UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2015
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-5828
CARPENTER TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 23-0458500 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
P.O. Box 14662 Reading, Pennsylvania | 19610 | |
(Address of principal executive offices) | (Zip Code) | |
610-208-2000 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 Par Value | New York Stock Exchange | |
Title of each class | Name of each exchange on which registered | |
Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)
Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
The aggregate market value of the registrants’ voting common stock held by non-affiliates at December 31, 2014 was $2,563,962,388, based on the closing price per share of the registrant’s common stock on that date of $49.25 as reported on the New York Stock Exchange.
As of August 14, 2015, 49,541,169 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Company’s fiscal year 2015 definitive Proxy Statement are incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
Page Number | |||
PART I
Item 1. Business
(a) General Development of Business:
Carpenter Technology Corporation, incorporated in 1904, is engaged in the manufacturing, fabrication and distribution of specialty metals. As used throughout this report, unless the context requires otherwise, the terms “Carpenter”, “Company”, “Registrant”, “Issuer”, “we” and “our” refer to Carpenter Technology Corporation.
(b) Financial Information About Segments:
We are organized in two reportable business segments: Specialty Alloys Operations (“SAO”) and Performance Engineered Products (“PEP”). See Note 19 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” for additional segment reporting information.
(c) Narrative Description of Business:
(1) General:
We develop, manufacture and distribute cast/wrought and powder metal stainless steels and special alloys including high temperature (iron-nickel-cobalt base), stainless, superior corrosion resistant, controlled expansion alloys, ultra-high strength and implantable alloys, tool and die steels and other specialty metals, as well as cast/wrought titanium alloys. We also manufacture and rent down-hole drilling tools and components used in the oil and gas industry.
We provide material solutions to the changing needs of the aerospace and defense, energy, transportation, medical and industrial and consumer industries. We have continued to increase our global manufacturing capacity as well as expand our operations to provide customers with solutions to today’s changing materials challenges.
Reportable Segments
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 and surrounding areas in Pennsylvania, 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, the Specialty Steel Supply business and the Latrobe and Mexico distribution businesses. The businesses in the PEP segment are managed with an entrepreneurial structure to promote speed and flexibility, and drive overall revenue and profit growth.
(2) Classes of Products:
Our major classes of products are:
Special alloys —
Our special alloys are used in critical components such as aerospace rings, discs and fasteners and include heat resistant alloys that range from slight modifications of stainless steels to complex nickel and cobalt base alloys, as well as alloys for electronic, magnetic and electrical applications with controlled thermal expansion characteristics, or high electrical resistivity or special magnetic characteristics.
Stainless steels —
Our stainless products include a broad range of corrosion resistant alloys including conventional stainless steels and many proprietary grades for special applications.
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Titanium products —
Our titanium products include corrosion resistant, highly specialized metal with a combination of high strength and low density. Most common uses are in aircraft fasteners, medical devices, sporting equipment and chemical and petroleum processing.
Powder metals —
Our powder metals include spherical gas atomized powders produced via air, vacuum or pressurized melting with Argon or Nitrogen Atomization in fine, medium and coarse powder distributions.
Alloy and tool steel —
Our alloy and tools steels are sold across a wide range of industries in long forms as well as rounds, plates and sheets.
Distribution and other —
Our distribution sales represent sales of globally sourced corrosion resistant steels, tool steels and powder metals for a wide range of industries.
(3) Raw Materials:
Our business depends on continued delivery of critical raw materials for our day-to-day operations. These raw materials include nickel, cobalt, chromium, manganese, molybdenum, titanium, iron and scrap containing iron and nickel. Some of the sources of these raw materials, many of which are international, could be subject to potential interruptions of supply as a result of political events, labor unrest or other reasons. These potential interruptions could cause material shortages and affect availability and price. We have arrangements with certain vendors to provide consigned materials at our manufacturing facilities available for our consumption as necessary.
We have long-term relationships with major suppliers who provide availability of material at competitive prices. Purchase prices of certain raw materials have historically been volatile. We use pricing surcharges, indexing mechanisms, base price adjustments and raw material forward contracts to reduce the impact of increased costs for the most significant of these materials. There can be delays between the time of the increase in the price of raw materials and the realization of the benefits of such mechanisms or actions that could have a short-term impact on our results and could affect the comparability of our results from period to period.
(4) Patents and Licenses:
We own a number of United States and international patents and have granted licenses under some of them. In addition, certain products that we produce are covered by patents held or owned by other companies from whom licenses have been obtained. The duration of a patent issued in the United States is between 14 and 20 years from the date of filing a patent application or issuance of the patents. The duration of patents issued outside of the United States vary from country to country. Generally, patent licenses are structured to match the duration of the underlying patent. Although these patents and licenses are believed to be of value, we do not consider our business to be materially dependent upon any single such item or related group of such items.
(5) Seasonality of Business:
Our sales are normally influenced by seasonal factors. Historically, our sales in the first two fiscal quarters (the respective three months ending September 30 and December 31) are typically the lowest — principally because of annual plant vacation and maintenance shutdowns by us, as well as by many of our customers. However, the timing of major changes in the general economy or the markets for certain products can alter this historical pattern.
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The chart below summarizes the percent of net sales by quarter for the past three fiscal years:
Quarter Ended | 2015 | 2014 | 2013 | ||||||
September 30, | 25 | % | 23 | % | 24 | % | |||
December 31, | 24 | 23 | 23 | ||||||
March 31, | 26 | 26 | 26 | ||||||
June 30, | 25 | 28 | 27 | ||||||
100 | % | 100 | % | 100 | % | ||||
(6) Customers:
On a consolidated basis, we are not dependent upon a single customer, or a very few customers, such that the loss of any one or more particular customers would have a materially adverse effect on our consolidated statement of income. No customers accounted for 10 percent or more of net sales during fiscal years 2015, 2014 or 2013. See Note 19 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” for additional information.
(7) Backlog:
As of June 30, 2015, we had a backlog of orders, believed to be firm, of approximately $543 million, substantially all of which is expected to be shipped within fiscal year 2016. Our backlog as of June 30, 2014 was approximately $680 million.
(8) Competition:
Our business is highly competitive. We supply materials to a wide variety of end-use market sectors and compete with various companies depending on end-use market, product or geography. We are leaders in specialty materials for critical applications with over 125 years of metallurgical and manufacturing expertise. A significant portion of the products we produce are highly engineered materials for demanding applications. There are less than ten companies producing one or more similar products that we consider our major competitors for our high value products used in demanding applications, particularly in our aerospace and defense and energy end-use markets. These products are generally required to meet complex customer product specifications and often require the materials to be qualified prior to supplying the customer orders. Our experience, technical capabilities, product offerings and research and development efforts that we have in our niche markets represent barriers to existing and potential competitors.
For other products, there are several dozen smaller producing companies and converting companies that are also competitors, as well as several hundred independent distributors of products similar to those distributed by us. Additionally, numerous foreign companies produce various specialty metal products similar to those produced by us. Furthermore, a number of different products may, in certain instances, be substituted for our finished products.
(9) Research, Product and Process Development:
Our expenditures for company-sponsored research and development were $18.7 million, $18.5 million and $19.4 million in fiscal years 2015, 2014 and 2013, respectively. We believe that our ability to be an innovator in special material development and manufacturing processes has been and will continue to be an important factor in the success of the Company. Our worldwide staff of expert metallurgists, research and development scientists, engineers and service professionals work closely with our customers to identify and provide innovative solutions to specific product requirements.
(10) Environmental Regulations:
We are subject to various stringent 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. Management evaluates the liability for future environmental
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remediation costs on a quarterly basis. We accrue amounts for environmental remediation costs representing management’s best estimate of the probable and reasonably estimable costs relating to environmental remediation. For further information on environmental remediation, see the Contingencies section included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.
Our costs of maintaining and operating environmental control equipment were $14.8 million, $13.3 million and $13.7 million for fiscal years 2015, 2014 and 2013, respectively. The capital expenditures for environmental control equipment were $0.5 million, $2.2 million and $1.6 million for fiscal years 2015, 2014 and 2013, respectively. We anticipate spending approximately $2.5 million on major domestic environmental capital projects over the next five fiscal years. This includes approximately $1 million in fiscal year 2016 and fiscal year 2017. Due to the possibility of future regulatory developments, the amount of future capital expenditures may vary from these estimates.
(11) Employees:
As of June 30, 2015, our total workforce consisted of approximately 4,900 employees, which included approximately 130 production employees in Washington, Pennsylvania who are covered under a collective bargaining agreement which expires on August 31, 2016, and approximately 450 employees in Latrobe, Pennsylvania who are covered under a collective bargaining agreement which expires August 1, 2017.
(d) Financial information about foreign and domestic operations and export sales:
Sales outside of the United States, including export sales, were $646.8 million, $635.1 million and $696.4 million in fiscal years 2015, 2014 and 2013, respectively. Long-lived assets held outside of the United States were $30.0 million, $27.5 million and $25.9 million as of June 30, 2015, 2014 and 2013, respectively. For further information on domestic and international sales, see Note 19 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.
(e) Available Information:
Our Board of Directors has adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers of Carpenter Technology Corporation, which is also applicable to our other executive officers. There were no waivers of the Code of Ethics in fiscal year 2015. The Code of Ethics and any information regarding any waivers of the Code of Ethics are disclosed on Carpenter’s website at www.cartech.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (“SEC”). Our website and the content contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and other information regarding issuers that file electronically. Such information can be accessed through the Internet at www.sec.gov.
Item 1A. Risk Factors
There are inherent risks and uncertainties associated with all businesses that could adversely affect operating performances or financial conditions. The following discussion outlines the risks and uncertainties that management believes are the most material to our business. However, these are not the only risks or uncertainties that could affect our business. Certain risks are associated specifically with our business, industry or customer base, while others have a broader effect.
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The demand for certain products we produce may be cyclical.
Demand in our end-use markets, including companies in the aerospace and defense, energy, transportation, medical and industrial and consumer markets, can be cyclical in nature and sensitive to general economic conditions, competitive influences and fluctuations in inventory levels throughout the supply chain. As such, our results of operations, financial condition, cash flows and availability of credit could fluctuate significantly from period to period.
A significant portion of our sales represents products sold to customers in the commercial aerospace and defense and energy markets. The cyclicality of those markets can adversely affect our current business and our expansion objectives.
The commercial aerospace and defense market is historically cyclical due to both external and internal market factors. These factors include general economic conditions, airline profitability, consumer demand for air travel, varying fuel and labor costs, price competition and international and domestic political conditions such as military conflict and the threat of terrorism. The length and degree of cyclical fluctuation can be influenced by any one or combination of these factors and therefore are difficult to predict with certainty. A downturn in the commercial aerospace and defense industry would adversely affect the demand for our products and/or the prices at which we are able to sell our products; our results of operations and financial condition could be materially adversely affected.
The energy market has also been historically cyclical, principally as a result of volatile oil prices. Recently, oil prices experienced a dramatic and rapid decline. The decline in oil prices has negatively impacted the demand for our products used in our energy end-use market. Our future success requires us to, among other things, expand in key international energy markets by successfully adding to our customer base, distribution channels and product portfolio. The outlook for oil prices remains uncertain. The duration of the current low price environment or further deterioration in prices could further adversely affect the demand for products, which could impact our results of operations and financial condition.
Any significant delay or inability to successfully expand our operations in a timely and cost effective manner could materially adversely affect our business, financial condition and results of operations.
Over the last few years, we have undertaken capital projects associated with expanding our production capacity and capability, including our state-of-the-art manufacturing facility in Athens, Alabama. These projects place a significant demand on management and operational resources. Our success in expanding our operations in a cost effective manner depends upon numerous factors including the ability of management to ensure the necessary resources are in place to properly execute these projects, our ability to obtain the necessary internal and customer qualifications to produce material from the facility and our ability to operate the facility to maximize the potential opportunities with minimal impacts to our existing operations. If we are not able to achieve the anticipated results from our capital expansion projects, or if we incur unanticipated excess costs, our results of operations and financial position may be materially adversely affected.
Periods of reduced demand and excess supply as well as the availability of substitute lower cost materials can adversely affect our ability to price and sell our products at the profitability levels we require to be successful.
Additional worldwide capacity and reduced demand for our products could significantly impact future worldwide pricing which would adversely impact our results of operations and financial condition. In addition, continued availability of lower cost, substitute materials may also cause significant fluctuations in future results as our customers opt for a lower cost alternative.
We change prices on our products as we deem necessary. In addition to the above general competitive impact, other market conditions and various economic factors beyond our control can adversely affect the timing of our pricing actions. The effects of any pricing actions may be delayed due to long manufacturing lead times or the terms of existing contracts. There is no guarantee that the pricing actions we implement will be effective in maintaining the Company’s profit margin levels.
We rely on third parties to supply certain raw materials that are critical to the manufacture of our products and we may not be able to access alternative sources of these raw materials if the suppliers are unwilling or unable to meet our demand.
Costs of certain critical raw materials, such as nickel, cobalt, chromium, manganese, molybdenum, titanium, iron and scrap containing iron and nickel have been volatile due to factors beyond our control. We are able to mitigate most of the adverse impact of rising raw material costs through raw material surcharges, indices to customers and raw material forward contracts, but changes in business conditions could adversely affect our ability to recover rapid increases in raw material costs and may adversely affect our results of operations.
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In addition, the availability of these critical raw materials is subject to factors that are not in our control. In some cases, these critical raw materials are purchased from suppliers operating in countries that may be subject to unstable political and economic conditions. At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, at prices and other terms acceptable to us, or at all.
If suppliers increase the price of critical raw materials or are unwilling or unable to meet our demand, we may not have alternative sources of supply. In addition, to the extent that we have quoted prices to customers and accepted customer orders for products prior to purchasing necessary raw materials, or have existing contracts, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials to our customers.
The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experience delays or shortages in the supply of raw materials. If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation.
Regulations related to conflict minerals could adversely impact our business.
The SEC has promulgated final rules mandated by the Dodd-Frank Act regarding disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, in products manufactured by public companies. These rules require due diligence to determine whether such minerals originated from the Democratic Republic of Congo (the “DRC”) or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. The Company timely filed its annual conflict minerals report required by the rules on June 1, 2015. There will be costs associated with complying with these disclosure requirements going forward, including costs to determine the origin of conflict minerals used in our products. In addition, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. Also, we may face disqualification as a supplier for customers and reputational challenges if the due diligence procedures we continue to implement do not enable us to verify the origins for all conflict minerals or to determine that such minerals are DRC conflict-free.
We provide benefits to active and retired employees throughout most of our Company, most of which are not covered by insurance; and thus, our financial condition can be adversely affected if our investment returns are insufficient to meet these obligations.
We have obligations to provide substantial benefits to active and retired employees, and most of the associated costs are paid by the Company and are not covered by insurance. In addition, certain employees are covered by defined benefit pension plans, with the majority of our plans covering employees in the United States. Many domestic and international competitors do not provide defined benefit plans and/or retiree health care plans, and other international competitors operate in jurisdictions with government sponsored health care plans that may offer them a cost advantage. A decline in the value of plan investments in the future, an increase in costs or liabilities or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding. A requirement to accelerate or increase pension contributions in the future could have a material adverse effect on our results of operations and financial condition.
The extensive environmental, health and safety regulatory regimes applicable to our manufacturing operations create the potential exposure to significant liabilities.
The nature of our manufacturing business subjects our operations to numerous and varied federal, state, local and international laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. We have used, and currently use and manufacture, substantial quantities of substances that are considered hazardous, extremely hazardous or toxic under worker safety and health laws and regulations. Although we implement controls and procedures designed to reduce continuing risk of adverse impacts and health and safety issues, we could incur substantial cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations, non-compliance or liabilities under these regulatory regimes required at our facilities.
We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a potentially responsible party (“PRP”) with respect to certain third party Superfund or similar waste disposal sites and other third party owned sites. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. From time to time, we are a party to lawsuits and other proceedings involving alleged violations of, or liabilities arising from, environmental laws.
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When our liability is probable and we can reasonably estimate our costs, we record environmental liabilities in our financial statements. However, in many cases, we are not able to determine whether we are liable, or if liability is probable, in order to reasonably estimate the loss or range of loss which could result from such environmental liabilities. Estimates of our liability remain subject to additional uncertainties, including the nature and extent of site contamination, available remediation alternatives, the extent of corrective actions that may be required, and the number and financial condition of other PRP’s, as well as the extent of their responsibility for the remediation. We adjust our accruals to reflect new information as appropriate. Future adjustments could have a material adverse effect on our results of operations in a given period, but we cannot reliably predict the amounts of such future adjustments. Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our financial condition, cash flows or results of operations.
Our manufacturing processes, and the manufacturing processes of many of our suppliers and customers, are energy intensive and generate carbon dioxide and other “Greenhouse Gases”, and pending legislation or regulation of Greenhouse Gases, if enacted or adopted in an onerous form, could have a material adverse impact on our results of operations, financial condition and cash flows.
Political and scientific debates related to the impacts of greenhouse gas emissions on the global climate are prevalent. Regulation or some form of legislation aimed at reducing the greenhouse gas emissions is currently being considered both in the United States and globally. As a specialty alloy manufacturer, we will be affected, both directly and indirectly, if proposed climate change legislation, such as use of a “cap and trade”, is enacted. Such legislation could have a material adverse impact on our results of operations, financial condition and cash flows.
Product liability and product quality claims could adversely affect our operating results.
We produce ultra-high strength, high temperature and corrosion-resistant alloys designed for our customers’ demanding applications particularly in our aerospace and defense, energy and medical end-use markets. Failure of the materials that are included in our customers’ applications could give rise to substantial product liability claims. There can be no assurance that our insurance coverage will be adequate or continue to be available on terms acceptable to us. We have a complex manufacturing process necessary to meet our customers’ stringent product specifications. We are also required to adhere to various third party quality certifications and perform sufficient internal quality reviews to ensure compliance with established standards. If we fail to meet the customer specifications for their products, we may be subject to product quality costs and claims. These costs are generally not insured. The impacts of product liability and quality claims could have a material adverse impact on the results of our operations, financial condition and cash flows.
Our business subjects us to risks of litigation claims, as a routine matter, and this risk increases the potential for a loss that might not be covered by insurance.
Litigation claims relate to the conduct of our currently and formerly owned businesses, including claims pertaining to product liability, commercial disputes, employment actions, employee benefits, compliance with domestic and federal laws, personal injury, patent infringement and tax issues. Due to the uncertainties of litigation, we can give no assurance that we will prevail on claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. The outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to us. The resolution in any reporting period of one or more of these matters could have a material adverse effect on our results of operations for that period. We can give no assurance that any other matters brought in the future will not have a material effect on our results of operations, financial condition and cash flows.
A portion of our workforce is covered by collective bargaining agreements and union attempts to organize our other employees may cause work interruptions or stoppages.
Approximately 130 production employees at our Dynamet business unit located in Washington, PA are covered by a collective bargaining agreement. This agreement expires in August 2016. Approximately 450 production employees at our Latrobe business unit located in Latrobe, Pennsylvania are covered by a collective bargaining agreement. This agreement expires in August 2017. There can be no assurance that we will succeed in concluding collective bargaining agreements with the unions to replace those that expire. From time to time, the employees at our manufacturing facility in Reading, Pennsylvania, participate in election campaigns or union organizing attempts. There is no guarantee that future organization attempts will not result in union representation.
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Our manufacturing processes are complex and depend upon critical, high cost equipment for which there may be only limited or no production alternatives.
It is possible that we could experience prolonged periods of reduced production due to unplanned equipment failures, and we could incur significant repair or replacement costs in the event of those failures. It is also possible that operations could be disrupted due to other unforeseen circumstances such as power outages, explosions, fires, floods, accidents and severe weather conditions. We must make regular, substantial capital investments and changes to our manufacturing processes to lower production costs, improve productivity, manufacture new or improved products and remain competitive. We may not be in a position to take advantage of business opportunities or respond to competitive pressures if we fail to update, replace or make additions to our equipment or our manufacturing processes in a timely manner. The cost to repair or replace much of our equipment or facilities would be significant. We cannot be certain that we will have sufficient internally generated cash or acceptable external financing to make necessary capital expenditures in the future.
A significant portion of our manufacturing and production facilities are located in Reading and Latrobe, Pennsylvania and Athens, Alabama, which increases our exposure to significant disruption to our business as a result of unforeseeable developments in these geographic areas.
It is possible that we could experience prolonged periods of reduced production due to unforeseen catastrophic events occurring in or around our manufacturing facilities in Reading and Latrobe, Pennsylvania and Athens, Alabama. As a result, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers, meet customer shipment needs or address other severe consequences that may be encountered. Our financial condition, cash flows and results of operations could be materially adversely affected.
We rely on third parties to supply energy consumed at each of our energy-intensive production facilities.
The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions or lack of availability in the supply of energy resources could temporarily impair the ability to operate our production facilities. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, has affected and may continue to adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition.
We consider acquisitions, joint ventures and other business combination opportunities, as well as possible business unit dispositions, as part of our overall business strategy, that involve uncertainties and potential risks that we cannot predict or anticipate fully.
From time to time, management holds discussions with management of other companies to explore such aforementioned opportunities. As a result, the relative makeup of the businesses comprising our Company is subject to change. Acquisitions, joint ventures and other business combinations involve various inherent risks. Such risks include difficulties in integrating the operations, technologies, products and personnel of the acquired companies, diversion of management’s attention from existing operations, difficulties in entering markets in which we have limited or no direct prior experience, dependence on unfamiliar supply chains, insufficient revenues to offset increased expenses associated with acquisitions, loss of key employees of the acquired companies, inaccurate assessment of undisclosed liabilities, difficulties in realizing projected efficiencies, synergies and cost savings, and increases in our debt or limitation on our ability to access additional capital when needed.
Our business may be impacted by external factors that we may not be able to control.
War, civil conflict, terrorism, natural disasters and public health issues including domestic or international pandemic have caused and could cause damage or disruption to domestic or international commerce by creating economic or political uncertainties. Additionally, the volatility in the financial markets could negatively impact our business. These events could result in a decrease in demand for our products, affect the availability of credit facilities to us, our customers or other members of the supply chain necessary to transact business, make it difficult or impossible to deliver orders to customers or receive materials from suppliers, affect the availability or pricing of energy sources or result in other severe consequences that may or may not be predictable. As a result, our business, financial condition and results of operations could be materially adversely affected.
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We believe that international sales, which are associated with various risks, will continue to account for a significant percentage of our future revenues.
Risks associated with international sales include without limitation: political and economic instability, including weak conditions in the world’s economies; difficulty in collecting accounts receivable; unstable or unenforced export controls; changes in legal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws and tariffs; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on international sales when converted into dollars). In addition, we will need to invest in building our capabilities and infrastructure to meet our international growth goals. Any of these factors could materially adversely affect our results for the period in which they occur.
We value most of our inventory using the LIFO method, which could be repealed resulting in adverse effects on our cash flows and financial condition.
The cost of our inventories is primarily determined using the Last-In First-Out (“LIFO”) method. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials and other costs may have been incurred at significantly different values due to the length of time of our production cycle. Generally in a period of rising prices, LIFO recognizes higher costs of goods sold, which both reduces current income and assigns a lower value to the year-end inventory. Recent proposals have been aimed at repealing the election to use the LIFO method for income tax purposes. According to these proposals, generally taxpayers that currently use the LIFO method would be required to revalue their LIFO inventory to its First-In, First-Out (“FIFO”) value. As of June 30, 2015, if the FIFO method of inventory had been used instead of the LIFO method, our inventories would have been approximately $197 million higher. This increase in inventory would result in a one-time increase in taxable income which would be taken into account over the following several taxable years. The repeal of the LIFO method could result in a substantial tax liability which could adversely impact our cash flows and financial condition.
We depend on the retention of key personnel.
Much of our future success depends on the continued service and availability of skilled personnel, including members of our executive management team, management, metallurgists and production positions. The loss of key personnel could adversely affect our ability to perform until suitable replacements are found.
We could be adversely impacted if our information technology (“IT”) and computer systems do not perform properly or if we fail to protect the integrity of confidential data.
Management relies on IT infrastructure, including hardware, network, software, people and processes, to provide useful information to conduct our business and support assessments and conclusions about operating performance. Our inability to produce relevant and/or reliable measures of operating performance in an efficient, cost-effective and well-controlled fashion may have significant negative impacts on our future operations. In addition, any material failure, interruption of service, or compromised data security could adversely affect our operations. Security breaches in our information technology could result in theft, destruction, loss, misappropriation or release of confidential data or intellectual property which could adversely impact our future results.
The carrying value of goodwill and other intangible assets may not be recoverable.
Goodwill and other intangible assets are recorded at fair value on the date of acquisition. We review these assets at least annually for impairment. Impairment may result from, among other things, deterioration in performance, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other factors. Any future impairment of goodwill or other intangible assets could have a material adverse effect on our results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The principal locations of our primary domestic integrated mills in our SAO segment are located in Reading and Latrobe, Pennsylvania in addition to the new premium products manufacturing plant in Athens, Alabama. In addition, SAO manufactures large diameter hollow bar in Orwigsburg, Pennsylvania and Elyria, Ohio and operates a mini mill manufacturing
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stainless steel bar and wire in Hartsville, South Carolina. The principal locations for PEP businesses include titanium alloy production facilities located in Washington, Pennsylvania and Clearwater, Florida, powder products manufacturing facilities in Bridgeville, Pennsylvania and Woonsocket, Rhode Island and a facility in Houston, Texas for manufacturing of machined components used in the drilling, exploration and production of oil and gas. The PEP segment also includes domestic leased warehouses and service centers located in Houston, Texas; San Antonio, Texas; Midland, Texas; Oklahoma City, Oklahoma; Casper, Wyoming; Lafayette, Louisiana; West Alexander, Pennsylvania; Vienna, Ohio; Chicago, Illinois; Pinehurst, Texas and Mobile, Alabama. The PEP segment includes one owned service center in White House, Tennessee.
The Reading, Hartsville, Washington, Bridgeville, Orwigsburg, Elyria, Woonsocket, Latrobe, Houston and Athens facilities are owned. The Clearwater facility is owned, but the land is leased.
As part of the restructuring actions announced in fiscal year 2015 we closed the Tyler, Texas manufacturing plant and the Northborough, Massachusetts service center. Both locations are owned.
We also own or lease manufacturing facilities, distribution centers, service centers and sales offices in a number of foreign countries, including Sweden, Canada, Singapore, China, Mexico, Taiwan, the United Arab Emirates, the United Kingdom and Belgium.
Our corporate offices, located in Wyomissing, Pennsylvania, are leased.
Our plants, customer service centers, and distribution centers were acquired or leased at various times over several years. There is an active maintenance program to ensure a safe operating environment and to keep facilities in good condition. In addition, we have had an active capital spending program to replace equipment as needed to keep it technologically competitive on a worldwide basis. We believe our facilities are in good condition and suitable for our business needs.
Item 3. Legal Proceedings
From time to time, we are a party to lawsuits and other proceedings involving alleged violations of, or liabilities arising from, environmental laws. We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a potentially responsible party (“PRP”) with respect to certain third party Superfund or similar waste disposal sites and other third party owned sites. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRP’s. Based upon information currently available, such future costs are not expected to have a material effect on our financial position, results of operations or cash flows over the long-term. However, such costs could be material to our financial position, results of operations or cash flows in a particular future quarter or year.
In addition, from time to time, we are a party to certain routine claims and legal actions and other contingent liabilities incident to the normal course of business which pertain to litigation, product claims, commercial disputes, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims, patent infringement and tax issues. Based on information currently available, the ultimate resolution of our known contingencies, individually or in the aggregate and including the matters described in Note 10 to the consolidated financial statements in this Form 10-K, is not expected to have a material adverse effect on our financial position, cash flows or results of operations. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to our financial position, results of operations or cash flows in a particular future quarter or year.
See the “Contingencies” section included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation”, and the “Contingencies and Commitments” section included in Note 10 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”, included in this Form 10-K, the contents of which are incorporated by reference to this Item 3.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 4A. Executive Officers of the Registrant
Listed below are the names of our corporate executive officers, including those required to be listed as executive officers for SEC purposes, each of whom assumes office after the annual organization meeting of the Board of Directors which immediately follows the Annual Meeting of Stockholders.
Tony R. Thene was appointed President and Chief Executive Officer effective July 1, 2015. Since joining Carpenter in January 2013, Mr. Thene served as the Senior Vice President and Chief Financial Officer. Mr. Thene joined Carpenter after 23 years with Alcoa Inc., a leading producer of primary and fabricated aluminum, holding various management positions.
Gregory A. Pratt was appointed interim Executive Chairman of the Board effective July 1, 2015. Mr. Pratt served as the Interim President and Chief Executive Officer from November 2014 to June 2015 upon the resignation of the prior President and Chief Executive Officer. Mr. Pratt was Carpenter's Chief Executive Officer in fiscal year 2010, and has been a Board member since 2002. Mr. Pratt has also been the Chairperson of Carpenter’s Board, a position he has held since 2009. During his tenure as Chairperson, Carpenter has made numerous investments in its business, acquired Amega West and Latrobe Specialty Metals and built Carpenter’s new Athens facility.
Timothy Lain was appointed Acting Chief Financial Officer effective July 1, 2015. Since joining Carpenter in June 2007, Mr. Lain has had progressively responsible roles in Carpenter's financial organization, most recently serving as Vice President — Controller and Chief Accounting Officer.
David L. Strobel was appointed Senior Vice President and Chief Technology Officer effective July 13, 2015. Since joining Carpenter in 1983, Mr. Strobel has held numerous positions of increasing responsibility, including Vice President — Manufacturing, Vice President — Technology and most recently serving as Senior Vice President — Global Operations.
Joseph E. Haniford was appointed Senior Vice President, Specialty Alloys Operations effective July 13, 2105. Mr. Haniford joined Carpenter from EnTrans International where he was responsible for all operations as the company's Chief Operating Officer (COO) and was a member of the Board of Directors. Prior to EnTrans International, Mr. Haniford worked for Alcoa, Inc. for more than 30 years in various executive leadership positions.
Assumed Present Position | ||||||
Name | Age | Position | ||||
Tony R. Thene | 54 | President and Chief Executive Officer | July 2015 | |||
Gregory A. Pratt | 66 | Interim Executive Chairman of the Board | July 2015 | |||
Timothy Lain | 43 | Acting Chief Financial Officer | July 2015 | |||
David L. Strobel | 54 | Senior Vice President and Chief Technology Officer | July 2015 | |||
Joseph E. Haniford | 56 | Senior Vice President, Specialty Alloys Operations | July 2015 | |||
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PART II
Item 5. Market for the Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange (“NYSE”) and traded under the symbol “CRS”. The following table sets forth, for the periods indicated, the high and low prices for our common stock as reported by the NYSE:
Fiscal Year 2015 | Fiscal Year 2014 | |||||||||||||||
Quarter Ended: | High | Low | High | Low | ||||||||||||
September 30 | $ | 64.69 | $ | 44.98 | $ | 60.01 | $ | 45.15 | ||||||||
December 31 | $ | 53.12 | $ | 41.43 | $ | 62.95 | $ | 57.41 | ||||||||
March 31 | $ | 49.73 | $ | 34.28 | $ | 66.54 | $ | 55.45 | ||||||||
June 30 | $ | 45.42 | $ | 34.80 | $ | 67.00 | $ | 61.00 | ||||||||
Annual | $ | 64.69 | $ | 34.28 | $ | 67.00 | $ | 45.15 | ||||||||
The range of our common stock price on the NYSE from July 1, 2015 to August 14, 2015 was $35.24 to $40.56. The closing price of the common stock was $39.08 on August 14, 2015.
We have paid quarterly cash dividends on our common stock for over 120 consecutive years. We paid a quarterly dividend of $0.18 per share of common stock during each quarter of fiscal years 2015 and 2014.
As of August 14, 2015, there were 2,434 common stockholders of record.
Information regarding Securities Authorized for Issuance under Equity Compensation Plans is set forth in Item 12 hereto “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.
Cumulative Total Stockholder Return
The graph below compares the cumulative total stockholder return on our common stock to the cumulative total return of the S&P MidCap 400 Index, the most widely used index for mid-sized companies, and our Peer Group, for each of the last five fiscal years ended June 30, 2015. The cumulative total return assumes an investment of $100 on June 30, 2010 and the reinvestment of any dividends during the period. Our Peer Group consists of the companies in the Russell Materials and Processing Growth Index. We believe the companies included in our Peer Group, taken as a whole, provide a more meaningful comparison in terms of product offerings, markets served, competition and other relevant factors. The total stockholder return for the peer group is weighted according to the respective issuer’s stock market capitalization at the beginning of each period.
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6/10 | 6/11 | 6/12 | 6/13 | 6/14 | 6/15 | |||||||||||||
Carpenter Technology Corporation | 100.00 | 178.99 | 150.52 | 143.85 | 204.34 | 126.92 | ||||||||||||
S&P Midcap 400 | 100.00 | 139.38 | 136.13 | 170.42 | 213.43 | 227.08 | ||||||||||||
Russell Materials & Processing Growth | 100.00 | 146.79 | 131.48 | 163.23 | 210.54 | 213.31 | ||||||||||||
Issuer Purchases of Equity Securities
In October 2014, the Company’s Board of Directors authorized a share repurchase program up to $500.0 million of the Company's shares of Common Stock over two years. The shares of Common Stock may be repurchased from time to time at our discretion based on capital needs of the business, general market conditions and market price of the stock. The timing or amount of the shares to be repurchased cannot be assured. The share repurchase program may be discontinued at any time. As of June 30, 2015, $375.5 million of the $500.0 million remained available for future purchases.
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The following table contains information about purchases by us of our common stock during the quarter ended June 30, 2015:
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) | ||||||||||
April 1-30, 2015 | 1,334,900 | $ | 40.27 | 1,334,900 | $ | 386.0 | ||||||||
May 1-31, 2015 | 147,800 | $ | 42.42 | 147,800 | $ | 379.7 | ||||||||
June 1-30, 2015 | 100,800 | $ | 41.21 | 100,800 | $ | 375.5 | ||||||||
Quarter ended June 30, 2015 | 1,583,500 | $ | 40.53 | 1,583,500 | $ | 375.5 | ||||||||
Item 6. Selected Financial Data
Five-Year Financial Summary
$ in millions, except per share data
(Fiscal years ended June 30,)
2015(a)(b) | 2014 | 2013(c) | 2012(c)(d) | 2011(e) | ||||||||||||||||
Summary of Operations: | ||||||||||||||||||||
Net sales | $ | 2,226.7 | $ | 2,173.0 | $ | 2,271.7 | $ | 2,028.7 | $ | 1,675.1 | ||||||||||
Operating income | $ | 111.5 | $ | 212.0 | $ | 232.7 | $ | 210.1 | $ | 96.4 | ||||||||||
Net income | $ | 58.7 | $ | 132.8 | $ | 146.5 | $ | 121.6 | $ | 71.7 | ||||||||||
Net income attributable to Carpenter | $ | 58.7 | $ | 132.8 | $ | 146.1 | $ | 121.2 | $ | 71.0 | ||||||||||
Financial Position at Year-End: | ||||||||||||||||||||
Cash and cash equivalents | $ | 70.0 | $ | 120.0 | $ | 257.5 | $ | 211.0 | $ | 492.5 | ||||||||||
Marketable securities, current | $ | — | $ | — | $ | — | $ | — | $ | 30.5 | ||||||||||
Total assets | $ | 2,905.9 | $ | 3,057.5 | $ | 2,882.9 | $ | 2,627.8 | $ | 1,991.9 | ||||||||||
Long-term obligations, net of current portion | $ | 607.1 | $ | 604.3 | $ | 604.2 | $ | 305.9 | $ | 407.8 | ||||||||||
Per Common Share: | ||||||||||||||||||||
Net earnings: | ||||||||||||||||||||
Basic | $ | 1.11 | $ | 2.48 | $ | 2.75 | $ | 2.55 | $ | 1.59 | ||||||||||
Diluted | $ | 1.11 | $ | 2.47 | $ | 2.73 | $ | 2.53 | $ | 1.59 | ||||||||||
Cash dividend-common | $ | 0.72 | $ | 0.72 | $ | 0.72 | $ | 0.72 | $ | 0.72 | ||||||||||
Weighted Average Common Shares Outstanding: | ||||||||||||||||||||
Basic | 52.6 | 53.3 | 52.9 | 47.1 | 44.1 | |||||||||||||||
Diluted | 52.7 | 53.6 | 53.2 | 47.5 | 44.7 | |||||||||||||||
(a) Fiscal year 2015 included $29.1 million of restructuring costs related principally to workforce reduction, facility closures and write-down of certain assets. See Note 2 in the Notes to the Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data” of this report.
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(b) The weighted average common shares outstanding for fiscal year 2015 included 0.9 million less shares related to the share repurchase program authorized in October 2014. During the year ended June 30, 2015, we repurchased 2,995,272 shares of common stock for $124.5 million.
(c) The weighted average common shares outstanding for fiscal years 2013 and 2012 included an additional 8.1 million and 2.7 million, respectively, shares issued in connection with the Latrobe acquisition.
(d) Fiscal year 2012 included $11.7 million of acquisition-related costs incurred in connection with the Latrobe Acquisition that was consummated on February 29, 2012.
(e) Fiscal year 2011 included $2.4 million of Latrobe acquisition-related costs and $0.7 million of Amega West acquisition-related costs incurred in connection with the Latrobe and Amega West Acquisitions.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion of factors that affect the comparability of the “Selected Financial Data”.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Background and General
Our discussions below in this Item 7 should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this annual report on Form 10-K.
We are engaged in the manufacturing, fabrication and distribution of specialty metals. We primarily process basic raw materials such as nickel, cobalt, titanium, manganese, chromium, molybdenum, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire and narrow strip in many sizes and finishes. We also produce certain metal powders. Our sales are distributed directly from our production plants and distribution network as well as through independent distributors. Unlike many other specialty steel producers, we operate our own worldwide network of service and distribution centers. These service centers, located in the United States, Canada, Mexico, Europe and Asia allow us to work more closely with customers and to offer various just-in-time stocking programs. We also manufacture and rent down-hole drilling tools and components used in the oil and gas industry.
As part of our overall business strategy, we have sought out and considered opportunities related to strategic acquisitions, divestitures and joint collaborations as well as possible business unit dispositions aimed at broadening our offering to the marketplace. We have participated with other companies to explore potential terms and structures of such opportunities and expect that we will continue to evaluate these opportunities.
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Business Trends
Selected financial results for the past three fiscal years are summarized below:
Fiscal Year | ||||||||||||
($ in millions, except per share data) | 2015 | 2014 | 2013 | |||||||||
Net sales | $ | 2,226.7 | $ | 2,173.0 | $ | 2,271.7 | ||||||
Net sales excluding surcharge revenue (1) | $ | 1,811.8 | $ | 1,782.8 | $ | 1,839.3 | ||||||
Operating income | $ | 111.5 | $ | 212.0 | $ | 232.7 | ||||||
Operating income excluding pension earnings, interest and deferrals (“pension EID”) expense (1) | $ | 120.9 | $ | 233.8 | $ | 264.6 | ||||||
Net income | $ | 58.7 | $ | 132.8 | $ | 146.5 | ||||||
Diluted earnings per share | $ | 1.11 | $ | 2.47 | $ | 2.73 | ||||||
Purchases of property, equipment and software | $ | 170.5 | $ | 349.2 | $ | 310.2 | ||||||
Free cash flow (1) | $ | 74.4 | $ | (147.8 | ) | $ | (159.3 | ) | ||||
Pounds sold (in thousands) (2) | 277,482 | 290,388 | 273,724 | |||||||||
(1) See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.
(2) Includes specialty and titanium alloys, stainless steel and powder materials.
Our sales are across a diversified list of end-use markets. The table below summarizes our estimated sales by market over the past three fiscal years:
Fiscal Year | |||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||
($ in millions) | Dollars | % of Total | Dollars | % of Total | Dollars | % of Total | |||||||||||||||
Aerospace and defense | $ | 1,023.3 | 46 | % | $ | 980.7 | 46 | % | $ | 1,067.0 | 47 | % | |||||||||
Industrial and consumer | 482.4 | 22 | 481.6 | 22 | 474.3 | 21 | |||||||||||||||
Energy | 292.1 | 13 | 310.4 | 14 | 337.3 | 15 | |||||||||||||||
Transportation | 168.1 | 7 | 150.1 | 7 | 138.8 | 6 | |||||||||||||||
Medical | 123.9 | 6 | 112.6 | 5 | 113.2 | 5 | |||||||||||||||
Distribution | 136.9 | 6 | 137.6 | 6 | 141.1 | 6 | |||||||||||||||
Total net sales | $ | 2,226.7 | 100 | % | $ | 2,173.0 | 100 | % | $ | 2,271.7 | 100 | % | |||||||||
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The table below shows our net sales by major product class for the past three fiscal years:
Fiscal Year | |||||||||||||||||||||
2015 | 2014 | 2013 | |||||||||||||||||||
($ in millions) | Dollars | % of Total | Dollars | % of Total | Dollars | % of Total | |||||||||||||||
Special alloys | $ | 991.2 | 44 | % | $ | 917.0 | 42 | % | $ | 989.9 | 43 | % | |||||||||
Stainless steels | 619.2 | 28 | 643.6 | 30 | 638.8 | 28 | |||||||||||||||
Alloy and tool steel | 218.8 | 10 | 240.4 | 11 | 255.7 | 11 | |||||||||||||||
Titanium products | 164.8 | 7 | 157.7 | 7 | 155.0 | 7 | |||||||||||||||
Powder metals | 61.8 | 3 | 48.6 | 2 | 60.4 | 3 | |||||||||||||||
Distribution and other | 170.9 | 8 | 165.7 | 8 | 171.9 | 8 | |||||||||||||||
Total net sales | $ | 2,226.7 | 100 | % | $ | 2,173.0 | 100 | % | $ | 2,271.7 | 100 | % | |||||||||
Impact of Raw Material Prices and Product Mix
We value most of our inventory utilizing LIFO inventory costing methodology. Under the LIFO inventory costing method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials may have been acquired at potentially significantly different values due to the length of time from the acquisition of the raw materials to the sale of the processed finished goods to the customers. In a period of rising raw material costs, the LIFO inventory valuation normally results in higher cost of sales. Conversely, in a period of decreasing raw material costs, the LIFO inventory valuation normally results in lower cost of sales.
The volatility of the costs of raw materials has impacted our operations over the past several years. We, and others in our industry, generally have been able to pass cost increases on major raw materials through to our customers using surcharges that are structured to recover increases in raw material costs. Generally, the formula used to calculate a surcharge is based on published prices of the respective raw materials for the previous month which correlates to the prices we pay for our raw material purchases. However, a portion of our surcharges to customers may be calculated using a different surcharge formula or may be based on the raw material prices at the time of order, which creates a lag between surcharge revenue and corresponding raw material costs recognized in cost of sales. The surcharge mechanism protects our net income on such sales except for the lag effect discussed above. However, surcharges have had a dilutive effect on our gross margin and operating margin percentages as described later in this report.
Approximately 25 percent of our net sales are sales to customers under firm price sales arrangements. Firm price sales arrangements involve a risk of profit margin fluctuations, particularly when raw material prices are volatile. In order to reduce the risk of fluctuating profit margins on these sales, we enter into commodity forward contracts to purchase certain critical raw materials necessary to produce the related products sold. Firm price sales arrangements generally include certain annual purchasing commitments and consumption schedules agreed to by the customers at selling prices based on raw material prices at the time the arrangements are established. If a customer fails to meet the volume commitments (or the consumption schedule deviates from the agreed-upon terms of the firm price sales arrangements), the Company may need to absorb the gains or losses associated with the commodity forward contracts on a temporary basis. Gains or losses associated with commodity forward contracts are reclassified to earnings/loss when earnings are impacted by the hedged transaction. Because we value most of our inventory under the LIFO costing methodology, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period attempting to match the most recently incurred costs with revenues. Gains or losses on the commodity forward contracts are reclassified from other comprehensive income together with the actual purchase price of the underlying commodities when the underlying commodities are purchased and recorded in inventory. To the extent that the total purchase price of the commodities, inclusive of the gains or losses on the commodity forward contracts, are higher or lower relative to the beginning of year costs, our cost of goods sold reflects such amounts. Accordingly, the gains and/or losses associated with commodity forward contracts may not impact the same period that the firm price sales arrangements revenue is recognized, and comparisons of gross profit from period to period may be impacted. These firm price sales arrangements are expected to continue as we look to strengthen our long-term customer relationships by expanding, renewing and in certain cases extending to a longer term, our customer long-term arrangements.
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We produce hundreds of grades of materials, with a wide range of pricing and profit levels depending on the grade. In addition, our product mix within a period is subject to the fluctuating order patterns of our customers as well as decisions we may make on participation in certain products based on available capacity including the impacts of capacity commitments we may have under existing customer agreements. While we expect to see positive contribution from a more favorable product mix in our margin performance over time, the impact by period may fluctuate, and period-to-period comparisons may vary.
Net Pension Expense
Net pension expense, as we define it below, includes the net periodic benefit costs related to both our pension and other postretirement plans. The net periodic benefit costs are determined annually based on beginning of year balances and are recorded ratably throughout the fiscal year, unless a significant re-measurement event occurs. The following is a summary of the net periodic benefit costs for the years ended June 30, 2015, 2014 and 2013:
Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Pension plans | $ | 34.5 | $ | 49.0 | $ | 59.5 | ||||||
Other postretirement plans | 10.0 | 11.1 | 9.3 | |||||||||
Net periodic benefit costs | $ | 44.5 | $ | 60.1 | $ | 68.8 | ||||||
The service cost component of net pension expense represents the estimated cost of future pension liabilities earned associated with active employees. The pension earnings, interest and deferrals (“pension EID”) is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans and amortization of actuarial gains and losses and prior service costs.
During the year ended June 30, 2015, we implemented a reduction in our workforce by approximately 200, or 10 percent, of the total salaried positions and a reduction of several hourly positions. As a result of the reduction in workforce, $8.3 million was paid from the Company's qualified pension plan consisting primarily of various personnel-related costs to cover severance payments and medical coverage.
Net pension expense is recorded in accounts that are included in both the cost of sales and selling, general and administrative expenses based on the function of the associated employees. The following is a summary of the classification of net pension expense for the years ended June 30, 2015, 2014 and 2013:
Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Cost of sales | ||||||||||||
Service cost | $ | 29.3 | $ | 28.2 | $ | 28.8 | ||||||
Pension earnings, interest and deferrals | 5.0 | 14.2 | 22.9 | |||||||||
$ | 34.3 | $ | 42.4 | $ | 51.7 | |||||||
Selling, general and administrative expenses | ||||||||||||
Service cost | $ | 7.3 | $ | 7.9 | $ | 8.1 | ||||||
Pension earnings, interest and deferrals | 4.5 | 7.6 | 9.0 | |||||||||
Curtailment gain | (1.6 | ) | — | — | ||||||||
$ | 10.2 | $ | 15.5 | $ | 17.1 | |||||||
Net pension expense | $ | 44.5 | $ | 57.9 | $ | 68.8 | ||||||
As of June 30, 2015 and 2014, amounts capitalized in gross inventory were $9.5 million and $9.2 million, respectively.
Operating Performance Overview
During fiscal year 2015 we faced several challenges including the impact of lower oil and gas prices on our energy end-use market, manufacturing problems earlier in the year including the unanticipated start-up issues after scheduled summer shutdowns at the Reading mill and the Latrobe unplanned press outages, as well as operating cost performance issues. Over the last two quarters, we have taken actions aimed at improving our operating performance and driving long-term growth and
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stockholder value, including:
- In March 2015, we initiated a restructuring plan that included the elimination of approximately 200 salaried positions and 60 outsourced positions, as well as other non-labor related costs. It is estimated that these actions will yield approximately $30 million of annual overhead cost savings.
- We targeted an inventory reduction of $50.0 million by the end of fiscal year 2015 compared to the end of the first quarter of fiscal year 2015. We achieved approximately $67 million reduction of inventory since the end of the first quarter.
- We repurchased 3.0 million common shares for $124.5 million in fiscal year 2015.
- We strengthened our “continuous improvement process” in January 2015, with the introduction of the Business Management Office (BMO). The BMO is focused on profit optimization, operating cost improvement and inventory reduction.
Results of Operations — Fiscal Year 2015 Compared to Fiscal Year 2014
For fiscal year 2015, we recorded net income of $58.7 million, or $1.11 per diluted share, compared with net income of $132.8 million, or $2.47 per diluted share, a year earlier. Our fiscal year 2015 results reflect the impact of increasing sales by 2 percent in a challenging market environment which was more than offset by the weakness in the oil and gas businesses, increased operating costs and the restructuring plan implemented in the recent third quarter.
Net Sales
Net sales for fiscal year 2015 were $2,226.7 million, which was a 2 percent increase from fiscal year 2014. Excluding surcharge revenue, sales were 2 percent higher than fiscal year 2014 on 4 percent lower volume. The results reflect sales increasing in the aerospace and defense, medical and transportation end-use markets, partially offset by the weakness in the energy end-use market due to weak market conditions. The increase in sales combined with lower shipment volume reflects a favorable shift in product mix.
Geographically, sales outside the United States increased 2 percent from fiscal year 2014 to $646.8 million. International sales as a percentage of our total net sales represented 29 percent for both fiscal years 2015 and 2014.
Sales by End-Use Markets
We sell to customers across diversified end-use markets. The following table includes comparative information for our net sales, which includes surcharge revenue, by principal end-use markets. We believe this is helpful supplemental information in analyzing the performance of the business from period to period.
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2015 | 2014 | |||||||||||||
Aerospace and defense | $ | 1,023.3 | $ | 980.7 | $ | 42.6 | 4 | % | |||||||
Industrial and consumer | 482.4 | 481.6 | 0.8 | — | % | ||||||||||
Energy | 292.1 | 310.4 | (18.3 | ) | (6 | )% | |||||||||
Transportation | 168.1 | 150.1 | 18.0 | 12 | % | ||||||||||
Medical | 123.9 | 112.6 | 11.3 | 10 | % | ||||||||||
Distribution | 136.9 | 137.6 | (0.7 | ) | (1 | )% | |||||||||
Total net sales | $ | 2,226.7 | $ | 2,173.0 | $ | 53.7 | 2 | % | |||||||
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The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2015 | 2014 | |||||||||||||
Aerospace and defense | $ | 800.5 | $ | 775.3 | $ | 25.2 | 3 | % | |||||||
Industrial and consumer | 383.0 | 379.8 | 3.2 | 1 | |||||||||||
Energy | 250.2 | 269.9 | (19.7 | ) | (7 | ) | |||||||||
Transportation | 128.7 | 118.0 | 10.7 | 9 | |||||||||||
Medical | 113.8 | 103.5 | 10.3 | 10 | |||||||||||
Distribution | 135.6 | 136.3 | (0.7 | ) | (1 | ) | |||||||||
Total net sales excluding surcharge revenue | $ | 1,811.8 | $ | 1,782.8 | $ | 29.0 | 2 | % | |||||||
Sales to the aerospace and defense market increased 4 percent from fiscal year 2014 to $1,023.3 million. Excluding surcharge revenue, sales increased 3 percent on 3 percent higher shipment volume. The results reflect an increase in sales of fastener materials and a stronger demand for engine materials, partially offset by lower demand for structural and defense materials.
Industrial and consumer market sales were $482.4 million for fiscal year 2015. Excluding surcharge revenue, sales increased 1 percent on 15 percent lower shipment volume. The results reflect a favorable shift in product mix related to high-end consumer electronics and industrial capital goods.
Sales to the energy market of $292.1 million reflected a 6 percent decrease from fiscal year 2014. Excluding surcharge revenue, sales decreased 7 percent on 5 percent lower shipment volume. The results reflect demand softness in materials used in oil and gas drilling and completions in the second half of fiscal year 2015. Also, North American average directional and horizontal rig count decreased 46 percent from the prior year. These declines were partially offset by a moderate increase in power generation sales.
Transportation market sales increased 12 percent from fiscal year 2014 to $168.1 million. Excluding surcharge revenue, sales increased 9 percent on 5 higher shipment volume. The results reflect a strengthening mix for our materials used in engine fasteners, valve and fuel system materials. Low fuel prices drove up sales for vehicle platforms with higher Carpenter material content. In addition, sales of light trucks increased from the year ago period. Also, backlog is experiencing growth due to an improved mix.
Sales to the medical market increased 10 percent to $123.9 million from fiscal year 2014. Adjusted for surcharge revenue, sales increased 10 percent on 14 percent higher shipment volume. The results reflect strength in demand for materials used for surgical instruments, as well as increased sales of titanium materials used in orthopedic implant procedures. In addition, Original Equipment Manufacturers (OEMs) appear to have resumed stabilized buying patterns. However, the medical market pricing environment remains extremely competitive.
Distribution sales decreased 1 percent from the same period a year ago to $136.9 million. Excluding surcharge revenue, sales decreased 1 percent from the same period a year ago.
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Sales by Product Class
The following table includes comparative information for our net sales by major product class:
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2015 | 2014 | |||||||||||||
Special alloys | $ | 991.2 | $ | 917.0 | $ | 74.2 | 8 | % | |||||||
Stainless steel | 619.2 | 643.6 | (24.4 | ) | (4 | ) | |||||||||
Alloy and tool steel | 218.8 | 240.4 | (21.6 | ) | (9 | ) | |||||||||
Titanium products | 164.8 | 157.7 | 7.1 | 5 | |||||||||||
Powder metals | 61.8 | 48.6 | 13.2 | 27 | |||||||||||
Distribution and other | 170.9 | 165.7 | 5.2 | 3 | |||||||||||
Total net sales | $ | 2,226.7 | $ | 2,173.0 | $ | 53.7 | 2 | % | |||||||
The following table includes comparative information for our net sales by the same major product class, but excluding surcharge revenue:
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2015 | 2014 | |||||||||||||
Special alloys | $ | 712.8 | $ | 666.3 | $ | 46.5 | 7 | % | |||||||
Stainless steels | 524.0 | 548.7 | (24.7 | ) | (5 | ) | |||||||||
Alloy and tool steel | 180.5 | 198.4 | (17.9 | ) | (9 | ) | |||||||||
Titanium products | 164.8 | 157.7 | 7.1 | 5 | |||||||||||
Powder metals | 61.8 | 48.6 | 13.2 | 27 | |||||||||||
Distribution and other | 167.9 | 163.1 | 4.8 | 3 | |||||||||||
Total net sales excluding surcharge revenue | $ | 1,811.8 | $ | 1,782.8 | $ | 29.0 | 2 | % | |||||||
Sales of special alloys products increased 8 percent in fiscal year 2015 as compared with a year ago to $991.2 million. Excluding surcharge revenue, sales increased 7 percent on 7 percent higher shipment volume. The year over year results reflect increased sales in the aerospace and defense, transportation and industrial and consumer end-use markets.
Sales of stainless steels decreased 4 percent in fiscal year 2015 as compared with a year ago to $619.2 million. Excluding surcharge revenue, such sales decreased by 5 percent on 10 percent lower shipment volume. The year over year results reflect decreased sales in the energy and industrial and consumer end-use markets.
Sales of alloy and tool steel decreased 9 percent in fiscal year 2015 on 6 percent lower shipment volume.
Sales of titanium products increased 5 percent as compared with fiscal year 2014 on 6 percent higher shipment volume due to higher sales in the medical end-use market.
Sales of powder metals increased 27 percent in fiscal year 2015 on 8 percent higher shipment volume.
Gross Profit
Gross profit in fiscal year 2015 decreased to $318.3 million, or 14.3 percent of net sales (17.6 percent of net sales excluding surcharge revenue), from $398.9 million, or 18.4 percent of net sales (22.4 percent of net sales excluding surcharge revenue), for fiscal year 2014. The results reflect a stronger product mix which was more than offset by higher operating costs, unfavorable cost absorption as a result of reducing inventory and incremental depreciation expense due to the Athens facility which was placed into service late in fiscal year 2014.
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Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin for fiscal years 2015 and 2014. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.
Fiscal Year | ||||||||
($ in millions) | 2015 | 2014 | ||||||
Net sales | $ | 2,226.7 | $ | 2,173.0 | ||||
Less: surcharge revenue | 414.9 | 390.2 | ||||||
Net sales excluding surcharge revenue | $ | 1,811.8 | $ | 1,782.8 | ||||
Gross profit | $ | 318.3 | $ | 398.9 | ||||
Gross margin | 14.3 | % | 18.4 | % | ||||
Gross margin excluding surcharge revenue | 17.6 | % | 22.4 | % | ||||
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal year 2015 were $177.7 million, or 8.0 percent of net sales (9.8 percent of net sales excluding surcharge revenue), compared to $186.9 million, or 8.6 percent of net sales (10.5 percent of net sales excluding surcharge revenue), in fiscal year 2014. Selling, general and administrative expenses decreased from the same period last year primarily due to lower depreciation and amortization expense of $4.3 million, lower variable compensation expense of $3.5 million, a reduction in pension EID expense of $3.1 million and lower severance of $1.6 million compared to prior year. These favorable items were partially offset by consulting costs of $5.1 million in fiscal year 2015 related to the BMO and strategic business review.
Restructuring Charges
During fiscal year 2015 we incurred $29.1 million of restructuring charges. We implemented a reduction in our workforce by approximately 200, or 10 percent, of the total salaried positions and a reduction of several hourly positions resulting in a charge of $12.7 million consisting primarily of various personnel-related costs to cover severance payments, medical coverage and related items. We also exited the ultra-fine grain materials development program resulting in a charge of $13.4 million during the fiscal year. In addition, we announced the closure of facilities resulting in a charge of $3.0 million to reflect the write-down of certain inventory, property and equipment and related items.
In fiscal year 2015 we recorded non-cash restructuring and asset impairment charges of $7.6 million, payments from qualified pension plan of $8.3 million and cash payments of $10.9 million made against the restructuring reserve. The remaining restructuring reserve of $2.3 million is expected to be paid in fiscal year 2016.
Activities undertaken in connection with the restructuring plan are expected to be substantially complete by the end of the first quarter of fiscal year 2016.
Operating Income
Our operating income in fiscal year 2015 decreased to $111.5 million as compared with $212.0 million in fiscal year 2014. The results reflect a strengthening product mix and lower selling, general and administrative expenses more than offset by higher operating costs, incremental depreciation expense due to the Athens facility which was placed into service in fiscal year 2014 and restructuring charges.
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Operating income has been significantly impacted by our pension EID, which may be volatile based on conditions in the financial markets, as well as restructuring charges and special items. The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales and cost of sales and excluding the impacts of pension EID, restructuring charges and special items. We present and discuss these financial measures because management believes removing these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.
Fiscal Year | ||||||||
($ in millions) | 2015 | 2014 | ||||||
Net sales | $ | 2,226.7 | $ | 2,173.0 | ||||
Less: surcharge revenue | 414.9 | 390.2 | ||||||
Net sales excluding surcharge revenue | $ | 1,811.8 | $ | 1,782.8 | ||||
Operating income | $ | 111.5 | $ | 212.0 | ||||
Pension EID | 9.5 | 21.8 | ||||||
Operating income excluding pension EID | 121.0 | 233.8 | ||||||
Restructuring charges and special items: | ||||||||
Restructuring charges | 29.1 | — | ||||||
Consulting costs | 5.1 | — | ||||||
Weather-related costs | — | 8.0 | ||||||
Operating income excluding pension EID, restructuring charges and special items | $ | 155.2 | $ | 241.8 | ||||
Operating margin | 5.0 | % | 9.8 | % | ||||
Operating margin excluding surcharge revenue, pension EID, restructuring charges and special items | 8.6 | % | 13.6 | % | ||||
In addition to the impacts of the surcharge mechanism and pension EID, fluctuations in raw material prices (combined with fluctuations in inventory levels) and the lag effect of the surcharge mechanism have impacted our operating income from year to year. We estimate that the effect of such combined fluctuations positively impacted our operating margin, excluding surcharge revenue, by 40 basis points during fiscal year 2015 and positively impacted our operating margin by 100 basis points during fiscal year 2014.
Interest Expense
Fiscal year 2015 interest expense of $27.7 million increased 63 percent compared to $17.0 million in fiscal year 2014. The increase in interest expense is due to capitalized interest of $2.7 million during the year ended June 30, 2015 compared to $15.1 million the same period a year ago which primarily reflects the impact of placing a significant amount of the assets, attributable to the construction project at our Athens manufacturing plant, in service late in fiscal year 2014. This is offset by net gains from interest rate swaps of $2.9 million as compared to $0.0 million in fiscal year 2014. We have used interest rate swaps to achieve a level of floating rate debt to fixed rate debt where appropriate.
Other Income, Net
Other income for fiscal year 2015 was $5.3 million as compared with $1.4 million a year ago. The year ended June 30, 2015 includes a $4.4 million favorable legal settlement.
Income Taxes
Our effective tax rate (income tax expense as a percent of income before taxes) for fiscal year 2015 was 34.1 percent as compared to 32.4 percent in fiscal year 2014. The tax rates for both periods were lower than the statutory rate of 35 percent, primarily due to benefits associated with the domestic manufacturing deduction. The fiscal year 2015 tax rate includes net tax charges of $1.6 million for the unfavorable impact of bonus depreciation on domestic manufacturing benefits recorded in the
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prior year, net of additional research and development credits as a result of the December 2014 enactment of the Tax Increase Prevention Act.
As of June 30, 2014 we had $128.4 million of indefinitely reinvested foreign earnings for which we had not provided deferred income taxes. Due to the authorization of the $500.0 million share repurchase program in October 2014, we changed our intent with regard to the indefinite reinvestment of a portion of the foreign earnings of one of our foreign subsidiaries for fiscal year 2014 and prior years. As a result of this change, we repatriated approximately $38 million during the third quarter of fiscal year 2015 with minimal tax cost. The remaining balance of unremitted foreign earnings continues to be indefinitely reinvested.
See Note 16 to the consolidated financial statements in Item 8, “Financial Statements and Supplementary Data” for a full reconciliation of the statutory federal tax rate to the effective tax rates.
Business Segment Results
Summary information about our operating results on a segment basis is set forth below. For more detailed segment information, see Note 19 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data”.
The following table includes comparative information for volumes by business segment:
Fiscal Year | Increase (Decrease) | % Increase (Decrease) | ||||||||||
(Pounds sold, in thousands) | 2015 | 2014 | ||||||||||
Specialty Alloys Operations | 269,550 | 282,914 | (13,364 | ) | (5 | )% | ||||||
Performance Engineered Products | 15,262 | 12,248 | 3,014 | 25 | % | |||||||
Intersegment | (7,330 | ) | (4,774 | ) | (2,556 | ) | (54 | )% | ||||
Consolidated pounds sold | 277,482 | 290,388 | (12,906 | ) | (4 | )% | ||||||
The following table includes comparative information for net sales by business segment:
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2015 | 2014 | |||||||||||||
Specialty Alloys Operations | $ | 1,796.6 | $ | 1,741.6 | $ | 55.0 | 3 | % | |||||||
Performance Engineered Products | 497.7 | 498.6 | (0.9 | ) | — | % | |||||||||
Intersegment | (67.6 | ) | (67.2 | ) | (0.4 | ) | (1 | )% | |||||||
Total net sales | $ | 2,226.7 | $ | 2,173.0 | $ | 53.7 | 2 | % | |||||||
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2015 | 2014 | |||||||||||||
Specialty Alloys Operations | $ | 1,373.5 | $ | 1,344.6 | $ | 28.9 | 2 | % | |||||||
Performance Engineered Products | 496.5 | 496.6 | (0.1 | ) | — | % | |||||||||
Intersegment | (58.2 | ) | (58.4 | ) | 0.2 | — | % | ||||||||
Total net sales excluding surcharge revenue | $ | 1,811.8 | $ | 1,782.8 | $ | 29.0 | 2 | % | |||||||
Specialty Alloys Operations Segment
Net sales in fiscal year 2015 for the Specialty Alloys Operations (“SAO”) segment increased 3 percent to $1,796.6 million, as compared with $1,741.6 million in fiscal year 2014. Excluding surcharge revenue, sales increased 2 percent from a year ago. The fiscal year 2015 net sales reflected 5 percent lower shipment volume as compared to fiscal year 2014. The
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increase in sales combined with lower shipment volumes reflects a favorable shift in product mix despite challenging market conditions.
Operating income for the SAO segment in fiscal year 2015 was $155.2 million, or 8.6 percent of net sales (11.3 percent of net sales excluding surcharge revenue), compared to $232.7 million, or 13.4 percent of net sales (17.3 percent of net sales excluding surcharge revenue), for fiscal year 2014. The decrease in operating income reflects the impacts of a strengthening mix more than offset by the operational issues, higher operating costs and incremental depreciation expense related to our Athens facility.
Performance Engineered Products Segment
Net sales for fiscal year 2015 for the Performance Engineered Products (“PEP”) segment were $497.7 million as compared with $498.6 million for fiscal year 2014. Excluding surcharge revenue, net sales were flat. The results reflect increased net sales of powder products and sales of titanium bar and wire products which was offset by lower rentals and sales of down-hole drilling tools due to the weakness in the energy end-use market.
Operating income for the PEP segment for fiscal year 2015 was $39.1 million, or 7.9 percent of net sales, as compared with $45.5 million, or 9.1 percent of net sales for fiscal year 2014. The results reflect the impacts of the weak market conditions in the oil and gas businesses experienced during the second half of fiscal year 2015, partially offset by improved performance in the titanium and powder products businesses.
Results of Operations — Fiscal Year 2014 Compared to Fiscal Year 2013
For fiscal year 2014, we recorded net income of $132.8 million, or $2.47 per diluted share, compared with net income of $146.1 million, or $2.73 per diluted share, a year earlier. Our fiscal year 2014 results reflect the impact of the decrease in demand for our materials used in aerospace and energy which was partially offset by increased volumes from lower value materials. The impact of the unfavorable mix was partially offset by reductions in variable cost per ton in our Specialty Alloys Operations and reduction in overall selling, general and administrative costs.
Net Sales
Net sales for fiscal year 2014 were $2,173.0 million, which was a 4 percent decrease from fiscal year 2013. Excluding surcharge revenue, sales were 3 percent lower than fiscal year 2013 on 6 percent higher volume. The decrease in sales combined with higher shipment volume reflects an unfavorable shift in product mix.
Geographically, sales outside the United States decreased 9 percent from fiscal year 2013 to $635.1 million. International sales as a percentage of our total net sales represented 29 percent and 31 percent for fiscal year 2014 and fiscal year 2013, respectively.
Sales by End-Use Markets
We sell to customers across diversified end-use markets. The following table includes comparative information for our net sales, which includes surcharge revenue, by principal end-use markets which we believe is helpful supplemental information in analyzing the performance of the business from period to period:
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2014 | 2013 | |||||||||||||
Aerospace and defense | $ | 980.7 | $ | 1,067.0 | $ | (86.3 | ) | (8 | )% | ||||||
Industrial and consumer | 481.6 | 474.3 | 7.3 | 2 | |||||||||||
Energy | 310.4 | 337.3 | (26.9 | ) | (8 | ) | |||||||||
Transportation | 150.1 | 138.8 | 11.3 | 8 | |||||||||||
Medical | 112.6 | 113.2 | (0.6 | ) | (1 | ) | |||||||||
Distribution | 137.6 | 141.1 | (3.5 | ) | (2 | ) | |||||||||
Total net sales | $ | 2,173.0 | $ | 2,271.7 | $ | (98.7 | ) | (4 | )% | ||||||
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The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2014 | 2013 | |||||||||||||
Aerospace and defense | $ | 775.3 | $ | 832.5 | $ | (57.2 | ) | (7 | )% | ||||||
Industrial and consumer | 379.8 | 366.4 | 13.4 | 4 | |||||||||||
Energy | 269.9 | 290.9 | (21.0 | ) | (7 | ) | |||||||||
Transportation | 118.0 | 106.6 | 11.4 | 11 | |||||||||||
Medical | 103.5 | 103.7 | (0.2 | ) | — | ||||||||||
Distribution | 136.3 | 139.2 | (2.9 | ) | (2 | ) | |||||||||
Total net sales excluding surcharge revenue | $ | 1,782.8 | $ | 1,839.3 | $ | (56.5 | ) | (3 | )% | ||||||
Sales to the aerospace and defense market decreased 8 percent from fiscal year 2013 to $980.7 million. Excluding surcharge revenue, sales decreased 7 percent on 1 percent lower shipment volume. The results reflect weakness in demand for our premium materials used in engine applications offset by improving demand for materials used in structural components and increased demand for materials used in titanium fasteners. The fiscal year 2014 results were impacted significantly by supply chain destocking in the first half of our fiscal year.
Industrial and consumer market sales increased 2 percent from fiscal year 2013 to $481.6 million. Excluding surcharge revenue, sales increased approximately 4 percent on 16 percent higher shipment volume. The results reflect strong demand for lower value materials used in plant and equipment applications as well as materials used in bridge infrastructure projects. The shift in unfavorable mix was a result of softened demand for materials used in the more premium products used in high-end valves and fittings and electronics applications.
Sales to the energy market of $310.4 million reflected an 8 percent decrease from fiscal year 2013. Excluding surcharge revenue, sales decreased 7 percent on 12 percent lower shipment volume. The results reflect demand softness in materials used in oil and gas completions as well as the power generation sector. These declines were partially offset by a moderate increase in sales, particularly rentals through our Amega West oil and gas business.
Transportation market sales increased 8 percent from the fiscal year 2013 to $150.1 million. Excluding surcharge revenue, sales increased 11 percent on 18 higher shipment volumes. The results reflect the impacts of growth in demand for our materials as a result of increasing North American vehicle sales and strong demand for materials used in the next generation of fuel delivery systems.
Sales to the medical market decreased 1 percent to $112.6 million from fiscal year 2013. Adjusted for surcharge revenue, sales were flat on 10 percent higher shipment volume. The results reflect the impacts of lower titanium scrap prices during most of the fiscal year, which negatively impacted order patterns for our materials. During the second half of the fiscal year we began to see improving demand for materials used in orthopedics and surgical devices and more normalized buying patterns by distributors as supply chain inventory levels appeared to stabilize.
Distribution sales decreased 2 percent from the same period a year ago to $137.6 million. Excluding surcharge revenue, sales decreased 2 percent from the same period a year ago.
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Sales by Product Class
The following table includes comparative information for our net sales by major product class:
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2014 | 2013 | |||||||||||||
Special alloys | $ | 917.0 | $ | 989.9 | $ | (72.9 | ) | (7 | )% | ||||||
Stainless steels | 643.6 | 638.8 | 4.8 | 1 | |||||||||||
Alloy and tool steel | 240.4 | 255.7 | (15.3 | ) | (6 | ) | |||||||||
Titanium products | 157.7 | 155.0 | 2.7 | 2 | |||||||||||
Powder metals | 48.6 | 60.4 | (11.8 | ) | (20 | ) | |||||||||
Distribution and other | 165.7 | 171.9 | (6.2 | ) | (4 | ) | |||||||||
Total net sales | $ | 2,173.0 | $ | 2,271.7 | $ | (98.7 | ) | (4 | )% | ||||||
The following table includes comparative information for our net sales by the same major product class, but excluding surcharge revenue:
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2014 | 2013 | |||||||||||||
Special alloys | $ | 666.3 | $ | 706.0 | $ | (39.7 | ) | (6 | )% | ||||||
Stainless steels | 548.7 | 543.1 | 5.6 | 1 | |||||||||||
Alloy and tool steel | 198.4 | 210.9 | (12.5 | ) | (6 | ) | |||||||||
Titanium products | 157.7 | 155.0 | 2.7 | 2 | |||||||||||
Powder metals | 48.6 | 55.9 | (7.3 | ) | (13 | ) | |||||||||
Distribution and other | 163.1 | 168.4 | (5.3 | ) | (3 | ) | |||||||||
Total net sales excluding surcharge revenue | $ | 1,782.8 | $ | 1,839.3 | $ | (56.5 | ) | (3 | )% | ||||||
Sales of special alloys products decreased 7 percent in fiscal year 2014 as compared with a year ago to $917.0 million. Excluding surcharge revenue, sales decreased 6 percent on flat shipment volume. The results reflect decreased sales for premium aerospace engine and fastener material as compared to the year ago period.
Sales of stainless steels increased 1 percent in fiscal year 2014 as compared with a year ago to $643.6 million. Excluding surcharge revenue, such sales increased by 1 percent on 14 percent higher shipment volume. The year over year results reflect increased volumes in transportation and industrial and consumer markets combined with an unfavorable shift in product mix from the same period last year.
Sales of alloy and tool steel decreased 6 percent in fiscal year 2014 on 2 percent lower shipment volume.
Sales of titanium products increased 2 percent as compared with fiscal year 2013 on 8 percent higher shipment volume.
Sales of powder metals decreased 20 percent in fiscal year 2014 on 17 percent lower shipment volume.
Gross Profit
Gross profit in fiscal year 2014 decreased to $398.9 million, or 18.4 percent of net sales (22.4 percent of net sales excluding surcharge revenue), from $433.5 million, or 19.1 percent of net sales (23.6 percent of net sales excluding surcharge revenue), for fiscal year 2013. The results reflect a weaker product mix and incremental costs associated with our new Alabama facility partially offset by a reduction in variable production costs. In addition, the fiscal year 2014 results were impacted by approximately $8.0 million of additional weather related expenses due to severe weather in the Northeast where the majority of our operations are centered.
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Our surcharge mechanism is structured to recover increases in raw material costs, although generally with a lag effect. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin for fiscal years 2014 and 2013. See the section “Non-GAAP Financial Measures” below for further discussion of these financial metrics.
Fiscal Year | ||||||||
($ in millions) | 2014 | 2013 | ||||||
Net sales | $ | 2,173.0 | $ | 2,271.7 | ||||
Less: surcharge revenue | 390.2 | 432.4 | ||||||
Net sales excluding surcharge revenue | $ | 1,782.8 | $ | 1,839.3 | ||||
Gross profit | $ | 398.9 | $ | 433.5 | ||||
Gross margin | 18.4 | % | 19.1 | % | ||||
Gross margin excluding surcharge revenue | 22.4 | % | 23.6 | % | ||||
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal year 2014 were $186.9 million, or 8.6 percent of net sales (10.5 percent of net sales excluding surcharge revenue), compared to $200.8 million, or 8.8 percent of net sales (10.9 percent of net sales excluding surcharge revenue), in fiscal year 2013. The decrease in selling, general and administrative expenses in fiscal year 2014 compared to fiscal year 2013 is primarily due to lower incentive compensation and a reduction in pension EID during the current year. Prior year included restructuring related costs of $2.9 million due to a reduction in salaried headcount, as well as costs associated with respect to manufacturing footprint optimization activities and inventory reduction initiative costs.
Operating Income
Our operating income in fiscal year 2014 decreased to $212.0 million as compared with $232.7 million in fiscal year 2013. The fiscal year 2014 results reflect the impacts of a weaker product mix, incremental costs associated with our new Alabama facility and costs associated with severe weather in the Northeast where the majority of our operations are centered resulting in an additional $8.0 million of energy related expenses in the third quarter of fiscal year 2014. These impacts were partially offset by a reduction in variable production costs and lower selling, general and administrative expenses.
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Operating income has been significantly impacted by the pension EID portion of our net pension expense, which may be volatile based on conditions in the financial markets. The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue and excluding the impacts of pension EID from operating income. We present and discuss these financial measures because management believes removing the impacts of raw material surcharges from operating margin provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.
Fiscal Year | ||||||||
($ in millions) | 2014 | 2013 | ||||||
Net sales | $ | 2,173.0 | $ | 2,271.7 | ||||
Less: surcharge revenue | 390.2 | 432.4 | ||||||
Net sales excluding surcharge revenue | $ | 1,782.8 | $ | 1,839.3 | ||||
Operating income | $ | 212.0 | $ | 232.7 | ||||
Pension EID | 21.8 | 31.9 | ||||||
Operating income excluding pension EID | $ | 233.8 | $ | 264.6 | ||||
Operating margin | 9.8 | % | 10.2 | % | ||||
Operating margin excluding surcharge revenue and pension EID | 13.1 | % | 14.4 | % | ||||
In addition to the impact of the surcharge mechanism and pension EID, fluctuations in raw material prices (combined with fluctuations in inventory levels) and the lag effect of the surcharge mechanism have impacted our operating income from year to year. We estimate that the effect of such combined fluctuations positively impacted our operating margin by approximately 100 basis points during fiscal year 2014 and positively impacted our operating margin by approximately 10 basis points during fiscal year 2013.
Interest Expense
Fiscal year 2014 interest expense of $17.0 million decreased 19 percent from $21.0 million in fiscal year 2013. The decrease of $4.0 million is due to $8.3 million of higher capitalized interest in connection with the increased spending attributable to the construction of our Alabama manufacturing plant offset by higher interest costs of $4.3 million. The increase in interest costs is due to higher outstanding debt levels in fiscal year 2014 as compared to fiscal year 2013 principally as a result of the February 2013 issuance of $300.0 million of 4.45% notes due March 2023 which is partially offset by the $100.0 million of 6.625% notes that matured in May 2013.
Other Income, Net
Other income for fiscal year 2014 was $1.4 million as compared with $5.1 million a year ago. The results reflect the decrease in earnings in the funding mechanisms for certain non-qualified retirement plans and the negative impacts in foreign exchange losses for the current period as compared to the same a year ago. The year ago period also reflects a gain of $1.9 million in connection with the dissolution of the strategic partnership with Sandvik Materials Technology.
Income Taxes
Our effective tax rate (income tax expense as a percent of income before taxes) for both fiscal years 2014 and 2013 was 32.4 percent. The tax rates for both periods were lower than the statutory rate of 35 percent, primarily due to benefits associated with the domestic manufacturing deduction and the research and development credits.
See Note 16 to the consolidated financial statements in Item 8, “Financial Statements and Supplementary Data” for a full reconciliation of the statutory federal tax rate to the effective tax rates.
Business Segment Results
Summary information about our operating results on a segment basis is set forth below. For more detailed segment information, see Note 19 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data”.
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The following table includes comparative information for volumes by business segment:
Fiscal Year | Increase (Decrease) | % Increase (Decrease) | ||||||||||
(Pounds sold, in thousands) | 2014 | 2013 | ||||||||||
Specialty Alloys Operations | 282,914 | 264,606 | 18,308 | 7 | % | |||||||
Performance Engineered Products | 12,248 | 13,451 | (1,203 | ) | (9 | )% | ||||||
Intersegment | (4,774 | ) | (4,333 | ) | (441 | ) | (10 | )% | ||||
Consolidated pounds sold | 290,388 | 273,724 | 16,664 | 6 | % | |||||||
The following table includes comparative information for net sales by business segment:
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2014 | 2013 | |||||||||||||
Specialty Alloys Operations | $ | 1,741.6 | $ | 1,823.5 | $ | (81.9 | ) | (4 | )% | ||||||
Performance Engineered Products | 498.6 | 520.1 | (21.5 | ) | (4 | )% | |||||||||
Intersegment | (67.2 | ) | (71.9 | ) | 4.7 | 7 | % | ||||||||
Total net sales | $ | 2,173.0 | $ | 2,271.7 | $ | (98.7 | ) | (4 | )% | ||||||
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
($ in millions) | 2014 | 2013 | |||||||||||||
Specialty Alloys Operations | $ | 1,344.6 | $ | 1,388.5 | $ | (43.9 | ) | (3 | )% | ||||||
Performance Engineered Products | 496.6 | 513.7 | (17.1 | ) | (3 | )% | |||||||||
Intersegment | (58.4 | ) | (62.9 | ) | 4.5 | 7 | % | ||||||||
Total net sales excluding surcharge revenue | $ | 1,782.8 | $ | 1,839.3 | $ | (56.5 | ) | (3 | )% | ||||||
Specialty Alloys Operations Segment
Net sales in fiscal year 2014 for the Specialty Alloys Operations (“SAO”) segment were $1,741.6 million, as compared with $1,823.5 million in fiscal year 2013. Excluding surcharge revenue, sales decreased 3 percent from a year ago. The fiscal year 2014 net sales reflected 7 percent higher shipment volume as compared to fiscal year 2013. The decrease in sales combined with higher shipment volume reflects an unfavorable shift in product mix as a result of continued challenging market conditions.
Operating income for the SAO segment in fiscal year 2014 was $232.7 million, or 13.4 percent of net sales (17.3 percent of net sales excluding surcharge revenue), compared to $268.5 million, or 14.7 percent of net sales (19.3 percent of net sales excluding surcharge revenue), for fiscal year 2013. The decrease in operating income reflects the impacts of a weaker product mix and the $8.0 million of additional weather related expenses in the third quarter of fiscal year 2014 partially offset by cost control in the current period as compared to the same period a year ago.
Performance Engineered Products Segment
Net sales for fiscal year 2014 for the Performance Engineered Products (“PEP”) segment decreased 4 percent to $498.6 million as compared with $520.1 million for fiscal year 2013. Excluding surcharge revenue, net sales decreased 3 percent. The results reflected softness in demand as a result of challenging market conditions, particularly in the aerospace and energy markets during the first half of fiscal year 2014. In addition, sales of powder metal products and sales from our distribution businesses were impacted by sluggish industrial activity. This was partially offset by sales growth resulting from
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strengthening demand for our titanium fastener material, better penetration in the medical orthopedic market and increased sales into the oil and gas exploration market in the second half of fiscal year 2014.
Operating income for the PEP segment for fiscal year 2014 was $45.5 million, or 9.1 percent of net sales, as compared with $45.2 million, or 8.7 percent of net sales for fiscal year 2013. The results reflect the impacts of lower sales levels in fiscal year 2014 compared to the same period a year ago offset by the positive impacts of improvements in the manufacturing processes and cost reduction initiatives.
Liquidity and Financial Resources
We ended fiscal year 2015 with $70.0 million of cash, a decrease of $50.0 million from fiscal year 2014. During fiscal year 2015 our cash from operations was $282.6 million as compared with $239.6 million in fiscal year 2014. The results reflect a decrease in net income of $74.1 million offset primarily by realization of a cash tax benefit of approximately $66 million in the third quarter of fiscal year 2015 as a result of the tax enactment of the extenders legislation. We improved our working capital levels as a result of our inventory reduction initiatives we began to execute in fiscal year 2015. By the end of fiscal year 2015 compared to the first quarter of fiscal year 2015, we targeted an inventory reduction of $50.0 million, however we achieved approximately $67 million of inventory reduction.
Our free cash flow, which we define under “Non-GAAP Financial Measures” below, was positive $74.4 million as compared to negative $147.8 million for the same period a year ago. This was our first year of positive free cash flow since 2010. The improvement in free cash flow reflects significantly lower capital spending levels largely related to the winding down in capital expenditures associated with the construction of our Athens facility. Capital expenditures for plant, equipment and software were $170.5 million, which included $73.5 million related to the completion of the construction of the Athens facility, for the year ended June 30, 2015, as compared with $349.2 million, which included $267.7 million related to Athens for the same period a year ago. In fiscal year 2016, we expect capital expenditures to be approximately $120 million.
During the year ended June 30, 2015, we used $124.5 million to purchase 2,995,272 shares of common stock pursuant to the terms of the share repurchase program authorized by our Board of Directors in October 2014. As of June 30, 2015, $375.5 million remains available for future purchases.
Dividends for the fiscal year 2015 were $37.9 million, as compared with $38.5 million in the prior year, and were paid at the same quarterly rate of $0.18 per share of common stock in both periods.
For the years ended June 30, 2015, 2014 and 2013, interest costs totaled $30.4 million, $32.1 million and $27.8 million, respectively, of which $2.7 million, $15.1 million and $6.8 million, respectively, were capitalized as part of the cost of property, plant, equipment and software.
During the fiscal year 2015, we made $7.2 million in cash contributions to our qualified pension plans, and do not expect to make cash contributions to our pension plans during fiscal year 2016. Over the next five years, current estimates indicate that we will contribute about $136.1 million to our pension plans, based on the laws in effect for pension funding as of June 30, 2015, and subject to market returns and interest rate assumptions.
We have demonstrated the ability to generate cash to meet our needs through cash flows from operations, management of working capital and the availability of outside sources of financing to supplement internally generated funds. We generally target minimum liquidity, consisting of cash and cash equivalents added to available borrowing capacity under our credit agreement, of $150.0 million. Our syndicated revolving credit agreement (“Credit Agreement”) contains a revolving credit commitment of $500.0 million and expires in June 2018. As of June 30, 2015, we had $7.1 million of issued letters of credit. The balance of the Credit Agreement ($492.9 million) remains available to us. As of June 30, 2015, we had total liquidity of approximately $563 million, including $70.0 million of cash and cash equivalents. From time to time during the year ended June 30, 2015 we have borrowed under our Credit Agreement and subsequently repaid any outstanding borrowings prior to June 30, 2015. The weighted average daily borrowing under the Credit Agreement during the year ended June 30, 2015 was $58.8 million with daily outstanding borrowings ranging from $0.0 million to $144.7 million.
We evaluate liquidity needs for alternative uses including funding external growth opportunities, share repurchases as well as funding consistent dividend payments to stockholders. Over the last several years, we declared and paid quarterly cash dividends of $0.18 per share.
As of June 30, 2015, we had cash and cash equivalents of approximately $29 million held at various foreign subsidiaries. Our global cash deployment considers, among other things, the geographic location of our subsidiaries’ cash
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balances, the locations of our anticipated liquidity needs and the cost to access international cash balances, as necessary. The repatriation of cash from certain foreign subsidiaries could have adverse tax consequences as we may be required to pay and record U.S. income taxes and foreign withholding taxes in various tax jurisdictions on these funds to the extent they were previously considered permanently reinvested. From time to time, we evaluate opportunities to repatriate cash from foreign jurisdictions. Our current plans consider repatriating cash only at levels that would result in minimal or no net adverse tax consequences in the near term. During the year ended June 30, 2015 we repatriated cash of approximately $30 million from foreign jurisdictions that resulted in minimal tax cost.
We are subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio (3.50 to 1.00 as of June 30, 2015). 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, 2015, the Company was in compliance with all of the covenants of the Credit Agreement.
The following table shows our actual ratio performance with respect to the financial covenants, as of June 30, 2015:
Covenant Requirement | Actual Ratio | |
Consolidated interest coverage | 3.50 to 1.00 (minimum) | 10.40 to 1.00 |
Consolidated debt to capital | 55% (maximum) | 32% |
We continue to believe that we will maintain compliance with the financial and restrictive covenants in future periods. To the extent that we do not comply with the covenants under the Credit Agreement, this could reduce our liquidity and flexibility due to potential restrictions on borrowings available to us unless we are able to obtain waivers or modifications of the covenants.
Non-GAAP Financial Measures
The following provides additional information regarding certain non-GAAP financial measures that we use in this report. Our definitions and calculations of these items may not necessarily be the same as those used by other companies.
Net Sales and Gross Margin Excluding Surcharge Revenue
This report includes discussions of net sales as adjusted to exclude the impact of raw material surcharge and the resulting impact on gross margins, which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales and cost of sales provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. See our earlier discussion of “Gross Profit” for a reconciliation of net sales and gross margin, excluding surcharge revenue, to net sales as determined in accordance with U.S. GAAP. Net sales and gross margin excluding surcharge revenue is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, net sales and gross margin calculated in accordance with U.S. GAAP.
Operating Income and Operating Margin Excluding Surcharge Revenue, Pension EID, Restructuring Charges and Special Items
This report includes discussions of operating income and operating margin as adjusted to exclude the impact of raw material surcharge, pension EID, restructuring charges and special items which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales and cost of sales provides a more consistent and meaningful basis for comparing results of operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding pension earnings, interest and deferrals expense, restructuring charges and special items from operating income and operating margin is helpful in analyzing our operating performance particularly as pension EID may be volatile due to changes in the financial markets and restructuring charges and special items are not indicative of ongoing operating performance. See our earlier discussion of operating income for a reconciliation of operating income and operating margin excluding pension EID, restructuring charges and special items to operating income and operating margin determined in accordance with U.S. GAAP. Operating income and operating margin excluding surcharge revenue, pension
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EID, restructuring charges and special items is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, operating income and operating margin calculated in accordance with U.S. GAAP.
Adjusted Earnings Per Share
The following provides a reconciliation of adjusted earnings per share, to its most directly comparable U.S. GAAP financial measures:
(in millions, except per share amounts) | Income Before Income Taxes | Income Tax Expense (Benefit) | Net Income | Earnings Per Diluted Share* | ||||||||||||
Year ended June 30, 2015, as reported | $ | 89.1 | $ | 30.4 | $ | 58.7 | $ | 1.11 | ||||||||
Restructuring charges | 29.1 | 10.2 | 18.9 | |||||||||||||
Consulting costs | 5.1 | 1.8 | 3.3 | |||||||||||||
Legal settlement | (4.4 | ) | (1.5 | ) | (2.9 | ) | ||||||||||
Impact of tax law change | — | (1.6 | ) | 1.6 | ||||||||||||
Year ended June 30, 2015, as adjusted | $ | 118.9 | $ | 39.3 | $ | 79.6 | $ | 1.51 | ||||||||
* Impact per diluted share calculated using weighted average common shares outstanding of 52.7 million. | ||||||||||||||||
Management believes that the presentation of earnings per share adjusted to exclude the impacts of restructuring charges and special items is helpful in analyzing the operating performance of the Company, as these costs are not indicative of ongoing operating performance. Our definitions and calculations of these items may not necessarily be the same as those used by other companies. Adjusted earnings per share is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, earnings per share calculated in accordance with U.S. GAAP.
Free Cash Flow
The following provides a reconciliation of free cash flow, as used in this annual report, to its most directly comparable U.S. GAAP financial measures:
Fiscal Year | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Net cash provided from operating activities | $ | 282.6 | $ | 239.6 | $ | 188.5 | ||||||
Purchases of property, equipment and software | (170.5 | ) | (349.2 | ) | (310.2 | ) | ||||||
Dividends paid | (37.9 | ) | (38.5 | ) | (38.3 | ) | ||||||
Proceeds from disposals of plant and equipment | 0.2 | 0.3 | 1.2 | |||||||||
Proceeds from sale of equity method investment | — | — | 7.9 | |||||||||
Purchase of subsidiary shares from noncontrolling interest | — | — | (8.4 | ) | ||||||||
Free cash flow | $ | 74.4 | $ | (147.8 | ) | $ | (159.3 | ) | ||||
Management believes that the presentation of free cash flow provides useful information to investors regarding our financial condition because it is a measure of cash generated which management evaluates for alternative uses. It is management’s current intention to use excess cash to fund investments in capital equipment, acquisition opportunities, treasury stock repurchases and consistent dividend payments. Free cash flow is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, cash flows calculated in accordance with U.S. GAAP.
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Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
The following provides a reconciliation of adjusted EBITDA, to its most directly comparable U.S. GAAP financial measures:
Fiscal Year | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Net income | $ | 58.7 | $ | 132.8 | $ | 146.5 | ||||||
Interest expense, net | 27.7 | 17.0 | 21.0 | |||||||||
Income tax expense | 30.4 | 63.6 | 70.3 | |||||||||
Depreciation and amortization | 122.3 | 111.9 | 104.1 | |||||||||
Other income, net | (5.3 | ) | (1.4 | ) | (5.1 | ) | ||||||
EBITDA | $ | 233.8 | $ | 323.9 | $ | 336.8 | ||||||
Net pension expense | 44.5 | 57.9 | 68.8 | |||||||||
Adjusted EBITDA | $ | 278.3 | $ | 381.8 | $ | 405.6 | ||||||
Management believes that adjusted EBITDA is helpful in analyzing the operating performance of the Company. Our definitions and calculations of these items may not necessarily be the same as those used by other companies. Adjusted EBITDA is not a measure of liquidity or profitability and should not be considered as an alternative to net income, operating income, net cash provided from operating activities or any other measure determined in accordance with U.S. GAAP.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to bad debts, customer claims, inventories, goodwill, intangible assets, income taxes, pensions and other postretirement benefits, contingencies and litigation, environmental liabilities and derivative instruments and hedging activities.
We believe the following are the critical accounting policies and areas affected by significant judgments and estimates impacting the preparation of our consolidated financial statements.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. We perform ongoing credit evaluations of our customers and monitor their payment patterns. Should the financial condition of our customers deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories
Inventories are stated at the lower of cost or market. The cost of inventories is primarily determined using the LIFO method. We also use the FIFO and average cost methods. As of June 30, 2015 and 2014, $154.9 million and $161.2 million of inventory, respectively, was accounted for using a method other than the LIFO method.
Costs include direct materials, direct labor and applicable manufacturing overhead and other direct costs. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials and other costs may have been incurred at significantly different values due to the length of time of our production cycle. The prices for many of the raw materials we use have been volatile. Since we value most of our inventory utilizing the LIFO inventory costing methodology, rapid changes in raw material costs have an impact on our operating results. In a period of rising prices, cost of sales expense recognized under LIFO is generally higher than the cash costs incurred to acquire the inventory sold. Conversely, in a period of declining raw material prices, cost of sales recognized under LIFO is generally lower than cash costs incurred to acquire the inventory sold.
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Since the LIFO inventory valuation methodology is designed for annual determination, interim estimates of the annual LIFO valuation are required. We recognize the effects of the LIFO inventory valuation method on an interim basis by estimating the expected annual LIFO cost based on cost changes to date. These projections of annual LIFO inventory valuation reserve changes are updated quarterly and are evaluated based upon material, labor and overhead costs.
Pension and Other Postretirement Benefits
The amount of the pension expense, which is determined annually, is based upon the value of the assets in the pension trusts at the beginning of the fiscal year as well as actuarial assumptions, such as the discount rate and the expected long-term rate of return on plan assets. The assumed long-term rate of return on pension plan assets is reviewed at each year-end based on the plan’s investment policies, an analysis of the historical returns of the capital markets and current interest rates. Based on the current funding level, the allocation policy for pension plan assets is to have approximately 60 percent in return seeking assets and 40 percent in liability matching assets. Return seeking assets include domestic and international equities and diversified loan funds. Liability matching assets include long duration bond funds. As the funding level of the 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 plan discount rate is determined by reference to the Bond:Link interest rate model based upon a portfolio of highly rated U.S. corporate bonds with individual bonds that are theoretically purchased to settle the plan’s anticipated cash outflows. The fluctuations in stock and bond markets could cause actual investment results to be significantly different from those assumed, and therefore, significantly impact the valuation of the assets in our pension trusts. Changes in actuarial assumptions could significantly impact the accounting for the pension assets and liabilities. If the assumed long-term rate of return on plan assets was changed by 0.25 percent, the net pension expense would change by $2.8 million. If the discount rate was changed by 0.25 percent, the net pension expense would change by $4.0 million.
Long-Lived Assets
Long-lived assets are reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable through estimated future undiscounted cash flows. The amount of the impairment loss is the excess of the carrying amount of the impaired assets over the fair value of the assets based upon estimated future discounted cash flows. We evaluate long-lived assets for impairment by individual business unit. Changes in estimated cash flows could have a significant impact on whether or not an asset is impaired and the amount of the impairment.
Goodwill
Goodwill is not amortized, but instead is tested for impairment, at least annually at the reporting unit level. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value, including goodwill. The fair value is estimated based principally upon discounted cash flow analysis. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting unit’s goodwill to its implied fair value. The discounted cash flow analysis for each reporting unit tested requires significant estimates and assumptions related to cash flow forecasts, discount rates, terminal values and income tax rates. The cash flow forecasts are developed based on assumptions about each reporting unit’s markets, product offerings, pricing, capital expenditure and working capital requirements as well as cost performance. The discount rates used in the discounted cash flow are estimated based on a market participant’s perspective of each reporting unit's weighted average cost of capital. The terminal value, which represents the value attributed to the reporting unit beyond the forecast period, is estimated using a perpetuity growth rate assumption. The income tax rates used in the discounted cash flow analysis represent estimates of the long-term statutory income tax rates for each reporting unit based on the jurisdictions in which the reporting units operate.
As of June 30, 2015, we had six reporting units with goodwill recorded. Goodwill associated with our SAO segment is tested at the SAO segment level and represents 76 percent of our total goodwill. All other goodwill is associated with our PEP segment, which includes 5 reporting units with goodwill recorded.
As of June 30, 2015, the fair value of all the reporting units, with the exception of Amega West Services (“Amega”), Specialty Steel Supply (“SSS”) and Carpenter Powder Products (“Powders”), substantially exceeded the carrying value.
The Amega and SSS reporting unit’s fair value exceeded the carrying value by 9 percent and 6 percent, respectively, as of June 30, 2015. The goodwill recorded related to Amega and SSS as of June 30, 2015 was $10.4 million and $2.2 million, respectively. The Amega and SSS reporting units sell and rent materials and tools to customers involved in drilling, exploration, and production of oil and gas. Due to the recent rapid and dramatic decline in oil prices, activity levels in these reporting units have been severely impacted. The lower activity levels have impacted and are expected to impact the results of
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operations for these reporting units for some time. The discounted cash flow forecasts for these reporting units for purposes of the goodwill impairment testing as of June 30, 2015 includes assumptions about the expected future impacts of the reduced activity levels and assumptions related to anticipated future recovery of activity levels in the longer-term. If the duration of the low oil and gas price environment is longer than anticipated resulting in continuing lower demand or oil and gas prices decline further, we may experience further deterioration in our cash flow forecasts that may indicate goodwill in the reporting units may be impaired in future impairment tests.
The Powders reporting unit’s fair value exceeded the carrying value by 4 percent as of June 30, 2015. The goodwill recorded related to Powders as of June 30, 2015 was $3.4 million. The discounted cash flows analysis for the Powders reporting unit includes assumptions related to our ability to increase volume, improve mix, expand product offerings and implement opportunities to reduce costs over the next several years.
For purposes of the discounted cash flow analysis for Amega, SSS and Powders reporting unit's fair value, we used a weighted average cost capital of 12 percent and a terminal growth rate assumption of 3 percent.
Environmental Expenditures
Environmental expenditures that pertain to current operations or to future revenues are expensed or capitalized consistent with Carpenter’s capitalization policy for property, plant and equipment. Expenditures that result from the remediation of an existing condition caused by past operations and that do not contribute to current or future revenues are expensed. Liabilities are recognized for remedial activities when the remediation is probable and the cost can be reasonably estimated. Most estimated liabilities are not discounted to present value due to the uncertainty as to the timing and duration of expected costs. For one former operating facility site, due to the routine nature of the expected costs, the liability for future costs is discounted to present value over 20 years assuming a discount rate of approximately 4 percent.
Income Taxes
Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, or differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits (assets) or costs (liabilities) to be recognized when those temporary differences reverse. We evaluate on a quarterly basis whether, based on all available evidence, we believe that our deferred income tax assets will be realizable. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax assets will not be realized. The evaluation includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Future realization of deferred income tax assets ultimately depends upon the existence of sufficient taxable income within the carryback or carryforward period available under tax law.
Management determines whether a tax position should be recognized in the financial statements by evaluating whether it is more likely than not that the tax position will be sustained upon examination by the tax authorities based upon the technical merits of the position. For those tax positions which should be recognized, the measurement of a tax position is determined as being the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Interest and penalties on estimated liabilities for uncertain tax positions are recorded as components of the provision for income taxes.
Derivative Financial Instruments
Our current risk management strategies include the use of derivative instruments to reduce certain risks. The critical strategies include: (1) the use of commodity forward contracts to fix the price of a portion of anticipated future purchases of certain raw materials and energy to offset the effects of changes in the costs of those commodities; and (2) the use of foreign currency forward contracts to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates. The commodity forwards and foreign currency forwards have been designated as cash flow hedges and unrealized net gains and losses are recorded in the accumulated other comprehensive loss component of stockholders’ equity. The unrealized gains or losses are reclassified to the income statement when the hedged transaction affects earnings or if the anticipated transactions are no longer expected to occur. We use interest rate swaps to maintain a certain level of floating rate debt relative to fixed rate debt. Interest rate swaps have been designated as fair value hedges. Accordingly, the mark-to-market values of both the interest rate swap and the underlying debt obligations are recorded as equal and offsetting gains and losses in the interest expense component of the
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consolidated statement of income. We have also used forward interest rate swaps to manage the risk of cash flow variability associated with fixed interest debt expected to be issued. We evaluate all derivative instruments each quarter to determine that they are highly effective. Any ineffectiveness is recorded in our consolidated statement of income. We also use foreign currency forward contracts to protect certain short-term asset positions denominated in foreign currency against the effect of changes in exchange rates. These positions do not qualify for hedge accounting and accordingly are marked-to-market at each reporting date through charges to other income and expense.
New Accounting Pronouncements
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 20, Recent Accounting Pronouncements, to Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data”.
Off Balance Sheet Arrangements
We had no off balance sheet arrangements during the periods presented.
Contractual Obligations
At June 30, 2015, we had the following contractual obligations and other commercial commitments and contingencies:
Fiscal Year | ||||||||||||||||||||||||||||
($ in millions) | Total | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | |||||||||||||||||||||
Long-term debt (1) | $ | 605.0 | $ | — | $ | — | $ | 55.0 | $ | — | $ | — | $ | 550.0 | ||||||||||||||
Estimated interest payments (2) | 191.3 | 30.2 | 30.2 | 29.5 | 26.4 | 26.4 | 48.6 | |||||||||||||||||||||
Operating leases | 37.1 | 9.6 | 7.3 | 5.4 | 4.0 | 3.1 | 7.7 | |||||||||||||||||||||
Pension plan contributions (3) | 390.7 | — | 0.7 | 12.7 | 65.0 | 57.7 | 254.6 | |||||||||||||||||||||
Accrued post-retirement benefits (4) | 149.5 | 14.0 | 14.4 | 14.6 | 14.8 | 15.0 | 76.7 | |||||||||||||||||||||
Purchase obligations (5) | 117.2 | 117.2 | — | — | — | — | — | |||||||||||||||||||||
Pension benefits (6) | 32.6 | 3.3 | 3.2 | 3.1 | 3.1 | 3.2 | 16.7 | |||||||||||||||||||||
Total | $ | 1,523.4 | $ | 174.3 | $ | 55.8 | $ | 120.3 | $ | 113.3 | $ | 105.4 | $ | 954.3 | ||||||||||||||
(1) Refer to Note 8 to Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”.
(2) Estimated interest payments for long-term debt were calculated based on the applicable rates and payment dates. No interest payments are included for any potential borrowings under our revolving credit facility.
(3) Pension plan contributions represent required minimum contributions for plan years beginning January 1, 2015. These amounts were calculated based on actuarial valuations as prescribed by pension funding regulations in the United States effective June 30, 2015. Estimated fiscal year contributions have been included through fiscal year 2026. The actual required pension contributions in future periods may be different.
(4) Postretirement benefits for certain plans are paid from corporate assets. There is no guarantee that future payments will be paid from corporate assets rather than plan assets. Estimated fiscal year postretirement benefit payments have been included through fiscal year 2025.
(5) We have entered into purchase commitments primarily for various key raw materials at market related prices, all made in the normal course of business. The commitments include both fixed and variable price provisions. We used June 30, 2015 raw material prices for commitments with variable pricing.
(6) Pension benefits for certain plans are paid from corporate assets. There is no guarantee that future payments will be paid from corporate assets rather than plan assets.
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Market Sensitive Instruments and Risk Management
See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for discussion of market sensitive instruments and associated market risk for Carpenter.
Contingencies
Environmental
We are subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of our operations, compliance costs to date have not been material. We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a potentially responsible party (“PRP”) with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRP’s at these Superfund sites have been determined. Accordingly, at this time, we cannot reasonably estimate expected costs for such matters. The liability for future environmental remediation costs that can be reasonably estimated is evaluated on a quarterly basis. We accrue amounts for environmental remediation costs that represent our best estimate of the probable and reasonably estimable future costs related to environmental remediation. During the fiscal years 2015, 2014 and 2013 the Company increased the liability for a company-owned former operating site by $0.4 million, $0.7 million and $0.3 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, 2015 and 2014 were $15.9 million and $15.5 million, respectively.
Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRP’s. Based upon information currently available, such future costs are not expected to have a material effect on our financial position, results of operations or cash flows over the long-term. However, such costs could be material to our financial position, results of operations or cash flows in a particular future quarter or year.
Other
We are defending various routine claims and legal actions that are incidental to our business, and that are common to our operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. Like many other manufacturing companies in recent years we, from time to time, have been named as a defendant in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace. We provide for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, we believe that the total liability from these matters will not have a material effect on our financial position, results of operations or cash flows over the long-term. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to our financial position, results of operations or cash flows in a particular future quarter or year.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected, anticipated or implied. The most significant of these uncertainties are described in this Form 10-K. They include but are not limited to: (1) the cyclical nature of the specialty materials business and certain end-use markets, including aerospace, defense, industrial, transportation, consumer, medical and energy, or other influences on Carpenter's business such as new competitors, the consolidation of competitors, customers and suppliers, or the transfer of manufacturing capacity from the United States to foreign countries; (2) the ability of Carpenter to achieve cash generation, growth, earnings, profitability, cost savings and reductions, productivity improvements or process changes; (3) the ability to recoup increases in the cost of energy, raw materials, freight or other factors; (4) domestic and foreign excess manufacturing capacity for certain metals; (5) fluctuations in currency exchange rates; (6) the degree of success of government trade actions; (7) the valuation of
39
the assets and liabilities in Carpenter's pension trusts and the accounting for pension plans; (8) possible labor disputes or work stoppages; (9) the potential that our customers may substitute alternate materials or adopt different manufacturing practices that replace or limit the suitability of our products; (10) the ability to successfully acquire and integrate acquisitions; (11) the availability of credit facilities to Carpenter, its customers or other members of the supply chain; (12) the ability to obtain energy or raw materials, especially from suppliers located in countries that may be subject to unstable political or economic conditions; (13) Carpenter's manufacturing processes are dependent upon highly specialized equipment located primarily in facilities in Reading, Latrobe and Athens for which there may be limited alternatives if there are significant equipment failures or a catastrophic event; (14) the ability to hire and retain key personnel, including members of the executive management team, management, metallurgists and other skilled personnel; (15) fluctuations in oil and gas prices and production; (16) the success of restructuring actions; and (17) share repurchases are at Carpenter's discretion and could be affected by changes in Carpenter's share price, operating results, capital spending, cash flows, inventory, acquisitions, investments, tax laws and general market conditions. Any of these factors could have an adverse and/or fluctuating effect on Carpenter’s results of operations. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Carpenter undertakes no obligation to update or revise any forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We use derivative financial instruments to reduce certain types of financial risk. Firm price sales arrangements involve a risk of profit margin fluctuations particularly as raw material prices have been volatile. Firm price sales arrangements generally include certain annual purchasing commitments and consumption schedules agreed to by the customers at selling prices based on raw material prices at the time the arrangements are established. As discussed in Note 15 to the consolidated financial statements included in Part II, Item 8. “Financial Statements and Supplementary Data”, in order to reduce the risk of fluctuating profit margins on these sales, we enter into commodity forward contracts to purchase certain critical raw materials necessary to produce the products sold under the firm price sales arrangements. If a customer fails to perform its obligations under the firm price sales arrangements, we may realize losses as a result of the related commodity forward contracts. Our customers have historically performed under these arrangements and we believe that they will honor such obligations in the future.
We are actively involved in managing risks associated with energy resources. Risk containment strategies include interaction with primary and secondary energy suppliers as well as obtaining adequate insurance coverage to compensate us for potential business interruption related to lack of availability of energy resources. In addition, we have used forwards to fix the price of a portion of our anticipated future purchases of certain energy requirements to protect against the impact of significant increases in energy costs. We also use surcharge mechanisms to offset a portion of these charges where appropriate.
Fluctuations in foreign currency exchange rates could subject us to risk of losses on anticipated future cash flows from our international operations or customers. Foreign currency forward contracts are used to hedge certain foreign exchange risk.
We use interest rate swaps to achieve a level of floating rate debt relative to fixed rate debt where appropriate. Historically, we have entered into forward swap contracts to manage the risk of cash flow variability associated with fixed interest debt expected to be issued.
All hedging strategies are reviewed and approved by senior financial management before being implemented. Senior financial management has established policies regarding the use of derivative instruments that prohibit the use of speculative or leveraged derivatives. Market valuations are performed at least quarterly to monitor the effectiveness of our risk management programs.
Based on the current funding level, the allocation policy for pension plan assets is to have approximately 60 percent in return seeking assets and 40 percent in liability matching assets. Return seeking assets include domestic and international equities and diversified loan funds. Liability matching assets include long duration bond funds. As the funding level of the 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 status of our financial instruments as of June 30, 2015 is provided in Note 15 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data”. Assuming on June 30, 2015, (a) an instantaneous 10 percent decrease in the price of raw materials and energy for which we have commodity forward contracts, and (b) a 10 percent strengthening of the U.S. dollar versus foreign currencies for which foreign exchange forward contracts existed, our results of operations would not have been materially affected in either scenario.
40
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary Data
Page | |
Consolidated Financial Statements: | |
Management’s Responsibilities for Financial Reporting | |
Management’s Report on Internal Control Over Financial Reporting | |
Report of Independent Registered Public Accounting Firm | |
Consolidated Statements of Income for the Years Ended June 30, 2015, 2014 and 2013 | |
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended June 30, 2015, 2014 and 2013 | |
Consolidated Statements of Cash Flows for the Years Ended June 30, 2015, 2014 and 2013 | |
Consolidated Balance Sheets as of June 30, 2015 and 2014 | |
Consolidated Statements of Changes in Equity for the Years Ended June 30, 2015, 2014 and 2013 | |
Notes to Consolidated Financial Statements | |
Supplementary Data: | |
Quarterly Financial Data (Unaudited) | |
Schedule II | |
Management’s Responsibilities for Financial Reporting
Management prepared the financial statements included in this Annual Report on Form 10-K and is responsible for their integrity and objectivity. The statements were prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include amounts based on management’s best judgments and estimates. Financial information elsewhere in this Annual Report is consistent with that in the financial statements.
Carpenter maintains a system of internal controls, supported by a code of conduct, designed to provide reasonable assurance that assets are safeguarded and transactions are properly executed and recorded for the preparation of financial information. We believe Carpenter’s system of internal controls provides this appropriate balance. The system of internal controls and compliance is continually monitored by Carpenter’s internal audit staff.
The Audit/Finance Committee of the Board of Directors, composed of independent directors, meets regularly with management, Carpenter’s internal auditors and our independent registered public accounting firm to consider audit results and to discuss significant internal control, auditing and financial reporting matters. Both the independent registered public accounting firm and internal auditors have unrestricted access to the Audit/Finance Committee.
41
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Carpenter’s internal control over financial reporting as of June 30, 2015. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO) in Internal Control — Integrated Framework. Based on its assessment, management concluded that, as of June 30, 2015, Carpenter’s internal control over financial reporting is effective based on those criteria.
The effectiveness of Carpenter’s internal control over financial reporting as of June 30, 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing herein.
/s/ Tony R. Thene |
Tony R. Thene |
President and Chief Executive Officer |
/s/ Timothy Lain |
Timothy Lain |
Acting Chief Financial Officer |
42
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Carpenter Technology Corporation
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Carpenter Technology Corporation and its subsidiaries at June 30, 2015 and June 30, 2014, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(1) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
August 25, 2015
43
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 2015, 2014 and 2013
($ in millions, except per share data) | 2015 | 2014 | 2013 | |||||||||
NET SALES | $ | 2,226.7 | $ | 2,173.0 | $ | 2,271.7 | ||||||
Cost of sales | 1,908.4 | 1,774.1 | 1,838.2 | |||||||||
Gross profit | 318.3 | 398.9 | 433.5 | |||||||||
Selling, general and administrative expenses | 177.7 | 186.9 | 200.8 | |||||||||
Restructuring charges | 29.1 | — | — | |||||||||
Operating income | 111.5 | 212.0 | 232.7 | |||||||||
Interest expense | (27.7 | ) | (17.0 | ) | (21.0 | ) | ||||||
Other income, net | 5.3 | 1.4 | 5.1 | |||||||||
Income before income taxes | 89.1 | 196.4 | 216.8 | |||||||||
Income tax expense | 30.4 | 63.6 | 70.3 | |||||||||
Net income | 58.7 | 132.8 | 146.5 | |||||||||
Less: net income attributable to noncontrolling interest | — | — | (0.4 | ) | ||||||||
NET INCOME ATTRIBUTABLE TO CARPENTER | $ | 58.7 | $ | 132.8 | $ | 146.1 | ||||||
EARNINGS PER COMMON SHARE: | ||||||||||||
Basic | $ | 1.11 | $ | 2.48 | $ | 2.75 | ||||||
Diluted | $ | 1.11 | $ | 2.47 | $ | 2.73 | ||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||
Basic | 52.6 | 53.3 | 52.9 | |||||||||
Diluted | 52.7 | 53.6 | 53.2 | |||||||||
See accompanying notes to consolidated financial statements.
44
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the Years ended June 30, 2015, 2014 and 2013
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Net income | $ | 58.7 | $ | 132.8 | $ | 146.5 | ||||||
Other comprehensive (loss) income, net of tax | ||||||||||||
Pension and postretirement benefits (loss) gain, net of tax of $12.0, $(22.1) and $(48.3), respectively | (20.1 | ) | 36.9 | 80.5 | ||||||||
Net (loss) gain on derivative instruments, net of tax of $21.7, $(29.5) and $5.3, respectively | (36.1 | ) | 49.1 | (8.7 | ) | |||||||
Unrealized gain on marketable securities, net of tax of $0.0, $0.0 and $(0.2), respectively | 0.1 | — | 0.3 | |||||||||
Foreign currency translation | (26.9 | ) | 4.5 | 5.0 | ||||||||
Other comprehensive (loss) income, net of tax | (83.0 | ) | 90.5 | 77.1 | ||||||||
Comprehensive (loss) income, net of tax | (24.3 | ) | 223.3 | 223.6 | ||||||||
Less: Comprehensive income attributable to the noncontrolling interest | — | — | 0.7 | |||||||||
Comprehensive (loss) income attributable to Carpenter | $ | (24.3 | ) | $ | 223.3 | $ | 222.9 | |||||
See accompanying notes to consolidated financial statements.
45
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2015, 2014 and 2013
($ in millions) | 2015 | 2014 | 2013 | |||||||||
OPERATING ACTIVITIES | ||||||||||||
Net income | $ | 58.7 | $ | 132.8 | 146.5 | |||||||
Adjustments to reconcile net income to net cash provided from operating activities: | ||||||||||||
Depreciation and amortization | 122.3 | 111.9 | 104.1 | |||||||||
Non-cash restructuring and asset impairment charges | 7.6 | — | — | |||||||||
Deferred income taxes | 60.4 | (9.7 | ) | 9.4 | ||||||||
Net pension expense | 44.5 | 57.9 | 68.8 | |||||||||
Payments from qualified pension plan associated with restructuring charges | 8.3 | — | — | |||||||||
Stock-based compensation expense | 10.0 | 11.4 | 13.1 | |||||||||
Net loss on disposal of property and equipment | 1.2 | 1.5 | 2.2 | |||||||||
Changes in working capital and other: | ||||||||||||
Accounts receivable | 25.4 | 5.6 | 12.6 | |||||||||
Inventories | 36.0 | (37.0 | ) | (14.9 | ) | |||||||
Other current assets | (0.3 | ) | (5.0 | ) | 11.5 | |||||||
Accounts payable | (59.9 | ) | 16.8 | (10.3 | ) | |||||||
Accrued liabilities | (12.1 | ) | (21.1 | ) | 9.9 | |||||||
Pension plan contributions | (7.2 | ) | (6.3 | ) | (144.9 | ) | ||||||
Other postretirement plan contributions | (13.2 | ) | (13.1 | ) | (12.8 | ) | ||||||
Other, net | 0.9 | (6.1 | ) | (6.7 | ) | |||||||
Net cash provided from operating activities | 282.6 | 239.6 | 188.5 | |||||||||
INVESTING ACTIVITIES | ||||||||||||
Purchases of property, equipment and software | (170.5 | ) | (349.2 | ) | (310.2 | ) | ||||||
Proceeds from disposals of property and equipment | 0.2 | 0.3 | 1.2 | |||||||||
Proceeds received from sale of equity method investment | — | — | 7.9 | |||||||||
Proceeds from sales and maturities of marketable securities | 0.3 | 0.3 | 0.1 | |||||||||
Net cash used for investing activities | (170.0 | ) | (348.6 | ) | (301.0 | ) | ||||||
FINANCING ACTIVITIES | ||||||||||||
Proceeds from issuance of long-term debt, net of discounts and offering costs | — | — | 297.0 | |||||||||
Payments on long-term debt | — | — | (101.0 | ) | ||||||||
Dividends paid | (37.9 | ) | (38.5 | ) | (38.3 | ) | ||||||
Purchases of treasury stock | (124.5 | ) | — | — | ||||||||
Purchase of subsidiary shares from noncontrolling interest | — | — | (8.4 | ) | ||||||||
Tax benefits on share-based compensation | 0.7 | 2.3 | 3.9 | |||||||||
Proceeds from stock options exercised | 2.3 | 7.1 | 2.3 | |||||||||
Net cash (used for) provided from financing activities | (159.4 | ) | (29.1 | ) | 155.5 | |||||||
Effect of exchange rate changes on cash and cash equivalents | (3.2 | ) | 0.6 | 3.5 | ||||||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (50.0 | ) | (137.5 | ) | 46.5 | |||||||
Cash and cash equivalents at beginning of year | 120.0 | 257.5 | 211.0 | |||||||||
Cash and cash equivalents at end of year | $ | 70.0 | $ | 120.0 | $ | 257.5 | ||||||
See accompanying notes to consolidated financial statements.
46
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2015 and 2014
($ in millions, except share data) | 2015 | 2014 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 70.0 | $ | 120.0 | ||||
Accounts receivable, net of allowance for doubtful accounts of $3.8 and $3.4 at June 30, 2015 and 2014, respectively | 304.1 | 339.6 | ||||||
Inventories | 655.8 | 699.2 | ||||||
Deferred income taxes | 3.3 | — | ||||||
Other current assets | 37.2 | 35.7 | ||||||
Total current assets | 1,070.4 | 1,194.5 | ||||||
Property, plant and equipment, net | 1,397.0 | 1,407.0 | ||||||
Goodwill | 257.4 | 257.7 | ||||||
Other intangibles, net | 71.6 | 80.6 | ||||||
Other assets | 109.5 | 117.7 | ||||||
Total assets | $ | 2,905.9 | $ | 3,057.5 | ||||
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 169.5 | $ | 278.1 | ||||
Accrued liabilities | 152.6 | 148.0 | ||||||
Deferred income taxes | — | 4.5 | ||||||
Total current liabilities | 322.1 | 430.6 | ||||||
Long-term debt | 607.1 | 604.3 | ||||||
Accrued pension liabilities | 334.1 | 203.4 | ||||||
Accrued postretirement benefits | 111.2 | 163.2 | ||||||
Deferred income taxes | 146.5 | 110.7 | ||||||
Other liabilities | 59.0 | 41.0 | ||||||
Total liabilities | 1,580.0 | 1,553.2 | ||||||
Contingencies and commitments (see Note 10) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock — authorized 100,000,000 shares; issued 55,234,942 shares at June 30, 2015 and 55,161,875 shares at June 30, 2014; outstanding 50,318,244 shares at June 30, 2015 and 53,137,144 shares at June 30, 2014 | 276.2 | 275.8 | ||||||
Capital in excess of par value | 266.6 | 263.5 | ||||||
Reinvested earnings | 1,332.4 | 1,311.6 | ||||||
Common stock in treasury (4,916,698 shares and 2,024,731 shares at June 30, 2015 and 2014, respectively), at cost | (221.1 | ) | (101.4 | ) | ||||
Accumulated other comprehensive loss | (328.2 | ) | (245.2 | ) | ||||
Total equity | 1,325.9 | 1,504.3 | ||||||
Total liabilities and equity | $ | 2,905.9 | $ | 3,057.5 | ||||
See accompanying notes to consolidated financial statements.
47
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended June 30, 2015, 2014 and 2013
Carpenter Stockholders’ Equity | |||||||||||||||||||||||||||||
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 | Non controlling Interest | Total Equity | ||||||||||||||||||||||
Balances at June 30, 2012 | $ | 274.0 | $ | 252.7 | $ | 1,109.6 | $ | (120.0 | ) | $ | (412.5 | ) | $ | 9.3 | $ | 1,113.1 | |||||||||||||
Net income | 146.1 | 0.4 | 146.5 | ||||||||||||||||||||||||||
Pension and postretirement benefits gain, net of tax | 80.5 | 80.5 | |||||||||||||||||||||||||||
Net loss on derivative instruments, net of tax | (8.7 | ) | (8.7 | ) | |||||||||||||||||||||||||
Purchase of subsidiary shares from noncontrolling interest | 1.6 | (10.0 | ) | (8.4 | ) | ||||||||||||||||||||||||
Unrealized gain on marketable securities, net of tax | 0.3 | 0.3 | |||||||||||||||||||||||||||
Foreign currency translation | 4.7 | 0.3 | 5.0 | ||||||||||||||||||||||||||
Cash Dividends: | |||||||||||||||||||||||||||||
Common @ $0.72 per share | (38.3 | ) | (38.3 | ) | |||||||||||||||||||||||||
Share-based compensation plans | (5.5 | ) | 12.5 | 7.0 | |||||||||||||||||||||||||
Stock options exercised | 0.6 | 1.7 | 2.3 | ||||||||||||||||||||||||||
Tax windfall on share-based compensation | 3.9 | 3.9 | |||||||||||||||||||||||||||
Other | (0.1 | ) | (0.1 | ) | |||||||||||||||||||||||||
Balances at June 30, 2013 | 274.6 | 254.4 | 1,217.3 | (107.5 | ) | (335.7 | ) | — | 1,303.1 | ||||||||||||||||||||
Net income | 132.8 | 132.8 | |||||||||||||||||||||||||||
Pension and postretirement benefits gain, net of tax | 36.9 | 36.9 | |||||||||||||||||||||||||||
Net gain on derivative instruments, net of tax | 49.1 | 49.1 | |||||||||||||||||||||||||||
Foreign currency translation | 4.5 | 4.5 | |||||||||||||||||||||||||||
Cash Dividends: | |||||||||||||||||||||||||||||
Common @ $0.72 per share | (38.5 | ) | (38.5 | ) | |||||||||||||||||||||||||
Share-based compensation plans | 0.9 | 6.1 | 7.0 | ||||||||||||||||||||||||||
Stock options exercised | 1.2 | 5.9 | 7.1 | ||||||||||||||||||||||||||
Tax windfall on share-based compensation | 2.3 | 2.3 | |||||||||||||||||||||||||||
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 | |||||||||||||
See accompanying notes to consolidated financial statements.
48
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
For the Years Ended June 30, 2015, 2014 and 2013
Common Shares | |||||||||
Issued | Treasury | Net Outstanding | |||||||
Balances at June 30, 2012 | 54,809,735 | (2,396,768 | ) | 52,412,967 | |||||
Stock options exercised | 115,600 | — | 115,600 | ||||||
Share-based compensation plans | — | 244,493 | 244,493 | ||||||
Balances at June 30, 2013 | 54,925,335 | (2,152,275 | ) | 52,773,060 | |||||
Stock options exercised | 236,540 | — | 236,540 | ||||||
Share-based compensation plans | — | 127,544 | 127,544 | ||||||
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 | |||||
See accompanying notes to consolidated financial statements.
49
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, net in the consolidated statements of income. In November 2012, the Company dissolved its strategic partnership with Sandvik Materials Technology (“Sandvik”). Prior to the dissolution of the strategic partnership, the Company owned a 40 percent interest in Sandvik Powdermet AB, which the Company accounted for as an equity method investment. In addition, Sandvik owned a 40 percent interest in Carpenter Powder Products AB which has historically been reported as a noncontrolling interest. Prior to November 2012, the financial results of Carpenter Powder Products AB were consolidated into the Company’s operating results and financial position, with the 40 percent interest of the noncontrolling partner recognized in the consolidated statement of income as net income attributable to noncontrolling interest and as equity attributable to the noncontrolling interest within total equity.
Revenue Recognition
Revenue, net of related discounts, rebates, returns and allowances of $27.4 million, $28.3 million and $26.4 million for the years ended June 30, 2015, 2014 and 2013 respectively, is recognized when title and risk of loss has transferred to the customer, which generally occurs 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 $18.7 million, $18.5 million and $19.4 million in fiscal years 2015, 2014 and 2013, 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.
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, 2015 and 2014, $154.9 million and $161.2 million of inventory, respectively, was accounted for using a method other than the LIFO method.
50
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 principally from 3 to 7 years. Amortization expense charged to operations related to capitalized software amounted to $6.1 million, $6.4 million and $6.8 million for the years ended June 30, 2015, 2014 and 2013, respectively.
Goodwill
Goodwill, 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, contracts and customer relationships are amortized on a straight-line basis over the estimated useful lives ranging from 2.5 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 4 percent. The liabilities, net of present value discount, for this former operating site were $10.8 million and $10.4 million, respectively, as of June 30, 2015 and 2014.
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.
51
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 are 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, 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 years 2015, 2014 and 2013, no customer accounted for 10 percent or more of total net sales. Approximately 17 percent of accounts receivable outstanding at June 30, 2015 are due from one customer. No single customer was greater than 10 percent of accounts receivable as of June 30, 2014.
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.
2. | Restructuring Charges |
During the year ended June 30, 2015, the Company initiated restructuring actions to reduce overhead costs and position the Company to drive long-term, profitable growth. Activities undertaken in connection with the restructuring plan are expected to be substantially complete by the end of the first quarter of fiscal year 2016.
52
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The restructuring charges for fiscal year 2015 amounted to $29.1 million before taxes. The components of the restructuring charges for the years ended June 30, 2015, 2014 and 2013 were as follows:
Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Personnel-related costs | $ | 12.7 | $ | — | $ | — | ||||||
Site closure costs | 3.0 | — | — | |||||||||
Material development program exit costs | 13.4 | — | — | |||||||||
$ | 29.1 | $ | — | $ | — | |||||||
The personnel-related costs of severance payments, medical coverage and related items during the year ended June 30, 2015 include $2.5 million cash payments, $2.3 million accrued expenses to be paid in fiscal year 2016, $8.3 million payments from the Company's qualified pension plan and $0.4 million of non-cash forfeiture income related to stock-based compensation.
The material development program exit costs during the year ended June 30, 2015 include an $8.0 million cash payment to exit a licensing agreement and non-cash asset impairment charges totaling $5.4 million.
The site closure costs during the year ended June 30, 2015 consist of $0.4 million cash payments and $2.6 million non-cash write-downs of inventory, property and equipment and related items.
Activity and reserve balances for restructuring charges at June 30, 2015 and 2014 were as follows:
($ in millions) | Reserve Balance | |||
Reserve balance at June 30, 2014 | $ | — | ||
Restructuring charges | 29.1 | |||
Cash payments | (10.9 | ) | ||
Payments from qualified pension plan associated with restructuring charges | (8.3 | ) | ||
Non-cash asset impairment charges and other | (7.6 | ) | ||
Reserve balance at June 30, 2015 | $ | 2.3 | ||
53
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Earnings per Common Share
The calculations of basic and diluted earnings from continuing operations per common share for the years ended June 30, 2015, 2014 and 2013 were as follows:
Years Ended June 30, | ||||||||||||
($ in millions, except per share data) | 2015 | 2014 | 2013 | |||||||||
Net income attributable to Carpenter | $ | 58.7 | $ | 132.8 | $ | 146.1 | ||||||
Less: earnings and dividends allocated to participating securities | (0.1 | ) | (0.4 | ) | (0.8 | ) | ||||||
Earnings available for Carpenter common shareholders used in calculation of basic earnings per share | $ | 58.6 | $ | 132.4 | $ | 145.3 | ||||||
Weighted average number of common shares outstanding, basic | 52.6 | 53.3 | 52.9 | |||||||||
Basic earnings per common share | $ | 1.11 | $ | 2.48 | $ | 2.75 | ||||||
Net income attributable to Carpenter | $ | 58.7 | $ | 132.8 | $ | 146.1 | ||||||
Less: earnings and dividends allocated to participating securities | (0.1 | ) | (0.4 | ) | (0.8 | ) | ||||||
Earnings available for Carpenter common shareholders used in calculation of diluted earnings per share | $ | 58.6 | $ | 132.4 | $ | 145.3 | ||||||
Weighted average number of common shares outstanding, basic | 52.6 | 53.3 | 52.9 | |||||||||
Effect of shares issuable under share-based compensation plans | 0.1 | 0.3 | 0.3 | |||||||||
Weighted average number of common shares outstanding, diluted | 52.7 | 53.6 | 53.2 | |||||||||
Diluted earnings per common share | $ | 1.11 | $ | 2.47 | $ | 2.73 | ||||||
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) | 2015 | 2014 | 2013 | ||||||
Stock options | 0.8 | 0.1 | 0.4 | ||||||
4. Inventories
Inventories consisted of the following components at June 30, 2015 and 2014:
June 30, | ||||||||
($ in millions) | 2015 | 2014 | ||||||
Raw materials and supplies | $ | 121.7 | $ | 122.3 | ||||
Work in process | 346.1 | 393.9 | ||||||
Finished and purchased products | 188.0 | 183.0 | ||||||
Total inventory | $ | 655.8 | $ | 699.2 | ||||
If the FIFO method of inventory had been used instead of the LIFO method, inventories would have been $196.6 million and $195.7 million higher as of June 30, 2015 and 2014, respectively. Current cost of LIFO-valued inventories was $697.5 million at June 30, 2015 and $733.7 million at June 30, 2014. The reductions in LIFO-valued inventories increased
54
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cost of sales by $1.6 million during fiscal year 2015 and $0.0 million during fiscal year 2014 and decreased cost of sales by $2.1 million during fiscal year 2013.
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following components at June 30, 2015 and 2014:
June 30, | ||||||||
($ in millions) | 2015 | 2014 | ||||||
Land | $ | 28.8 | $ | 27.1 | ||||
Buildings and building equipment | 442.9 | 451.3 | ||||||
Machinery and equipment | 2,035.1 | 1,956.1 | ||||||
Construction in progress | 90.0 | 79.1 | ||||||
Total at cost | 2,596.8 | 2,513.6 | ||||||
Less: accumulated depreciation and amortization | 1,199.8 | 1,106.6 | ||||||
Total property, plant, and equipment | $ | 1,397.0 | $ | 1,407.0 | ||||
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 | |
Depreciation for the years ended June 30, 2015, 2014 and 2013 was $107.2 million, $93.3 million and $85.1 million, respectively.
6. Goodwill and Other Intangible Assets, Net
Goodwill
The Company has conducted its annual goodwill impairment as of June 30, 2015 and June 30, 2014, and as a result, the Company has determined there was no goodwill impairment.
The changes in the carrying amount of goodwill by reportable segment for fiscal years 2015 and 2014 were as follows:
($ in millions) | June 30, 2013 | Other | June 30, 2014 | Other | June 30, 2015 | |||||||||||||||
Goodwill | $ | 292.4 | $ | — | $ | 292.4 | $ | (0.3 | ) | $ | 292.1 | |||||||||
Accumulated impairment losses | (34.7 | ) | — | (34.7 | ) | — | (34.7 | ) | ||||||||||||
Total goodwill | $ | 257.7 | $ | — | $ | 257.7 | $ | (0.3 | ) | $ | 257.4 | |||||||||
Specialty Alloys Operations | $ | 195.5 | $ | — | $ | 195.5 | $ | — | $ | 195.5 | ||||||||||
Performance Engineered Products | 62.2 | — | 62.2 | (0.3 | ) | 61.9 | ||||||||||||||
Total goodwill | $ | 257.7 | $ | — | $ | 257.7 | $ | (0.3 | ) | $ | 257.4 | |||||||||
The amounts included in “other” in the above table represent foreign exchange impacts on the amounts recorded in goodwill.
55
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Intangible Assets, Net
June 30, 2015 | June 30, 2014 | |||||||||||||||||||||||||
($ 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 | 2.5 - 30 | $ | 42.0 | $ | (29.0 | ) | $ | 13.0 | $ | 42.0 | $ | (27.2 | ) | $ | 14.8 | |||||||||||
Customer relationships | 5 - 15 | 78.2 | (21.3 | ) | 56.9 | 78.2 | (15.2 | ) | 63.0 | |||||||||||||||||
Non-compete agreements | 6.5 | 5.4 | (3.7 | ) | 1.7 | 5.4 | (2.9 | ) | 2.5 | |||||||||||||||||
Contracts | 2.9 | 1.5 | (1.5 | ) | — | 1.5 | (1.2 | ) | 0.3 | |||||||||||||||||
Total | $ | 127.1 | $ | (55.5 | ) | $ | 71.6 | $ | 127.1 | $ | (46.5 | ) | $ | 80.6 | ||||||||||||
The Company recorded $9.0 million of amortization expense related to intangible assets during fiscal year 2015, $12.2 million during fiscal year 2014 and $12.2 million during fiscal year 2013. The estimated annual amortization expense related to intangible assets for each of the succeeding five fiscal years is $7.4 million in fiscal year 2016, $6.8 million in fiscal year 2017, $6.0 million in fiscal year 2018, $6.0 million in fiscal year 2019 and $6.0 million in fiscal year 2020.
7. Accrued Liabilities
Accrued liabilities consisted of the following as of June 30, 2015 and 2014:
June 30, | ||||||||
($ in millions) | 2015 | 2014 | ||||||
Accrued compensation and benefits | $ | 44.3 | $ | 49.8 | ||||
Derivative financial instruments | 32.7 | 4.7 | ||||||
Accrued postretirement benefits | 14.0 | 15.5 | ||||||
Accrued interest expense | 11.2 | 11.2 | ||||||
Accrued income taxes | 8.7 | 8.4 | ||||||
Deferred revenue | 8.6 | 7.5 | ||||||
Accrued pension liabilities | 3.3 | 19.3 | ||||||
Other | 29.8 | 31.6 | ||||||
Total accrued liabilities | $ | 152.6 | $ | 148.0 | ||||
8. Debt
On February 26, 2013, the Company completed an offering and sale of $300.0 million in aggregate principal amount of its 4.45% Senior Notes due 2023 (the “Notes”). The Notes accrue interest at the rate of 4.45% per annum, with interest payable in cash semi-annually in arrears on each March 1 and September 1, commencing September 1, 2013. The Notes will mature on March 1, 2023. The Notes are senior unsecured indebtedness of the Company, ranking equally in right of payment with all existing and future senior unsecured indebtedness and senior to future subordinated indebtedness. During the fiscal year ended June 30, 2013, the Company recorded a discount of $0.4 million and capitalized $2.6 million of debt issue costs paid in connection with the Notes.
The Company entered into $500.0 million syndicated credit facility (“Credit Agreement”) that extends to June 2018. During the fiscal year ended June 30, 2013, the Company capitalized $0.8 million of debt issue costs paid in connection with the Credit Agreement. 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 0.75% to 1.90% (1.25% as of June 30, 2015), and for Base Rate-determined loans, from 0.00% to 0.90% (0.25% as of June 30, 2015). The Company also pays a quarterly commitment fee ranging from 0.075% to 0.375% (0.15% as of June 30, 2015), determined based upon the Debt Rating, of the unused portion of the $500.0 million commitment under the Credit Agreement. In addition, the Company must pay certain letter of credit fees, ranging from 0.75% to 1.90% (1.25% as of June 30, 2015), with respect to letters of credit issued under the Credit Agreement. The Company has the right to voluntarily prepay and reborrow loans and to terminate or reduce the commitments under the facility. As of June 30, 2015, the Company had $7.1 million of issued letters of credit under the Credit Agreement, with the balance of $492.9 million available to the Company.
56
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio of 3.50 to 1.00. The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense (“EBITDA”) to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than 55 percent. The debt to capital ratio is defined in the Credit Agreement as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. As of June 30, 2015, the Company was in compliance with all of the covenants of the Credit Agreement.
Long-term debt outstanding as of June 30, 2015 and 2014 consisted of the following:
June 30, | ||||||||
($ in millions) | 2015 | 2014 | ||||||
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, 2015 and 2014) | $ | 55.0 | $ | 55.0 | ||||
Senior unsecured notes, 5.20% due July 2021 (face value of $250.0 million at June 30, 2015 and 2014) | 252.5 | 249.7 | ||||||
Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at June 30, 2015 and 2014) | 299.6 | 299.6 | ||||||
Total | 607.1 | 604.3 | ||||||
Less amounts due within one year | — | — | ||||||
Long-term debt, net of current portion | $ | 607.1 | $ | 604.3 | ||||
Aggregate maturities of long-term debt for the five years subsequent to June 30, 2015, are $0.0 million in fiscal year 2016 and 2017, $55.0 million in 2018, $0.0 million in 2019 and 2020 and $550.0 million thereafter.
For the years ended June 30, 2015, 2014 and 2013, interest costs totaled $30.4 million, $32.1 million and $27.8 million, respectively, of which $2.7 million, $15.1 million and $6.8 million, respectively, were capitalized as part of the cost of property, plant, equipment and software.
9. Pension and Other Postretirement Benefits
The Company provides several noncontributory defined benefit pension plans to certain employees. The plans provide defined benefits based on years of service and final average salary. Effective January 1, 2012, new employees are not eligible to participate in the Company’s largest defined benefit pension plan.
The Company also provides other postretirement benefit plans to certain of its employees. The postretirement benefit plans consist of health care and life insurance plans. Benefit payments are currently paid from corporate assets. Plan assets are maintained in a Voluntary Employee Benefit Association Trust (“VEBA”).
57
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans:
Pension Plans | Other Postretirement Plans | |||||||||||||||
($ in millions) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Change in projected benefit obligation: | ||||||||||||||||
Projected benefit obligation at beginning of year | $ | 1,247.0 | $ | 1,186.7 | $ | 285.2 | $ | 259.8 | ||||||||
Service cost | 32.2 | 32.1 | 4.4 | 4.0 | ||||||||||||
Interest cost | 54.1 | 57.5 | 11.8 | 12.5 | ||||||||||||
Benefits paid | (81.3 | ) | (81.0 | ) | (13.8 | ) | (13.5 | ) | ||||||||
Actuarial loss | 61.2 | 53.2 | 2.7 | 22.4 | ||||||||||||
Plan settlements | — | (0.2 | ) | — | — | |||||||||||
Special termination benefits | 8.3 | — | — | — | ||||||||||||
Curtailment gain | — | — | (1.6 | ) | — | |||||||||||
Plan amendments | 1.6 | (1.3 | ) | (51.9 | ) | — | ||||||||||
Projected benefit obligation at end of year | $ | 1,323.1 | $ | 1,247.0 | $ | 236.8 | $ | 285.2 | ||||||||
Change in plan assets: | ||||||||||||||||
Fair value of plan assets at beginning of year | $ | 1,024.4 | $ | 930.2 | $ | 106.5 | $ | 93.2 | ||||||||
Actual return | 32.2 | 165.7 | 5.4 | 13.7 | ||||||||||||
Benefits paid | (81.3 | ) | (81.0 | ) | (13.8 | ) | (13.5 | ) | ||||||||
Contributions | 10.5 | 9.8 | 13.5 | 13.1 | ||||||||||||
Plan settlements | — | (0.3 | ) | — | — | |||||||||||
Fair value of plan assets at end of year | $ | 985.8 | $ | 1,024.4 | $ | 111.6 | $ | 106.5 | ||||||||
Funded status of the plans | $ | (337.3 | ) | $ | (222.6 | ) | $ | (125.2 | ) | $ | (178.7 | ) | ||||
Amounts recognized in the consolidated balance sheets: | ||||||||||||||||
Other assets - noncurrent | $ | 0.1 | $ | 0.1 | $ | — | $ | — | ||||||||
Accrued liabilities - current | (3.3 | ) | (19.3 | ) | (14.0 | ) | (15.5 | ) | ||||||||
Accrued pension liabilities - noncurrent | (334.1 | ) | (203.4 | ) | — | — | ||||||||||
Accrued postretirement benefits - noncurrent | — | — | (111.2 | ) | (163.2 | ) | ||||||||||
$ | (337.3 | ) | $ | (222.6 | ) | $ | (125.2 | ) | $ | (178.7 | ) | |||||
Pension Plans | Other Postretirement Plans | |||||||||||||||
($ in millions) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Amounts recognized in accumulated other comprehensive loss: | ||||||||||||||||
Net actuarial loss | $ | 422.3 | $ | 341.2 | $ | 52.3 | $ | 50.8 | ||||||||
Prior service cost (credit) | 2.4 | 1.0 | (51.8 | ) | — | |||||||||||
Total | $ | 424.7 | $ | 342.2 | $ | 0.5 | $ | 50.8 | ||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive loss consist of: | ||||||||||||||||
Net actuarial loss (gain) | $ | 97.8 | $ | (49.4 | ) | $ | 3.6 | $ | 15.1 | |||||||
Amortization of accumulated net actuarial loss | (16.7 | ) | (21.8 | ) | (2.0 | ) | (1.2 | ) | ||||||||
Prior service cost (credit) | 1.6 | (1.3 | ) | (51.9 | ) | — | ||||||||||
Amortization of prior service (cost) benefit | (0.3 | ) | (0.5 | ) | — | 0.1 | ||||||||||
Total, before tax effect | $ | 82.4 | $ | (73.0 | ) | $ | (50.3 | ) | $ | 14.0 | ||||||
Additional information: | ||||||||||||||||
Accumulated benefit obligation for all pension plans | $ | 1,253.5 | $ | 1,154.0 | N/A | N/A | ||||||||||
58
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, 2015 and 2014:
Pension Plans | Other Postretirement Plans | |||||||||||||||
($ in millions) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Projected benefit obligation | $ | 1,323.0 | $ | 1,246.9 | $ | 236.8 | $ | 285.2 | ||||||||
Fair value of plan assets | $ | 985.6 | $ | 1,024.2 | $ | 111.6 | $ | 106.5 | ||||||||
The following additional information is for plans with accumulated benefit obligations in excess of plan assets as of June 30, 2015 and 2014:
Pension Plans | Other Postretirement Plans | |||||||||||||||
($ in millions) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Accumulated benefit obligation | $ | 1,253.4 | $ | 1,153.9 | $ | 236.8 | $ | 285.2 | ||||||||
Fair value of plan assets | $ | 985.6 | $ | 1,024.2 | $ | 111.6 | $ | 106.5 | ||||||||
The components of the net periodic benefit cost related to the Company’s pension and other postretirement benefits for the years ended June 30, 2015, 2014 and 2013 are as follows:
Pension Plans | Other Postretirement Plans | |||||||||||||||||||||||
($ in millions) | 2015 | 2014 | 2013 | 2015 | 2014 | 2013 | ||||||||||||||||||
Service cost | $ | 32.2 | $ | 32.1 | $ | 32.5 | $ | 4.4 | $ | 4.0 | $ | 4.4 | ||||||||||||
Interest cost | 54.1 | 57.5 | 53.0 | 11.8 | 12.5 | 12.2 | ||||||||||||||||||
Expected return on plan assets | (68.8 | ) | (62.9 | ) | (54.8 | ) | (6.6 | ) | (6.5 | ) | (6.4 | ) | ||||||||||||
Amortization of net loss | 16.7 | 21.8 | 28.1 | 2.0 | 1.2 | 3.2 | ||||||||||||||||||
Amortization of prior service cost (benefit) | 0.3 | 0.5 | 0.7 | — | (0.1 | ) | (4.1 | ) | ||||||||||||||||
Curtailment gain | — | — | — | (1.6 | ) | — | — | |||||||||||||||||
Net periodic benefit costs | $ | 34.5 | $ | 49.0 | $ | 59.5 | $ | 10.0 | $ | 11.1 | $ | 9.3 | ||||||||||||
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.
Historically, the Company capitalized in inventory only the service cost portion of periodic benefit costs associated with manufacturing employees. During the quarter ended December 31, 2013, the Company began to capitalize the portion of periodic benefit costs related to the interest cost, expected return on assets and amortization of actuarial net loss and prior service cost (benefit), which the Company refers to as pension earnings, interest and deferrals (“pension EID”) expense, related to current manufacturing employees in inventory. The impact of this change resulted in an increase in the amount of capitalized periodic benefit costs of $2.2 million during year ended June 30, 2014. This change did not have a material impact on any previously reported amounts.
Weighted-average assumptions used to determine benefit obligations at fiscal year end | Pension Plans | Other Postretirement Plans | |||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||
Discount rate | 4.50 | % | 4.47 | % | 4.40 | % | 4.27 | % | |||||
Rate of compensation increase | 3.52 | % | 3.57 | % | N/A | N/A | |||||||
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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 | |||||||||||||||||
2015 | 2014 | 2013 | 2015 | 2014 | 2013 | |||||||||||||
Discount rate | 4.48 | % | 5.00 | % | 4.50 | % | 4.26 | % | 4.95 | % | 4.50 | % | ||||||
Expected long-term rate of return on plan assets | 6.92 | % | 7.00 | % | 7.00 | % | 6.25 | % | 7.00 | % | 7.50 | % | ||||||
Long-term rate of compensation increase | 3.52 | % | 3.57 | % | 3.67 | % | 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, | ||||||
2015 | 2014 | |||||
Assumed health care cost trend rate | 7.50 | % | 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 | 2021 | 2020 | ||||
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 $0.5 million and increase the postretirement benefit obligation by $3.8 million. A one percentage point decrease in the assumed health care cost trend rate would decrease service and interest cost by $0.5 million and decrease the postretirement benefit obligation by $3.4 million.
Net pension expense, which we define to include the net periodic benefit costs of both the pension and other postretirement plans, is estimated to be $53.6 million for the year ended June 30, 2016, comprised of $50.8 million of net periodic benefit costs for pension plans and $2.8 million of net periodic benefit costs for other postretirement benefit plans. The discount rate and expected long-term rate of return on plan assets used to calculate the net periodic benefit costs for pension plans for the year ended June 30, 2016 were 4.50 percent and 6.25 - 7.00 percent, respectively. The discount rate and expected long-term rate of return on plan assets used to calculate the net periodic benefits costs for other postretirement benefit plans for the year ended June 30, 2016 were 4.50 percent and 6.25 percent, respectively.
Amounts in other comprehensive loss that are expected to be recognized as components of net periodic benefit cost in the year ended June 30, 2016 are:
($ in millions) | Pension Plans | Other Postretirement Plans | Total | |||||||||
Amortization of prior service cost | $ | 0.4 | $ | (6.5 | ) | $ | (6.1 | ) | ||||
Amortization of net actuarial loss | 27.4 | 2.6 | 30.0 | |||||||||
Amortization of accumulated other comprehensive loss | $ | 27.8 | $ | (3.9 | ) | $ | 23.9 | |||||
The Company’s U.S. pension plans’ weighted-average asset allocations at June 30, 2015 and 2014, by asset category are as follows:
2015 | 2014 | |||||
Equity securities | 57.5 | % | 55.1 | % | ||
Fixed income securities | 42.4 | 44.2 | ||||
Cash and cash equivalents | 0.1 | 0.7 | ||||
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 Plan Committee.
60
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the current funding level, the allocation policy for pension plan assets is to have approximately 60 percent in return seeking assets and 40 percent in liability matching assets. Return seeking assets include domestic and international equities and diversified loan funds. Liability matching assets include long duration bond funds. As the funding level of the 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 approximately 68 percent U.S. equities and 32 percent fixed income securities as of June 30, 2015. 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, 2015 and 2014, by asset category and by the levels of inputs used to determine fair value were as follows:
June 30, 2015 | June 30, 2014 | |||||||||||||||||||||||
Fair Value Measurements Using Input Type | Fair Value Measurements Using Input Type | |||||||||||||||||||||||
($ in millions) | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||||||||||||||
Short-term investments | $ | — | $ | 14.9 | $ | 14.9 | $ | — | $ | 15.3 | $ | 15.3 | ||||||||||||
Domestic and international equities | 158.9 | — | 158.9 | 142.1 | — | 142.1 | ||||||||||||||||||
Commingled funds | 58.6 | 334.9 | 393.5 | 64.7 | 341.4 | 406.1 | ||||||||||||||||||
Limited partnerships | — | 38.4 | 38.4 | — | 52.0 | 52.0 | ||||||||||||||||||
Government agency bonds | 2.2 | 141.3 | 143.5 | 4.8 | 129.8 | 134.6 | ||||||||||||||||||
Corporate bonds | — | 225.8 | 225.8 | — | 248.1 | 248.1 | ||||||||||||||||||
Mutual funds | 1.5 | — | 1.5 | 2.9 | — | 2.9 | ||||||||||||||||||
Mortgage/asset backed securities and other | — | 9.3 | 9.3 | — | 23.3 | 23.3 | ||||||||||||||||||
$ | 221.2 | $ | 764.6 | $ | 985.8 | $ | 214.5 | $ | 809.9 | $ | 1,024.4 | |||||||||||||
The fair values of the Company’s other postretirement benefit plans as of June 30, 2015 and 2014, by asset category and by the level of inputs used to determine fair value, were as follows:
June 30, 2015 | June 30, 2014 | |||||||||||||||||||||||
Fair Value Measurements Using Input Type | Fair Value Measurements Using Input Type | |||||||||||||||||||||||
($ in millions) | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||||||||||||||
Commingled fund | $ | — | $ | 63.1 | $ | 63.1 | $ | — | $ | 61.2 | $ | 61.2 | ||||||||||||
Short-term investments | — | 21.6 | 21.6 | — | 17.2 | 17.2 | ||||||||||||||||||
Government agency bonds | — | 16.0 | 16.0 | — | 18.6 | 18.6 | ||||||||||||||||||
Corporate bonds and other | — | 8.6 | 8.6 | — | 6.8 | 6.8 | ||||||||||||||||||
Mortgage backed securities | — | 2.3 | 2.3 | — | 2.7 | 2.7 | ||||||||||||||||||
$ | — | $ | 111.6 | $ | 111.6 | $ | — | $ | 106.5 | $ | 106.5 | |||||||||||||
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 and limited partnerships 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.
61
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flows — Employer Contributions
The Company made contributions to the qualified US pension plans of $7.2 million, $6.3 million and $144.9 million during fiscal years 2015, 2014 and 2013, respectively. The Company currently expects to make no pension contributions to the qualified defined benefit pension plans during fiscal year 2016. During the years ended June 30, 2015, 2014 and 2013, the Company made contributions of $3.3 million, $3.2 million and $3.3 million to other non-qualified pension plans, respectively.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid. Pension benefits are currently paid from plan assets and other benefits are currently paid from corporate assets.
($ in millions) | Pension Benefits | Other Benefits | ||||||
2016 | $ | 73.6 | $ | 14.0 | ||||
2017 | $ | 74.5 | $ | 14.4 | ||||
2018 | $ | 76.0 | $ | 14.6 | ||||
2019 | $ | 78.3 | $ | 14.8 | ||||
2020 | $ | 80.5 | $ | 15.0 | ||||
2021-2024 | $ | 425.8 | $ | 76.7 | ||||
Other Benefit Plans
Carpenter also maintains defined contribution retirement and savings plans for substantially all domestic employees. Company contributions to the plan were $12.0 million in fiscal year 2015, $10.6 million in fiscal year 2014 and $8.9 million in fiscal year 2013.
10. 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 PRP’s 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 years 2015, 2014 and 2013 the Company increased the liability for a company-owned former operating site by $0.4 million, $0.7 million and $0.3 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, 2015 and 2014 were $15.9 million and $15.5 million, respectively.
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
62
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015 were used for commitments with variable pricing. The purchase commitments covered by these agreements aggregate to $117.2 million as of June 30, 2015, all of which relates to fiscal year 2016.
11. 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 over two years. The shares may be 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. The share repurchase program may be discontinued at any time. During the year ended June 30, 2015, the Company purchased 2,995,272 of its common stock on the open market for an aggregate of $124.5 million.
12. Operating Leases
The Company leases certain facilities and equipment under operating leases. Total rent expense was $12.0 million, $12.8 million and $12.3 million for the fiscal years ended June 30, 2015, 2014 and 2013, respectively.
Future minimum payments for non-cancellable operating leases in effect at June 30, 2015 are: $9.6 million in fiscal year 2016, $7.3 million in fiscal year 2017, $5.4 million in fiscal year 2018, $4.0 million in fiscal year 2019, $3.1 million in fiscal year 2020 and $7.7 million thereafter.
13. Fair Value Measurements
The fair value hierarchy has three levels based on the inputs used to determine fair value. Level 1 refers to quoted prices in active markets for identical assets or liabilities. Level 2 refers to observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 refers to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. Currently, the Company does not use Level 1 and 3 inputs.
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
June 30, 2015 | Fair Value Measurements Using Input Type | |||||||
($ in millions) | Level 2 | Total | ||||||
Assets: | ||||||||
Marketable securities | +C5 | |||||||
Municipal auction rate securities | $ | 5.0 | $ | 5.0 | ||||
Derivative financial instruments | 4.4 | 4.4 | ||||||
Total assets | $ | 9.4 | $ | 9.4 | ||||
Liabilities: | ||||||||
Derivative financial instruments | $ | 53.5 | $ | 53.5 | ||||
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 | Fair Value Measurements Using Input Type | |||||||
($ in millions) | Level 2 | Total | ||||||
Assets: | ||||||||
Marketable securities | ||||||||
Municipal auction rate securities | $ | 5.2 | $ | 5.2 | ||||
Derivative financial instruments | 20.4 | 20.4 | ||||||
Total assets | $ | 25.6 | $ | 25.6 | ||||
Liabilities: | ||||||||
Derivative financial instruments | $ | 10.9 | $ | 10.9 | ||||
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 15.
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, 2015 | June 30, 2014 | |||||||||||||||
($ in millions) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Long-term debt | $ | 607.1 | $ | 628.6 | $ | 604.3 | $ | 638.7 | ||||||||
Company-owned life insurance | $ | 13.0 | $ | 13.0 | $ | 16.2 | $ | 16.2 | ||||||||
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.
The fair values of long-term debt as of June 30, 2015 and June 30, 2014 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.
14. Share-Based Compensation
The Company has two share-based compensation plans: the 1993 Plan covering officers and key employees and the Director’s Plan covering non-employee directors. 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 $10.0 million, $11.4 million and $13.1 million for the years ended June 30, 2015, 2014 and 2013, respectively.
64
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1993 Plan
The 1993 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 1993 plan provides the Chief Executive Officer with limited authority to grant awards. As of June 30, 2015, 1,549,511 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, 2015, 693,116 shares were reserved 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 2015, 2014 and 2013 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, | |||||||||
2015 | 2014 | 2013 | |||||||
Expected volatility | 36 | % | 49 | % | 55 | % | |||
Dividend yield | 1.6 | % | 1.3 | % | 1.5 | % | |||
Risk-free interest rate | 1.4 | % | 1.4 | % | 0.7 | % | |||
Expected term (in years) | 5.0 | 5.0 | 5.0 | ||||||
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, 2012 | 1,022,606 | $ | 33.54 | ||||||||||
Granted | 198,904 | 48.60 | |||||||||||
Exercised | (115,600 | ) | 19.82 | ||||||||||
Cancelled | (17,182 | ) | 48.42 | ||||||||||
Outstanding at June 30, 2013 | 1,088,728 | 37.51 | |||||||||||
Granted | 243,292 | 54.65 | |||||||||||
Exercised | (236,540 | ) | 30.19 | ||||||||||
Cancelled | (31,585 | ) | 49.83 | ||||||||||
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 | 7.1 years | $ | 4.5 | |||||||
Exercisable at June 30, 2015 | 979,538 | $ | 41.44 | 6.2 years | $ | 4.5 | |||||||
65
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding and Exercisable Options
Exercise Price Range | Number Outstanding at June 30, 2015 | Weighted Average Remaining Contractual Term (in Years) | Weighted Average Exercise Price | Number Exercisable at June 30, 2015 | Weighted Average Exercise Price | |||||||||||
$5.00 - $20.00 | 72,412 | 4.1 | $ | 17.29 | 72,412 | $ | 17.29 | |||||||||
$20.01 - $30.00 | 162,371 | 3.9 | 22.72 | 162,371 | 22.72 | |||||||||||
$30.01 - $40.00 | 93,736 | 5.1 | 34.55 | 93,736 | 34.55 | |||||||||||
$40.01 - $50.00 | 403,380 | 7.9 | 43.18 | 258,272 | 43.55 | |||||||||||
$50.01 - $63.54 | 775,979 | 7.8 | 53.70 | 392,747 | 53.89 | |||||||||||
1,507,878 | $ | 44.61 | 979,538 | $ | 41.44 | |||||||||||
The weighted average grant date fair value of options awarded during fiscal years 2015, 2014 and 2013 was $11.78, $21.31 and $20.37, respectively. Share-based compensation charged against income related to stock options for the years ended June 30, 2015, 2014 and 2013 was $6.8 million, $3.5 million and $3.4 million, respectively. As of June 30, 2015, $2.7 million of compensation cost related to nonvested stock options will be recognized over a weighted average remaining life of 1.2 years.
Of the options outstanding at June 30, 2015, 1,262,872 relate to the 1993 plan and 245,006 relate to the Directors’ Plan.
Restricted Stock Unit Awards (1993 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.
66
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts charged to compensation expense for restricted stock unit awards was $1.3 million, $2.8 million and $4.8 million for the years end June 30, 2015, 2014 and 2013, respectively. As of June 30, 2015, $1.2 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, 2012 | 419,331 | $ | 35.71 | ||||
Time-based granted | 22,838 | 50.15 | |||||
Performance-based granted | 41,816 | 47.85 | |||||
Vested | (254,967 | ) | 31.39 | ||||
Forfeited | (13,603 | ) | 51.85 | ||||
Restricted Balance at June 30, 2013 | 215,415 | 43.75 | |||||
Time-based granted | 14,086 | 52.58 | |||||
Performance-based granted | 20,794 | 48.85 | |||||
Vested | (120,117 | ) | 43.96 | ||||
Forfeited | (16,615 | ) | 48.02 | ||||
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 | ||||
Total Stockholder Return Awards
The Company granted Total Stockholder Return (“TSR”) awards in fiscal years 2015, 2014 and 2013. The TSR awards are granted at a target number of shares. The fiscal year 2013 TSR awards are earned based on the Company’s total stockholder return compared to the total stockholder returns of a group of peer companies at the end of a three-year period. Beginning with fiscal year 2014, TSR awards are earned based on the Company’s total stockholder return compared to the total stockholder returns of the Russell Materials and 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 2015, 2014 and 2013 was $0.8 million, $3.9 million and $3.7 million, respectively.
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.
67
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2012 | 221,410 | $ | 27.10 | ||||
Granted | 21,710 | 53.53 | |||||
Dividend equivalents | 3,399 | — | |||||
Outstanding at June 30, 2013 | 246,519 | 30.06 | |||||
Granted | 19,770 | 59.47 | |||||
Dividend equivalents | 3,026 | — | |||||
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 | ||||
Compensation cost is determined using the grant date fair value and charged to expense over the vesting period of one year and amounted to $1.1 million, $1.2 million and $1.2 million for the years ended June 30, 2015, 2014 and 2013, respectively. As of June 30, 2015, $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.
15. 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.
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, 2015, the Company had forward contracts to purchase 27.7 million pounds of certain raw materials with settlement dates through June 2019.
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, 2015 and 2014, net gains of $0.3 million and $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.
68
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also uses foreign currency forward contracts to protect certain short-term asset positions denominated in foreign currency 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, 2015, 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 where appropriate. 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, 2015 and 2014, the total notional amount of floating interest rate contracts were $150.0 million and $0.0 million, respectively. For the years ended June 30, 2015, 2014 and 2013, net gains of $2.9 million, $0.0 million and $1.4 million, respectively, were recorded as a reduction to interest expense.
The fair value and location of outstanding derivative contracts recorded in the accompanying consolidated balance sheets were as follows as of June 30, 2015 and 2014:
June 30, 2015 ($ in millions) | Interest Rate Swaps | Foreign Currency Contracts | Commodity Contracts | Total Derivatives | ||||||||||||
Asset Derivatives: | ||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||
Other current assets | $ | 1.5 | $ | 0.2 | $ | — | $ | 1.7 | ||||||||
Other assets | 2.7 | — | — | 2.7 | ||||||||||||
Total asset derivatives | $ | 4.2 | $ | 0.2 | $ | — | $ | 4.4 | ||||||||
Liability Derivatives: | ||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||
Accrued liabilities | $ | — | $ | — | $ | 32.7 | $ | 32.7 | ||||||||
Other liabilities | — | — | 20.8 | 20.8 | ||||||||||||
Total liability derivatives | $ | — | $ | — | $ | 53.5 | $ | 53.5 | ||||||||
June 30, 2014 ($ in millions) | Interest Rate Swaps | Foreign Currency Contracts | Commodity Contracts | Total Derivatives | ||||||||||||
Asset Derivatives: | ||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||
Other current assets | $ | — | $ | — | $ | 11.3 | $ | 11.3 | ||||||||
Other assets | — | — | 9.1 | 9.1 | ||||||||||||
Total asset derivatives | $ | — | $ | — | $ | 20.4 | $ | 20.4 | ||||||||
Liability Derivatives: | ||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||
Accrued liabilities | $ | — | $ | 0.4 | $ | 4.3 | $ | 4.7 | ||||||||
Other liabilities | — | 0.2 | 6.0 | 6.2 | ||||||||||||
Total liability derivatives | $ | — | $ | 0.6 | $ | 10.3 | $ | 10.9 | ||||||||
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 $7.7 million and total liability derivatives would have been $56.8 million as of June 30, 2015.
69
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
According to the provisions of the Company’s derivative arrangements, in the event that the fair value of outstanding derivative positions with certain counterparties exceeds certain thresholds, the Company may be required to issue cash collateral to the counterparties. As of June 30, 2015 the Company had no cash collateral held by counterparties.
The Company is exposed to credit loss in the event of nonperformance by counterparties on its derivative instruments as well as credit or performance risk with respect to its customer commitments to perform. Although nonperformance is possible, the Company does not anticipate nonperformance by any of the parties. In addition, various master netting arrangements are in place with counterparties to facilitate settlements of gains and losses on these contracts.
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings or it becomes probable the forecasted transactions will not occur. The following is a summary of the (loss) gains related to cash flow hedges recognized during the years ended June 30, 2015, 2014 and 2013:
Amount of (Loss) Gain Recognized in AOCI on Derivatives (Effective Portion) Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Derivatives in Cash Flow Hedging Relationship: | ||||||||||||
Commodity contracts | $ | (76.3 | ) | $ | 59.3 | $ | (43.2 | ) | ||||
Foreign exchange contracts | 2.6 | (1.6 | ) | 1.9 | ||||||||
Forward interest rate swaps | — | — | 2.7 | |||||||||
Total | $ | (73.7 | ) | $ | 57.7 | $ | (38.6 | ) | ||||
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) | 2015 | 2014 | 2013 | ||||||||||
Derivatives in Cash Flow Hedging Relationship: | ||||||||||||||
Commodity contracts | Cost of sales | $ | (18.5 | ) | $ | (20.5 | ) | $ | (24.9 | ) | ||||
Foreign exchange contracts | Net sales | 2.3 | (0.8 | ) | 0.1 | |||||||||
Forward interest rate swaps | Interest expense | 0.4 | 0.4 | 0.2 | ||||||||||
Total | $ | (15.8 | ) | $ | (20.9 | ) | $ | (24.6 | ) | |||||
Location of Loss Reclassified from AOCI into Income | Amount of Loss Reclassified from AOCI into Income (Ineffective Portion) Years Ended June 30, | |||||||||||||
($ in millions) | (Ineffective Portion) | 2015 | 2014 | 2013 | ||||||||||
Derivatives in Cash Flow Hedging Relationship: | ||||||||||||||
Commodity contracts | Cost of sales | $ | (2.2 | ) | $ | (0.3 | ) | $ | — | |||||
Foreign exchange contracts | Net sales | — | — | — | ||||||||||
Forward interest rate swaps | Interest expense | — | — | — | ||||||||||
Total | $ | (2.2 | ) | $ | (0.3 | ) | $ | — | ||||||
The Company estimates that $27.7 million of net derivative losses included in AOCI as of June 30, 2015 will be reclassified into earnings within the next twelve months. No significant cash flow hedges were discontinued during the year ended June 30, 2015.
70
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes in AOCI associated with derivative hedging activities during the years ended June 30, 2015, 2014 and 2013 were as follows:
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Balance, beginning | $ | 7.6 | $ | (41.5 | ) | $ | (32.8 | ) | ||||
Current period changes in fair value, net of tax | (46.0 | ) | 36.0 | (24.2 | ) | |||||||
Reclassification to earnings, net of tax | 9.9 | 13.1 | 15.5 | |||||||||
Balance, ending | $ | (28.5 | ) | $ | 7.6 | $ | (41.5 | ) | ||||
16. Income Taxes
Income before income taxes for the Company’s domestic and foreign operations was as follows:
Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Domestic | $ | 64.3 | $ | 178.6 | $ | 198.0 | ||||||
Foreign | 24.8 | 17.8 | 18.8 | |||||||||
Income before income taxes | $ | 89.1 | $ | 196.4 | $ | 216.8 | ||||||
The provision (benefit) for income taxes from continuing operations consisted of the following:
Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Current: | ||||||||||||
Federal | $ | (39.3 | ) | $ | 61.3 | $ | 49.7 | |||||
State | 1.2 | 6.5 | 5.9 | |||||||||
Foreign | 8.1 | 5.5 | 5.3 | |||||||||
Total current | (30.0 | ) | 73.3 | 60.9 | ||||||||
Deferred: | ||||||||||||
Federal | 60.2 | (8.0 | ) | 7.8 | ||||||||
State | 0.1 | (1.4 | ) | 2.5 | ||||||||
Foreign | 0.1 | (0.3 | ) | (0.9 | ) | |||||||
Total deferred | 60.4 | (9.7 | ) | 9.4 | ||||||||
Total income tax expense | $ | 30.4 | $ | 63.6 | $ | 70.3 | ||||||
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) | 2015 | 2014 | 2013 | ||||||
Statutory federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
State income taxes, net of federal tax benefit | 2.2 | 2.5 | 2.0 | ||||||
Domestic manufacturing deduction | (2.7 | ) | (3.5 | ) | (2.7 | ) | |||
Prior year impact of Tax Increase Prevention Act | 1.7 | — | — | ||||||
Other, net | (2.1 | ) | (1.6 | ) | (1.9 | ) | |||
Effective income tax rate | 34.1 | % | 32.4 | % | 32.4 | % | |||
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
71
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2015, the Company had state net operating loss carryforwards of $321.7 million expiring between 2016 and 2035. Based on current year and forecasted taxable state income, we determined that it was appropriate to reverse a portion of the valuation allowance in fiscal year 2015. A tax benefit was recognized through the reduction of the valuation allowance in the amount of $0.3 million in fiscal year 2015. 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) | 2015 | 2014 | ||||||
Deferred tax assets: | ||||||||
Pensions | $ | 125.1 | $ | 82.7 | ||||
Postretirement provisions | 48.9 | 66.9 | ||||||
Net operating loss carryforwards | 20.3 | 20.6 | ||||||
Derivatives and hedging activities | 18.5 | — | ||||||
Other | 32.6 | 35.0 | ||||||
Gross deferred tax assets | 245.4 | 205.2 | ||||||
Valuation allowances | (17.5 | ) | (17.8 | ) | ||||
Net deferred tax assets | 227.9 | 187.4 | ||||||
Deferred tax liabilities: | ||||||||
Depreciation | (321.2 | ) | (232.3 | ) | ||||
Intangible assets | (26.1 | ) | (37.5 | ) | ||||
Inventories | (17.6 | ) | (28.8 | ) | ||||
Other | (6.2 | ) | (4.0 | ) | ||||
Total deferred tax liabilities | (371.1 | ) | (302.6 | ) | ||||
Deferred tax liabilities | $ | (143.2 | ) | $ | (115.2 | ) | ||
As of June 30, 2015, the Company had $118.5 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 the authorization of the $500.0 million share repurchase program in October 2014, we changed our intent with regard to the indefinite reinvestment of a portion of the foreign earnings of one of our foreign subsidiaries for fiscal year 2014 and prior years. As a result of this change, we repatriated approximately $38 million during the third quarter of fiscal year 2015 with minimal tax cost.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for uncertain tax positions is as follows:
Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Balance, beginning | $ | — | $ | 1.4 | $ | 2.3 | ||||||
Additions based on tax positions of prior years | — | — | 0.6 | |||||||||
Reductions as a result of a lapse of statute of limitations | — | (1.1 | ) | (1.3 | ) | |||||||
Reductions based on tax positions of prior year | — | (0.1 | ) | (0.2 | ) | |||||||
Reductions as a result of settlements with taxing authorities | — | (0.2 | ) | — | ||||||||
Balance, ending | $ | — | $ | — | $ | 1.4 | ||||||
The liability for unrecognized tax benefits was $0.0 million at June 30, 2015 and June 30, 2014 and $1.4 million at June 30, 2013. It is reasonably possible that the amount of the unrecognized tax benefits will change within the next twelve months; however, any such changes are not expected to have a significant impact on the Company’s consolidated financial statements.
72
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
It is the Company’s policy to classify interest and penalties recognized on uncertain tax positions as a component of income tax expense. The Company’s income tax expense included net benefits of $0.0 million, $0.6 million and $0.3 million related to interest and penalties for the years ended June 30, 2015, 2014 and 2013, respectively. In addition, no amounts were included in accrued income taxes for interest and penalties in the consolidated balance sheets as of June 30, 2015 and 2014.
All years prior to fiscal year 2012 have been settled with the Internal Revenue Service and with most significant state, local and foreign tax jurisdictions.
17. Other Income, Net
Other income, net consists of the following:
Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Interest income | $ | 0.1 | $ | 0.2 | $ | 0.3 | ||||||
Equity in earnings of unconsolidated subsidiaries | 0.1 | 0.6 | 1.3 | |||||||||
Unrealized gains on company owned life insurance contracts and investments held in rabbi trusts | 0.3 | 2.1 | 3.4 | |||||||||
Foreign Exchange | 0.4 | (1.5 | ) | — | ||||||||
Other | 4.4 | — | 0.1 | |||||||||
Total other income, net | $ | 5.3 | $ | 1.4 | $ | 5.1 | ||||||
18. Superalloy Powders Technical Assistance and Powder Supply Agreements
On September 30, 2013, the Company entered into a multi-level agreement with United Technologies Corporation (“UTC”) through its Pratt & Whitney Division, which includes a technical assistance agreement and a long-term powder supply agreement. The technical assistance agreement provides for the licensing of technology associated with the production of superalloy powders. As a result of the agreements, the Company began construction of a superalloy powder facility at an estimated cost of $30 million. Once the facility is qualified by UTC, the Company will supply UTC with superalloy powder for up to 20 years. The powder supply agreement provides for minimum guaranteed purchase quantities of specified materials for a period of 12 years.
According to the terms of the technology licensing agreement, the Company paid a $13.0 million up-front license fee in equal quarterly installments beginning on December 15, 2013. This amount has been capitalized and will be amortized as a reduction to revenue over the term of the minimum guarantee period of 12 years. As of June 30, 2015 and 2014, the $13.0 million upfront license fee is included in other assets.
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 and surrounding areas in Pennsylvania, 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, the Specialty Steel Supply business, the Latrobe and Mexico distribution business. 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.
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also excluded are items that management considers not representative of ongoing operations, such as restructuring related 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, no single customer accounted for 10 percent or more of the Company’s net sales for the years ended June 30, 2015, 2014 and 2013.
74
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment Data | Years Ended June 30, | |||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Net Sales: | ||||||||||||
Specialty Alloys Operations | $ | 1,796.6 | $ | 1,741.6 | $ | 1,823.5 | ||||||
Performance Engineered Products | 497.7 | 498.6 | 520.1 | |||||||||
Intersegment | (67.6 | ) | (67.2 | ) | (71.9 | ) | ||||||
Consolidated net sales | $ | 2,226.7 | $ | 2,173.0 | $ | 2,271.7 | ||||||
Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Operating Income: | ||||||||||||
Specialty Alloys Operations | $ | 155.2 | $ | 232.7 | $ | 268.5 | ||||||
Performance Engineered Products | 39.1 | 45.5 | 45.2 | |||||||||
Corporate costs (including restructuring charges) | (72.0 | ) | (43.8 | ) | (47.7 | ) | ||||||
Pension EID | (9.4 | ) | (21.8 | ) | (31.9 | ) | ||||||
Intersegment | (1.4 | ) | (0.6 | ) | (1.4 | ) | ||||||
Consolidated operating income | $ | 111.5 | $ | 212.0 | $ | 232.7 | ||||||
Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Depreciation and Amortization: | ||||||||||||
Specialty Alloys Operations | $ | 95.0 | $ | 83.4 | $ | 76.7 | ||||||
Performance Engineered Products | 23.3 | 23.8 | 22.1 | |||||||||
Corporate | 4.6 | 5.5 | 5.9 | |||||||||
Intersegment | (0.6 | ) | (0.8 | ) | (0.6 | ) | ||||||
Consolidated depreciation and amortization | $ | 122.3 | $ | 111.9 | $ | 104.1 | ||||||
Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Capital Expenditures: | ||||||||||||
Specialty Alloys Operations | $ | 129.0 | $ | 319.9 | $ | 283.5 | ||||||
Performance Engineered Products | 38.1 | 24.7 | 24.1 | |||||||||
Corporate | 4.3 | 5.4 | 4.1 | |||||||||
Intersegment | (0.9 | ) | (0.8 | ) | (1.5 | ) | ||||||
Consolidated capital expenditures | $ | 170.5 | $ | 349.2 | $ | 310.2 | ||||||
June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | ||||||||||
Total Assets: | ||||||||||||
Specialty Alloys Operations | $ | 2,323.0 | $ | 2,454.8 | ||||||||
Performance Engineered Products | 499.2 | 491.7 | ||||||||||
Corporate | 125.0 | 144.9 | ||||||||||
Intersegment | (41.3 | ) | (33.9 | ) | ||||||||
Consolidated total assets | $ | 2,905.9 | $ | 3,057.5 | ||||||||
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Geographic Data | Years Ended June 30, | |||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Net Sales: (a) | ||||||||||||
United States | $ | 1,579.9 | $ | 1,537.9 | $ | 1,575.3 | ||||||
Europe | 359.6 | 349.5 | 382.1 | |||||||||
Asia Pacific | 141.8 | 137.1 | 153.6 | |||||||||
Canada | 61.2 | 65.3 | 59.8 | |||||||||
Mexico | 59.2 | 59.2 | 66.6 | |||||||||
Other | 25.0 | 24.0 | 34.3 | |||||||||
Consolidated net sales | $ | 2,226.7 | $ | 2,173.0 | $ | 2,271.7 | ||||||
(a) Net sales were attributed to countries based on the location of the customer.
June 30, | ||||||||
($ in millions) | 2015 | 2014 | ||||||
Long-lived assets: | ||||||||
United States | $ | 1,367.0 | $ | 1,379.5 | ||||
Asia Pacific | 18.1 | 11.6 | ||||||
Canada | 6.5 | 8.4 | ||||||
Europe | 4.5 | 6.1 | ||||||
Mexico | 0.9 | 1.4 | ||||||
Consolidated long-lived assets | $ | 1,397.0 | $ | 1,407.0 | ||||
Product Data | Years Ended June 30, | |||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Special alloys | $ | 991.2 | $ | 917.0 | $ | 989.9 | ||||||
Stainless steel | 619.2 | 643.6 | 638.8 | |||||||||
Alloy and tool steel | 218.8 | 240.4 | 255.7 | |||||||||
Titanium products | 164.8 | 157.7 | 155.0 | |||||||||
Powder metals | 61.8 | 48.6 | 60.4 | |||||||||
Distribution and other | 170.9 | 165.7 | 171.9 | |||||||||
Total net sales | $ | 2,226.7 | $ | 2,173.0 | $ | 2,271.7 | ||||||
20. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in ASU 2014-09 requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The FASB voted on July 9, 2015 to defer the effective date of this guidance by one year. Under the deferral, the Company will be required to adopt this standard for its interim and annual periods beginning after December 15, 2017. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. The Company is evaluating the impact of the adoption of ASU 2014-09 on the Consolidated Financial Statements.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs. The guidance in ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The guidance in ASU 2015-03 is required for annual reporting periods beginning after December 15, 2015, including interim periods within the reporting period. Early adoption is permitted for financial statements that have not been previously issued. The Company expects the reclassification impact on the Consolidated Balance Sheets to be $4.7 million from other assets to long-term debt as of June 30, 2015.
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, which amends existing guidance for measuring inventories. This amendment will require the Company to measure inventories recorded using the FIFO method and average cost method at the lower of cost and net realizable value. This amendment does not change the methodology for measuring inventories recorded using the LIFO method. The guidance in ASU 2015-11 is required for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the impact of the adoption of ASU 2015-11 to have a material impact on the Consolidated Financial Statements.
21. Reclassifications from Accumulated Other Comprehensive Income (Loss)
The changes in AOCI by component, net of tax, for the years ended June 30, 2015 and 2014 were as follows:
($ in millions) (a) | Cash flow hedging items | Pension and other postretirement benefit plan items | Unrealized losses on available-for-sale securities | Foreign currency items | Total | |||||||||||||||
Balance at June 30, 2014 | $ | 7.6 | $ | (236.7 | ) | $ | (0.4 | ) | $ | (15.7 | ) | $ | (245.2 | ) | ||||||
Other comprehensive income before reclassifications | (46.0 | ) | (32.0 | ) | — | (26.9 | ) | (104.9 | ) | |||||||||||
Amounts reclassified from AOCI (b) | 9.9 | 11.9 | 0.1 | — | 21.9 | |||||||||||||||
Net current-period other comprehensive income | (36.1 | ) | (20.1 | ) | 0.1 | (26.9 | ) | (83.0 | ) | |||||||||||
Balance at June 30, 2015 | $ | (28.5 | ) | $ | (256.8 | ) | $ | (0.3 | ) | $ | (42.6 | ) | $ | (328.2 | ) | |||||
($ in millions) (a) | Cash flow hedging items | Pension and other postretirement benefit plan items | Unrealized losses on available-for-sale securities | Foreign currency items | Total | |||||||||||||||
Balance at June 30, 2013 | $ | (41.5 | ) | $ | (273.6 | ) | $ | (0.4 | ) | $ | (20.2 | ) | $ | (335.7 | ) | |||||
Other comprehensive income before reclassifications | 36.0 | 22.2 | — | 4.5 | 62.7 | |||||||||||||||
Amounts reclassified from AOCI (b) | 13.1 | 14.7 | — | — | 27.8 | |||||||||||||||
Net current-period other comprehensive income | 49.1 | 36.9 | — | 4.5 | 90.5 | |||||||||||||||
Balance at June 30, 2014 | $ | 7.6 | $ | (236.7 | ) | $ | (0.4 | ) | $ | (15.7 | ) | $ | (245.2 | ) | ||||||
(a) All amounts are net of tax. Amounts in parentheses indicate debits.
(b) See separate table below for further details.
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of amounts reclassified from AOCI for the years ended June 30, 2015 and 2014:
Amount Reclassified from AOCI | ||||||||||
Years Ended June 30, | ||||||||||
($ in millions) (a) | Location of (loss) gain | 2015 | 2014 | |||||||
Details about AOCI Components | ||||||||||
Cash flow hedging items | ||||||||||
Commodity contracts | Cost of sales | $ | (18.5 | ) | $ | (20.5 | ) | |||
Foreign exchange contracts | Net sales | 2.3 | (0.8 | ) | ||||||
Forward interest rate swaps | Interest expense | 0.4 | 0.4 | |||||||
Total before tax | (15.8 | ) | (20.9 | ) | ||||||
Tax benefit | 5.9 | 7.8 | ||||||||
Net of tax | $ | (9.9 | ) | $ | (13.1 | ) | ||||
Amortization of pension and other postretirement benefit plan items | ||||||||||
Net actuarial loss | (b) | $ | (18.7 | ) | $ | (23.0 | ) | |||
Prior service cost | (b) | (0.3 | ) | (0.4 | ) | |||||
Total before tax | (19.0 | ) | (23.4 | ) | ||||||
Tax benefit | 7.1 | 8.7 | ||||||||
Net of tax | $ | (11.9 | ) | $ | (14.7 | ) | ||||
(a) Amounts in parentheses indicate debits to income/loss.
(b) These AOCI components are included in the computation of net periodic benefit cost (see Note 9 for additional details).
During the year ended June 30, 2015, the Company identified an error related to the accounting for an equity method investment. Since the investee’s financial statements are prepared using a functional currency other than the US dollar, the Company should be translating the Company’s investment balance into a US dollar equivalent at the end of each period. The impact of correcting this error was a $4.9 million reduction in other assets with an offsetting adjustment to accumulated other comprehensive loss in the Company’s consolidated balance sheet. This adjustment is included in foreign currency translation in the consolidated statement of comprehensive (loss) income for the year ended June 30, 2015. The Company determined that neither the prior period error nor the current period adjustment were material to the periods presented.
22. Supplemental Data
The following are additional required disclosures and other material items:
Years Ended June 30, | ||||||||||||
($ in millions) | 2015 | 2014 | 2013 | |||||||||
Cost Data: | ||||||||||||
Repairs and maintenance costs | $ | 114.7 | $ | 108.9 | $ | 101.9 | ||||||
Cash Flow Data: | ||||||||||||
Noncash investing and financing activities: | ||||||||||||
Noncash purchases of property, equipment and software | $ | 17.3 | $ | 65.5 | $ | 57.0 | ||||||
Seller financed debt related to the purchase of software | $ | 4.9 | $ | — | $ | — | ||||||
Cash paid during the year for: | ||||||||||||
Interest payments | $ | 29.0 | $ | 15.1 | $ | 16.8 | ||||||
Income tax (refunds) payments, net | $ | (27.1 | ) | $ | 70.8 | $ | 51.2 | |||||
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SUPPLEMENTARY DATA
Quarterly Financial Data (Unaudited)
Quarterly sales and earnings results are normally influenced by seasonal factors. Historically, the first two fiscal quarters (three months ending September 30 and December 31) are typically the lowest principally because of annual plant vacation and maintenance shutdowns by the Company and by many of its customers. However, the timing of major changes in the general economy or the markets for certain products can alter this pattern.
(dollars and shares in millions, except per share amounts) | First Quarter | Second Quarter | Third Quarter (1) | Fourth Quarter | ||||||||||||
Results of Operations | ||||||||||||||||
Fiscal Year 2015 | ||||||||||||||||
Net sales | $ | 549.8 | $ | 548.4 | $ | 570.6 | $ | 558.0 | ||||||||
Gross profit | $ | 69.1 | $ | 85.0 | $ | 75.8 | $ | 88.4 | ||||||||
Operating income | $ | 22.1 | $ | 45.0 | $ | 4.8 | $ | 39.5 | ||||||||
Net income (loss) | $ | 13.5 | $ | 24.1 | $ | (1.4 | ) | $ | 22.5 | |||||||
Fiscal Year 2014 | ||||||||||||||||
Net sales | $ | 498.6 | $ | 503.5 | $ | 566.3 | $ | 604.6 | ||||||||
Gross profit | $ | 103.3 | $ | 95.4 | $ | 94.5 | $ | 105.6 | ||||||||
Operating income | $ | 55.8 | $ | 47.5 | $ | 49.5 | $ | 59.2 | ||||||||
Net income | $ | 34.6 | $ | 29.5 | $ | 30.6 | $ | 38.1 | ||||||||
(1) During the quarter ended March 31, 2015, the Company recorded restructuring charges. See Note 2, Restructuring Charges to Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data”.
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
Earnings (Loss) per common share | ||||||||||||||||
Fiscal Year 2015 | ||||||||||||||||
Basic earnings | $ | 0.25 | $ | 0.45 | $ | (0.03 | ) | $ | 0.44 | |||||||
Diluted earnings | $ | 0.25 | $ | 0.45 | $ | (0.03 | ) | $ | 0.44 | |||||||
Fiscal Year 2014 | ||||||||||||||||
Basic earnings | $ | 0.65 | $ | 0.55 | $ | 0.57 | $ | 0.71 | ||||||||
Diluted earnings | $ | 0.65 | $ | 0.55 | $ | 0.57 | $ | 0.71 | ||||||||
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First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||
Weighted average common shares outstanding | ||||||||||||
Fiscal Year 2015 | ||||||||||||
Basic | 53.5 | 53.4 | 52.6 | 50.9 | ||||||||
Diluted | 53.7 | 53.6 | 52.6 | 51.0 | ||||||||
Fiscal Year 2014 | ||||||||||||
Basic | 53.1 | 53.2 | 53.3 | 53.4 | ||||||||
Diluted | 53.4 | 53.6 | 53.7 | 53.8 | ||||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a—15(e) and 15d—15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of June 30, 2015. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of June 30, 2015 were effective in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required under the Securities and Exchange Commission’s rules and forms, including a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Report on Internal Control over Financial Reporting
Management’s Report on the Company’s internal control over financial reporting is included in Item 8 of this Annual Report on Form 10-K under the caption “Management’s Report on Internal Control Over Financial Reporting” and is incorporated herein by reference. The Company’s independent registered public accounting firm has issued a report on management’s assessment of the Company’s internal control over financial reporting and is set forth in Item 8 of this Annual Report on Form 10-K under the caption “Report of Independent Registered Public Accounting Firm” and is incorporated herein by reference.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2015 that have materially affected, or are likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors and Executive Officers and Corporate Governance
The information required as to the officers is set forth in Part I hereof.
The information required as to directors and the committees of the Board of Directors is incorporated herein by reference to the Company’s fiscal year 2015 definitive Proxy Statement under the captions “Election of Directors” and “Corporate Governance”.
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The information concerning compliance with Section 16(a) of the Securities and Exchange Act of 1934, as amended, is incorporated herein by reference to the Company’s fiscal year 2015 definitive Proxy Statement under the caption “Corporate Governance”.
The information concerning Carpenter’s Code of Ethics and certain additional information relating to the Company’s Corporate Governance is incorporated herein by reference to the Company’s fiscal year 2015 definitive Proxy Statement under the caption “Corporate Governance”.
The information concerning the Audit Committee and its financial experts is incorporated herein by reference to the Company’s fiscal year 2015 definitive Proxy Statement under the caption “Audit/Finance Committee Report”.
The information concerning material changes to the procedures by which shareholders may recommend nominees to the Board of Directors is incorporated herein by reference to the Company’s fiscal year 2015 definitive Proxy Statement under the caption “General Information”.
On October 23, 2014, we filed with the New York Stock Exchange (“NYSE”) the Annual CEO Certification regarding our compliance with the NYSE’s Corporate Governance listing standards as required by Section 303 A-12(a) of the NYSE Listed Company Manual. In addition, we have filed as exhibits to our annual report on Form 10-K for the fiscal year ended June 30, 2015, the applicable certifications of our Chief Executive Officer and our Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002, regarding the quality of Carpenter’s public disclosures.
Item 11. Executive Compensation
Certain information required by this item is incorporated herein by reference to the Company’s fiscal year 2015 definitive Proxy Statement under the captions “Compensation Discussion and Analysis” and “Executive Compensation”.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the Company’s fiscal year 2015 definitive Proxy Statement under the caption “Security Ownership of Certain Persons”.
Equity Compensation Plan Information
The following table shows the securities authorized for issuance under equity compensation plans as of June 30, 2015:
Equity Compensation Plan Information
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | ||||||||||
Equity compensation plans approved by security holders | 1,507,878 | $ | 44.61 | 2,242,627 | (1 | ) | |||||||
Equity compensation plans not approved by security holders | — | — | — | ||||||||||
Total | 1,507,878 | $ | 44.61 | 2,242,627 | (1 | ) | |||||||
(1) Includes 1,549,511 shares available for issuance under the Stock-Based Incentive Compensation Plan for Officers and Key Employees (which provides for the issuance of stock options, restricted stock and restricted stock units) and 693,116 shares available under the Stock-Based Compensation Plan for Non-Employee Directors (which provides for issuance of stock options, stock units and performance units).
There were no reportable purchases during the quarter ended June 30, 2015, provided however that 6,846 shares, at an average purchase price of $40.06, were surrendered by employees to the Company for the payment of the minimum tax liability withholding obligations upon the vesting of shares of restricted stock and the exercise of options. We do not consider this a share repurchase program.
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Item 13. Certain Relationships, Related Transactions and Director Independence
The information required by this item is incorporated herein by reference to the Company’s fiscal year 2015 definitive Proxy Statement under the captions “Corporate Governance” and “Executive Compensation”.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to the Company’s fiscal year 2015 definitive Proxy Statement under the caption “Approval of Appointment of Independent Registered Public Accounting Firm”.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statement Schedule:
(1) The following consolidated financial statement schedule should be read in conjunction with the consolidated financial statements (see Item 8. “Financial Statements and Supplementary Data”):
Schedule II — Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is contained in the consolidated financial statements or notes thereto.
(b) Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K are listed below. Documents not designated as being incorporated herein by reference are filed herewith. The exhibit numbers correspond to the paragraph numbers designated in Item 601 of Regulation S-K.
Exhibit No. | Description | |
3(A) | Restated Certificate of Incorporation, dated October 26, 1998 (Exhibit 3(A) to our Annual Report on Form 10-K filed on September 9, 2005 and incorporated herein by reference). | |
3(B) | By-Laws, amended as of August 11, 2015 (Exhibit 3.1 to our Current Report on Form 8-K filed on August 17, 2015 and incorporated herein by reference). | |
4(A) | Restated Certificate of Incorporation and By-Laws identified above in Exhibit Nos. 3(A) and 3(B), respectively. | |
4(B) | Indenture, dated January 12, 1994, between Carpenter and U.S. Bank Trust National Association, formerly known as First Trust of New York, National Association, as successor Trustee to Morgan Guaranty Trust Company of New York (Exhibit 4(A) to our Quarterly Report on Form 10-Q filed on February 10, 1994 and incorporated herein by reference). | |
4(C) | Forms of Fixed Rate and Floating Rate Medium-Term Note, Series B (Exhibit 4(F) to our Annual Report on Form 10-K filed on September 3, 2004 and incorporated herein by reference). | |
4(D) | First Supplemental Indenture, dated May 22, 2003, between Carpenter Technology Corporation and U.S. Bank Trust National Association (formerly known as First Trust of New York, National Association as successor Trustee to Morgan Guaranty Trust Company of New York) (Exhibit 4(I) to our Annual Report on Form 10-K filed on September 12, 2003 and incorporated herein by reference). | |
4(E) | Second Supplemental Indenture, dated as of June 30, 2011, between Carpenter Technology Corporation and U.S. Bank National Association (Exhibit 4.1 to our Current Report on Form 8-K filed on June 30, 2011 and incorporated herein by reference). | |
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Exhibit No. | Description | |
4(F) | Form of 5.20% Senior Notes Due 2012 (Exhibit 4.2 to our Current Report on Form 8-K filed on June 30, 2011 and incorporated herein by reference). | |
4(G) | Stockholders Agreement, dated February 29, 2012, by and among Carpenter Technology Corporation, Watermill-Toolrock Partners, L.P., Watermill-Toolrock Partners II, L.P., Watermill-Toolrock Enterprises, LLC and HHEP-Latrobe, L.P. (Exhibit 10.1 to our Current Report on Form 8-K filed on March 1, 2012 and incorporated herein by reference). | |
4(H) | Registration Rights Agreement, dated February 29, 2012, by and among Carpenter, Watermill-Toolrock Partners, L.P., Watermill-Toolrock Partners II, L.P., Watermill-Toolrock Enterprises, LLC and HHEP-Latrobe, L.P. (Exhibit 10.2 to our Current Report on Form 8-K filed on March 1, 2012 and incorporated herein by reference). | |
4(I) | Third Supplemental Indenture, dated as of February 26, 2013, between Carpenter Technology Corporation and U.S. Bank National Association (Exhibit 4.1 to our Current Report on Form 8-K filed on February 26, 2013 and incorporated herein by reference). | |
4(J) | Form of 4.450% Senior Notes Due 2023 (Exhibit 4.2 to our Current Report on Form 8-K filed on February 26, 2013 and incorporated herein by reference). | |
4(K) | Form of Note related to the Credit Agreement, dated as of June 28, 2013, among Carpenter Technology Corporation, as borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders party thereto, JPMorgan Chase Bank, N.A., as Syndication Agent, PNC Bank, National Association, The Bank Of Tokyo-Mitsubishi UFJ, Ltd., New York Branch and Sovereign Bank, each, as a Documentation Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated, and J.P. Morgan Securities LLC, as Joint Lead Arrangers and Joint Book Managers (Exhibit 4(Q) to our Annual Report on Form 10-K filed on August 23, 2013 and incorporated herein by reference). | |
† 10(A) | Supplemental Retirement Plan for Executives of Carpenter Technology Corporation as amended on June 29, 2010 (Exhibit 10(A) to our Annual Report on Form 10-K filed on August 20, 2010 and incorporated herein by reference). | |
† 10(B) | Deferred Compensation Plan for Non-Management Directors of Carpenter Technology Corporation, amended as of August 16, 2011 (Exhibit 10(B) to our Annual Report on Form 10-K filed on August 24, 2011 and incorporated herein by reference). | |
† 10(C) | Deferred Compensation Plan for Officers and Key Employees of Carpenter Technology Corporation, as amended and restated effective January 1, 2008 (Exhibit 10(C) to our Current Report on Form 10-Q filed on February 3, 2010 and incorporated herein by reference). | |
† 10(D) | Executive Bonus Compensation Plan, amended and restated July 1, 2011 (Exhibit 10(D) to our Annual Report on Form 10-K filed on August 24, 2011 and incorporated herein by reference). | |
† 10(E) | Stock-Based Compensation Plan For Non-Employee Directors, as amended as of August 16, 2011 (Exhibit 10(E) to our Annual Report on Form 10-K filed on August 24, 2011 and incorporated herein by reference). | |
† 10(F) | Officers’ and Key Employees Supplemental Retirement Plan of Carpenter Technology Corporation restated as of August 20, 2007 and amended as of June 29, 2010 (Exhibit 10(F) to our Annual Report on Form 10-K filed on August 22, 2012 and incorporated herein by reference). | |
10(G) | Trust Agreement for Non-Qualified Employee Benefits Trust between Carpenter Technology Corporation and JP Morgan Chase Bank, N.A., effective as of August 15, 2014 (filed herewith). | |
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Exhibit No. | Description | |
† 10(H) | Indemnification Agreement dated as of July 1, 2010 by and between the Company and William A. Wulfsohn (pursuant to Instruction 2 to Item 601 of Regulation S-K, the Indemnification Agreements, which are substantially identical in all material respects, except as to the parties thereto and the dates, between the Company and the following individuals, were not filed: Gary E. Heasley, Mark S. Kamon, David L. Strobel, Tony R. Thene and Andrew T. Ziolkowski) (Exhibit 10(H) to our Annual Report on Form 10-K filed on August 24, 2011 and incorporated herein by reference). | |
† 10(I) | Stock-Based Incentive Compensation Plan for Officers and Key Employees, as amended effective July 1, 2011 (Exhibit 10(I) to our Annual Report on Form 10-K filed on August 24, 2011 and incorporated herein by reference). | |
† 10(J) | Second Amendment to the Stock-Based Incentive Compensation Plan for Officers and Key Employees, as amended effective April 30, 2013, together with the First Amendment to the Stock-Based Incentive Compensation Plan for Officers and Key Employees, as amended January 17, 2012 (Exhibit 10(A) to our Current Report on Form 8-K filed on May 2, 2013 and incorporated herein by reference). | |
† 10(K) | Third Amendment to the Stock-Based Incentive Compensation Plan for Officers and Key Employees, as amended effective August 13, 2013 (Exhibit 10(K) to our Annual Report on Form 10-K filed on August 23, 2013 and incorporated herein by reference). | |
† 10(L) | Form of Restricted Stock Option Award Agreement (pursuant to Carpenter’s Stock-Based Incentive Plan for Officers and Key Employees) (Exhibit 10(W) to our Annual Report on Form 10-K filed on August 22, 2012 and incorporated herein by reference). | |
† 10(M) | Form of Restricted Unit Award Agreement (pursuant to Carpenter’s Stock-Based Incentive Plan for Officers and Key Employees) (Exhibit 10(X) to our Annual Report on Form 10-K filed on August 22, 2012 and incorporated herein by reference). | |
† 10(N) | Form of Performance Stock Unit Award Agreement (pursuant to Carpenter’s Stock-Based Incentive Compensation Plan for Officers and Key Employees) (Exhibit 10(B) to our Current Report on Form 8-K filed on May 2, 2013 and incorporated herein by reference). | |
† 10(O) | Form of One-Year Performance Stock Unit Award Agreement (pursuant to Carpenter’s Stock-Based Incentive Compensation Plan for Officers and Key Employees) (Exhibit 10(O) to our Annual Report on Form 10-K filed on August 23, 2013 and incorporated herein by reference). | |
† 10(P) | Form of Three-Year Performance Stock Unit Award Agreement (pursuant to Carpenter’s Stock-Based Incentive Compensation Plan for Officers and Key Employees) (Exhibit 10(P) to our Annual Report on Form 10-K filed on August 23, 2013 and incorporated herein by reference). | |
† 10(Q) | Amended and Restated Carpenter Technology Corporation Change of Control Severance Plan, effective September 1, 2010 (Exhibit 10.1 to our Current Report on Form 8-K filed on September 3, 2010 and incorporated herein by reference). | |
† 10(R) | Earnings Adjustment Plan of Carpenter Technology Corporation, restated as of August 20, 2007 (Exhibit 10(M) to our Annual Report on Form 10-K filed on August 29, 2007 and incorporated herein by reference). | |
† 10(S) | Benefit Equalization Plan of Carpenter Technology Corporation, restated as of August 20, 2007 (Exhibit 10(N) to our Annual Report on Form 10-K filed on August 29, 2007 and incorporated herein by reference). | |
† 10(T) | Form of Indemnification Agreement for Directors and Officers (Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 7, 2015 and incorporated herein by reference). | |
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Exhibit No. | Description | |
† 10(U) | Employment Letter Agreement of William A. Wulfsohn with Special Severance Agreement, dated June 3, 2010 (Exhibit 10.1 to our Current Report on Form 8-K filed on June 7, 2010 and incorporated herein by reference). | |
† 10(V) | Employment Letter Agreement of David Strobel, dated September 2, 2010 (Exhibit 10(C) to our Quarterly Report on Form 10-Q filed on November 5, 2010 and incorporated herein by reference). | |
† 10(W) | Employment Letter Agreement of Gary E. Heasley, dated July 11, 2013, is incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on July 15, 2013 and incorporated herein by reference). | |
† 10(X) | Non-Competition Agreement, dated December 31, 2012, by and between Carpenter Technology Corporation and Mark S. Kamon (Exhibit 10(AA) to our Annual Report on Form 10-K filed on August 23, 2013 and incorporated herein by reference). | |
† 10(Y) | Severance Pay Plan for Executives of Carpenter Technology Corporation, as adopted on July 1, 2010 (Exhibit 10.1 to our Current Report on Form 8-K filed on July 2, 2010 and incorporated herein by reference). | |
10(Z) | Credit Agreement, dated as of June 28, 2013, among Carpenter Technology Corporation, as borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders party thereto, JPMorgan Chase Bank, N.A., as Syndication Agent, PNC Bank, National Association, The Bank Of Tokyo-Mitsubishi UFJ, Ltd., New York Branch and Sovereign Bank, each, as a Documentation Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated, and J.P. Morgan Securities LLC, as Joint Lead Arrangers and Joint Book Managers (Exhibit 10.1 to our Current Report on Form 8-K, filed on July 1, 2013 and incorporated herein by reference). | |
10(AA) | Agreement and Plan of Merger, dated as of June 20, 2011, by and among Carpenter Technology Corporation, Hawke Acquisition Corp., HHEP-Latrobe, L.P. and Watermill-Toolrock Partners, L.P. (Exhibit 2.1 to our Current Report on Form 8-K filed on June 21, 2011 and incorporated herein by reference). | |
10(AB) | Amendment to Agreement and Plan of Merger, dated as of January 13, 2012, by and among Carpenter, Hawke Acquisition Corp., HHEP-Latrobe, L.P. and Watermill-Toolrock Partners L.P. (Exhibit 2.1 to our Current Report on Form 8-K filed on January 18, 2012 and incorporated herein by reference). | |
10(AC) | Amendment to Agreement and Plan of Merger, dated February 29, 2012, by and among Carpenter, Hawke Acquisition Corp., Latrobe Specialty Metals, Inc., HHEP-Latrobe, L.P., and Watermill-Toolrock Partners, L.P. (Exhibit 2.1 to our Current Report on Form 8-K filed on March 1, 2012 and incorporated herein by reference). | |
† 10(AD) | Offer Letter, dated June 15, 2015, by and between Carpenter Technology Corporation and Joseph E. Haniford (Exhibit 10.1 to our Current Report on Form 8-K filed on June 22, 2015 and incorporated herein by reference). | |
† 10(AE) | Offer Letter, dated June 1, 2015, by and between Carpenter Technology Corporation and Tony R. Thene (Exhibit 10.1 to our Current Report on Form 8-K filed on June 3, 2015 and incorporated herein by reference). | |
† 10(AF) | Employment Letter Agreement of Gregory A. Pratt, dated February 4, 2015 (Exhibit 10(A) to our Quarterly Report on Form 10-Q filed on February 9, 2015 and incorporated herein by reference). | |
12 | Computations of Ratios of Earnings to Fixed Charges (Unaudited) (filed herewith). | |
21 | Subsidiaries of the Registrant (filed herewith). | |
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Exhibit No. | Description | |
23 | Consent of PricewaterhouseCoopers LLP (filed herewith). | |
24 | Powers of Attorney in favor of James D. Dee or Timothy Lain (filed herewith). | |
31(A) | Certification of Chief Executive Officer required by the Securities and Exchange Commission Rule 13a-14(a)/15d-14(a) (filed herewith). | |
31(B) | Certification of Chief Financial Officer required by the Securities and Exchange Commission Rule 13a-14(a)/15d-14(a) (filed herewith). | |
32 | Certification pursuant to 18 U.S.C Section 1350 (filed herewith). | |
101 | The following financial information from this Annual Report on Form 10-K for the fiscal year ended June 30, 2015, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements of Changes in Equity; and (vi) the Notes to the Consolidated Financial Statements (filed herewith). | |
† Denotes employment- or compensation- related agreement, document or plan.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CARPENTER TECHNOLOGY CORPORATION | ||
By | /s/ Timothy Lain | |
Timothy Lain | ||
Acting Chief Financial Officer | ||
Date: August 25, 2015 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
/s/ Tony R. Thene | President and Chief Executive Officer | August 25, 2015 | ||
Tony R. Thene | and Director | |||
(Principal Executive Officer) | ||||
/s/ Timothy Lain | Acting Chief Financial Officer | August 25, 2015 | ||
Timothy Lain | (Principal Financial Officer) | |||
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* | Chairman and Director | August 25, 2015 | ||
Gregory A. Pratt | ||||
* | Director | August 25, 2015 | ||
Carl G. Anderson, Jr. | ||||
* | Director | August 25, 2015 | ||
Robert R. McMaster | ||||
* | Director | August 25, 2015 | ||
I. Martin Inglis | ||||
* | Director | August 25, 2015 | ||
Peter N. Stephans | ||||
* | Director | August 25, 2015 | ||
Kathryn C. Turner | ||||
* | Director | August 25, 2015 | ||
Jeffrey Wadsworth | ||||
* | Director | August 25, 2015 | ||
Stephen M. Ward, Jr. | ||||
* | Director | August 25, 2015 | ||
Dr. Philip M. Anderson | ||||
* | Director | August 25, 2015 | ||
Steven E. Karol | ||||
Original Powers of Attorney authorizing James D. Dee or Timothy Lain to sign this Report on behalf of: Carl G. Anderson, Jr., Robert R. McMaster, I . Martin Inglis, Gregory A. Pratt, Peter N. Stephans, Kathryn C. Turner, Jeffrey Wadsworth, Stephen M. Ward, Jr., Dr. Philip M. Anderson, and Steven E. Karol are being filed with the Securities and Exchange Commission.
*By | /s/ James D. Dee | |
James D. Dee | ||
Attorney-in-fact | ||
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CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
($ in millions)
Column A | Column B | Column C Additions | Column D | Column E | ||||||||||||||||
Description | Balance at Beginning of Period | Charged to Costs & Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | |||||||||||||||
Year Ended June 30, 2015 | ||||||||||||||||||||
Allowance for doubtful accounts receivable | $ | 3.4 | $ | 1.2 | $ | — | $ | (0.8 | ) | $ | 3.8 | |||||||||
Deferred tax valuation allowance | $ | 17.8 | $ | (0.3 | ) | $ | — | $ | — | $ | 17.5 | |||||||||
Year Ended June 30, 2014 | ||||||||||||||||||||
Allowance for doubtful accounts receivable | $ | 4.1 | $ | 0.1 | $ | — | $ | (0.8 | ) | $ | 3.4 | |||||||||
Deferred tax valuation allowance | $ | 19.2 | $ | (1.4 | ) | $ | — | $ | — | $ | 17.8 | |||||||||
Year Ended June 30, 2013 | ||||||||||||||||||||
Allowance for doubtful accounts receivable | $ | 4.9 | $ | 0.6 | $ | — | $ | (1.4 | ) | $ | 4.1 | |||||||||
Deferred tax valuation allowance | $ | 18.1 | $ | 1.1 | $ | — | $ | — | $ | 19.2 | ||||||||||
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