Background and General
We are a producer and distributor of premium specialty alloys, including titanium alloys, powder metals, stainless steels, alloy steels, and tool steels as well as drilling tools. We are a recognized leader in high-performance specialty alloy-based materials and process solutions for critical applications in the aerospace, defense, medical, transportation, energy, industrial and consumer markets. We have evolved to become a pioneer in premium specialty alloys, including titanium, nickel, and cobalt, as well as alloys specifically engineered for additive manufacturing ("AM") processes and soft magnetics applications. We have expanded our AM capabilities to provide a complete "end-to-end" solution to accelerate materials innovation and streamline parts production. We primarily process basic raw materials such as nickel, cobalt, titanium, manganese, chromium, molybdenum, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire and narrow strip in many sizes and finishes. We also produce certain metal powders and parts. Our sales are distributed directly from our production plants and distribution network as well as through independent distributors. Unlike many other specialty steel producers, we operate our own worldwide network of service and distribution centers. These service centers, located inthe United States ,Canada ,Mexico ,Europe andAsia allow us to work more closely with customers and to offer various just-in-time stocking programs. As part of our overall business strategy, we have sought out and considered opportunities related to strategic acquisitions and joint collaborations as well as possible business unit dispositions aimed at broadening our offering to the marketplace. We have participated with other companies to explore potential terms and structures of such opportunities and expect that we will continue to evaluate these opportunities. 29
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Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in Item 7 of our 2019 Form 10-K. Our discussions here focus on our results during or as of the three and six-month periods endedDecember 31, 2019 and the comparable periods of fiscal year 2019, and to the extent applicable, on material changes from information discussed in the 2019 Form 10-K and other important intervening developments or information that we have reported on Form 8-K. These discussions should be read in conjunction with the 2019 Form 10-K for detailed background information and with any such intervening Form 8-K.
Impact of Raw Material Prices and Product Mix
We value most of our inventory utilizing the last-in, first-out ("LIFO") inventory costing method. Under the LIFO inventory costing method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials may potentially have been acquired at significantly different values due to the length of time from the acquisition of the raw materials to the sale of the processed finished goods to the customers. In a period of rising raw material costs, the LIFO inventory valuation normally results in higher cost of sales. Conversely, in a period of decreasing raw material costs, the LIFO inventory valuation normally results in lower cost of sales. The volatility of the costs of raw materials has impacted our operations over the past several years. We, and others in our industry, generally have been able to pass cost increases on major raw materials through to our customers using surcharges that are structured to recover increases in raw material costs. Generally, the formula used to calculate a surcharge is based on published prices of the respective raw materials for the previous month which correlates to the prices we pay for our raw material purchases. However, a portion of our surcharges to customers may be calculated using a different surcharge formula or may be based on the raw material prices at the time of order, which creates a lag between surcharge revenue and corresponding raw material costs recognized in cost of sales. The surcharge mechanism protects our net income on such sales except for the lag effect discussed above. However, surcharges have had a dilutive effect on our gross margin and operating margin percentages as described later in this report. Approximately 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 (loss) together with the actual purchase price of the underlying commodities when the underlying commodities are purchased and recorded in inventory. To the extent that the total purchase price of the commodities, inclusive of the gains or losses on the commodity forward contracts, are higher or lower relative to the beginning of year costs, our cost of goods sold reflects such amounts. Accordingly, the gains and/or losses associated with commodity forward contracts may not impact the same period that the firm price sales arrangements revenue is recognized, and comparisons of gross profit from period to period may be impacted. These firm price sales arrangements are expected to continue as we look to strengthen our long-term customer relationships by expanding, renewing and in certain cases extending to a longer-term, our customer long-term arrangements. We produce hundreds of grades of materials with a wide range of pricing and profit levels depending on the grade. In addition, our product mix within a period is subject to the fluctuating order patterns of our customers as well as decisions we may make on participation in certain products based on available capacity, including the impacts of capacity commitments we may have under existing customer agreements. While we expect to see positive contribution from a more favorable product mix in our margin performance over time, the impact by period may fluctuate and period-to-period comparisons may vary. 30
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Net Pension Expense
Net pension expense, as we define it below, includes the net periodic benefit costs related to both our pension and other postretirement plans. The net periodic benefit costs are determined annually based on beginning of year balances and are recorded ratably throughout the fiscal year, unless a significant re-measurement event occurs. We currently expect that the total net periodic benefit costs for fiscal year 2020 will be$15.0 million as compared with$11.4 million in fiscal year 2019. The following is the net pension expense for the three and six months endedDecember 31, 2019 and 2018: Three Months Ended Six Months Ended December 31, December 31, ($ in millions) 2019 2018 2019 2018 Pension plans$ 3.0 $ 2.4 $ 6.0 $ 4.8 Other postretirement plans 0.8 0.5 1.6 1.0 Net periodic benefit costs$ 3.8 $ 2.9 $ 7.6 $ 5.8 Net pension expense is recorded in accounts that are included in cost of sales and selling, general and administrative expenses based on the function of the associated employees and in other income (expense), net. The following is a summary of the classification of net pension expense for the three and six months endedDecember 31, 2019 and 2018: Three Months Ended Six Months Ended December 31, December 31, ($ in millions) 2019 2018 2019 2018 Cost of sales: Service cost$ 2.7 $ 2.5 $ 5.5 $ 5.0 Selling, general and administrative expenses: Service cost 0.4 0.4 0.8 0.8 Other income (expense), net: Pension earnings, interest and deferrals 0.7 - 1.3 - Net pension expense$ 3.8 $ 2.9 $ 7.6 $ 5.8
As of
Operating Performance Overview
Our second quarter results reflect a continuation of our consistent year-over-year earnings growth and backlog expansion. Operating income at SAO reached its highest level on record as we continued to drive a richer product mix by prioritizing higher-value solutions across our end-use markets. In addition, customer activity at ourAthens facility remains high and we received four vendor approved process approvals in the second quarter of fiscal year 2020. We believe that demand patterns are largely healthy across our end-use markets and the second quarter marked our twelfth consecutive quarter of year-over-year net sales growth. We generated double-digit year-over-year revenue growth in the Aerospace and Defense and Medical end-use markets. Our leading solutions, sub-market diversity and participation on practically all major industry platforms continued to drive strong performance in the Aerospace and Defense end-use market. In addition, our total company backlog increased year-over-year for the twelfth consecutive quarter. Over the last several months, the Aerospace supply chain has been disrupted as a result of the grounding of the Boeing 737 MAX aircraft and more recently by the decision to temporarily halt production of the Boeing 737 MAX. The Company continues to work with its customers to understand the impacts, timing and mitigating actions available as a result of the disruption. The supply chain disruption associated with the 737 MAX did not have a significant impact on the Company's revenues or operating income in the three or six month periods endedDecember 31, 2019 . A significant and prolonged reduction in aerospace build rates could negatively impact our results of operations and financial position in future periods. 31
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We believe our commercial strategy is clearly resonating with customers and that our expanding relationships and concerted mix shift will be supported by additional manufacturing efficiencies and unlocking capacity via the Carpenter Operating Model. Longer-term, we continue to place strategic emphasis on advancing our leadership in emerging technologies to best positionCarpenter Technology for sustainable growth. We recently opened ourEmerging Technology Center on ourAthens, Alabama campus, and customer collaborations around additive manufacturing across our end-use markets are accelerating. The construction of our hot strip mill atReading remains on target and will enable us to further capitalize on our soft magnetics solutions portfolio and the potential disruption of electrification. The strategic investments we are making for the future of our industry are critical to strengthening our position as a solutions provider and driving long-term success for our diverse base of customers.
Results of Operations - Three Months Ended
For the three months endedDecember 31, 2019 , we reported net income of$38.8 million , or$0.79 per diluted share. This compares with net income for the same period a year earlier of$35.5 million , or$0.73 per diluted share. Excluding special items, for the three months endedDecember 31, 2019 and 2018, earnings per share would have been$0.83 per diluted share and$0.76 per diluted share, respectively. The current period results reflect strengthening product mix across all end-use markets combined with our solutions-focused approach driving increased sales in our Aerospace and Defense and Medical end-use markets compared to the prior year period.
Net sales for the three months endedDecember 31, 2019 were$573.0 million , which was a 3 percent increase over the same period a year ago. Excluding surcharge revenue, sales increased 5 percent on a 7 percent decrease in shipment volume from the same period a year ago. The results excluding surcharge revenue reflect a favorable product mix across all end-use markets. Geographically, sales outsidethe United States increased 18 percent from the same period a year ago to$202.1 million for the three months endedDecember 31, 2019 . The increase is primarily due to stronger demand in the Aerospace and Defense end-use market inEurope ,Asia Pacific andCanada . A portion of our sales outsidethe United States are denominated in foreign currencies. The fluctuations in foreign currency exchange rates resulted in a$0.1 million decrease in sales during the three months endedDecember 31, 2019 compared to the three months endedDecember 31, 2018 . Net sales outsidethe United States represented 35 percent and 31 percent of total net sales for the three months endedDecember 31, 2019 and 2018, respectively.
Sales by End-Use Markets
We sell to customers across diversified end-use markets. The following table includes comparative information for our net sales, which includes surcharge revenue by principal end-use markets. We believe this is helpful supplemental information in analyzing the performance of the business from period to period: Three Months Ended $ % December 31, Increase Increase ($ in millions) 2019 2018 (Decrease) (Decrease) Aerospace and Defense$ 348.7 $ 299.0 $ 49.7 17 % Medical 49.0 45.5 3.5 8 % Transportation 38.4 37.8 0.6 2 % Energy 31.2 42.8 (11.6 ) (27 )% Industrial and Consumer 78.0 97.5 (19.5 ) (20 )% Distribution 27.7 33.9 (6.2 ) (18 )% Total net sales$ 573.0 $ 556.5 $ 16.5 3 % 32
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The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
Three Months Ended $ % December 31, Increase Increase ($ in millions) 2019 2018 (Decrease) (Decrease) Aerospace and Defense$ 278.8 $ 234.1 $ 44.7 19 % Medical 43.5 38.4 5.1 13 % Transportation 30.6 29.4 1.2 4 % Energy 26.9 36.4 (9.5 ) (26 )% Industrial and Consumer 63.9 77.6 (13.7 ) (18 )% Distribution 27.5 33.5 (6.0 ) (18 )% Total net sales excluding surcharge revenue$ 471.2 $ 449.4 $ 21.8 5 % Sales to the Aerospace and Defense end-use market increased 17 percent from the second quarter a year ago to$348.7 million . Excluding surcharge revenue, sales increased 19 percent from the second quarter a year ago on a 10 percent increase in shipment volume. The results reflect stronger demand in all aerospace sub-markets demonstrating the continued benefits from our broad solutions portfolio across multiple attractive sub-markets. In addition, we continue to experience strong demand for our defense related applications driven by specific programs. Medical end-use market sales increased 8 percent from the second quarter a year ago to$49.0 million . Excluding surcharge revenue, sales increased 13 percent on 2 percent higher shipment volume from the second quarter a year ago. The results reflect continued strong demand for high-value materials used in orthopedic and cardiology applications. Transportation end-use market sales increased 2 percent from the second quarter a year ago to$38.4 million . Excluding surcharge revenue, sales increased 4 percent on 11 percent lower shipment volume from the second quarter a year ago. The results reflect increased sales in medium and heavy duty trucks driven by richer product mix focused on solutions specifically engineered for high-temperature and high-wear applications partially offset by lower fastener demand in light vehicles. Sales to the Energy end-use market of$31.2 million reflect a 27 percent decrease from the second quarter a year ago. Excluding surcharge revenue, sales decreased 26 percent from a year ago. The results primarily reflect decreases in the domestic oil and gas sub-market due to declining market activity and growing pricing pressures, partially offset by increases in the international power generation sub-market. Industrial and Consumer end-use market sales decreased 20 percent from the second quarter a year ago to$78.0 million . Excluding surcharge revenue, sales decreased 18 percent on 30 percent lower shipment volume. The results reflect the impact of reduced demand for materials used in select industrial applications offset by growth in consumer electronics and improved product mix.
Gross Profit
Our gross profit in the second quarter increased 5 percent to$112.6 million , or 19.7 percent of net sales as compared with$107.0 million , or 19.2 percent of net sales in the same quarter a year ago. Excluding the impact of surcharge revenue, our adjusted gross margin in the second quarter was 23.9 percent as compared to 23.8 percent in the same period a year ago. The current period results were driven by increasing margins in the SAO segment and favorable product mix in all end-use markets. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin for the comparative three month periods. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. 33
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Table of Contents Three Months Ended December 31, ($ in millions) 2019 2018 Net sales$ 573.0 $ 556.5 Less: surcharge revenue 101.8 107.1 Net sales excluding surcharge revenue$ 471.2 $ 449.4 Gross profit$ 112.6 $ 107.0 Gross margin 19.7 % 19.2 %
Adjusted gross margin excluding surcharge revenue 23.9 % 23.8 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses of$55.3 million were 9.7 percent of net sales (11.7 percent of net sales excluding surcharge) as compared with$51.6 million and 9.3 percent of net sales (11.5 percent of net sales excluding surcharge) in the same quarter a year ago. The selling, general and administrative expenses reflect higher spending in key growth areas including additive manufacturing in addition to market driven losses in compensation plans compared to the same quarter a year ago.
Restructuring Charges
During the recent second quarter, the Company incurred
Operating Income
Our operating income in the recent second quarter was$55.0 million or 9.6 percent of net sales as compared with$55.4 million or 10.0 percent of net sales in the same quarter a year ago. Excluding surcharge revenue and special items, adjusted operating margin was 12.2 percent for the most recent quarter as compared with 12.6 percent a year ago. The results for the second quarter of fiscal year 2020 primarily reflect stronger product mix across all end-use markets and improved margins in the SAO segment compared to the same period a year ago offset by higher spending in key growth areas. The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales and special items. We present and discuss these financial measures because management believes removing these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. 34
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Table of Contents Three Months Ended December 31, ($ in millions) 2019 2018 Net sales$ 573.0 $ 556.5 Less: surcharge revenue 101.8 107.1 Net sales excluding surcharge revenue$ 471.2 $ 449.4 Operating income$ 55.0 $ 55.4 Special items: Restructuring charges 2.3 - Acquisition-related costs - 1.2 Operating income excluding special items$ 57.3 $ 56.6 Operating margin 9.6 % 10.0 % Adjusted operating margin excluding surcharge revenue and special items 12.2 % 12.6 % Interest Expense Interest expense for the three months endedDecember 31, 2019 was$5.3 million compared with$7.0 million in the same period a year ago. We have used interest rate swaps to achieve a level of floating rate debt to fixed rate debt where appropriate. Interest expense for the three months endedDecember 31, 2019 and 2018 includes net gains from interest rate swaps of$0.1 million compared with net losses of$0.1 million , respectively. Capitalized interest reduced interest expense by$2.2 million for the three months endedDecember 31, 2019 and$0.9 million for the three months endedDecember 31, 2018 .
Other Income (Expense), Net
Other income, net for the three months endedDecember 31, 2019 was$0.8 million as compared with$3.2 million of other expense, net for the three months endedDecember 31, 2018 . The current year results include favorable market returns on investments used to fund Company-owned life insurance contracts and investments held in rabbi trusts partially offset by expense from pension earnings, interest and deferrals. The other expense, net for the three months endedDecember 31, 2018 reflected unfavorable market returns on investments used to fund Company-owned life insurance contracts and investments held in rabbi trusts.
Income Taxes
Income tax expense in the recent second quarter was$11.7 million , or 23.2 percent of pre-tax income compared with$9.7 million , or 21.5 percent of pre-tax income in the same quarter a year ago. Income tax expense for the three months endedDecember 31, 2018 included tax benefits of$1.8 million as a result of changes in the Company's prior year tax positions. An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (the "The Tax Cuts and Jobs Act") was enacted onDecember 22, 2017 . The Tax Cuts and Jobs Act included provisions that reduced the federal corporate income tax rate, created a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings (i.e. transition tax), and changed certain business deductions including allowing for immediate expensing of certain qualified capital expenditures and limitations on deductions of interest expense. The accounting for the income tax effects of the Tax Cut and Jobs Act was completed during the three months endedDecember 31, 2018 . A discrete tax benefit of$0.2 million was recorded for the transition tax offset by a discrete tax charge of$0.2 million for the re-measurement of deferred tax assets and liabilities in the three months endedDecember 31, 2018 . 35
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Business Segment Results
We have two reportable business segments: SAO and PEP.
The following table includes comparative information for volumes by business segment: Three Months Ended % December 31, (Decrease) (Decrease) (Pounds sold, in thousands) 2019 2018 Increase Increase Specialty Alloys Operations 56,564 61,668 (5,104 ) (8 )% Performance Engineered Products * 3,424 3,300 124 4 % Intersegment (690 ) (1,050 ) 360 34 % Consolidated pounds sold 59,298 63,918 (4,620 ) (7 )%
* Pounds sold data for PEP segment includes
The following table includes comparative information for net sales by business segment: Three Months Ended $ % December 31, Increase Increase ($ in millions) 2019 2018 (Decrease) (Decrease) Specialty Alloys Operations$ 483.0 $ 461.6 $ 21.4 5 % Performance Engineered Products 106.0 112.9 (6.9 ) (6 )% Intersegment (16.0 ) (18.0 ) 2.0 11 % Total net sales$ 573.0 $ 556.5 $ 16.5 3 %
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
Three Months Ended $ % December 31, Increase Increase ($ in millions) 2019 2018 (Decrease) (Decrease) Specialty Alloys Operations$ 382.5 $ 356.2 $ 26.3 7 % Performance Engineered Products 104.1 109.4 (5.3 ) (5 )% Intersegment (15.4 ) (16.2 ) 0.8 5 % Total net sales excluding surcharge revenue$ 471.2 $ 449.4 $ 21.8 5 %
Specialty Alloys Operations Segment
Net sales for the quarter endedDecember 31, 2019 for the SAO segment increased 5 percent to$483.0 million , as compared with$461.6 million in the same quarter a year ago. Excluding surcharge revenue, net sales increased 7 percent on 8 percent lower shipment volume from a year ago. The results primarily reflect the impact of increased sales in all end-use markets and stronger product mix in all key end-use markets compared to the prior year same quarter. Operating income for the SAO segment was$76.3 million or 15.8 percent of net sales (19.9 percent of net sales excluding surcharge revenue) in the recent second quarter, as compared with$69.0 million or 14.9 percent of net sales (19.4 percent of net sales excluding surcharge revenue) in the same quarter a year ago. The results reflect improved margins from capacity and productivity gains and stronger product mix compared to the prior year same quarter. 36
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Performance Engineered Products Segment
Net sales for the quarter endedDecember 31, 2019 for the PEP segment decreased 6 percent to$106.0 million , as compared with$112.9 million in the same quarter a year ago. Excluding surcharge revenue, net sales of$104.1 million decreased from$109.4 million a year ago. The results reflect lower sales in our Energy end-use market, primarily in the domestic oil and gas sub-market. Distribution sales were also down as a result of the impact of tariffs. Operating income for the PEP segment was$0.4 million or 0.4 percent of net sales in the recent second quarter, compared with operating income of$4.4 million or 3.9 percent of net sales in the same quarter a year ago. The results were impacted by our continuing strategic investment in additive manufacturing, decreased activity in the North American oil and gas sub-market and the impact of tariffs on our distribution business.
Results of Operations - Six Months Ended
Net Sales Net sales for the six months endedDecember 31, 2019 were$1,158.4 million , which was a 3 percent increase over the same period a year ago. Excluding surcharge revenue, sales increased 6 percent on 6 percent lower shipment volume from the same period a year ago. The results reflect the impact of stronger product mix for materials used in all end-use markets in addition to stronger demand in the Aerospace and Defense and Medical end-use markets. Geographically, sales outsidethe United States increased 12 percent from the same period a year ago to$402.6 million for the six months endedDecember 31, 2019 . The increase is primarily due to stronger product demand in the Aerospace and Defense end-use market inEurope ,Asia Pacific andCanada . A portion of our sales outsidethe United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a$0.9 million decrease in sales during the six months endedDecember 31, 2019 compared to the six months endedDecember 31, 2018 . Net sales outsidethe United States represented 35 percent and 32 percent of total net sales for the six months endedDecember 31, 2019 and 2018, respectively.
Sales by End-Use Markets
We sell to customers across diversified end-use markets. The following table includes comparative information for our net sales, which includes surcharge revenue by principal end-use markets. We believe this is helpful supplemental information in analyzing the performance of the business from period to period: Six Months Ended $ % December 31, Increase Increase ($ in millions) 2019 2018 (Decrease) (Decrease) Aerospace and Defense$ 702.0 $ 609.7 $ 92.3 15 % Medical 98.0 92.5 5.5 6 % Transportation 78.4 78.1 0.3 - % Energy 70.5 87.1 (16.6 ) (19 )% Industrial and Consumer 151.3 193.6 (42.3 ) (22 )% Distribution 58.2 67.9 (9.7 ) (14 )% Total net sales$ 1,158.4 $ 1,128.9 $ 29.5 3 % 37
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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:
Six Months Ended $ % December 31, Increase Increase ($ in millions) 2019 2018 (Decrease) (Decrease) Aerospace and Defense$ 564.9 $ 473.8 $ 91.1 19 % Medical 87.5 78.0 9.5 12 % Transportation 63.6 60.8 2.8 5 % Energy 59.9 73.9 (14.0 ) (19 )% Industrial and Consumer 124.1 152.1 (28.0 ) (18 )% Distribution 57.8 67.2 (9.4 ) (14 )% Total net sales excluding surcharge$ 957.8 $ 905.8 $ 52.0
6 %
Sales to the Aerospace and Defense end-use market increased 15 percent from the same period a year ago to$702.0 million . Excluding surcharge revenue, sales increased 19 percent from the same period a year ago on a 10 percent increase in shipment volume. The results reflect stronger demand in all sub-markets and improved product mix for key sub-markets compared to the prior year quarter. Medical end-use market sales increased 6 percent from the same period a year ago to$98.0 million . Excluding surcharge revenue, sales increased 12 percent on 5 percent higher shipment volume from the same period a year ago. The results reflect strong market conditions with increased sales and improved product mix within the orthopedic and dental sub-markets. Transportation end-use market sales of$78.4 million were flat from the same period a year ago. Excluding surcharge revenue, sales of$63.6 million increased 5 percent on 6 percent lower shipment volume from the same period a year ago. The results reflect a stronger product mix offset with lower demand for our applications due to trade actions and tariffs which has impacted customer order patterns. Sales to the Energy end-use market decreased 19 percent from the same period a year ago to$70.5 million . Excluding surcharge revenue, sales decreased 19 percent from a year ago. The results reflect the impact of decreased sales in the oil and gas sub-market in the domestic market. Industrial and Consumer end-use market sales decreased 22 percent from the same period a year ago to$151.3 million . Excluding surcharge revenue, sales decreased 18 percent on a 29 percent decrease in shipment volume. The results reflect the impact of lower demand primarily in the industrial sub-market offset partially by increased sales and stronger product mix in consumer electronics and sporting goods. Gross Profit Our gross profit in the six months endedDecember 31, 2019 increased 13 percent to$225.3 million , or 19.4 percent of net sales as compared with$198.7 million , or 17.6 percent of net sales in the same period a year ago. Excluding the impact of surcharge revenue, our gross margin in the six months endedDecember 31, 2019 was 23.5 percent as compared to 21.9 percent in the same period a year ago. The results for the six months endedDecember 31, 2019 reflect stronger product mix across all end-use markets as well as operating cost improvements compared to the same period a year ago. Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin for the comparative six month periods. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. 38
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Table of Contents Six Months Ended December 31, ($ in millions) 2019 2018 Net sales$ 1,158.4 $ 1,128.9 Less: surcharge revenue 200.6 223.1 Net sales excluding surcharge revenue$ 957.8 $ 905.8 Gross profit$ 225.3 $ 198.7 Gross margin 19.4 % 17.6 %
Adjusted gross margin excluding surcharge revenue 23.5 % 21.9 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses of$108.2 million were 9.3 percent of net sales (11.3 percent of net sales excluding surcharge) for the six months endedDecember 31, 2019 as compared with$98.3 million or 8.7 percent of net sales (10.9 percent of net sales excluding surcharge) in the same period a year ago. Selling, general and administrative expenses increased in the six months endedDecember 31, 2019 reflecting the full impact from the LPW acquisition in the second quarter of fiscal year 2019 and higher spending in key growth areas including additive manufacturing and soft magnetics.
Restructuring Charges
During the six months ended
Operating Income
Our operating income in the six months endedDecember 31, 2019 was$114.8 million , or 9.9 percent of net sales as compared with$100.4 million , or 8.9 percent of net sales in the same period a year ago. Excluding surcharge revenue and special items, adjusted operating margin was 12.2 percent for the six months endedDecember 31, 2019 and 11.2 percent for the same period a year ago. The increase in the operating margin is a result of increased sales and stronger product mix in key end-use markets partially offset by higher spending in additive manufacturing compared to the same period a year ago. The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales and special items. We present and discuss these financial measures because management believes removing these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. 39
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Table of Contents Six Months Ended December 31, ($ in millions) 2019 2018 Net sales$ 1,158.4 $ 1,128.9 Less: surcharge revenue 200.6 223.1 Net sales excluding surcharge revenue$ 957.8 $ 905.8 Operating income$ 114.8 $ 100.4 Special items: Restructuring charges 2.3 - Acquisition-related costs - 1.2 Operating income excluding special items$ 117.1 $ 101.6 Operating margin 9.9 % 8.9 % Adjusted operating margin excluding surcharge revenue and special items 12.2 % 11.2 % Interest Expense Interest expense for the six months endedDecember 31, 2019 was$10.7 million compared with$13.2 million in the same period a year ago. Capitalized interest reduced interest expense by$4.2 million for the six months endedDecember 31, 2019 and$1.9 million for the six months endedDecember 31, 2018 .
Other Income (Expense), Net
Other income, net was$0.5 million for the recent six months endedDecember 31, 2019 compared with other expense, net of$1.7 million in the same period a year ago. Income Taxes Income tax expense in the six months endedDecember 31, 2019 was$24.6 million , or 23.5 percent of pre-tax income as compared with$18.5 million , or 21.6 percent of pre-tax income in the six months endedDecember 31, 2018 . Income tax expense in the six months endedDecember 31, 2018 included tax benefits of$1.8 million as a result of changes in the Company's prior year tax positions. InDecember 2017 ,the United States enacted tax reform legislation. The Tax Cuts and Jobs Act included provisions that reduced the federal corporate income tax rate, created a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings (i.e. transition tax), and changed certain business deductions including allowing for immediate expensing of certain qualified capital expenditures and limitations on deductions of interest expense. The accounting for the income tax effects of the Tax Cuts and Jobs Act was completed during the three months endedDecember 31, 2018 . A discrete tax benefit of$0.2 million was recorded for the transition tax offset by a discrete tax charge of$0.2 million for the re-measurement of deferred tax assets and liabilities in the three months endedDecember 31, 2018 . 40
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Business Segment Results
We have two reportable business segments: SAO and PEP.
The following table includes comparative information for volumes by business segment: Six Months Ended % December 31, Decrease Decrease (Pounds sold, in thousands) 2019 2018 (Increase) (Increase) Specialty Alloys Operations 116,606 124,382 (7,776 ) (6 )% Performance Engineered Products * 6,674 6,032 642 11 % Intersegment (1,684 ) (880 ) (804 ) (91 )% Consolidated pounds sold 121,596 129,534 (7,938 ) (6 )%
* Pounds sold data for PEP segment includes
The following table includes comparative information for net sales by business segment: Six Months Ended $ % December 31, Increase Increase ($ in millions) 2019 2018 (Decrease) (Decrease) Specialty Alloys Operations$ 974.1 $ 937.1 $ 37.0 4 % Performance Engineered Products 215.4 224.6 (9.2 ) (4 )% Intersegment (31.1 ) (32.8 ) 1.7 5 % Total net sales$ 1,158.4 $ 1,128.9 $ 29.5 3 %
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
Six Months Ended $ % December 31, Increase Increase ($ in millions) 2019 2018 (Decrease) (Decrease) Specialty Alloys Operations$ 775.7 $ 717.7 $ 58.0 8 % Performance Engineered Products 212.0 217.4 (5.4 ) (2 )% Intersegment (29.9 ) (29.3 ) (0.6 ) (2 )% Total net sales excluding surcharge revenue$ 957.8 $ 905.8 $ 52.0 6 %
Specialty Alloys Operations Segment
Net sales for the six months ended
Operating income for the SAO segment was$157.3 million or 16.1 percent of net sales (20.3 percent of net sales excluding surcharge revenue) in the recent six months endedDecember 31, 2019 as compared with$121.7 million or 13.0 percent of net sales (17.0 percent of net sales excluding surcharge revenue) in the same period a year ago. The increase in operating income reflects the impact of stronger product mix across all end-use markets as well as operating cost improvements compared to the prior year same period. 41
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Performance Engineered Products Segment
Net sales for the six months endedDecember 31, 2019 for the PEP segment decreased 4 percent to$215.4 million , as compared with$224.6 million in the same period a year ago. Excluding surcharge revenue, net sales decreased 2 percent from a year ago. The results reflect decreases in the Energy and Distribution end-use markets partially offset by an increase in sales in the Medical end-use market. Operating loss for the PEP segment was$1.7 million or negative 0.8 percent of net sales in the recent six months endedDecember 31, 2019 , compared with an operating income of$11.7 million or 5.2 percent of net sales in the same period a year ago. The current year results were impacted by ongoing trade actions and tariffs on our distribution business.
Liquidity and Financial Resources
During the six months endedDecember 31, 2019 , we generated cash from operations of$22.6 million compared to$47.2 million in the same period a year ago. Our free cash flow, which we define under "Non-GAAP Financial Measures" below, was negative$91.0 million as compared to negative$132.7 million for the same period a year ago. The decrease in cash provided from operating activities for the six months endedDecember 31, 2019 compared to the same period a year ago was primarily driven by working capital investments partially offset by higher income levels. The free cash flow results reflect working capital investments and higher capital spending levels in the current period as we continued to increase our investment in strategic growth areas. Prior year results included the impact of the acquisition of LPW.
Capital expenditures for property, plant, equipment and software were
Dividends during the six months ended
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 of$150 million , consisting of cash and cash equivalents added to available borrowing capacity under our Credit Agreement. Our Credit Agreement contains a revolving credit commitment of$400 million , which expires inMarch 2022 . As ofDecember 31, 2019 , we had$5.9 million of issued letters of credit and$118.9 million of short-term borrowings under the Credit Agreement. The balance of the Credit Agreement,$275.2 million , remains available to us. As ofDecember 31, 2019 , we had total liquidity of$305.1 million , including$29.9 million of cash and cash equivalents. From time to time during the six months endedDecember 31, 2019 , we have borrowed under our Credit Agreement. The weighted average daily borrowing under the Credit Agreement during the six months endedDecember 31, 2019 was approximately$70.7 million with daily outstanding borrowings ranging from$11.0 million to$118.9 million during the period. We believe that our cash and cash equivalents of$29.9 million as ofDecember 31, 2019 and available borrowing capacity of$275.2 million under our credit facility will be sufficient to fund our cash needs over the foreseeable future. During the six months endedDecember 31, 2019 , we made pension contributions of$3.6 million to our qualified defined benefit pension plans. We currently expect to make$2.6 million of additional contributions to our qualified defined benefit pension plans during the remainder of fiscal year 2020. As ofDecember 31, 2019 , we had cash and cash equivalents of approximately$27.3 million held at various foreign subsidiaries. Our global deployment considers, among other things, geographic location of our subsidiaries' cash balances, the locations of our anticipated liquidity needs, and the cost to access international cash balances, as necessary. From time to time, we may make short-term intercompany borrowings against our cash held outsidethe United States in order to reduce or eliminate any required borrowing under our Credit Agreement. 42
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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 ofDecember 31, 2019 ). The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense ("EBITDA") to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than 55%. 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 ofDecember 31, 2019 , the Company was in compliance with all of the covenants of the Credit Agreement.
The following table shows our actual ratio performance with respect to the
financial covenants as of
Covenant Covenant Requirement Actual Ratio
Consolidated interest coverage 3.50 to 1.00 (minimum) 17.49 to 1.00 Consolidated debt to capital 55% (maximum)
29.5% 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.
This report includes discussions of net sales as adjusted to exclude the impact of raw material surcharge and the resulting impact on gross margins, which represent financial measures that have not been determined in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales and cost of sales provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our board of directors and others. See our earlier discussion of "Gross Profit" for a reconciliation of net sales and gross margin, excluding surcharge revenue and special items, to net sales as determined in accordance withU.S. GAAP. Net sales and gross margin excluding surcharge revenue and special items is not aU.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, net sales and gross margin calculated in accordance withU.S. GAAP.
Adjusted Operating Margin Excluding Surcharge Revenue and Special Items
This report includes discussions of operating margin as adjusted to exclude the impact of raw material surcharge revenue and special items which represent financial measures that have not been determined in accordance withU.S. GAAP. We present and discuss this financial measure because management believes removing the impact of raw material surcharge from net sales and cost of sales provides a more consistent and meaningful basis for comparing results of operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding special items from operating margin is helpful in analyzing our operating performance, as these items are not indicative of ongoing operating performance. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our board of directors and others. See our earlier discussion of operating income for a reconciliation of operating income and operating margin excluding surcharge revenue and special items to operating income and operating margin determined in accordance withU.S. GAAP. Operating margin excluding surcharge revenue is not aU.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, operating margin calculated in accordance withU.S. GAAP. 43
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Adjusted Earnings Per Share
The following provides a reconciliation of adjusted earnings per share, to its
most directly comparable
($ in millions, except per share Income Before Earnings Per amounts) Income Taxes Income Tax Expense Net Income Diluted Share* Three months ended December 31, 2019, as reported $ 50.5 $ (11.7 )$ 38.8 $ 0.79 Special item: Restructuring charges 2.3 (0.5 ) 1.8 0.04 Three months ended December 31, 2019, as adjusted $ 52.8 $ (12.2 )$ 40.6 $ 0.83
* Impact per diluted share calculated using weighted average common shares
outstanding of 48.5 million for the three months ended
($ in millions, except per share Income Before Earnings Per amounts) Income Taxes Income Tax Expense Net Income Diluted Share* Three months ended December 31, 2018, as reported $ 45.2 $ (9.7 )$ 35.5 $ 0.73 Special item: Acquisition-related costs 1.2 - 1.2 0.03 Three months ended December 31, 2018, as adjusted $ 46.4 $ (9.7 )$ 36.7 $ 0.76
* Impact per diluted share calculated using weighted average common shares
outstanding of 48.0 million for the three months ended
($ in millions, except per share Income Before Earnings Per amounts) Income Taxes Income Tax Expense Net Income Diluted Share* Six months endedDecember 31, 2019 , as reported$ 104.6 $ (24.6 )$ 80.0 $ 1.64 Special item: Restructuring charges 2.3 (0.5 ) 1.8 0.03 Six months endedDecember 31, 2019 , as adjusted$ 106.9 $ (25.1 )$ 81.8 $ 1.67
* Impact per diluted share calculated using weighted average common shares
outstanding of 48.4 million for the six months ended
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($ in millions, except per share Income Before Earnings Per amounts) Income Taxes Income Tax Expense Net Income Diluted Share* Six months endedDecember 31, 2018 , as reported $ 85.5 $ (18.5 )$ 67.0 $ 1.38 Special item: Acquisition-related costs 1.2 - 1.2 0.03 Six months endedDecember 31, 2018 , as adjusted $ 86.7 $ (18.5 )$ 68.2 $ 1.41
* Impact per diluted share calculated using weighted average common shares
outstanding of 48.1 million for the six months ended
Management believes that the presentation of earnings per share adjusted to exclude special items is helpful in analyzing the operating performance of the Company, as these items are not indicative of ongoing operating performance. Our definitions and calculations of these items may not necessarily be the same as those used by other companies. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our Board of Directors and others. Adjusted earnings per share is not aU.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, earnings per share calculated in accordance withU.S. GAAP.
Free Cash Flow
The following provides a reconciliation of free cash flow, as used in this
report, to its most directly comparable
Six Months Ended December 31, ($ in millions) 2019 2018 Net cash provided from operating activities$ 22.6 $ 47.2 Purchases of property, plant, equipment and software (94.3 )
(81.7 ) Proceeds from disposals of property, plant and equipment and assets held for sale
0.1
0.1
Acquisition of business, net of cash acquired - (79.0 ) Dividends paid (19.4 ) (19.3 ) Free cash flow$ (91.0 ) $ (132.7 ) Management believes that the presentation of free cash flow provides useful information to investors regarding our financial condition because it is a measure of cash generated which management evaluates for alternative uses. It is management's current intention to use excess cash to fund investments in capital equipment, acquisition opportunities and consistent dividend payments. Free cash flow is not aU.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, cash flows calculated in accordance withU.S. GAAP. 45
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Table of Contents Contingencies Environmental We are subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of our operations, compliance costs to date have not been material. We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a PRP with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. We accrue amounts for environmental remediation costs that represent our best estimate of the probable and reasonably estimable future costs related to environmental remediation. During the six months endedDecember 31, 2019 , the Company decreased the liability for a Company-owned former operating site by$0.2 million . The liabilities recorded for environmental remediation costs at Superfund sites, other third party-owned sites and Carpenter-owned current or former operating facilities remaining atDecember 31, 2019 andJune 30, 2019 were$15.9 million and$16.1 million , respectively. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRPs at these Superfund sites have been determined. Accordingly, at this time, we cannot reasonably estimate expected costs for such matters. The liability for future environmental remediation costs that can be reasonably estimated is evaluated on a quarterly basis. Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRPs. Based upon information currently available, such future costs are not expected to have a material effect on our financial position, results of operations or cash flows over the long-term. However, such costs could be material to our financial position, results of operations or cash flows in a particular future quarter or year.
Other
We are defending various routine claims and legal actions that are incidental to our business, and that are common to our operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. Like many other manufacturing companies in recent years we, from time to time, have been named as a defendant in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace such as asbestos. We provide for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, we believe that the total liability from these matters will not have a material effect on our financial position, results of operations or cash flows over the long-term. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to our financial position, results of operations or cash flows in a particular future quarter or year.
Critical Accounting Policies and Estimates
A summary of other significant accounting policies is discussed in our 2019 Form 10-K Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations", and in Note 1, Summary of Significant Accounting Policies, of the Notes to our consolidated financial statements included in Part II, Item 8 thereto. 46
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Goodwill is not amortized but instead is at least annually tested for impairment as ofJune 30 , or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value. The fair value is estimated using discounted cash flows and the use of market multiples valuation techniques. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting unit's goodwill to its implied fair value. The discounted cash flow analysis for each reporting unit tested requires significant estimates and assumptions related to cash flow forecasts, discount rates, terminal values and income tax rates. The cash flow forecasts include significant judgments and assumptions relating to revenue growth rates. The cash flow forecasts are developed based on assumptions about each reporting unit's markets, product offerings, pricing, capital expenditure and working capital requirements as well as cost performance. The discount rates used in the discounted cash flow are estimated based on a market participant's perspective of each reporting unit's weighted average cost of capital. The terminal value, which represents the value attributed to the reporting unit beyond the forecast period, is estimated using a perpetuity growth rate assumption. The income tax rates used in the discounted cash flow analysis represent estimates of the long-term statutory income tax rates for each reporting unit based on the jurisdictions in which the reporting units operate. As ofDecember 31, 2019 , we had five reporting units with goodwill recorded.Goodwill associated with our SAO reporting unit is tested at the SAO segment level and represents approximately 60 percent of our total goodwill. All other goodwill is associated with our PEP segment, which includes four reporting units with goodwill recorded. As ofJune 30, 2019 , the fair value of the SAO reporting unit exceeded the carrying value by approximately 32 percent. The goodwill recorded related to the SAO reporting unit as ofJune 30, 2019 was$195.5 million . The discounted cash flows analysis for the SAO reporting unit includes assumptions related to our ability to increase volume, improve mix, expand product offerings and continue to implement opportunities to reduce costs over the next several years. For purposes of the discounted cash flow analysis for SAO's fair value, we used a weighted average cost capital of 10 percent and a terminal growth rate assumption of 3 percent. As ofJune 30, 2019 , the fair value ofCarpenter Powder Products ("Powders") exceeded the carrying value by 8 percent. The goodwill recorded related to Powders as ofJune 30, 2019 was$22.0 million . The discounted cash flows analysis for the Powders reporting unit includes assumptions related to our ability to increase volume, improve mix, expand product offerings and implement opportunities to reduce costs over the next several years. For purposes of the discounted cash flow analysis for the Powders reporting unit's fair value, we used a weighted average cost capital of 14.5 percent and a terminal growth rate assumption of 3 percent. OnJuly 1, 2019 , the Company reorganized certain business units within our PEP segment. The LPW, CalRAM and Powder businesses inAlabama andWest Virginia were combined to create the Carpenter Additive reporting unit. The Powders reporting unit remains but now excludes theAlabama andWest Virginia sites. As a result, the Company performed an interim goodwill impairment test as ofJuly 1, 2019 for the reporting units impacted by the reorganization noting the fair value exceeded the carrying value in all instances. The estimate of fair value requires significant judgment. We based our fair value estimates on assumptions that we believe to be reasonable but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for our business units. There can be no assurance that our estimates and assumptions made for purposes of our goodwill and identifiable intangible asset testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business projections, competitive environments or anticipated growth rates are not correct, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment testing or earlier, if an indicator of an impairment is present before our next annual evaluation. 47
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected, anticipated or implied. The most significant of these uncertainties are described inCarpenter Technology's filings with theSecurities and Exchange Commission , including its report on Form 10-K for the year endedJune 30, 2019 , Form 10-Q for the quarter endedSeptember 30, 2019 , and the exhibits attached to those filings. They include but are not limited to: (1) the cyclical nature of the specialty materials business and certain end-use markets, including aerospace, defense, medical, transportation, energy, industrial and consumer, or other influences onCarpenter Technology's business such as new competitors, the consolidation of competitors, customers, and suppliers or the transfer of manufacturing capacity fromthe United States to foreign countries; (2) the ability ofCarpenter Technology to achieve cash generation, growth, earnings, profitability, operating income, cost savings and reductions, qualifications, productivity improvements or process changes; (3) the ability to recoup increases in the cost of energy, raw materials, freight or other factors; (4) domestic and foreign excess manufacturing capacity for certain metals; (5) fluctuations in currency exchange rates; (6) the effect of government trade actions; (7) the valuation of the assets and liabilities inCarpenter Technology's pension trusts and the accounting for pension plans; (8) possible labor disputes or work stoppages; (9) the potential that our customers may substitute alternate materials or adopt different manufacturing practices that replace or limit the suitability of our products; (10) the ability to successfully acquire and integrate acquisitions; (11) the availability of credit facilities toCarpenter Technology , its customers or other members of the supply chain; (12) the ability to obtain energy or raw materials, especially from suppliers located in countries that may be subject to unstable political or economic conditions; (13)Carpenter Technology's manufacturing processes are dependent upon highly specialized equipment located primarily in facilities inReading andLatrobe, Pennsylvania andAthens, Alabama for which there may be limited alternatives if there are significant equipment failures or a catastrophic event; (14) the ability to hire and retain key personnel, including members of the executive management team, management, metallurgists and other skilled personnel;15) fluctuations in oil and gas prices and production; and 16) uncertainty regarding the return to service of the Boeing 737 MAX aircraft and related supply chain disruption. Any of these factors could have an adverse and/or fluctuating effect onCarpenter Technology's results of operations. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended.Carpenter Technology undertakes no obligation to update or revise any forward-looking statements. 48
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