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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
 
FORM 10-K
 
 
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2017
 
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.)
 
 
 
1735 Market Street, 15th Floor
Philadelphia, Pennsylvania
 
19103
(Address of principal executive offices)
 
(Zip Code)
610-208-2000
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 Par Value
 
New York Stock Exchange
Title of each class
 
Name of each exchange on which registered
 
Securities registered pursuant to 12(g) of the Act:   None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes   ý    No   o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes   o   No   ý
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.
Yes   ý   No   o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)
Yes   ý    No   o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer  x
 
Accelerated filer  o
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
 
 
 
 
 
Emerging growth company  o
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   o   No   ý
 
The aggregate market value of the registrants’ voting common stock held by non-affiliates at December 31, 2016 was $1,689,766,058, based on the closing price per share of the registrant’s common stock on that date of $36.17 as reported on the New York Stock Exchange.
 
As of August 8, 2017, 46,757,548 shares of the registrant’s common stock were outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Selected portions of the Company’s fiscal year 2017 definitive Proxy Statement are incorporated by reference into Part III of this Report.



Table of Contents

TABLE OF CONTENTS
 
 
 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I
 
Item 1.  Business
 
(a)              General Development of Business:
 
Carpenter Technology Corporation, founded in 1889, is engaged in the manufacturing, fabrication and distribution of specialty metals.  As used throughout this report, unless the context requires otherwise, the terms “Carpenter”, “Company”, “Registrant”, “Issuer”, “we” and “our” refer to Carpenter Technology Corporation.
 
(b)              Financial Information About Segments:
 
We are organized in two reportable business segments: Specialty Alloys Operations (“SAO”) and Performance Engineered Products (“PEP”).  See Note 19 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” for additional segment reporting information.
 
(c)               Narrative Description of Business:
  (1)                General:
 
We 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. Our high-performance materials and advanced process solutions are an integral part of critical applications used within the aerospace, transportation, medical and energy markets, among other sectors. Building on our history of innovation, our superalloy and titanium powder technologies support a range of next-generation products and manufacturing techniques, including additive manufacturing (or 3D printing).
 
Reportable Segments
 
The SAO segment is comprised of the Company’s major premium alloy and stainless steel manufacturing operations. This includes operations performed at mills primarily in Reading and Latrobe, Pennsylvania and surrounding areas as well as South Carolina and Alabama. The combined assets of the SAO operations are being managed in an integrated manner to optimize efficiency and profitability across the total system.
 
The PEP segment is comprised of the Company’s differentiated operations. This segment includes the Dynamet titanium business, the Carpenter Powder Products business, the Amega West business and the Latrobe and Mexico distribution businesses. The businesses in the PEP segment are managed with an entrepreneurial structure to promote speed and flexibility, and drive overall revenue and profit growth. 
(2)                  Raw Materials:
 
Our business depends on continued delivery of critical raw materials for our day-to-day operations.  These raw materials include nickel, cobalt, chromium, manganese, molybdenum, titanium, iron and scrap containing iron and nickel.  Some of the sources of these raw materials, many of which are international, could be subject to potential interruptions of supply as a result of political events, labor unrest or other reasons.  These potential interruptions could cause material shortages and affect availability and price. We have arrangements with certain vendors to provide consigned materials at our manufacturing facilities available for our consumption as necessary.
 
We have long-term relationships with major suppliers who provide availability of material at competitive prices.  Purchase prices of certain raw materials have historically been volatile.  We use pricing surcharges, indexing mechanisms, base price adjustments and raw material forward contracts to reduce the impact of increased costs for the most significant of these materials. There can be delays between the time of the increase in the price of raw materials and the realization of the benefits of such mechanisms or actions that could have a short-term impact on our results and could affect the comparability of our results from period to period.
 

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(3)                  Patents and Licenses:
 
We own a number of United States and international patents and have granted licenses under some of them.  In addition, certain products that we produce are covered by patents held or owned by other companies from whom licenses have been obtained.  The duration of a patent issued in the United States is between 14 and 20 years from the date of filing a patent application or issuance of the patents.  The duration of patents issued outside of the United States vary from country to country.  Generally, patent licenses are structured to match the duration of the underlying patent.  Although these patents and licenses are believed to be of value, we do not consider our business to be materially dependent upon any single such item or related group of such items.
 
(4)                 Seasonality of Business:
 
Our sales are normally influenced by seasonal factors. Historically, our sales in the first two fiscal quarters (the respective three months ending September 30 and December 31) are typically the lowest — principally because of annual plant vacation and maintenance shutdowns by us, as well as by many of our customers.  However, the timing of major changes in the general economy or the markets for certain products can alter this historical pattern.
 
The chart below summarizes the percent of net sales by quarter for the past three fiscal years:
 
Quarter Ended
 
2017
 
2016
 
2015
September 30,
 
22
%
 
25
%
 
25
%
December 31,
 
24

 
25

 
24

March 31,
 
26

 
25

 
26

June 30,
 
28

 
25

 
25

 
 
100
%
 
100
%
 
100
%

(5)                  Customers:
 
On a consolidated basis, we are not dependent upon a single customer, or a very few customers, such that the loss of any one or more particular customers would have a materially adverse effect on our consolidated statement of income.  One customer, Arconic, Inc., accounted for approximately 11 percent and 13 percent of net sales for the years ended June 30, 2017 and 2016, respectively. No single customer accounted for 10 percent or more of net sales during fiscal year 2015. No single customer accounted for 10 percent or more of the accounts receivable outstanding at June 30, 2017. Approximately 22 percent of the accounts receivable outstanding at June 30, 2016 was due from two customers, Alcoa Inc. and Precision Castparts Corporation. See Note 19 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” for additional information.
 
(6)                 Backlog:
 
As of June 30, 2017 , we had a sales backlog of orders excluding surcharge, believed to be firm, of approximately $438 million, substantially all of which is expected to be shipped within fiscal year 2018.  Our backlog of orders excluding surcharge as of June 30, 2016 was approximately $306 million.

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(7)                 Competition:
 
We are leaders in specialty materials for critical applications with over 125 years of metallurgical and manufacturing expertise. Our business is highly competitive.  We manufacture and supply materials to a variety of end-use market sectors and compete with various companies depending on end-use market, product or geography.  A significant portion of the products we produce are highly engineered materials for demanding applications. There are less than ten companies producing one or more similar products that we consider our major competitors for our high-value products used in demanding applications, particularly in our Aerospace and Defense and Energy end-use markets.  These products are generally required to meet complex customer product specifications and often require the materials to be qualified prior to supplying the customer. Our experience, technical capabilities, product offerings and research and development efforts represent barriers to existing and potential competitors.
 
For other products, there are several dozen smaller producing companies and converting companies that are also competitors, as well as several hundred independent distributors of products similar to those distributed by us.  Additionally, numerous foreign companies produce various specialty metal products similar to those produced by us.  Furthermore, a number of different products may, in certain instances, be substituted for our finished products.
(8)                 Research, Product and Process Development:
 
Our expenditures for company-sponsored research and development were $16.9 million, $16.3 million and $18.7 million in fiscal years 2017 , 2016 and 2015 , respectively. We believe that our ability to be an innovator in special material development and manufacturing processes has been and will continue to be an important factor in the success of the Company.  Our worldwide staff of expert metallurgists, research and development scientists, engineers and service professionals work closely with our customers to identify and provide innovative solutions to specific product requirements.
(9)          Environmental Regulations:
 
We are subject to various stringent federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health.  Management evaluates the liability for future environmental remediation costs on a quarterly basis.  We accrue amounts for environmental remediation costs representing management’s best estimate of the probable and reasonably estimable costs relating to environmental remediation.  For further information on environmental remediation, see the Contingencies section included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.
 
Our costs of maintaining and operating environmental control equipment were $12.4 million, $13.5 million and $14.8 million for fiscal years 2017 , 2016 and 2015 , respectively.  The capital expenditures for environmental control equipment were $0.8 million, $0.7 million and $0.5 million for fiscal years 2017 , 2016 and 2015 , respectively.  We anticipate spending approximately $6 million on major domestic environmental capital projects over the next five fiscal years.  This includes approximately $3 million in fiscal year 2018.  Due to the possibility of future regulatory developments, the amount of future capital expenditures may vary from these estimates.
 
(10)          Employees:
 
As of June 30, 2017 , our total workforce consisted of approximately 4,600 employees, which included approximately 130 production employees in Washington, Pennsylvania, who are covered under a collective bargaining agreement which expires on August 31, 2019, and approximately 440 employees in Latrobe, Pennsylvania who are covered under a collective bargaining agreement which expires August 1, 2020.
 

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(d)                Financial information about foreign and domestic operations and export sales:
 
Sales outside of the United States, including export sales, were $599.3 million, $569.9 million and $646.8 million in fiscal years 2017 , 2016 and 2015 , respectively. Long-lived assets held outside of the United States were $26.1 million and $28.0 million as of June 30, 2017 and 2016 , respectively.  For further information on domestic and international sales, see Note 19 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.
 
(e)                 Available Information:
 
Our Board of Directors has adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers of Carpenter Technology Corporation, which is also applicable to our other executive officers.  There were no waivers of the Code of Ethics in fiscal year 2017 .  The Code of Ethics and any information regarding any waivers of the Code of Ethics are disclosed on Carpenter’s website at www.cartech.com.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (“SEC”).  Our website and the content contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an Internet site that contains reports, proxy and other information regarding issuers that file electronically.  Such information can be accessed through the Internet at www.sec.gov.

Item 1A.  Risk Factors
 
There are inherent risks and uncertainties associated with all businesses that could adversely affect operating performances or financial conditions. The following discussion outlines the risks and uncertainties that management believes are the most material to our business. However, these are not the only risks or uncertainties that could affect our business. Certain risks are associated specifically with our business, industry or customer base, while others have a broader effect.
 
The demand for certain products we produce may be cyclical.
 
Demand in our end-use markets, including companies in the aerospace and defense, energy, transportation, medical and industrial and consumer markets, can be cyclical in nature and sensitive to general economic conditions, competitive influences and fluctuations in inventory levels throughout the supply chain. As such, our results of operations, financial condition, cash flows and availability of credit could fluctuate significantly from period to period.
 
A significant portion of our sales represents products sold to customers in the commercial aerospace and defense and energy markets. The cyclicality of those markets can adversely affect our current business and our expansion objectives.
 
The commercial aerospace and defense market is historically cyclical due to both external and internal market factors. These factors include general economic conditions, airline profitability, consumer demand for air travel, varying fuel and labor costs, price competition and international and domestic political conditions such as military conflict and the threat of terrorism. The length and degree of cyclical fluctuation can be influenced by any one or combination of these factors and therefore are difficult to predict with certainty. A downturn in the commercial aerospace and defense industry would adversely affect the demand for our products and/or the prices at which we are able to sell our products; our results of operations and financial condition could be materially adversely affected.
 

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The energy market has also been historically cyclical, principally as a result of volatile oil prices. Due to lower oil prices, oil and gas drilling and exploration activity has slowed. The decline in oil prices has negatively impacted the demand for our products used in our Energy and Industrial and Consumer end-use markets. Our future success requires us to, among other things, expand in key international energy markets by successfully adding to our customer base, distribution channels and product portfolio. The outlook for oil prices remains uncertain. The duration of the current low price environment or further deterioration in prices could further adversely affect the demand for products, which could impact our results of operations and financial condition.
Any significant delay or inability to successfully expand our operations in a timely and cost effective manner could materially adversely affect our business, financial condition and results of operations.
 
Over the last few years, we have undertaken capital projects associated with expanding our production capacity and capability, including our state-of-the-art manufacturing facility in Athens, Alabama and our adjacent superalloy powder facility.  These projects place a significant demand on management and operational resources. Our success in expanding our operations in a cost effective manner depends upon numerous factors including the ability of management to ensure the necessary resources are in place to properly execute these projects, our ability to obtain the necessary internal and customer qualifications to produce material from the facilities and our ability to operate the facilities to maximize the potential opportunities with minimal impacts to our existing operations. If we are not able to achieve the anticipated results from our capital expansion projects, or if we incur unanticipated excess costs, our results of operations and financial position may be materially adversely affected.
 
Periods of reduced demand and excess supply as well as the availability of substitute lower cost materials can adversely affect our ability to price and sell our products at the profitability levels we require to be successful.
 
Additional worldwide capacity and reduced demand for our products could significantly impact future worldwide pricing which would adversely impact our results of operations and financial condition. In addition, continued availability of lower cost, substitute materials may cause significant fluctuations in future results as our customers opt for a lower cost alternative.
 
We change prices on our products as we deem necessary. In addition to the above general competitive impact, other market conditions and various economic factors beyond our control can adversely affect the timing of our pricing actions. The effects of any pricing actions may be delayed due to long manufacturing lead times or the terms of existing contracts. There is no guarantee that the pricing actions we implement will be effective in maintaining the Company’s profit margin levels.
 
We rely on third parties to supply certain raw materials that are critical to the manufacture of our products and we may not be able to access alternative sources of these raw materials if the suppliers are unwilling or unable to meet our demand.
 
Costs of certain critical raw materials, such as nickel, cobalt, chromium, manganese, molybdenum, titanium, iron and scrap containing iron and nickel have been volatile due to factors beyond our control. We are able to mitigate most of the adverse impact of rising raw material costs through raw material surcharges, indices to customers and raw material forward contracts, but changes in business conditions could adversely affect our ability to recover rapid increases in raw material costs and may adversely affect our results of operations.
 
In addition, the availability of these critical raw materials is subject to factors that are not in our control. In some cases, these critical raw materials are purchased from suppliers operating in countries that may be subject to unstable political and economic conditions.  At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, at prices and other terms acceptable to us, or at all.
 
If suppliers increase the price of critical raw materials or are unwilling or unable to meet our demand, we may not have alternative sources of supply. In addition, to the extent that we have quoted prices to customers and accepted customer orders for products prior to purchasing necessary raw materials, or have existing contracts, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials to our customers.
The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experience delays or shortages in the supply of raw materials. If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation.
 

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Regulations related to conflict minerals could adversely impact our business.
 
The SEC has promulgated final rules mandated by the Dodd-Frank Act regarding disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, in products manufactured by public companies.  These rules require due diligence to determine whether such minerals originated from the Democratic Republic of Congo (the “DRC”) or an adjoining country and whether such minerals helped finance the armed conflict in the DRC.  The Company timely filed its annual conflict minerals report required by the rules on May 19, 2017. There are costs associated with complying with these disclosure requirements going forward, including costs to determine the origin of conflict minerals used in our products. In addition, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products.  Also, we may face disqualification as a supplier for customers and reputational challenges if the due diligence procedures we continue to implement do not enable us to verify the origins for all conflict minerals or to determine that such minerals are DRC conflict-free.
 
We provide benefits to active and retired employees throughout most of our Company, most of which are not covered by insurance; and thus, our financial condition can be adversely affected if our investment returns are insufficient to meet these obligations.
 
We have obligations to provide substantial benefits to active and retired employees, and most of the associated costs are paid by the Company and are not covered by insurance. In addition, certain employees are covered by defined benefit pension plans, with the majority of our plans covering employees in the United States. Benefits accrued to eligible participants of our largest qualified defined benefit pension plan and certain non-qualified pension plans were frozen effective December 31, 2016. Many domestic and international competitors do not provide defined benefit plans and/or retiree health care plans, and other international competitors operate in jurisdictions with government sponsored health care plans that may offer them a cost advantage.  A decline in the value of plan investments in the future, an increase in costs or liabilities or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding. A requirement to accelerate or increase pension contributions in the future could have a material adverse effect on our results of operations and financial condition.
 
The extensive environmental, health and safety regulatory regimes applicable to our manufacturing operations create potential exposure to significant liabilities.
 
The nature of our manufacturing business subjects our operations to numerous and varied federal, state, local and international laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. We have used, and currently use and manufacture, substantial quantities of substances that are considered hazardous, extremely hazardous or toxic under worker safety and health laws and regulations. Although we implement controls and procedures designed to reduce continuing risk of adverse impacts and health and safety issues, we could incur substantial cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations, non-compliance or liabilities under these regulatory regimes required at our facilities.
We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a potentially responsible party (“PRP”) with respect to certain third party Superfund or similar waste disposal sites and other third party owned sites. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. From time to time, we are a party to lawsuits and other proceedings involving alleged violations of, or liabilities arising from, environmental laws.
 
When our liability is probable and we can reasonably estimate our costs, we record environmental liabilities in our financial statements. However, in many cases, we are not able to determine whether we are liable, or if liability is probable, in order to reasonably estimate the loss or range of loss which could result from such environmental liabilities. Estimates of our liability remain subject to additional uncertainties, including the nature and extent of site contamination, available remediation alternatives, the extent of corrective actions that may be required, and the number and financial condition of other PRPs, as well as the extent of their responsibility for the remediation. We adjust our accruals to reflect new information as appropriate. Future adjustments could have a material adverse effect on our results of operations in a given period, but we cannot reliably predict the amounts of such future adjustments. Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our financial condition, cash flows or results of operations.
 

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Our manufacturing processes, and the manufacturing processes of many of our suppliers and customers, are energy intensive and generate carbon dioxide and other “Greenhouse Gases”, and pending legislation or regulation of Greenhouse Gases, if enacted or adopted in an onerous form, could have a material adverse impact on our results of operations, financial condition and cash flows.
 
Political and scientific debates related to the impacts of greenhouse gas emissions on the global climate are prevalent. Regulation or some form of legislation aimed at reducing the greenhouse gas emissions is currently being considered both in the United States and globally.  As a specialty alloy manufacturer, we will be affected, both directly and indirectly, if climate change legislation, such as use of a “cap and trade” and the recently signed Paris climate accord, is enacted and implemented. Such legislation could have a material adverse impact on our results of operations, financial condition and cash flows.
 
Product liability and product quality claims could adversely affect our operating results.
 
We produce ultra-high strength, high temperature and corrosion-resistant alloys designed for our customers’ demanding applications particularly in our Aerospace and Defense, Energy and Medical end-use markets. Failure of the materials that are included in our customers’ applications could give rise to substantial product liability claims. There can be no assurance that our insurance coverage will be adequate or continue to be available on terms acceptable to us.  We have a complex manufacturing process necessary to meet our customers’ stringent product specifications. We are also required to adhere to various third party quality certifications and perform sufficient internal quality reviews to ensure compliance with established standards. If we fail to meet the customer specifications for their products, we may be subject to product quality costs and claims. These costs are generally not insured. The impacts of product liability and quality claims could have a material adverse impact on the results of our operations, financial condition and cash flows.
Our business subjects us to risks of litigation claims, as a routine matter, and this risk increases the potential for a loss that might not be covered by insurance.
 
Litigation claims relate to the conduct of our currently and formerly owned businesses, including claims pertaining to product liability, commercial disputes, employment actions, employee benefits, compliance with domestic and federal laws, personal injury, patent infringement and tax issues. Due to the uncertainties of litigation, we can give no assurance that we will prevail on claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. The outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to us.  The resolution in any reporting period of one or more of these matters could have a material adverse effect on our results of operations for that period. We can give no assurance that any other matters brought in the future will not have a material effect on our results of operations, financial condition and cash flows.
 
A portion of our workforce is covered by collective bargaining agreements and union attempts to organize our other employees may cause work interruptions or stoppages.
 
Approximately 130 production employees at our Dynamet business unit located in Washington, Pennsylvania are covered by a collective bargaining agreement.  This agreement expires in August 2019.  Approximately 440 production employees at our Latrobe business unit located in Latrobe, Pennsylvania are covered by a collective bargaining agreement.  This agreement expires in August 2020.  There can be no assurance that we will succeed in concluding collective bargaining agreements with the unions to replace those that expire. From time to time, the employees at our manufacturing facility in Reading, Pennsylvania, participate in election campaigns or union organizing attempts. There is no guarantee that future organization attempts will not result in union representation.
 
Our manufacturing processes are complex and depend upon critical, high cost equipment for which there may be only limited or no production alternatives.
 
It is possible that we could experience prolonged periods of reduced production due to unplanned equipment failures, and we could incur significant repair or replacement costs in the event of those failures.  It is also possible that operations could be disrupted due to other unforeseen circumstances such as power outages, explosions, fires, floods, accidents and severe weather conditions.  We must make regular, substantial capital investments and changes to our manufacturing processes to lower production costs, improve productivity, manufacture new or improved products and remain competitive. We may not be in a position to take advantage of business opportunities or respond to competitive pressures if we fail to update, replace or make additions to our equipment or our manufacturing processes in a timely manner.  The cost to repair or replace much of our equipment or facilities would be significant.  We cannot be certain that we will have sufficient internally generated cash or acceptable external financing to make necessary capital expenditures in the future.
 

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A significant portion of our manufacturing and production facilities are located in Reading and Latrobe, Pennsylvania and Athens, Alabama, which increases our exposure to significant disruption to our business as a result of unforeseeable developments in these geographic areas.
 
It is possible that we could experience prolonged periods of reduced production due to unforeseen catastrophic events occurring in or around our manufacturing facilities in Reading and Latrobe, Pennsylvania and Athens, Alabama. As a result, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers, meet customer shipment needs or address other severe consequences that may be encountered.  Our financial condition, cash flows and results of operations could be materially adversely affected.

We rely on third parties to supply energy consumed at each of our energy-intensive production facilities.
 
The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions or lack of availability in the supply of energy resources could temporarily impair the ability to operate our production facilities. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, has affected and may continue to adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations, financial condition and cash flows.
 
We consider acquisitions, joint ventures and other business combination opportunities, as well as possible business unit dispositions, as part of our overall business strategy, that involve uncertainties and potential risks that we cannot predict or anticipate fully.
 
From time to time, management holds discussions with management of other companies to explore such aforementioned opportunities. As a result, the relative makeup of the businesses comprising our Company is subject to change. Acquisitions, joint ventures and other business combinations involve various inherent risks. Such risks include difficulties in integrating the operations, technologies, products and personnel of the acquired companies, diversion of management’s attention from existing operations, difficulties in entering markets in which we have limited or no direct prior experience, dependence on unfamiliar supply chains, insufficient revenues to offset increased expenses associated with acquisitions, loss of key employees of the acquired companies, inaccurate assessment of undisclosed liabilities, difficulties in realizing projected efficiencies, synergies and cost savings, and increases in our debt or limitation on our ability to access additional capital when needed.
 
Our business may be impacted by external factors that we may not be able to control.
 
War, civil conflict, terrorism, natural disasters and public health issues including domestic or international pandemic have caused and could cause damage or disruption to domestic or international commerce by creating economic or political uncertainties. Additionally, the volatility in the financial markets could negatively impact our business. These events could result in a decrease in demand for our products, affect the availability of credit facilities to us, our customers or other members of the supply chain necessary to transact business, make it difficult or impossible to deliver orders to customers or receive materials from suppliers, affect the availability or pricing of energy sources or result in other severe consequences that may or may not be predictable. As a result, our business, financial condition and results of operations could be materially adversely affected.
 
We believe that international sales, which are associated with various risks, will continue to account for a significant percentage of our future revenues .
 
Risks associated with international sales include without limitation: political and economic instability, including weak conditions in the world’s economies; difficulty in collecting accounts receivable; unstable or unenforced export controls; changes in legal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws and tariffs; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on international sales when converted into dollars). In addition, we will need to invest in building our capabilities and infrastructure to meet our international growth goals. Any of these factors could materially adversely affect our results for the period in which they occur.

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We value most of our inventory using the LIFO method, which could be repealed resulting in adverse effects on our cash flows and financial condition.
 
The cost of our inventories is primarily determined using the Last-In, First-Out (“LIFO”) method. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials and other costs may have been incurred at significantly different values due to the length of time of our production cycle. Generally in a period of rising prices, LIFO recognizes higher costs of goods sold, which both reduces current income and assigns a lower value to the year-end inventory.  Recent proposals have been aimed at repealing the election to use the LIFO method for income tax purposes. According to these proposals, generally taxpayers that currently use the LIFO method would be required to revalue their LIFO inventory to its First-In, First-Out (“FIFO”) value. As of June 30, 2017 , if the FIFO method of inventory had been used instead of the LIFO method, our inventories would have been approximately $106 million higher. This increase in inventory would result in a one-time increase in taxable income which may be taken into account over the following several taxable years. The repeal of the LIFO method could result in a substantial tax liability which could adversely impact our cash flows and financial condition.
 
We depend on the retention of key personnel.
 
Much of our future success depends on the continued service and availability of skilled personnel, including members of our executive management team, management, metallurgists and production positions. The loss of key personnel could adversely affect our ability to perform until suitable replacements are found.
 
We could be adversely impacted if our information technology (“IT”) and computer systems do not perform properly or if we fail to protect the integrity of confidential data.
 
Management relies extensively on IT infrastructure, including hardware, network, software, people and processes, to provide useful information to conduct our business and support assessments and conclusions about operating performance. Our inability to produce relevant and/or reliable measures of operating performance in an efficient, cost-effective and well-controlled fashion may have significant negative impacts on our future operations. In addition, any material failure, interruption of service, or compromised data security could adversely affect our operations. Security breaches in our information technology could result in theft, destruction, loss, misappropriation or release of confidential data or intellectual property which could adversely impact our future results.

We are in the process of implementing a new enterprise resource planning system and problems with the design or implementation of this system could interfere with our business and operations.

We are engaged in a multi-year implementation of a global enterprise resource planning (ERP) system. The new ERP system will replace multiple current business systems and is being designed to improve manufacturing planning, development and processes, accurately maintain books and records, record transactions and provide important information of the operations of our business to our management. The implementation of the new ERP system has required, and will continue to require, the investment of significant financial resources as well as a considerable allocation of personnel for the project. Any disruptions, delays or deficiencies in the design and implementation of the new ERP system may result in increased costs and other difficulties that could adversely affect our financial condition and results of operations.
 
The carrying value of goodwill and other intangible assets may not be recoverable.
 
Goodwill and other long-lived assets including property, plant and equipment and other intangible assets are recorded at fair value on the date of acquisition. We review these assets at least annually for impairment. Impairment may result from, among other things, deterioration in performance, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other factors. Any future impairment of goodwill or other long-lived assets could have a material adverse effect on our results of operations.

Item 1B.  Unresolved Staff Comments
 
None.


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Item 2.  Properties
 
The principal locations of our primary domestic integrated mills in our SAO segment are located in Reading and Latrobe, Pennsylvania and Athens, Alabama. In addition, SAO manufactures large diameter hollow bar in Orwigsburg, Pennsylvania and Elyria, Ohio and operates a mini mill manufacturing stainless steel bar and wire in Hartsville, South Carolina. The principal locations for PEP businesses include titanium alloy production facilities located in Washington, Pennsylvania and Clearwater, Florida, powder products manufacturing facilities in Bridgeville, Pennsylvania, Athens, Alabama, Woonsocket, Rhode Island and Bruceton Mills, West Virginia and a facility in Houston, Texas for manufacturing of machined components used in the drilling, exploration and production of oil and gas. The PEP segment also includes domestic leased warehouses and service centers located in Houston, Texas; San Antonio, Texas; Midland, Texas; Oklahoma City, Oklahoma; Casper, Wyoming; Lafayette, Louisiana; West Alexander, Pennsylvania; Vienna, Ohio and Chicago, Illinois. The PEP segment includes one owned service center in White House, Tennessee.

The Reading, Hartsville, Washington, Bridgeville, Orwigsburg, Elyria, Woonsocket, Latrobe, Houston and Athens facilities are owned.  The Clearwater facility is owned, but the land is leased.

We also own or lease manufacturing facilities, distribution centers, service centers and sales offices in a number of foreign countries, including Sweden, Canada, Singapore, China, Mexico, Taiwan, the United Arab Emirates, the United Kingdom and Belgium.

Our corporate offices, located in Philadelphia, Pennsylvania, are leased.

Our plants, customer service centers and distribution centers were acquired or leased at various times over several years.  There is an active maintenance program to ensure a safe operating environment and to keep facilities in good condition.  In addition, we have an active capital spending program to replace equipment as needed to keep it technologically competitive on a worldwide basis.  We believe our facilities are in good condition and suitable for our business needs.
Item 3.  Legal Proceedings
 
From time to time, we are a party to lawsuits and other proceedings involving alleged violations of, or liabilities arising from, environmental laws.  We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a PRP with respect to certain third party Superfund or similar waste disposal sites and other third party owned sites. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us.  Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRP’s.  Based upon information currently available, such future costs are not expected to have a material effect on our financial position, results of operations or cash flows over the long-term. However, such costs could be material to our financial position, results of operations or cash flows in a particular future quarter or year.
 
In addition, from time to time, we are a party to certain routine claims and legal actions and other contingent liabilities incident to the normal course of business which pertain to litigation, product claims, commercial disputes, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims, patent infringement and tax issues.  Based on information currently available, the ultimate resolution of our known contingencies, individually or in the aggregate and including the matters described in Note 11 to the consolidated financial statements in this Form 10-K, is not expected to have a material adverse effect on our financial position, cash flows or results of operations.  However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to our financial position, results of operations or cash flows in a particular future quarter or year.
See the “Contingencies” section included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation”, and the “Contingencies and Commitments” section included in Note 11 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”, included in this Form 10-K, the contents of which are incorporated by reference to this Item 3.

Item 4. Mine Safety Disclosures
 
Not applicable. 


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Item 4A.  Executive Officers of the Registrant
 
Listed below are the names of our corporate executive officers, including those required to be listed as executive officers for SEC purposes, each of whom assumes office after the annual organization meeting of the Board of Directors which immediately follows the Annual Meeting of Stockholders.
 
Tony R. Thene was appointed President and Chief Executive Officer effective July 1, 2015. Since joining Carpenter in January 2013, Mr. Thene served as the Senior Vice President and Chief Financial Officer.  Mr. Thene joined Carpenter after 23 years with Alcoa Inc., a leading producer of primary and fabricated aluminum, holding various management positions.

Damon J. Audia was appointed Senior Vice President and Chief Financial Officer effective October 19, 2015. Mr. Audia joined Carpenter from The Goodyear Tire & Rubber Company where he worked for ten years and most recently served as Senior Vice President of Finance for the company's North America division.
 
Joseph E. Haniford was appointed Senior Vice President and Chief Operating Officer effective June 30, 2016. Since joining Carpenter in July 2015, Mr. Haniford served as Senior Vice President - Specialty Alloys Operations. Mr. Haniford joined Carpenter from EnTrans International where he was responsible for all operations as the company's Chief Operating Officer and was a member of the Board of Directors. Prior to EnTrans International, Mr. Haniford worked for Alcoa, Inc. for more than 30 years in various executive leadership positions.

James D. Dee was appointed Vice President, General Counsel and Secretary effective September 13, 2010. Mr. Dee joined Carpenter from C&D Technologies where he last served as Senior Vice President, General Counsel, Secretary and Chief Administrative Officer at C&D Technologies. Prior to his tenure at C&D Technologies, Mr. Dee was employed by the law firm of Montgomery, McCracken, Walker & Rhodes, LLP. He also worked 16 years at SPS Technologies, Inc., where he last served as Vice President, General Counsel and Secretary.

 
 
 
 
 
 
Assumed
Present
Position
Name
 
Age
 
Position
 
Tony R. Thene
 
56
 
President and Chief Executive Officer
 
July 2015
 
 
 
 
 
 
 
Damon J. Audia
 
46
 
Senior Vice President and Chief Financial Officer
 
October 2015
 
 
 
 
 
 
 
Joseph E. Haniford
 
58
 
Senior Vice President and Chief Operating Officer
 
June 2016
 
 
 
 
 
 
 
James D. Dee
 
60
 
Vice President, General Counsel and Secretary
 
September 2010

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PART II
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is listed on the New York Stock Exchange (“NYSE”) and traded under the symbol “CRS”. The following table sets forth, for the periods indicated, the high and low prices for our common stock as reported by the NYSE:
 
 
 
Fiscal Year 2017
 
Fiscal Year 2016
Quarter Ended:
 
High
 
Low
 
High
 
Low
September 30,
 
$
42.25

 
$
32.44

 
$
41.25

 
$
29.18

 
 
 
 
 
 
 
 
 
December 31,
 
$
42.27

 
$
30.37

 
$
37.18

 
$
27.55

 
 
 
 
 
 
 
 
 
March 31,
 
$
45.34

 
$
34.50

 
$
36.18

 
$
23.99

 
 
 
 
 
 
 
 
 
June 30,
 
$
41.50

 
$
34.24

 
$
38.16

 
$
28.74

 
 
 
 
 
 
 
 
 
Annual
 
$
45.34

 
$
30.37

 
$
41.25

 
$
23.99

 
The range of our common stock price on the NYSE from July 3, 2017 to August 8, 2017 was $36.96 to $40.62.  The closing price of the common stock was $39.15 on August 8, 2017.
 
We have paid quarterly cash dividends on our common stock for over 120 consecutive years. We paid a quarterly dividend of $0.18 per share of common stock during each quarter of fiscal years 2017 and 2016 .
 
As of August 8, 2017, there were 2,227 common stockholders of record.
 
Information regarding Securities Authorized for Issuance under Equity Compensation Plans is set forth in Item 12 hereto “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.

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Cumulative Total Stockholder Return
 
The graph below compares the cumulative total stockholder return on our common stock to the cumulative total return of the S&P MidCap 400 Index, the most widely used index for mid-sized companies, and our Peer Group, for each of the last five fiscal years ended June 30, 2017 . The cumulative total return assumes an investment of $100 on June 30, 2012 and the reinvestment of any dividends during the period. Our Peer Group consists of the companies in the Russell RSCC Materials & Processing Growth Index. We believe the companies included in our Peer Group, taken as a whole, provide a more meaningful comparison in terms of product offerings, markets served, competition and other relevant factors.  The total stockholder return for the peer group is weighted according to the respective issuer’s stock market capitalization at the beginning of each period.
A5YRTOTALRETURNTABLEUPDATED2.JPG
 
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
Carpenter Technology Corporation
 
$
100.00

 
$
95.60

 
$
137.60

 
$
99.70

 
$
86.70

 
$
102.40

S&P Midcap 400
 
$
100.00

 
$
125.10

 
$
149.70

 
$
156.10

 
$
157.40

 
$
175.90

Russell Materials & Processing Growth
 
$
100.00

 
$
118.10

 
$
145.90

 
$
149.40

 
$
151.20

 
$
177.20


Issuer Purchases of Equity Securities

On October 14, 2016, the Company issued 56,217 shares of its common stock to Hans J. Sack in connection with the settlement of certain litigation between him and the Company. This issuance of securities was not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act, as it was an issuance not involving any “public offering.”
Employees surrendered 5,977 shares to the Company, at an average purchase price of $37.45, during the fourth quarter of fiscal year 2017, for the payment of the minimum tax liability withholding obligations upon the vesting of shares of restricted stock and the exercise of options. We do not consider this a share buyback program.

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Item 6.  Selected Financial Data

Five-Year Financial Summary
in millions, except per share data
(Fiscal years ended June 30,)

 
 
2017(a)
 
2016(b)(d)
 
2015(c)(d)
 
2014
 
2013
Summary of Operations:
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
1,797.6

 
$
1,813.4

 
$
2,226.7

 
$
2,173.0

 
$
2,271.7

Operating income
 
$
97.2

 
$
51.6

 
$
111.5

 
$
212.0

 
$
232.7

Net income
 
$
47.0

 
$
11.3

 
$
58.7

 
$
132.8

 
$
146.5

Financial Position at Year-End:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
66.3

 
$
82.0

 
$
70.0

 
$
120.0

 
$
257.5

Total assets
 
$
2,878.1

 
$
2,794.3

 
$
2,902.6

 
$
3,053.7

 
$
2,878.6

Long-term debt, net of current portion
 
$
550.0

 
$
611.3

 
$
603.8

 
$
600.5

 
$
599.9

Per Common Share:
 
 

 
 

 
 

 
 

 
 

Net earnings:
 
 

 
 

 
 

 
 

 
 

Basic
 
$
0.99

 
$
0.23

 
$
1.11

 
$
2.48

 
$
2.75

Diluted
 
$
0.99

 
$
0.23

 
$
1.11

 
$
2.47

 
$
2.73

Cash dividend-common
 
$
0.72

 
$
0.72

 
$
0.72

 
$
0.72

 
$
0.72

Weighted Average Common Shares Outstanding:
 
 

 
 

 
 

 
 

 
 

Basic
 
47.0

 
48.1

 
52.6

 
53.3

 
52.9

Diluted
 
47.1

 
48.2

 
52.7

 
53.6

 
53.2

 
(a) Fiscal year 2017 included $3.2 million of loss on divestiture of business. See Note 2 in the Notes to the Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data” of this report.

(b) Fiscal year 2016 included $22.5 million of excess inventory write-down charges, $12.5 million of goodwill impairment charges and $18.0 million of restructuring and impairment charges including $7.6 million of impairment of intangible assets and property, plant and equipment and $10.4 million of restructuring costs related primarily to an early retirement incentive and other severance related costs. See Note 3 in the Notes to the Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data” of this report.

(c) Fiscal year 2015 included $29.1 million of restructuring costs related principally to workforce reduction, facility closures and write-down of certain assets. See Note 3 in the Notes to the Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data” of this report.
 
(d) The weighted average common shares outstanding for fiscal years 2016 and 2015 included 5.5 million and 0.9 million less shares, respectively, related to the share repurchase program authorized in October 2014. During the year ended June 30, 2016 and 2015, we repurchased 3,762,200 shares and 2,995,272 shares, respectively, of common stock for $123.9 million and $124.5 million, respectively.


See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion of factors that affect the comparability of the “Selected Financial Data”.

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Background and General
 
Our discussions below in this Item 7 should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this annual report on Form 10-K.
 
We are 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. Our high-performance materials and advanced process solutions are an integral part of critical applications used within the aerospace, transportation, medical and energy markets, among other sectors. Building on our history of innovation, our superalloy and titanium powder technologies support a range of next-generation products and manufacturing techniques, including additive manufacturing or 3D printing. 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.  Our sales are distributed directly from our production plants and distribution network as well as through independent distributors. Unlike many other specialty steel producers, we operate our own worldwide network of service and distribution centers. These service centers, located in the United States, Canada, Mexico, Europe and Asia allow us to work more closely with customers and to offer various just-in-time stocking programs.
    
As part of our overall business strategy, we have sought out and considered opportunities related to strategic acquisitions, divestitures and joint collaborations as well as possible business unit dispositions aimed at broadening our offering to the marketplace. We have participated with other companies to explore potential terms and structures of such opportunities and expect that we will continue to evaluate these opportunities.

While we prepare our financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), we also utilize and present certain financial measures that are not based on or included in U.S. GAAP (we refer to these as “Non-GAAP financial measures”).  Please see the section “Non-GAAP Financial Measures” below for further discussion of these financial measures, including the reasons why we use such financial measures and reconciliations of such financial measures to the nearest U.S. GAAP financial measures.
 

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Business Trends
 
Selected financial results for the past three fiscal years are summarized below:
 
 
 
Years Ended June 30,
($ in millions, except per share data)
 
2017
 
2016
 
2015
Net sales
 
$
1,797.6

 
$
1,813.4

 
$
2,226.7


 
 
 
 
 
 
Net sales excluding surcharge revenue (1)
 
$
1,558.4

 
$
1,572.6

 
$
1,811.8


 
 
 
 
 
 
Operating income
 
$
97.2

 
$
51.6

 
$
111.5

 
 
 
 
 
 
 
Operating income excluding pension earnings, interest and deferrals (“pension EID”) expense (1)
 
$
121.0

 
$
70.9

 
$
121.0


 
 
 
 
 
 
Net income
 
$
47.0

 
$
11.3

 
$
58.7


 
 
 
 
 
 
Diluted earnings per share
 
$
0.99

 
$
0.23

 
$
1.11


 
 
 
 
 
 
Purchases of property, equipment and software
 
$
98.5

 
$
95.2

 
$
170.5


 
 
 
 
 
 
Free cash flow (1)
 
$
(17.8
)
 
$
138.6

 
$
74.4


 
 
 
 
 
 
Pounds sold (in thousands) (2)
 
236,346

 
242,560

 
277,482


(1)  See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.
 
(2)  Includes pounds from Specialty Alloys Operations segment, Dynamet and Carpenter Powder Products businesses.

     Our sales are across a diversified list of end-use markets.  The table below summarizes our sales by market over the past three fiscal years:
 
 
 
Years Ended June 30,
 
 
2017
 
2016
 
2015
($ in millions)
 
Dollars
 
% of
Total
 
Dollars
 
% of
Total
 
Dollars
 
% of
Total
Aerospace and Defense
 
$
973.3

 
54
%
 
$
981.5

 
54
%
 
$
1,053.8

 
48
%
Energy
 
138.0

 
8

 
130.6

 
7

 
285.6

 
13

Transportation
 
143.9

 
8

 
160.6

 
8

 
171.0

 
7

Medical
 
125.5

 
7

 
121.5

 
7

 
129.4

 
6

Industrial and Consumer
 
298.2

 
17

 
300.9

 
17

 
450.0

 
20

Distribution
 
118.7

 
6

 
118.3

 
7

 
136.9

 
6

Total net sales
 
$
1,797.6

 
100
%
 
$
1,813.4

 
100
%
 
$
2,226.7

 
100
%


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Impact of Raw Material Prices and Product Mix
 
We value most of our inventory utilizing LIFO inventory costing methodology. Under the LIFO inventory costing method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials may have been acquired at potentially significantly different values due to the length of time from the acquisition of the raw materials to the sale of the processed finished goods to the customers. In a period of rising raw material costs, the LIFO inventory valuation normally results in higher cost of sales. Conversely, in a period of decreasing raw material costs, the LIFO inventory valuation normally results in lower cost of sales.
The volatility of the costs of raw materials has impacted our operations over the past several years.  We, and others in our industry, generally have been able to pass cost increases on major raw materials through to our customers using surcharges that are structured to recover increases in raw material costs.  Generally, the formula used to calculate a surcharge is based on published prices of the respective raw materials for the previous month which correlates to the prices we pay for our raw material purchases. However, a portion of our surcharges to customers may be calculated using a different surcharge formula or may be based on the raw material prices at the time of order, which creates a lag between surcharge revenue and corresponding raw material costs recognized in cost of sales.  The surcharge mechanism protects our net income on such sales except for the lag effect discussed above. However, surcharges have had a dilutive effect on our gross margin and operating margin percentages as described later in this report.
 
Approximately 30 percent of our net sales are sales to customers under firm price sales arrangements. Firm price sales arrangements involve a risk of profit margin fluctuations, particularly when raw material prices are volatile.  In order to reduce the risk of fluctuating profit margins on these sales, we enter into commodity forward contracts to purchase certain critical raw materials necessary to produce the related products sold.  Firm price sales arrangements generally include certain annual purchasing commitments and consumption schedules agreed to by the customers at selling prices based on raw material prices at the time the arrangements are established. If a customer fails to meet the volume commitments (or the consumption schedule deviates from the agreed-upon terms of the firm price sales arrangements), the Company may need to absorb the gains or losses associated with the commodity forward contracts on a temporary basis. Gains or losses associated with commodity forward contracts are reclassified to earnings/loss when earnings are impacted by the hedged transaction. Because we value most of our inventory under the LIFO costing methodology, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period attempting to match the most recently incurred costs with revenues. Gains and/or losses on the commodity forward contracts are reclassified from other comprehensive income 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.
Net Pension Expense
 
Net pension expense, as we define it below, includes the net periodic benefit costs related to both our pension and other postretirement plans. The net periodic benefit costs are determined annually based on beginning of year balances and are recorded ratably throughout the fiscal year, unless a significant re-measurement event occurs.  The following is a summary of the net periodic benefit costs for the years ended June 30, 2017, 2016 and 2015:
 
 
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Pension plans
 
$
45.8

 
$
50.9

 
$
34.5

Other postretirement plans
 
2.6

 
2.9

 
10.0

Net periodic benefit costs
 
$
48.4

 
$
53.8

 
$
44.5

 

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In September 2016, we announced changes to retirement plans we offer to certain employees. Benefits accrued to eligible participants of our largest qualified defined benefit pension plan and certain non-qualified pension plans were frozen effective December 31, 2016. Approximately 1,900 affected employees were transitioned to the Company’s 401(k) plan that has been in effect for eligible employees since 2012, when the pension plan was closed to new entrants. We recognized the plan freeze during fiscal year 2017 as a curtailment, since it eliminated the accrual for a significant number of participants for all of their future services. We also made a voluntary pension contribution of  $100 million  to the affected plan in October 2016. 
 
The service cost component of net pension expense represents the estimated cost of future pension liabilities earned associated with active employees. The pension earnings, interest and deferrals (“pension EID”) is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans and amortization of actuarial gains and losses and prior service costs.

During the year ended June 30, 2016, we offered an early retirement incentive to certain employees. The cost of this early retirement incentive totaled $9.4 million and was paid from the Company’s qualified pension plan.
     
During the year ended June 30, 2015, in connection with a restructuring plan, we reduced approximately 200 salaried positions. As a result, $8.3 million was paid from the Company’s qualified pension plan consisting primarily of various personnel-related costs to cover severance payments and medical coverage.

Net pension expense is recorded in accounts that are included in both the cost of sales and selling, general and administrative expenses based on the function of the associated employees.  The following is a summary of the classification of net pension expense for the years ended June 30, 2017 , 2016 and 2015 :
 
 
 
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Cost of sales
 
 

 
 

 
 

Service cost
 
$
20.2

 
$
28.1

 
$
29.3

Pension earnings, interest and deferrals
 
16.5

 
13.2

 
5.0

      Total cost of sales
 
36.7

 
41.3

 
34.3

Selling, general and administrative expenses
 
 

 
 

 
 

Service cost
 
3.9

 
6.4

 
7.3

Pension earnings, interest and deferrals
 
7.3

 
6.1

 
4.5

Curtailment charge (benefit)
 
0.5

 

 
(1.6
)
      Total selling, general and administrative expenses
 
11.7

 
12.5

 
10.2

Net pension expense
 
$
48.4

 
$
53.8

 
$
44.5

 
As of June 30, 2017 and 2016, amounts capitalized in gross inventory were $3.4 million and $10.6 million, respectively.
Operating Performance Overview
 
Overall, fiscal year 2017 was a successful year for Carpenter as we continued building a foundation for long-term sustainable growth. More specifically, we executed our updated strategy and made notable progress in the following areas:

We began to see the benefits of our realigned commercial team and market-focused sales approach, as evidenced by achieving share gains across our end-use markets and delivering consistent backlog growth and increasing booking rates. We also took advantage of improving market conditions across most of our end-use markets in the second half of the fiscal year.

We advanced our productivity and cost reduction plan through the further roll-out of the Carpenter Operating Model in our PEP businesses. In addition, the Carpenter Operating Model helped to reduce our SAO variable costs by approximately 3 percent as compared to the prior year.


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Table of Contents

We invested in new technology and capabilities to further strengthen our solutions portfolio. These investments in core growth areas include most notably in fiscal year 2017 the addition of titanium powder as a result of the Puris acquisition.

We have actively managed our business and remain in solid financial position. In fiscal 2017, we refinanced our existing credit facility. We also acted to reduce our pension liabilities moving forward by freezing our largest defined benefit pension plan in addition to a $100 million voluntary pension contribution. In addition, we divested a business that did not fit our core strategic direction for cash proceeds of $12 million.

Results of Operations — Fiscal Year 2017 Compared to Fiscal Year 2016
 
For fiscal year 2017 , we reported net income of $47.0 million , or $0.99 per diluted share, compared with net income of $11.3 million , or $0.23 per diluted share, a year earlier.  Our fiscal year 2017 results reflect operating cost improvements driven by the implementation of the Carpenter Operating Model and improving market conditions in many of our end-use markets. In the Aerospace and Defense end-use market, we experienced increasing demand for our products across our diversified sub-markets, especially engines, where we saw strong order flows related to the next generation engines. We experienced similar momentum across other markets, such as the oil and gas sub-market, where our Amega West business continues to benefit from our investments in new products over the last several years. In addition, we saw stronger demand in both the Aerospace and Medical end-use markets for our titanium solutions. Our fiscal year 2016 results reflect non-cash impairment charges consisting of excess inventory write-down totaling $22.5 million, goodwill impairment charges totaling $12.5 million and impairment of intangible assets and property, plant and equipment charges totaling $7.6 million.

Net Sales
 
Net sales for fiscal year 2017 were $1,797.6 million , which was a 1 percent decrease from fiscal year 2016 . Excluding surcharge revenue, sales were 1 percent lower than fiscal year 2016 on 3 percent lower volume.  The results reflect demand challenges in the first half of fiscal year 2017 offset by the improving demand conditions in the second half of fiscal year 2017 driven by the Aerospace and Defense end-use market. The year over year performance was also impacted by reduced ongoing weakness in demand for material used in the Transportation end-use market.
 
Geographically, sales outside the United States increased 5 percent from fiscal year 2016 to $599.3 million . The increase is primarily due to sales to Europe in the Aerospace and Defense end-use market. A portion of our sales outside the United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a $5.1 million decrease in sales during the fiscal year 2017 compared to fiscal year 2016. International sales as a percentage of our total net sales represented 33 percent and 31 percent for fiscal year 2017 and fiscal year 2016 , 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.
 
 
 
Fiscal Year
 
$
Increase
(Decrease)
 
%
Increase
(Decrease)
($ in millions)
 
2017
 
2016
Aerospace and Defense
 
$
973.3

 
$
981.5

 
$
(8.2
)
 
(1
)%
Energy
 
138.0

 
130.6

 
7.4

 
6
 %
Transportation
 
143.9

 
160.6

 
(16.7
)
 
(10
)%
Medical
 
125.5

 
121.5

 
4.0

 
3
 %
Industrial and Consumer
 
298.2

 
300.9

 
(2.7
)
 
(1
)%
Distribution
 
118.7

 
118.3

 
0.4

 
 %
Total net sales
 
$
1,797.6

 
$
1,813.4

 
$
(15.8
)
 
(1
)%

20


The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
 
 
 
Fiscal Year
 
$
Increase (Decrease)
 
%
Increase
(Decrease)
($ in millions)
 
2017
 
2016
 
Aerospace and Defense
 
$
817.1

 
$
823.1

 
$
(6.0
)
 
(1
)%
Energy
 
124.2

 
115.3

 
8.9

 
8
 %
Transportation
 
122.7

 
136.8

 
(14.1
)
 
(10
)%
Medical
 
115.7

 
114.5

 
1.2

 
1
 %
Industrial and Consumer
 
260.7

 
265.2

 
(4.5
)
 
(2
)%
Distribution
 
118.0

 
117.7

 
0.3

 
 %
Total net sales excluding surcharge revenue
 
$
1,558.4

 
$
1,572.6

 
$
(14.2
)
 
(1
)%
 
Sales to the Aerospace and Defense market decreased 1 percent from fiscal year 2016 to $973.3 million . Excluding surcharge revenue, sales were decreased 1 percent on 2 percent lower shipment volume. The results reflect the impact of increased new engine platform demand offset by a decrease in sales of material used for fasteners, structural and distribution applications due to supply chain consolidation.
  
Sales to the Energy market of $138.0 million reflected a 6 percent increase from fiscal year 2016 . Excluding surcharge revenue, sales increased 8 percent on 8 percent higher shipment volume. The results reflect strong demand for power generation materials during the first half of fiscal year 2017. In addition, we experienced an increase in demand during the second half of fiscal year 2017 driven by improved rental activity within the oil and gas businesses.  The North American quarterly average directional and horizontal rig count, an indicator of drilling activity, increased 123 percent from the same period a year ago.
 
Transportation market sales decreased 10 percent from fiscal year 2016 to $143.9 million . Excluding surcharge revenue, sales decreased 10 percent on 14 percent lower shipment volume. The results reflect the impact of weaker demand as a result of ongoing weakness in production of passenger car and heavy duty on-road and off-road trucks.

Sales to the Medical market sales increased 3 percent to $125.5 million from fiscal year 2016 . Excluding surcharge revenue, sales increased 1 percent on 2 percent higher shipment volume. The results reflect improving demand for materials used in cardiology and orthopedics applications in addition to more normalized buying patterns by distributors and OEMs as supply chain inventory levels appear to be stabilizing.

Industrial and Consumer market sales decreased 1 percent to $298.2 million for fiscal year 2017 . Excluding surcharge revenue, sales decreased 2 percent on flat shipment volume.  The results reflect the impact of strong demand for materials used in consumer electronics, pumps, valves and fittings during the second half of fiscal year 2017 offset by weaker demand for industrial tooling.

Gross Profit
 
Gross profit in fiscal year 2017 increased to $284.3 million , or 15.8 percent of net sales from $255.9 million , or 14.1 percent of net sales for fiscal year 2016 . During the year ended June 30, 2016, we recorded a $22.5 million excess inventory adjustment in our oil and gas businesses within the PEP segment due to the prolonged weakness in oil and gas businesses. Excluding the impacts of the excess inventory write-down and surcharge revenue, our gross margin in fiscal year 2017 was 18.2 percent compared to 17.7 percent in fiscal year 2016. The results reflect the impact of weaker demand across all end-use markets during the first half of fiscal year 2017 offset by improving demand conditions in the second half of fiscal year 2017 and operating cost improvements compared to the same period a year ago.


21


Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin excluding the impact of the excess inventory write-down. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.
 
 
 
Fiscal Year
($ in millions)
 
2017
 
2016
Net sales
 
$
1,797.6

 
$
1,813.4

Less: surcharge revenue
 
239.2

 
240.8

Net sales excluding surcharge revenue
 
$
1,558.4

 
$
1,572.6

 
 
 
 
 
Gross profit
 
$
284.3

 
$
255.9

Excess inventory write-down
 

 
22.5

Gross profit excluding the excess inventory write-down
 
$
284.3

 
$
278.4

 
 
 
 
 
Gross margin
 
15.8
%
 
14.1
%
 
 
 
 
 
Gross margin excluding surcharge revenue and excess inventory write-down
 
18.2
%
 
17.7
%
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses in fiscal year 2017 were $183.9 million , or 10.2 percent of net sales ( 11.8 percent of net sales excluding surcharge revenue), compared to $173.8 million , or 9.6 percent of net sales ( 11.1 percent of net sales excluding surcharge revenue), in fiscal year 2016 . Selling, general and administrative expenses increased in fiscal year 2017 primarily due to higher variable compensation expense compared to fiscal year 2016.

Restructuring and Asset Impairment Charges
    
During fiscal year 2016, we incurred $18.0 million of restructuring and asset impairment charges. This included $7.6 million of non-cash impairment charges to write down property, plant and equipment and other intangible assets. The remaining $10.4 million consisted primarily of an early retirement incentive that resulted in a reduction of approximately 130 production and maintenance positions. No restructuring and asset impairment charges were incurred during the fiscal year ended June 30, 2017.
    
Activities undertaken in connection with the fiscal year 2016 restructuring plan are complete.

Goodwill Impairment Charge

The Company’s Amega West Services (“Amega”) and Specialty Steel Supply (“SSS”), prior to its divestiture, reporting units within the PEP Segment were significantly impacted by the prolonged weakness in oil and gas drilling and exploration activity driven by depressed oil prices. As a result, during the fiscal year 2016 we recorded an impairment charge of $12.5 million, which represented the entire balance of the goodwill recorded for these reporting units. No goodwill impairment charges were incurred during the fiscal year ended June 30, 2017.
Operating Income
 
Our operating income in fiscal year 2017 increased to $97.2 million , or 5.4 percent of net sales as compared with $51.6 million , or 2.8 percent in net sales in fiscal year 2016 . Excluding surcharge revenue, pension EID and special items, operating margin was 8.0 percent for the fiscal year 2017 and 8.5 percent for the same period a year ago. The decrease in the operating margin reflects the impact of weaker demand during the first half of fiscal year 2017 and higher variable compensation accruals partially offset by improving demand conditions in the second half of fiscal year 2017 and operating cost efficiencies compared to the same period a year ago.

22


 Operating income has been significantly impacted by our pension EID, which may be volatile based on conditions in the financial markets, as well as other special items. The following presents our operating income and operating margin, in each case excluding the impact of surcharge on net sales, pension EID, the loss on divestiture of business, the excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.

 
 
Fiscal Year
($ in millions)
 
2017
 
2016
Net sales
 
$
1,797.6

 
$
1,813.4

Less: surcharge revenue
 
239.2

 
240.8

Net sales excluding surcharge revenue
 
$
1,558.4

 
$
1,572.6

 
 
 
 
 
Operating income
 
$
97.2

 
$
51.6

Pension EID
 
23.8

 
19.3

Operating income excluding pension EID
 
121.0

 
70.9

 
 
 
 
 
Special items:
 
 
 
 
Loss on divestiture of business
 
3.2

 

Pension curtailment charge
 
0.5

 

Excess inventory write-down
 

 
22.5

  Restructuring and asset impairment charges
 

 
18.0

  Goodwill impairment
 

 
12.5

Consulting costs
 

 
9.3

Operating income excluding pension EID and special items
 
$
124.7

 
$
133.2

 
 
 
 
 
Operating margin
 
5.4
%
 
2.8
%
 
 
 
 
 
Operating margin excluding surcharge revenue, pension EID and special items
 
8.0
%
 
8.5
%
 
Interest Expense
 
Fiscal year 2017 interest expense was $29.8 million compared to $28.0 million in fiscal year 2016 . We have used interest rate swaps to achieve a level of floating rate debt to fixed rate debt. Interest expense for fiscal year 2017 includes net gains from interest rate swaps of $1.8 million compared with $2.6 million of net gains from interest rate swaps for the fiscal year 2016.

Other Income (Expense), Net
 
Other income for fiscal year 2017 was $2.8 million as compared with other expense of $2.1 million a year ago. The results reflect positive impacts in foreign exchange gains of $2.0 million and favorable market return on investments used to fund company-owned life insurance contracts and investments held in rabbi trusts of $2.2 million for the current period compared to the same period a year ago.


23


Income Taxes
 
Our effective tax rate (income tax expense as a percent of income before taxes) for fiscal year 2017 was 33.0 percent as compared to 47.4 percent in fiscal year 2016 . As a result of the voluntary pension contribution, income tax expense for fiscal year 2017 includes a tax charge of $2.1 million due to reduced tax benefits for domestic manufacturing claimed in prior periods. The fiscal year 2017 tax rate also includes tax benefits of $0.9 million associated with the repatriation of earnings from one of our foreign subsidiaries and a tax charge of $0.9 million for prior year adjustments in various tax jurisdictions. The fiscal year 2016 tax rate includes the impact of non-cash goodwill impairment charges, a portion of which is non-deductible for tax purposes, as well as a tax charge of $2.8 million recorded as a result of a decision to sell our equity method investment in India. The fiscal year 2016 tax rate also 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 of June 30, 2017, we had $99.1 million of indefinitely reinvested foreign earnings for which we had not provided deferred income taxes. Due to a change in foreign cash requirements for one of our foreign subsidiaries, we changed our intent with regard to indefinite reinvestment of foreign earnings of this subsidiary. As a result of this change, we repatriated $11.5 million of foreign earnings during fiscal year 2017 and recognized associated tax benefits of $0.9 million. The remaining balance of unremitted foreign earnings continues to be indefinitely reinvested.

See Note 17 to the consolidated financial statements in Item 8, “Financial Statements and Supplementary Data” for a full reconciliation of the statutory federal tax rate to the effective tax rates.
Business Segment Results
 
Summary information about our operating results on a segment basis is set forth below. For more detailed segment information, see Note 19 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data”.

 The following table includes comparative information for volumes by business segment:
 
 
 
Fiscal Year
 
Increase
(Decrease)
 
%
Increase
(Decrease)
(Pounds sold, in thousands) 
 
2017
 
2016
 
Specialty Alloys Operations
 
227,744

 
234,296

 
(6,552
)
 
(3
)%
Performance Engineered Products
 
10,902

 
11,626

 
(724
)
 
(6
)%
Intersegment
 
(2,300
)
 
(3,362
)
 
1,062

 
32
 %
Consolidated pounds sold
 
236,346

 
242,560

 
(6,214
)
 
(3
)%

* Pounds sold data for PEP segment includes Dynamet and Carpenter Powder Products businesses only.

The following table includes comparative information for net sales by business segment:

 
 
Fiscal Year
 
$
Increase
(Decrease)
 
%
Increase
(Decrease)
($ in millions) 
 
2017
 
2016
 
Specialty Alloys Operations
 
$
1,461.6

 
$
1,481.0

 
$
(19.4
)
 
(1
)%
Performance Engineered Products
 
366.6

 
358.7

 
7.9

 
2
 %
Intersegment
 
(30.6
)
 
(26.3
)
 
(4.3
)
 
(16
)%
Total net sales
 
$
1,797.6

 
$
1,813.4

 
$
(15.8
)
 
(1
)%


24


The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:

 
 
Fiscal Year
 
$
Increase
(Decrease)
 
%
Increase
(Decrease)
($ in millions) 
 
2017
 
2016
 
Specialty Alloys Operations
 
$
1,221.8

 
$
1,239.6

 
$
(17.8
)
 
(1
)%
Performance Engineered Products
 
365.7

 
357.9

 
7.8

 
2
 %
Intersegment
 
(29.1
)
 
(24.9
)
 
(4.2
)
 
(17
)%
Total net sales excluding surcharge revenue
 
$
1,558.4

 
$
1,572.6

 
$
(14.2
)
 
(1
)%

Specialty Alloys Operations Segment
 
Net sales in fiscal year 2017 for the SAO segment decreased 1 percent to $1,461.6 million , as compared with $1,481.0 million in fiscal year 2016 . Excluding surcharge revenue, net sales decreased 1 percent from a year ago. The fiscal year 2017 net sales reflected 3 percent lower shipment volume as compared to fiscal year 2016 . The results reflect the impact of lower demand primarily in the Aerospace and Defense and Transportation end-use markets in the first half of fiscal year 2017 partially offset by improving demand conditions during the second half of fiscal year 2017 compared to prior year same period.
 
Operating income for the SAO segment in fiscal year 2017 was $172.3 million , or 11.8 percent of net sales ( 14.1 percent of net sales excluding surcharge revenue), compared to $176.9 million , or 11.9 percent of net sales ( 14.3 percent of net sales excluding surcharge revenue), for fiscal year 2016 . The decrease in operating income reflects lower demand in the first half of the fiscal year 2017 partially offset by improving demand conditions during the second half of fiscal year 2017 and cost improvement driven by the implementation of the Carpenter Operating Model compared to prior year same period.
Performance Engineered Products Segment
 
Net sales for fiscal year 2017 for the PEP segment were $366.6 million as compared with $358.7 million for fiscal year 2016 . Excluding surcharge revenue, net sales were increased 2 percent from a year ago. The results reflect the increased net sales in the second half of fiscal year 2017 as a result of improved rental activity within the oil and gas businesses partially offset by lower shipment volume primarily in the Aerospace and Defense end-use market.
 
Operating income for the PEP segment for fiscal year 2017 was $ 8.5 million , or 2.3 percent of net sales, as compared with operating loss of $ 5.5 million , or 1.5 percent of net sales for fiscal year 2016 . The results reflect the improved rental activity within the oil and gas businesses in the second half of fiscal year 2017 and the positive impact of cost reduction initiatives partially offset by lower shipment volume primarily in the Aerospace and Defense end-use market.


Results of Operations — Fiscal Year 2016 Compared to Fiscal Year 2015
 
For fiscal year 2016, we reported net income of $11.3 million, or $0.23 per diluted share, compared with net income of $58.7 million, or $1.11 per diluted share for the fiscal year 2015. Our fiscal year 2016 results reflect operating cost improvements driven by the implementation of the Carpenter Operating Model which were more than offset by the impact of lower volumes principally in our Energy, Industrial and Consumer and Aerospace and Defense end-use markets and non-cash impairment charges related to certain assets in the Company’s oil and gas businesses within the PEP segment. The non-cash impairment charges consist of:

25



Excess inventory write-down charges totaling $22.5 million
Goodwill impairment charges totaling $12.5 million
Impairment of intangible assets and property, plant and equipment charges totaling $7.6 million

In addition, the Company recorded $10.4 million of restructuring charges consisting primarily of an early retirement incentive offered to certain employees funded by the Company’s pension plan.
Net Sales
 
Net sales for fiscal year 2016 were $1,813.4 million, which was a 19 percent decrease from fiscal year 2015. Excluding surcharge revenue, sales were 13 percent lower than fiscal year 2015 on 13 percent lower volume. The results reflect weakness in demand for materials used in the Energy end-use market which also affected order patterns for customers in the Industrial and Consumer end-use market.
 
Geographically, sales outside the United States decreased 12 percent from fiscal year 2015 to $569.9 million. The decrease is primarily due to sales to Asia and Canada in the Energy and Industrial and Consumer end-use markets. In addition, sales to Europe decreased in the Aerospace and Defense, Energy, Medical and Industrial and Consumer end-use markets. A portion of our sales outside the United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a $9.5 million decrease in sales during the fiscal year 2016 compared to fiscal year 2015. International sales as a percentage of our total net sales represented 31 percent and 29 percent for fiscal year 2016 and fiscal year 2015, 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.
 
 
 
Fiscal Year
 
$
Decrease
 
%
Decrease
($ in millions)
 
2016
 
2015
Aerospace and Defense
 
$
981.5

 
$
1,053.8

 
$
(72.3
)
 
(7
)%
Energy
 
130.6

 
285.6

 
(155.0
)
 
(54
)%
Transportation
 
160.6

 
171.0

 
(10.4
)
 
(6
)%
Medical
 
121.5

 
129.4

 
(7.9
)
 
(6
)%
Industrial and Consumer
 
300.9

 
450.0

 
(149.1
)
 
(33
)%
Distribution
 
118.3

 
136.9

 
(18.6
)
 
(14
)%
Total net sales
 
$
1,813.4

 
$
2,226.7

 
$
(413.3
)
 
(19
)%
The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
 
 
 
Fiscal Year
 
$
Increase
(Decrease)
 
%
Increase
(Decrease)
($ in millions)
 
2016
 
2015
 
Aerospace and Defense
 
$
823.1

 
$
823.5

 
$
(0.4
)
 
 %
Energy
 
115.3

 
245.0

 
(129.7
)
 
(53
)%
Transportation
 
136.8

 
130.9

 
5.9

 
5
 %
Medical
 
114.5

 
118.5

 
(4.0
)
 
(3
)%
Industrial and Consumer
 
265.2

 
358.3

 
(93.1
)
 
(26
)%
Distribution
 
117.7

 
135.6

 
(17.9
)
 
(13
)%
Total net sales excluding surcharge revenue
 
$
1,572.6

 
$
1,811.8

 
$
(239.2
)
 
(13
)%
 

26


Sales to the Aerospace and Defense market decreased 7 percent from fiscal year 2015 to $981.5 million. Excluding surcharge revenue, sales were flat on similar shipment volume. The results reflect stronger demand for materials used in structural applications and an increase in sales of engine materials as a result of additional activity across the new platforms offset by a decrease in sales of titanium fastener material. In addition, we experienced strength in our defense related sales with continued spending on supported programs.
  
Sales to the Energy market of $130.6 million reflected a 54 percent decrease from fiscal year 2015. Excluding surcharge revenue, sales decreased 53 percent on 50 percent lower shipment volume. The results reflect the impact of low oil and gas prices and slowing demand, which significantly reduced drilling and exploration activity. The North American average directional rig count, a leading indicator of drilling activity, decreased 53 percent from fiscal year 2015.
 
Transportation market sales decreased 6 percent from fiscal year 2015 to $160.6 million. Excluding surcharge revenue, sales increased 5 percent on 3 percent lower shipment volume. The results reflect a strengthening mix for our materials used in engine, valve and fuel system materials. Low fuel prices drove up sales for vehicle platforms with higher Carpenter material content. In addition, sales of light trucks increased from fiscal year 2015.

Sales to the Medical market decreased 6 percent to $121.5 million from fiscal year 2015. Excluding surcharge revenue, sales decreased 3 percent on 2 percent lower shipment volume. The results reflect pricing pressures on transactional business for titanium and stainless steel materials.

Industrial and Consumer market sales were $300.9 million for fiscal year 2016. Excluding surcharge revenue, sales decreased 26 percent on 22 percent lower shipment volume. The results reflect decreased demand for materials used in capital equipment and industrial components due in part to the drilling and exploration activity.
 
Distribution sales decreased 14 percent from fiscal year 2015 to $118.3 million. Excluding surcharge revenue, sales decreased 13 percent from fiscal year 2015.

Gross Profit
 
Gross profit in fiscal year 2016 decreased to $255.9 million, or 14.1 percent of net sales from $318.3 million, or 14.3 percent of net sales for fiscal year 2015. During the year ended June 30, 2016, we recorded a $22.5 million excess inventory adjustment in our oil and gas businesses within the PEP segment due to the prolonged weakness in oil and gas businesses. Excluding the impacts of the excess inventory write-down and surcharge revenue, our gross margin in fiscal year 2016 was 17.7 percent as compared 17.6 percent in fiscal year 2015. The results reflect lower operating costs driven by the implementation of the Carpenter Operating Model which were offset by lower volume principally in our Energy and Industrial and Consumer end-use markets compared to fiscal year 2015.

Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin excluding the impact of the excess inventory write-down. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.



27


 
 
Fiscal Year
($ in millions)
 
2016
 
2015
Net sales
 
$
1,813.4

 
$
2,226.7

Less: surcharge revenue
 
240.8

 
414.9

Net sales excluding surcharge revenue
 
$
1,572.6

 
$
1,811.8

 
 
 
 
 
Gross profit
 
$
255.9

 
$
318.3

Excess inventory write-down
 
22.5

 

Gross profit excluding the excess inventory write-down
 
$
278.4

 
$
318.3

 
 
 
 
 
Gross margin
 
14.1
%
 
14.3
%
 
 
 
 
 
Gross margin excluding surcharge revenue and excess inventory write-down
 
17.7
%
 
17.6
%

Selling, General and Administrative Expenses
 
Selling, general and administrative expenses in fiscal year 2016 were $173.8 million, or 9.6 percent of net sales (11.1 percent of net sales excluding surcharge revenue), compared to $177.7 million, or 8.0 percent of net sales (9.8 percent of net sales excluding surcharge revenue), in fiscal year 2015. Selling, general and administrative expenses decreased due to lower salaries and benefits of $5.6 million primarily as a result of the restructuring actions taken in fiscal year 2015, lower variable compensation expense of $3.1 million partially offset by consulting costs of $4.2 million related to the Business Management Office (BMO) and strategic business review. The BMO is focused on profit optimization, operating cost improvement and inventory reductions.

Restructuring and Asset Impairment Charges

During fiscal year 2016, we incurred $18.0 million of restructuring and asset impairment charges. This included $7.6 million of non-cash impairment charges to write down property, plant and equipment and other intangible assets. The remaining $10.4 million consisted primarily of an early retirement incentive that resulted in a reduction of approximately 130 production and maintenance positions.

During fiscal year 2015, we incurred $29.1 million of restructuring charges. We implemented a reduction of approximately 200 salaried positions resulting in a charge of $12.7 million consisting primarily of various personnel-related costs to cover severance payments, medical coverage and related items. We also exited the ultra-fine grain materials development program resulting in a charge of $13.4 million during fiscal year 2015. In addition, we announced the closure of a facility resulting in a charge of $3.0 million to reflect the write-down of certain property and equipment. The actions taken in fiscal year 2015 aimed to yield approximately $30 million of fixed costs savings were realized in fiscal year 2016.
    
Activities undertaken in connection with the fiscal years 2016 and 2015 restructuring plans are complete.

Goodwill Impairment Charge

Amega and SSS, prior to its divestiture, reporting units within the PEP Segment were significantly impacted by the prolonged weakness in oil and gas drilling and exploration activity driven by depressed oil prices. As a result, during the fiscal year 2016 we recorded an impairment charge of $12.5 million which represents the entire balance of the goodwill recorded for these reporting units.
    
Operating Income
 
Our operating income in fiscal year 2016 decreased to $51.6 million, or 2.8 percent of net sales as compared with $111.5 million, or 5.0 percent in net sales in fiscal year 2015. Excluding surcharge revenue, pension EID and special items, operating margin was 8.5 percent for fiscal year 2016 and 8.6 percent for fiscal year 2015. The decrease in the operating margin reflects lower volume principally in our Energy and Industrial and Consumer end-use markets partially offset by operating cost improvements and overhead cost reductions compared to fiscal year 2015.


28


 Operating income has been significantly impacted by our pension EID, which may be volatile based on conditions in the financial markets, as well as other special items. The following presents our operating income and operating margin, in each case excluding the impact of surcharge on net sales, pension EID, the excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.

 
 
Fiscal Year
($ in millions)
 
2016
 
2015
Net sales
 
$
1,813.4

 
$
2,226.7

Less: surcharge revenue
 
240.8

 
414.9

Net sales excluding surcharge revenue
 
$
1,572.6

 
$
1,811.8

 
 
 
 
 
Operating income
 
$
51.6

 
$
111.5

Pension EID
 
19.3

 
9.5

Operating income excluding pension EID
 
70.9

 
121.0

 
 
 
 
 
Special items:
 
 
 
 
  Excess inventory write-down
 
22.5

 

  Restructuring and asset impairment charges
 
18.0

 
29.1

  Goodwill impairment
 
12.5

 

  Consulting costs
 
9.3

 
5.1

Operating income excluding pension EID and special items
 
$
133.2

 
$
155.2

 
 
 
 
 
Operating margin
 
2.8
%
 
5.0
%
 
 
 
 
 
Operating margin excluding surcharge revenue, pension EID and special items
 
8.5
%
 
8.6
%
Interest Expense  
Fiscal year 2016 interest expense was $28.0 million compared to $27.7 million in fiscal year 2015. We have used interest rate swaps to achieve a level of floating rate debt to fixed rate debt. Interest expense for fiscal year 2016 includes net gains from interest rate swaps of $2.6 million compared with $2.9 million of net gains from interest rate swaps for the fiscal year 2015.
Other (Expense) Income, Net
 
Other expense for fiscal year 2016 was $2.1 million as compared with other income of $5.3 million for fiscal year 2015. The results reflect negative impacts in foreign exchange losses of $2.7 million for fiscal year 2016 compared to fiscal year 2015. The fiscal year 2015 results include a $4.4 million favorable legal settlement. 

Income Taxes
 
Our effective tax rate (income tax expense as a percent of income before taxes) for fiscal year 2016 was 47.4 percent as compared to 34.1 percent in fiscal year 2015. The fiscal year 2016 tax rate includes the impact of non-cash goodwill impairment charges, a portion of which is non-deductible for tax purposes, as well as a tax charge of $2.8 million recorded due to a change in business strategy for one of our foreign subsidiaries that resulted in a change in our intent with regard to the indefinite reinvestment of the foreign earnings for this subsidiary. The fiscal year 2016 tax rate also 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. 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.

As of June 30, 2016, we had $106.5 million of indefinitely reinvested foreign earnings for which we had not provided deferred income taxes.

29



 See Note 17 to the consolidated financial statements in Item 8, “Financial Statements and Supplementary Data” for a full reconciliation of the statutory federal tax rate to the effective tax rates.
Business Segment Results
 
Summary information about our operating results on a segment basis is set forth below. For more detailed segment information, see Note 19 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data”.
 
 The following table includes comparative information for volumes by business segment:
 
 
 
Fiscal Year
 
Increase
(Decrease)
 
%
Increase
(Decrease)
(Pounds sold, in thousands) 
 
2016
 
2015
 
Specialty Alloys Operations
 
234,296

 
269,550

 
(35,254
)
 
(13
)%
Performance Engineered Products
 
11,626

 
15,262

 
(3,636
)
 
(24
)%
Intersegment
 
(3,362
)
 
(7,330
)
 
3,968

 
54
 %
Consolidated pounds sold
 
242,560

 
277,482

 
(34,922
)
 
(13
)%

* Pounds sold data for PEP segment includes Dynamet and Carpenter Powder Products businesses only.

The following table includes comparative information for net sales by business segment:

 
 
Fiscal Year
 
$
Increase
(Decrease)
 
%
Increase
(Decrease)
($ in millions) 
 
2016
 
2015
 
Specialty Alloys Operations
 
$
1,481.0

 
$
1,796.6

 
$
(315.6
)
 
(18
)%
Performance Engineered Products
 
358.7

 
497.7

 
(139.0
)
 
(28
)%
Intersegment
 
(26.3
)
 
(67.6
)
 
41.3

 
61
 %
Total net sales
 
$
1,813.4

 
$
2,226.7

 
$
(413.3
)
 
(19
)%

The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:

 
 
Fiscal Year
 
$
Increase
(Decrease)
 
%
Increase
(Decrease)
($ in millions) 
 
2016
 
2015
 
Specialty Alloys Operations
 
$
1,239.6

 
$
1,373.5

 
$
(133.9
)
 
(10
)%
Performance Engineered Products
 
357.9

 
496.5

 
(138.6
)
 
(28
)%
Intersegment
 
(24.9
)
 
(58.2
)
 
33.3

 
57
 %
Total net sales excluding surcharge revenue
 
$
1,572.6

 
$
1,811.8

 
$
(239.2
)
 
(13
)%

Specialty Alloys Operations Segment
 
Net sales in fiscal year 2016 for the SAO segment decreased 18 percent to $1,481.0 million, as compared with $1,796.6 million in fiscal year 2015. Excluding surcharge revenue, sales decreased 10 percent from fiscal year 2015. The fiscal year 2016 net sales reflected 13 percent lower shipment volume as compared to fiscal year 2015. The results reflect weakness in the Energy and Industrial and Consumer end-use markets compared to fiscal year 2015.
 
Operating income for the SAO segment in fiscal year 2016 was $176.9 million, or 11.9 percent of net sales (14.3 percent of net sales excluding surcharge revenue), compared to $155.2 million, or 8.6 percent of net sales (11.3 percent of net sales excluding surcharge revenue), for fiscal year 2015. The increase in operating income reflects operating cost improvements driven by the implementation of the Carpenter Operating Model, an insurance recovery benefit of $4 million and a favorable shift in product mix.

30


Performance Engineered Products Segment
 
Net sales for fiscal year 2016 for the PEP segment were $358.7 million as compared with $497.7 million for fiscal year 2015. Excluding surcharge revenue, net sales were decreased 28 percent. The results reflect decreased net sales primarily due to the current weakness in the Energy end-use market.
 
Operating loss for the PEP segment for fiscal year 2016 was $5.5 million, or 1.5 percent of net sales, as compared with operating income of $39.1 million, or 7.9 percent of net sales for fiscal year 2015. The results reflect the impact of the weak Energy end-use market due to limited drilling activity.

Liquidity and Financial Resources
 
We ended fiscal year 2017 with $66.3 million of cash, a decrease of $15.7 million from fiscal year 2016 . During fiscal year 2017 our cash from operations was $129.3 million as compared with $256.9 million in fiscal year 2016 . Our free cash flow, which we define under “Non-GAAP Financial Measures” below, was negative $17.8 million as compared to positive $138.6 million for the same period a year ago. The decrease in free cash flow reflects the impact of the $100 million pension contribution offset by cash tax benefits realized with the contribution of approximately $39 million, the titanium powder acquisition and unfavorable working capital levels, principally as a result of increased inventory levels to support improving demand conditions.

Capital expenditures for property, equipment and software were $98.5 million for fiscal year 2017 as compared to $95.2 million for the fiscal year 2016. In fiscal year 2018, we expect capital expenditures to be approximately $120 million.

Dividends for the fiscal year 2017 were $34.1 million , as compared with $34.8 million in the prior year and were paid at the same quarterly rate of $0.18 per share of common stock in both periods.
 
For the years ended June 30, 2017 , 2016 and 2015 , interest costs totaled $31.1 million , $29.9 million and $30.4 million , respectively, of which $1.3 million , $1.9 million and $2.7 million , respectively, were capitalized as part of the cost of property, plant, equipment and software.
 
During fiscal year 2017 , we made a voluntary cash contribution of $100 million to our largest qualified pension plan, and are required to make cash contributions of $6.7 million to our pension plans during fiscal year 2018. Over the next five years, current estimates indicate that we will be required to make about $85.4 million of cash contributions to our pension plans, based on the laws in effect for pension funding as of June 30, 2017 , and subject to market returns and interest rate assumptions.

We have demonstrated the ability to generate cash to meet our needs through cash flows from operations, management of working capital and the availability of outside sources of financing to supplement internally generated funds. We generally target minimum liquidity, consisting of cash and cash equivalents added to available borrowing capacity under our credit agreement, of $150.0 million. On March 31, 2017, we entered into a new $400.0 million Credit Agreement (the “Credit Agreement”) that extends to March 2022. The Credit Agreement replaced the previous $500.0 million revolving credit facility, dated June 28, 2013, which had been set to expire in June 2018. As of June 30, 2017 , we had $6.1 million of issued letters of credit. The balance of the Credit Agreement ( $393.9 million as of June 30, 2017 ) remains available to us. As of June 30, 2017 , we had total liquidity of approximately $460 million, including $66.3 million of cash and cash equivalents. The Credit Agreement provides flexibility to fund our ongoing cash requirements as needed. From time to time during the year ended June 30, 2017 we have borrowed under our Credit Agreement and subsequently repaid any outstanding borrowings prior to June 30, 2017 . The weighted average daily borrowing under the Credit Agreement during the year ended June 30, 2017 was $28.1 million with daily outstanding borrowings ranging from $0.0 million to $88.2 million.

We evaluate liquidity needs for alternative uses including funding external growth opportunities, share repurchases as well as funding consistent dividend payments to stockholders. Over the last several years, we declared and paid quarterly cash dividends of $0.18 per share.
 

31


As of June 30, 2017 , we had cash and cash equivalents of approximately $27.1 million held at various foreign subsidiaries. Our global cash deployment considers, among other things, the geographic location of our subsidiaries’ cash balances, the locations of our anticipated liquidity needs and the cost to access international cash balances, as necessary. The repatriation of cash from certain foreign subsidiaries could have adverse tax consequences as we may be required to pay and record U.S. income taxes and foreign withholding taxes in various tax jurisdictions on these funds to the extent they were previously considered permanently reinvested. From time to time, we evaluate opportunities to repatriate cash from foreign jurisdictions. Our current plans consider repatriating cash only at levels that would result in minimal or no net adverse tax consequences in the near term. During the year ended June 30, 2017, we repatriated cash of $11.5 million from foreign jurisdictions that resulted in $0.9 million of tax benefits. From time to time, we may make short-term intercompany borrowings against our cash held outside the United States in order to reduce or eliminate any required borrowing under our Credit Agreement.
 
We are subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio (3.50 to 1.00 as of June 30, 2017 ). The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense (“EBITDA”) to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than 55 percent. The debt to capital ratio is defined in the Credit Agreement as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. As of June 30, 2017 , the Company was in compliance with all of the covenants of the Credit Agreement.
 
The following table shows our actual ratio performance with respect to the financial covenants, as of June 30, 2017 :
 
Covenant
 
Covenant Requirement
 
Actual
Ratio
Consolidated interest coverage
 
3.50 to 1.00 (minimum)
 
9.38 to 1.00
Consolidated debt to capital
 
55% (maximum)
 
34%
We continue to believe that we will maintain compliance with the financial and restrictive covenants in future periods. To the extent that we do not comply with the covenants under the Credit Agreement, this could reduce our liquidity and flexibility due to potential restrictions on borrowings available to us unless we are able to obtain waivers or modifications of the covenants .
Non-GAAP Financial Measures
 
The following provides additional information regarding certain non-GAAP financial measures that we use in this report. Our definitions and calculations of these items may not necessarily be the same as those used by other companies.
 
Net Sales and Gross Margin Excluding Surcharge Revenue and Special Items
 
This report includes discussions of net sales as adjusted to exclude the impact of raw material surcharge and the resulting impact on gross margins, as well as the excess inventory write-down, which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales and cost of sales provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding the excess inventory write-down from gross profit and gross margin is helpful in analyzing our operating performance as the excess inventory write-down is not indicative of ongoing operating performance. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, the Company’s board of directors and others. See our earlier discussions of “Gross Profit” for reconciliations of net sales and gross margin, excluding surcharge revenue and the excess inventory write-down, to net sales as determined in accordance with U.S. GAAP. Net sales and gross margin excluding surcharge revenue and the excess inventory write-down is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, net sales and gross margin calculated in accordance with U.S. GAAP.


32


Operating Income and Operating Margin Excluding Surcharge Revenue, Pension EID and Special Items
 
This report includes discussions of operating income and operating margin as adjusted to exclude the impact of raw material surcharge revenue, pension EID, loss on divestiture of business, excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales and cost of sales provides a more consistent and meaningful basis for comparing results of operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding pension EID, loss on divestiture of business, excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items from operating income and operating margin is helpful in analyzing our operating performance particularly as pension EID may be volatile due to changes in the financial markets and the loss on divestiture of business, the excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items are not indicative of ongoing operating performance. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, the Company’s board of directors and others. See our earlier discussion of operating income for a reconciliation of operating income and operating margin excluding pension EID, loss on divestiture of business, excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items to operating income and operating margin determined in accordance with U.S. GAAP. Operating income and operating margin excluding surcharge revenue, pension EID, loss on divestiture of business, excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and special items is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, operating income and operating margin calculated in accordance with U.S. GAAP.


33


Adjusted Earnings Per Share  

The following provides a reconciliation of adjusted earnings per share, to its most directly comparable U.S. GAAP financial measures:

($ in millions, except per share data)
 
Income Before Income Taxes
 
Income Tax Benefit (Expense) (a)
 
Net Income
 
Earnings Per Diluted Share
Year ended June 30, 2017, as reported
 
$
70.2

 
$
(23.2
)
 
$
47.0

 
$
0.99

 
 
 
 
 
 
 
 
 
Special items:
 
 
 
 
 
 
 
 
  Loss on divestiture of business
 
3.2

 
(1.1
)
 
2.1

 
0.04

  Pension curtailment
 
0.5

 
(0.1
)
 
0.4

 
0.01

  Income tax item (b)
 

 
2.1

 
2.1

 
0.04

Total impact of special items
 
3.7

 
0.9

 
4.6

 
0.09

 
 
 
 
 
 
 
 
 
Year ended June 30, 2017, as adjusted
 
$
73.9

 
$
(22.3
)
 
$
51.6

 
$
1.08

 
 
 
 
 
 
 
 
 

($ in millions, except per share data)
 
Income Before Income Taxes
 
Income Tax Benefit (Expense) (a)
 
Net Income
 
Earnings Per Diluted Share
Year ended June 30, 2016, as reported
 
$
21.5

 
$
(10.2
)
 
$
11.3

 
$
0.23

 
 
 
 
 
 
 
 
 
Special items:
 
 
 
 
 
 
 
 
  Excess inventory write-down
 
22.5

 
(7.8
)
 
14.7

 
0.31

  Restructuring and asset impairment charges
 
18.0

 
(5.7
)
 
12.3

 
0.26

  Goodwill impairment
 
12.5

 
(3.2
)
 
9.3

 
0.19

  Consulting costs
 
9.3

 
(3.3
)
 
6.0

 
0.13

Income tax item (c)
 

 
2.8

 
2.8

 
0.06

  Impact of tax law change
 

 
(0.8
)
 
(0.8
)
 
(0.02
)
Total impact of special items
 
62.3

 
(18.0
)
 
44.3

 
0.93

 
 
 
 
 
 
 
 
 
Year ended June 30, 2016, as adjusted
 
$
83.8

 
$
(28.2
)
 
$
55.6

 
$
1.16

 
 
 
 
 
 
 
 
 
(a) The income tax effect of the special items was determined using a normalized effective income tax rate of 35 percent unless the item had specific discrete income tax impacts such as certain nontaxable goodwill and asset impairment charges and impacts of tax law changes.

(b) Discrete income tax charge recorded as a result of reduced tax benefits claimed in prior years in connection with the Company’s $100 million voluntary pension contribution made in October 2016.

(c) As a result of a decision to sell our equity method investment in India, we changed our intent with regard to the indefinite reinvestment of the foreign earnings from one of our subsidiaries. Accordingly, we recorded a discrete income tax charge during the year ended June 30, 2016.


34


Management believes that the presentation of earnings per share adjusted to exclude the impacts of loss on divestiture of business, excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items is helpful in analyzing the operating performance of the Company, as these costs are not indicative of ongoing operating performance. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, the Company's board of directors and others. Our definitions and calculations of these items may not necessarily be the same as those used by other companies. Adjusted earnings per share is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, earnings per share calculated in accordance with U.S. GAAP.

Free Cash Flow

The following provides a reconciliation of free cash flow, as used in this annual report, to its most directly comparable U.S. GAAP financial measures:
 
 
Fiscal Year
($ in millions)
 
2017
 
2016
 
2015
Net cash provided from operating activities
 
$
129.3

 
$
256.9

 
$
282.6

Purchases of property, equipment and software
 
(98.5
)
 
(95.2
)
 
(170.5
)
Purchase of business
 
(35.3
)
 

 

Proceeds from divestiture of business
 
12.0

 

 

Dividends paid
 
(34.1
)
 
(34.8
)
 
(37.9
)
Proceeds from disposals of plant and equipment and assets held for sale
 
2.5

 
1.4

 
0.2

Proceeds from note receivable from the sale of equity method investment
 
6.3

 

 

Proceeds from sale of equity method investment
 

 
6.3

 

Other
 

 
4.0

 

Free cash flow
 
$
(17.8
)
 
$
138.6

 
$
74.4

 
Management believes that the presentation of free cash flow provides useful information to investors regarding our financial condition because it is a measure of cash generated which management evaluates for alternative uses.  It is management’s current intention to use excess cash to fund investments in capital equipment, acquisition opportunities and consistent dividend payments. Free cash flow is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, cash flows calculated in accordance with U.S. GAAP.
 
Critical Accounting Policies and Estimates
 
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  On an on-going basis, we evaluate our estimates, including those related to bad debts, customer claims, inventories, goodwill, intangible assets, income taxes, pensions and other postretirement benefits, contingencies and litigation, environmental liabilities and derivative instruments and hedging activities.
 
We believe the following are the critical accounting policies and areas affected by significant judgments and estimates impacting the preparation of our consolidated financial statements.
 
Allowance for Doubtful Accounts
 
We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments.  We perform ongoing credit evaluations of our customers and monitor their payment patterns.  Should the financial condition of our customers deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
 

35


Inventories
 
Inventories are stated at the lower of cost or market. The cost of inventories is primarily determined using the LIFO method. We also use the FIFO and average cost methods. As of June 30, 2017 and 2016, $107.3 million and $118.4 million of inventory, respectively, was accounted for using a method other than the LIFO method.

Costs include direct materials, direct labor and applicable manufacturing overhead and other direct costs. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials and other costs may have been incurred at significantly different values due to the length of time of our production cycle. The prices for many of the raw materials we use have been volatile. Since we value most of our inventory utilizing the LIFO inventory costing methodology, rapid changes in raw material costs have an impact on our operating results. In a period of rising prices, cost of sales expense recognized under LIFO is generally higher than the cash costs incurred to acquire the inventory sold. Conversely, in a period of declining raw material prices, cost of sales recognized under LIFO is generally lower than cash costs incurred to acquire the inventory sold.
 
Since the LIFO inventory valuation methodology is designed for annual determination, interim estimates of the annual LIFO valuation are required. We recognize the effects of the LIFO inventory valuation method on an interim basis by estimating the expected annual LIFO cost based on cost changes to date.  These projections of annual LIFO inventory valuation reserve changes are updated quarterly and are evaluated based upon material, labor and overhead costs.

Pension and Other Postretirement Benefits
 
The amount of the pension expense, which is determined annually, is based upon the value of the assets in the pension trusts at the beginning of the fiscal year as well as actuarial assumptions, such as the discount rate and the expected long-term rate of return on plan assets.  The assumed long-term rate of return on pension plan assets is reviewed at each year-end based on the plan’s investment policies, an analysis of the historical returns of the capital markets and current interest rates.  Based on the current funding level, the allocation policy for pension plan assets is to have approximately 60 percent in return seeking assets and 40 percent in liability matching assets.  Return seeking assets include domestic and international equities and diversified loan funds.  Liability matching assets include long duration bond funds.  As the funding level of the plans improves in increments of 5 percent, assets will be shifted from return seeking to liability matching in increments of 4 percent as a de-risking strategy.  The plan discount rate is determined by reference to the Bond:Link interest rate model based upon a portfolio of highly rated U.S. corporate bonds with individual bonds that are theoretically purchased to settle the plan’s anticipated cash outflows.  The fluctuations in stock and bond markets could cause actual investment results to be significantly different from those assumed, and therefore, significantly impact the valuation of the assets in our pension trusts.  Changes in actuarial assumptions could significantly impact the accounting for the pension assets and liabilities.  If the assumed long-term rate of return on plan assets was changed by 0.25 percent, the net pension expense would change by $2.6 million.  If the discount rate was changed by 0.25 percent, the net pension expense would change by $0.7 million.
 
Long-Lived Assets
 
Long-lived assets are reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable through estimated future undiscounted cash flows.  The amount of the impairment loss is the excess of the carrying amount of the impaired assets over the fair value of the assets based upon estimated future discounted cash flows.  We evaluate long-lived assets for impairment by individual business unit.  Changes in estimated cash flows could have a significant impact on whether or not an asset is impaired and the amount of the impairment.
 

36


Goodwill
 
Goodwill is not amortized, but instead is tested for impairment, at least annually at the reporting unit level.  Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value.  The fair value is estimated based principally upon discounted cash flow analysis.  If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting unit’s goodwill to its implied fair value.  The discounted cash flow analysis for each reporting unit tested requires significant estimates and assumptions related to cash flow forecasts, discount rates, terminal values and income tax rates. The cash flow forecasts are developed based on assumptions about each reporting unit’s markets, product offerings, pricing, capital expenditure and working capital requirements as well as cost performance. The discount rates used in the discounted cash flow are estimated based on a market participant’s perspective of each reporting unit's weighted average cost of capital.  The terminal value, which represents the value attributed to the reporting unit beyond the forecast period, is estimated using a perpetuity growth rate assumption. The income tax rates used in the discounted cash flow analysis represent estimates of the long-term statutory income tax rates for each reporting unit based on the jurisdictions in which the reporting units operate.

As of June 30, 2017, we had four remaining reporting units with goodwill recorded. Goodwill associated with our SAO reporting unit is tested at the SAO segment level and represents approximately 75 percent of our total goodwill. All other goodwill is associated with our PEP segment, which includes 3 reporting units with goodwill recorded.

As of June 30, 2017, the fair value of the SAO exceeded the carrying value by approximately 20 percent.  The goodwill recorded related to the SAO as of June 30, 2017 was $195.5 million. The discounted cash flows analysis for the SAO 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.

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.

Environmental Expenditures
 
Environmental expenditures that pertain to current operations or to future revenues are expensed or capitalized consistent with Carpenter’s capitalization policy for property, plant and equipment.  Expenditures that result from the remediation of an existing condition caused by past operations and that do not contribute to current or future revenues are expensed.  Liabilities are recognized for remedial activities when the remediation is probable and the cost can be reasonably estimated.  Most estimated liabilities are not discounted to present value due to the uncertainty as to the timing and duration of expected costs.  For one former operating facility site, due to the routine nature of the expected costs, the liability for future costs is discounted to present value over 20 years assuming a discount rate of approximately 3 percent as of June 30, 2017 and 2016.
 

37


Income Taxes
 
Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, or differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits (assets) or costs (liabilities) to be recognized when those temporary differences reverse. We evaluate on a quarterly basis whether, based on all available evidence, we believe that our deferred income tax assets will be realizable. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax assets will not be realized. The evaluation includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Future realization of deferred income tax assets ultimately depends upon the existence of sufficient taxable income within the carryback or carryforward period available under tax law.
 
Management determines whether a tax position should be recognized in the financial statements by evaluating whether it is more likely than not that the tax position will be sustained upon examination by the tax authorities based upon the technical merits of the position. For those tax positions which should be recognized, the measurement of a tax position is determined as being the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Interest and penalties on estimated liabilities for uncertain tax positions are recorded as components of the provision for income taxes.
Derivative Financial Instruments
 
Our current risk management strategies include the use of derivative instruments to reduce certain risks.  The critical strategies include: (1) the use of commodity forward contracts to fix the price of a portion of anticipated future purchases of certain raw materials and energy to offset the effects of changes in the costs of those commodities; and (2) the use of foreign currency forward contracts to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates. The commodity forwards and foreign currency forwards have been designated as cash flow hedges and unrealized net gains and losses are recorded in the accumulated other comprehensive loss component of stockholders’ equity.  The unrealized gains or losses are reclassified to the income statement when the hedged transaction affects earnings or if the anticipated transactions are no longer expected to occur. We use interest rate swaps to maintain a certain level of floating rate debt relative to fixed rate debt.  Interest rate swaps have been designated as fair value hedges. Accordingly, the mark-to-market values of both the interest rate swap and the underlying debt obligations are recorded as equal and offsetting gains and losses in the interest expense component of the consolidated statement of income. We have also used forward interest rate swaps to manage the risk of cash flow variability associated with fixed interest debt expected to be issued. We evaluate all derivative instruments each quarter to determine that they are highly effective.  Any ineffectiveness is recorded in our consolidated statement of income.  We also use foreign currency forward contracts to protect certain short-term asset or liability positions denominated in foreign currencies against the effect of changes in exchange rates. These positions do not qualify for hedge accounting and accordingly are marked-to-market at each reporting date through charges to other income and expense.
 
New Accounting Pronouncements
 
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 20 , Recent Accounting Pronouncements, to Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data”.
Off Balance Sheet Arrangements
 
We had no off balance sheet arrangements during the periods presented.

38


Contractual Obligations
 
At June 30, 2017 , we had the following contractual obligations and other commercial commitments and contingencies:
 
 
 
 
 
Fiscal Year
 
 
($ in millions)
 
Total
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
Long-term debt (1)
 
$
605.0

 
$
55.0

 
$

 
$

 
$

 
$
250.0

 
$
300.0

Estimated interest payments (2)
 
131.5

 
29.5

 
26.4

 
26.4

 
26.4

 
13.9

 
8.9

Operating leases
 
30.4

 
8.7

 
6.6

 
5.1

 
3.1

 
1.9

 
5.0

Pension plan contributions (3)
 
229.4

 
6.7

 
5.7

 
6.9

 
24.5

 
41.6

 
144.0

Accrued post-retirement benefits (4)
 
153.5

 
15.5

 
15.5

 
15.6

 
15.5

 
15.5

 
75.9

Purchase obligations (5)
 
127.8

 
127.8

 

 

 

 

 

Pension benefits (6)
 
34.1

 
3.3

 
3.3

 
3.5

 
3.6

 
3.6

 
16.8

Total
 
$
1,311.7

 
$
246.5

 
$
57.5

 
$
57.5

 
$
73.1

 
$
326.5

 
$
550.6


(1)          Refer to Note 9 to Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data”.
 
(2)        Estimated interest payments for long-term debt were calculated based on the applicable rates and payment dates. No interest payments are included for any potential borrowings under our revolving credit facility.
 
(3)        Pension plan contributions represent required minimum contributions for plan years beginning January 1, 2016. These amounts were calculated based on actuarial valuations as prescribed by pension funding regulations in the United States effective June 30, 2017 . Estimated fiscal year contributions have been included through fiscal year 2028. The actual required pension contributions in future periods may be different.
 
(4)        Postretirement benefits for certain plans may be paid from corporate assets or certain designated plan assets maintained in a Voluntary Employee Benefit Association (“VEBA”) Trust. During fiscal year 2017, we funded benefit payments using assets in the VEBA Trust. Prior to fiscal year 2017, benefit payments for these plans were funded by corporate assets. Estimated fiscal year postretirement benefit payments have been included through fiscal year 2027.
 
(5)         We have entered into purchase commitments primarily for various key raw materials at market related prices, all made in the normal course of business. The commitments include both fixed and variable price provisions.  We used June 30, 2017 raw material prices for commitments with variable pricing.
 
(6)          Pension benefits for certain plans are paid from corporate assets. There is no guarantee that future payments will be paid from corporate assets rather than plan assets.

Market Sensitive Instruments and Risk Management
 
See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for discussion of market sensitive instruments and associated market risk for Carpenter.

39


Contingencies
 
Environmental
 
We are subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health.  Although compliance with these laws and regulations may affect the costs of our operations, compliance costs to date have not been material.  We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a potentially responsible party (“PRP”) with respect to certain third party Superfund waste-disposal sites and other third party-owned sites.  Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRPs at these Superfund sites have been determined.  Accordingly, at this time, we cannot reasonably estimate expected costs for such matters. The liability for future environmental remediation costs that can be reasonably estimated is evaluated on a quarterly basis. We accrue amounts for environmental remediation costs that represent our best estimate of the probable and reasonably estimable future costs related to environmental remediation. During fiscal years 2017 , the Company decreased the liability for a company-owned former operating site by $0.1 million. During fiscal years 2016 and 2015 , the Company increased the liability for a company-owned former operating site by $0.3 million and $0.4 million , respectively. The liabilities recorded for environmental remediation costs at Superfund sites, other third party-owned sites and Carpenter-owned current or former operating facilities remaining at June 30, 2017 and 2016 were $16.1 million and $16.2 million , respectively.
 
Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRPs.  Based upon information currently available, such future costs are not expected to have a material effect on our financial position, results of operations or cash flows over the long-term. However, such costs could be material to our financial position, results of operations or cash flows in a particular future quarter or year.
 
Other
 
We are defending various routine claims and legal actions that are incidental to our business, and that are common to our operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. Like many other manufacturing companies in recent years we, from time to time, have been named as a defendant in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace. We provide for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, we believe that the total liability from these matters will not have a material effect on our financial position, results of operations or cash flows over the long-term. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to our financial position, results of operations or cash flows in a particular future quarter or year.

Forward-Looking Statements
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected, anticipated or implied.  The most significant of these uncertainties are described in this Form 10-K. They include but are not limited to: (1) the cyclical nature of the specialty materials business and certain end-use markets, including aerospace, defense, industrial, transportation, consumer, medical and energy, or other influences on Carpenter’s business such as new competitors, the consolidation of competitors, customers and suppliers, or the transfer of manufacturing capacity from the United States to foreign countries; (2) the ability of Carpenter to achieve cash generation, growth, earnings, profitability, 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 degree of success of government trade actions; (7) the valuation of the assets and liabilities in Carpenter’s pension trusts and the accounting for pension plans; (8) possible labor disputes or work stoppages; (9) the potential that our customers may substitute alternate materials or adopt different manufacturing practices that replace or limit the suitability of our products; (10) the ability to successfully acquire and integrate acquisitions; (11) the availability of credit facilities to Carpenter, its customers or other members of the supply chain;

40


(12) the ability to obtain energy or raw materials, especially from suppliers located in countries that may be subject to unstable political or economic conditions; (13) Carpenter’s manufacturing processes are dependent upon highly specialized equipment located primarily in facilities in Reading and Latrobe, Pennsylvania and Athens, Alabama for which there may be limited alternatives if there are significant equipment failures or a catastrophic event; (14) the ability to hire and retain key personnel, including members of the executive management team, management, metallurgists and other skilled personnel; (15) fluctuations in oil and gas prices and production; and (16) the success of actions taken to reduce costs associated with retirement and pension plans. Any of these factors could have an adverse and/or fluctuating effect on Carpenter’s results of operations. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. Carpenter undertakes no obligation to update or revise any forward-looking statements.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk
 
We use derivative financial instruments to reduce certain types of financial risk.  Firm price sales arrangements involve a risk of profit margin fluctuations particularly as raw material prices have been volatile.  Firm price sales arrangements generally include certain annual purchasing commitments and consumption schedules agreed to by the customers at selling prices based on raw material prices at the time the arrangements are established.  As discussed in Note 16 to the consolidated financial statements included in Part II, Item 8. “Financial Statements and Supplementary Data”, in order to reduce the risk of fluctuating profit margins on these sales, we enter into commodity forward contracts to purchase certain critical raw materials necessary to produce the products sold under the firm price sales arrangements. If a customer fails to perform its obligations under the firm price sales arrangements, we may realize losses as a result of the related commodity forward contracts. Our customers have historically performed under these arrangements and we believe that they will honor such obligations in the future.
 
We are actively involved in managing risks associated with energy resources. Risk containment strategies include interaction with primary and secondary energy suppliers as well as obtaining adequate insurance coverage to compensate us for potential business interruption related to lack of availability of energy resources. In addition, we have used forwards to fix the price of a portion of our anticipated future purchases of certain energy requirements to protect against the impact of significant increases in energy costs. We also use surcharge mechanisms to offset a portion of these charges where appropriate.
 
Fluctuations in foreign currency exchange rates could subject us to risk of losses on anticipated future cash flows from our international operations or customers.  Foreign currency forward contracts are used to hedge certain foreign exchange risk.
 
We use interest rate swaps to achieve a level of floating rate debt relative to fixed rate debt where appropriate.  Historically, we have entered into forward swap contracts to manage the risk of cash flow variability associated with fixed interest debt expected to be issued.
 
All hedging strategies are reviewed and approved by senior financial management before being implemented.  Senior financial management has established policies regarding the use of derivative instruments that prohibit the use of speculative or leveraged derivatives.  Market valuations are performed at least quarterly to monitor the effectiveness of our risk management programs.
 
Based on the current funding level, the allocation policy for our largest pension plan assets is to have approximately 60 percent in return seeking assets and 40 percent in liability matching assets.  Return seeking assets include domestic and international equities and diversified loan funds.  Liability matching assets include long duration bond funds.  As the funding level of the plans improves in increments of 5 percent, assets will be shifted from return seeking to liability matching in increments of 4 percent as a de-risking strategy.
 
The status of our financial instruments as of June 30, 2017 is provided in Note 16 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data”.  Assuming on June 30, 2017 , (a) an instantaneous 10 percent decrease in the price of raw materials and energy for which we have commodity forward contracts, and (b) a 10 percent strengthening of the U.S. dollar versus foreign currencies for which foreign exchange forward contracts existed, our results of operations would not have been materially affected in either scenario.







41

Table of Contents


Item 8.  Financial Statements and Supplementary Data

Index to Consolidated Financial Statements and Supplementary Data

 
Page
Consolidated Financial Statements:
 
 
 
Management’s Responsibilities for Financial Reporting
 
 
Management’s Report on Internal Control Over Financial Reporting
 
 
Report of Independent Registered Public Accounting Firm
 
 
Consolidated Statements of Income for the Years Ended June 30, 2017, 2016 and 2015
 
 
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended June 30, 2017, 2016 and 2015
 
 
Consolidated Statements of Cash Flows for the Years Ended June 30, 2017, 2016 and 2015
 
 
Consolidated Balance Sheets as of June 30, 2017 and 2016
 
 
Consolidated Statements of Changes in Equity for the Years Ended June 30, 2017, 2016 and 2015
 
 
Notes to Consolidated Financial Statements
 
 
Supplementary Data:
 
 
 
Quarterly Financial Data (Unaudited)
 
 
Schedule II. Valuation and Qualifying Accounts





















42

Table of Contents


Management’s Responsibilities for Financial Reporting
 
Management prepared the financial statements included in this Annual Report on Form 10-K and is responsible for their integrity and objectivity.  The statements were prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include amounts based on management’s best judgments and estimates.  Financial information elsewhere in this Annual Report is consistent with that in the financial statements.
 
Carpenter maintains a system of internal controls, supported by a code of conduct, designed to provide reasonable assurance that assets are safeguarded and transactions are properly executed and recorded for the preparation of financial information.  We believe Carpenter’s system of internal controls provides this appropriate balance.  The system of internal controls and compliance is continually monitored by Carpenter’s internal audit staff.
 
The Audit/Finance Committee of the Board of Directors, composed of independent directors, meets regularly with management, Carpenter’s internal auditors and our independent registered public accounting firm to consider audit results and to discuss significant internal control, auditing and financial reporting matters.  Both the independent registered public accounting firm and internal auditors have unrestricted access to the Audit/Finance Committee.
Management’s Report on Internal Control Over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management assessed the effectiveness of Carpenter’s internal control over financial reporting as of June 30, 2017 . In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO) in Internal Control — Integrated Framework .  Based on its assessment, management concluded that, as of June 30, 2017 , Carpenter’s internal control over financial reporting is effective based on those criteria.
 
The effectiveness of Carpenter’s internal control over financial reporting as of June 30, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing herein.
 
/s/ Tony R. Thene
Tony R. Thene
President and Chief Executive Officer
 
/s/ Damon J. Audia
Damon J. Audia
Senior Vice President and Chief Financial Officer
 

43

Table of Contents





Report of Independent Registered Public Accounting Firm



To the Board of Directors and
Shareholders of Carpenter Technology Corporation


In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Carpenter Technology Corporation and its subsidiaries as of June 30, 2017 and June 30, 2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Philadelphia, PA
August 11, 2017

44


CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30, 2017 , 2016 and 2015
 
($ in millions, except per share data)
 
2017
 
2016
 
2015
Net sales
 
$
1,797.6

 
$
1,813.4

 
$
2,226.7

Cost of sales
 
1,513.3

 
1,535.0

 
1,908.4

Cost of sales - excess inventory write-down
 

 
22.5

 

Gross profit
 
284.3

 
255.9

 
318.3

 
 
 
 
 
 
 
Selling, general and administrative expenses
 
183.9

 
173.8

 
177.7

Loss on divestiture of business
 
3.2

 

 

Restructuring and asset impairment charges
 

 
18.0

 
29.1

Goodwill impairment
 

 
12.5

 

Operating income
 
97.2

 
51.6

 
111.5

 
 
 
 
 
 
 
Interest expense
 
(29.8
)
 
(28.0
)
 
(27.7
)
Other income (expense), net
 
2.8

 
(2.1
)
 
5.3

 
 
 
 
 
 
 
Income before income taxes
 
70.2

 
21.5

 
89.1

Income tax expense
 
23.2

 
10.2

 
30.4

 
 
 
 
 
 
 
Net income
 
$
47.0

 
$
11.3

 
$
58.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE:
 
 

 
 

 
 

Basic
 
$
0.99

 
$
0.23

 
$
1.11

Diluted
 
$
0.99

 
$
0.23

 
$
1.11

 
 
 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 
 

 
 

 
 

Basic
 
47.0

 
48.1

 
52.6

Diluted
 
47.1

 
48.2

 
52.7

 
See accompanying notes to consolidated financial statements.

45


CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years ended June 30, 2017 , 2016 and 2015
 
($ in millions)
 
2017
 
2016
 
2015
Net income
 
$
47.0

 
$
11.3

 
$
58.7

Other comprehensive income (loss), net of tax
 
 

 
 

 
 

Pension and postretirement benefits gain (loss), net of tax of $(27.3), $52.8 and $12.0, respectively
 
45.3

 
(87.5
)
 
(20.1
)
Net gain (loss) on derivative instruments, net of tax of $(11.8), $(4.0) and $21.7, respectively
 
19.5

 
6.7

 
(36.1
)
Unrealized gain on marketable securities, net of tax of $0.0, $0.0 and $0.0, respectively
 

 

 
0.1

Foreign currency translation
 
2.0

 
(0.9
)
 
(26.9
)
Other comprehensive income (loss), net of tax
 
66.8

 
(81.7
)
 
(83.0
)
Comprehensive income (loss), net of tax
 
$
113.8

 
$
(70.4
)
 
$
(24.3
)
 
See accompanying notes to consolidated financial statements.

46


CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2017 , 2016 and 2015
($ in millions)
 
2017
 
2016
 
2015
OPERATING ACTIVITIES
 
 

 
 

 
 

Net income
 
$
47.0

 
$
11.3

 
$
58.7

Adjustments to reconcile net income to net cash provided from operating activities:
 
 

 
 

 
 

Depreciation and amortization
 
117.8

 
119.3

 
122.3

Goodwill impairment charge
 

 
12.5

 

Non-cash excess inventory write-down
 

 
22.5

 

Non-cash restructuring and asset impairment charges
 

 
7.6

 
7.6

Deferred income taxes
 
41.6

 
0.8

 
60.4

Net pension expense
 
48.4

 
53.8

 
44.5

Payments from qualified pension plan associated with restructuring charges
 

 
9.4

 
8.3

Stock-based compensation expense
 
13.0

 
8.7

 
10.0

Net loss on disposal of property and equipment
 
2.5

 
0.6

 
1.2

Loss on divestiture of business
 
3.2

 

 

Changes in working capital and other:
 
 
 
 

 
 

Accounts receivable
 
(34.6
)
 
48.2

 
25.4

Inventories
 
(74.6
)
 
1.6

 
36.0

Other current assets
 
2.8

 
(2.1
)
 
(0.3
)
Accounts payable
 
42.5

 
(7.6
)
 
(59.9
)
Accrued liabilities
 
25.6

 
(14.0
)
 
(12.1
)
Pension plan contributions
 
(100.0
)
 

 
(7.2
)
Other postretirement plan contributions
 
(3.2
)
 
(13.0
)
 
(13.2
)
Other, net
 
(2.7
)
 
(2.7
)
 
0.9

Net cash provided from operating activities
 
129.3

 
256.9

 
282.6

INVESTING ACTIVITIES
 
 

 
 

 
 

Purchases of property, equipment and software
 
(98.5
)
 
(95.2
)
 
(170.5
)
Proceeds from disposals of property and equipment and assets held for sale
 
2.5

 
1.4

 
0.2

Acquisition of business
 
(35.3
)
 

 

Proceeds from maturities of marketable securities
 
0.9

 
0.9

 
0.3

Net proceeds from divestiture of business
 
12.0

 

 

   Proceeds from note receivable from the sale of equity method investment
 
6.3

 

 

Proceeds received from sale of equity method investment
 

 
6.3

 

Other
 

 
4.0

 

Net cash used for investing activities
 
(112.1
)
 
(82.6
)
 
(170.0
)
FINANCING ACTIVITIES
 
 

 
 

 
 

Credit agreement borrowings
 
122.1

 
77.0

 
545.1

Credit agreement repayments
 
(122.1
)
 
(77.0
)
 
(545.1
)
Dividends paid
 
(34.1
)
 
(34.8
)
 
(37.9
)
Payments of debt issue costs
 
(1.4
)
 

 

Purchases of treasury stock
 

 
(123.9
)
 
(124.5
)
Payments on seller financed debt related to purchase of software
 

 
(4.9
)
 

Tax benefits on share-based compensation
 
0.5

 

 
0.7

Proceeds from stock options exercised
 
2.2

 
0.5

 
2.3

Net cash used for financing activities
 
(32.8
)
 
(163.1
)
 
(159.4
)
Effect of exchange rate changes on cash and cash equivalents
 
(0.1
)
 
0.8

 
(3.2
)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
 
(15.7
)
 
12.0

 
(50.0
)
Cash and cash equivalents at beginning of year
 
82.0

 
70.0

 
120.0

Cash and cash equivalents at end of year
 
$
66.3

 
$
82.0

 
$
70.0

See accompanying notes to consolidated financial statements.

47


CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2017 and 2016
 
($ in millions, except share data)
 
2017
 
2016
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
66.3

 
$
82.0

Accounts receivable, net of allowance for doubtful accounts of $2.6 million and $4.1 million at June 30, 2017 and 2016, respectively
 
290.4

 
253.6

Inventories
 
690.4

 
628.7

Other current assets
 
46.5

 
46.4

Total current assets
 
1,093.6

 
1,010.7

Property, plant and equipment, net
 
1,316.8

 
1,351.4

Goodwill
 
263.4

 
244.8

Other intangibles, net
 
64.9

 
63.2

Deferred income taxes
 
7.6

 
8.2

Other assets
 
131.8

 
116.0

Total assets
 
$
2,878.1

 
$
2,794.3

LIABILITIES
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of long term debt
 
$
55.0

 
$

Accounts payable
 
201.1

 
159.6

Accrued liabilities
 
139.9

 
139.2

Total current liabilities
 
396.0

 
298.8

Long-term debt, net of current portion
 
550.0

 
611.3

Accrued pension liabilities
 
378.3

 
509.3

Accrued postretirement benefits
 
122.6

 
116.6

Deferred income taxes
 
184.8

 
102.4

Other liabilities
 
47.8

 
51.0

Total liabilities
 
1,679.5

 
1,689.4

 
 
 
 
 
Contingencies and commitments (see Note 11)
 


 


 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 

 
 

Common stock — authorized 100,000,000 shares; issued 55,349,658 shares at June 30, 2017 and 55,254,569 shares at June 30, 2016; outstanding 46,753,180 shares at June 30, 2017 and 46,600,125 shares at June 30, 2016
 
276.7

 
276.3

Capital in excess of par value
 
284.8

 
273.5

Reinvested earnings
 
1,321.8

 
1,308.9

Common stock in treasury (8,596,478 shares and 8,654,444 shares at June 30, 2017 and 2016, respectively), at cost
 
(341.6
)
 
(343.9
)
Accumulated other comprehensive loss
 
(343.1
)
 
(409.9
)
Total equity
 
1,198.6

 
1,104.9

Total liabilities and equity
 
$
2,878.1

 
$
2,794.3

 
See accompanying notes to consolidated financial statements.

48


CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended June 30, 2017 , 2016 and 2015
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
($ in millions, except
per share data)
 
Par
Value
of $5
 
Capital in
Excess of
Par Value
 
Reinvested
Earnings
 
Common
Stock in
Treasury
Accumulated Other Comprehensive (Loss) Income
Total Equity
 
 
Balances at June 30, 2014
 
$
275.8

 
$
263.5

 
$
1,311.6

 
$
(101.4
)
 
$
(245.2
)
 
$
1,504.3

 
Net income
 
 

 
 

 
58.7

 
 

 
 

 
58.7

 
Pension and postretirement benefits loss, net of tax
 
 

 
 

 
 

 
 

 
(20.1
)
 
(20.1
)
 
Net loss on derivative instruments, net of tax
 
 

 
 

 
 

 
 

 
(36.1
)
 
(36.1
)
 
Unrealized gain on marketable securities, net of tax
 
 
 
 
 
 
 
 
 
0.1

 
0.1

 
Foreign currency translation
 
 

 
 

 
 

 
 

 
(26.9
)
 
(26.9
)
 
Cash Dividends:
 
 

 
 

 
 

 
 

 
 
 


 
Common @ $0.72 per share
 
 

 
 

 
(37.9
)
 
 

 
 

 
(37.9
)
 
Purchases of treasury stock
 
 
 
 
 
 
 
(124.5
)
 
 
 
(124.5
)
 
Share-based compensation plans
 
 

 
2.1

 
 

 
4.8

 
 

 
6.9

 
Stock options exercised
 
0.4

 
1.9

 
 

 
 

 
 

 
2.3

 
Tax shortfall on share-based compensation
 
 

 
(0.9
)
 
 

 
 

 
 

 
(0.9
)
 
Balances at June 30, 2015
 
276.2

 
266.6

 
1,332.4

 
(221.1
)
 
(328.2
)
 
1,325.9

 
Net income
 
 

 
 

 
11.3

 
 

 
 

 
11.3

 
Pension and postretirement benefits loss, net of tax
 
 

 
 

 
 

 
 

 
(87.5
)
 
(87.5
)
 
Net gain on derivative instruments, net of tax
 
 

 
 

 
 

 
 

 
6.7

 
6.7

 
Foreign currency translation
 
 

 
 

 
 

 
 

 
(0.9
)
 
(0.9
)
 
Cash Dividends:
 
 

 
 

 
 

 
 

 


 


 
Common @ $0.72 per share
 
 

 
 

 
(34.8
)
 
 

 
 

 
(34.8
)
 
Purchases of treasury stock
 


 


 


 
(123.9
)
 


 
(123.9
)
 
Share-based compensation plans
 
 

 
7.7

 
 

 
1.1

 
 

 
8.8

 
Stock options exercised
 
0.1

 
0.4

 
 

 
 

 
 

 
0.5

 
Tax shortfall on share-based compensation
 
 

 
(1.2
)
 
 

 
 

 
 

 
(1.2
)
 
Balances at June 30, 2016
 
276.3

 
273.5

 
1,308.9

 
(343.9
)
 
(409.9
)
 
1,104.9

 
Net income
 
 

 
 

 
47.0

 
 

 
 

 
47.0

 
Pension and postretirement benefits gain, net of tax
 
 

 
 

 
 

 
 

 
45.3

 
45.3

 
Net gain on derivative instruments, net of tax
 
 

 
 

 
 

 
 

 
19.5

 
19.5

 
Foreign currency translation
 
 

 
 

 
 

 
 

 
2.0

 
2.0

 
Cash Dividends:
 
 

 
 

 
 

 
 

 
 
 
 
 
Common @ $0.72 per share
 
 

 
 

 
(34.1
)
 
 

 
 

 
(34.1
)
 
Share-based compensation plans
 
 

 
10.4

 
 

 
2.3

 
 

 
12.7

 
Stock options exercised
 
0.4

 
1.8

 
 

 
 

 
 

 
2.2

 
Tax shortfall on share-based compensation
 
 

 
(0.9
)
 
 

 
 

 
 

 
(0.9
)
 
Balances at June 30, 2017
 
$
276.7

 
$
284.8

 
$
1,321.8

 
$
(341.6
)
 
$
(343.1
)
 
$
1,198.6

 

See accompanying notes to consolidated financial statements.

49


CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
For the Years Ended June 30, 2017, 2016 and 2015
 
 
 
Common Shares
 
 
  Issued
 
  Treasury
 
Net Outstanding
Balances at June 30, 2014
 
55,161,875

 
(2,024,731
)
 
53,137,144

Purchases of treasury stock
 

 
(2,995,272
)
 
(2,995,272
)
Stock options exercised
 
73,067

 

 
73,067

Share-based compensation plans
 

 
103,305

 
103,305

Balances at June 30, 2015
 
55,234,942

 
(4,916,698
)
 
50,318,244

Purchases of treasury stock
 

 
(3,762,200
)
 
(3,762,200
)
Stock options exercised
 
19,627

 

 
19,627

Share-based compensation plans
 

 
24,454

 
24,454

Balances at June 30, 2016
 
55,254,569

 
(8,654,444
)
 
46,600,125

Stock options exercised
 
95,089

 

 
95,089

Share-based compensation plans
 

 
57,966

 
57,966

Balances at June 30, 2017
 
55,349,658

 
(8,596,478
)
 
46,753,180

 
See accompanying notes to consolidated financial statements.

50

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


 
1.                                       Summary of Significant Accounting Policies
 
Basis of Consolidation
 
The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries.  All significant intercompany accounts and transactions are eliminated.  Investments in companies in which the Company exercises significant influence, but which it does not control (generally a 20 to 50 percent ownership interest), are accounted for by the equity method of accounting and the Company’s share of their income or loss is included in other income(expense), net in the consolidated statements of income. During fiscal year 2016, the Company sold its only equity method investment in exchange for $6.3 million in cash and $12.6 million in a note receivable. During fiscal year 2017 the Company received $6.3 million related to the note receivable.
 
Revenue Recognition
 
Revenue, net of related discounts, rebates, returns and allowances of $23.8 million , $29.8 million and $27.4 million for the years ended June 30, 2017 , 2016 and 2015 , respectively, is recognized when persuasive evidence of arrangement exists, title and risk of loss has transferred to the customer, collectability is reasonably assured and pricing is fixed and determinable. These criteria are generally met upon shipment or delivery of the product based on the applicable shipping terms. Shipping terms may vary for products shipped outside the United States depending on the mode of transportation, the country where the material is shipped and any agreements made with the customers.
 
Freight and Handling Fees and Costs
 
Freight and handling costs billed separately to customers are included as part of net sales, and freight and handling costs expensed are included as part of cost of sales on the consolidated statements of income.
 
Research and Development
 
Research and development expenditures, which amounted to $16.9 million , $16.3 million and $18.7 million in fiscal years 2017 , 2016 and 2015 , respectively, are expensed as incurred and are generally reported in cost of sales in the consolidated statements of income.  The research and development expenditures consist principally of salaries and benefits, building costs, utilities and administrative expenses.  Substantially all development costs are related to developing new products or designing significant improvements to existing products or processes.
 
Cash Equivalents
 
Cash equivalents consist of highly liquid instruments with original maturities of three months or less.  Cash equivalents are stated at cost, which approximates market.
 
Accounts Receivable
 
Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of outstanding amounts. Trade credit is extended based upon periodic evaluation of each customer’s ability to perform its obligations. The Company determines accounts receivable allowances based on an aging of accounts and a review of specific accounts identified as collection risks. The Company does not require collateral to secure accounts receivable.
 
Inventories
 
Inventories are valued at the lower of cost or market.  Cost for inventories is principally determined by the LIFO method.   The Company also uses the FIFO and average cost methods. As of June 30, 2017 and 2016, $107.3 million and $118.4 million of inventory, respectively, was accounted for using a method other than the LIFO method.
 

51

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Property, Plant and Equipment and Depreciation
 
Fixed assets are stated at historical cost less accumulated depreciation.  Depreciation for financial reporting purposes is computed by the straight-line method over the estimated useful lives of the assets.  Depreciation for income tax purposes is computed using accelerated methods.  Upon disposal, assets and related depreciation are removed from the accounts and the differences between the net amounts and proceeds from disposal are generally included in cost of goods sold in the consolidated statement of income.
 
Computer Software and Amortization
 
Computer software is included in other assets on the consolidated balance sheet, and is amortized for financial reporting purposes on a straight-line basis over the respective estimated useful lives ranging from 3 to 15 years. Amortization expense charged to operations related to capitalized software amounted to $5.2 million , $5.5 million and $6.1 million for the years ended June 30, 2017 , 2016 and 2015 , respectively. The carrying value of computer software net of accumulated amortization at June 30, 2017 and 2016 was $71.0 million and $49.3 million , respectively.
 
Goodwill
 
Goodwill, net of accumulated impairment losses, representing the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses, is stated at cost. Goodwill is not amortized but instead is annually tested for impairment (in the fourth quarter), or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired.  Such events or circumstances include a decline in general economic conditions, adverse changes in the industry and markets, poor financial performance effecting earnings and cash flows and a trend of negative or declining cash flows over multiple periods. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value, including goodwill.  The fair value is estimated using discounted cash flows and the use of market multiples valuation techniques. These valuation techniques require the use of estimates and assumptions related to projected operating results, capital expenditures and working capital levels as well as the cost of capital. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting unit’s goodwill to its implied fair value.
 
Intangible assets
 
The costs of intangible assets, consisting principally of trademarks, trade names, non-compete arrangements, technology and customer relationships are amortized on a straight-line basis over the estimated useful lives ranging from 5 to 30 years.
 
Impairment of Long-Lived Assets
 
Long-lived assets, including property, plant and equipment and intangible assets, subject to amortization are reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable through future undiscounted cash flows.  The amount of the impairment loss is the excess of the carrying amount of the impaired assets over the fair value of the assets based upon discounted future cash flows.
 
Environmental Expenditures
 
Environmental expenditures that pertain to current operations or to future revenues are expensed or capitalized consistent with the Company’s capitalization policy for property, plant and equipment.  Expenditures that result from the remediation of an existing condition caused by past operations and that do not contribute to current or future revenues are expensed.  Liabilities are recognized for remedial activities when the remediation is probable and the cost can be reasonably estimated.  Most estimated liabilities are not discounted to present value due to the uncertainty as to the timing and duration of expected costs.  For one former operating facility site, due to the routine nature of the expected costs, the liability for future costs is discounted to present value over 20 years assuming a discount rate of approximately 3 percent as of June 30, 2017 and 2016.  The liabilities, net of present value discount, for this former operating site were $11.0 million and $10.9 million , as of June 30, 2017 and 2016 , respectively.
 

52

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Derivative Financial Instruments
 
All derivative financial instruments are recorded on the balance sheet at their fair value and changes in fair value are recorded each period in current earnings or other comprehensive income.  The Company enters into derivative financial instruments to hedge certain anticipated transactions, firm commitments or assets and liabilities denominated in foreign currencies.  In addition, the Company utilizes interest rate swaps to convert fixed rate debt to floating rate.

At least quarterly, the Company determines hedge effectiveness utilizing regression analysis for measuring the probable high correlation of the expected future cash flows of the hedged item and the derivative hedging instrument. The ineffective portion of hedges is immediately recorded in the consolidated statement of income. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, future gains or losses on the derivative instrument are recorded in the consolidated statement of income.
 
Foreign Currency Translation
 
Assets and liabilities of most international operations are translated into U.S. dollars at exchange rates in effect at year-end, and their income statements are translated at the average monthly exchange rates prevailing during the year.  The resulting translation gains and losses are recorded each period as a component of accumulated other comprehensive (loss) income until the international entity is sold or liquidated. Gains and losses from transactions denominated in foreign currencies are reported in other income (expense), net in the consolidated statement of income.
 
Income Taxes
 
Deferred income taxes are recognized by applying enacted statutory tax rates, applicable to future years, to temporary differences between the tax bases and financial statement carrying values of the Company’s assets and liabilities.  Valuation allowances are recorded to reduce deferred tax assets to amounts that are more likely than not to be realized.
 
Significant judgments, estimates and assumptions are required in determining tax return reporting positions and in calculating provisions for income tax, which are based on interpretations of tax regulations and accounting pronouncements. Liabilities are established for uncertain tax positions when it is more likely than not that such positions, if challenged, would not be sustained upon review by taxing authorities. These liabilities are re-evaluated as tax regulations and facts and circumstances change, such as the closing of a tax audit or the expiration of the statute of limitations for a specific exposure.
 
Earnings per Share
 
The Company calculates basic and diluted earnings per share using the two class method.  Under the two class method, earnings are allocated to common stock and participating securities (restricted stock units that receive non-forfeitable dividends) according to their participation rights in dividends and undistributed earnings.  The earnings available to each class of stock are divided by the weighted average number of shares for the period in each class.  Diluted earnings per share assume the issuance of common stock for all potentially dilutive share equivalents outstanding.
 
Concentration of Credit Risk
 
Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and cash equivalents, investments in marketable securities and trade receivables. Investment and cash management policies have been implemented that limit deposit concentrations and limit investments to investment grade securities. The risk with respect to trade receivables is mitigated by monitoring payment terms and periodic credit evaluations we perform on our customers, the short duration of our payment terms and by the diversification of our customer base. During fiscal year 2017 and 2016, one customer, Arconic, Inc., accounted for approximately 11 percent and 13 percent , respectively, of total net sales. No single customer accounted for 10 percent or more of total net sales during fiscal year 2015. No single customer accounted for 10 percent or more of accounts receivable outstanding at June 30, 2017. Approximately 22 percent of the accounts receivable outstanding at June 30, 2016 was due from two customers, Alcoa Inc. and Precision Castparts Corporation.
 

53

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Reclassifications
 
The Company changed the presentation of borrowings and repayments made under the credit agreement in the consolidated statements of cash flows. Prior year amounts have been reclassified to conform to fiscal year 2017 presentation.

2.                                       Acquisition and Divestiture

On February 28, 2017, the Company acquired substantially all the assets of Puris LLC (“Puris”), for a cash purchase price of $35.3 million . The acquisition provides the Company with immediate entry into the rapidly growing titanium powder market, an expanded presence in additive manufacturing and strengthens the Company’s capabilities as a solutions provider for customers across its end-use markets. The purchase price allocation was completed in the fourth quarter of fiscal year 2017 and resulted in the purchase price being allocated to $1.7 million of working capital, $6.5 million of property and equipment, $8.5 million of identifiable intangible assets and $18.6 million of goodwill.

On June 29, 2017, the Company divested the Specialty Steel Supply (“SSS”) business. The divestiture was completed in two separate transactions for total cash proceeds of $12.0 million . In connection with the divestiture, the Company recorded a pretax loss of $3.2 million . The operations of the SSS business were historically included in our Performance Engineered Products (“PEP”) segment. The Company does not have any significant continuing involvement in the operations of SSS after the divestiture.

3 .
Restructuring Charges and Asset Impairment Charges
 
There were no restructuring or asset impairment charges during fiscal year 2017. Restructuring and asset impairment charges for the years ended June 30, 2016 and 2015 were $18.0 million and $29.1 million , respectively.

Fiscal Year 2016

During the year ended June 30, 2016, the Company recorded $10.4 million of pre-tax charges, consisting of $9.4 million associated with an early retirement incentive funded by the Company’s qualified pension plan, $0.7 million of other severance costs paid by the Company in fiscal year 2016 and $0.3 million of other severance related costs paid by the Company in fiscal year 2017. At this time, the Company does not expect any additional charges related to these restructuring actions in the future.

As a result of the prolonged weakness in oil and gas drilling and exploration activities and the impact this weakness had on certain reporting units in the PEP segment, the Company recognized non-cash impairment pre-tax charges of $7.6 million on certain long-lived assets, including $6.5 million related to property, plant and equipment and $1.1 million associated with certain definite lived intangible assets during the year ended June 30, 2016.

Fiscal Year 2015

In fiscal year 2015, the Company implemented a restructuring plan aimed at reducing fixed costs by approximately $30 million annually across the Company. In connection with this restructuring plan, the Company recorded a pre-tax charge of $12.7 million during the year ended June 30, 2015 consisting primarily of various personnel-related costs for severance payments, medical coverage and related items. Of this charge, $2.5 million was paid by the Company in fiscal year 2015, $8.3 million was paid from the Company’s qualified pension plan in fiscal year 2015, $0.4 million was recorded as non-cash forfeiture income related to stock-based compensation in fiscal year 2015 and the remaining balance was paid by the Company in fiscal year 2016.


54

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


The Company recorded a pre-tax charge of $13.4 million during the year ended June 30, 2015 to exit a materials development program. This includes an $8.0 million cash payment during the year ended June 30, 2015 to exit a licensing agreement and non-cash asset impairment charges totaling $5.4 million .

The Company recorded a pre-tax charge of $3.0 million during the year ended June 30, 2015 to reflect site closure costs consisting of $0.4 million cash payments and $2.6 million non-cash write-downs of inventory, property and equipment and related items.

Activity and reserve balances for restructuring charges at June 30, 2017 and 2016 were as follows:

 
 
June 30,
($ in millions)
 
2017
 
2016
Reserve balance beginning of year
 
$
0.3

 
$
2.3

Restructuring charges and asset impairment charges
 

 
18.0

Cash payments
 
(0.3
)
 
(3.0
)
Payments from qualified pension plan associated with restructuring charges
 

 
(9.4
)
Non-cash asset impairment charges and other
 

 
(7.6
)
Reserve balance end of year
 
$

 
$
0.3


4.                                       Earnings per Common Share
 
The calculations of basic and diluted earnings from continuing operations per common share for the years ended June 30, 2017 , 2016 and 2015 were as follows:
 
 
 
Years Ended June 30,
(in millions, except per share data)
 
2017
 
2016
 
2015
Net income
 
$
47.0

 
$
11.3

 
$
58.7

Less: earnings and dividends allocated to participating securities
 
(0.3
)
 
(0.1
)
 
(0.1
)
 
 
 
 
 
 
 
Earnings available for common shareholders used in calculation of basic earnings per share
 
$
46.7

 
$
11.2

 
$
58.6

 
 
 
 
 
 
 
Weighted average number of common shares outstanding, basic
 
47.0

 
48.1

 
52.6

 
 
 
 
 
 
 
Basic earnings per common share
 
$
0.99

 
$
0.23

 
$
1.11

 
 
 
 
 
 
 
Net income
 
$
47.0

 
$
11.3

 
$
58.7

Less: earnings and dividends allocated to participating securities
 
(0.3
)
 
(0.1
)
 
(0.1
)
 
 
 
 
 
 
 
Earnings available for common shareholders used in calculation of diluted earnings per share
 
$
46.7

 
$
11.2

 
$
58.6

 
 
 
 
 
 
 
Weighted average number of common shares outstanding, basic
 
47.0

 
48.1

 
52.6

Effect of shares issuable under share-based compensation plans
 
0.1

 
0.1

 
0.1

 
 
 
 
 
 
 
Weighted average number of common shares outstanding, diluted
 
47.1

 
48.2

 
52.7

 
 
 
 
 
 
 
Diluted earnings per common share
 
$
0.99

 
$
0.23

 
$
1.11


55

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


 
The following awards issued under share-based compensation plans were excluded from the calculations of diluted earnings per share above because their effects were anti-dilutive:
 
 
 
Years Ended June 30,
(in millions)
 
2017
 
2016
 
2015
Stock options
 
1.9

 
1.5

 
0.8

5.                                       Inventories
 
Inventories consisted of the following components at June 30, 2017 and 2016 :
    
 
 
June 30,
($ in millions)
 
2017
 
2016
Raw materials and supplies
 
$
152.8

 
$
137.6

Work in process
 
365.6

 
298.9

Finished and purchased products
 
172.0

 
192.2

Total inventory
 
$
690.4

 
$
628.7

 
If the FIFO method of inventory had been used instead of the LIFO method, inventories would have been $106.1 million and $98.2 million higher as of June 30, 2017 and 2016 , respectively.  Current cost of LIFO-valued inventories was $689.2 million at June 30, 2017 and $608.5 million at June 30, 2016 .  The reductions in LIFO-valued inventories increased cost of sales by $0.0 million during fiscal year 2017 and $0.0 million during fiscal year 2016 and $1.6 million during fiscal year 2015

During fiscal year 2016, the Company recorded a $22.5 million charge for excess inventory adjustments in certain reporting units in the PEP segment due to the prolonged weakness in oil and gas businesses.
6.                                       Property, Plant and Equipment
 
Property, plant and equipment consisted of the following components at June 30, 2017 and 2016 :

 
 
June 30,
($ in millions)
 
2017
 
2016
Land
 
$
34.1

 
$
33.0

Buildings and building equipment
 
495.7

 
484.1

Machinery and equipment
 
2,082.4

 
2,038.3

Construction in progress
 
56.3

 
52.3

Total at cost
 
2,668.5

 
2,607.7

Less: accumulated depreciation and amortization
 
1,351.7

 
1,256.3

Total property, plant, and equipment
 
$
1,316.8

 
$
1,351.4

 
The estimated useful lives of depreciable assets are as follows:
 
Asset Category
 
Useful Life
(in Years)
Buildings and building equipment
 
10 – 45
Machinery and equipment
 
3 – 30
 

56

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


As a result of the prolonged weakness in oil and gas drilling and exploration activities and the impact this weakness had on certain reporting units in the PEP segment, the Company recorded an impairment charge related to property, plant and equipment of $6.5 million during fiscal year 2016.

Depreciation for the years ended June 30, 2017 , 2016 and 2015 was $105.8 million , $106.5 million and $107.2 million , respectively.
7.                                       Goodwill and Other Intangible Assets, Net
 
Goodwill
 
The Company conducts goodwill impairment testing at least annually as of June 30, or more often if events, changes or circumstances indicate that the carrying amount may not be recoverable. 

The Company has determined there was no goodwill impairment for the year ended June 30, 2017. As a result of prolonged weakness in oil and gas drilling and exploration activity, the Company determined that the goodwill associated with 2 reporting units was impaired and recorded an impairment charge of $12.5 million during the year ended June 30, 2016 which represented the entire balance of the goodwill recorded for these reporting units.

The changes in the carrying amount of goodwill by reportable segment for fiscal years 2017 and 2016 were as follows:
 
($ in millions)
 
June 30, 2015
 
Impairment
 
Other
 
June 30, 2016
 
Acquisition
 
June 30, 2017
Goodwill
 
$
292.1

 
$

 
$
(0.1
)
 
$
292.0

 
$
18.6

 
$
310.6

Accumulated impairment losses
 
(34.7
)
 
(12.5
)
 

 
(47.2
)
 

 
(47.2
)
Total goodwill
 
$
257.4

 
$
(12.5
)
 
$
(0.1
)
 
$
244.8

 
$
18.6

 
$
263.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Specialty Alloys Operations
 
$
195.5

 
$

 
$

 
$
195.5

 
$

 
$
195.5

Performance Engineered Products
 
61.9

 
(12.5
)
 
(0.1
)
 
49.3

 
18.6

 
67.9

Total goodwill
 
$
257.4

 
$
(12.5
)
 
$
(0.1
)
 
$
244.8

 
$
18.6

 
$
263.4

 
The amounts included in “other” in the above table represent foreign exchange impacts on the amounts recorded in goodwill.
 
Other Intangible Assets, Net
 
 
 
 
 
June 30, 2017
 
June 30, 2016
($ in millions)
 
Useful Life
(in Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Trademarks and trade names
 
15 - 30
 
$
33.5

 
$
(21.9
)
 
$
11.6

 
$
32.4

 
$
(20.7
)
 
$
11.7

Customer relationships
 
10 - 15
 
73.3

 
(25.8
)
 
47.5

 
73.0

 
(22.2
)
 
50.8

Non-compete agreements
 
5
 
0.2

 

 
0.2

 
5.4

 
(4.7
)
 
0.7

Technology
 
15
 
5.7

 
(0.1
)
 
5.6

 

 

 

Total
 
 
 
$
112.7

 
$
(47.8
)
 
$
64.9

 
$
110.8

 
$
(47.6
)
 
$
63.2

 
As a result of the prolonged weakness in oil and gas drilling and exploration activities and the impact this weakness had on certain reporting units in the PEP segment, the Company recorded an impairment charge of $1.1 million related to definite lived intangible assets during fiscal year 2016.


57

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


The Company recorded $6.8 million of amortization expense related to intangible assets during fiscal year 2017 , $7.3 million during fiscal year 2016 and $9.0 million during fiscal year 2015 . The estimated annual amortization expense related to intangible assets for each of the succeeding five fiscal years is $6.6 million in fiscal years 2018 , 2019 , 2020 , 2021 and 2022 .
8.                                       Accrued Liabilities
 
Accrued liabilities consisted of the following as of June 30, 2017 and 2016 :
 
 
 
June 30,
($ in millions)
 
2017
 
2016
Accrued compensation and benefits
 
$
59.1

 
$
41.8

Accrued postretirement benefits
 
15.5

 
13.8

Derivative financial instruments
 
13.1

 
31.6

Accrued interest expense
 
11.2

 
11.2

Deferred revenue
 
9.8

 
8.9

Accrued income taxes
 
5.1

 
1.5

Accrued pension liabilities
 
3.3

 
10.1

Other
 
22.8

 
20.3

Total accrued liabilities
 
$
139.9

 
$
139.2

 
9 .    Debt

On March 31, 2017, the Company entered into a $400.0 million syndicated credit facility (“Credit Agreement”) that extends to March 2022. The Credit Agreement replaced the Company’s previous revolving credit facility, dated June 28, 2013, which had been set to expire in June 2018. Interest on the borrowings under the Credit Agreement accrue at variable rates, based upon LIBOR or a defined “ Base Rate ,” both determined based upon the rating of the Company’s senior unsecured long-term debt (the “Debt Rating”). The applicable margin to be added to LIBOR ranges from 1.00% to 1.75% ( 1.50% as of June 30, 2017 ), and for Base Rate-determined loans, from 0.00% to 0.75% ( 0.50% as of June 30, 2017 ). The Company also pays a quarterly commitment fee ranging from 0.125% to 0.400% ( 0.275% as of June 30, 2017 ), determined based upon the Debt Rating, of the unused portion of the $400.0 million commitment under the Credit Agreement. In addition, the Company must pay certain letter of credit fees, ranging from 1.00% to 1.75% ( 1.50% as of June 30, 2017 ), with respect to letters of credit issued under the Credit Agreement. The Company has the right to voluntarily prepay and re-borrow loans and to terminate or reduce the commitments under the facility. As of June 30, 2017 , the Company had $6.1 million of issued letters of credit under the Credit Agreement, with the balance of $393.9 million available to the Company.
 
The Company is subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio of 3.50 to 1.00 . The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense (“EBITDA”) to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than 55 percent. The debt to capital ratio is defined in the Credit Agreement as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. As of June 30, 2017 , the Company was in compliance with all of the covenants of the Credit Agreement.
 

58

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Long-term debt outstanding as of June 30, 2017 and 2016 consisted of the following: 
 
 
June 30,
($ in millions)
 
2017
 
2016
Medium-term notes, Series B at 6.97% to 7.10% due from April 2018 to May 2018 (face value of $55.0 million at June 30, 2017 and 2016)
 
$
55.0

 
$
55.0

Senior unsecured notes, 5.20% due July 2021 (face value of $250.0 million at June 30, 2017 and 2016)
 
251.2

 
257.8

Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at June 30, 2017 and 2016)
 
298.8

 
298.5

Total
 
605.0

 
611.3

Less: amounts due within one year
 
(55.0
)
 

Long-term debt, net of current portion
 
$
550.0

 
$
611.3

 
Aggregate maturities of long-term debt for the five years subsequent to June 30, 2017 , are $55.0 million in fiscal year 2018 , $0.0 million in 2019 , 2020, 2021, $250.0 million in 2022, and $300.0 million thereafter.
 
For the years ended June 30, 2017 , 2016 and 2015 , interest costs totaled $31.1 million , $29.9 million and $30.4 million , respectively, of which $1.3 million , $1.9 million and $2.7 million , respectively, were capitalized as part of the cost of property, plant, equipment and software.

10 .    Pension and Other Postretirement Benefits
 
The Company provides several noncontributory defined benefit pension plans to certain employees. The plans provide defined benefits based on years of service and final average salary.
In September 2016, the Company announced changes to retirement plans it offers to certain employees. The Company froze benefits accrued to eligible participants of its largest qualified defined benefit pension plan and certain non-qualified benefit plans effective December 31, 2016.  The Company recognized the plan freeze during fiscal year 2017 as a curtailment, since it eliminated the accrual of defined benefits for future services for a significant number of participants. The impact of the curtailment included a one-time accelerated recognition of outstanding unamortized prior service costs of $0.5 million . The curtailment event triggered a re-measurement for the affected benefit plans as of August 31, 2016 using a weighted average discount rate of 3.57 percent . The re-measurement resulted in a reduction of accrued pension liabilities of $18.7 million .
In October 2016, the Company made a voluntary pension contribution of  $100.0 million  to its largest qualified defined benefit pension plan. 

The Company also provides other postretirement benefit plans to certain of its employees. The postretirement benefit plans consist of health care and life insurance plans. Plan assets are maintained in a Voluntary Employee Benefit Association (“VEBA”) Trust. During fiscal year 2017, the Company funded benefit payments using assets in the VEBA Trust. Prior to fiscal year 2017, benefit payments for these plans were funded by the Company assets.
 

59

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans:
 
 
 
Pension Plans
 
Other Postretirement Plans
($ in millions)
 
2017
 
2016
 
2017
 
2016
Change in projected benefit obligation:
 
 

 
 

 
 

 
 

Projected benefit obligation at beginning of year
 
$
1,404.4

 
$
1,323.1

 
$
246.0

 
$
236.8

Service cost
 
20.5

 
31.2

 
3.6

 
3.3

Interest cost
 
50.3

 
58.0

 
9.2

 
10.4

Benefits paid
 
(92.0
)
 
(126.1
)
 
(12.7
)
 
(13.3
)
Actuarial loss
 
39.3

 
108.8

 
(1.7
)
 
8.8

Special termination benefits
 
0.6

 
9.4

 

 

Curtailment gain
 
(72.6
)
 

 

 

Plan amendments
 
18.6

 

 
10.7

 

Projected benefit obligation at end of year
 
1,369.1

 
1,404.4

 
255.1

 
246.0

Change in plan assets:
 
 

 
 

 
 

 
 

Fair value of plan assets at beginning of year
 
885.1

 
985.8

 
115.6

 
111.6

Actual return
 
91.1

 
22.2

 
10.9

 
4.3

Benefits paid
 
(92.0
)
 
(126.1
)
 
(12.7
)
 
(13.3
)
Contributions
 
103.4

 
3.2

 
3.2

 
13.0

Fair value of plan assets at end of year
 
987.6

 
885.1

 
117.0

 
115.6

Funded status of the plans
 
$
(381.5
)
 
$
(519.3
)
 
$
(138.1
)
 
$
(130.4
)
 
 
 
 
 
 
 
 
 
Amounts recognized in the consolidated balance sheets:
 
 

 
 

 
 

 
 

Other assets - noncurrent
 
$
0.1

 
$
0.1

 
$

 
$

Accrued liabilities - current
 
(3.3
)
 
(10.1
)
 
(15.5
)
 
(13.8
)
Accrued pension liabilities - noncurrent
 
(378.3
)
 
(509.3
)
 

 

Accrued postretirement benefits - noncurrent
 

 

 
(122.6
)
 
(116.6
)
 
 
$
(381.5
)
 
$
(519.3
)
 
$
(138.1
)
 
$
(130.4
)
 
 
 
Pension Plans
 
Other Postretirement Plans
($ in millions)
 
2017
 
2016
 
2017
 
2016
Amounts recognized in accumulated other comprehensive loss:
 
 

 
 

 
 

 
 

Net actuarial loss
 
$
451.3

 
$
547.7

 
$
52.2

 
$
61.1

Prior service cost (credit)
 
18.3

 
2.0

 
(28.2
)
 
(45.4
)
Total
 
$
469.6

 
$
549.7

 
$
24.0

 
$
15.7

Other changes in plan assets and benefit obligations recognized in other comprehensive loss consist of:
 
 
 
 
 
 
 
 
Net actuarial (gain) loss
 
$
(59.1
)
 
$
152.8

 
$
(5.7
)
 
$
11.3

Amortization of net loss
 
(37.8
)
 
(27.3
)
 
(3.2
)
 
(2.6
)
Prior service cost
 
18.6

 

 
10.7

 

Amortization of prior service (cost) benefit
 
(1.8
)
 
(0.4
)
 
6.5

 
6.5

Total, before tax effect
 
$
(80.1
)
 
$
125.1

 
$
8.3

 
$
15.2

Additional information:
 
 

 
 

 
 

 
 

Accumulated benefit obligation for all pension plans
 
$
1,362.8

 
$
1,319.7

 
N/A

 
N/A

 

60

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


The following is additional information related to plans with projected benefit obligations in excess of plan assets as of June 30, 2017 and 2016 :
 
 
 
Pension Plans
 
Other Postretirement Plans
($ in millions)
 
2017
 
2016
 
2017
 
2016
Projected benefit obligation
 
$
1,369.0

 
$
1,404.3

 
$
255.1

 
$
246.0

Fair value of plan assets
 
$
987.4

 
$
884.9

 
$
117.0

 
$
115.6

 
The following additional information is for plans with accumulated benefit obligations in excess of plan assets as of June 30, 2017 and 2016 :
 
 
 
Pension Plans
 
Other Postretirement Plans
($ in millions)
 
2017
 
2016
 
2017
 
2016
Accumulated benefit obligation
 
$
1,362.7

 
$
1,319.6

 
$
255.1

 
$
246.0

Fair value of plan assets
 
$
987.4

 
$
884.9

 
$
117.0

 
$
115.6

 
The components of the net periodic benefit cost related to the Company’s pension and other postretirement benefits for the years ended June 30, 2017 , 2016 and 2015 are as follows:
 
 
 
Pension Plans
 
Other Postretirement Plans
($ in millions)
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Service cost
 
$
20.5

 
$
31.2

 
$
32.2

 
$
3.6

 
$
3.3

 
$
4.4

Interest cost
 
50.3

 
58.0

 
54.1

 
9.2

 
10.4

 
11.8

Expected return on plan assets
 
(65.1
)
 
(66.1
)
 
(68.8
)
 
(6.9
)
 
(7.0
)
 
(6.6
)
Amortization of net loss
 
37.8

 
27.4

 
16.7

 
3.2

 
2.7

 
2.0

Amortization of prior service cost (benefit)
 
1.8

 
0.4

 
0.3

 
(6.5
)
 
(6.5
)
 

Curtailment loss (gain)
 
0.5

 

 

 

 

 
(1.6
)
Net periodic benefit costs
 
$
45.8

 
$
50.9

 
$
34.5

 
$
2.6

 
$
2.9

 
$
10.0

 
The service cost component of the Company’s net pension expense, which represents the estimated cost of future pension liabilities earned associated with active employees, is included in the operating income of the business segments. The residual net pension expense, which is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans, and amortization of actuarial gains and losses and prior service costs, is included under the heading “Pension earnings, interest & deferrals” in the segment data presented in Note 19 .

During the year ended June 30, 2016, the Company offered an early retirement incentive to certain employees. As a result of the incentive, $9.4 million was paid from the Company’s qualified pension plan consisting of various personnel-related costs to cover severance payments.
  
Weighted-average assumptions used to determine benefit obligations at fiscal year end
 
Pension Plans
Other Postretirement Plans
 
2017
 
2016
 
2017
 
2016
 
Discount rate
 
3.92
%
 
3.92
%
 
3.89
%
 
3.86
%
 
Rate of compensation increase
 
3.50
%
 
3.49
%
 
N/A

 
N/A

 
 

61

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Weighted-average assumptions used to determine net periodic benefit cost for the fiscal year
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Plans
 
Other Postretirement Plans
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Discount rate
 
3.91
%
 
4.50
%
 
4.48
%
 
3.86
%
 
4.50
%
 
4.26
%
Expected long-term rate of return on plan assets
 
6.88
%
 
6.92
%
 
6.92
%
 
6.25
%
 
6.25
%
 
6.25
%
Long-term rate of compensation increase
 
3.50
%
 
3.49
%
 
3.52
%
 
N/A

 
N/A

 
N/A

 
The following table shows the expected health care rate increase and the future rate and time at which it is expected to remain constant:
 
 
June 30,
 
 
2017
 
2016
Assumed health care cost trend rate
 
7.00
%
 
7.50
%
Rate to which the cost trend rate is assumed to decline and remain (the ultimate trend rate)
 
5.00
%
 
5.00
%
Year that the rate reaches the ultimate trend rate
 
2022

 
2022

 
Assumed health care cost trend rates have an effect on the amounts reported for other postretirement benefits. A one percentage point increase in the assumed health care cost trend rate would increase service and interest cost by $0.1 million and increase the postretirement benefit obligation by $3.3 million . A one percentage point decrease in the assumed health care cost trend rate would decrease service and interest cost by $0.1 million and decrease the postretirement benefit obligation by $2.9 million .
  
Amounts in other comprehensive loss that are expected to be recognized as components of net periodic benefit cost in the year ended June 30, 2018 are:
 
($ in millions)
 
Pension Plans
 
Other Postretirement Plans
 
Total
Amortization of prior service cost (benefit)
 
$
2.1

 
$
(5.2
)
 
$
(3.1
)
Amortization of net actuarial loss
 
13.5

 
2.9

 
16.4

Amortization of accumulated other comprehensive loss (gain)
 
$
15.6

 
$
(2.3
)
 
$
13.3

 
The Company’s U.S. pension plans’ weighted-average asset allocations at June 30, 2017 and 2016 , by asset category are as follows: 

 
 
2017
 
2016
Equity securities
 
55.0
%
 
55.4
%
Fixed income securities
 
45.0

 
44.2

Cash and cash equivalents
 

 
0.4

Total
 
100.0
%
 
100.0
%
 
The Company’s policy for developing a pension plan investment strategy includes the periodic development of an asset and liability study by an independent investment consultant. Management considers this study in establishing an asset allocation that is presented to and approved by the Company’s Retirement Plan Committee.
 

62

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Based on the current funding level, the allocation policy for the Company’s largest pension plan assets is to have approximately 60 percent in return seeking assets and 40 percent in liability matching assets.  Return seeking assets include domestic and international equities and diversified loan funds.  Liability matching assets include long duration bond funds.  As the funding level of the plans improves in increments of 5 percent , assets will be shifted from return seeking to liability matching in increments of 4 percent as a de-risking strategy.  The assets related to the Company’s other postretirement benefit plans were invested in approximately 75 percent U.S. equities and 25 percent fixed income securities as of June 30, 2017 .  Management establishes the expected long-term rate of return assumption by reviewing historical trends and analyzing the current and projected market conditions in relation to the plan’s asset allocation and risk management objectives. In determining the expected long-term rate of return, the Company considered historical returns for individual asset classes and the impact of active portfolio management.
 
The fair values of the Company’s pension plan assets as of June 30, 2017 and 2016 , by asset category and by the levels of inputs used to determine fair value were as follows:
 
 
 
June 30, 2017
 
 
Fair Value
Measurements Using
Input Type
 
 
 
 
($ in millions)
 
Level 1
 
Level 2
 
Net Asset Value
 
Total
Short-term investments
 
$
9.4

 
$
14.6

 
$

 
$
24.0

Domestic and international equities
 
148.3

 

 

 
148.3

Commingled funds
 

 

 
376.6

 
376.6

Limited partnerships
 

 

 
42.3

 
42.3

Government agency bonds
 
3.4

 
151.0

 

 
154.4

Corporate bonds
 

 
236.2

 

 
236.2

Mutual funds
 

 

 
1.8

 
1.8

Mortgage/asset backed securities and other
 

 
4.0

 

 
4.0

 
 
$
161.1

 
$
405.8

 
$
420.7

 
$
987.6

 
 
June 30, 2016
 
 
Fair Value
Measurements Using
Input Type
 
 
 
 
($ in millions)
 
Level 1
 
Level 2
 
Net Asset Value
 
Total
Short-term investments
 
$

 
$
15.3

 
$

 
$
15.3

Domestic and international equities
 
139.4

 

 

 
139.4

Commingled funds
 

 

 
338.2

 
338.2

Limited partnerships
 

 

 
38.5

 
38.5

Government agency bonds
 
0.7

 
141.0

 

 
141.7

Corporate bonds
 

 
197.3

 

 
197.3

Mutual funds
 

 

 
1.9

 
1.9

Mortgage/asset backed securities and other
 

 
12.8

 

 
12.8

 
 
$
140.1

 
$
366.4

 
$
378.6


$
885.1

 

63

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


The fair values of the Company’s other postretirement benefit plans as of June 30, 2017 and 2016 , by asset category and by the level of inputs used to determine fair value, were as follows:
 
 
 
June 30, 2017
 
 
Fair Value
Measurements Using
Input Type
 
 
 
 
($ in millions)
 
Level 1
 
Level 2
 
Net Asset Value
 
Total
Commingled fund
 
$

 
$

 
$
73.0

 
$
73.0

Short-term investments
 

 
22.4

 

 
22.4

Government agency bonds
 

 
12.2

 

 
12.2

Corporate bonds and other
 

 
8.2

 

 
8.2

Mortgage backed securities
 

 
1.2

 

 
1.2

 
 
$

 
$
44.0

 
$
73.0

 
$
117.0

 
 
June 30, 2016
 
 
Fair Value
Measurements Using
Input Type
 
 
 
 
($ in millions)
 
Level 1
 
Level 2
 
Net Asset Value
 
Total
Commingled fund
 
$

 
$

 
$
64.0

 
$
64.0

Short-term investments
 

 
23.8

 

 
23.8

Government agency bonds
 

 
16.1

 

 
16.1

Corporate bonds and other
 

 
9.9

 

 
9.9

Mortgage backed securities
 

 
1.8

 

 
1.8

 
 
$

 
$
51.6

 
$
64.0

 
$
115.6

 
 
 
 
 
 
 
 
 
 
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Investments in domestic and international equities are generally valued at the closing price reported on the active market on which they are traded. Commingled funds, limited partnerships and mutual funds are valued based on the net asset value (“NAV”) established for the fund at each valuation date. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units/shares outstanding. Corporate and government agency bonds and other fixed income securities are valued using closing bid prices on an active market when possible, otherwise using evaluated bid prices.
 
Cash Flows — Employer Contributions
 
The Company made contributions to the qualified US pension plans of $100.0 million , $0.0 million and $7.2 million during fiscal years 2017 , 2016 and 2015 , respectively. The Company currently expects to make $6.7 million in required cash pension contributions to the qualified defined benefit pension plans during fiscal year 2018 .  During the years ended June 30, 2017 , 2016 and 2015 , the Company made contributions of $3.5 million , $3.2 million and $3.3 million to other non-qualified pension plans, respectively.
 

64

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Estimated Future Benefit Payments
 
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid.  Pension benefits are currently paid from plan assets and other benefits are currently paid from corporate assets.
 
($ in millions)
 
Pension
Benefits
 
Other
Benefits
2018
 
$
80.9

 
$
15.5

2019
 
$
81.5

 
$
15.5

2020
 
$
82.1

 
$
15.6

2021
 
$
82.6

 
$
15.5

2022
 
$
82.7

 
$
15.5

2023-2027
 
$
406.4

 
$
75.9

 
Other Benefit Plans
 
Carpenter also maintains defined contribution retirement and savings plans for substantially all domestic employees.  Company contributions to the plans were $16.7 million in fiscal year 2017 , $11.8 million in fiscal year 2016 and $12.0 million in fiscal year 2015

11 .    Contingencies and Commitments

Environmental
 
The Company is subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health.  Although compliance with these laws and regulations may affect the costs of the Company’s operations, compliance costs to date have not been material.  The Company has environmental remediation liabilities at some of its owned operating facilities and has been designated as a potentially responsible party (“PRP”) with respect to certain third party Superfund waste-disposal sites and other third party-owned sites.  Additionally, the Company has been notified that it may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against the Company. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRPs at these Superfund sites have been determined.  Accordingly, at this time, we cannot reasonably estimate expected costs for such matters. The liability for future environmental remediation costs that can be reasonably estimated is evaluated by management on a quarterly basis.  The Company accrues amounts for environmental remediation costs that represent management’s best estimate of the probable and reasonably estimable future costs related to environmental remediation. During fiscal year 2017 , the Company decreased the liability for a company-owned former operating site by $0.1 million . During fiscal years 2016 and 2015 , the Company increased the liability for a company-owned former operating site by $0.3 million and $0.4 million , respectively. The liabilities recorded for environmental remediation costs at Superfund sites, other third party-owned sites and Carpenter-owned current or former operating facilities remaining at June 30, 2017 and 2016 were $16.1 million and $16.2 million , respectively.
  

65

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Other
 
The Company is defending various routine claims and legal actions that are incidental to its business and common to its operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. Like many other manufacturing companies in recent years, the Company, from time to time, has been named as a defendant in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace. The Company provides for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on the Company’s future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, management believes that the total liability from these matters will not have a material effect on the Company’s financial position, results of operations or cash flows over the long-term. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to the Company’s financial position, results of operations or cash flows in a particular future quarter or year.

The Company has entered into purchase agreements primarily for various key raw materials at market related prices, all made in the normal course of business.  The commitments include both fixed and variable price provisions.  Raw material prices as of June 30, 2017 were used for commitments with variable pricing.  The purchase commitments covered by these agreements aggregate to $127.8 million as of June 30, 2017 , all of which relates to fiscal year 2018.

12.    Share Repurchase Program

In October 2014, the Company’s Board of Directors authorized a share repurchase program. The program authorizes the purchase of up to $500.0 million of the Company’s outstanding common stock and expired in October 2016.The shares were repurchased from time to time at the Company’s discretion based on capital needs of the business, general market conditions and market price of the stock. During the year ended June 30, 2017 , the Company did not purchase shares of its common stock on the open market.
13.                                Operating Leases
 
The Company leases certain facilities and equipment under operating leases.  Total rent expense was $13.2 million , $11.3 million and $12.0 million for the fiscal years ended June 30, 2017 , 2016 and 2015 , respectively.
 
Future minimum payments for non-cancellable operating leases in effect at June 30, 2017 are:  $8.7 million in fiscal year 2018 , $6.6 million in fiscal year 2019 , $5.1 million in fiscal year 2020 , $3.1 million in fiscal year 2021 , $1.9 million in fiscal year 2022 and $5.0 million thereafter.
14.                                Fair Value Measurements
 
The fair value hierarchy has three levels based on the inputs used to determine fair value. Level 1 refers to quoted prices in active markets for identical assets or liabilities. Level 2 refers to observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 refers to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
 

66

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
 
June 30, 2017
 
Fair Value Measurements
Using Input Type
($ in millions)
 
Level 2
 
Total
Assets:
 
 

 
 

Marketable securities
 
 

 
+C5

Municipal auction rate securities
 
$
3.4

 
$
3.4

Derivative financial instruments
 
14.5

 
14.5

Total assets
 
$
17.9

 
$
17.9

Liabilities:
 
 

 
 

Derivative financial instruments
 
$
19.1

 
$
19.1

 
June 30, 2016
 
Fair Value Measurements
Using Input Type
($ in millions)
 
Level 2
 
Total
Assets:
 
 

 
 

Marketable securities
 
 

 
 

Municipal auction rate securities
 
$
4.1

 
$
4.1

Derivative financial instruments
 
11.8

 
11.8

Total assets
 
$
15.9

 
$
15.9

Liabilities:
 
 

 
 

Derivative financial instruments
 
$
43.9

 
$
43.9

 
The Company’s derivative financial instruments consist of commodity forward contracts, foreign currency forward contracts, interest rate swaps and forward interest rate swaps. These instruments are measured at fair value using the market method valuation technique.  The inputs to this technique utilize information related to foreign exchange rates, commodity prices and interest rates published by third party leading financial news and data providers.  This is observable data; however, the valuation of these instruments is not based on actual transactions for the same instruments and, as such, they are classified as Level 2. The Company’s use of derivatives and hedging policies are more fully discussed in Note 16 .
 
The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States of America.
 
The carrying amounts of other financial instruments not listed in the table below approximate fair value due to the short-term nature of these items. The carrying amounts and estimated fair values of the Company’s financial instruments not recorded at fair value in the financial statements were as follows:
 
 
 
June 30, 2017
 
June 30, 2016
($ in millions)
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt, including current portion
 
$
605.0

 
$
622.5

 
$
611.3

 
$
597.7

Company-owned life insurance
 
$
15.9

 
$
15.9

 
$
14.0

 
$
14.0

 
The carrying amount of company-owned life insurance reflects cash surrender values based upon the market values of underlying securities, using Level 2 inputs, net of any outstanding policy loans. The carrying value associated with the cash surrender value of these policies is recorded in other assets in the accompanying consolidated balance sheets.
 

67

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


The fair values of long-term debt as of June 30, 2017 and June 30, 2016 were determined by using current interest rates for debt with terms and maturities similar to the Company’s existing debt arrangements and accordingly would be classified as Level 2 inputs in the fair value hierarchy.

For purposes of performing Step 1 of goodwill impairment testing, the Company uses certain nonrecurring fair value measurements using significant unobservable inputs (Level 3). Fair value of each reporting unit for purposes of the goodwill impairment test is based on a weighting of an income approach and a market approach. Under the income approach, fair value is determined based on a discounted cash flow analysis that uses estimates of cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. Under the market approach, a market-based value is derived by relating multiples for earnings and cash flow measures for a group of comparable public companies to the same measure for each reporting unit to estimate fair value. The assumptions used by the Company to determine fair value of the reporting units are similar to those that would be used by market participants performing valuations.

15.                                Share-Based Compensation
 
The Company has two share-based compensation plans: Amended and Restated Stock-Based Incentive Compensation Plan for Officers and Key Employees (the “Omnibus Plan”) and the Stock-Based Compensation Plan for Non-Employee Directors (“Director's Plan”).  The Company recognizes compensation cost based on the fair value of the awards on the date of grant. The compensation cost is recognized over the requisite service period of the award, which is generally the shorter of the vesting period that the holder is required to provide service, or the period from the grant date to the date on which the employee is eligible to retire. Upon retirement, as defined in the Company’s share-based compensation plans, outstanding awards are subject to certain accelerated vesting terms.
 
Awards granted under the share-based compensation plans are paid from shares held in treasury and newly issued shares. The total compensation cost that has been charged against income related to these share-based compensation plans was $13.0 million , $8.7 million and $10.0 million for the years ended June 30, 2017 , 2016 and 2015 , respectively.
 
Omnibus Plan
 
The Omnibus Plan provides that the Board of Directors or a designated committee may grant stock options, restricted stock and restricted stock units, and determine the terms and conditions of each grant.  The Omnibus Plan provides the Chief Executive Officer with limited authority to grant awards.  As of June 30, 2017 , 3,614,109 shares were available for awards which may be granted under this plan.
 
Director’s Plan
 
The Director’s Plan provides for the granting of stock options and stock units to non-employee directors. As of June 30, 2017 , 550,691 shares were available for awards which may be granted under this plan.
 
Stock Options (all plans)
 
Stock options granted under the plans above are granted with an exercise price equal to at least the fair market value of the Company’s common stock on the date of grant. The options are typically exercisable after one to three years of service and expire no longer than ten years from the grant date.
 
The fair value of stock options awarded in fiscal years 2017 , 2016 and 2015 were estimated on the date of each grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
 
 
 
Years Ended June 30,
 
 
2017
 
2016
 
2015
Expected volatility
 
37
%
 
33
%
 
36
%
Dividend yield
 
1.8
%
 
2.0
%
 
1.6
%
Risk-free interest rate
 
1.1
%
 
1.5
%
 
1.4
%
Expected term (in years)
 
5.0

 
5.0

 
5.0


68

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


 
The assumptions are based on multiple factors, including historical exercise patterns of employees in relatively homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and the implied volatility of our stock price based on historical performance for the same expected term of the options granted. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of each grant.
 
 
 
Number of
Awards
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
($ in millions)
Outstanding at June 30, 2014
 
1,063,895

 
$
42.69

 
 
 
 

Granted
 
702,411

 
$
48.28

 
 
 
 

Exercised
 
(73,067
)
 
$
31.53

 
 
 
 

Cancelled
 
(185,361
)
 
$
52.67

 
 
 
 

Outstanding at June 30, 2015
 
1,507,878

 
$
44.61

 
 
 
 

Granted
 
277,769

 
$
36.31

 
 
 
 

Exercised
 
(19,627
)
 
$
25.12

 
 
 
 

Cancelled
 
(64,518
)
 
$
47.98

 
 
 
 

Outstanding at June 30, 2016
 
1,701,502

 
$
43.35

 
 
 
 

Granted
 
907,141

 
$
38.98

 
 
 
 

Exercised
 
(95,289
)
 
$
23.21

 
 
 
 

Cancelled
 
(80,926
)
 
$
44.35

 
 
 
 

Expired
 
(40,000
)
 
$
55.12

 
 
 
 
Outstanding at June 30, 2017
 
2,392,428

 
$
42.27

 
7.1 years
 
$
2.8

 
 
 
 
 
 
 
 
 
Exercisable at June 30, 2017
 
1,350,727

 
$
44.70

 
5.7 years
 
$
2.7

 
Outstanding and Exercisable Options
 
Exercise Price
Range
 
Number Outstanding at June 30, 2017
 
Weighted
Average
Remaining
Contractual
Term (in Years)
 
Weighted
Average
Exercise
Price
 
Number Exercisable at June 30, 2017
 
Weighted
Average
Exercise
Price
$14.17 - $20.00
 
55,214

 
2.1
 
$
17.29

 
55,214

 
$
17.29

$20.01 - $30.00
 
82,277

 
1.7
 
$
23.16

 
82,277

 
$
23.16

$30.01 - $40.00
 
1,193,588

 
8.5
 
$
38.16

 
182,685

 
$
35.28

$40.01 - $50.00
 
385,566

 
6.0
 
$
43.01

 
385,566

 
$
43.01

$50.01 - $63.54
 
675,783

 
6.2
 
$
53.49

 
644,985

 
$
53.46

 
 
2,392,428

 
 
 
$
42.27

 
1,350,727

 
$
44.70

 
The weighted average grant date fair value of options awarded during fiscal years 2017 , 2016 and 2015 was $10.81 , $9.27 and $11.78 , respectively. Share-based compensation charged against income related to stock options for the years ended June 30, 2017 , 2016 and 2015 was $4.7 million , $3.1 million and $6.8 million , respectively. As of June 30, 2017 , $6.2 million of compensation cost related to nonvested stock options will be recognized over a weighted average remaining life of 1.9 years.
 
Of the options outstanding at June 30, 2017 , 2,136,406 relate to the Omnibus Plan and 256,022 relate to the Directors’ Plan.
 

69

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Restricted Stock Unit Awards (Omnibus Plan)
 
Restricted stock unit awards are granted to employees with performance and/or service conditions. Earned restricted stock unit awards receive non-forfeitable cash dividends during the restriction period. The fair value of the restricted stock unit awards is determined based on the close price of the Company’s stock on the grant date.
 
Performance-based restricted stock unit awards are earned dependent upon how certain performance goals are achieved during a specified performance period according to the terms determined at the date of the grant. These shares typically vest zero to two years from the date of the attainment of the specified performance goals. Compensation cost is determined and charged to expense beginning in the performance period through the vesting period.
 
Time-based restricted stock unit awards typically vest three years from the date of grant. Compensation cost related to time-based stock unit awards is recognized over the vesting period of the award.
 
Amounts charged to compensation expense for restricted stock unit awards were $5.0 million , $2.4 million and $1.3 million for the years ended June 30, 2017 , 2016 and 2015 , respectively. As of June 30, 2017 , $8.2 million of compensation cost related to restricted stock unit awards remains to be recognized over a weighted average remaining life of 1.3 years.
 
 
 
Number of Awards
 
Weighted Average Grant Date Fair Value
Restricted Balance at June 30, 2014
 
113,563

 
$
44.99

Time-based granted
 
97,168

 
$
42.65

Performance-based granted
 
895

 
$
54.37

Vested
 
(76,214
)
 
$
42.04

Forfeited
 
(8,003
)
 
$
48.94

Restricted Balance at June 30, 2015
 
127,409

 
$
45.09

Time-based granted
 
130,742

 
$
35.96

Performance-based granted
 
49,529

 
$
31.11

Vested
 
(36,057
)
 
$
48.85

Forfeited
 
(83,154
)
 
$
42.14

Restricted Balance at June 30, 2016
 
188,469

 
$
35.69

Time-based granted
 
231,195

 
$
38.82

Performance-based granted
 
55,478

 
$
36.18

Vested
 
(44,873
)
 
$
34.24

Forfeited
 
(37,792
)
 
$
38.80

Restricted Balance at June 30, 2017
 
392,477

 
$
37.47

 
Total Stockholder Return Awards
 
The Company granted Total Stockholder Return (“TSR”) awards in fiscal years 2017 , 2016 and 2015 . The TSR awards are granted at a target number of shares.  The TSR awards are earned based on the Company’s total stockholder return compared to the total stockholder returns of the Russell RSCC Materials & Processing Growth Index at the end of a three -year period. The actual number of shares awarded may range from a minimum of 0 percent of the target shares to a maximum of 200 percent of the target shares. Participants do not have any rights to dividends (or equivalents) during the performance period. The fair value of the TSR awards was estimated using Monte Carlo valuation models. Compensation cost related to TSR awards recognized in fiscal years 2017 , 2016 and 2015 was $2.0 million , $2.0 million and $0.8 million , respectively.
 

70

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Director Stock Units
 
According to the provisions of the Director’s Plan, on the date of each annual stockholders’ meeting or on such other regularly scheduled date as the Board of Directors may determine from time to time in light of the Company’s prevailing practices for the grant of equity awards to employees, each Director shall be granted, in place of cash compensation, a number of stock units determined by dividing 50 percent of the Director’s annual retainer by the fair market value of the Company’s common stock on that date. These stock units vest as to one-quarter of the units for every three months of service following the grant date and are fully vested on the first anniversary of the grant date.  At the Director’s election, the remaining 50 percent of the annual retainer and 100 percent of committee chair fees may be paid in stock units in lieu of cash. These units are immediately vested.
 
In addition to the grant of retainer stock units described above, each Director may be granted annually an additional award of stock units as the Board may determine by resolution.  These stock units vest as to one-quarter of the units for every three months of service following the grant date and are fully vested on the first anniversary of the grant date.
 
Additional units are credited to each Director on a quarterly basis to reflect dividend equivalents on the Company’s common stock.
 
In the case of separation from service due to death or disability, all stock units shall immediately vest.
 
Following a Director’s separation from service, or such other elected distribution date or event, the number of stock units credited to the Director’s account will be converted to an equivalent number of the Company’s common stock.

 
 
Number of Units
 
Weighted Average Grant Date Fair Value
Outstanding at June 30, 2014
 
269,315

 
$
32.25

Granted
 
24,668

 
$
42.80

Distributed
 
(11,296
)
 
$
31.79

Dividend equivalents
 
4,749

 
$

Outstanding at June 30, 2015
 
287,436

 
$
35.48

Granted
 
40,323

 
$
32.54

Dividend equivalents
 
7,184

 
$

Outstanding at June 30, 2016
 
334,943

 
$
38.64

Granted
 
27,285

 
$
39.69

Distributed
 
(30,022
)
 
$
34.19

Dividend equivalents
 
6,347

 
$

Outstanding at June 30, 2017
 
338,553

 
$
42.47

 
Compensation cost is determined using the grant date fair value and charged to expense over the vesting period of one year and amounted to $1.2 million , $1.2 million and $1.1 million for the years ended June 30, 2017 , 2016 and 2015 , respectively. As of June 30, 2017 , $0.3 million of compensation cost related to director stock units remains to be recognized over a weighted average remaining life of 0.3 years.
16 .    Derivatives and Hedging Activities
 
The Company uses commodity forwards, interest rate swaps, forward interest rate swaps and foreign currency forwards to manage risks generally associated with commodity price, interest rate and foreign currency rate fluctuations. The following explains the various types of derivatives and includes a recap about the impact the derivative instruments had on the Company’s financial position, results of operations and cash flows.
 

71

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Cash Flow Hedging — Commodity forward contracts: The Company enters into commodity forward contracts to fix the price of a portion of anticipated future purchases of certain critical raw materials and energy to manage the risk of cash flow variability associated with volatile commodity prices. The commodity forward contracts have been designated as cash flow hedges. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive (loss) income (“AOCI”) to the extent effective, and reclassified to cost of sales in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur. As of June 30, 2017 , the Company had forward contracts to purchase 23.5 million pounds of certain raw materials with settlement dates through December 2023.
 
Cash Flow Hedging — Forward interest rate swaps: Historically, the Company has entered into forward interest rate swap contracts to manage the risk of cash flow variability associated with fixed interest debt expected to be issued. The forward interest rate swaps were designated as cash flow hedges. The qualifying hedge contracts were marked-to-market at each reporting date and any unrealized gains or losses were included in AOCI to the extent effective, and reclassified to interest expense in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur. For the years ended June 30, 2017 , 2016 and 2015 net gains of $0.3 million , $0.3 million , $0.3 million , respectively, were recorded as a reduction to interest expense. These amounts represent the impact of previously terminated swaps which are being amortized over the remaining term of the underlying debt.
 
Cash Flow Hedging — Foreign currency forward contracts: The Company uses foreign currency forward contracts to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to net sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
 
The Company also uses foreign currency forward contracts to protect certain short-term asset positions denominated in foreign currencies against the effect of changes in exchange rates. These positions do not qualify for hedge accounting and accordingly are marked-to-market at each reporting date through charges to other income and expense. As of June 30, 2017 , the fair value of the outstanding foreign currency forwards not designated as hedging instruments and the charges to income for changes in fair value for these contracts were not material.
 
Fair Value Hedging — Interest rate swaps: The Company uses interest rate swaps to achieve a level of floating rate debt relative to fixed rate debt. The Company has designated fixed to floating interest rate swaps as fair value hedges.  Accordingly, the changes in the fair value of these instruments are immediately recorded in earnings.  The mark-to-market values of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains and losses in interest expense in the consolidated statements of income. As of June 30, 2017 and 2016 , the total notional amount of floating interest rate contracts was $150.0 million and $150.0 million , respectively. For the years ended June 30, 2017 , 2016 and 2015 , net gains of $1.8 million , $2.6 million and $2.9 million , respectively, were recorded as a reduction to interest expense.
 

72

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


The fair value and location of outstanding derivative contracts recorded in the accompanying consolidated balance sheets were as follows as of June 30, 2017 and 2016 :
 
June 30, 2017
($ in millions)
 
Interest Rate Swaps
 
Foreign Currency Contracts
 
Commodity Contracts
 
Total Derivatives
Asset Derivatives:
 
 
 
 

 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

 
 

Other current assets
 
$
0.6

 
$
0.2

 
$
6.4

 
$
7.2

Other assets
 
1.6

 

 
5.7

 
7.3

Total asset derivatives
 
$
2.2

 
$
0.2

 
$
12.1

 
$
14.5

Liability Derivatives:
 
 
 
 

 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

 
 

Accrued liabilities
 
$

 
$
1.0

 
$
12.1

 
$
13.1

Other liabilities
 

 

 
6.0

 
6.0

Total liability derivatives
 
$

 
$
1.0

 
$
18.1

 
$
19.1


June 30, 2016
($ in millions)
 
Interest Rate Swaps
 
Foreign Currency Contracts
 
Commodity Contracts
 
Total Derivatives
Asset Derivatives:
 
 
 
 

 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

 
 

Other current assets
 
$
1.2

 
$
0.3

 
$
0.6

 
$
2.1

Other assets
 
9.7

 

 

 
9.7

Total asset derivatives
 
$
10.9

 
$
0.3

 
$
0.6

 
$
11.8

Liability Derivatives:
 
 
 
 

 
 

 
 

Derivatives designated as hedging instruments:
 
 
 
 

 
 

 
 

Accrued liabilities
 
$

 
$
0.3

 
$
31.3

 
$
31.6

Other liabilities
 

 

 
12.3

 
12.3

Total liability derivatives
 
$

 
$
0.3

 
$
43.6

 
$
43.9

 
Substantially all of the Company's derivative contracts are subject to master netting arrangements, or similar agreements with each counterparty, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company presents the outstanding derivative contracts on a net basis by counterparty in the consolidated balance sheets. If the Company had chosen to present the derivative contracts on a gross basis, the total asset derivatives would have been $20.3 million and total liability derivatives would have been $24.9 million as of June 30, 2017.

According to the provisions of the Company’s derivative arrangements, in the event that the fair value of outstanding derivative positions with certain counterparties exceeds certain thresholds, the Company may be required to issue cash collateral to the counterparties. As of June 30, 2017 the Company had no cash collateral held by counterparties.
 
The Company is exposed to credit loss in the event of nonperformance by counterparties on its derivative instruments as well as credit or performance risk with respect to its customer commitments to perform. Although nonperformance is possible, the Company does not anticipate nonperformance by any of the parties. In addition, various master netting arrangements are in place with counterparties to facilitate settlements of gains and losses on these contracts.


73

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Cash Flow Hedges
 
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings or it becomes probable the forecasted transactions will not occur.  The following is a summary of the (losses) gains related to cash flow hedges recognized during the years ended June 30, 2017 , 2016 and 2015 :
 
 
 
Amount of Gain (Loss) Recognized in AOCI on Derivatives 
(Effective Portion)
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Derivatives in Cash Flow Hedging Relationship:
 
 

 
 

 
 

Commodity contracts
 
$
9.4

 
$
(34.0
)
 
$
(76.3
)
Foreign exchange contracts
 
(0.1
)
 
0.7

 
2.6

Total
 
$
9.3

 
$
(33.3
)
 
$
(73.7
)
 
 
 
Location of (Loss) Gain 
Reclassified from AOCI
 into Income
 
Amount of (Loss) Gain Reclassified from AOCI into Income 
(Effective Portion)
Years Ended June 30,
($ in millions)
 
(Effective Portion)
 
2017
 
2016
 
2015
Derivatives in Cash Flow Hedging Relationship:
 
 
 
 

 
 

 
 

Commodity contracts
 
Cost of sales
 
$
(22.8
)
 
$
(44.6
)
 
$
(18.5
)
Foreign exchange contracts
 
Net sales
 
0.5

 
0.2

 
2.3

Forward interest rate swaps
 
Interest expense
 
0.4

 
0.4

 
0.4

Total
 
 
 
$
(21.9
)
 
$
(44.0
)
 
$
(15.8
)
 
 
 
Location of Gain (Loss) 
Reclassified from AOCI 
into Income
 
Amount of Gain (Loss) Reclassified from AOCI into Income 
(Ineffective Portion)
Years Ended June 30,
($ in millions)
 
(Ineffective Portion)
 
2017
 
2016
 
2015
Derivatives in Cash Flow Hedging Relationship:
 
 
 
 

 
 

 
 

Commodity contracts
 
Cost of sales
 
$
2.0

 
$
1.5

 
$
(2.2
)
Total
 
 
 
$
2.0

 
$
1.5

 
$
(2.2
)
 
The Company estimates that $5.6 million of net derivative losses included in AOCI as of June 30, 2017 will be reclassified into earnings within the next twelve months. No significant cash flow hedges were discontinued during the year ended June 30, 2017 .
 
The changes in AOCI associated with derivative hedging activities during the years ended June 30, 2017 , 2016 and 2015 were as follows:
 
($ in millions)
 
2017
 
2016
 
2015
Balance, beginning
 
$
(21.8
)
 
$
(28.5
)
 
$
7.6

Current period changes in fair value, net of tax
 
5.8

 
(20.8
)
 
(46.0
)
Reclassification to earnings, net of tax
 
13.7

 
27.5

 
9.9

Balance, ending
 
$
(2.3
)
 
$
(21.8
)
 
$
(28.5
)


74

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


17 .    Income Taxes
 
Income before income taxes for the Company’s domestic and foreign operations was as follows:
 
 
 
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Domestic
 
$
56.0

 
$
17.3

 
$
64.3

Foreign
 
14.2

 
4.2

 
24.8

Income before income taxes
 
$
70.2

 
$
21.5

 
$
89.1

 
The provision (benefit) for income taxes from continuing operations consisted of the following:
 
 
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Current:
 
 

 
 

 
 

Federal
 
$
(24.5
)
 
$
4.7

 
$
(39.3
)
State
 
(1.1
)
 
0.4

 
1.2

Foreign
 
7.2

 
4.3

 
8.1

Total current
 
(18.4
)
 
9.4

 
(30.0
)
Deferred:
 
 

 
 

 
 

Federal
 
38.7

 
0.1

 
60.2

State
 
3.5

 
0.5

 
0.1

Foreign
 
(0.6
)
 
0.2

 
0.1

Total deferred
 
41.6

 
0.8

 
60.4

Total income tax expense
 
$
23.2

 
$
10.2

 
$
30.4

 
The following is a reconciliation of income taxes computed at the U.S. Federal income tax rate to the Company’s effective income tax rates:
 
 
 
Years Ended June 30,
(% of pre-tax income)
 
2017
 
2016
 
2015
Statutory federal income tax rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of federal tax benefit
 
2.0

 
2.2

 
2.2

Foreign tax rate differential
 
(1.5
)
 
5.5

 
(1.6
)
Domestic manufacturing deduction
 
(3.0
)
 
(7.0
)
 
(2.7
)
Research and development tax credit
 
(3.9
)
 
(8.4
)
 
(0.9
)
Law changes
 
0.9

 
(3.8
)
 
1.8

Increases (decreases) in valuation allowances
 
1.1

 
2.1

 
(0.3
)
Adjustments of prior years' income taxes
 
3.3

 
1.3

 
(0.1
)
Unremitted earnings of foreign subsidiaries
 
(1.2
)
 
12.7

 

Non-deductible goodwill impairment
 

 
5.1

 

Other, net
 
0.3

 
2.7

 
0.7

Effective income tax rate
 
33.0
 %
 
47.4
 %
 
34.1
 %
 
Due to a change in business strategy for one of our foreign subsidiaries, the Company changed its intent with regard to the indefinite reinvestment of the foreign earnings for this subsidiary. As a result of this change, the Company recorded a tax charge of $2.8 million during fiscal year 2016.


75

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Deferred taxes are recorded for temporary differences between the carrying amounts of assets and liabilities and their tax bases.  The significant components of deferred tax assets and liabilities that are recorded in the consolidated balance sheet are summarized in the table below. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. As of June 30, 2017 , the Company had state net operating loss carryforwards of $361.8 million expiring between 2019 and 2037. Valuation allowances increased by $0.8 million during fiscal year 2017 primarily due to decreases in projected future taxable income. A significant portion of the state net operating loss carryforwards are subject to an annual limitation that under current law is likely to limit future tax benefits to approximately $5 million .
 
 
 
June 30,
($ in millions)
 
2017
 
2016
Deferred tax assets:
 
 

 
 

Pensions
 
$
139.8

 
$
193.5

Postretirement provisions
 
54.4

 
51.0

Net operating loss carryforwards
 
23.1

 
20.5

Derivatives and hedging activities
 
2.4

 
14.8

Other
 
44.8

 
37.4

Gross deferred tax assets
 
264.5

 
317.2

Valuation allowances
 
(18.5
)
 
(17.7
)
Total deferred tax assets
 
246.0

 
299.5

Deferred tax liabilities:
 
 

 
 

Depreciation
 
(347.5
)
 
(333.0
)
Intangible assets
 
(19.4
)
 
(20.4
)
Inventories
 
(50.1
)
 
(27.4
)
Other
 
(6.2
)
 
(12.9
)
Total deferred tax liabilities
 
(423.2
)
 
(393.7
)
Deferred tax liabilities, net
 
$
(177.2
)
 
$
(94.2
)
 
As of June 30, 2017 , the Company had $99.1 million of indefinitely reinvested foreign earnings for which we have not provided deferred income taxes. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes and withholding taxes in various foreign tax jurisdictions. It is not practical to calculate these taxes due to the complex and hypothetical nature of the calculations. Due to a change in foreign cash requirements for one of the Company’s subsidiaries, the Company changed its intent with regard to indefinite reinvestment of foreign earnings of this subsidiary. As a result of this change, the Company repatriated $11.5 million of foreign earnings during fiscal year 2017 and recognized associated tax benefits of $0.9 million . The remaining balance of unremitted foreign earnings continues to be indefinitely reinvested.

The Company does not have unrecognized tax benefits as of June 30, 2017, 2016 and 2015. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as of a component of income tax expense.

All years prior to fiscal year 2013 have been settled with the Internal Revenue Service and with most significant state, local and foreign tax jurisdictions.


76

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


18.                                Other Income (Expense), Net
 
Other income (expense), net consists of the following:
 
 
 
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Interest income
 
$
0.3

 
$
0.2

 
$
0.1

Equity in earnings of unconsolidated subsidiaries
 

 
0.6

 
0.1

Unrealized gains (losses) on company owned life insurance contracts and investments held in rabbi trusts
 
1.7

 
(0.5
)
 
0.3

Foreign exchange
 
(0.4
)
 
(2.4
)
 
0.4

Other
 
1.2

 

 
4.4

Total other income (expense), net
 
$
2.8

 
$
(2.1
)
 
$
5.3

 
19 .    Segment Information, Geographic and Product Data
 
The Company has two reportable segments, Specialty Alloys Operations (“SAO”) and Performance Engineered Products (“PEP”).
 
The SAO segment is comprised of the Company’s major premium alloy and stainless steel manufacturing operations. This includes operations performed at mills primarily in Reading and Latrobe, Pennsylvania and surrounding areas as well as South Carolina and Alabama. The combined assets of the SAO operations are being managed in an integrated manner to optimize efficiency and profitability across the total system.
 
The PEP segment is comprised of the Company’s differentiated operations. This segment includes the Dynamet titanium business, the Carpenter Powder Products business, the Amega West business, and the Latrobe and Mexico distribution businesses. The businesses in the PEP segment are managed with an entrepreneurial structure to promote flexibility and agility to quickly respond to market dynamics.
 
The Company’s executive management evaluates the performance of these operating segments based on sales, operating income and cash flow generation. Segment operating profit excludes general corporate costs, which include executive and director compensation, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that management considers not representative of ongoing operations, such as loss on divestiture of business, restructuring and asset impairment charges, and other specifically-identified income or expense items.

The service cost component of the Company’s net pension expense, which represents the estimated cost of future pension liabilities earned associated with active employees, is included in the operating income of the business segments.  The residual net pension expense, which is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans and amortization of actuarial gains and losses and prior service costs, is included under the heading “Pension earnings, interest and deferrals.”

On a consolidated basis, one customer, Arconic, Inc., accounted for approximately 11 percent and 13 percent of net sales for the years ended June 30, 2017 and 2016, respectively. No single customer accounted for 10 percent or more of the Company’s net sales for the year ended June 30, 2015. No single customer accounted for 10 percent or more of the accounts receivable outstanding at June 30, 2017. Approximately 22 percent of the accounts receivable outstanding at June 30, 2016 was due from two customers, Alcoa Inc. and Precision Castparts Corporation.
        



77

CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Segment Data
 
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Net Sales:
 
 

 
 

 
 

Specialty Alloys Operations
 
$
1,461.6

 
$
1,481.0

 
$
1,796.6

Performance Engineered Products
 
366.6

 
358.7

 
497.7

Intersegment
 
(30.6
)
 
(26.3
)
 
(67.6
)
Consolidated net sales
 
$
1,797.6

 
$
1,813.4

 
$
2,226.7

 
 
 
 
 
 
 
 
 
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Operating Income:
 
 

 
 

 
 

Specialty Alloys Operations
 
$
172.3

 
$
176.9

 
$
155.2

Performance Engineered Products
 
8.5

 
(5.5
)
 
39.1

Corporate costs (including loss on divestiture of business, restructuring and impairment charges)
 
(61.3
)
 
(103.0
)
 
(72.0
)
Pension earnings, interest and deferrals
 
(23.8
)
 
(19.3
)
 
(9.4
)
Intersegment
 
1.5

 
2.5

 
(1.4
)
Consolidated operating income
 
$
97.2

 
$
51.6

 
$
111.5

 
 
 
 
 
 
 
 
 
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Depreciation and Amortization:
 
 

 
 

 
 

Specialty Alloys Operations
 
$
94.0

 
$
94.4

 
$
95.0

Performance Engineered Products
 
20.6

 
21.9

 
23.3

Corporate
 
4.0

 
3.8

 
4.6

Intersegment
 
(0.8
)
 
(0.8
)
 
(0.6
)
Consolidated depreciation and amortization
 
$
117.8

 
$
119.3

 
$
122.3

 
 
 
 
 
 
 
 
 
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Capital Expenditures:
 
 

 
 

 
 

Specialty Alloys Operations
 
$
52.2

 
$
67.0

 
$
129.0

Performance Engineered Products
 
17.0

 
19.8

 
38.1

Corporate
 
29.7

 
8.6

 
4.3

Intersegment
 
(0.4
)
 
(0.2
)
 
(0.9
)
Consolidated capital expenditures
 
$
98.5

 
$
95.2

 
$
170.5

 
 
 
 
 
 
 
 
 
 
 
June 30,
($ in millions)
 
 
 
2017
 
2016
Total Assets:
 
 
 
 

 
 

Specialty Alloys Operations
 
 
 
$
2,292.1

 
$
2,256.5

Performance Engineered Products
 
 
 
434.3

 
415.8

Corporate
 
 
 
167.2

 
151.3

Intersegment
 
 
 
(15.5
)
 
(29.3
)
Consolidated total assets
 
 
 
$
2,878.1

 
$
2,794.3



78

Table of Contents     
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


Geographic Data
 
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Net Sales: (a)
 
 

 
 

 
 

United States
 
$
1,198.3

 
$
1,243.5

 
$
1,579.9

Europe
 
349.6

 
321.4

 
359.6

Asia Pacific
 
127.2

 
129.5

 
141.8

Canada
 
47.7

 
44.9

 
61.2

Mexico
 
48.5

 
46.7

 
59.2

Other
 
26.3

 
27.4

 
25.0

Consolidated net sales
 
$
1,797.6

 
$
1,813.4

 
$
2,226.7

 
(a) Net sales were attributed to countries based on the location of the customer.
 
 
June 30,
($ in millions)
 
2017
 
2016
Long-lived assets:
 
 

 
 

United States
 
$
1,290.7

 
$
1,323.4

Asia Pacific
 
15.3

 
16.8

Canada
 
5.6

 
5.9

Europe
 
4.0

 
4.2

Mexico
 
1.2

 
1.1

Consolidated long-lived assets
 
$
1,316.8

 
$
1,351.4


20 .    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 permits two methods of adoption: full retrospective in which the standard is applied to all of the periods presented or modified retrospective where an entity would recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings.

The Company is in the process of evaluating the effect that ASU 2014-09 will have on its Consolidated Financial Statements and related disclosures, as well as the expected method of adoption. Currently, the Company is in the process of completing the assessment phase of its evaluation.   The assessment phase includes conducting and evaluating the results of internal surveys of its businesses, holding revenue recognition workshops with commercial and business unit finance leadership, and reviewing revenue arrangements across all businesses to initially identify a set of applicable qualitative revenue recognition changes related to the new standard update.   The Company’s method of adoption for ASU 2014-09 has not yet been determined and is not expected to be finalized until the assessment phase of the evaluation has been completed.  The Company’s effective date for the adoption of the guidance in ASU 2014-09 is July 1, 2018.

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). ASU 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 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.


79

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO 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 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 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.

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 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.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments, which outlines new provisions intended to reduce the existing diversity in practice related to accounting for the cash flow and its presentation in the financial statements. ASU 2016-15 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 2016-15 on the consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory, which outlines updates to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. ASU 2016-16 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 2016-16 on the consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, which outlines that a statement of cash flows explains the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 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 2016-18 on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, which outlines updates to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, with early application permitted. The Company is evaluating the impact of the adoption of ASU 2017-04 on the consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which outlines updates to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. ASU 2017-07 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 2017-07 on the consolidated financial statements.


80

Table of Contents     
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


21.                                Reclassifications from Accumulated Other Comprehensive (Loss) Income
 
The changes in AOCI by component, net of tax, for the years ended June 30, 2017 and 2016 were as follows:

($ in millions) (a)
 
Cash flow hedging items
 
Pension and other postretirement benefit plan items
 
Unrealized losses on available-for-sale securities
 
Foreign currency items
 
Total
Balance at June 30, 2016
 
$
(21.8
)
 
$
(344.3
)
 
$
(0.3
)
 
$
(43.5
)
 
$
(409.9
)
Other comprehensive income before reclassifications
 
5.7

 
22.4

 

 
2.0

 
30.1

Amounts reclassified from AOCI (b)
 
13.8

 
22.9

 

 

 
36.7

 
 
 
 
 
 
 
 
 
 
 
Net current-period other comprehensive income
 
19.5

 
45.3

 

 
2.0

 
66.8

 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2017
 
$
(2.3
)
 
$
(299.0
)
 
$
(0.3
)
 
$
(41.5
)
 
$
(343.1
)
($ in millions) (a)
 
Cash flow hedging items
 
Pension and other postretirement benefit plan items
 
Unrealized losses on available-for-sale securities
 
Foreign currency items
 
Total
Balance at June 30, 2015
 
$
(28.5
)
 
$
(256.8
)
 
$
(0.3
)
 
$
(42.6
)
 
$
(328.2
)
Other comprehensive loss before reclassifications
 
(20.8
)
 
(102.5
)
 

 
(0.9
)
 
(124.2
)
Amounts reclassified from AOCI (b)
 
27.5

 
15.0

 

 

 
42.5


 
 
 
 
 
 
 
 
 
 
Net current-period other comprehensive (loss) income
 
6.7

 
(87.5
)
 

 
(0.9
)
 
(81.7
)

 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2016
 
$
(21.8
)
 
$
(344.3
)
 
$
(0.3
)
 
$
(43.5
)
 
$
(409.9
)

(a)                        All amounts are net of tax. Amounts in parentheses indicate debits.
(b)                        See separate table below for further details.
 

81

Table of Contents     
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  


The following is a summary of amounts reclassified from AOCI for the years ended June 30, 2017 and 2016 :
 
 
 
 
 
Amount Reclassified from AOCI
 
 
 
 
Years Ended June 30,
($ in millions) (a)
 
Location of
(loss) gain
 
2017
 
2016
Details about AOCI Components
 
 
 
 

 
 
Cash flow hedging items
 
 
 
 

 
 
Commodity contracts
 
Cost of sales
 
$
(22.8
)
 
$
(44.6
)
Foreign exchange contracts
 
Net sales
 
0.5

 
0.2

Forward interest rate swaps
 
Interest expense
 
0.4

 
0.4

 
 
Total before tax
 
(21.9
)
 
(44.0
)
 
 
Tax benefit
 
8.1

 
16.5

 
 
Net of tax
 
$
(13.8
)
 
$
(27.5
)
Amortization of pension and other postretirement benefit plan items
 
 
 
 

 
 

Net actuarial loss
 
(b)
 
$
(41.0
)
 
$
(30.1
)
Prior service cost
 
(b)
 
4.7

 
6.1

 
 
Total before tax
 
(36.3
)
 
(24.0
)
 
 
Tax benefit
 
13.4

 
9.0

 
 
Net of tax
 
$
(22.9
)
 
$
(15.0
)

(a)                        Amounts in parentheses indicate debits to income/loss.
(b)                        These AOCI components are included in the computation of net periodic benefit cost (see Note 10 for additional details).

22.                                Supplemental Data
 
The following are additional required disclosures and other material items:
 
 
 
Years Ended June 30,
($ in millions)
 
2017
 
2016
 
2015
Cost Data:
 
 

 
 

 
 

Repairs and maintenance costs
 
$
99.1

 
$
101.8

 
$
114.7

Cash Flow Data:
 
 

 
 

 
 

Noncash investing and financing activities:
 
 

 
 

 
 

Sale of equity method investment
 
$

 
$
12.6

 
$

Noncash purchases of property, equipment and software
 
$
13.7

 
$
15.1

 
$
17.3

Seller financed debt related to the purchase of software
 
$

 
$

 
$
4.9

Cash (received) paid during the year for:
 
 

 
 

 
 

Interest payments, net
 
$
27.7

 
$
27.5

 
$
29.0

Income tax (refunds) payment, net
 
$
(33.3
)
 
$
27.9

 
$
(27.1
)

82

Table of Contents

SUPPLEMENTARY DATA
 
Quarterly Financial Data (Unaudited)
 
Quarterly sales and earnings results are normally influenced by seasonal factors.  Historically, the first two fiscal quarters (three months ending September 30 and December 31) are typically the lowest principally because of annual plant vacation and maintenance shutdowns by the Company and by many of its customers.  However, the timing of major changes in the general economy or the markets for certain products can alter this pattern.
 
($ and shares in millions, except per share amounts)
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Results of Operations
 
 

 
 

 
 

 
 

Fiscal Year 2017
 
 

 
 

 
 

 
 

Net sales
 
$
389.0

 
$
427.4

 
$
473.6

 
$
507.7

 
 
 
 
 
 
 
 
 
Gross profit
 
$
46.0

 
$
62.5

 
$
83.1

 
$
92.7

 
 
 
 
 
 
 
 
 
Operating income
 
$
1.4

 
$
15.4

 
$
35.8

 
$
44.6

 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(6.2
)
 
$
7.0

 
$
20.7

 
$
25.5

 
 
 
 
 
 
 
 
 
Fiscal Year 2016
 
 

 
 

 
 

 
 

Net sales
 
$
455.6

 
$
443.8

 
$
456.3

 
$
457.7

 
 
 
 
 
 
 
 
 
Gross profit
 
$
68.6

 
$
66.3

 
$
47.5

 
$
73.5

 
 
 
 
 
 
 
 
 
Operating income (loss)
 
$
24.8

 
$
21.8

 
$
(24.3
)
 
$
29.2

 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
8.9

 
$
11.5

 
$
(23.9
)
 
$
14.9

During the quarter ended June 30, 2017, the Company recorded a loss on divestiture of business. See Note 2, Acquisition and Divestiture to Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data”. During the quarters ended March 31, 2016, and September 30, 2015, the Company recorded restructuring and asset impairment charges. See Note 3, Restructuring Charges and Asset Impairment Charges to Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data”.
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Earnings (Loss) per common share
 
 
 
 
 
 
 
 
Fiscal Year 2017
 
 
 
 
 
 
 
 
Basic earnings
 
$
(0.13
)
 
$
0.15

 
$
0.44

 
$
0.54

 
 
 
 
 
 
 
 
 
Diluted earnings
 
$
(0.13
)
 
$
0.15

 
$
0.44

 
$
0.54

Fiscal Year 2016
 
 
 
 
 
 
 
 
Basic earnings
 
$
0.18

 
$
0.23

 
$
(0.51
)
 
$
0.32

 
 
 
 
 
 
 
 
 
Diluted earnings
 
$
0.18

 
$
0.23

 
$
(0.51
)
 
$
0.32


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First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Weighted average common shares outstanding
 
 
 
 
 
 
 
 
Fiscal Year 2017
 
 

 
 

 
 

 
 

Basic
 
46.9

 
47.0

 
47.0

 
47.1

Diluted
 
46.9

 
47.1

 
47.1

 
47.1

Fiscal Year 2016
 
 

 
 

 
 

 
 

Basic
 
49.7

 
48.8

 
47.1

 
46.9

Diluted
 
49.9

 
48.9

 
47.1

 
47.0

 
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Not applicable.
Item 9A.  Controls and Procedures
 
(a)                                  Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a—15(e) and 15d—15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of June 30, 2017 . Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of June 30, 2017 were effective in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required under the Securities and Exchange Commission’s rules and forms, including a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b)                                  Management’s Report on Internal Control over Financial Reporting
 
Management’s Report on the Company’s internal control over financial reporting is included in Item 8 of this Annual Report on Form 10-K under the caption “Management’s Report on Internal Control Over Financial Reporting” and is incorporated herein by reference.  The Company’s independent registered public accounting firm has issued a report on management’s assessment of the Company’s internal control over financial reporting and is set forth in Item 8 of this Annual Report on Form 10-K under the caption “Report of Independent Registered Public Accounting Firm” and is incorporated herein by reference.
 
(c)                                   Changes in Internal Control over Financial Reporting
 
There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2017 that have materially affected, or are likely to materially affect, our internal control over financial reporting.
Item 9B.  Other Information
 
Not applicable.
PART III
Item 10.  Directors, Executive Officers and Corporate Governance
 
The information required as to the officers is set forth in Part I hereof.
 
The information required as to directors and the committees of the Board of Directors is incorporated herein by reference to the Company’s fiscal year 2017 definitive Proxy Statement under the captions “Election of Directors” and “Corporate Governance”.
 

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The information concerning compliance with Section 16(a) of the Securities and Exchange Act of 1934, as amended, is incorporated herein by reference to the Company’s fiscal year 2017 definitive Proxy Statement under the caption “Corporate Governance”.
 
The information concerning Carpenter’s Code of Ethics and certain additional information relating to the Company’s Corporate Governance is incorporated herein by reference to the Company’s fiscal year 2017 definitive Proxy Statement under the caption “Corporate Governance”.
 
The information concerning the Audit Committee and its financial experts is incorporated herein by reference to the Company’s fiscal year 2017 definitive Proxy Statement under the caption “Audit/Finance Committee Report”.
 
The information concerning material changes to the procedures by which shareholders may recommend nominees to the Board of Directors is incorporated herein by reference to the Company’s fiscal year 2017 definitive Proxy Statement under the caption “General Information”.
 
On October 20, 2016, we filed with the New York Stock Exchange (“NYSE”) the Annual CEO Certification regarding our compliance with the NYSE’s Corporate Governance listing standards as required by Section 303 A-12(a) of the NYSE Listed Company Manual. In addition, we have filed as exhibits to our annual report on Form 10-K for the fiscal year ended June 30, 2017 , the applicable certifications of our Chief Executive Officer and our Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002, regarding the quality of Carpenter’s public disclosures.
Item 11.  Executive Compensation
 
Certain information required by this item is incorporated herein by reference to the Company’s fiscal year 2017 definitive Proxy Statement under the captions “Compensation Discussion and Analysis” and “Executive Compensation”.
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by this item is incorporated herein by reference to the Company’s fiscal year 2017 definitive Proxy Statement under the caption “Security Ownership of Certain Persons”.
 
Equity Compensation Plan Information
 
The following table shows the securities authorized for issuance under equity compensation plans as of June 30, 2017 :
 
Equity Compensation Plan Information
 
Plan category
 
Number of 
securities to be issued upon exercise of outstanding options, warrants and rights
(a)
 
Weighted average exercise price of outstanding options, warrants and rights
(b)
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
Equity compensation plans approved by security holders
 
2,392,428

 
$
42.27

 
4,164,800

 
(1
)
Equity compensation plans not approved by security holders
 

 

 

 
 
Total
 
2,392,428

 
$
42.27

 
4,164,800

 
(1
)
 
(1)                                  Includes 3,614,109 shares available for issuance under the Amended and Restated Stock-Based Incentive Compensation Plan for Officers and Key Employees (which provides for the issuance of stock options, restricted stock and restricted stock units) and 550,691 shares available under the Stock-Based Compensation Plan for Non-Employee Directors (which provides for issuance of stock options, stock units and performance units).
 
There were no reportable purchases during the quarter ended June 30, 2017 , provided however that 5,977 shares, at an average purchase price of $37.45, were surrendered by employees to the Company for the payment of the minimum tax liability withholding obligations upon the vesting of shares of restricted stock and the exercise of options. We do not consider this a share repurchase program.



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Table of Contents

Item 13.  Certain Relationships, Related Transactions and Director Independence
 
The information required by this item is incorporated herein by reference to the Company’s fiscal year 2017 definitive Proxy Statement under the captions “Corporate Governance” and “Executive Compensation”.
Item 14.  Principal Accounting Fees and Services
 
The information required by this item is incorporated herein by reference to the Company’s fiscal year 2017 definitive Proxy Statement under the caption “Approval of Appointment of Independent Registered Public Accounting Firm”.
PART IV
Item 15.  Exhibits and Financial Statement Schedules
 
(a)                                  Financial Statement Schedule:
 
(1)                       The following consolidated financial statement schedule should be read in conjunction with the consolidated financial statements (see Item 8. “Financial Statements and Supplementary Data”):
 
Schedule II — Valuation and Qualifying Accounts
 
All other schedules are omitted because they are not applicable or the required information is contained in the consolidated financial statements or notes thereto.
 
(b)                                  Exhibits
 
Exhibits required to be filed by Item 601 of Regulation S-K are listed below.  Documents not designated as being incorporated herein by reference are filed herewith.  The exhibit numbers correspond to the paragraph numbers designated in Item 601 of Regulation S-K.

Exhibit No.
 
Description
3(A)
 
Restated Certificate of Incorporation, dated October 26, 1998 (Exhibit 3(A) to our Annual Report on Form 10-K filed on September 9, 2005 and incorporated herein by reference).
 
 
 
3(B)
 
By-Laws, amended as of August 11, 2015 (Exhibit 3.1 to our Current Report on Form 8-K filed on August 17, 2015 and incorporated herein by reference).
 
 
 
4(A)
 
Indenture, dated January 12, 1994, between Carpenter and U.S. Bank Trust National Association, formerly known as First Trust of New York, National Association, as successor Trustee to Morgan Guaranty Trust Company of New York (Exhibit 4(A) to our Quarterly Report on Form 10-Q filed on February 10, 1994 and incorporated herein by reference).
 
 
 
4(B)
 
Forms of Fixed Rate and Floating Rate Medium-Term Note, Series B (Exhibit 4(F) to our Annual Report on Form 10-K filed on September 3, 2004 and incorporated herein by reference).
 
 
 
4(C)
 
First Supplemental Indenture, dated May 22, 2003, between Carpenter Technology Corporation and U.S. Bank Trust National Association (formerly known as First Trust of New York, National Association as successor Trustee to Morgan Guaranty Trust Company of New York) (Exhibit 4(I) to our Annual Report on Form 10-K filed on September 12, 2003 and incorporated herein by reference).
 
 
 
4(D)
 
Second Supplemental Indenture, dated as of June 30, 2011, between Carpenter Technology Corporation and U.S. Bank National Association (Exhibit 4.1 to our Current Report on Form 8-K filed on June 30, 2011 and incorporated herein by reference).
 
 
 

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Exhibit No.
 
Description
4(E)
 
Form of 5.20% Senior Notes Due 2021 (Exhibit 4.2 to our Current Report on Form 8-K filed on June 30, 2011 and incorporated herein by reference).
 
 
 
4(F)
 
Registration Rights Agreement, dated February 29, 2012, by and among Carpenter, Watermill-Toolrock Partners, L.P., Watermill-Toolrock Partners II, L.P., Watermill-Toolrock Enterprises, LLC and HHEP-Latrobe, L.P. (Exhibit 10.2 to our Current Report on Form 8-K filed on March 1, 2012 and incorporated herein by reference).
 
 
 
4(G)
 
Third Supplemental Indenture, dated as of February 26, 2013, between Carpenter Technology Corporation and U.S. Bank National Association (Exhibit 4.1 to our Current Report on Form 8-K filed on February 26, 2013 and incorporated herein by reference).
 
 
 
4(H)
 
Form of 4.450% Senior Notes Due 2023 (Exhibit 4.2 to our Current Report on Form 8-K filed on February 26, 2013 and incorporated herein by reference).
 
 
 
4(I)
 
Form of Note related to the Credit Agreement, dated as of March 31, 2017, among Carpenter Technology Corporation, as borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders party thereto, JPMorgan Chase Bank, N.A., as Syndication Agent, PNC Bank, National Association, US Bank, National Association and Wells Fargo Bank, National Association, each, as Documentation Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated and JPMorgan Chase Bank, N.A., as Joint Lead Arrangers and Joint Bookrunners (filed herewith).
 
 
 
† 10(A)
 
Supplemental Retirement Plan for Executives of Carpenter Technology Corporation (Exhibit 10(A) to our Annual Report on Form 10-K filed on August 20, 2010 and incorporated herein by reference).
 
 
 
† 10(B)
 
First Amendment to the Supplemental Retirement Plan for Executives of Carpenter Technology Corporation (Exhibit 10(A) to our Quarterly Report on Form 10-Q filed on October 27, 2016 and incorporated herein by reference.)
 
 
 
† 10(C)
 
Amended and Restated Deferred Compensation Plan for Non-Management Directors of Carpenter Technology Corporation (Exhibit 10(B) to our Annual Report on Form 10-K filed on August 24, 2011 and incorporated herein by reference).
 
 
 
† 10(D)
 
Amended and Restated Deferred Compensation Plan for Officers and Key Employees of Carpenter Technology Corporation (filed herewith).
 
 
 
† 10(E)
 
Amended and Restated Executive Bonus Compensation Plan (Exhibit B to our Definitive Proxy Statement filed on September 19, 2016 and incorporated herein by reference).
 
 
 
† 10(F)
 
Stock-Based Compensation Plan For Non-Employee Directors, as amended (Exhibit 10(E) to our Annual Report on Form 10-K filed on August 24, 2011 and incorporated herein by reference).
 
 
 
 10(G)
 
Trust Agreement for Non-Qualified Employee Benefits Trust between Carpenter Technology Corporation and JP Morgan Chase Bank, N.A., effective as of August 15, 2014 (Exhibit 10(G) to our Annual Report on Form 10-K filed on August 25, 2015 and incorporated herein by reference).
 
 
 
† 10(H)
 
Amended and Restated Stock-Based Incentive Compensation Plan for Officers and Key Employees (Exhibit A to our Definitive Proxy Statement filed on September 19, 2016 and incorporated herein by reference).
 
 
 

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Exhibit No.
 
Description
† 10(I)
 
First Amendment to the Amended and Restated Stock-Based Incentive Compensation Plan for Officers and Key Employees (Exhibit A to our Definitive Additional Materials filed on September 27, 2016 and incorporated herein by reference).
 
 
 
† 10(J)
 
Form of Restricted Unit Award Agreement (pursuant to Carpenter’s Stock-Based Incentive Plan for Officers and Key Employees) (Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on May 2, 2016 and incorporated herein by reference).
 
 
 
† 10(K)
 
Form of Performance Stock Unit Award Agreement (pursuant to Carpenter’s Stock-Based Incentive Compensation Plan for Officers and Key Employees) (Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on May 2, 2016 and incorporated herein by reference).
 
 
 
† 10(L)
 
Form of One-Year Performance Stock Unit Award Agreement (pursuant to Carpenter’s Stock-Based Incentive Compensation Plan for Officers and Key Employees) (Exhibit 10.4 to our Quarterly Report on Form 10-Q on May 2, 2016 and incorporated herein by reference).
 
 
 
† 10(M)
 
Form of Three-Year Performance Stock Unit Award Agreement (pursuant to Carpenter’s Stock-Based Incentive Compensation Plan for Officers and Key Employees) (Exhibit 10.5 to our Quarterly Report on Form 10-Q filed on May 2, 2016 and incorporated herein by reference).
 
 
 
† 10(N)
 
Amended and Restated Carpenter Technology Corporation Change of Control Severance Plan (Exhibit 10.1 to our Current Report on Form 8-K filed on September 3, 2010 and incorporated herein by reference).
 
 
 
† 10(O)
 
Benefits Restoration Plan of Carpenter Technology Corporation (Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 2, 2016 and incorporated herein by reference).
 
 
 
† 10(P)
 
First Amendment to the Benefits Restoration Plan of Carpenter Technology Corporation (Exhibit 10(A) to our Quarterly Report on Form-10Q filed on October 27, 2016 and incorporated herein by reference.)
 
 
 
† 10(Q)
 
Form of Indemnification Agreement for Directors and Officers (Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on May 7, 2015 and incorporated herein by reference).
 
 
 
† 10(R)
 
Employment Letter Agreement of David Strobel, dated September 2, 2010 (Exhibit 10(C) to our Quarterly Report on Form 10-Q filed on November 5, 2010 and incorporated herein by reference).
 
 
 
 † 10(S)
 
Amended and Restated Severance Pay Plan for Executives of Carpenter Technology Corporation (filed herewith).
 
 
 
 10(T)
 
Credit Agreement, dated as of March 31, 2017, among Carpenter Technology Corporation, as borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders party thereto,   JPMorgan Chase Bank, N.A., as Syndication Agent, PNC Bank, National Association, US Bank, National Association and Wells Fargo Bank, National Association, each, as Documentation Agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated and JPMorgan Chase Bank, N.A., as Joint Lead Arrangers and Joint Bookrunners (Exhibit 10.1 to our Current Report on Form 8-K filed on April 4, 2017 and incorporated herein by reference).

 
 
 
† 10(U)
 
Offer Letter, dated June 15, 2015, by and between Carpenter Technology Corporation and Joseph E. Haniford (Exhibit 10.1 to our Current Report on Form 8-K filed on June 22, 2015 and incorporated herein by reference).

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Table of Contents

Exhibit No.
 
Description
 
 
 
† 10(V)
 
Offer Letter, dated June 1, 2015, by and between Carpenter Technology Corporation and Tony R. Thene (Exhibit 10.1 to our Current Report on Form 8-K filed on June 3, 2015 and incorporated herein by reference).
 
 
 
† 10(W)
 
Offer Letter, dated October 13, 2015, by and between Carpenter Technology Corporation and Damon Audia (Exhibit 10.1 to our Current Report on Form 8-K filed on October 16, 2015 and incorporated herein by reference).
 
 
 
12
 
Computations of Ratios of Earnings to Fixed Charges (Unaudited) (filed herewith).
 
 
 
21
 
Subsidiaries of the Registrant (filed herewith).
 
 
 
23
 
Consent of PricewaterhouseCoopers LLP (filed herewith).
 
 
 
24
 
Powers of Attorney in favor of James D. Dee or Damon J. Audia (filed herewith).
 
 
 
31(A)
 
Certification of Chief Executive Officer required by the Securities and Exchange Commission Rule 13a-14(a)/15d-14(a) (filed herewith).
 
 
 
31(B)
 
Certification of Chief Financial Officer required by the Securities and Exchange Commission Rule 13a-14(a)/15d-14(a) (filed herewith).
 
 
 
32
 
Certification pursuant to 18 U.S.C Section 1350 (filed herewith).
 
 
 
101
 
The following financial information from this Annual Report on Form 10-K for the fiscal year ended June 30, 2017, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements of Changes in Equity; and (vi) the Notes to the Consolidated Financial Statements (filed herewith).
† Denotes employment- or compensation- related agreement, document or plan.

Item 16.  Form 10-K Summary
Not applicable.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
CARPENTER TECHNOLOGY CORPORATION
 
 
 
 
 
By
/s/ Damon J. Audia
 
 
Damon J. Audia
 
 
Senior Vice President and Chief Financial Officer
 
 
 
 
 
Date: August 11, 2017
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
 
/s/ Tony R. Thene
 
President and Chief Executive Officer
 
August 11, 2017
Tony R. Thene
 
and Director
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ Damon J. Audia
 
Senior Vice President and Chief Financial Officer
 
August 11, 2017
Damon J. Audia
 
(Principal Financial Officer)
 
 
 
 
 
 
 
 
 
 
 
 
/s/ Timothy Lain
 
Vice President - Controller, Chief Accounting
 
August 11, 2017
Timothy Lain
 
Officer
 
 
 
 
(Principal Accounting Officer)
 
 

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*
 
Chairman and Director
 
August 11, 2017
Gregory A. Pratt
 
 
 
 
 
 
 
 
 
*
 
Director
 
August 11, 2017
Carl G. Anderson, Jr.
 
 
 
 
 
 
 
 
 
*
 
Director
 
August 11, 2017
Robert R. McMaster
 
 
 
 
 
 
 
 
 
*
 
Director
 
August 11, 2017
I. Martin Inglis
 
 
 
 
 
 
 
 
 
*
 
Director
 
August 11, 2017
Kathryn C. Turner
 
 
 
 
 
 
 
 
 
*
 
Director
 
August 11, 2017
Jeffrey Wadsworth
 
 
 
 
 
 
 
 
 
*
 
Director
 
August 11, 2017
Stephen M. Ward, Jr.
 
 
 
 
 
 
 
 
 
*
 
Director
 
August 11, 2017
Dr. Philip M. Anderson
 
 
 
 
 
 
 
 
 
*
 
Director
 
August 11, 2017
Steven E. Karol
 
 
 
 
 
Original Powers of Attorney authorizing James D. Dee or Damon J. Audia to sign this Report on behalf of:  Carl G. Anderson, Jr., Robert R. McMaster, I . Martin Inglis, Gregory A. Pratt, Kathryn C. Turner, Jeffrey Wadsworth, Stephen M. Ward, Jr., Dr. Philip M. Anderson, and Steven E. Karol are being filed with the Securities and Exchange Commission.
 
 
*By
/s/ James D. Dee
 
 
James D. Dee
 
 
Attorney-in-fact
















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CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
 
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
 
($ in millions)  
Column A
 
Column B
 
Column C
Additions
 
Column D
 
Column E
Description
 
Balance at
Beginning
of Period
 
Charged to
Costs &
Expenses
 
Charged to
Other
Accounts
 
Deductions
 
Balance at
End 
of Period
Year Ended June 30, 2017
 
 

 
 

 
 

 
 

 
 

Allowance for doubtful accounts receivable
 
$
4.1

 
$
(1.0
)
 
$

 
$
(0.5
)
 
$
2.6

Deferred tax valuation allowance
 
$
17.7

 
$
0.8

 
$

 
$

 
$
18.5

Year Ended June 30, 2016
 
 

 
 

 
 

 
 

 
 

Allowance for doubtful accounts receivable
 
$
3.8

 
$
1.2

 
$

 
$
(0.9
)
 
$
4.1

Deferred tax valuation allowance
 
$
17.5

 
$
0.2

 
$

 
$

 
$
17.7

Year Ended June 30, 2015
 
 

 
 

 
 

 
 

 
 

Allowance for doubtful accounts receivable
 
$
3.4

 
$
1.2

 
$

 
$
(0.8
)
 
$
3.8

Deferred tax valuation allowance
 
$
17.8

 
$
(0.3
)
 
$

 
$

 
$
17.5


92
D-1 87790874_3 EXHIBIT D [FORM OF] NOTE _______________________ FOR VALUE RECEIVED, each of the Borrowers hereby promises to pay to ________________ or registered assigns (the “Lender”), in accordance with the provisions of the Agreement (as hereinafter defined), the principal amount of each Loan from time to time made by the Lender to the Borrowers under that certain Credit Agreement, dated as of March 31, 2017 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “Agreement”; capitalized terms defined therein being used herein as therein defined), among Carpenter, the Subsidiary Borrowers from time to time party thereto, the Lenders from time to time party thereto and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer. Each Borrower promises to pay interest on the unpaid principal amount of each Loan from the date of such Loan until such principal amount is paid in full, at such interest rates and at such times as provided in the Agreement. Except as otherwise provided in Section 2.05(f) of the Agreement with respect to Swing Line Loans, all payments of principal and interest shall be made to the Administrative Agent for the account of the Lender in the currency in which such Committed Loan was denominated and in Same Day Funds at the Administrative Agent’s Office for such currency. If any amount is not paid in full when due hereunder, such unpaid amount shall bear interest, to be paid upon demand, from the due date thereof until the date of actual payment (and before as well as after judgment) computed at the per annum rate set forth in the Agreement. This Note (this “Note”) is one of the Notes referred to in the Agreement, is entitled to the benefits thereof and may be prepaid and reborrowed in whole or in part subject to the terms and conditions provided therein. This Note is also entitled to the benefits of the continuing guaranty of Carpenter under Article X of the Agreement. Upon the occurrence and continuation of one or more of the Events of Default specified in the Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable all as provided in the Agreement. Loans made by the Lender shall be evidenced by one or more loan accounts or records maintained by the Lender in the ordinary course of business. The Lender may also attach schedules to this Note and endorse thereon the date, amount, currency and maturity of its Loans and payments with respect thereto. Each Borrower, for itself, its successors and assigns, hereby waives diligence, presentment, protest and demand and notice of protest, demand, dishonor and non-payment of this Note. [Signature Page Follows]


 
D-2 87790874_3 THIS NOTE AND ANY CLAIMS, CONTROVERSIES, DISPUTES OR CAUSES OF ACTION (WHETHER IN CONTRACT, TORT OR OTHERWISE) BASED UPON, ARISING OUT OF OR RELATING TO THIS NOTE AND THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK (WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THAT WOULD REQUIRE THE APPLICATION OF ANOTHER STATE’S LAW). CARPENTER TECHNOLOGY CORPORATION By: Name: Title: [ADDITIONAL SUBSIDIARY BORROWERS]10 By: Name: Title: 10 If any added pursuant to Section 2.15 of the Agreement.


 
Exhibit 10(D)

DEFERRED COMPENSATION PLAN FOR
OFFICERS AND KEY EMPLOYEES OF
CARPENTER TECHNOLOGY CORPORATION
As amended and restated, effective July 1, 2014
This is the Deferred Compensation Plan for Officers and Key Employees of Carpenter Technology Corporation, effective January 1, 1995, established by Carpenter Technology Corporation and its subsidiaries expressly included herein to provide its senior executives with an additional method of planning for their retirement. The Plan is intended to be an “unfunded” plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended.
The Plan was amended and restated, effective January 1, 2005, to meet the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, to achieve deferral of taxation until deferred amounts are distributed in accordance with the terms of the Plan. This document contains the amended and restated Plan, effective as of July 1, 2014.
ARTICLE I
DEFINITIONS
The following words and phrases as used herein have the following meanings unless the context plainly requires a different meaning:
1.1      Account means the total amount credited to the bookkeeping accounts in which a Participant’s Deferral Credits are maintained, including earnings thereon. The Accounts will consist of Tranches for each type of Deferral made under Article IV, as the Plan Administrator deems necessary.
1.2      Beneficiary means the person that the Participant designates to receive any unpaid portion of the Participant’s Account should the Participant’s death occur before the Participant receives the entire balance to the credit of such Participant’s Account. If the Participant does not designate a beneficiary, his Beneficiary shall be his spouse if he is married at the time of his death, or his estate if he is unmarried at the time of his death.
1.3      Board of Directors means the board of directors of Carpenter Technology Corporation or the Human Resources Committee thereof (including any duly appointed subcommittee or successor committee performing similar duties, hereafter the “Committee”), whenever said Board delegates responsibilities under this Plan to the Committee.
1.4      Bonus Compensation means any bonus compensation plan which constitutes “performance based compensation” as defined in Section 1.409A-1(e) of the Treasury Regulations including, but not limited to, the Executive Bonus Compensation Plan, the Salaried Exempt Annual Compensation Plan and any successor plans.



Exhibit 10(D)

1.5      Change in Control means and includes each of the following which also constitutes a “change in the ownership or effective control of the corporation or in the ownership of a substantial portion of the assets of the corporation” within the meaning of Code Section 409A and the Treasury regulations issued thereunder:”
1.5.1      The acquisition by any person, entity, or group of persons (within the meaning of section 13(d)(3) or 14(d)(2) of the Exchange Act) (each, a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of either (i) more than 50% of the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or, (ii) within any 12 month period, 35% or more of the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that, the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company or, (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 1.5.3 (i), 1.5.3 (ii) and 1.5.3 (iii);
1.5.2      individuals who, as of the date hereof, constitute the Board of Directors (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors; provided, however , that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors;
1.5.3      consummation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of the assets or stock of another entity (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the surviving entity resulting from such Business Combination (including, without limitation, a surviving entity that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any surviving entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such surviving entity resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the surviving entity resulting from

2


Exhibit 10(D)

such Business Combination or the combined voting power of the then-outstanding voting securities of such surviving entity, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the surviving entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board of Directors providing for such Business Combination; or
1.5.4      approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.
1.6 Code means the Internal Revenue Code of 1986, as amended.
1.7      Company means Carpenter Technology Corporation or any successor by merger, purchase or otherwise.
1.8      Credits means the amount credited to a Participant’s Account or Tranche, as appropriate, as a result of a Participant’s Deferrals plus investment returns credited under Section 4.6.
1.9      Deferral means an amount deferred under the Plan pursuant to a Participant’s election or an Employer Addition under Article IV, and credited to a Participant’s Account. No money or other assets will actually be contributed to such Accounts.
1.10      Disability means a qualified physician designated by the Company has reviewed and approved the determination that the Employee:
1.10.1      is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or
1.10.2      is, by reasons of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering Employees of an Employer.
1.11 Effective Date means January 1, 1995.
1.12 Employee means an individual who is employed by an Employer.
1.13      Employer means the Company and all majority-owned subsidiaries of the Company.
1.14      Employer Addition means Deferrals made on behalf of a Participant by an Employer.
1.15      Event means any one or combination of the following elected by the Participant in writing prior to the year of deferral to govern distribution of a Tranche: Termination or specific date (such as attainment of a specified age). When a Participant elects a combination of events, the Participant must specify whether the event that is the “earlier of” or “later of” will control

3


Exhibit 10(D)

distribution. In the absence of a designation by the Participant, the “earlier of will apply to a combination of events.
1.16      Executive Bonus Compensation Plan means the Carpenter Technology Corporation Executive Bonus Compensation Plan, as may be amended from time to time.
1.17      Investment Funds means the investment alternatives made available by the Plan Administrator from time to time under the Plan.
1.18      Participant means a Senior Executive who elects to participate or is otherwise granted participation in the Plan pursuant to Section 2.2.
1.19      Plan means this Deferred Compensation Plan for Officers and Key Employees of Carpenter Technology Corporation as amended from time to time.
1.20 Plan Administrator means the Company.
1.21      Plan Year means the 12-month period beginning January 1 and ending December  31.
1.22      Salary means all amounts of cash compensation that are treated as wages for federal income tax withholding under section 3401(a) of the Code for the Plan Year (or would be except for payment by a foreign Company subsidiary) plus amounts that would be paid to the Employee during the year but for the Employee’s election under a cash or deferred arrangement described in section 401(k) of the Code or a cafeteria plan described in section 125 of the Code. Notwithstanding the preceding sentence, Salary shall not include Bonus Compensation or any compensation plan designated under Section 4.2.3;
1.22.1      severance payments under a written agreement with the Company or any subsidiary following an Employee’s Termination;
1.22.2      contributions by the Employer to this or any other plan or plans for the benefit of its employees, except as otherwise expressly provided in this Section 1.23; or
1.22.3      amounts identified by the Employer as expense allowances or reimbursements regardless of whether such amounts are treated as wages under the Code.
1.23      Senior Executive means an Employee who is classified as “exempt” under the Fair Labor Standards Act of 1938, as amended, who is a member of a select group of managerial and highly compensated employees within the meaning of the Employee Retirement Income Security Act of 1973, as amended, as determined by the Plan Administrator and who meets the eligibility criteria set forth in the attached Schedule A.
1.24      Termination means a Participant’s termination of employment with the Company that complies with “separation from service” as defined in 26 CFR 1.409A-1(h).
1.25      Tranche means the Deferrals and associated investment results related to each separate election made by a Participant under Article IV.

4


Exhibit 10(D)

1.26      Unforeseeable Emergency means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or a dependent (as defined in Code section 152(a)) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.
1.27      Valuation Date means any day on which the New York Stock Exchange or any successor to its business is open for trading.
ARTICLE II
PARTICIPATION
2.1      Eligibility to Participate . All Senior Executives are eligible to participate in the Plan.
2.2      Participation . Any Senior Executive who elects to participate in the Plan shall become a Participant in the Plan immediately upon enrolling as a Participant by the method required by the Plan Administrator. Any Senior Executive receiving Employer Additions shall become a Participant on the date of the initial Employer Addition, if the Participant has not enrolled under the preceding sentence. An individual shall remain a Participant in the Plan until all amounts credited to the Participant’s Account have been distributed to the Participant or the Participant’s Beneficiary.
ARTICLE III
VESTING
Participants are always fully vested in all amounts credited to their Accounts.
ARTICLE IV
DEFERRAL CREDITS
4.1      Eligibility to Receive Deferral Credits . A Participant may receive Deferral Credits in each Plan Year that the Participant is a Senior Executive.
4.2 Participant Deferrals .
4.2.1      Salary Deferrals . A Participant may elect to defer receipt of up to 35% of the Participant’s Salary and to have the Employer credit that amount to the Participant’s Account under the Plan.
4.2.2      Bonus Compensation Deferrals . A Participant may elect to defer receipt of up to 100% of the amounts the Participant is eligible to receive under the Executive Bonus Compensation Plan, the Salaried Exempt Annual Compensation Plan and any successor plans and any other Bonus Compensation plan which is designated by the Committee or, for Employees whose Salary is not determined by said Committee, the Company’s Chief Executive Officer as a bonus compensation plan eligible for Deferrals under this Section 4.2.2.
4.2.3      Other Cash Deferrals . A Participant may elect to defer receipt of up to 100% of the amount the Participant is eligible to receive under any cash compensation plan that the Board

5


Exhibit 10(D)

of Directors or, for Employees whose Salary is not determined by said Board, the Company’s Chief Executive Officer designates a compensation plan for purposes of this Section 4.2.3, and to have the Employer credit that amount to the Participant’s Account under the Plan.
4.3      Employer Additions . The Participant’s Employer will contribute to a separate Tranche on behalf of a Senior Executive whose Company Basic Contributions (as defined in the Savings Plan of Carpenter Technology Corporation (“Savings Plan”)) are limited by Code section 401(a)(17). The amount of the Employer Addition will equal the amount that would have been contributed to the Savings Plan as Company Basic Contributions except for such limitation.
4.4 Elections .
4.4.1 Frequency and Timing of Elections .
4.4.1.1      Any elections made pursuant to this Section 4.4 may not be modified during the Plan Year to which such election applies, except that a Participant’s elections must cease to apply in the event such Participant receives a hardship distribution under the Savings Plan or a distribution from this Plan due to an Unforeseeable Emergency. For Salary Deferrals, Other Cash Deferrals and Employer Additions, described in Sections 4.2.1, 4.2.3, and 4.3 respectively, the Participant must make an election by December 15 of a Plan Year for it to take effect for the next Plan Year. Notwithstanding the foregoing, a new Participant (or a Participant who has been ineligible to receive Deferral Credits or Employer Additions for a period of 24 consecutive months) may file an initial election governing Salary Deferrals and Employer Additions during the first 30 days of participation in this Plan.
For Bonus Compensation Deferrals described in Section 4.2.2 and any Other Cash Deferrals described in Section 4.2.3 that are constructed as bonus compensation, the Participant must make an election by the earlier of:
4.4.1.2 December 15 of the final fiscal year of the performance period applicable to such Bonus Compensation; or
4.4.1.3 six months prior to any date within the performance period upon which the outcome of any performance goals or measures will determine all or a portion of the Bonus Compensation to be paid to the Participant.
For example, to defer an award paid after the end of the two-year July 1, 2006 to June 30, 2008 performance period, during which the Participant’s bonus, although not paid until the end of the performance period, is calculated separately for each year, the Participant must make an election by the earlier of December 15, 2007 (4.4.1.2 above) or December 31, 2006 (4.4.1.3 above).
4.4.2      Duration of Elections . Elections to defer amounts under this Article IV expire at the end of the Plan Year, fiscal year or performance period for which the election was made. Each such election shall constitute a separate Tranche. In the case of a distribution of the Participant’s entire Account by operation of the Plan’s terms under Section 5.3 instead of the Participant’s election,

6


Exhibit 10(D)

such Senior Executive’s participation in the Plan will terminate for the remainder of any unexpired election period during which such distribution occurs.
4.4.3      Restriction on Elections . Elections to defer amounts may be in the form of a whole percentage or in $1 increments.
4.5      Investment Funds . The Plan Administrator shall establish multiple Investment Funds which shall be maintained for the purpose of determining the investment return to be credited to each Participant’s Account. The Plan Administrator may change the number, identity or composition of the Investment Funds from time to time. Each Participant shall indicate the Investment Funds based on which Deferrals under Sections 4.2 and 4.3 are to be adjusted.
4.6      Investment Returns . Each Participant’s Account shall be increased or decreased by the net amount of investment earnings or losses that it would have achieved had it actually been invested in the deemed investments. The Company is not required to purchase or hold any of the deemed investments. Investment Fund elections must be made in a minimum of 1% increments and in such a manner as the Plan Administrator shall specify. A Participant may change his or her Investment Fund election as soon as administratively practicable following the date the Plan Administrator receives notice of such change in the form prescribed by the Plan Administrator.
No less frequently than as of each Valuation Date, each Participant’s Account shall be increased or decreased to reflect investment results. Each Participant’s Account shall be adjusted by the investment return of the Investment Funds in which the Participant’s elected to be deemed to participate. The investment return adjustment is intended to reflect the actual performance of the Investment Fund net of any applicable investment management fees or administrative expenses determined by the Plan Administrator. Notwithstanding the above, the amount of any payment of Plan benefits pursuant to Article V shall be determined as of the Valuation Date preceding the date of payment.
ARTICLE V     
DISTRIBUTIONS
5.1      Source of Distributions . All distributions shall, at the Employer’s discretion, be made directly out of the Employer’s general assets or from the Carpenter Technology Corporation Non-Qualified Employee Benefits Trust, if available.
5.2      Form of Distributions . A Participant may receive distributions in one of the following manners, which the Participant shall elect on the initial enrollment forms for each Tranche. A Participant may elect to receive distributions from each Tranche in different manners and at different times.
5.2.1      A lump sum distribution of the Participant’s entire Tranche;
5.2.2      Ten annual installments, with the distribution each year equal to the product resulting from multiplying the then current Tranche balance by a fraction. The numerator of the

7


Exhibit 10(D)

fraction is always one, and the denominator of the fraction is ten for the first distribution and is reduced by one for each subsequent distribution; or
5.2.3      Fifteen annual installments, with the distribution each year equal to the product resulting from multiplying the then current Tranche balance by a fraction. The numerator of the fraction is always one, and the denominator of the fraction is fifteen for the first distribution and is reduced by one for each subsequent distribution.
5.3      Timing of Distributions . Each Participant shall elect the timing of the distribution with respect to each of his or her Tranches in the manner authorized by the Plan Administrator. The Participant’s election(s) shall indicate that payment of each Tranche shall be made (in the case of a lump sum election) or shall commence (in the case of an installment election) as soon as administratively practicable and in compliance with the requirements of Code Section 409A following the Participant’s elected Event; provided, however, if the Participant is a key employee, as defined in Code section 416(i) without regard to paragraph (5) thereof, and the common stock of the Company is publicly traded on an established securities market, any distributions scheduled to be paid upon Termination shall not commence before the date which is 6 months following the date of Termination (or, if earlier, the death of the Participant) and, if such distribution is the first in a series of installments, subsequent distributions shall be paid upon the anniversary of the Termination date.
Notwithstanding the foregoing or a Participant’s elections under Article IV, the balance of a Participant’s Account shall be paid as soon as administratively practicable and in compliance with the requirements of Code Section 409A following the date of the Participant’s Disability after Termination or death, or a Change in Control.
For purposes of this Section 5.3, a distribution will comply with Code Section 409A where (1) an event distribution (Termination, Disability, death, Change in Control or Unforeseeable Emergency) is made within 90 days and the Participant is not permitted to elect the taxable year of the distribution, and (2) a specific date distribution is made within the same taxable year of such specific date or, if later, the 15th day of the third calendar month following such specific date.
5.4      Default Form and Timing Election . If the Participant has not affirmatively made a form or timing of distribution election pursuant to Sections 5.2 and/or 5.3 above, the Participant will be deemed to have made elections as indicated in Sections 5.2.1 and 5.3 based upon Termination.
5.5      Change in Form or Time of Distribution . A Participant may change his or her form and timing election applicable to the distribution of any Tranche under Sections 5.2 and 5.3 (or a deemed election under Section 5.4), provided that such request for change is made (i) at least twelve (12) consecutive months prior to the date on which such distribution would otherwise have been made or commenced and (ii) the first payment with respect to such new election is deferred for a period of not less than 5 years beyond the date such distribution would otherwise have been made.
5.6      Distributions Due to Unforeseeable Emergency . Distributions hereunder may commence if the Plan Administrator determines, based on uniform, established standards, that the Participant has incurred an Unforeseeable Emergency. The amount distributed under this Section 5.6 shall not

8


Exhibit 10(D)

exceed the amount necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). The Plan Administrator shall determine the Investment Fund or Funds under Section 4.5 and the Participant shall identify the Tranche(s) from which such distribution shall be made. If the Participant fails to identify Tranches with sufficient credits to satisfy the Unforeseeable Emergency, the Plan Administrator shall determine any additional Tranches required to complete the distribution.
5.7      Distributions Due to a Domestic Relations Order . Distributions hereunder may commence to an individual other than the Participant if the Plan Administrator determines it is necessary to fulfill a domestic relations order as defined in section 414(p)(1)(B) of the Code.
5.8      Distributions Due to Tax Obligations . Distributions hereunder may commence to the Participant for the payment of tax obligation under the Federal Insurance Contributions Act (FICA), Railroad Retirement Act (RRTA), or any state, local or foreign tax obligation arising from Plan participation as determined at the sole discretion of the Plan Administrator in compliance with the requirements of 26 CFR 1.409A-3(j)(4).
5.9      Termination of Employment . Upon Termination, a Participant shall receive distribution of the Participant’s Account pursuant to the election(s) in place under Sections 5.2, 5.3, 5.4 and 5.5. If the Termination is caused by the Participant’s death, the Beneficiary shall receive distribution of the Participant’s Account in accordance with Section 5.3.
ARTICLE VI     
PLAN ADMINISTRATION
6.1      General . The Plan shall be administered by the Plan Administrator. Employees (of the Company) shall use that degree of care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the employee’s or member’s conduct of a similar situation.
The Plan Administrator may appoint such agents, who need not be employees (of the Company), as it deems necessary for the effective exercise of its duties and may delegate to such agents any powers and duties, both ministerial and discretionary, as the Plan Administrator may deem expedient and appropriate.
6.2      Responsibilities and Reports . The Plan Administrator may, pursuant to a written resolution, allocate specific responsibilities under the Plan among one or more of its members, or such other persons it deems appropriate. The Plan Administrator shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports that are furnished by any actuary, accountant, controller, counsel, investment banker or other person who is employed or engaged for such purposes.

9


Exhibit 10(D)

6.3      Governing Law . This Plan shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, to the extent not preempted by federal law.
ARTICLE VII     
CLAIMS PROCEDURE
7.1      Plan Interpretation . The Plan Administrator shall have the authority and responsibility to interpret and construe the Plan and to decide all questions arising thereunder, including, without limitation, questions of eligibility for participation, eligibility for Deferral Credits, the amount of Account balances, and the timing of the distribution thereof, and shall have the authority to deviate from the literal terms of the Plan to the extent it shall determine to be necessary or appropriate to operate the Plan in compliance with the provisions of applicable law. The decisions of the Plan Administrator upon all matters within the scope of its authority shall be final, binding and conclusive upon all parties.
7.2      Denial of Claim for Benefits . Any denial by the Plan Administrator of any claim for benefits under the Plan by a Participant or Beneficiary shall be stated in writing by the Plan Administrator and delivered or mailed to the Participant or Beneficiary. The Plan Administrator shall furnish the claimant with notice of the decision not later than 90 days after receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the final decision. The notice of the Plan Administrator’s decision shall be written in a manner calculated to be understood by the claimant and shall include (i) the specific reasons for the denial, including, where appropriate, references to the Plan, (ii) any additional information necessary to perfect the claim with an explanation of why the information is necessary, and (iii) an explanation of the procedure for perfecting the claim.
7.3      Appeal of Denial . The claimant shall have 60 days after receipt of written notification of denial of his or her claim in which to file a written appeal with the Plan Administrator. As a part of any such appeal, the claimant may submit issues and comments in writing and shall, on request, be afforded an opportunity to review any documents pertinent to the perfection of his or her claim. The Plan Administrator shall render a written decision on the claimant’s appeal ordinarily within 60 days of receipt of notice thereof but, in no case, later than 120 days.
ARTICLE VIII     
FUNDING
8.1      Funding . The Employer shall not segregate or hold separately from its general assets any amounts credited to the Accounts, and shall be under no obligation whatsoever to fund in advance any amounts under the Plan, including all Credits and earnings thereon.

10


Exhibit 10(D)

8.2      Insolvency . In the event that the Employer becomes insolvent, all Participants and Beneficiaries shall be treated as general, unsecured creditors of the Employer with respect to any amounts credited to the Accounts under the Plan.
ARTICLE IX     
AMENDMENT AND TERMINATION
9.1      Reservation of Rights . The Employer reserves the right to amend or terminate the Plan at any time by action of the Board of Directors. Notwithstanding the foregoing, no such amendment or termination shall reduce the balance of any Participant’s Account as of the date of such amendment or termination.
9.2 Funding upon Termination . Upon a complete termination of the Plan, the Employer shall contribute to the Carpenter Technology Corporation Non-Qualified Employee Benefits Trust an amount equal to the aggregate of all amounts credited to Participants’ Accounts as of the date of such termination. If the Carpenter Technology Corporation Non-Qualified Employee Benefits Trust does not exist at the time the Plan is terminated, the Employer shall create an irrevocable grantor trust to which it will contribute such amounts. This newly created trust shall be designed to ensure that Participants will not be subject to taxation on amounts contributed to and held under the trust on their behalf before the amounts are distributed.
9.3      Survival of Accounts and Elections . Notwithstanding any termination of the Plan, the trustee of the trust to which amounts are contributed under Section 9.2 shall maintain the Accounts for Participants in the same manner as under this Plan and all elections for distributions under Article V of the Plan shall survive the termination and remain in effect.
ARTICLE X     
MISCELLANEOUS
10.1      Limited Purpose of Plan . The establishment or existence of the Plan shall not confer upon any individual the right to continue as an Employee. The Employer expressly reserves the right to discharge any Employee whenever in its judgment its best interests so require.
10.2      Non-alienation . No amounts payable under the Plan shall be subject in any manner to anticipation, assignment, or voluntary or involuntary alienation.
10.3      Facility of Payment . If the Plan Administrator, in-its-sole discretion, deems a Participant or Beneficiary who is eligible to receive any payment hereunder to be incompetent to receive the same by reason of age, illness or any infirmity or incapacity of any kind, the Plan Administrator may direct the Employer to apply such payment directly for the benefit of such person, or to make payment to any person selected by the Plan Administrator to disburse the same for the benefit of the Participant or Beneficiary. Payments made pursuant to this Section 10.3 shall operate as a discharge, to the extent thereof, of all liabilities of all Employers and the Plan Administrator to the person for whose benefit the payments are made.


11


Exhibit 10(D)

DEFERRED COMPENSATION PLAN FOR
OFFICERS AND KEY EMPLOYEES OF

CARPENTER TECHNOLOGY CORPORATION
APPENDIX A
ELIGIBILITY CRITERIA

Employees in Hay Global Grade 20 and above



As of July 1, 2014


12

Exhibit10(S)

Severance Pay Plan for Executives
of Carpenter Technology Corporation
As amended and restated effective June 14, 2016
Carpenter Technology Corporation, a Delaware corporation (the “Employer”), hereby adopts the Carpenter Technology Corporation Severance Pay Plan for Executives (the “Plan”) for the benefit of certain of its executives on the following terms and conditions:
The Plan, as set forth herein, provides consideration that is intended to assist with the transition period which may be experienced by executives of the Employer covered by the Plan in the event of a termination of employment under the enumerated circumstances in return for the executive’s execution of a valid and binding release (that is not subsequently revoked, rescinded, invalidated or challenged in any way), that releases the Employer from any and all legal or equitable claims related to the executive’s employment, or termination of employment, with the Employer, notwithstanding any indemnification agreements that were in effect indemnifying the executives during their employment with the Employer.
This Plan is a “top-hat” plan within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). As such, this Plan is subject to limited ERISA reporting and disclosure requirements, and is exempt from all other ERISA requirements. Distributions required or contemplated by this Plan or actions required to be taken under this Plan shall not be construed as creating a trust of any kind or a fiduciary relationship between the Employer and any Employee, any beneficiary, or any other person.
Article I
Definitions
In the Plan the singular includes the plural, use of the masculine pronoun includes the feminine pronoun, and initially capitalized words shall have the following meanings unless the context clearly indicates otherwise. The use of any definition given to terms within this Plan shall be strictly limited to the interpretation of this Plan and shall in no way modify definitions of those same terms established elsewhere under law or contract.
Section 1.01.      Base Salary . The total annual base salary payable to such Employee at the rate in effect on the Date of Termination. Base Salary shall not be reduced for any salary reduction contributions: (a) to cash or deferred arrangements under Code § 401(k), (b) to a cafeteria plan under Code § 125, or (c) to a nonqualified deferred compensation plan. Base Salary shall not take into account any bonuses, reimbursed expenses, credits or benefits (including benefits under any plan of deferred compensation), or any additional cash compensation or compensation payable in a form other than cash.
Section 1.02.      Cause . Any termination of an Employee’s employment with an Employer which results from:
(i)      Employee’s conviction of a crime involving moral turpitude;


Company Confidential


(ii)      Employee becoming incapable of performing the duties of his employment with Employer due to loss or suspension of any license or certification required for the performance of those duties;
(iii)      conduct by Employee that is found by Employer to constitute fraud, embezzlement, or theft that occurs during or in the course of Employee’s employment with Employer;
(iv)      intentional damage by Employee to Employer’s assets or property or the assets or property of Employer’s customers, vendors, or employees;
(v)      intentional disclosure by Employee of Employer’s confidential information contrary to Employer’s policies or instructions received by Employee during or in the course of Employee’s employment with Employer;
(vi)      intentional engagement by Employee in any activity which would constitute a breach of duty of loyalty to Employer;
(vii)      conduct by Employee found by Employer to constitute a willful and continued failure or refusal by Employee to substantially perform Employee’s duties for Employer (except as a result of incapacity due to physical or mental illness);
(viii)      Employee’s failure to comply with Employer’s policies or practices despite having been advised and/or instructed regarding those policies or practices; or
(ix)      conduct by Employee that is demonstrably and materially injurious to Employer, monetarily or otherwise, as determined by Employer, including injury to Employer’s reputation or conduct by Employee otherwise having an adverse effect upon Employer’s interests, as determined by Employer.
Section 1.03.      Code . The Internal Revenue Code of 1986, as now in effect or as hereafter amended. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.
Section 1.04.      Date of Termination . The Date of Termination shall be the date on which a Termination occurs.
Section 1.05.      Employee . A full-time salaried employee of an Employer who is a United States resident, except a person (1) who has an individual employment or severance agreement which is then currently effective with an Employer, (2) is covered by a statutory severance entitlement, or (3) is a member of a bargaining unit.
Section 1.06.      Employer . Employer means Carpenter Technology Corporation.
Section 1.07.      Good Reason . An Employee’s voluntary Termination within the ninety (90) day period following the initial existence of one or more of the following conditions arising without the Employee’s consent:

2
Company Confidential


(i)      a material diminution in the Employee’s Base Salary;
(ii)      a material permanent diminution in the Employee’s authority, duties, or responsibilities;
(iii)      a material change in the geographic location at which the Employee must perform services which is at least fifty (50) miles from his current principal place of work; or
(iv)      any other action or inaction that constitutes a material breach by the Employer of any employment agreement between the Employee and the Employer; and
within thirty (30) days following the initial existence of a condition described in subsections (a) through (d) above, the Employee must provide notice to the Employer of the existence of the condition, and the Employer must fail to remedy the condition within thirty (30) days of receipt of such notice.
Section 1.08.      Severed Employee . An Employee who has experienced a Termination.
Section 1.09.      Termination . An Employee’s termination of employment with the Employer, as described in Treas. Reg. § 1.409A-1(h); provided, however, that a Termination shall include only an involuntary discontinuance of the Employee’s employment without Cause as a result of the independent exercise of the unilateral authority of the Employer, as described in Treas. Reg. § 1.409A-1(n)(1), or a voluntary separation from service for Good Reason.
ARTICLE II     
Eligibility and Participation
Section 2.01.      Eligibility . An Employee shall be eligible to participate in the Plan if the Employee is:
(i)      an Employee of the Employer at a Pay Grade Level identified on the attached Schedule A on the Date of Termination; and
(ii)      a member of the Employer’s “select group of management or highly compensated employees,” as defined in ERISA Sections 201(2), 301(a)(3), and 401(a)(1).
Section 2.02.      Participation . An Employee who is eligible under Section 2.01 shall become a participant as of the date the Employee becomes eligible to participate under Section 2.01.
Section 2.03.      Duration of Participation . A Severed Employee shall cease to participate in the Plan on the date the Severed Employee is no longer entitled to a benefit under this Plan.

3
Company Confidential


ARTICLE III     
Benefits
Section 3.01.      Amount of Severance Benefit . Each Severed Employee shall be entitled, upon Termination and the execution of all required waivers, to a severance benefit calculated in accordance with Schedule A (attached hereto).
Section 3.02.      Payment of Severance Benefit . A Severed Employee shall receive his severance benefit following the Severed Employee’s execution of all required and appropriate releases and waivers, to be paid, at the Employer’s discretion, to the extent the severance benefit does not exceed the amount of the “separation pay exception” under Treas. Reg. § 1.409A-1(b)(9)(iii) (the “Separation Pay Exception”), either in a lump sum payment or in normal payroll installments over the applicable period, beginning as soon as practicable but no later than sixty (60) days following his Date of Termination. To the maximum extent permitted under Code § 409A, the severance benefits payable under this Plan are intended to comply with the Separation Pay Exception; provided, however, that any portion of the severance benefits that exceeds the dollar limitation for the Separation Pay Exception in effect on the Date of Termination shall be paid in a single lump sum payment no later than two and one half (2 ½) months following the Date of Termination in a manner that is intended to comply with the “short-term deferral exception” under Treas. Reg. § 1.409A-1(b)(4).
Section 3.03.      Mitigation and Offset . An Employee shall not be required to mitigate the amount of any payment provided for in this Article by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Article be reduced by any compensation earned by the Employee as the result of employment by another employer.
Section 3.04.      Medical and Prescription Coverage . If the Severed Employee is eligible for continuing group coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), the Employer shall provide a lump sum taxable payment to the Employee equal to the cost (including the Employer and Employee portion) of such continuation coverage for the period the Severed Employee is eligible to receive Base Salary continuation payments pursuant to Schedule A , reduced by applicable taxes. This payment will be made no later than two and one-half (2 ½) months following the Date of Termination.
Section 3.05.      Cash-Incentive Plan Benefits . Subject to the execution of all required waivers, and unless otherwise determined by the Committee, a prorated portion of benefits under the Executive Bonus Compensation Plan of Carpenter Technology Corporation, as amended from time to time (the “Cash-Incentive Plan”) for the fiscal year of the Date of Termination shall be paid at the time such benefits would have been paid had no Termination occurred, but in no event later than two and one-half months (2 ½ months) after the later of the end of the calendar year that includes the Date of Termination or the end of the Company’s fiscal year that includes the Date of Termination. The prorated portion shall be equal to the amount of such benefits multiplied by a fraction the numerator of which is the number of full and partial pay periods elapsed in the “Performance Period” (as defined in the Cash-Incentive Plan) prior to Termination and the denominator of which is the number of total pay periods in such “Performance Period.”

4
Company Confidential


Section 3.06.      Outstanding Equity RSUs . The Severed Employee shall forfeit all unvested shares or units (“Equity Awards”) outstanding under the Stock-Based Incentive Compensation Plan for Officers and Key Employees (“Equity Incentive Plan”) as of the Date of Termination. Notwithstanding the preceding, the Employer’s Board of Directors may, in its sole discretion, provide that the Severed Employee’s right to the outstanding Equity Awards shall become 100% fully vested, and nonforfeitable as of the Date of Termination provided:
(i)      such accelerated vesting does not accelerate or alter the time and form of payment of any Equity Award that is subject to the application of Code § 409A, or
(ii)      the payment of any Equity Award that is not subject to the application of Code § 409A shall be made no later than two and one half (2 ½) months following the later of the end of the calendar year that includes the Date of Termination or the end of the Equity Incentive Plan fiscal year that includes the Date of Termination.
Section 3.07.      Options . All vested options granted to the Severed Employee that remain outstanding as of the Date of Termination shall become nonforfeitable. The Severed Employee may exercise such options for a period of three (3) months after the Date of Termination (but in no event later than the expiration date of the option under the terms of the option’s grant). To the extent that the Severed Employee does not exercise the options within the time specified herein, the options shall terminate.
Section 3.08.      Outplacement Services . If requested by Severed Employee, Employer shall provide Severed Employee with reasonable outplacement counseling and services through an outplacement specialty firm designated by Employer at the Employer’s expense. Severed Employee may utilize the outplacement services until the earlier of (i) Severed Employee’s obtainment of other employment (full-time or part-time), or (ii) the expiration of the number of months identified on the attached Schedule A from the date Severed Employee begins utilizing the outplacement services.
Section 3.09.      Reimbursements or In-Kind Benefits . Any reimbursements or in-kind benefits provided under this Plan that are subject to Code § 409A shall be made or provided in accordance with the requirements of Code § 409A, including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during the period of time specified in the Plan, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during a calendar year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year, (iii) the reimbursement of an eligible expense will be made no later than the last day of the calendar year following the year in which the expense is incurred, and (iv) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit.
ARTICLE IV     
Amendment and Termination
Section 4.01.      Amendment and Termination . The Compensation Committee of the Employer’s Board of Directors may amend or terminate this Plan at any time.

5
Company Confidential


ARTICLE V     
Non-competition Covenant
Section 5.01.      Employee’s Promises . Employee agrees to comply fully with any written agreement between the Employer and the Employee which provides for post-termination of employment restrictions against solicitation or competition; provided, however, that if no such agreement exists, the Employee shall not for a minimum period of six (6) months after termination of employment by Employer, either himself or together with other persons, (a) either directly or indirectly, solicit or divert to any Competing Business, as defined below, any individual or entity that is a customer or prospective customer of Employer or its subsidiaries or affiliates, or was such a customer or prospective customer at any time during the 18 months prior to the date of Employee’s termination of employment with Employer; (b) either directly or indirectly own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or have any financial interest in, or aid or assist anyone else in the conduct of, or use or permit Employee’s name to be used in connection with, any Competing Business or any other entity which would require Employee’s use of confidential information even though such entity may not be a Competing Business; provided, however, that nothing herein shall prevent Employee from investing in the securities of any company listed on a national securities exchange, provided that Employee’s involvement with any such company is solely that of a stockholder of 5% or less of any class of the outstanding securities thereof; (c) induce, offer, assist, encourage or suggest (i) that another business or enterprise offer employment to or enter into a business affiliation with any employee, agent or representative of Employer, or any individual who acted as an employee, agent or representative of Employer in the previous six months; or (ii) that any employee, agent or representative of Employer (or individual who acted as an employee, agent or representative of Employer in the previous six months) terminate his or her employment or business affiliation with Employer; or (d) hire or, directly or indirectly, participate in the hiring of any employee of Employer or any person who was an employee of Employer in the previous six months, by any business, enterprise or employer.
The term “Competing Business” as used herein shall mean any business or enterprise that is engaged in the research, development, manufacture, sale, marketing or distribution of stainless steel, titanium, specialty alloys, metal powders or metal fabricated parts or components similar to or competitive with those manufactured by Carpenter
Section 5.02.      Remedies . Employee acknowledges and agrees that in the event that Employee breaches any of the covenants in this Article V, the Employer will suffer immediate and irreparable harm and injury for which the Employer will have no adequate remedy at law. Accordingly, in the event that Employee breaches any of the covenants in Article V, the Employer shall be absolutely entitled to obtain equitable relief, including without limitation temporary restraining orders, preliminary injunctions, permanent injunctions, and specific performance. The foregoing remedies and relief shall be cumulative and in addition to any other remedies available to the Employer. In addition to the other remedies in this Article to which the Employer may be entitled, the Employer shall receive attorneys’ fees and any other expenses incident to its maintenance of any action to enforce its rights under this Agreement.

6
Company Confidential


Section 5.03.      Severability . The covenants in this Article are severable, and if any covenant or portion thereof is held to be invalid or unenforceable for any reason, such covenant or portion thereof shall be modified to the extent necessary to cure such invalidity or unenforceability and all other covenants and provisions shall remain valid and enforceable.
ARTICLE VI     
Miscellaneous
Section 6.01.      Administration . The general administration of the Plan, and the responsibility for carrying out the provisions hereof, shall be placed in the Compensation Committee of the Employer.
The Compensation Committee shall have complete discretionary authority to interpret this Plan and to determine all questions arising in the administration, construction and application of the Plan. The Compensation Committee’s discretionary authority includes, but is not limited to, determinations of all questions of fact relating to the eligibility of Employees for benefits under this Plan and the amount of such benefits to which an Employee may become entitled hereunder. It shall have complete discretion to correct any defect, supply any omission, reconcile any inconsistency or resolve any ambiguity in such manner and to such extent as it shall deem necessary to carry out the purpose of this Plan. The decision of the Compensation Committee upon all matters within the scope of its authority shall be final, conclusive and binding on all parties.
The Compensation Committee may appoint such agents, who need not be members of the Compensation Committee, as it deems necessary for the effective exercise of its duties and may delegate to such agents any powers and duties, both ministerial and discretionary, as the Compensation Committee may deem expedient and appropriate.
The members of the Compensation Committee, including any Compensation Committee appointee or designee, shall use that degree of care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the Compensation Committee member’s conduct of a similar situation.
With respect to the exercise of authority hereunder, and to the extent not insured by an insurance company pursuant to the provisions of any applicable insurance policy and to the extent permitted by law and Employer policy, the Employer may indemnify and hold harmless each member of the Compensation Committee against any personal liability or expense incurred as a result of any act or omission in the capacity as a member of the Compensation Committee.
Section 6.02.      Claims . An Employee who has not begun to receive benefits under this Plan and who believes he is entitled to benefits hereunder, or the Employee’s representative, must submit a claim to the Compensation Committee or its designee (the “Administrator”). A claim must be submitted in writing and in a manner acceptable to the Administrator. A claim will not be considered complete until the Administrator has received all documentation it has requested to verify the validity of the claim. If the claim is wholly or partially denied, the Administrator shall, within 90 days (or in special cases, and upon prior written notice to the claimant, 180 days) of receipt of the completed claim inform the claimant of the reason(s) for the denial, the specific reference to the Plan provisions

7
Company Confidential


on which the denial was based, any additional information that may be necessary to perfect the claim, and the procedure for appealing the denial of the claim.
Section 6.03.      Appeals . The denial of any claim or application of the provisions of this Plan must be appealed to the Compensation Committee by the claimant within 60 days of notification of such denial. The claimant shall have a right to review all pertinent documents and submit comments in writing. Any appeal must include a written statement of the claimant’s position. Upon its receipt of the appeal the Compensation Committee shall schedule an opportunity for a full hearing of the issue and shall review and decide such appeal within 60 days (or in special cases, and upon prior written notice to the claimant, 120 days) of receipt of such appeal. Its decision shall be promptly communicated in writing to the claimant.
Section 6.04.      Legal Action . An Employee or any person claiming rights through the Employee must complete the above claims and appeal procedures as a mandatory precondition to any legal or equitable action in connection with this Plan, and such legal or equitable action must be filed within 120 days of the receipt of a final decision regarding the appeal or, if later, within one year of the Termination (or alleged Termination) of the Employee, or benefits under this Plan will be irrevocably barred.
Section 6.05.      Nonalienation of Benefits . None of the payments, benefits or rights of any Employee shall be subject to any claim of any creditor of such Employee, and, in particular, to the full extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustee’s process, or any other legal or equitable process available to any creditor of such Employee. No Employee shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which such Employee may expect to receive, contingently or otherwise, under this Plan.
Section 6.06.      No Contract of Employment . Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust, or account, nor the payment of any benefits shall be construed as giving an Employee, or any person whomsoever, the right to be retained in the service of any Employer, and all Employees shall remain subject to discharge to the same extent as if the Plan had never been adopted.
Section 6.07.      Severability of Provisions . The invalidity or unenforceability of any provision of this Plan shall not affect the validity or enforceability of any other provision of this Plan, which shall remain in full force and effect.
Section 6.08.      Headings and Captions . The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan.
Section 6.09.      Unfunded Plan . All payments of monetary benefits provided under the Plan shall be paid from the general assets of the Employer and no separate fund shall be established to secure payment of vested amounts. Notwithstanding the foregoing, the Employer may establish a grantor trust to assist it in funding Plan obligations; provided, however, that such trust shall at all times remain located within the United States. Any payments of vested amounts made to an

8
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Employee or other person from any such trust shall relieve the Employer from any further obligations under the Plan only to the extent of such payment. Nothing herein shall constitute the creation of a trust or other fiduciary relationship between the Employer and any other person. No Employee shall have any right to, or interest in, any particular assets of the Employer which may be applied by the Employer to the payment of benefits or other rights under this Plan.
Section 6.10.      Payments to Incompetent Persons, Etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of giving a receipt therefor shall be deemed paid when paid to such person’s guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Employer, the Compensation Committee, and all other parties with respect thereto.
Section 6.11.      Controlling Law . This Plan shall be construed and enforced according to the internal laws of the Commonwealth of Pennsylvania to the extent not preempted by federal law, which shall otherwise control.
Section 6.12.      Binding Effect . Obligations incurred by the Employer pursuant to this Plan shall be binding upon and inure to the benefit of the Employer, its successors and assigns, and the Employee and any beneficiary or other successor in interest of the Employee.
Section 6.13.      Code § 409A . The Plan is intended to be exempt from the application of Code § 409A. To the extent this Plan is determined to be subject to Code § 409A and a provision of the Plan is contrary to or fails to address the requirements of Code § 409A and related Treasury Regulations, the Plan shall be construed and administered as necessary to comply with such requirements to the extent allowed under applicable Treasury Regulations until the Plan is appropriately amended to comply with such requirements. Furthermore, to the extent this Plan is determined to be subject to Code § 409A, any payment made on account of the Termination of a “specified employee” (as determined under Treas. Reg. § 1.409A-1(i)) shall be made on the date that is six (6) months after the date of the Employee’s Termination to the extent necessary to comply with the requirements of Code § 409A and related Treasury Regulations; provided, however, that the payments of vested amounts to which the Employee would have been entitled during such 6-month period, but for this Section, shall be accumulated and paid to the Employee on the first (1 st ) day of the seventh (7 th ) month following the Employee’s Termination.


9
Company Confidential


SCHEDULE A
 
Hay Pay Grade Level 31
Hay Pay Grade Levels 23 to 30
Hay Pay Grade Level 22
Continuation of Base Salary
18 months
12 months
6 months
Outplacement Services
12 months
12 months
6 months

Notwithstanding any provision of the Plan to the contrary, the Company may, in its sole and absolute discretion, on a case-by-case basis, which does not have to be applied uniformly, pay additional benefits to an Employee in excess of the Severance Benefi t provided in this Schedule A ; provided, however, any such increase in the benefit provided under this Plan to an Employee covered by Section 16 of the Securities Exchange Act of 1934 shall be approved by the Compensation Committee or its authorized designee.


SCHEDULE A-1
Company Confidential



Exhibit 12

Carpenter Technology Corporation
Computation of Ratios of Earnings to Fixed Charges - unaudited
Five Years Ended June 30, 2017
($ in millions)

 
 
 
Years Ended June 30,
 
 
 
2017
 
2016
 
2015
 
2014
 
2013
Fixed charges:
 
 
 
 
 
 
 
 
 
 
Interest costs (a)
$
31.1

 
$
29.9

 
$
30.4

 
$
32.1

 
$
27.8

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest component of non-capitalized lease rental expense (b)
4.4

 
3.8

 
4.0

 
4.3

 
4.1

 
 
 
 
 
 
 
 
 
 
 
 
 
    Total fixed charges
 
$
35.5

 
$
33.7

 
$
34.4

 
$
36.4

 
$
31.9

 
 
 
 
 
 
 
 
 
 
 
 
Earnings as defined:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
$
70.2

 
$
21.5

 
$
89.1

 
$
196.4

 
$
216.8

 
 
 
 
 
 
 
 
 
 
 
 
 
Less income from less-than-fifty-percent owned entities, and loss on sale of partial interest in less-than-fifty percent owned entities

 
(0.6
)
 
(0.1
)
 
(0.6
)
 
(1.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling interest in the income of subsidiary with fixed charges

 

 

 

 
(0.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed charges less interest capitalized
34.2

 
31.8

 
31.7

 
21.3

 
25.1

 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of capitalized interest
1.3

 
1.3

 
1.4

 
1.4

 
1.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings as defined
$
105.7

 
$
54.0

 
$
122.1

 
$
218.5

 
$
241.7

 
 
 
 
 
 
 
 
 
 
 
 
Ratio of earnings to fixed charges
3.0x

 
1.6x

 
3.5x

 
6.0x

 
7.6x

 
 
 
 
 
 
 
 
 
 
 
 

(a) Includes interest capitalized relating to significant construction projects, amortization of debt discount and debt issue costs.

(b) One-third of rental expense which approximates the interest component of non-capitalized leases.







        
Exhibit 21

SUBSIDIARY LIST

Doing Business As
 
State of Incorporation
Carpenter Investments, Inc.
 
Delaware
CRS Holdings Inc.
 
Delaware
Dynamet Incorporated
 
Delaware
Talley Industries, LLC
 
Delaware
LSM Holding LLC
 
Delaware
Latrobe Specialty Metals Company, LLC
 
Delaware



Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We hereby consent to the incorporation by reference in the Registration Statements on Form S‑8 (Nos. 2-83780, 2-81019, 33-42536, 33-65077, 33-54045, 333-40991, 333-55667, 333-55669, 333-57774, 333-147057, 333-147059, 333-173830, 333-182155, 333-182156, 333-186361, and 333-214151) and Form S-3ASR (No. 333-182121 and 333-214152) of Carpenter Technology Corporation of our report dated August 11, 2017 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10‑K.


/s/ PricewaterhouseCoopers LLP
 
Philadelphia, Pennsylvania
August 11, 2017
 




Exhibit 24

CARPENTER TECHNOLOGY CORPORATION

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints James D. Dee and Damon J. Audia, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2017, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the exercise of any of the rights and powers herein granted, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys.
    IN TESTIMONY WHEREOF, the undersigned has voluntarily executed this instrument this 8th day of August, 2017.

/s/ Carl G. Anderson, Jr.         
Carl G. Anderson, Jr.
Director





CARPENTER TECHNOLOGY CORPORATION

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints James D. Dee and Damon J. Audia, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2017, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the exercise of any of the rights and powers herein granted, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys.
    IN TESTIMONY WHEREOF, the undersigned has voluntarily executed this instrument this 8th day of August, 2017.

/s/ Philip M. Anderson
Philip M. Anderson
Director





CARPENTER TECHNOLOGY CORPORATION

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints James D. Dee and Damon J. Audia, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2017, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the exercise of any of the rights and powers herein granted, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys.
    IN TESTIMONY WHEREOF, the undersigned has voluntarily executed this instrument this 8th day of August, 2017.

/s/ I. Martin Inglis
I. Martin Inglis
Director





CARPENTER TECHNOLOGY CORPORATION

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints James D. Dee and Damon J. Audia, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2017, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the exercise of any of the rights and powers herein granted, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys.
    IN TESTIMONY WHEREOF, the undersigned has voluntarily executed this instrument this 8th day of August, 2017.

/s/ Steven E. Karol
Steven E. Karol
Director





CARPENTER TECHNOLOGY CORPORATION

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints James D. Dee and Damon J. Audia, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2017, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the exercise of any of the rights and powers herein granted, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys.
    IN TESTIMONY WHEREOF, the undersigned has voluntarily executed this instrument this 8th day of August, 2017.

/s/ Robert R. McMaster
Robert R. McMaster
Director









CARPENTER TECHNOLOGY CORPORATION

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints James D. Dee and Damon J. Audia, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2017, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the exercise of any of the rights and powers herein granted, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys.
    IN TESTIMONY WHEREOF, the undersigned has voluntarily executed this instrument this 8th day of August, 2017.

/s/ Gregory A. Pratt
Gregory A. Pratt
Director






CARPENTER TECHNOLOGY CORPORATION

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints James D. Dee and Damon J. Audia, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2017, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the exercise of any of the rights and powers herein granted, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys.
    IN TESTIMONY WHEREOF, the undersigned has voluntarily executed this instrument this 8th day of August, 2017.

/s/ Kathryn C. Turner
Kathryn C. Turner
Director





CARPENTER TECHNOLOGY CORPORATION

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints James D. Dee and Damon J. Audia, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2017, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the exercise of any of the rights and powers herein granted, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys.
    IN TESTIMONY WHEREOF, the undersigned has voluntarily executed this instrument this 8th day of August, 2017.

/s/ Jeffrey Wadsworth
Jeffrey Wadsworth
Director





CARPENTER TECHNOLOGY CORPORATION

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints James D. Dee and Damon J. Audia, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2017, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the exercise of any of the rights and powers herein granted, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys.
    IN TESTIMONY WHEREOF, the undersigned has voluntarily executed this instrument this 8th day of August, 2017.

/s/ Stephen M. Ward, Jr.
Stephen M. Ward, Jr.
Director










Exhibit 31(A)
CERTIFICATIONS OF PERIODIC REPORTS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Tony R. Thene, certify that:
1.
I have reviewed this Annual Report on Form 10-K (the “Report”) of the Registrant;
2.
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3.
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4.
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
(d)
Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: August 11, 2017
/s/ Tony R. Thene
 
Tony R. Thene
 
President and Chief Executive Officer




Exhibit 31(B)
CERTIFICATIONS OF PERIODIC REPORTS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Damon J. Audia, certify that:
1.
I have reviewed this Annual Report on Form 10-K (the “Report”) of the Registrant;
2.
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3.
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;
4.
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
(d)
Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
Date: August 11, 2017
/s/ Damon J. Audia
 
Damon J. Audia
 
Senior Vice President and Chief Financial Officer





Exhibit 32
CERTIFICATION OF PERIODIC FINANCIAL REPORTS PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Carpenter Technology Corporation (the “Issuer”) on Form 10-K for the year ended June 30, 2017 , as filed with the Securities and Exchange Commission on the date hereof (the “Periodic Report”), I, Tony R. Thene, and I, Damon J. Audia, each hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Periodic Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and that information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Date: August 11, 2017
/s/ Tony R. Thene
 
/s/ Damon J. Audia
Tony R. Thene
 
Damon J. Audia
President and Chief Executive Officer
 
Senior Vice President and Chief Financial Officer