UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended June 30 , 2024
OR
| 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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | 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.
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 ☐ No ☒
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to post such files).
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.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | |||||||||||
| Emerging growth company | ||||||||||||||
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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The aggregate market value of the registrant's voting common stock held by non-affiliates at December 31, 2023, was $3,498,374,545 , based on the closing price per share of the registrant's common stock on that date of $70.80 as reported on the New York Stock Exchange.
As of August 9, 2024, 49,947,498 shares of the registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Company's fiscal year 2024 definitive Proxy Statement are incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
| Page Number | |||||||||||
PART I
Item 1. Business
(a) General Development of Business:
Carpenter Technology Corporation, 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," "Carpenter Technology," "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. We are a recognized leader in high-performance specialty alloy-based materials and process solutions for critical applications in the aerospace, defense, medical, transportation, energy, industrial and consumer markets. We have evolved to become a pioneer in premium specialty alloys, including titanium, nickel, and cobalt, as well as alloys specifically engineered for additive manufacturing processes and soft magnetics applications.
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 segment are 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 Additive 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.
(2) Raw Materials:
Our business depends on continued receipt of critical raw materials for our day to day operations. These raw materials include nickel, cobalt, chromium, manganese, molybdenum, titanium, iron and scrap containing the named alloys. 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 on our business of changing prices 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.
2
(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 patent. The duration of a patent issued outside of the United States varies 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 can be influenced by seasonal factors with the first six months of the fiscal year typically being lower, 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 pattern.
(5) Customers:
On a consolidated basis, we are not dependent upon a single customer, or 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 operations. No single customer accounted for 10 percent or more of total net sales for the years ended June 30, 2024, June 30, 2023 and June 30, 2022. No single customer accounted for 10 percent or more of the accounts receivable outstanding at June 30, 2024 or June 30, 2023. 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, 2024, we had a sales backlog of orders excluding surcharge, believed to be firm, of approximately $2,256.6 million, significantly all of which is expected to be shipped within fiscal years 2025 and 2026. Our backlog of orders excluding surcharge as of June 30, 2023, was approximately $2,123.3 million.
(7) Competition:
We are leaders in specialty materials for critical applications with over 130 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 the 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. Many of our 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.
3
(8) Research, Product and Process Development:
Our expenditures for Company-sponsored research and development were $25.6 million, $24.4 million and $20.4 million in fiscal years 2024, 2023 and 2022, 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 $17.4 million, $15.7 million and $14.8 million for fiscal years 2024, 2023 and 2022, respectively. The capital expenditures for environmental control equipment were $0.7 million, $0.3 million and $1.1 million for fiscal years 2024, 2023 and 2022, respectively. We anticipate spending approximately $2.3 million on domestic environmental capital projects over the next five fiscal years. This includes approximately $2.0 million in fiscal year 2025. Due to the possibility of future regulatory developments, the amount of future capital expenditures may vary from these estimates.
4
(10) Human Capital Resources:
We maintain a high-performance work environment that supports our vision to be the preferred solutions provider in specialty materials. We value our employees and help them build careers that are as resilient, innovative and valuable as our work for our customers. We are committed to increasing employee engagement by leveraging the diversity and drive of our people, maximizing their talents, empowering them and supporting their career aspirations.
Health and Safety: Safety is our number one Core Value. We believe that a Zero Injury workplace is achievable and relentlessly pursue measures to increase safety and accountability for our employees. We are proactive in our approach to safety, working to eliminate hazards before causing injury or harm. We invest in our employees by providing appropriate tools, resources and education necessary to achieve a Zero Injury workplace.
Talent Acquisition: We are always looking for nimble, smart, growth-minded people – regardless of background – to help our organization continue to succeed. We strive to be an employer of choice in the communities that we operate. We have built an organizational culture that seeks to be transparent, supportive of work/life balance, welcoming of diverse viewpoints, treating all with dignity and respect and supporting each individuals' needs for professional growth and development.
Performance Management: Our formalized bi-annual performance review process accelerates employee growth and development at every stage of the process: (1) objectives and goal setting, (2) ongoing performance check-ins and coaching, as well as (3) performance evaluation and review. We also have Structured Individual Development Plans to assist managers in effectively setting targeted development activities for their direct reports and aligning those activities with business priorities.
Engagement: We regularly conduct a company-wide Employee Engagement Survey to collect tangible data to make our Company even better. The survey is conducted across the organization to seek input from all employees. The survey questions are updated regularly and cover a wide variety of topics, including safety, culture, diversity, inclusion and belonging, work/life balance and leadership and career development. Using the feedback provided by the Employee Engagement Survey, specific action plans are developed to address areas of concern or opportunities for improvement across the organization.
Professional Development: Our employees enjoy a wide variety of rewards that assist with engagement and development. From traditional items such as compensation to less traditional aspects such as work-life balance, hybrid and remote work arrangements, future career opportunities, and innovative work.
Diversity and Inclusion: We have a culture that blends our different backgrounds, experiences and perspectives from all employees. We seek to ensure that all our employees feel welcomed. Our values underlie our goal to ensure all employees are treated equally with dignity and respect regardless of their race, age, gender identity, or sexual orientation. Our Diversity, Inclusion and Belonging Committee plays a critical role in advancing us to the next level of awareness and engagement.
Governance: Our policy is to comply with the letter and spirit of all laws that govern our operations and to adhere to the highest standards of business ethics. We implemented general legal and ethical guidelines in our "Code of Conduct." The guidelines apply to all employees and majority-owned affiliates, including subsidiaries, both in the United States and other countries.
As of June 30, 2024, our total workforce consisted of approximately 4,600 employees, which included 184 production employees in Washington, Pennsylvania, who are covered under a collective bargaining agreement which expires on August 31, 2025, and 450 employees in Latrobe, Pennsylvania who are covered under a collective bargaining agreement which expires on July 31, 2027. We believe our relations with our employees are generally good.
5
(d) Financial information about foreign and domestic operations and export sales:
Sales outside of the United States, including export sales, were $1,136.7 million, $994.1 million and $656.4 million in fiscal years 2024, 2023 and 2022, respectively. Long-lived assets held outside of the United States were $5.2 million and $15.7 million as of June 30, 2024 and 2023, respectively. For further information on domestic and international sales, see Note 4 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 Chief Financial Officer 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 2024. The Code of Ethics and any information regarding any waivers of the Code of Ethics are disclosed on Carpenter's website at www.carpentertechnology.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 SEC 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 can be cyclical in nature and sensitive to general economic conditions, competitive influences and fluctuations in inventory levels throughout the supply chain. As such, our results of operations, financial condition, cash flows and availability of credit could fluctuate significantly from period to period.
A significant portion of our sales represents products sold to customers in the commercial aerospace and defense and energy markets. The cyclicality of those markets can adversely affect our current business and our expansion objectives.
The commercial aerospace and defense market is historically cyclical due to both external and internal market factors. These factors include general economic conditions, airline profitability, consumer demand for air travel, varying fuel and labor costs, price competition and international and domestic political conditions such as military conflict and the threat of terrorism. The length and degree of cyclical fluctuation can be influenced by any one or combination of these factors and therefore are difficult to predict with certainty. A downturn in the commercial aerospace and defense industry would adversely affect the demand for our products and/or the prices at which we are able to sell our products; our results of operations and financial condition could be materially adversely affected.
The energy market has also been historically cyclical, principally as a result of volatile oil prices that impact demand for our products. 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 volatility of oil prices and other factors that contribute to the cyclicality of the energy market will impact our ability to expand successfully in this area and may adversely affect our results of operations and financial condition.
6
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. 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 delays, or 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 and supplies 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 these alloys have been volatile due to factors beyond our control. We expect 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 critical raw materials and supplies is subject to factors that are not in our control. In some cases, these critical raw materials and supplies 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 and supplies 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 receipts 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.
7
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, cash flows 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.
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" system, is enacted and implemented. Such legislation could have a material adverse impact on our results of operations, financial condition and cash flows.
8
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, Medical and Energy 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 our results of 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 international laws and regulations, 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 adverse 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 184 production employees at our Dynamet business unit located in Washington, Pennsylvania are covered by a collective bargaining agreement which expires on August 31, 2025. Approximately 450 production employees at our Latrobe business unit located in Latrobe, Pennsylvania are covered by a collective bargaining agreement which expires on July 31, 2027. There can be no assurance that we will succeed in concluding collective bargaining agreements with the unions to replace those that expire which could result in work interruptions and stoppages. 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.
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.
9
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, have 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.
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 the Congo (the "DRC") or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. The Company timely filed its latest annual conflict minerals report required by the rules on May 28, 2024. 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.
Our business may be impacted by external factors that we may not be able to control.
War (such as the current war in Ukraine, the war between Israel and HAMAS, and the Houthi attacks on commercial shipping vessels and other naval vessels), civil conflict, terrorism, other geopolitical and diplomatic tensions, natural disasters, climate change and public health issues including domestic or international pandemics, other outbreaks of contagious diseases and other adverse public health developments have caused or 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.
10
Our international operations and global sales expose us to various risks including the impact of tariffs, which may adversely affect our business.
Risks associated with international operations 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 duties, quotas, tariffs and taxes; changes in taxation including the ability to repatriate earnings; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on international sales when converted into U.S. 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.
Significant changes to United States and international trade policies continue to emerge and activity levels have increased with regard to new import and export tariffs, retaliatory tariffs, and quotas; modifications to international trade policy; the withdrawal from or renegotiation of certain trade agreements; and other changes. These changes, including any implementation of or changes in trade sanctions, tariffs and embargoes, could materially adversely impact our business or require us to make changes to our current business practices or supply chain.
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. From time to time, there have been proposals 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, 2024, if the FIFO method of inventory had been used instead of the LIFO method, our inventories would have been approximately $371.0 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 ability to hire and retain a qualified workforce and 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. Failure to attract, hire, develop, motivate, and retain highly qualified employee talent, or failure to develop and implement an adequate succession plan for the management team, could disrupt our operations and adversely affect our business and our future success.
Cybersecurity attacks and other security breaches or failures in functionality of our information technology ("IT") and computer systems could adversely impact our financial condition and results of operations and compromise the integrity of confidential data.
Management relies extensively on IT infrastructure, including hardware, networks, 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 IT could result in theft, destruction, loss, misappropriation or release of confidential data or intellectual property which could adversely impact our future results.
We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our IT networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. Cybersecurity attacks are evolving in both frequency and sophistication and could be made by both internal and external individuals or groups with an extensive range of motives. If we are unable to prevent cybersecurity attacks and other information security breaches, we may encounter significant disruptions in our operations which could adversely impact our business, financial condition and results of operations or result in the unauthorized disclosure of confidential information. Such breaches may also harm our reputation, result in financial losses or subject us to litigation or other costs or penalties.
11
The carrying value of goodwill and other long-lived assets may not be recoverable.
Goodwill and other long-lived assets including property, plant, equipment and software 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.
Our ability to produce timely and accurate financial statements may be impacted if we fail to maintain an effective system of disclosure controls and internal control over financial reporting.
We are subject to the reporting requirements of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). Sarbanes-Oxley requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are also required to make a formal assessment and provide an annual management report on the effectiveness of our internal control over financial reporting, which must be attested to by our independent registered public accounting firm. In order to maintain the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, resources, including accounting-related costs and management oversight.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Carpenter Technology’s cybersecurity team and organizational partnerships are designed to protect our employees, intellectual property and customers from various cyber threats. Our cybersecurity team strives to achieve these protections through obtaining leading certifications and regular engagement with third parties and federal organizations to further protect our information. While we continually work to safeguard the information systems we use, and the proprietary, confidential and personal information residing therein, and mitigate potential risks, there can be no assurance that such actions will be sufficient to prevent cybersecurity incidents or mitigate all potential risks to such systems, networks and data or those of our third party providers. See “Item 1A. Risk Factors” for a discussion of cybersecurity risks.
Risk Management and Strategy
As cybersecurity risks continue to evolve and potentially affect businesses globally, Carpenter Technology understands that protecting business, employee, and customer information, data, and systems is of critical importance. Through a series of cybersecurity imperatives aligned with the National Institute of Standards and Technology (NIST), Carpenter Technology assesses, identifies and manages potential cyber risks. Imperatives include:
•Increasing Visibility: Improve understanding of what to protect
•Rapid Response: Mitigate the amount of damage that could occur
•Shrink Surface of Attack: Reduce the total resources exposed to cyber threat
•Identity Management: Ensure the right people have correct access
•Supply Chain Risk Management: Manage security risks introduced by vendors and third parties
•Data-Centric Security: Protect data throughout the lifecycle
Carpenter Technology’s multi-faceted cybersecurity program includes implementation of leading technologies to detect evolving cyber threats, recurring regular cybersecurity training to keep employees situationally aware, mock security exercises to prepare for rapid response, penetration tests to continuously improve operations, and internal audits to confirm controls are operating effectively. Carpenter Technology also maintains strong partnerships with law enforcement, leading academic institutions and peers in the manufacturing industry to stay informed of the latest cybersecurity developments and trends in the ever-evolving threat landscape. Employees annually review and acknowledge an information systems Acceptable Use Policy. Information Technology associates participate in comprehensive annual training including DFARS and Sarbanes-Oxley compliance training.
12
Carpenter Technology maintains a Cybersecurity Incident Response Plan ("CIRP") which provides specific guidance and documentation for proper incident handling and communication. The CIRP applies to all locations and situations where Carpenter Technology business is conducted. All cybersecurity incidents, regardless of severity, are to be promptly handled according to this plan. The CIRP will invoke Carpenter Technology's business continuity and crisis management processes for the most severe incidents.
Additionally, Carpenter Technology leverages third party security firms in various capacities to assist with various aspects of Carpenter Technology’s cybersecurity program, including risk assessments, vulnerability scans, and penetration testing. Carpenter Technology uses a variety of processes to address cybersecurity threats related to the use of third party technology and services, such as reviewing independent assessments of the third party’s cyber/information security controls, such as Systems and Organization Controls 2 audits or other standards-based assessments, where appropriate. As part of Carpenter Technology’s process to continuously improve its cyber and information security programs, Carpenter Technology also engages third party subject matter experts to assess and evaluate the effectiveness of various aspects of such programs.
As of the date of this Annual Report on Form 10-K, we are not aware of any risks from the cybersecurity threats that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations and financial condition.
Governance
Board of Directors Oversight
The Board of Directors is provided regular updates on the Company's cybersecurity program. The Audit/Finance Committee of the Board of Directors oversees the Company’s risk management program, including cyber and information security. The Board of Directors is also regularly briefed on Carpenter Technology’s cybersecurity risks and mitigation efforts. The oversight of our cybersecurity risk is integrated into our Enterprise Risk Management ("ERM") process owned by management and facilitated by Carpenter Technology's Internal Audit department. The ERM program includes an annual risk prioritization process designed to identify key enterprise risks. Each key enterprise risk is assigned risk owners to establish action plans and implement risk mitigation strategies. The annual risk assessment is presented to the full Board of Directors at least once per year, with regular updates presented quarterly to the Audit/Finance Committee.
Management’s Role in Cybersecurity Risk Management
We have a dedicated Chief Information Security Officer ("CISO") with overall responsibility for the cybersecurity program, including threat detection and response, vulnerability management, governance, risk and compliance, security strategy and architecture, security engineering and operations, product and operational technology security. The current CISO has 15+ years of experience in the cybersecurity field and has broad expertise in cybersecurity threat assessments and detection, mitigation technologies, cybersecurity training and incident response. The CISO’s credentials include a Master of Science Degree in Information Security Management from SANS Technology Institute and a CISO Certificate from Carnegie Mellon University. The CISO holds multiple certifications including CISSP, CISA, GCIH, GCIA and PMP.
Pursuant to our formal CIRP, suspected cybersecurity incidents are first evaluated by the Carpenter Technology Cybersecurity Team Leader who follows the guidance as outlined in the CIRP to respond to cybersecurity incidents and escalate as necessary based on a defined severity matrix. Based on the nature and severity of the incident, the response team may be comprised of representatives from our Information Technology, Human Resources, Safety, Legal, Finance and Communications departments, who jointly determine if the incident may result in a business interruption, require reporting to regulators, employees and/or business partners, have a material financial impact or cause reputational harm and should be escalated to the executive crisis response team, which includes Chief Executive Officer, Chief Financial Officer and General Counsel. For all matters that have been escalated, the responsible team executes specified procedures to contain the incident, implement incident response procedures and implement and document remediation measures.
13
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 bar products in Orwigsburg, Pennsylvania and Elyria, Ohio and operates a mini-mill in Hartsville, South Carolina, manufacturing bar and wire products. The principal locations for the PEP businesses include titanium alloy production facilities located in Washington, Pennsylvania and Clearwater, Florida and a powder products manufacturing facility in Athens, Alabama. The PEP segment includes domestic leased warehouses and service centers located in Washington, Pennsylvania and Vienna, Ohio.
The Reading, Hartsville, Washington, Orwigsburg, Elyria, Latrobe, 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 Belgium, Canada, China, Mexico, Singapore, Sweden, Taiwan and the United Kingdom.
Our corporate offices, located in Philadelphia, Pennsylvania, and Raleigh, North Carolina, are leased.
Our plants, customer service centers and distribution centers were acquired or leased at various times over numerous 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 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.
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 and regulations, 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 12 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 12 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.
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.
14
Tony R. Thene was appointed President and Chief Executive Officer effective July 1, 2015. Mr. Thene joined Carpenter Technology in January 2013 and served as the Senior Vice President and Chief Financial Officer. Prior to joining Carpenter Technology, Mr. Thene was employed for 23 years by Alcoa Inc., a leading producer of primary and fabricated aluminum, holding various management positions.
Timothy Lain was appointed Senior Vice President and Chief Financial Officer effective August 11, 2020. Mr. Lain joined Carpenter Technology in June 2007. From June 2013 to September 2018, he served as the Vice President-Controller and Chief Accounting Officer. He served as the Vice President and Chief Financial Officer from September 2018 until August 2020. Prior to joining the Company, Mr. Lain served as Audit Director at McGladrey & Pullen LLP, a certified public accounting firm.
Brian J. Malloy was appointed Senior Vice President and Chief Operating Officer effective December 4, 2023. Mr. Malloy previously served as the Senior Vice President and Group President of the SAO business segment from April 2022 until December 2023. He also served as Senior Vice President and Group President of the PEP segment from February 2022 until April 2022; Mr. Malloy assumed interim leadership of the PEP business segment in July of 2021, while serving as Senior Vice President and Chief Commercial Officer, the role he held since August of 2020. Mr. Malloy joined Carpenter Technology in August 2015 as Vice President, Sales & Customer Service for SAO. He served as Vice President and Chief Commercial Officer from March 2016 until August 2020. Prior to joining Carpenter Technology, Mr. Malloy worked for Global Precision Tubes where he was the Senior Vice President & Chief Strategy Officer. During Mr. Malloy's two years in this role, he was responsible for business development, strategy and the commercial organizations. Mr. Malloy's previous experience includes key roles at Alcoa, Inc., where his last position was Vice President, Commercial for Industrial Gas Turbines in the Power and Propulsion business unit.
James D. Dee was appointed Senior Vice President, General Counsel and Secretary effective August 11, 2020. Mr. Dee served as Vice President, General Counsel and Secretary from September 2010 until August 2020. Mr. Dee joined Carpenter Technology from C&D Technologies where he last served as Senior Vice President, General Counsel, Secretary and Chief Administrative Officer. Prior to his tenure at C&D Technologies, Mr. Dee was employed by the law firm of Montgomery, McCracken, Walker & Rhodes, LLP. Mr. Dee also worked 16 years at SPS Technologies, Inc., where he last served as Vice President, General Counsel and Secretary.
Marshall D. Akins was appointed Vice President - Chief Commercial Officer effective February 21, 2022. Mr. Akins joined Carpenter Technology in February 2016 and served as Vice President - Aerospace until February 2022. Prior to joining Carpenter Technology, Mr. Akins served as Principal at the Boston Consulting Group, a global management consulting firm. Mr. Akins was responsible for a wide range of strategic and operational engagements within the Industrial Goods practice, primarily focusing on company growth and effectiveness.
| Assumed Present Position | ||||||||||||||||||||
| Name | Age | Position | ||||||||||||||||||
| Tony R. Thene | 63 | President and Chief Executive Officer | July 2015 | |||||||||||||||||
| Timothy Lain | 52 | Senior Vice President and Chief Financial Officer | August 2020 | |||||||||||||||||
| Brian J. Malloy | 57 | Senior Vice President and Chief Operating Officer | December 2023 | |||||||||||||||||
| James D. Dee | 67 | Senior Vice President, General Counsel and Secretary | August 2020 | |||||||||||||||||
| Marshall D. Akins | 41 | Vice President - Chief Commercial Officer | February 2022 | |||||||||||||||||
15
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 2024 | Fiscal Year 2023 | |||||||||||||||||||||||||
| Period Ended: | High | Low | High | Low | ||||||||||||||||||||||
| September 30, | $ | 71.19 | $ | 51.94 | $ | 39.43 | $ | 24.76 | ||||||||||||||||||
| December 31, | $ | 74.06 | $ | 60.38 | $ | 43.32 | $ | 31.81 | ||||||||||||||||||
| March 31, | $ | 71.65 | $ | 58.87 | $ | 52.50 | $ | 35.72 | ||||||||||||||||||
| June 30, | $ | 112.75 | $ | 70.19 | $ | 56.34 | $ | 40.57 | ||||||||||||||||||
| Annual June 30, | $ | 112.75 | $ | 51.94 | $ | 56.34 | $ | 24.76 | ||||||||||||||||||
The range of our common stock price on the NYSE from July 1, 2024 to August 9, 2024 was $103.37 to $148.94. The closing price of the common stock was $139.31 on August 9, 2024.
We have paid quarterly cash dividends on our common stock since 1906. We paid a quarterly dividend of $0.20 per share of common stock during each quarter of fiscal years 2024 and 2023, respectively.
As of August 9, 2024, there were 1,516 common stockholders of record.
We recently announced that our Board of Directors approved a share repurchase program up to $400.0 million of our outstanding common stock.
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."
16
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 fiscal year ended June 30, 2024, and prior four fiscal years. The cumulative total return assumes an investment of $100.00 on June 30, 2019 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 our Peer Group is weighted according to the respective issuer's stock market capitalization at the beginning of each period.
| * $100.00 invested on June 30, 2019 in stock or index, including reinvestment of dividends. Fiscal years ending June 30. | ||
| Data sourced from Nasdaq | ||
| Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global | ||
| Copyright © 2024 Russell Investments | ||
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | |||||||||||||||||||||||||||||||||
| Carpenter Technology Corporation | $ | 100.00 | $ | 51.80 | $ | 88.50 | $ | 63.00 | $ | 129.00 | $ | 255.10 | ||||||||||||||||||||||||||
| S&P Midcap 400 | $ | 100.00 | $ | 91.70 | $ | 138.60 | $ | 116.60 | $ | 134.80 | $ | 150.60 | ||||||||||||||||||||||||||
| Russell Materials & Processing Growth | $ | 100.00 | $ | 111.10 | $ | 158.90 | $ | 111.20 | $ | 135.80 | $ | 155.10 | ||||||||||||||||||||||||||
Issuer Purchases of Equity Securities
During the fourth quarter of fiscal year 2024, employees surrendered 7,571 shares to the Company, at an average purchase price of $98.49, for the payment of the minimum tax liability withholding obligations upon the vesting of shares of restricted stock. We do not consider this a share buyback program.
17
Item 6.
Reserved.
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. We are a recognized leader in high-performance specialty alloy-based materials and process solutions for critical applications in the aerospace, defense, medical, transportation, energy, industrial and consumer markets. We have evolved to become a pioneer in premium specialty alloys, including titanium, nickel, and cobalt, as well as alloys specifically engineered for additive manufacturing processes and soft magnetics applications. We primarily process basic raw materials such as nickel, cobalt, titanium, manganese, chromium, molybdenum, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire and narrow strip in many sizes and finishes. We also produce certain metal powders and parts. Our sales are distributed directly from our production plants and distribution network as well as through independent distributors. Unlike many other specialty steel producers, we operate our own worldwide network of service and distribution centers. These service centers, located 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 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.
18
Business Trends
Selected financial results for the past three fiscal years are summarized below:
| Years Ended June 30, | ||||||||||||||||||||
| ($ in millions, except per share data) | 2024 | 2023 | 2022 | |||||||||||||||||
| Net sales | $ | 2,759.7 | $ | 2,550.3 | $ | 1,836.3 | ||||||||||||||
| Net sales excluding surcharge revenue (1) | $ | 2,167.7 | $ | 1,848.0 | $ | 1,400.0 | ||||||||||||||
| Operating income (loss) | $ | 323.1 | $ | 133.1 | $ | (24.9) | ||||||||||||||
| Adjusted operating income (loss) (1) | $ | 354.1 | $ | 133.1 | $ | (34.0) | ||||||||||||||
| Net income (loss) | $ | 186.5 | $ | 56.4 | $ | (49.1) | ||||||||||||||
| Diluted earnings (loss) per share | $ | 3.70 | $ | 1.14 | $ | (1.01) | ||||||||||||||
| Adjusted diluted earnings (loss) per share (1) | $ | 4.74 | $ | 1.14 | $ | (1.06) | ||||||||||||||
| Purchases of property, plant, equipment and software | $ | 96.6 | $ | 82.3 | $ | 91.3 | ||||||||||||||
| Adjusted free cash flow (1) | $ | 179.0 | $ | (67.6) | $ | (83.1) | ||||||||||||||
| Pounds sold (in thousands) (2) | 206,302 | 214,122 | 188,112 | |||||||||||||||||
(1) See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.
(2) Pounds sold data includes Specialty Alloys Operations segment and Dynamet and Additive businesses from the Performance Engineered Products segment.
Our sales are across diverse end-use markets. The table below summarizes our sales by end-use market over the past three fiscal years:
| Years Ended June 30, | ||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||
| ($ in millions) | Dollars | % of Total | Dollars | % of Total | Dollars | % of Total | ||||||||||||||||||||||||||||||||
| Aerospace and Defense | $ | 1,538.8 | 56 | % | $ | 1,290.7 | 51 | % | $ | 790.2 | 43 | % | ||||||||||||||||||||||||||
| Medical | 375.6 | 14 | % | 301.6 | 12 | % | 212.3 | 12 | % | |||||||||||||||||||||||||||||
| Transportation | 149.1 | 5 | % | 185.0 | 7 | % | 178.3 | 10 | % | |||||||||||||||||||||||||||||
| Energy | 185.8 | 7 | % | 163.3 | 6 | % | 113.0 | 6 | % | |||||||||||||||||||||||||||||
| Industrial and Consumer | 415.3 | 15 | % | 487.2 | 19 | % | 417.2 | 23 | % | |||||||||||||||||||||||||||||
| Distribution | 95.1 | 3 | % | 122.5 | 5 | % | 125.3 | 6 | % | |||||||||||||||||||||||||||||
| Total net sales | $ | 2,759.7 | 100 | % | $ | 2,550.3 | 100 | % | $ | 1,836.3 | 100 | % | ||||||||||||||||||||||||||
19
Impact of Raw Material Prices and Product Mix
We value most of our inventory utilizing the 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 45 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), we 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 accumulated other comprehensive income (loss) ("AOCI") 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.
Impact of Inflation and Supply Chain Disruption
Recent inflationary pressures affecting the general economy have impacted our operating costs including increased costs for raw materials, energy, key operating supplies and labor.
Additionally, global supply chain disruptions have affected our operations, including the availability and cost of labor, as well as the supply of industrial goods. As a result, we are experiencing higher labor rates, extended lead times for certain supplies, as well as delay of certain capital expenditures due to the availability of equipment and outside contractors. These disruptions have resulted in increased direct costs and certain inefficiencies in our operations.
20
We have taken steps that we believe are necessary to mitigate inflationary pressures and supply chain disruptions. As discussed above, we have certain mechanisms in place to reduce the impact for the most significant of these items and have been able to recover these increases through our raw material surcharge and other pricing strategies. We have long-term relationships with major suppliers who provide availability of material at competitive prices along with arrangements with certain vendors to provide consigned materials at our manufacturing facilities available for our consumption as necessary. We also continue to execute on targeted initiatives to maximize productivity and achieve capacity gains.
While these inflation and supply chain factors could negatively impact our business in the near-term, we do not currently expect them to materially impact our business outlook or operational goals over the long-term.
Net Pension Expense (Income)
Net pension expense (income), 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.
During the fiscal year ended June 30, 2024, we executed a buy-out annuity transaction for our largest defined benefit plan. We determined that the annuity settlement and lump-sum payments exceeded the threshold of service cost and interest cost components and therefore settlement accounting was required. We recorded a noncash settlement charge of $51.9 million in the year ended June 30, 2024, within other expense (income), net.
The following is a summary of the net pension expense (income) for the years ended June 30, 2024, 2023 and 2022:
| Years Ended June 30, | ||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2022 | |||||||||||||||||
| Pension plans | $ | 78.0 | $ | 20.6 | $ | (4.2) | ||||||||||||||
| Other postretirement plans | (2.0) | (0.7) | (3.1) | |||||||||||||||||
Net pension expense (income) | $ | 76.0 | $ | 19.9 | $ | (7.3) | ||||||||||||||
The service cost component of net pension expense (income) represents the estimated cost of future pension liabilities earned associated with active employees. The pension earnings, interest and deferrals 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 and benefits.
Net periodic expense (income) 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 and in other expense (income), net. The following is a summary of the classification of net pension expense (income) for the years ended June 30, 2024, 2023 and 2022:
| Years Ended June 30, | ||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2022 | |||||||||||||||||
| Service cost included in Cost of sales | $ | 8.4 | $ | 8.6 | $ | 9.6 | ||||||||||||||
| Service cost included in Selling, general and administrative expenses | 1.3 | 1.3 | 1.4 | |||||||||||||||||
| Pension earnings, interest and deferrals included in Other expense (income), net | 14.4 | 10.0 | (18.3) | |||||||||||||||||
| Settlement charge included in Other expense (income), net | 51.9 | — | — | |||||||||||||||||
Net pension expense (income) | $ | 76.0 | $ | 19.9 | $ | (7.3) | ||||||||||||||
As of June 30, 2024 and 2023, amounts capitalized in gross inventory were $1.6 million and $2.8 million, respectively.
21
Operating Performance Overview
Fiscal year 2024 was the most profitable year in Carpenter Technology’s history, achieving $354.1 million in adjusted operating income. Further, we generated adjusted free cash flow of $179.0 million for the full fiscal year. We continue to drive earnings momentum through improved productivity, product mix optimization and pricing actions. Notably, the SAO segment generated $408.5 million in operating income with an adjusted operating margin of 16.7 percent of net sales (21.8 percent of net sales excluding surcharge revenue).
With our operating momentum, we are pulling forward our previously communicated fiscal year 2027 goal of doubling our operating income versus fiscal year 2019. We expect to achieve $460.0 million to $500.0 million in operating income in fiscal year 2025. Having just realized over 60 percent of our goal in fiscal year 2024, we are accelerating a four-year goal into a two-year goal. We expect a strong start to fiscal year 2025, with first quarter operating income in the range of $114.0 million to $120.0 million. Further, we expect to generate $250.0 million to $300.0 million in adjusted free cash flow in fiscal year 2025.
With a strong balance sheet and meaningful adjusted free cash flow, we will continue to take a balanced approach to capital allocation: sustaining our current asset base to achieve our targets, investing in incremental growth initiatives, and returning cash to stockholders. We recently announced that our Board of Directors approved a share repurchase program up to $400.0 million of our outstanding common stock. Carpenter Technology continues to exceed performance and outlook expectations. Having just completed a historic fourth quarter and fiscal year 2024, we believe we are well positioned to achieve our accelerated goals and believe our earnings growth journey will extend far beyond fiscal year 2025.
We are actively managing our preventive maintenance schedules to protect our unique assets, serve our customers and maximize shipments. Macro trends are increasing demand across our end-use markets for our broad portfolio of specialized solutions. We have leading capabilities and capacity with a difficult-to-replicate system of assets, and we continue to drive improved productivity to capture the demand.
Results of Operations — Fiscal Year 2024 Compared to Fiscal Year 2023
For fiscal year 2024, we reported net income of $186.5 million, or $3.70 earnings per diluted share. This compares with net income of $56.4 million, or $1.14 earnings per diluted share, in fiscal year 2023. Excluding special items, as identified below, adjusted earnings per diluted share was $4.74 in fiscal year 2024. There were no reported special items for fiscal year 2023. The results for fiscal year 2024 compared to fiscal year 2023 reflect ongoing improvement in product mix, higher realized prices, as well as expanded operating efficiencies.
Special items included in our fiscal year 2024 results include a noncash goodwill impairment charge of $14.1 million related to the Latrobe Distribution reporting unit in the PEP segment. We recorded restructuring and asset impairment charges of $16.9 million as a result of actions taken to streamline operations in the Carpenter Additive business. $15.8 million of this amount represent noncash asset impairment charges. We also recorded a noncash pension settlement charge of $51.9 million as a result of executing de-risking actions to annuitize certain pension plan obligations. During fiscal year 2024, we also reduced income tax expense by $18.4 million related to a U.S. tax benefit that was generated as a result of the Carpenter Additive restructuring actions.
Net Sales
Net sales for fiscal year 2024 were $2,759.7 million, which represents an 8 percent increase from fiscal year 2023. Excluding surcharge revenue, sales were 17 percent higher than fiscal year 2023 on 4 percent lower volume. The results reflect double-digit sales growth across Aerospace and Defense, Medical and Energy end-use markets versus the prior year period driven by realized price increases and improved product mix.
Geographically, domestic net sales increased 4 percent from fiscal year 2023. Excluding surcharge revenue, domestic sales increased 15 percent driven by stronger demand in the end-use markets of Aerospace and Defense, Medical and Energy Net sales outside the United States increased 14 percent from fiscal year 2023 to $1,136.7 million for fiscal year 2024. Excluding surcharge revenue, sales outside the United States increased 21 percent, reflecting stronger demand in the end-use markets of Aerospace and Defense, Medical and Energy in the European and Asia Pacific regions compared to fiscal year 2023. 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 $1.9 million increase in sales during fiscal year 2024 compared to fiscal year 2023. International sales as a percentage of our total net sales represented 41 percent and 39 percent for fiscal year 2024 and fiscal year 2023, respectively.
22
Sales by End-Use Markets
We sell to customers across diversified end-use markets. We believe that net sales by end-use markets is helpful supplemental information in analyzing the performance of the business from period to period. The following table includes comparative information for our net sales, which includes surcharge revenue, by principal end-use markets:
| Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | ||||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | ||||||||||||||||||||||||
| Aerospace and Defense | $ | 1,538.8 | $ | 1,290.7 | $ | 248.1 | 19 | % | ||||||||||||||||||
| Medical | 375.6 | 301.6 | 74.0 | 25 | % | |||||||||||||||||||||
| Transportation | 149.1 | 185.0 | (35.9) | (19) | % | |||||||||||||||||||||
| Energy | 185.8 | 163.3 | 22.5 | 14 | % | |||||||||||||||||||||
| Industrial and Consumer | 415.3 | 487.2 | (71.9) | (15) | % | |||||||||||||||||||||
| Distribution | 95.1 | 122.5 | (27.4) | (22) | % | |||||||||||||||||||||
| Total net sales | $ | 2,759.7 | $ | 2,550.3 | $ | 209.4 | 8 | % | ||||||||||||||||||
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) | 2024 | 2023 | ||||||||||||||||||||||||
| Aerospace and Defense | $ | 1,199.2 | $ | 919.5 | $ | 279.7 | 30 | % | ||||||||||||||||||
| Medical | 315.4 | 241.3 | 74.1 | 31 | % | |||||||||||||||||||||
| Transportation | 108.9 | 121.8 | (12.9) | (11) | % | |||||||||||||||||||||
| Energy | 130.4 | 104.3 | 26.1 | 25 | % | |||||||||||||||||||||
| Industrial and Consumer | 319.4 | 339.4 | (20.0) | (6) | % | |||||||||||||||||||||
| Distribution | 94.4 | 121.7 | (27.3) | (22) | % | |||||||||||||||||||||
| Total net sales excluding surcharge revenue | $ | 2,167.7 | $ | 1,848.0 | $ | 319.7 | 17 | % | ||||||||||||||||||
Sales to the Aerospace and Defense end-use market increased 19 percent from fiscal year 2023 to $1,538.8 million. Excluding surcharge revenue, sales increased 30 percent on 11 percent higher shipment volume. The fiscal year 2024 results reflect increases across nearly all Aerospace end-use sub-markets. This was driven by increased demand in the aerospace supply chain due to continued higher aircraft build rates to replace aging fleets and to meet increasing passenger travel demand and to realize fuel efficiency new aircrafts can achieve. The fiscal year 2023 results reflected increases across all Aerospace end-use sub-markets. This was driven by ramping activity levels across the aerospace supply chain due to higher aircraft build rates to replace aging fleets and to meet increasing passenger travel demand.
Sales to the Medical end-use market increased 25 percent to $375.6 million from fiscal year 2023. Excluding surcharge revenue, sales increased 31 percent on 14 percent higher shipment volume. The fiscal year 2024 results reflect higher demand across all applications as the medical supply chain replenishes inventory levels to meet higher patient demand for elective medical procedures.
Transportation end-use market sales of $149.1 million reflected a 19 percent decrease from fiscal year 2023. Excluding surcharge revenue, sales decreased 11 percent on 23 percent lower shipment volume. The results reflect lower demand across light, medium and heavy-duty vehicle applications offset partially by higher demand in specialty transportation applications compared to fiscal year 2023. The fiscal year 2024 results also reflect the negative impact of employee union strikes in North America which did not occur in fiscal year 2023.
23
Sales to the Energy end-use market of $185.8 million reflected a 14 percent increase from fiscal year 2023. Excluding surcharge revenue, sales increased 25 percent on 12 percent higher shipment volume. The fiscal year 2024 results reflect increasing global oil consumption benefiting the oil and gas sub-market and higher demand for power generation materials compared to fiscal year 2023.
Industrial and Consumer end-use market sales of $415.3 million decreased 15 percent from fiscal year 2023. Excluding surcharge revenue, sales decreased 6 percent on 26 percent lower shipment volume. The fiscal year 2024 results reflect lower demand in both Industrial and Consumer end-use markets partially offset by realized price increases compared to fiscal year 2023.
Gross Profit
Gross profit in fiscal year 2024 increased to $584.3 million, or 21.2 percent of net sales, from $337.3 million, or 13.2 percent of net sales for fiscal year 2023. The fiscal year 2024 results reflect 8 percent increased sales with a stronger product mix driven by higher prices and improved operational efficiencies, partially offset by inflationary cost increases compared to fiscal year 2023. Excluding the impact of surcharge revenue, our adjusted gross margin in fiscal year 2024 was 27.0 percent. This compares to adjusted gross margin of 18.3 percent in fiscal year 2023.
Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.
| Fiscal Year | ||||||||||||||
| ($ in millions) | 2024 | 2023 | ||||||||||||
| Net sales | $ | 2,759.7 | $ | 2,550.3 | ||||||||||
| Less: surcharge revenue | 592.0 | 702.3 | ||||||||||||
| Net sales excluding surcharge revenue | $ | 2,167.7 | $ | 1,848.0 | ||||||||||
| Gross profit | $ | 584.3 | $ | 337.3 | ||||||||||
| Gross margin | 21.2 | % | 13.2 | % | ||||||||||
| Gross margin excluding surcharge revenue | 27.0 | % | 18.3 | % | ||||||||||
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal year 2024 were $230.2 million, or 8.3 percent of net sales (10.6 percent of net sales excluding surcharge revenue), compared to $204.2 million, or 8.0 percent of net sales (11.0 percent of net sales excluding surcharge revenue), in fiscal year 2023. The higher selling, general and administrative expenses in fiscal year 2024 reflect higher variable compensation charges compared to fiscal year 2023.
Restructuring and Asset Impairment Charges
During fiscal year 2024, restructuring and asset impairment charges were $16.9 million, compared to no restructuring and asset impairment charges in fiscal year 2023. Restructuring activities were a result of actions taken to streamline operations in our Carpenter Additive business in the PEP segment during fiscal year 2024. This included $15.8 million of noncash pre-tax impairment charges related to $8.8 million of property, plant, equipment and software and $7.0 million associated with a certain definite lived intangible asset.
24
Goodwill Impairment Charge
During fiscal year 2024, we identified an impairment triggering event in the Latrobe Distribution reporting unit within the PEP segment related to a decline in customer ordering patterns. This combined with market headwinds due to general industrial macroeconomic conditions including rising interest rates has contributed to lower sales and profit margins compared to the established annual operation plan for fiscal year 2024. Despite our efforts to mitigate the market challenges, results did not improve for the Latrobe Distribution reporting unit during fiscal year 2024. In light of these market conditions at the time, the pace of growth in the future projections for the Latrobe Distribution reporting unit were lowered. We determined the goodwill associated with the Latrobe Distribution reporting unit was impaired and recorded an impairment charge of $14.1 million during the third quarter of fiscal year 2024, which represented the entire balance of goodwill for this reporting unit. No goodwill impairment charges were recognized during fiscal year 2023.
Operating Income
Our operating income in fiscal year 2024 was $323.1 million, or 11.7 percent of net sales, as compared with $133.1 million of operating income, or 5.2 percent of net sales, in fiscal year 2023. Excluding surcharge revenue and special items, adjusted operating income was $354.1 million or adjusted operating margin of 16.3 percent for fiscal year 2024 and 7.2 percent for fiscal year 2023. Results for fiscal year 2024 reflect ongoing improvement in product mix, higher realized prices, as well as expanded operating efficiencies compared to fiscal year 2023. Our fiscal year 2023 operating results reflected higher sales in key end-use markets, increased productivity at our facilities, improved product mix and realized price increases.
Special items included in fiscal year 2024 operating income include a noncash goodwill impairment charge of $14.1 million related to the Latrobe Distribution reporting unit in the PEP segment and restructuring and asset impairment charges of $16.9 million as a result of actions taken to streamline operations in the Carpenter Additive business.
The following presents our operating income and operating margin, in each case excluding the impact of surcharge on net sales and special items. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.
| Fiscal Year | ||||||||||||||
| ($ in millions) | 2024 | 2023 | ||||||||||||
| Net sales | $ | 2,759.7 | $ | 2,550.3 | ||||||||||
| Less: surcharge revenue | 592.0 | 702.3 | ||||||||||||
| Net sales excluding surcharge revenue | $ | 2,167.7 | $ | 1,848.0 | ||||||||||
| Operating income | $ | 323.1 | $ | 133.1 | ||||||||||
Special items: | ||||||||||||||
| Goodwill impairment charge | 14.1 | — | ||||||||||||
| Restructuring and asset impairment charges | 16.9 | — | ||||||||||||
| Adjusted operating income excluding special items | $ | 354.1 | $ | 133.1 | ||||||||||
| Operating margin | 11.7 | % | 5.2 | % | ||||||||||
| Adjusted operating margin excluding surcharge revenue and special items | 16.3 | % | 7.2 | % | ||||||||||
Interest Expense, Net
Fiscal year 2024 interest expense, net was $51.0 million compared to $54.1 million in fiscal year 2023. Capitalized interest reduced interest expense by $1.6 million for fiscal year 2024 and by $1.5 million in fiscal year 2023. The lower interest expense, net in fiscal year 2024 is largely due to less short-term borrowings under our Credit Facility compared to fiscal year 2023.
25
Other Expense, Net
Other expense, net for fiscal year 2024 was $60.5 million compared with other expense, net of $6.5 million in fiscal year 2023. Fiscal year 2024 reflects $14.4 million of expense from pension earnings, interest and deferrals compared to $10.0 million of expense from pension earnings, interest and deferrals in fiscal year 2023, driven by lower than expected returns on plan assets. The results for fiscal year 2024 also include a noncash pension settlement charge of $51.9 million.
Income Taxes
Our effective tax rate (income tax expense (benefit) as a percent of income (loss) before taxes) for fiscal year 2024 was 11.9 percent as compared to 22.2 percent for fiscal year 2023. The fiscal year 2024 tax expense includes $18.4 million for U.S. tax benefits related to the closure of Carpenter Additive operations in the United Kingdom, $12.4 million associated with the pension settlement charge and $6.8 million attributable to employee share-based compensation. Tax expense also reflects the unfavorable impacts of the $14.1 million non-deductible goodwill impairment charge, $16.9 million non-deductible restructuring charges and losses in certain foreign jurisdictions for which no tax benefit can be recognized. Excluding the tax impact of the pension settlement charge, non-deductible goodwill impairment charge, restructuring charges and tax benefits related to the closure of the Carpenter Additive operations in the United Kingdom, the rate for fiscal year 2024 would have been 19.0 percent.
The fiscal year 2023 tax expense included the unfavorable impacts of losses in certain foreign jurisdictions for which no tax benefit can be recognized as well as tax charges of $0.3 million for the impact of a state tax legislative change and $0.4 million resulting from changes in our prior year tax positions. Also included were tax benefits of $1.0 million for anticipated interest on IRS income tax refund claims and $0.9 million for decreases in state valuation allowances for deferred tax assets resulting from changes in our ability to utilize certain state net operating loss carryforwards.
On October 8, 2021, the Organization for Economic Co-operation and Development ("OECD") released a statement on the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, which agreed to a two-pillar solution to address tax challenges of the digital economy. On December 20, 2021, the OECD released Pillar Two model rules defining a 15 percent global minimum tax rate for large multinational corporations. The OECD continues to release additional guidance and countries are implementing legislation with widespread adoption of the Pillar Two Framework expected by calendar year 2024. We are continuing to evaluate the Pillar Two Framework and its potential impact on future periods.
We assert that substantially all undistributed earnings from foreign subsidiaries are not considered permanently reinvested. The potential tax implications from the distribution of these earnings are expected to be limited to withholding taxes in certain foreign jurisdictions and are not expected to materially impact the consolidated financial statements.
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 our volumes by business segment:
| Pounds sold | Fiscal Year | Decrease | % Decrease | |||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||||||||||||||
| Specialty Alloys Operations | 208,154 | 212,050 | (3,896) | (2) | % | |||||||||||||||||||||
| Performance Engineered Products * | 10,094 | 11,864 | (1,770) | (15) | % | |||||||||||||||||||||
| Intersegment | (11,946) | (9,792) | (2,154) | (22) | % | |||||||||||||||||||||
| Total pounds sold | 206,302 | 214,122 | (7,820) | (4) | % | |||||||||||||||||||||
* Pounds sold data for PEP segment includes Dynamet and Additive businesses only.
26
The following table includes comparative information for our net sales by business segment:
| Net sales | Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | ||||||||||||||||||||||||
| Specialty Alloys Operations | $ | 2,443.8 | $ | 2,213.6 | $ | 230.2 | 10 | % | ||||||||||||||||||
| Performance Engineered Products | 411.0 | 433.7 | (22.7) | (5) | % | |||||||||||||||||||||
| Intersegment | (95.1) | (97.0) | 1.9 | 2 | % | |||||||||||||||||||||
| Total net sales | $ | 2,759.7 | $ | 2,550.3 | $ | 209.4 | 8 | % | ||||||||||||||||||
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
| Net sales excluding surcharge revenue | Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | ||||||||||||||||||||||||
| Specialty Alloys Operations | $ | 1,876.0 | $ | 1,540.6 | $ | 335.4 | 22 | % | ||||||||||||||||||
| Performance Engineered Products | 377.8 | 397.1 | (19.3) | (5) | % | |||||||||||||||||||||
| Intersegment | (86.1) | (89.7) | 3.6 | 4 | % | |||||||||||||||||||||
| Total net sales excluding surcharge revenue | $ | 2,167.7 | $ | 1,848.0 | $ | 319.7 | 17 | % | ||||||||||||||||||
Specialty Alloys Operations Segment
Net sales in fiscal year 2024 for the SAO segment increased 10 percent to $2,443.8 million, as compared with $2,213.6 million in fiscal year 2023. Excluding surcharge revenue, net sales increased 22 percent on 2 percent lower shipment volume as compared to fiscal year 2023. The higher sales excluding surcharge revenue in the SAO segment reflect double-digit percentage growth in the end-use markets of Aerospace and Defense, Medical and Energy driven by productivity gains, stronger product mix and pricing actions compared to fiscal year 2023.
Operating income for the SAO segment in fiscal year 2024 was $408.5 million, or 16.7 percent of net sales (21.8 percent of net sales excluding surcharge revenue), compared to operating income of $179.1 million, or 8.1 percent of net sales (11.6 percent of net sales excluding surcharge revenue), for fiscal year 2023. Fiscal year 2024 reflects stronger product mix and improved operational efficiencies, partially offset by inflationary cost increases compared to fiscal year 2023.
Performance Engineered Products Segment
Net sales for fiscal year 2024 for the PEP segment were $411.0 million as compared with $433.7 million for fiscal year 2023. Excluding surcharge revenue, net sales decreased 5 percent from fiscal year 2023 on 15 percent lower shipment volume. The results reflect higher sales in Aerospace and Defense and Medical end-use markets, in particular Medical end-use market sales excluding surcharge increased 17 percent compared to fiscal year 2023.
Operating income for the PEP segment for fiscal year 2024 was $36.0 million, or 8.8 percent of net sales (9.5 percent of net sales excluding surcharge revenue), as compared with operating income of $31.8 million, or 7.3 percent of net sales (8.0 percent of net sales excluding surcharge revenue) for fiscal year 2023. Fiscal year 2024 results reflect stronger product mix and improved operational efficiencies, partially offset by inflationary cost increases compared to fiscal year 2023.
Results of Operations — Fiscal Year 2023 Compared to Fiscal Year 2022
For fiscal year 2023, we reported net income of $56.4 million, or $1.14 earnings per diluted share. This compares with net loss of $49.1 million, or $1.01 loss per diluted share in fiscal year 2022. There were no reported special items for fiscal year 2023. Excluding special items for fiscal year 2022, loss per share would have been $1.06. The results for fiscal year 2023 compared to fiscal year 2022 were driven by growing demand across all our end-use markets, increased productivity at our facilities, improved product mix and realized price increases.
Special items included in our fiscal year 2022 results included negative impacts from COVID-19 charges of $5.9 million, a historical environmental site charge of $2.4 million and debt extinguishment losses, net of $6.0 million. These charges were offset by benefits related to COVID-19 employee retention credits of $12.7 million and an acquisition-related contingent liability release of $4.7 million.
27
Net Sales
Net sales for fiscal year 2023 were $2,550.3 million, which represents a 39 percent increase from fiscal year 2022. Excluding surcharge revenue, sales were 32 percent higher than fiscal year 2022 on 14 percent higher volume. The results reflect double-digit sales growth across Aerospace and Defense, Medical, Energy and Industrial and Consumer end-use markets versus the prior year period.
Geographically, sales outside the United States increased 51 percent from fiscal year 2022 to $994.1 million. The increase was due to higher product demand in all regions and in all end-use markets except Distribution. In particular, Aerospace and Defense outside the United States increased 89 percent. 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 $5.8 million decrease in sales during fiscal year 2023 compared to fiscal year 2022. International sales as a percentage of our total net sales represented 39 percent and 36 percent for fiscal year 2023 and fiscal year 2022, respectively.
Sales by End-Use Markets
We sell to customers across diversified end-use markets. We believe this is helpful supplemental information in analyzing performance of the business from period to period. The following table includes comparative information for our net sales, which includes surcharge revenue, by principal end-use markets:
| Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | ||||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | ||||||||||||||||||||||||
| Aerospace and Defense | $ | 1,290.7 | $ | 790.2 | $ | 500.5 | 63 | % | ||||||||||||||||||
| Medical | 301.6 | 212.3 | 89.3 | 42 | % | |||||||||||||||||||||
| Transportation | 185.0 | 178.3 | 6.7 | 4 | % | |||||||||||||||||||||
| Energy | 163.3 | 113.0 | 50.3 | 45 | % | |||||||||||||||||||||
| Industrial and Consumer | 487.2 | 417.2 | 70.0 | 17 | % | |||||||||||||||||||||
| Distribution | 122.5 | 125.3 | (2.8) | (2) | % | |||||||||||||||||||||
| Total net sales | $ | 2,550.3 | $ | 1,836.3 | $ | 714.0 | 39 | % | ||||||||||||||||||
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) | 2023 | 2022 | ||||||||||||||||||||||||
| Aerospace and Defense | $ | 919.5 | $ | 599.6 | $ | 319.9 | 53 | % | ||||||||||||||||||
| Medical | 241.3 | 177.2 | 64.1 | 36 | % | |||||||||||||||||||||
| Transportation | 121.8 | 125.2 | (3.4) | (3) | % | |||||||||||||||||||||
| Energy | 104.3 | 76.3 | 28.0 | 37 | % | |||||||||||||||||||||
| Industrial and Consumer | 339.4 | 297.2 | 42.2 | 14 | % | |||||||||||||||||||||
| Distribution | 121.7 | 124.5 | (2.8) | (2) | % | |||||||||||||||||||||
| Total net sales excluding surcharge revenue | $ | 1,848.0 | $ | 1,400.0 | $ | 448.0 | 32 | % | ||||||||||||||||||
28
Sales to the Aerospace and Defense end-use market increased 63 percent from fiscal year 2022 to $1,290.7 million. Excluding surcharge revenue, sales increased 53 percent on 34 percent higher shipment volume. The fiscal year 2023 results reflect increases across all Aerospace end-use sub-markets. This was driven by ramping activity levels across the aerospace supply chain due to higher aircraft build rates to replace aging fleets and meet increasing passenger travel demand. The fiscal year 2022 results reflected short-term operational challenges associated with the Reading press outage and labor shortages.
Sales to the Medical end-use market increased 42 percent to $301.6 million from fiscal year 2022. Excluding surcharge revenue, sales increased 36 percent on 30 percent higher shipment volume. The fiscal year 2023 results reflect higher demand across all applications as the medical supply chain replenishes inventory levels to meet higher patient demand for elective medical procedures.
Transportation end-use market sales of $185.0 million reflected a 4 percent increase from fiscal year 2022. Excluding surcharge revenue, sales decreased 3 percent on 20 percent lower shipment volume. The fiscal year 2023 results reflect an improved mix from recent price increases, particularly in light-duty vehicle applications, offset by reduced medium and heavy-duty build rates compared to fiscal year 2022.
Sales to the Energy end-use market of $163.3 million reflected a 45 percent increase from fiscal year 2022. Excluding surcharge revenue, sales increased 37 percent on 35 percent higher shipment volume. The fiscal year 2023 results reflect increasing global rig counts and higher oil prices benefiting the oil and gas sub-market along with slightly higher demand for power generation materials compared to fiscal year 2022.
Industrial and Consumer end-use market sales of $487.2 million increased 17 percent from fiscal year 2022. Excluding surcharge revenue, sales increased 14 percent on 1 percent lower shipment volume. The fiscal year 2023 results reflect stronger product mix, higher demand for semiconductor materials and increased sales in the electronic sub-market.
Gross Profit
Gross profit in fiscal year 2023 increased to $337.3 million, or 13.2 percent of net sales, from $149.8 million, or 8.2 percent of net sales for fiscal year 2022. The fiscal year 2023 results reflect the impact of higher volumes across key end-use markets with 39 percent increased net sales, a stronger product mix, higher prices and improved operational efficiencies, partially offset by inflationary cost increases compared to fiscal year 2022. Excluding the impact of surcharge revenue, our adjusted gross margin in fiscal year 2023 was 18.3 percent. This compares to adjusted gross margin of 9.9 percent in fiscal year 2022 after excluding the impact of surcharge revenue and COVID-19 employee retention credits of $11.9 million.
Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin excluding the impact of the special items. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.
| Fiscal Year | ||||||||||||||
| ($ in millions) | 2023 | 2022 | ||||||||||||
| Net sales | $ | 2,550.3 | $ | 1,836.3 | ||||||||||
| Less: surcharge revenue | 702.3 | 436.3 | ||||||||||||
| Net sales excluding surcharge revenue | $ | 1,848.0 | $ | 1,400.0 | ||||||||||
| Gross profit: | $ | 337.3 | $ | 149.8 | ||||||||||
| COVID-19 employee retention credits | — | (11.9) | ||||||||||||
| Gross profit excluding special item | $ | 337.3 | $ | 137.9 | ||||||||||
| Gross margin | 13.2 | % | 8.2 | % | ||||||||||
| Gross margin excluding surcharge revenue and special item | 18.3 | % | 9.9 | % | ||||||||||
29
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal year 2023 were $204.2 million, or 8.0 percent of net sales (11.0 percent of net sales excluding surcharge revenue), compared to $174.7 million, or 9.5 percent of net sales (12.5 percent of net sales excluding surcharge revenue), in fiscal year 2022. The higher selling, general and administrative expenses in fiscal year 2023 reflect higher variable compensation charges compared to fiscal year 2022. Fiscal year 2022 included a noncash benefit of $4.7 million from the reversal of a contingent liability associated with a historical acquisition for which the time period expired. Partially offsetting this benefit in fiscal year 2022 was an environmental charge of $2.4 million which represents a historical environmental site liability.
Operating Income (Loss)
Our operating income in fiscal year 2023 was $133.1 million, or 5.2 percent of net sales, as compared with $24.9 million of operating loss, or negative 1.4 percent of net sales in fiscal year 2022. Excluding surcharge revenue and special items, adjusted operating margin was 7.2 percent for fiscal year 2023 and negative 2.4 percent for fiscal year 2022. Results for fiscal year 2023 reflect higher sales in key end-use markets compared to fiscal year 2022, increased productivity at our facilities, improved product mix and realized price increases. Our fiscal year 2022 operating results were negatively impacted by COVID-19 charges of $5.9 million and a historical environmental site charge of $2.4 million, offset by COVID-19 employee retention credits of $12.7 million and an acquisition-related contingent liability release of $4.7 million.
The following presents our operating income (loss) and operating margin, in each case excluding the impact of surcharge on net sales and special items. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.
| Fiscal Year | ||||||||||||||
| ($ in millions) | 2023 | 2022 | ||||||||||||
| Net sales | $ | 2,550.3 | $ | 1,836.3 | ||||||||||
| Less: surcharge revenue | 702.3 | 436.3 | ||||||||||||
| Net sales excluding surcharge revenue | $ | 1,848.0 | $ | 1,400.0 | ||||||||||
| Operating income (loss) | $ | 133.1 | $ | (24.9) | ||||||||||
| Special items: | ||||||||||||||
| COVID-19 costs | — | 5.9 | ||||||||||||
| COVID-19 employee retention credits | — | (12.7) | ||||||||||||
| Acquisition-related contingent liability release | — | (4.7) | ||||||||||||
| Environmental site charge | — | 2.4 | ||||||||||||
| Adjusted operating income (loss) excluding special items | $ | 133.1 | $ | (34.0) | ||||||||||
| Operating margin | 5.2 | % | (1.4) | % | ||||||||||
| Adjusted operating margin excluding surcharge revenue and special items | 7.2 | % | (2.4) | % | ||||||||||
Interest Expense, Net and Debt Extinguishment Losses, Net
Fiscal year 2023 interest expense, net was $54.1 million compared to $44.9 million in fiscal year 2022. Capitalized interest reduced interest expense by $1.5 million for fiscal year 2023 and by $0.8 million in fiscal year 2022. Debt extinguishment losses, net in fiscal year 2023 were $0.0 million. Debt extinguishment losses, net in fiscal year 2022 were $6.0 million due to debt prepayment costs made in connection with the notes due in March 2023. The higher interest expense in fiscal year 2023 is largely due to higher interest rates on debt that was refinanced and short-term borrowings under our Credit Facility.
30
Other Expense (Income), Net
Other expense, net for fiscal year 2023 was $6.5 million compared with other income, net of $12.7 million in fiscal year 2022. The fiscal year 2023 reflects expense from pension earnings, interest and deferrals compared to income from pension earnings, interest and deferrals from favorable returns on plan assets in fiscal year 2022.
Income Taxes
Our effective tax rate (income tax expense (benefit) as a percent of income (loss) before taxes) for fiscal year 2023 was 22.2 percent which was the same as 22.2 percent for fiscal year 2022. The fiscal year 2023 tax expense includes the unfavorable impacts of losses in certain foreign justifications for which no tax benefit can be recognized as well as tax charges of $0.3 million for the impact of a state tax legislative change and $0.4 million resulting from changes in our prior year tax positions. Also included are tax benefits of $1.0 million for anticipated interest on Internal Revenue Service ("IRS") income tax refund claims and $0.9 million for decreases in state valuation allowances for deferred tax assets resulting from changes in our ability to utilize certain state net operating loss carryforwards. The fiscal year 2022 tax benefit included the unfavorable impacts of losses in certain foreign jurisdictions for which no tax benefit can be recognized.
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 our volumes by business segment:
| Pounds sold | Fiscal Year | Increase | % Increase | |||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | ||||||||||||||||||||||||
| Specialty Alloys Operations | 212,050 | 187,754 | 24,296 | 13 | % | |||||||||||||||||||||
| Performance Engineered Products * | 11,864 | 10,662 | 1,202 | 11 | % | |||||||||||||||||||||
| Intersegment | (9,792) | (10,304) | 512 | 5 | % | |||||||||||||||||||||
| Total pounds sold | 214,122 | 188,112 | 26,010 | 14 | % | |||||||||||||||||||||
* Pounds sold data for PEP segment includes Dynamet and Additive businesses only.
The following table includes comparative information for our net sales by business segment:
| Net sales | Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | ||||||||||||||||||||||||
| Specialty Alloys Operations | $ | 2,213.6 | $ | 1,565.6 | $ | 648.0 | 41 | % | ||||||||||||||||||
| Performance Engineered Products | 433.7 | 344.5 | 89.2 | 26 | % | |||||||||||||||||||||
| Intersegment | (97.0) | (73.8) | (23.2) | (31) | % | |||||||||||||||||||||
| Total net sales | $ | 2,550.3 | $ | 1,836.3 | $ | 714.0 | 39 | % | ||||||||||||||||||
31
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
| Net sales excluding surcharge revenue | Fiscal Year | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | ||||||||||||||||||||||||
| Specialty Alloys Operations | $ | 1,540.6 | $ | 1,137.1 | $ | 403.5 | 35 | % | ||||||||||||||||||
| Performance Engineered Products | 397.1 | 336.7 | 60.4 | 18 | % | |||||||||||||||||||||
| Intersegment | (89.7) | (73.8) | (15.9) | (22) | % | |||||||||||||||||||||
| Total net sales excluding surcharge revenue | $ | 1,848.0 | $ | 1,400.0 | $ | 448.0 | 32 | % | ||||||||||||||||||
Specialty Alloys Operations Segment
Net sales in fiscal year 2023 for the SAO segment increased 41 percent to $2,213.6 million, as compared with $1,565.6 million in fiscal year 2022. Excluding surcharge revenue, net sales increased 35 percent from fiscal year 2022 on 13 percent higher shipment volume. The SAO segment results reflect higher sales in all end-use markets except Transportation compared to fiscal year 2022. In particular, Aerospace and Defense sales excluding surcharge increased 54 percent as compared to fiscal year 2022.
Operating income for the SAO segment in fiscal year 2023 was $179.1 million, or 8.1 percent of net sales (11.6 percent of net sales excluding surcharge revenue), compared to operating income of $9.6 million, or 0.6 percent of net sales (0.8 percent of net sales excluding surcharge revenue), for fiscal year 2022. Fiscal year 2023 reflects increased productivity, improved product mix and realized price increases. Fiscal year 2022 included a benefit of $10.6 million related to COVID-19 employee retention credits offset by COVID-19 related costs of $5.2 million.
Performance Engineered Products Segment
Net sales for fiscal year 2023 for the PEP segment were $433.7 million as compared with $344.5 million for fiscal year 2022. Excluding surcharge revenue, net sales increased 18 percent from a year ago on 11 percent higher shipment volume. The fiscal year 2023 net sales reflect 11 percent higher shipment volume as compared to fiscal year 2022. The results reflect higher sales in all end-use markets except Distribution. In particular, Medical end-use market sales excluding surcharge increased 32 percent.
Operating income for the PEP segment for fiscal year 2023 was $31.8 million, or 7.3 percent of net sales (8.0 percent of net sales excluding surcharge revenue), as compared with operating income of $18.1 million, or 5.3 percent of net sales for fiscal year 2022. Fiscal year 2023 results reflect stronger demand conditions compared to fiscal year 2022. Fiscal year 2022 included a benefit of $2.1 million related to COVID-19 employee retention credits offset by COVID-19 related costs of $0.7 million.
Liquidity and Financial Resources
During fiscal year 2024, we generated cash from operating activities of $274.9 million as compared with $14.7 million in fiscal year 2023. Our adjusted free cash flow, which we define under "Non-GAAP Financial Measures" below, was positive $179.0 million as compared to negative $67.6 million for fiscal year 2023. The change in operating cash flow and adjusted free cash flow in fiscal year 2024 primarily reflects the impact of higher earnings after noncash adjustments to net income and lower cash used for inventory compared to a year ago. The current year reflects cash used to build inventory of $96.7 million compared to $140.3 million in fiscal year 2023. The adjusted free cash flow results also reflect lower capital spending levels in the current period as compared to the prior year period.
Capital expenditures for property, plant, equipment and software were $96.6 million for fiscal year 2024 as compared to $82.3 million for fiscal year 2023. In fiscal year 2025, we expect capital expenditures to be approximately $125 million.
We evaluate liquidity needs for alternative uses including funding external growth opportunities, share repurchases as well as funding consistent dividend payments to stockholders. Dividends for fiscal year 2024 were $40.0 million, as compared to $39.4 million in the prior year period. In fiscal years 2024, 2023 and 2022 we declared and paid quarterly cash dividends of $0.20 per share. Additionally, we will discretionarily use excess cash for a recently approved share repurchase program up to $400.0 million of our outstanding common stock. The primary use of this program will be to offset dilution.
32
During fiscal year 2024, we made $11.3 million of pension contributions to our qualified defined benefit pension plans. Over the next five years, current estimates indicate that we will be required to make approximately $128.7 million of cash contributions to our domestic qualified defined benefit pension plans, based on the laws in effect for pension funding as of June 30, 2024, 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 ability to access capital markets to supplement internally generated funds. We target minimum liquidity of $150.0 million, consisting of cash and cash equivalents added to available borrowing capacity under our Credit Facility.
On April 14, 2023, we entered into a Second Amended and Restated Credit Agreement with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer and the other lenders, agents and arrangers party thereto (the "Credit Facility"). The Credit Facility amended and restated our then existing Amended and Restated Credit Agreement dated as of March 26, 2021 which had been set to expire on March 31, 2024. The Credit Facility extends the maturity to April 12, 2028.
The Credit Facility is a secured revolving credit facility with a commitment of $350.0 million subject to our right, from time to time, to request an increase of the commitment by the greater of (i) $300.0 million or (ii) an amount equal to our consolidated EBITDA; and provides for the issuance of letters of credit subject to a $40.0 million sub-limit. We have the right to voluntarily prepay and re-borrow loans, to terminate or reduce the commitments under the Credit Facility, and, subject to certain lender approvals, to join subsidiaries as subsidiary borrowers.
As of June 30, 2024, the borrowing rate for the Credit Facility was 7.09%, however we had no short-term borrowings. As of June 30, 2024, we had $1.2 million of issued letters of credit under the Credit Facility and the balance of the Credit Facility, $348.8 million, remains available to us. From time to time during the fiscal year ended June 30, 2024, we borrowed under our Credit Facility. The weighted average daily borrowing under the Credit Facility during the fiscal year ended June 30, 2024 was approximately $19.1 million with daily outstanding borrowings ranging from $0.0 million to $67.8 million.
We believe that our total liquidity of $547.9 million, as of June 30, 2024, which includes cash and cash equivalents of $199.1 million and available borrowing capacity of $348.8 million under the Credit Facility, will be sufficient to fund our cash needs over the foreseeable future.
As of June 30, 2024, we had cash and cash equivalents of $22.0 million held at various foreign subsidiaries. Our global cash deployment considers, among other things, the geographic and institutional location of our subsidiaries' cash balances, the locations of our anticipated liquidity needs and the cost to access international cash balances, as necessary. During the fiscal year ended June 30, 2024, we repatriated cash of $4.3 million from foreign jurisdictions. 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 Facility.
We are subject to certain financial and restrictive covenants under the Credit Facility which requires the maintenance of a minimum interest coverage ratio of 3.00 to 1.00 and a consolidated net leverage ratio of no more than 4.00 to 1.00. The restrictions of these covenants (other than the financial ratio covenants) are subject to certain exceptions or threshold triggering amounts or events specified in the Credit Facility, and in some cases the restrictions may be waived by the lenders. As of June 30, 2024, we were in compliance with all of the covenants of the Credit Facility.
The following table shows our actual ratio performance with respect to the financial covenants, as of June 30, 2024:
| Covenant | Covenant Requirement | Actual Ratio | ||||||||||||
| Consolidated interest coverage ratio | 3.00 to 1.00 (minimum) | 10.14 to 1.00 | ||||||||||||
| Consolidated net leverage ratio | 4.00 to 1.00 (maximum) | 0.96 to 1.00 | ||||||||||||
To the extent that we do not comply with the current or modified covenants under the Credit Facility, 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.
33
Non-GAAP Financial Measures
The following provides additional information regarding certain non-GAAP financial measures that we use in this report. Our definitions and calculations of these items may not necessarily be the same as those used by other companies.
Net Sales and Gross Margin Excluding Surcharge Revenue
This report includes discussions of net sales as adjusted to exclude the impact of raw material surcharge and the resulting impact on gross margins, which represent financial measures that have not been determined in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our Board of Directors and others. See our earlier discussion of "Gross Profit" for a reconciliation of net sales and gross margin, excluding surcharge revenue, to net sales as determined in accordance with U.S. GAAP. Net sales and gross margin excluding surcharge revenue is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, net sales and gross margin calculated in accordance with U.S. GAAP.
Adjusted Operating Income (Loss) and Adjusted Operating Margin Excluding Surcharge Revenue and Special Items
This report includes discussions of operating income (loss) and operating margin as adjusted to exclude the impact of raw material surcharge revenue and special items which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales provides a more consistent and meaningful basis for comparing results of operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding special items from operating margin is helpful in analyzing our operating performance, as these items are not indicative of ongoing operating performance. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our Board of Directors and others. See our earlier discussion of operating income (loss) for a reconciliation of adjusted operating income (loss) and adjusted operating margin excluding special items to operating income (loss) and operating margin determined in accordance with U.S. GAAP. Adjusted operating income (loss) and adjusted operating margin excluding surcharge revenue and special items are not U.S. GAAP financial measures and should not be considered in isolation of, or as a substitute for, operating income (loss) and operating margin calculated in accordance with U.S. GAAP.
Adjusted Earnings Per Share
The following provides a reconciliation of adjusted earnings per share, to its most directly comparable U.S. GAAP financial measure:
| ($ in millions, except per share data) | Earnings Before Income Taxes | Income Tax Expense | Net Income | Earnings Per Diluted Share* | ||||||||||||||||||||||
| Year ended June 30, 2024, as reported | $ | 211.6 | $ | (25.1) | $ | 186.5 | $ | 3.70 | ||||||||||||||||||
| Special items: | ||||||||||||||||||||||||||
| Goodwill impairment charge | 14.1 | — | 14.1 | 0.28 | ||||||||||||||||||||||
| Restructuring and asset impairment charges | 16.9 | (0.1) | 16.8 | 0.33 | ||||||||||||||||||||||
| Pension settlement charge | 51.9 | (12.4) | 39.5 | 0.79 | ||||||||||||||||||||||
| U.S. Tax benefit related to restructuring activities | — | (18.4) | (18.4) | (0.36) | ||||||||||||||||||||||
| Year ended June 30, 2024, as adjusted | $ | 294.5 | $ | (56.0) | $ | 238.5 | $ | 4.74 | ||||||||||||||||||
* Impact per diluted share calculated using weighted average common shares outstanding of 50.3 million for the fiscal year ended June 30, 2024.
34
| ($ in millions, except per share data) | Earnings Before Income Taxes | Income Tax Expense | Net Income | Earnings Per Diluted Share* | ||||||||||||||||||||||
| Year ended June 30, 2023, as reported | $ | 72.5 | $ | (16.1) | $ | 56.4 | $ | 1.14 | ||||||||||||||||||
| Special item: | ||||||||||||||||||||||||||
| None reported | — | — | — | — | ||||||||||||||||||||||
| Year ended June 30, 2023, as adjusted | $ | 72.5 | $ | (16.1) | $ | 56.4 | $ | 1.14 | ||||||||||||||||||
* Impact per diluted share calculated using weighted average common shares outstanding of 49.2 million for the fiscal year ended June 30, 2023.
Management believes that the presentation of earnings per share adjusted to exclude the impact of special items is helpful in analyzing the operating performance of the Company, as these items are not indicative of ongoing operating performance. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, 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.
Adjusted Free Cash Flow
This report includes discussions of adjusted free cash flow which is a non-GAAP financial measure and may not be comparable to adjusted free cash flow reported by other companies. The following provides a reconciliation of adjusted free cash flow, as used in this Annual Report, to its most directly comparable U.S. GAAP financial measure:
| Fiscal Year | ||||||||||||||||||||
| ($ in millions) | 2024 | 2023 | 2022 | |||||||||||||||||
| Net cash provided from operating activities | $ | 274.9 | $ | 14.7 | $ | 6.0 | ||||||||||||||
| Purchases of property, plant, equipment and software | (96.6) | (82.3) | (91.3) | |||||||||||||||||
| Proceeds from disposals of property, plant and equipment and assets held for sale | 0.7 | — | 2.2 | |||||||||||||||||
| Adjusted free cash flow | $ | 179.0 | $ | (67.6) | $ | (83.1) | ||||||||||||||
Management believes that the presentation of adjusted 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. Additionally, we will discretionarily use excess cash for a recently approved share repurchase program up to $400.0 million of our outstanding common stock. The primary use of this program will be to offset dilution. Adjusted 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, pensions and other postretirement benefits, intangible assets, goodwill, leases, environmental liabilities, income taxes, derivative instruments and hedging activities and contingencies and litigation.
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
35
the financial condition of our customers deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories
Inventories are valued at the lower of cost or market for those inventories determined by the LIFO method. We value other inventory at the lower of cost or net realizable value, determined by the FIFO and average cost methods. As of June 30, 2024 and 2023, $152.2 million and $133.2 million of inventory, respectively, was accounted for using a method other than the LIFO method. If the FIFO method of inventory had been used instead of the LIFO method, inventories would have been $371.0 million and $517.2 million higher as of June 30, 2024 and 2023, respectively.
Costs include direct materials, direct labor, 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 expense recognized under LIFO is generally lower than the 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 evaluate 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 and recognize effects that are not expected to be replaced by year-end in the interim period in which the liquidation occurs. 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 net pensi