Performance-based granted
|
|
895
|
|
|
$
|
54.37
|
|
Vested
|
|
(76,214
|
)
|
|
$
|
42.04
|
|
Forfeited
|
|
(8,003
|
)
|
|
$
|
48.94
|
|
Restricted Balance at June 30, 2015
|
|
127,409
|
|
|
$
|
45.09
|
|
Time-based granted
|
|
130,742
|
|
|
$
|
35.96
|
|
Performance-based granted
|
|
49,529
|
|
|
$
|
31.11
|
|
Vested
|
|
(36,057
|
)
|
|
$
|
48.85
|
|
Forfeited
|
|
(83,154
|
)
|
|
$
|
42.14
|
|
Restricted Balance at June 30, 2016
|
|
188,469
|
|
|
$
|
35.69
|
|
Time-based granted
|
|
231,195
|
|
|
$
|
38.82
|
|
Performance-based granted
|
|
55,478
|
|
|
$
|
36.18
|
|
Vested
|
|
(44,873
|
)
|
|
$
|
34.24
|
|
Forfeited
|
|
(37,792
|
)
|
|
$
|
38.80
|
|
Restricted Balance at June 30, 2017
|
|
392,477
|
|
|
$
|
37.47
|
|
Total Stockholder Return Awards
The Company granted Total Stockholder Return (“TSR”) awards in fiscal years
2017
,
2016
and
2015
. The TSR awards are granted at a target number of shares. The TSR awards are earned based on the Company’s total stockholder return compared to the total stockholder returns of the Russell RSCC Materials & Processing Growth Index at the end of a
three
-year period. The actual number of shares awarded may range from a minimum of
0 percent
of the target shares to a maximum of
200 percent
of the target shares. Participants do not have any rights to dividends (or equivalents) during the performance period. The fair value of the TSR awards was estimated using Monte Carlo valuation models. Compensation cost related to TSR awards recognized in fiscal years
2017
,
2016
and
2015
was
$2.0 million
,
$2.0 million
and
$0.8 million
, respectively.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Director Stock Units
According to the provisions of the Director’s Plan, on the date of each annual stockholders’ meeting or on such other regularly scheduled date as the Board of Directors may determine from time to time in light of the Company’s prevailing practices for the grant of equity awards to employees, each Director shall be granted, in place of cash compensation, a number of stock units determined by dividing
50 percent
of the Director’s annual retainer by the fair market value of the Company’s common stock on that date. These stock units vest as to one-quarter of the units for every
three
months of service following the grant date and are fully vested on the first anniversary of the grant date. At the Director’s election, the remaining
50 percent
of the annual retainer and
100 percent
of committee chair fees may be paid in stock units in lieu of cash. These units are immediately vested.
In addition to the grant of retainer stock units described above, each Director may be granted annually an additional award of stock units as the Board may determine by resolution. These stock units vest as to one-quarter of the units for every
three months
of service following the grant date and are fully vested on the first anniversary of the grant date.
Additional units are credited to each Director on a quarterly basis to reflect dividend equivalents on the Company’s common stock.
In the case of separation from service due to death or disability, all stock units shall immediately vest.
Following a Director’s separation from service, or such other elected distribution date or event, the number of stock units credited to the Director’s account will be converted to an equivalent number of the Company’s common stock.
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at June 30, 2014
|
|
269,315
|
|
|
$
|
32.25
|
|
Granted
|
|
24,668
|
|
|
$
|
42.80
|
|
Distributed
|
|
(11,296
|
)
|
|
$
|
31.79
|
|
Dividend equivalents
|
|
4,749
|
|
|
$
|
—
|
|
Outstanding at June 30, 2015
|
|
287,436
|
|
|
$
|
35.48
|
|
Granted
|
|
40,323
|
|
|
$
|
32.54
|
|
Dividend equivalents
|
|
7,184
|
|
|
$
|
—
|
|
Outstanding at June 30, 2016
|
|
334,943
|
|
|
$
|
38.64
|
|
Granted
|
|
27,285
|
|
|
$
|
39.69
|
|
Distributed
|
|
(30,022
|
)
|
|
$
|
34.19
|
|
Dividend equivalents
|
|
6,347
|
|
|
$
|
—
|
|
Outstanding at June 30, 2017
|
|
338,553
|
|
|
$
|
42.47
|
|
Compensation cost is determined using the grant date fair value and charged to expense over the vesting period of
one year
and amounted to
$1.2 million
,
$1.2 million
and
$1.1 million
for the years ended
June 30, 2017
,
2016
and
2015
, respectively. As of
June 30, 2017
,
$0.3 million
of compensation cost related to director stock units remains to be recognized over a weighted average remaining life of
0.3
years.
16
. Derivatives and Hedging Activities
The Company uses commodity forwards, interest rate swaps, forward interest rate swaps and foreign currency forwards to manage risks generally associated with commodity price, interest rate and foreign currency rate fluctuations. The following explains the various types of derivatives and includes a recap about the impact the derivative instruments had on the Company’s financial position, results of operations and cash flows.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Hedging — Commodity forward contracts:
The Company enters into commodity forward contracts to fix the price of a portion of anticipated future purchases of certain critical raw materials and energy to manage the risk of cash flow variability associated with volatile commodity prices. The commodity forward contracts have been designated as cash flow hedges. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive (loss) income (“AOCI”) to the extent effective, and reclassified to cost of sales in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur. As of
June 30, 2017
, the Company had forward contracts to purchase
23.5 million
pounds of certain raw materials with settlement dates through December 2023.
Cash Flow Hedging — Forward interest rate swaps:
Historically, the Company has entered into forward interest rate swap contracts to manage the risk of cash flow variability associated with fixed interest debt expected to be issued. The forward interest rate swaps were designated as cash flow hedges. The qualifying hedge contracts were marked-to-market at each reporting date and any unrealized gains or losses were included in AOCI to the extent effective, and reclassified to interest expense in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur. For the years ended
June 30, 2017
,
2016
and
2015
net gains of
$0.3 million
,
$0.3 million
,
$0.3 million
, respectively, were recorded as a reduction to interest expense. These amounts represent the impact of previously terminated swaps which are being amortized over the remaining term of the underlying debt.
Cash Flow Hedging — Foreign currency forward contracts:
The Company uses foreign currency forward contracts to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to net sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
The Company also uses foreign currency forward contracts to protect certain short-term asset positions denominated in foreign 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. As of
June 30, 2017
, the fair value of the outstanding foreign currency forwards not designated as hedging instruments and the charges to income for changes in fair value for these contracts were not material.
Fair Value Hedging — Interest rate swaps:
The Company uses interest rate swaps to achieve a level of floating rate debt relative to fixed rate debt. The Company has designated fixed to floating interest rate swaps as fair value hedges. Accordingly, the changes in the fair value of these instruments are immediately recorded in earnings. The mark-to-market values of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains and losses in interest expense in the consolidated statements of income. As of
June 30, 2017
and
2016
, the total notional amount of floating interest rate contracts was
$150.0 million
and
$150.0 million
, respectively. For the years ended
June 30, 2017
,
2016
and
2015
, net gains of
$1.8 million
,
$2.6 million
and
$2.9 million
, respectively, were recorded as a reduction to interest expense.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value and location of outstanding derivative contracts recorded in the accompanying consolidated balance sheets were as follows as of
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
($ in millions)
|
|
Interest Rate Swaps
|
|
Foreign Currency Contracts
|
|
Commodity Contracts
|
|
Total Derivatives
|
Asset Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
0.6
|
|
|
$
|
0.2
|
|
|
$
|
6.4
|
|
|
$
|
7.2
|
|
Other assets
|
|
1.6
|
|
|
—
|
|
|
5.7
|
|
|
7.3
|
|
Total asset derivatives
|
|
$
|
2.2
|
|
|
$
|
0.2
|
|
|
$
|
12.1
|
|
|
$
|
14.5
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
12.1
|
|
|
$
|
13.1
|
|
Other liabilities
|
|
—
|
|
|
—
|
|
|
6.0
|
|
|
6.0
|
|
Total liability derivatives
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
18.1
|
|
|
$
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
($ in millions)
|
|
Interest Rate Swaps
|
|
Foreign Currency Contracts
|
|
Commodity Contracts
|
|
Total Derivatives
|
Asset Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
1.2
|
|
|
$
|
0.3
|
|
|
$
|
0.6
|
|
|
$
|
2.1
|
|
Other assets
|
|
9.7
|
|
|
—
|
|
|
—
|
|
|
9.7
|
|
Total asset derivatives
|
|
$
|
10.9
|
|
|
$
|
0.3
|
|
|
$
|
0.6
|
|
|
$
|
11.8
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
31.3
|
|
|
$
|
31.6
|
|
Other liabilities
|
|
—
|
|
|
—
|
|
|
12.3
|
|
|
12.3
|
|
Total liability derivatives
|
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
43.6
|
|
|
$
|
43.9
|
|
Substantially all of the Company's derivative contracts are subject to master netting arrangements, or similar agreements with each counterparty, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company presents the outstanding derivative contracts on a net basis by counterparty in the consolidated balance sheets. If the Company had chosen to present the derivative contracts on a gross basis, the total asset derivatives would have been
$20.3 million
and total liability derivatives would have been
$24.9 million
as of June 30, 2017.
According to the provisions of the Company’s derivative arrangements, in the event that the fair value of outstanding derivative positions with certain counterparties exceeds certain thresholds, the Company may be required to issue cash collateral to the counterparties. As of
June 30, 2017
the Company had
no
cash collateral held by counterparties.
The Company is exposed to credit loss in the event of nonperformance by counterparties on its derivative instruments as well as credit or performance risk with respect to its customer commitments to perform. Although nonperformance is possible, the Company does not anticipate nonperformance by any of the parties. In addition, various master netting arrangements are in place with counterparties to facilitate settlements of gains and losses on these contracts.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings or it becomes probable the forecasted transactions will not occur. The following is a summary of the (losses) gains related to cash flow hedges recognized during the years ended
June 30, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in AOCI on Derivatives
(Effective Portion)
Years Ended June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
Derivatives in Cash Flow Hedging Relationship:
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
9.4
|
|
|
$
|
(34.0
|
)
|
|
$
|
(76.3
|
)
|
Foreign exchange contracts
|
|
(0.1
|
)
|
|
0.7
|
|
|
2.6
|
|
Total
|
|
$
|
9.3
|
|
|
$
|
(33.3
|
)
|
|
$
|
(73.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of (Loss) Gain
Reclassified from AOCI
into Income
|
|
Amount of (Loss) Gain Reclassified from AOCI into Income
(Effective Portion)
Years Ended June 30,
|
($ in millions)
|
|
(Effective Portion)
|
|
2017
|
|
2016
|
|
2015
|
Derivatives in Cash Flow Hedging Relationship:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Cost of sales
|
|
$
|
(22.8
|
)
|
|
$
|
(44.6
|
)
|
|
$
|
(18.5
|
)
|
Foreign exchange contracts
|
|
Net sales
|
|
0.5
|
|
|
0.2
|
|
|
2.3
|
|
Forward interest rate swaps
|
|
Interest expense
|
|
0.4
|
|
|
0.4
|
|
|
0.4
|
|
Total
|
|
|
|
$
|
(21.9
|
)
|
|
$
|
(44.0
|
)
|
|
$
|
(15.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss)
Reclassified from AOCI
into Income
|
|
Amount of Gain (Loss) Reclassified from AOCI into Income
(Ineffective Portion)
Years Ended June 30,
|
($ in millions)
|
|
(Ineffective Portion)
|
|
2017
|
|
2016
|
|
2015
|
Derivatives in Cash Flow Hedging Relationship:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Cost of sales
|
|
$
|
2.0
|
|
|
$
|
1.5
|
|
|
$
|
(2.2
|
)
|
Total
|
|
|
|
$
|
2.0
|
|
|
$
|
1.5
|
|
|
$
|
(2.2
|
)
|
The Company estimates that
$5.6 million
of net derivative losses included in AOCI as of
June 30, 2017
will be reclassified into earnings within the next twelve months. No significant cash flow hedges were discontinued during the year ended
June 30, 2017
.
The changes in AOCI associated with derivative hedging activities during the years ended
June 30, 2017
,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
Balance, beginning
|
|
$
|
(21.8
|
)
|
|
$
|
(28.5
|
)
|
|
$
|
7.6
|
|
Current period changes in fair value, net of tax
|
|
5.8
|
|
|
(20.8
|
)
|
|
(46.0
|
)
|
Reclassification to earnings, net of tax
|
|
13.7
|
|
|
27.5
|
|
|
9.9
|
|
Balance, ending
|
|
$
|
(2.3
|
)
|
|
$
|
(21.8
|
)
|
|
$
|
(28.5
|
)
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17
. Income Taxes
Income before income taxes for the Company’s domestic and foreign operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
Domestic
|
|
$
|
56.0
|
|
|
$
|
17.3
|
|
|
$
|
64.3
|
|
Foreign
|
|
14.2
|
|
|
4.2
|
|
|
24.8
|
|
Income before income taxes
|
|
$
|
70.2
|
|
|
$
|
21.5
|
|
|
$
|
89.1
|
|
The provision (benefit) for income taxes from continuing operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(24.5
|
)
|
|
$
|
4.7
|
|
|
$
|
(39.3
|
)
|
State
|
|
(1.1
|
)
|
|
0.4
|
|
|
1.2
|
|
Foreign
|
|
7.2
|
|
|
4.3
|
|
|
8.1
|
|
Total current
|
|
(18.4
|
)
|
|
9.4
|
|
|
(30.0
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
38.7
|
|
|
0.1
|
|
|
60.2
|
|
State
|
|
3.5
|
|
|
0.5
|
|
|
0.1
|
|
Foreign
|
|
(0.6
|
)
|
|
0.2
|
|
|
0.1
|
|
Total deferred
|
|
41.6
|
|
|
0.8
|
|
|
60.4
|
|
Total income tax expense
|
|
$
|
23.2
|
|
|
$
|
10.2
|
|
|
$
|
30.4
|
|
The following is a reconciliation of income taxes computed at the U.S. Federal income tax rate to the Company’s effective income tax rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
(% of pre-tax income)
|
|
2017
|
|
2016
|
|
2015
|
Statutory federal income tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
2.0
|
|
|
2.2
|
|
|
2.2
|
|
Foreign tax rate differential
|
|
(1.5
|
)
|
|
5.5
|
|
|
(1.6
|
)
|
Domestic manufacturing deduction
|
|
(3.0
|
)
|
|
(7.0
|
)
|
|
(2.7
|
)
|
Research and development tax credit
|
|
(3.9
|
)
|
|
(8.4
|
)
|
|
(0.9
|
)
|
Law changes
|
|
0.9
|
|
|
(3.8
|
)
|
|
1.8
|
|
Increases (decreases) in valuation allowances
|
|
1.1
|
|
|
2.1
|
|
|
(0.3
|
)
|
Adjustments of prior years' income taxes
|
|
3.3
|
|
|
1.3
|
|
|
(0.1
|
)
|
Unremitted earnings of foreign subsidiaries
|
|
(1.2
|
)
|
|
12.7
|
|
|
—
|
|
Non-deductible goodwill impairment
|
|
—
|
|
|
5.1
|
|
|
—
|
|
Other, net
|
|
0.3
|
|
|
2.7
|
|
|
0.7
|
|
Effective income tax rate
|
|
33.0
|
%
|
|
47.4
|
%
|
|
34.1
|
%
|
Due to a change in business strategy for one of our foreign subsidiaries, the Company changed its intent with regard to the indefinite reinvestment of the foreign earnings for this subsidiary. As a result of this change, the Company recorded a tax charge of
$2.8 million
during fiscal year 2016.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred taxes are recorded for temporary differences between the carrying amounts of assets and liabilities and their tax bases. The significant components of deferred tax assets and liabilities that are recorded in the consolidated balance sheet are summarized in the table below. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. As of
June 30, 2017
, the Company had state net operating loss carryforwards of
$361.8 million
expiring between 2019 and 2037. Valuation allowances increased by
$0.8 million
during fiscal year 2017 primarily due to decreases in projected future taxable income. A significant portion of the state net operating loss carryforwards are subject to an annual limitation that under current law is likely to limit future tax benefits to approximately
$5 million
.
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
|
Pensions
|
|
$
|
139.8
|
|
|
$
|
193.5
|
|
Postretirement provisions
|
|
54.4
|
|
|
51.0
|
|
Net operating loss carryforwards
|
|
23.1
|
|
|
20.5
|
|
Derivatives and hedging activities
|
|
2.4
|
|
|
14.8
|
|
Other
|
|
44.8
|
|
|
37.4
|
|
Gross deferred tax assets
|
|
264.5
|
|
|
317.2
|
|
Valuation allowances
|
|
(18.5
|
)
|
|
(17.7
|
)
|
Total deferred tax assets
|
|
246.0
|
|
|
299.5
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Depreciation
|
|
(347.5
|
)
|
|
(333.0
|
)
|
Intangible assets
|
|
(19.4
|
)
|
|
(20.4
|
)
|
Inventories
|
|
(50.1
|
)
|
|
(27.4
|
)
|
Other
|
|
(6.2
|
)
|
|
(12.9
|
)
|
Total deferred tax liabilities
|
|
(423.2
|
)
|
|
(393.7
|
)
|
Deferred tax liabilities, net
|
|
$
|
(177.2
|
)
|
|
$
|
(94.2
|
)
|
As of
June 30, 2017
, the Company had
$99.1 million
of indefinitely reinvested foreign earnings for which we have not provided deferred income taxes. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes and withholding taxes in various foreign tax jurisdictions. It is not practical to calculate these taxes due to the complex and hypothetical nature of the calculations. Due to a change in foreign cash requirements for one of the Company’s subsidiaries, the Company changed its intent with regard to indefinite reinvestment of foreign earnings of this subsidiary. As a result of this change, the Company repatriated
$11.5 million
of foreign earnings during fiscal year 2017 and recognized associated tax benefits of
$0.9 million
. The remaining balance of unremitted foreign earnings continues to be indefinitely reinvested.
The Company does
not
have unrecognized tax benefits as of June 30, 2017, 2016 and 2015. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as of a component of income tax expense.
All years prior to fiscal year 2013 have been settled with the Internal Revenue Service and with most significant state, local and foreign tax jurisdictions.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18.
Other Income (Expense), Net
Other income (expense), net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
Interest income
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
$
|
0.1
|
|
Equity in earnings of unconsolidated subsidiaries
|
|
—
|
|
|
0.6
|
|
|
0.1
|
|
Unrealized gains (losses) on company owned life insurance contracts and investments held in rabbi trusts
|
|
1.7
|
|
|
(0.5
|
)
|
|
0.3
|
|
Foreign exchange
|
|
(0.4
|
)
|
|
(2.4
|
)
|
|
0.4
|
|
Other
|
|
1.2
|
|
|
—
|
|
|
4.4
|
|
Total other income (expense), net
|
|
$
|
2.8
|
|
|
$
|
(2.1
|
)
|
|
$
|
5.3
|
|
19
. Segment Information, Geographic and Product Data
The Company has
two
reportable segments, Specialty Alloys Operations (“SAO”) and Performance Engineered Products (“PEP”).
The SAO segment is comprised of the Company’s major premium alloy and stainless steel manufacturing operations. This includes operations performed at mills primarily in Reading and Latrobe, Pennsylvania and surrounding areas as well as South Carolina and Alabama. The combined assets of the SAO operations are being managed in an integrated manner to optimize efficiency and profitability across the total system.
The PEP segment is comprised of the Company’s differentiated operations. This segment includes the Dynamet titanium business, the Carpenter Powder Products business, the Amega West business, and the Latrobe and Mexico distribution businesses. The businesses in the PEP segment are managed with an entrepreneurial structure to promote flexibility and agility to quickly respond to market dynamics.
The Company’s executive management evaluates the performance of these operating segments based on sales, operating income and cash flow generation. Segment operating profit excludes general corporate costs, which include executive and director compensation, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that management considers not representative of ongoing operations, such as loss on divestiture of business, restructuring and asset impairment charges, and other specifically-identified income or expense items.
The service cost component of the Company’s net pension expense, which represents the estimated cost of future pension liabilities earned associated with active employees, is included in the operating income of the business segments. The residual net pension expense, which is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans and amortization of actuarial gains and losses and prior service costs, is included under the heading “Pension earnings, interest and deferrals.”
On a consolidated basis, one customer, Arconic, Inc., accounted for approximately
11 percent
and
13 percent
of net sales for the years ended June 30, 2017 and 2016, respectively. No single customer accounted for 10 percent or more of the Company’s net sales for the year ended June 30, 2015. No single customer accounted for 10 percent or more of the accounts receivable outstanding at June 30, 2017. Approximately
22 percent
of the accounts receivable outstanding at June 30, 2016 was due from two customers, Alcoa Inc. and Precision Castparts Corporation.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Data
|
|
Years Ended June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations
|
|
$
|
1,461.6
|
|
|
$
|
1,481.0
|
|
|
$
|
1,796.6
|
|
Performance Engineered Products
|
|
366.6
|
|
|
358.7
|
|
|
497.7
|
|
Intersegment
|
|
(30.6
|
)
|
|
(26.3
|
)
|
|
(67.6
|
)
|
Consolidated net sales
|
|
$
|
1,797.6
|
|
|
$
|
1,813.4
|
|
|
$
|
2,226.7
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations
|
|
$
|
172.3
|
|
|
$
|
176.9
|
|
|
$
|
155.2
|
|
Performance Engineered Products
|
|
8.5
|
|
|
(5.5
|
)
|
|
39.1
|
|
Corporate costs (including loss on divestiture of business, restructuring and impairment charges)
|
|
(61.3
|
)
|
|
(103.0
|
)
|
|
(72.0
|
)
|
Pension earnings, interest and deferrals
|
|
(23.8
|
)
|
|
(19.3
|
)
|
|
(9.4
|
)
|
Intersegment
|
|
1.5
|
|
|
2.5
|
|
|
(1.4
|
)
|
Consolidated operating income
|
|
$
|
97.2
|
|
|
$
|
51.6
|
|
|
$
|
111.5
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations
|
|
$
|
94.0
|
|
|
$
|
94.4
|
|
|
$
|
95.0
|
|
Performance Engineered Products
|
|
20.6
|
|
|
21.9
|
|
|
23.3
|
|
Corporate
|
|
4.0
|
|
|
3.8
|
|
|
4.6
|
|
Intersegment
|
|
(0.8
|
)
|
|
(0.8
|
)
|
|
(0.6
|
)
|
Consolidated depreciation and amortization
|
|
$
|
117.8
|
|
|
$
|
119.3
|
|
|
$
|
122.3
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations
|
|
$
|
52.2
|
|
|
$
|
67.0
|
|
|
$
|
129.0
|
|
Performance Engineered Products
|
|
17.0
|
|
|
19.8
|
|
|
38.1
|
|
Corporate
|
|
29.7
|
|
|
8.6
|
|
|
4.3
|
|
Intersegment
|
|
(0.4
|
)
|
|
(0.2
|
)
|
|
(0.9
|
)
|
Consolidated capital expenditures
|
|
$
|
98.5
|
|
|
$
|
95.2
|
|
|
$
|
170.5
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
($ in millions)
|
|
|
|
2017
|
|
2016
|
Total Assets:
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations
|
|
|
|
$
|
2,292.1
|
|
|
$
|
2,256.5
|
|
Performance Engineered Products
|
|
|
|
434.3
|
|
|
415.8
|
|
Corporate
|
|
|
|
167.2
|
|
|
151.3
|
|
Intersegment
|
|
|
|
(15.5
|
)
|
|
(29.3
|
)
|
Consolidated total assets
|
|
|
|
$
|
2,878.1
|
|
|
$
|
2,794.3
|
|