10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
 

FORM 10-Q
 
 

(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016
 
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)
 
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 such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.  Yes x  No 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 the 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
(Do not check if a smaller reporting company)
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 x
 
The number of shares outstanding of the issuer’s common stock as of April 22, 2016 was 46,588,771.

Table of Contents    

CARPENTER TECHNOLOGY CORPORATION
FORM 10-Q
INDEX
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents    

PART I
Item 1. Financial Statements
 
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except share data)
 
March 31,
2016
 
June 30,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
23.4

 
$
70.0

Accounts receivable, net
271.0

 
304.1

Inventories
649.4

 
655.8

Deferred income taxes
7.5

 
3.3

Other current assets
64.8

 
37.2

Total current assets
1,016.1

 
1,070.4

Property, plant and equipment, net
1,347.7

 
1,397.0

Goodwill
244.8

 
257.4

Other intangibles, net
64.9

 
71.6

Other assets
113.0

 
109.5

Total assets
$
2,786.5

 
$
2,905.9

LIABILITIES
 
 
 
Current liabilities:
 

 
 

Short-term debt
$
25.0

 
$
—

Accounts payable
152.9

 
169.5

Accrued liabilities
137.2

 
152.6

Total current liabilities
315.1

 
322.1

Long-term debt
612.9

 
607.1

Accrued pension liabilities
358.4

 
334.1

Accrued postretirement benefits
106.7

 
111.2

Deferred income taxes
147.6

 
146.5

Other liabilities
58.8

 
59.0

Total liabilities
1,599.5

 
1,580.0

Contingencies and commitments (see Note 10)

 

STOCKHOLDERS’ EQUITY
 
 
 
Common stock — authorized 100,000,000 shares; issued 55,245,681 shares at March 31, 2016 and 55,234,942 shares at June 30, 2015; outstanding 46,582,834 shares at March 31, 2016 and 50,318,244 shares at June 30, 2015
276.2

 
276.2

Capital in excess of par value
272.9

 
266.6

Reinvested earnings
1,302.5

 
1,332.4

Common stock in treasury (8,662,847 shares and 4,916,698 shares at March 31, 2016 and June 30, 2015, respectively), at cost
(344.2
)
 
(221.1
)
Accumulated other comprehensive loss
(320.4
)
 
(328.2
)
Total stockholders' equity
1,187.0

 
1,325.9

Total liabilities and stockholders' equity
$
2,786.5

 
$
2,905.9


See accompanying notes to consolidated financial statements.

3
Table of Contents    

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except per share data)
 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2016
 
2015
 
2016
 
2015
Net sales
$
456.3

 
$
570.6

 
$
1,355.7

 
$
1,668.8

Cost of sales
386.3

 
494.8

 
1,150.8

 
1,438.9

Cost of sales - excess inventory write-down
22.5

 
—

 
22.5

 
—

Gross profit
47.5

 
75.8

 
182.4

 
229.9

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
41.7

 
45.7

 
129.5

 
132.7

Restructuring and asset impairment charges
17.6

 
25.3

 
18.0

 
25.3

Goodwill impairment
12.5

 
—

 
12.5

 
—

Operating (loss) income
(24.3
)
 
4.8

 
22.4

 
71.9

 
 
 
 
 
 
 
 
Interest expense
(7.2
)
 
(7.1
)
 
(20.8
)
 
(20.9
)
Other (expense) income, net
(1.5
)
 
—

 
(3.4
)
 
4.8

 
 
 
 
 
 
 
 
(Loss) income before income taxes
(33.0
)
 
(2.3
)
 
(1.8
)
 
55.8

Income tax (benefit) expense
(9.1
)
 
(0.9
)
 
1.8

 
19.6

 
 
 
 
 
 
 
 
Net (loss) income
$
(23.9
)
 
$
(1.4
)
 
$
(3.6
)
 
$
36.2

 
 
 
 
 
 
 
 
(LOSS) EARNINGS PER COMMON SHARE:
 

 
 

 
 

 
 

Basic
$
(0.51
)
 
$
(0.03
)
 
$
(0.08
)
 
$
0.68

Diluted
$
(0.51
)
 
$
(0.03
)
 
$
(0.08
)
 
$
0.68

 
 
 
 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 

 
 

 
 

 
 

Basic
47.1

 
52.6

 
48.5

 
53.2

Diluted
47.1

 
52.6

 
48.5

 
53.3

 
 
 
 
 
 
 
 
Cash dividends per common share
$
0.18

 
$
0.18

 
$
0.54

 
$
0.54

 
See accompanying notes to consolidated financial statements.

4
Table of Contents    

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
($ in millions)
 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2016
 
2015
 
2016
 
2015
Net (loss) income
$
(23.9
)
 
$
(1.4
)
 
$
(3.6
)
 
$
36.2

Other comprehensive income (loss), net of tax
 

 
 

 
 

 
 

Pension and postretirement benefits, net of tax of $(2.2), $(1.8), $(6.8) and $(5.5), respectively
3.8

 
3.0

 
11.2

 
8.9

Net gain (loss) on derivative instruments, net of tax of $(3.4), $8.0, $3.3 and $23.4, respectively
5.7

 
(13.2
)
 
(5.5
)
 
(38.7
)
Foreign currency translation
7.7

 
(9.9
)
 
2.1

 
(27.9
)
Other comprehensive income (loss)
17.2

 
(20.1
)
 
7.8

 
(57.7
)
Comprehensive (loss) income
$
(6.7
)
 
$
(21.5
)
 
$
4.2

 
$
(21.5
)
 
See accompanying notes to consolidated financial statements.

5
Table of Contents    

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in million)
 
Nine Months Ended
March 31,
 
2016
 
2015
OPERATING ACTIVITIES
 

 
 

Net (loss) income
$
(3.6
)
 
$
36.2

Adjustments to reconcile net (loss) income to net cash provided from operating activities:
 

 
 

Depreciation and amortization
90.0

 
91.2

Goodwill impairment charge
12.5

 
—

Non-cash excess inventory write-down
22.5

 
—

Non-cash restructuring and asset impairment charge
7.6

 
6.3

Deferred income taxes
(6.6
)
 
68.4

Net pension expense
40.3

 
34.6

Payments from qualified pension plan associated with restructuring
9.4

 
7.6

Share-based compensation expense
6.8

 
6.8

Net loss on disposals of property and equipment
0.2

 
0.8

Changes in working capital and other:
 

 
 

Accounts receivable
32.6

 
6.6

Inventories
(18.0
)
 
(18.4
)
Other current assets
(13.0
)
 
(12.0
)
Accounts payable
(6.6
)
 
(42.3
)
Accrued liabilities
(22.3
)
 
(22.7
)
Pension plan contributions
—

 
(5.5
)
Other postretirement plan contributions
(9.5
)
 
(10.2
)
Cash paid as collateral under derivative agreements
(8.0
)
 
—

Other, net
2.9

 
1.0

Net cash provided from operating activities
137.2

 
148.4

INVESTING ACTIVITIES
 

 
 

Purchases of property, equipment and software
(66.1
)
 
(152.3
)
Proceeds from disposals of property and equipment
0.3

 
0.2

Proceeds from the sale of equity method investment
6.3

 
—

Other
4.0

 
—

Net cash used for investing activities
(55.5
)
 
(152.1
)
FINANCING ACTIVITIES
 

 
 

Net change in short-term debt
25.0

 
—

Dividends paid
(26.3
)
 
(28.8
)
Purchases of treasury stock
(123.9
)
 
(60.3
)
Payments on seller financed debt related to purchase of software
(3.7
)
 
—

Tax benefits on share-based compensation
—

 
0.6

Proceeds from stock options exercised
0.3

 
2.3

Net cash used for financing activities
(128.6
)
 
(86.2
)
Effect of exchange rate changes on cash and cash equivalents
0.3

 
(0.7
)
DECREASE IN CASH AND CASH EQUIVALENTS
(46.6
)
 
(90.6
)
Cash and cash equivalents at beginning of period
70.0

 
120.0

Cash and cash equivalents at end of period
$
23.4

 
$
29.4

SUPPLEMENTAL CASH FLOW INFORMATION:
 

 
 

Non-cash investing activities:
 

 
 

Acquisition of property, equipment and software
$
7.3

 
$
9.3

     Sale of equity method investment
$
12.6

 
$
—

Non-cash financing activities:
 
 
 
Seller financed debt related to purchase of software
$
—

 
$
4.9

See accompanying notes to consolidated financial statements.

6
Table of Contents    

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2016 AND 2015
(Unaudited)
($ in millions, except per share data)
 
 
Common Stock
 
Reinvested Earnings
 
Common Stock in Treasury
 
Accumulated Other Comprehensive (Loss) Income
 
Total Equity
 
Par Value Of $5
 
Capital in Excess of Par Value
 
 
 
 
Balances at June 30, 2015
$
276.2

 
$
266.6

 
$
1,332.4

 
$
(221.1
)
 
$
(328.2
)
 
$
1,325.9

Net loss
 

 
 

 
(3.6
)
 
 

 
 

 
(3.6
)
Pension and postretirement benefits gain, net of tax
 

 
 

 
 

 
 

 
11.2

 
11.2

Net loss on derivative instruments, net of tax
 

 
 

 
 

 
 

 
(5.5
)
 
(5.5
)
Foreign currency translation
 

 
 

 
 

 
 

 
2.1

 
2.1

Cash Dividends:
 

 
 

 
 

 
 

 
 

 
0

Common @ $0.54 per share
 

 
 

 
(26.3
)
 
 

 
 

 
(26.3
)
Purchase of treasury stock
 
 
 
 
 
 
(123.9
)
 
 
 
(123.9
)
Share-based compensation plans
 

 
6.2

 
 

 
0.8

 
 

 
7.0

Stock options exercised


 
0.3

 
 

 
 

 
 

 
0.3

Tax shortfall on share-based compensation
 

 
(0.2
)
 
 

 
 

 
 

 
(0.2
)
Balances at March 31, 2016
$
276.2

 
$
272.9

 
$
1,302.5

 
$
(344.2
)
 
$
(320.4
)
 
$
1,187.0

 
 
Common Stock
 
Reinvested Earnings
 
Common Stock in Treasury
 
Accumulated Other Comprehensive (Loss) Income
 
Total Equity
 
Par Value Of $5
 
Capital in Excess of Par Value
 
 
 
 
Balances at June 30, 2014
$
275.8

 
$
263.5

 
$
1,311.6

 
$
(101.4
)
 
$
(245.2
)
 
$
1,504.3

Net income
 

 
 

 
36.2

 
 

 
 

 
36.2

Pension and postretirement benefits gain, net of tax
 

 
 

 
 

 
 

 
8.9

 
8.9

Net loss on derivative instruments, net of tax
 

 
 

 
 

 
 

 
(38.7
)
 
(38.7
)
Foreign currency translation
 

 
 

 
 

 
 

 
(27.9
)
 
(27.9
)
Cash Dividends:
 

 
 

 
 

 
 

 
 

 
0

Common @ $0.54 per share
 

 
 

 
(28.8
)
 
 

 
 

 
(28.8
)
Purchase of treasury stock
 
 
 
 
 
 
(60.3
)
 
 
 
(60.3
)
Share-based compensation plans
 

 
(0.9
)
 
 

 
4.1

 
 

 
3.2

Stock options exercised
0.4

 
1.9

 
 

 
 

 
 

 
2.3

Tax windfall on share-based compensation
 

 
0.6

 
 

 
 

 
 

 
0.6

Balances at March 31, 2015
$
276.2

 
$
265.1

 
$
1,319.0

 
$
(157.6
)
 
$
(302.9
)
 
$
1,399.8

 
See accompanying notes to consolidated financial statements.

7
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
1.
Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair statement of the results are reflected in the interim periods presented. The June 30, 2015 consolidated balance sheet data was derived from audited financial statements, but does not include all of the disclosures required by U.S. generally accepted accounting principles. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Carpenter’s annual report on Form 10-K for the year ended June 30, 2015 (the “2015 Form 10-K”). Operating results for the three and nine months ended March 31, 2016 are not necessarily indicative of the operating results for any future period.

As used throughout this report, unless the context requires otherwise, the terms “Carpenter”, the “Company”, “Registrant”, “Issuer”, “we” and “our” refer to Carpenter Technology Corporation.
 
2.
Restructuring and Asset Impairment Charges

Restructuring and asset impairment charges for the three months ended March 31, 2016 and 2015 were $17.6 million and $25.3 million, respectively. Restructuring and asset impairment charges for the nine months ended March 31, 2016 and 2015 were $18.0 million and $25.3 million, respectively.

Restructuring charges

Fiscal Year 2016

 During the three months ended March 31, 2016, the Company recorded $10.0 million of pre-tax charges, consisting of $9.4 million associated with an early retirement incentive to be funded by the Company's qualified pension plan and $0.6 million of other severance related costs to be paid by the Company. At this time, the Company does not expect any additional charges related to these restructuring actions in the future. During the first quarter of fiscal year 2016, the Company recorded $0.4 million of restructuring costs associated with the 2015 restructuring plan.

Fiscal Year 2015

The Company recorded a pre-tax charge of $10.6 million during the three and nine months ended March 31, 2015 consisting primarily of various personnel-related costs for severance payments, medical coverage and related items. Of this charge, $3.4 million was paid by the Company and $7.6 million was paid from the Company's qualified pension plan. The charge also includes $0.4 million of non-cash forfeiture income related to stock-based compensation.

The Company recorded a pre-tax charge of $13.4 million during the three and nine months ended March 31, 2015 to exit a material development program. This includes an $8.0 million cash payment during the three and nine months ended March 31, 2015 to exit a licensing agreement and non-cash asset impairment charges totaling $5.4 million.

The Company recorded a pre-tax charge of $1.3 million during the three and nine months ended March 31, 2015 to reflect the accelerated depreciation of the property and equipment at a facility that closed in the fourth quarter of fiscal year 2015.

8
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




Activity and reserve balances for restructuring charges during the nine months ended March 31, 2016 were as follows:

($ in millions)
 
Reserve Balance
Reserve balance at June 30, 2015
 
$
2.3

Restructuring charges
 
10.4

Payments from qualified pension plan associated with restructuring charges
 
(9.4
)
Cash payments
 
(2.2
)
Other
 
(0.4
)
Reserve balance at March 31, 2016
 
$
0.7


The remaining reserve is expected to be substantially paid in cash during the remainder of fiscal year 2016.

Long-lived asset impairment charge

As a result of the prolonged weakness in oil and gas drilling and exploration activities and the impact of this weakness on certain reporting units, the Company recognized non-cash impairment charges of $7.6 million on certain long-lived assets, including $6.5 million related to property, plant and equipment and $1.1 million associated with certain definite lived intangible assets.

3.    Goodwill

The Company conducts annual goodwill impairment testing at least annually as of June 30, or more often if events, changes or circumstances indicate that the carrying amount may not be recoverable. The Company’s Amega West Services (“Amega”) and Specialty Steel Supply (“SSS”) reporting units have been significantly impacted by the prolonged weakness in oil and gas drilling and exploration activity driven by depressed oil prices. In connection with the Company’s latest annual impairment testing date of June 30, 2015, the discounted cash flows analysis for these reporting units included assumptions regarding the duration of the low oil price environment, the timing of an anticipated increase in activity levels and the related impact on customer buying patterns. The Company anticipated an increase in sales for these reporting units beginning in the third quarter of fiscal year 2016. However, given current market conditions, customer orders remained depressed and the reporting units’ results were lower than expected. As a result of the current quarter’s results and outlook for the balance of the fiscal year, the Company determined that an interim impairment test should be performed during the third quarter of fiscal year 2016. In connection with the interim impairment test for Amega and SSS, the Company also performed an interim goodwill impairment test for the Latrobe Distribution reporting unit, for which results have been below expectations for the last several quarters. As a result of the goodwill impairment testing completed in the third quarter, the Company determined that the goodwill associated with Amega and SSS was impaired and recorded an impairment charge of $12.5 million which represents the entire balance of the goodwill recorded for these reporting units. No impairment was identified at the interim impairment testing date for Latrobe Distribution.


9
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The changes in the carrying amount of goodwill by reportable segment for the nine months ended March 31, 2016 were as follows:

($ in millions)
 
June 30, 2015
 
Impairment Losses
 
Other
 
March 31, 2016
Goodwill
 
$
292.1

 
$
—

 
$
(0.1
)
 
$
292.0

Accumulated impairment losses
 
(34.7
)
 
(12.5
)
 
—

 
(47.2
)
Total goodwill
 
$
257.4

 
$
(12.5
)
 
$
(0.1
)
 
$
244.8

 
 
 
 
 
 
 
 
 
Specialty Alloys Operations
 
$
195.5

 
$
—

 
$
—

 
$
195.5

Performance Engineered Products
 
61.9

 
(12.5
)
 
(0.1
)
 
49.3

Total goodwill
 
$
257.4

 
$
(12.5
)
 
$
(0.1
)
 
$
244.8


The amounts included in “other” in the above table represent foreign exchange impacts on the amounts recorded in goodwill.

4.    Earnings per Common 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 (non-vested restricted shares and 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 outstanding shares for the period in each class. Diluted earnings per share assumes the issuance of common stock for all potentially dilutive share equivalents outstanding. For the three months ended March 31, 2016 and 2015 and the nine months ended March 31, 2016, the Company incurred a net loss and accordingly excluded all potentially dilutive securities from the determination of diluted loss per share as their impact was anti-dilutive.  


10
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The calculations of basic and diluted earnings per common share for the three and nine months ended March 31, 2016 and 2015 were as follows: 
 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
(in millions, except per share data)
 
2016
 
2015
 
2016
 
2015
Net (loss) income
 
$
(23.9
)
 
$
(1.4
)
 
$
(3.6
)
 
$
36.2

Less: earnings and dividends allocated to participating securities
 
—

 
—

 
—

 
—

(Loss) earnings available for common stockholders used in calculation of basic earnings per common share
 
$
(23.9
)
 
$
(1.4
)
 
$
(3.6
)
 
$
36.2

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding, basic
 
47.1

 
52.6

 
48.5

 
53.2

 
 
 
 
 
 
 
 
 
Basic (loss) earnings per common share
 
$
(0.51
)
 
$
(0.03
)
 
$
(0.08
)
 
$
0.68

 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(23.9
)
 
$
(1.4
)
 
$
(3.6
)
 
$
36.2

Less: earnings and dividends allocated to participating securities
 
—

 
—

 
—

 
—

(Loss) earnings available for common stockholders used in calculation of diluted earnings per common share
 
$
(23.9
)
 
$
(1.4
)
 
$
(3.6
)
 
$
36.2

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding, basic
 
47.1

 
52.6

 
48.5

 
53.2

Effect of shares issuable under share-based compensation plans
 
—

 
—

 
—

 
0.1

Weighted average number of common shares outstanding, diluted
 
47.1

 
52.6

 
48.5

 
53.3

 
 
 
 
 
 
 
 
 
Diluted (loss) earnings per common share
 
$
(0.51
)
 
$
(0.03
)
 
$
(0.08
)
 
$
0.68

 
The following awards issued under share-based compensation plans were excluded from the above calculations of diluted earnings per share because their effects were anti-dilutive:
 
 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
(in millions)
 
2016
 
2015
 
2016
 
2015
Stock options
 
1.6

 
1.1

 
1.6

 
0.7

 

11
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


5.
Inventories
 
Inventories consisted of the following components as of March 31, 2016 and June 30, 2015:
 
($ in millions)
 
March 31,
2016
 
June 30,
2015
Raw materials and supplies
 
$
142.8

 
$
121.7

Work in process
 
316.3

 
346.1

Finished and purchased products
 
190.3

 
188.0

Total inventory
 
$
649.4

 
$
655.8

 
Inventories are valued at the lower of cost or market. Cost for inventories is principally determined using the last-in, first-out (“LIFO”) method. The Company also uses the first-in, first-out (“FIFO”) and average costs methods. As of March 31, 2016 and June 30, 2015, $120.5 million and $154.9 million of inventory, respectively, was accounted for using a method other than the LIFO method. During the three months ended March 31, 2016, the Company recorded a $22.5 million excess inventory adjustment due to the prolonged weakness in oil and gas businesses.
 
6.
Book Overdrafts
 
Checks outstanding in excess of bank balances create net book overdrafts, which are recorded in accounts payable in the consolidated balance sheets and are reflected as an operating activity in the consolidated statements of cash flows. As of March 31, 2016 and June 30, 2015, the Company had net book overdrafts in certain banks of $3.6 million and $0.0 million, respectively. 

7.
Accrued Liabilities
 
Accrued liabilities consisted of the following as of March 31, 2016 and June 30, 2015:
 
($ in millions)
 
March 31,
2016
 
June 30,
2015
Derivative financial instruments
 
$
43.2

 
$
32.7

Accrued compensation and benefits
 
34.8

 
44.3

Accrued postretirement benefits
 
14.0

 
14.0

Accrued interest expense
 
5.6

 
11.2

Accrued pension liabilities
 
3.4

 
3.3

Accrued income taxes
 
1.3

 
8.7

Other
 
34.9

 
38.4

Total accrued liabilities
 
$
137.2

 
$
152.6

 

12
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


8.
Pension and Other Postretirement Benefits
 
The components of the net periodic benefit cost related to the Company’s pension and other postretirement benefits for the three and nine months ended March 31, 2016 and 2015 were as follows:
 
Three months ended March 31,
 
Pension Plans
 
Other Postretirement Plans
($ in millions)
 
2016
 
2015
 
2016
 
2015
Service cost
 
$
7.8

 
$
8.0

 
$
0.8

 
$
1.1

Interest cost
 
14.4

 
13.5

 
2.5

 
3.0

Expected return on plan assets
 
(16.4
)
 
(17.2
)
 
(1.7
)
 
(1.7
)
Amortization of net loss
 
6.8

 
4.2

 
0.7

 
0.5

Amortization of prior service cost (benefit)
 
0.1

 
0.1

 
(1.6
)
 
—

    Net periodic benefit costs
 
$
12.7

 
$
8.6

 
$
0.7

 
$
2.9

Nine months ended March 31,
 
Pension Plans
 
Other Postretirement Plans
($ in millions)
 
2016
 
2015
 
2016
 
2015
Service cost
 
$
23.4

 
$
24.0

 
$
2.5

 
$
3.3

Interest cost
 
43.2

 
40.5

 
7.7

 
9.0

Expected return on plan assets
 
(49.3
)
 
(51.6
)
 
(5.2
)
 
(5.0
)
Amortization of net loss
 
20.5

 
12.6

 
2.0

 
1.5

Amortization of prior service cost (benefit)
 
0.3

 
0.3

 
(4.8
)
 
—

    Net periodic benefit costs
 
$
38.1

 
$
25.8

 
$
2.2

 
$
8.8


During the nine months ended March 31, 2016 and 2015, the Company made $0 million and $5.5 million, respectively, of contributions to its qualified defined benefit pension plans. The Company currently expects to make no contributions to its qualified defined benefit pension plans during the remainder of fiscal year 2016.
 
9.
Debt
 
The Company's $500.0 million syndicated credit facility (“Credit Agreement”) extends to June 2018. Interest on the borrowings under the Credit Agreement accrue at variable rates, based upon LIBOR or a defined “Base Rate,” both determined based upon the rating of the Company’s senior unsecured long-term debt (the “Debt Rating”). The applicable margin to be added to LIBOR ranges from 0.75% to 1.90% (1.45% as of March 31, 2016), and for Base Rate-determined loans, from 0.00% to 0.90% (0.45% as of March 31, 2016). The Company also pays a quarterly commitment fee ranging from 0.075% to 0.375% (0.225% as of March 31, 2016), 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% (1.45% as of March 31, 2016), with respect to letters of credit issued under the Credit Agreement. The Company has the right to voluntarily prepay and re-borrow loans and to terminate or reduce the commitments under the facility. As of March 31, 2016, the Company had $7.6 million of issued letters of credit and $25.0 million of short-term borrowings under the Credit Agreement, with the balance of $467.4 million available to the Company.

The Company is subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio of 3.50 to 1.00. The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense (“EBITDA”) to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than 55 percent. The debt to capital ratio is defined in the Credit Agreement as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. As of March 31, 2016 and June 30, 2015, the Company was in compliance with all of the covenants of the Credit Agreement.
 

13
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Long-term debt outstanding as of March 31, 2016 and June 30, 2015 consisted of the following:
 
($ in millions)
 
March 31,
2016
 
June 30,
2015
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 March 31, 2016 and June 30, 2015)
 
$
55.0

 
$
55.0

Senior unsecured notes, 5.20% due July 2021 (face value of $250.0 million at March 31, 2016 and June 30, 2015)
 
258.2

 
252.5

Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at March 31, 2016 and June 30, 2015)
 
299.7

 
299.6

Total
 
612.9

 
607.1

Less: amounts due within one year
 
—

 
—

Long-term debt, net of current portion
 
$
612.9

 
$
607.1

 
For the three months ended March 31, 2016 and 2015, interest costs totaled $7.6 million and $7.7 million, respectively, of which $0.4 million and $0.6 million, respectively, were capitalized as part of the cost of property, plant, equipment and software. For the nine months ended March 31, 2016 and 2015, interest costs totaled $22.3 million and $22.9 million, respectively, of which $1.5 million and $2.0 million, respectively, were capitalized as part of the cost of property, plant, equipment and software.

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. 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 the nine months ended March 31, 2016, the Company increased 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 at March 31, 2016 and June 30, 2015 were $16.1 million and $15.9 million, respectively. 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, the Company 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.


14
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 such as asbestos. The Company provides for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on the Company’s future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, management believes that the total liability from these matters will not have a material effect on the Company’s financial position, results of operations or cash flows over the long-term. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to the Company’s financial position, results of operations or cash flows in a particular future quarter or year.

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 the market price of the stock. The share repurchase program may be discontinued at any time. During the nine months ended March 31, 2016, the Company purchased 3,762,200 of its common stock on the open market for an aggregate of $123.9 million. As of March 31, 2016, $251.6 million remains available for future purchases.

12.
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 or liabilities in active markets; quoted prices for identical or similar assets or 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 or 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.
 

15
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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:
 
March 31, 2016
 
Fair Value
Measurements Using
Input Type
($ in millions)
 
Level 2
Assets:
 
 

Marketable securities
 
 

Municipal auction rate securities
 
$
5.0

Derivative financial instruments
 
9.2

Total assets
 
$
14.2

 
 
 

Liabilities:
 
 

Derivative financial instruments
 
$
63.1

 
June 30, 2015
 
Fair Value
Measurements Using
Input Type
($ in millions)
 
Level 2
Assets:
 
 

Marketable securities
 
 

Municipal auction rate securities
 
$
5.0

Derivative financial instruments
 
4.4

Total assets
 
$
9.4

 
 
 

Liabilities:
 
 

Derivative financial instruments
 
$
53.5

 
The Company’s derivative financial instruments consist of commodity forward contracts, foreign currency forward contracts and 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 13.
 
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:
 
 
 
March 31, 2016
 
June 30, 2015
($ in millions)
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt
 
$
612.9

 
$
588.8

 
$
607.1

 
$
628.6

Company-owned life insurance
 
$
12.2

 
$
12.2

 
$
13.0

 
$
13.0

 

16
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 March 31, 2016 and June 30, 2015 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.
 
13.
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 income (loss) (“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 March 31, 2016, the Company had forward contracts to purchase 22.5 million pounds of certain raw materials with settlement dates through December 2020.
 
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 affected earnings or it became probable that the forecasted transaction would not occur.  Upon the issuance of the fixed rate debt, the forward interest rate swap contracts were terminated. The realized gains at the time the interest rate swap contracts were terminated are being amortized over the term of the underlying debt. For the three months ended March 31, 2016 and 2015, net gains of $0.1 million and $0.1 million, respectively, related to the previously terminated contracts were recorded as a reduction to interest expense. For the nine months ended March 31, 2016 and 2015, net gains of $0.3 million and $0.3 million, respectively, related to the previously terminated contracts were recorded as a reduction to interest expense.
 
Cash Flow Hedging — Foreign currency forward contracts: The Company uses foreign currency forward contracts to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to net sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
 
The Company also uses foreign currency forward contracts to protect certain short-term asset positions denominated in foreign currencies against the effect of changes in exchange rates. These positions do not qualify for hedge accounting and accordingly are marked-to-market at each reporting date through charges to other income and expense. As of March 31, 2016 and 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.
 

17
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 operations. As of March 31, 2016 and June 30, 2015, the total notional amount of floating interest rate contracts was $150.0 million. For the three months ended March 31, 2016 and 2015, net gains of $0.6 million and $0.8 million, respectively, were recorded as a reduction to interest expense. For the nine months ended March 31, 2016 and 2015, net gains of $1.9 million and $2.1 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 March 31, 2016 and June 30, 2015:
 
March 31, 2016
 
Interest
Rate Swaps
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
Total
Derivatives
($ in millions)
 
 
 
 
Asset Derivatives:
 
 

 
 

 
 

 
 

Derivatives designated as hedging instruments:
 
 

 
 

 
 

 
 

Other current assets
 
$
0.5

 
$
0.2

 
$
—

 
$
0.7

Other assets
 
8.5

 
—

 
—

 
8.5

Total asset derivatives
 
$
9.0

 
$
0.2

 
$
—

 
$
9.2

Liability Derivatives:
 
 

 
 

 
 

 
 

Derivatives designated as hedging instruments:
 
 

 
 

 
 

 
 

Accrued liabilities
 
$
—

 
$
0.5

 
$
42.7

 
$
43.2

Other liabilities
 
—

 
—

 
19.9

 
19.9

Total liability derivatives
 
$
—

 
$
0.5

 
$
62.6

 
$
63.1

 
June 30, 2015
 
Interest
Rate Swaps
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
Total
Derivatives
($ in millions)
 
 
 
 
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


Substantially all of the 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 $10.9 million and total liability derivatives would have been $64.8 million as of March 31, 2016.


18
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 March 31, 2016 and June 30, 2015, the Company had $8.0 million and $0.0 million cash collateral held by counterparties, respectively.
 
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 (losses) gains related to cash flow hedges recognized during the three and nine months ended March 31, 2016 and 2015:
 
 
 
Amount of (Loss) Gain
Recognized in AOCI on
Derivatives
(Effective Portion)
 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
($ in millions)
 
2016
 
2015
 
2016
 
2015
Derivatives in Cash Flow Hedging Relationship:
 
 

 
 

 
 

 
 

Commodity contracts
 
$
(2.5
)
 
$
(28.6
)
 
$
(41.3
)
 
$
(71.8
)
Foreign exchange contracts
 
(0.2
)
 
1.3

 
0.4

 
3.4

Total
 
$
(2.7
)
 
$
(27.3
)
 
$
(40.9
)
 
$
(68.4
)
 
($ in millions)
 
Location of (Loss) Gain
Reclassified from AOCI into
Income
 
Amount of (Loss) Gain
Reclassified from AOCI
into Income
(Effective Portion)
 
Amount of Gain (Loss)
Reclassified from AOCI
into Income
(Ineffective Portion)
 
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
 
2016
 
2015
 
2016
 
2015
Derivatives in Cash Flow Hedging Relationship:
 
 
 
 
 
 
 
 
Commodity contracts
 
Cost of sales
 
$
(12.0
)
 
$
(6.9
)
 
$
0.5

 
$
(2.0
)
Foreign exchange contracts
 
Net sales
 
0.1

 
0.9

 
—

 
—

Forward interest rate swaps
 
Interest expense
 
0.1

 
0.1

 
—

 
—

Total
 
 
 
$
(11.8
)
 
$
(5.9
)
 
$
0.5

 
$
(2.0
)



19
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


($ in millions)
 
Location of (Loss) Gain
Reclassified from AOCI into
Income
 
Amount of (Loss) Gain
Reclassified from AOCI
into Income
(Effective Portion)
 
Amount of Gain (Loss)
Reclassified from AOCI
into Income
(Ineffective Portion)
 
 
Nine Months Ended
March 31,
 
Nine Months Ended
March 31,
 
 
2016
 
2015
 
2016
 
2015
Derivatives in Cash Flow Hedging Relationship:
 
 
 
 
 
 
 
 
Commodity contracts
 
Cost of sales
 
$
(32.6
)
 
$
(8.4
)
 
$
1.5

 
$
(2.2
)
Foreign exchange contracts
 
Net sales
 
0.2

 
1.9

 
—

 
—

Forward interest rate swaps
 
Interest expense
 
0.3

 
0.3

 
—

 
—

Total
 
 
 
$
(32.1
)
 
$
(6.2
)
 
$
1.5

 
$
(2.2
)
 
The Company estimates that $23.2 million of net derivative losses included in AOCI as of March 31, 2016 will be reclassified into income within the next 12 months. No significant cash flow hedges were discontinued during the three and nine months ended March 31, 2016.
   
14.
Other (Expense) Income, Net
 
Other (expense) income, net consisted of the following:
 
 
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
($ in millions)
 
2016
 
2015
 
2016
 
2015
Foreign exchange
 
$
—

 
$
(0.1
)
 
$
(2.3
)
 
$
0.3

Unrealized (losses) gains on company-owned life insurance contracts and investments held in rabbi trusts
 
(1.3
)
 
—

 
(1.8
)
 
0.5

Equity in (losses) earnings of unconsolidated subsidiaries
 
(0.2
)
 
0.1

 
0.6

 
(0.4
)
Legal settlement
 
—

 
—

 
—

 
4.4

Other
 
—

 
—

 
0.1

 
—

Total other (expense) income, net
 
$
(1.5
)
 
$
—

 
$
(3.4
)
 
$
4.8

 
15.
Income Taxes
 
The effective tax rate used for interim periods is the estimated annual effective consolidated tax rate, based on the current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur.
 
Income tax expense for the three months ended March 31, 2016 was a benefit of $9.1 million, or 27.6 percent of pre-tax loss as compared with a benefit of $0.9 million, or 39.1 percent of pre-tax loss for the three months ended March 31, 2015. Income tax expense for the nine months ended March 31, 2016 was $1.8 million, or negative 100.0 percent of pre-tax loss as compared with $19.6 million, or 35.1 percent of pre-tax income for the nine months ended March 31, 2015. The current period tax expense includes the impact of non-cash goodwill impairment charges, a portion of which is non-deductible for tax purposes, as well as a discrete tax charge of $0.8 million related to the sale of an equity investment in India.   Income tax expense for the nine months ended March 31, 2016 includes net tax benefits of $0.8 million primarily for additional research and development credits as a result of the December 2015 enactment of the Protecting Americans from Tax Hikes Act of 2015 as well as a discrete tax charge of $2.8 million recorded as a result of the decision to sell an equity investment in India.  Income tax expense in the prior year includes a net tax charge of $1.6 million for the unfavorable impact of bonus depreciation on domestic manufacturing benefits, net of additional research and development credits, as a result of the enactment of the Tax Increase Prevention Act of 2014. 


20
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


As of June 30, 2015, the Company had $118.5 million of indefinitely reinvested foreign earnings for which deferred income taxes have not been provided.  Due to a change in business strategy for one of our foreign subsidiaries, the Company changed its intent with regard to the indefinite reinvestment of the foreign earnings for this subsidiary.  As a result of this change, the Company recorded a discrete deferred tax charge of $2.0 million in the first quarter of fiscal year 2016.  The remaining balance, approximately $112.9 million, of undistributed foreign earnings continues to be indefinitely reinvested at March 31, 2016.

16.
Business Segments
 
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, and the Latrobe and Mexico distribution businesses. The businesses in the PEP segment are managed with an entrepreneurial structure to promote flexibility and agility to quickly respond to market dynamics. 
 
The Company’s executive management evaluates the performance of these operating segments based on sales, operating income and cash flow generation. Segment operating profit excludes general corporate costs, which include executive and director compensation, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that management considers not representative of ongoing operations, such as excess inventory write-downs, restructuring and asset impairment charges, goodwill impairment and other specifically-identified income or expense items.
 
The service cost component of the Company’s net pension expense, which represents the estimated cost of future pension liabilities earned associated with active employees, is included in the operating income of the business segments. The residual net pension expense, which is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans and amortization of actuarial gains and losses and prior service costs, is included under the heading “Pension earnings, interest and deferrals”.
 
On a consolidated basis, one customer, Alcoa Inc., accounted for approximately 11 percent and 12 percent of the net sales for the three months ended March 31, 2016 and 2015, respectively. On a consolidated basis, one customer, Alcoa Inc., accounted for approximately 13 percent of the net sales for the nine months ended March 31, 2016. There were no significant individual customers that accounted for 10 percent or more of the Company’s net sales for the nine months ended March 31, 2015. Approximately 24 percent of the accounts receivable outstanding at March 31, 2016 is due from two customers, Alcoa Inc. and Precision Castparts Corporation. Approximately 17 percent of the accounts receivable outstanding at June 30, 2015 is due from one customer, Alcoa Inc.
Segment Data
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
($ in millions)
 
2016
 
2015
 
2016
 
2015
Net Sales:
 
 

 
 

 
 

 
 

Specialty Alloys Operations
 
$
370.5

 
$
469.8

 
$
1,106.7

 
$
1,344.0

Performance Engineered Products
 
91.4

 
120.4

 
268.3

 
384.1

Intersegment
 
(5.6
)
 
(19.6
)
 
(19.3
)
 
(59.3
)
Consolidated net sales
 
$
456.3

 
$
570.6

 
$
1,355.7

 
$
1,668.8


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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Segment Data
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
($ in millions)
 
2016
 
2015
 
2016
 
2015
Operating (Loss) Income:
 
 

 
 

 
 
 
 
Specialty Alloys Operations
 
$
45.6

 
$
37.9

 
$
128.3

 
$
106.0

Performance Engineered Products
 
(0.9
)
 
8.5

 
(4.2
)
 
30.8

Corporate costs (including excess inventory write-down, restructuring and asset impairment charges)
 
(64.5
)
 
(38.6
)
 
(89.3
)
 
(55.9
)
     Pension earnings, interest and deferrals
 
(4.8
)
 
(2.4
)
 
(14.4
)
 
(7.1
)
Intersegment
 
0.3

 
(0.6
)
 
2.0

 
(1.9
)
Consolidated operating (loss) income
 
$
(24.3
)
 
$
4.8

 
$
22.4

 
$
71.9

Segment Data
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
($ in millions)
 
2016
 
2015
 
2016
 
2015
Depreciation and Amortization:
 
 

 
 

 
 
 
 
Specialty Alloys Operations
 
$
23.4

 
$
23.9

 
$
70.9

 
$
70.7

Performance Engineered Products
 
5.5

 
5.7

 
17.0

 
17.7

Corporate
 
0.9

 
1.0

 
2.8

 
3.3

Intersegment
 
(0.2
)
 
0.1

 
(0.7
)
 
(0.5
)
Consolidated depreciation and amortization
 
$
29.6

 
$
30.7

 
$
90.0

 
$
91.2

Segment Data
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
($ in millions)
 
2016
 
2015
 
2016
 
2015
Capital Expenditures:
 
 

 
 

 
 
 
 
Specialty Alloys Operations
 
$
11.2

 
$
15.2

 
$
47.9

 
$
119.5

Performance Engineered Products
 
3.6

 
8.1

 
14.9

 
31.0

Corporate
 
1.9

 
1.5

 
3.5

 
2.8

Intersegment
 
(0.1
)
 
—

 
(0.2
)
 
(1.0
)
Consolidated capital expenditures
 
$
16.6

 
$
24.8

 
$
66.1

 
$
152.3

Segment Data
 
March 31,
2016
 
June 30,
2015
($ in millions)
 
 
Total Assets:
 
 

 
 

Specialty Alloys Operations
 
$
2,291.4

 
$
2,323.0

Performance Engineered Products
 
423.0

 
499.2

Corporate
 
107.6

 
125.0

Intersegment
 
(35.5
)
 
(41.3
)
Consolidated total assets
 
$
2,786.5

 
$
2,905.9



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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


17.
Recent Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of this guidance by one year. As such, the Company is 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 ASU 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. If adopted as of March 31, 2016, the reclassification impact on the consolidated balance sheets would be $3.0 million from other assets to long-term debt.

In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements. This guidance indicates that the guidance in ASU 2015-03 did not address presentation or subsequent measurement of debt issuance costs related to line of credit arrangements. Given the absence of authoritative guidance within ASU 2015-03, the SEC staff has indicated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The Company does not expect the adoption of ASU 2015-15 to have any effect on the consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, requiring all deferred tax assets and liabilities, and any related valuation allowance, to be classified as noncurrent on the balance sheet. The classification change for all deferred taxes as noncurrent simplifies entities’ processes as it eliminates the need to separately identify the net current and net noncurrent deferred tax asset or liability in each jurisdiction and allocate valuation allowances. The guidance in ASU 2015-17 is effective for public entities in fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. ASU 2015-17 can be applied retrospectively or prospectively and early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2015-17 on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). ASU No. 2016-02 improves transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early application permitted. The Company is evaluating the impact of the adoption of ASU 2016-02 on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08 Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU No. 2016-08 requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. ASU No. 2016-08 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. The Company is evaluating the impact of the adoption of ASU 2016-08 on the consolidated financial statements.


23
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which outlines new provisions intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements. ASU No. 2016-09 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2016, with early application permitted. The Company is evaluating the impact of the adoption of ASU 2016-09 on the consolidated financial statements.    

18.    Reclassifications from Accumulated Other Comprehensive (Loss) Income
 
The changes in AOCI by component, net of tax, for the three months ended March 31, 2016 and 2015 were as follows:
 

Three Months Ended March 31, 2016
($ 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 December 31, 2015
 
$
(39.7
)
 
$
(249.4
)
 
$
(0.3
)
 
$
(48.2
)
 
$
(337.6
)
Other comprehensive (loss) income before reclassifications
 
(1.7
)
 
—

 
—

 
7.7

 
6.0

Amounts reclassified from AOCI (b)
 
7.4

 
3.8

 
—

 
—

 
11.2

Net current-period other comprehensive income
 
5.7

 
3.8

 
—

 
7.7

 
17.2

Balance at March 31, 2016
 
$
(34.0
)
 
$
(245.6
)
 
$
(0.3
)
 
$
(40.5
)
 
$
(320.4
)
 

Three Months Ended March 31, 2015
($ 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 December 31, 2014
 
$
(17.9
)
 
$
(230.8
)
 
$
(0.4
)
 
$
(33.7
)
 
$
(282.8
)
Other comprehensive (loss) before reclassifications
 
(16.9
)
 
—

 
—

 
(9.9
)
 
(26.8
)
Amounts reclassified from AOCI (b)
 
3.7

 
3.0