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

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

For the quarterly period ended September 30, 2021
 
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
 
CARPENTER TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its Charter)

Delaware 23-0458500
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1735 Market Street, 15th Floor
 
Philadelphia, Pennsylvania19103
(Address of principal executive offices) (Zip Code)
610-208-2000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 Par ValueCRS New York Stock Exchange
Title of each classTrading Symbol Name of each exchange on which registered
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No
 
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.  Yes   No



 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
 
The number of shares outstanding of the issuer's common stock as of October 22, 2021 was 48,187,094.


Table of Contents
CARPENTER TECHNOLOGY CORPORATION
FORM 10-Q
INDEX
 
   Page
 
    
  
    
  
    
  
    
  
    
  
    
  
    
  
    
 
    
 
    
 
    
 
    
 
    
 
    
 
 
    
  

1

Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
 
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)

($ in millions, except share data)September 30,
2021
June 30,
2021
ASSETS
Current assets:
Cash and cash equivalents$213.2 $287.4 
Accounts receivable, net311.6 308.7 
Inventories491.4 425.7 
Other current assets110.7 95.6 
Total current assets1,126.9 1,117.4 
Property, plant and equipment, net1,440.9 1,457.5 
Goodwill241.4 241.4 
Other intangibles, net41.1 43.1 
Deferred income taxes6.2 5.3 
Other assets103.4 106.5 
Total assets$2,959.9 $2,971.2 
LIABILITIES  
Current liabilities:  
Accounts payable$212.0 $142.4 
Accrued liabilities120.4 163.9 
Total current liabilities332.4 306.3 
Long-term debt694.8 694.5 
Accrued pension liabilities218.1 222.6 
Accrued postretirement benefits98.3 98.6 
Deferred income taxes150.5 156.9 
Other liabilities98.2 100.0 
Total liabilities1,592.3 1,578.9 
Contingencies and commitments (see Note 11)
STOCKHOLDERS' EQUITY  
Common stock — authorized 100,000,000 shares; issued 56,024,619 shares at September 30, 2021 and 56,024,619 shares at June 30, 2021; outstanding 48,187,028 shares at September 30, 2021 and 48,040,676 shares at June 30, 2021
280.1 280.1 
Capital in excess of par value316.3 322.6 
Reinvested earnings1,274.7 1,299.3 
Common stock in treasury (7,837,591 shares and 7,983,943 shares at September 30, 2021 and June 30, 2021, respectively), at cost
(311.3)(317.4)
Accumulated other comprehensive loss(192.2)(192.3)
Total stockholders' equity1,367.6 1,392.3 
Total liabilities and stockholders' equity$2,959.9 $2,971.2 

See accompanying notes to consolidated financial statements.
2

Table of Contents
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


Three Months Ended
September 30,
 (in millions, except per share data)20212020
Net sales$387.6 $353.3 
Cost of sales362.4 349.8 
Gross profit25.2 3.5 
Selling, general and administrative expenses44.3 42.3 
Restructuring and asset impairment charges 10.0 
Operating loss (19.1)(48.8)
Interest expense, net10.2 6.7 
Debt extinguishment losses, net
 8.2 
Other (income) expense, net(4.1)2.3 
Loss before income taxes(25.2)(66.0)
Income tax benefit(10.4)(18.9)
Net loss$(14.8)$(47.1)
LOSS PER COMMON SHARE:  
Basic$(0.31)$(0.98)
Diluted$(0.31)$(0.98)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:  
Basic48.5 48.3 
Diluted48.5 48.3 
 
See accompanying notes to consolidated financial statements.
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CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

Three Months Ended
September 30,
 ($ in millions)20212020
Net loss$(14.8)$(47.1)
Other comprehensive income (loss), net of tax  
Pension and postretirement benefits, net of tax of $(0.4) and $(1.1), respectively
1.1 3.6 
Net gain on derivative instruments, net of tax of $(0.4) and $(2.7) respectively
1.1 8.3 
Foreign currency translation (2.1)5.7 
Other comprehensive income, net of tax0.1 17.6 
Comprehensive loss$(14.7)$(29.5)
 
See accompanying notes to consolidated financial statements.
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CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months Ended
September 30,
($ in millions)20212020
OPERATING ACTIVITIES  
Net loss$(14.8)$(47.1)
Adjustments to reconcile net loss to net cash (used for) provided from operating activities:  
Depreciation and amortization32.5 30.9 
Non-cash restructuring and asset impairment charges 8.7 
Debt extinguishment losses, net 8.2 
Deferred income taxes(8.0)(3.9)
Net pension (income) expense(1.8)4.1 
Share-based compensation expense2.8 2.7 
Net loss on disposals of property, plant and equipment  0.1 
Changes in working capital and other:  
Accounts receivable(3.8)42.0 
Inventories(66.5)84.9 
Other current assets(13.2)(23.0)
Accounts payable69.3 (7.4)
Accrued liabilities(41.7)(8.0)
Pension plan contributions(0.2)(2.9)
Other postretirement plan contributions(0.7)(0.6)
Other, net(0.9)(0.7)
Net cash (used for) provided from operating activities(47.0)88.0 
INVESTING ACTIVITIES  
Purchases of property, plant, equipment and software(14.4)(33.3)
Proceeds from divestiture of business 17.6 
Net cash used for investing activities(14.4)(15.7)
FINANCING ACTIVITIES  
Net change in short-term credit agreement borrowings (170.0)
Proceeds from issuance of long-term debt, net of offering costs 395.5 
Payments on long-term debt (250.0)
Payments for debt extinguishment costs, net (8.2)
Payments for debt issue costs (1.1)
Dividends paid(9.8)(9.7)
Withholding tax payments on share-based compensation awards(3.0)(2.2)
Net cash used for financing activities(12.8)(45.7)
Effect of exchange rate changes on cash and cash equivalents (0.8)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS(74.2)25.8 
Cash and cash equivalents at beginning of period287.4 193.1 
Cash and cash equivalents at end of period$213.2 $218.9 
SUPPLEMENTAL CASH FLOW INFORMATION:  
Non-cash investing activities: Purchase of property, plant, equipment and software$7.6 $9.0 
See accompanying notes to consolidated financial statements.
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CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)

 Common StockReinvested EarningsCommon Stock in TreasuryAccumulated Other Comprehensive (Loss) IncomeTotal Equity
($ in millions, except per share data)
Par Value of $5
Capital in Excess of Par Value
Balances at June 30, 2021$280.1 $322.6 $1,299.3 $(317.4)$(192.3)$1,392.3 
Net loss  (14.8)  (14.8)
Pension and postretirement benefits gain, net of tax    1.1 1.1 
Net gain on derivative instruments, net of tax    1.1 1.1 
Foreign currency translation    (2.1)(2.1)
Cash Dividends:     
     Common @ $0.20 per share
  (9.8)  (9.8)
Share-based compensation plans(6.3) 6.1  (0.2)
Balances at September 30, 2021$280.1 $316.3 $1,274.7 $(311.3)$(192.2)$1,367.6 
 
 Common StockReinvested EarningsCommon Stock in TreasuryAccumulated Other Comprehensive (Loss) IncomeTotal Equity
($ in millions, except per share data)
Par Value of $5
Capital in Excess of Par Value
Balances at June 30, 2020$280.1 $321.4 $1,568.0 $(325.8)$(398.0)$1,445.7 
Net loss  (47.1)  (47.1)
Pension and postretirement benefits gain, net of tax    3.6 3.6 
Net gain on derivative instruments, net of tax    8.3 8.3 
Foreign currency translation    5.7 5.7 
Cash Dividends:     
     Common @ $0.20 per share
  (9.7)  (9.7)
Share-based compensation plans(5.5) 6.5  1.0 
Balances at September 30, 2020$280.1 $315.9 $1,511.2 $(319.3)$(380.4)$1,407.5 
 
See accompanying notes to consolidated financial statements.

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair statement of the results are reflected in the interim periods presented. The June 30, 2021 consolidated balance sheet data was derived from audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Carpenter Technology's Annual Report on Form 10-K for the fiscal year ended June 30, 2021 (the "2021 Form 10-K"). Operating results for the three months ended September 30, 2021 are not necessarily indicative of the operating results for any future period.

Certain amounts in the consolidated statement of operations as presented in Carpenter Technology’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 have been reclassified to conform to the current quarter presentation.

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

Restructuring and asset impairment charges for the three months ended September 30, 2021 and 2020 were $0.0 million and $10.0 million, respectively.

In the quarter ended September 30, 2020, the Company initiated a restructuring plan to consolidate certain operations within the Additive business in the Performance Engineered Products "PEP" segment. This included $8.7 million of non-cash impairment charges related primarily to certain long-lived assets and certain definite-lived intangible assets. The Company also recognized $1.3 million of charges for various personnel-related costs for severance payments, medical coverage and other items.

The reserve balances and activity for restructuring charges at September 30, 2021 and June 30, 2021 were as follows:

($ in millions)September 30, 2021June 30, 2021
Reserve balance at beginning of period$1.4 $9.5 
Restructuring charges excluding non-cash impairments 1.2 
Cash payments(1.1)(9.3)
Reserve balance at end of period$0.3 $1.4 

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.    Recent Accounting Pronouncements
 
Recently Issued Accounting Pronouncements - Adopted in current fiscal year

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance removes certain exceptions to the general principles related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year, and recognition of deferred tax liabilities for outside basis differences. The new standard also simplifies the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the basis of goodwill. ASU 2019-12 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2020, with early adoption permitted. The Company adopted the provisions of ASU 2019-12 in the first quarter of fiscal year 2022. As a result, the Company recorded tax benefits on its year-to-date net loss for the first quarter of fiscal year 2022 in excess of its forecasted total tax benefits for the full fiscal year. Adoption of the other provisions in ASU 2019-12 did not materially impact the consolidated financial statements.

Recently Issued Accounting Pronouncements - Pending adoption

At this time there are no issued pronouncements, pending adoption, that would materially impact the Company.

4.    Revenue

The Company recognizes revenue in accordance with Topic 606, Revenue from Contracts. The Company applies the five-step model in the FASB's guidance, which requires the Company to: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies a performance obligation.

The Company recognizes revenue when performance obligations under the terms of a customer purchase order or contract are satisfied. This occurs when control of the goods and services has transferred to the customer, which is generally determined when title, ownership, and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product. Consignment transactions are arrangements where the Company transfers product to a customer location but retains ownership and control of such product until it is used by the customer. Revenue for consignment arrangements is recognized upon usage by the customer. Service revenue is recognized as the services are performed.

Each customer purchase order or contract for goods transferred has a single performance obligation for which revenue is recognized at a point in time. The standard terms and conditions of a customer purchase order include general rights of return and product warranty provisions related to nonconforming product. Depending on the circumstances, the product is either replaced or a quality adjustment is issued. Such warranties do not represent a separate performance obligation.

Each customer purchase order or contract sets forth the transaction price for the products and services purchased under that arrangement. Some customer arrangements include variable consideration, such as volume rebates, which generally depend upon the Company's customers meeting specified performance criteria, such as a purchasing level over a period of time. The Company exercises judgment to estimate the most likely amount of variable consideration at each reporting date.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for its product. The standard payment terms are 30 days. The Company has elected to use the practical expedient that permits a Company to not adjust for the effects of a significant financing component if it expects that at the contract inception, the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amounts billed to customers for shipping and handling activities to fulfill the Company's promise to transfer the goods are included in revenues and costs incurred by the Company for the delivery of goods and are classified as cost of sales in the consolidated statements of operations. Shipping terms may vary for products shipped outside the United States depending on the mode of transportation, the country where the material is shipped and any agreements made with the customers.

Contract liabilities are recognized when the Company has received consideration from a customer to transfer goods or services at a future point in time when the Company performs under the purchase order or contract. Contract liabilities were $11.9 million and $8.6 million at September 30, 2021 and June 30, 2021, respectively, and are included in accrued liabilities on the consolidated balance sheets.

The Company has elected to use the practical expedient that permits the omission of disclosure for remaining performance obligations which are expected to be satisfied in one year or less.  

Disaggregation of Revenue

The Company operates in two business segments, Specialty Alloys Operations ("SAO") and Performance Engineered Products ("PEP"). Revenue is disaggregated within these two business segments by diversified end-use markets and by geographical location. Comparative information of the Company's overall revenues by end-use markets and geography for the three months ended September 30, 2021 and 2020 were as follows:
End-Use Market DataThree Months Ended
September 30,
($ in millions)20212020
Aerospace and Defense$166.9 $172.0 
Medical43.1 32.8 
Transportation41.6 29.1 
Energy22.2 25.1 
Industrial and Consumer86.6 73.4 
Distribution27.2 20.9 
Consolidated net sales$387.6 $353.3 

Geographic DataThree Months Ended
September 30,
($ in millions)20212020
United States$246.9 $224.7 
Asia Pacific61.5 37.9 
Europe48.5 61.3 
Mexico15.8 13.1 
Canada7.9 7.8 
Other7.0 8.5 
Consolidated net sales$387.6 $353.3 

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

On September 30, 2020, the Company divested the Amega West business for a total sale price of $20.0 million. In connection with the divestiture, the Company received $17.6 million of cash in the quarter ended September 30, 2020 and the remaining $2.4 million of cash in the quarter ended December 31, 2020. The operations of the Amega West business were historically included in our PEP segment and the Energy end-use market. The Company does not have any significant continuing involvement in the operations of Amega West after the divestiture.

6.    Loss per Common Share
 
The Company calculates basic and diluted loss per share using the two class method. Under the two class method, losses are allocated to common stock and participating securities (non-vested restricted shares and units that receive non-forfeitable dividends) according to their participation rights in dividends and undistributed earnings. The losses available to each class of stock are divided by the weighted average number of outstanding shares for the period in each class. Diluted loss per share assumes the issuance of common stock for all potentially dilutive share equivalents outstanding. For the three months ended September 30, 2021 and 2020, respectively, the Company incurred a net loss and accordingly excluded all potentially dilutive securities from the determination of diluted loss per share as their impact was anti-dilutive.

The calculations of basic and diluted loss per common share for the three months ended September 30, 2021 and 2020 were as follows: 
Three Months Ended
September 30,
(in millions, except per share data)20212020
Net loss $(14.8)$(47.1)
Dividends allocated to participating securities  
Loss available for common stockholders used in calculation of basic loss per common share$(14.8)$(47.1)
Weighted average number of common shares outstanding, basic48.5 48.3 
Basic loss per common share$(0.31)$(0.98)
Net loss$(14.8)$(47.1)
Dividends allocated to participating securities  
Loss available for common stockholders used in calculation of diluted loss per common share$(14.8)$(47.1)
Weighted average number of common shares outstanding, basic48.5 48.3 
Effect of shares issuable under share-based compensation plans  
Weighted average number of common shares outstanding, diluted48.5 48.3 
Diluted loss per common share$(0.31)$(0.98)
 
The following awards issued under share-based compensation plans were excluded from the above calculations of diluted loss per share because their effects were anti-dilutive:
 
Three Months Ended
September 30,
(in millions)20212020
Stock options1.9 2.1 
 
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.    Inventories
 
Inventories consisted of the following components as of September 30, 2021 and June 30, 2021:
 
($ in millions)September 30,
2021
June 30,
2021
Raw materials and supplies$124.8 $115.0 
Work in process251.1 206.2 
Finished and purchased products115.5 104.5 
Total inventories$491.4 $425.7 
 
Inventories are valued at the lower of cost or market. Cost for inventories is principally determined using the last-in, first-out ("LIFO") inventory costing method. The Company also uses the first-in, first-out ("FIFO") and average cost methods. As of September 30, 2021 and June 30, 2021, $118.5 million and $107.5 million of inventory, respectively, was accounted for using a method other than the LIFO inventory costing method.

8.    Accrued Liabilities
 
Accrued liabilities consisted of the following as of September 30, 2021 and June 30, 2021:
 
($ in millions)September 30,
2021
June 30,
2021
Accrued compensation and benefits$45.9 $81.4 
Accrued postretirement benefits14.4 14.4 
Contract liabilities11.9 8.6 
Current portion of lease liabilities8.8 9.0 
Accrued interest expense6.5 16.2 
Accrued pension liabilities3.5 3.5 
Derivative financial instruments2.5 4.2 
Accrued income taxes0.7 0.5 
Other26.2 26.1 
Total accrued liabilities$120.4 $163.9 
 
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.    Pension and Other Postretirement Benefits
 
The components of the net periodic pension (income) expense related to the Company's pension and other postretirement benefits for the three months ended September 30, 2021 and 2020 were as follows:
 
Three months ended September 30,Pension PlansOther Postretirement Plans
($ in millions)2021202020212020
Service cost$2.1 $2.4 $0.6 $0.7 
Interest cost9.1 9.9 1.8 1.9 
Expected return on plan assets(14.9)(13.9)(2.0)(1.6)
Amortization of net loss (gain)2.1 4.3 (0.2)0.9 
Amortization of prior service cost (credits)0.6 0.5 (1.0)(1.0)
Net pension (income) expense$(1.0)$3.2 $(0.8)$0.9 

During the three months ended September 30, 2021 and 2020, the Company made $0.2 million and $2.9 million, respectively, of contributions to its qualified defined benefit pension plans. The Company currently does not expect to contribute additional amounts to its U.S. qualified defined benefit pension plans during the remainder of fiscal year 2022.

10.    Debt
 
On July 10, 2020, the Company completed its offering and sale of $400.0 million in aggregate principal amount of 6.375% Senior Notes due 2028 (the "Notes"). The Notes accrue interest at the rate of 6.375% per annum, with interest payable in cash semi-annually in arrears on each January 15th and July 15th, commencing January 15, 2021. The Notes will mature on July 15, 2028. The Notes are senior unsecured indebtedness of the Company, ranking equally in right of payment with all its existing and future senior unsecured indebtedness and senior to any future subordinated indebtedness. The Company utilized a portion of the net proceeds from the issuance of the Notes to repay in full $250.0 million in aggregate principal amount of its senior unsecured notes due July 2021. The Company used or intends to use the remaining net proceeds from the issuance of the Notes for general corporate purposes.

On March 26, 2021, the Company entered into a $300.0 million secured revolving credit facility ("the Credit Facility"). The Credit Facility amended and restated the Company's previous revolving credit facility, dated March 31, 2017, which had been set to expire in March 2022. The Credit Facility extends the maturity to March 31, 2024, subject to a springing maturity of November 30, 2022. If, by November 30, 2022, the Company's outstanding $300.0 million 4.45% Senior Notes due in March 2023 are not redeemed, repurchased or refinanced with indebtedness having a maturity date of October 1, 2024 or later, all indebtedness under the Credit Facility will be due. The Credit Facility contains a revolving credit commitment amount of $300.0 million, subject to the Company's right, from time to time, to request an increase of the commitment to $500.0 million in the aggregate; and provides for the issuance of letters of credit subject to a $40.0 million sub-limit. The Company has the right to terminate or reduce the commitments under the Credit Facility, and, subject to certain lender approvals, to join subsidiaries as subsidiary borrowers.

Interest on the borrowings under the Credit Facility accrues at variable rates, based upon a "Eurocurrency Rate" or a defined "Base Rate". Both are determined based upon the credit rating of the Company's senior unsecured long-term debt (the "Debt Rating"). The applicable margin to be added to Eurocurrency Rate ranges from 1.25% to 2.25% (2.00% as of September 30, 2021), and for Base Rate-determined loans, from 0.25% to 1.25% (1.00% as of September 30, 2021). The Company also pays a quarterly commitment fee ranging from 0.275% to 0.375% (0.35% as of September 30, 2021), determined based upon the Debt Rating, of the unused portion of the $300.0 million commitment under the Credit Facility. In addition, the Company must pay certain letter of credit fees, ranging from 1.25% to 2.25% (2.00% as of September 30, 2021), with respect to letters of credit issued under the Credit Facility. The Company has the right to voluntarily prepay and re-borrow loans and to terminate or reduce the commitments under the facility. As of September 30, 2021, the Company had $5.4 million of issued letters of credit under the Credit Facility and no short-term borrowings, with the balance of $294.6 million available to the Company. As of September 30, 2021, the borrowing rate for the Credit Facility was 2.08%.

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company is subject to certain financial and restrictive covenants under the Credit Facility, which, among other things, require the maintenance of a minimum interest coverage ratio. The interest coverage ratio is defined in the Credit Facility as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense ("EBITDA") to consolidated interest expense for such period. The interest coverage covenant is waived until the quarter ended March 31, 2022 at which time it will be 3.00 to 1.00 and then 3.50 to 1.00 thereafter. The Credit Facility also requires the Company to maintain a debt to capital ratio of less than 55 percent. The debt to capital ratio is defined in the Credit Facility as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. During the period which the interest coverage covenant is waived, the Credit Facility requires that the Company maintain a minimum available liquidity of $150.0 million for certain periods, which is defined in the Credit Facility as aggregate amount of loans available to be drawn under the credit facility plus non-restricted cash and cash equivalents as defined therein. In addition, the Company is also subject to an asset coverage ratio minimum of 1.10 to 1.00. The asset coverage ratio is defined in the Credit Facility as eligible receivables and inventory, as defined therein, to outstanding loans and obligations, as defined therein. As of September 30, 2021, the Company was in compliance with all of the covenants of the Credit Facility.

Long-term debt outstanding as of September 30, 2021 and June 30, 2021 consisted of the following:
 
($ in millions)September 30,
2021
June 30,
2021
Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at September 30, 2021 and June 30, 2021)
$299.6 $299.5 
Senior unsecured notes, 6.375% due July 2028 (face value of $400.0 million at September 30, 2021 and June 30, 2021)
395.2 395.0 
Total694.8 694.5 
Less: amounts due within one year  
Long-term debt, net of current portion$694.8 $694.5 
 
For the three months ended September 30, 2021 and 2020, interest costs totaled $10.3 million and $9.5 million, respectively, of which $0.1 million and $2.8 million, respectively, were capitalized as part of the cost of property, plant, equipment and software. For the three months ended September 30, 2021, there were no debt extinguishment losses, net. Debt extinguishment losses, net for the three months ended September 30, 2020 includes $10.5 million of debt prepayment costs on the Notes that were due July 2021 offset by gains of $2.3 million on related interest rate swaps that were terminated in connection with the prepayment.

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.     Contingencies and Commitments

Environmental
 
The Company is subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of the Company's operations, compliance costs to date have not been material. The Company has environmental remediation liabilities at some of its owned operating facilities and has been designated as a potentially responsible party ("PRP") with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. The Company accrues amounts for environmental remediation costs that represent management's best estimate of the probable and reasonably estimable future costs related to environmental remediation. During the three months ended September 30, 2021, the Company increased the liability for a company-owned former operating site by $0.1 million. The liabilities recorded for environmental remediation costs at Superfund sites, other third party-owned sites and Carpenter-owned current or former operating facilities remaining at September 30, 2021 and June 30, 2021 were $16.1 million and $16.0 million, respectively. Additionally, the Company has been notified that it may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against the Company. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRPs at these Superfund sites have been determined. Accordingly, at this time, the Company cannot reasonably estimate expected costs for such matters. The liability for future environmental remediation costs that can be reasonably estimated is evaluated by management on a quarterly basis.

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 the Company's financial position, results of operations or cash flows over the long-term. However, such costs could be material to the Company's financial position, results of operations or cash flows in a particular future quarter or year.

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

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

The Company records right-of-use "ROU" assets and operating lease liabilities on the consolidated balance sheet for several types of operating leases, including land and buildings, equipment (e.g. trucks and forklifts), vehicles and computer equipment. On the lease commencement date, the Company measures and records a ROU asset and lease liability equal to the present value of the remaining lease payments, discounted using the rate implicit in the lease (or if that rate cannot be readily determined, the Company's incremental borrowing rate). Operating leases are included in other assets, accrued liabilities (current) and other liabilities (long-term) on the consolidated balance sheets.

The Company elected the practical expedient to not separate lease components from non-lease components for all asset classes. The Company recognizes lease expense in the consolidated statements of operations on a straight-line basis over the lease term. The Company elected to not recognize ROU assets and lease liabilities for short-term leases with an initial term of 12 months or less for all asset classes. Leases with the option to extend their term or terminate early are reflected in the lease term when it is reasonably certain that the Company will exercise such options. Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable lease payments are not presented as part of the ROU asset or lease liability. Income from subleased properties is recognized and presented as a reduction of selling, general and administrative expenses in the Company's consolidated statements of operations. The leases have remaining terms of one to sixteen years.

The following table sets forth the components of the Company's lease cost for the three months ended September 30, 2021 and September 30, 2020:

Three Months Ended
September 30,
($ in millions)20212020
Operating lease cost$2.5 $3.6 
Short-term lease cost0.8 0.8 
Variable lease cost0.2 0.2 
Sublease income(0.2) 
Total lease cost$3.3 $4.6 
Operating cash flow payments from operating leases$2.8 $3.5 
Non-cash ROU assets obtained in exchange for lease obligations$0.2 $1.4 

The following table sets forth the Company's weighted-average remaining lease term and weighted-average discount rate at September 30, 2021 and June 30, 2021:

September 30,
2021
June 30,
2021
Weighted-average remaining lease term - operating leases8.3 years8.4 years
Weighted-average discount rate - operating leases4.0 %4.0 %
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table sets forth the Company's ROU assets and lease liabilities at September 30, 2021 and June 30, 2021:

($ in millions)September 30,
2021
June 30,
2021
Operating lease assets:
    Other assets$32.2 $34.3 
Operating lease liabilities:
    Accrued liabilities$8.8 $9.0 
    Other liabilities33.4 35.5 
Total operating lease liabilities$42.2 $44.5 

Minimum lease payments for operating leases expiring subsequent to September 30, 2021 are as follows:
($ in millions)September 30,
2021
2022 (remaining period of fiscal year)$7.8 
20238.7 
20246.4 
20254.1 
20263.4 
Thereafter20.4 
Total future minimum lease payments50.8 
Less imputed interest(8.6)
Total$42.2 

13.     Fair Value Measurements
 
The fair value hierarchy has three levels based on the inputs used to determine fair value. Level 1 refers to quoted prices in active markets for identical assets or liabilities. Level 2 refers to observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 refers to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. Currently, the Company does not use Level 1 and 3 inputs.
 
The following tables present the Company's assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
September 30, 2021Fair Value
Measurements Using
Input Type
($ in millions)Level 2
Assets: 
Derivative financial instruments$16.1 
  
Liabilities: 
Derivative financial instruments$2.9 
 
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2021Fair Value
Measurements Using
Input Type
($ in millions)Level 2
Assets: 
Derivative financial instruments$15.9 
  
Liabilities: 
Derivative financial instruments$5.3 
 
The Company's derivative financial instruments consist of commodity forward contracts, foreign currency forward contracts and interest rate swaps. These instruments are measured at fair value using the market method valuation technique. The inputs to this technique utilize information related to commodity prices, foreign exchange rates and interest rates published by third party leading financial news and data providers. This is observable data; however, the valuation of these instruments is not based on actual transactions for the same instruments and, as such, they are classified as Level 2. The Company's use of derivatives and hedging policies are more fully discussed in Note 14. Derivatives and Hedging Activities.
 
The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States of America.
 
The carrying amounts of other financial instruments not listed in the table below approximate fair value due to the short-term nature of these items. The carrying amounts and estimated fair values of the Company's financial instruments not recorded at fair value in the financial statements were as follows:
 
 September 30, 2021June 30, 2021
($ in millions)Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Long-term debt$694.8 $741.7 $694.5 $754.7 
Company-owned life insurance$25.4 $25.4 $24.6 $24.6 
 
The fair values of long-term debt as of September 30, 2021 and June 30, 2021 were determined by using current interest rates for debt with terms and maturities similar to the Company's existing debt arrangements and accordingly would be classified as Level 2 inputs in the fair value hierarchy.

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

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14.    Derivatives and Hedging Activities
 
The Company uses commodity forwards, interest rate swaps, forward interest rate swaps and foreign currency forwards to manage risks generally associated with commodity price, interest rate and foreign currency rate fluctuations. The following explains the various types of derivatives and includes a summary of the impact the derivative instruments had on the Company's financial position, results of operations and cash flows.
 
Cash Flow Hedging — Commodity forward contracts: The Company enters into commodity forward contracts to fix the price of a portion of anticipated future purchases of certain critical raw materials and energy to manage the risk of cash flow variability associated with volatile commodity prices. The commodity forward contracts have been designated as cash flow hedges. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive (loss) income ("AOCI") and reclassified to cost of sales in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur. As of September 30, 2021, the Company had forward contracts to purchase 5.6 million pounds of certain raw materials with settlement dates through December 2023.
 
Cash Flow Hedging — Forward interest rate swaps: Historically, the Company has entered into forward interest rate swap contracts to manage the risk of cash flow variability associated with fixed interest debt expected to be issued. The forward interest rate swaps were designated as cash flow hedges. The qualifying hedge contracts were marked-to-market at each reporting date and any unrealized gains or losses were included in AOCI and reclassified to interest expense in the period during which the hedged transaction affected earnings or it became probable that the forecasted transaction would not occur. Upon the issuance of the fixed rate debt, the forward interest rate swap contracts were terminated. The realized gains at the time the interest rate swap contracts were terminated are being amortized over the term of the underlying debt. For the three months ended September 30, 2021 and 2020, net gains related to the previously terminated contracts of $0.1 million and $0.1 million, respectively, were recorded as a reduction to interest expense.

Cash Flow Hedging — Foreign currency forward contracts: The Company uses foreign currency forward contracts to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI and reclassified to net sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
 
The Company also uses foreign currency forward contracts to protect certain short-term positions denominated in foreign currencies against the effect of changes in exchange rates. These positions do not qualify for hedge accounting and accordingly are marked-to-market at each reporting date through charges to other (income) and expense. As of September 30, 2021 and June 30, 2021, the fair value of the outstanding foreign currency forwards not designated as hedging instruments and the charges to income for changes in fair value for these contracts were not material.
 
Fair Value Hedging — Interest rate swaps: The Company uses interest rate swaps to achieve a level of floating rate debt relative to fixed rate debt where appropriate. The Company has designated fixed to floating interest rate swaps as fair value hedges. Accordingly, the changes in the fair value of these instruments are immediately recorded in earnings. The mark-to-market values of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains and losses in interest expense in the consolidated statements of operations. As of the quarter ended September 30, 2020, all interest rate swaps were terminated in connection with the prepayment of Notes due July 2021. At September 30, 2021 and June 30, 2021, the total notional amount of floating interest rate contracts was $0.0 million and $0.0 million, respectively. For the three months ended September 30, 2021, there were no interest rate swaps and no gains or losses recorded to interest expense. For the three months ended September 30, 2020, net gains of $0.4 million were recorded as a decrease to interest expense and $2.3 million of gains were recorded as a decrease to debt extinguishment losses.
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value and location of outstanding derivative contracts recorded in the accompanying consolidated balance sheets were as follows as of September 30, 2021 and June 30, 2021:
 
September 30, 2021Interest
Rate Swaps
Foreign
Currency
Contracts
Commodity
Contracts
Total
Derivatives
($ in millions)
Asset Derivatives:    
Derivatives designated as hedging instruments:    
Other current assets$ $ $12.0 $12.0 
Other assets  4.1 4.1 
Total asset derivatives$ $ $16.1 $16.1 
Liability Derivatives:    
Derivatives designated as hedging instruments:    
Accrued liabilities$ $2.1 $0.4 $2.5 
Other liabilities  0.4 0.4 
Total liability derivatives$ $2.1 $0.8 $2.9 
 
June 30, 2021Interest
Rate Swaps
Foreign
Currency
Contracts
Commodity
Contracts
Total
Derivatives
($ in millions)
Asset Derivatives:    
Derivatives designated as hedging instruments:    
Other current assets$ $ $10.0 $10.0 
Other assets  5.9 5.9 
Total asset derivatives$ $ $15.9 $15.9 
Liability Derivatives:    
Derivatives designated as hedging instruments:    
Accrued liabilities$ $2.6 $1.6 $4.2 
Other liabilities  1.1 1.1 
Total liability derivatives$ $2.6 $2.7 $5.3 

Substantially all of the derivative contracts are subject to master netting arrangements, or similar agreements with each counterparty, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company presents the outstanding derivative contracts on a net basis by counterparty in the consolidated balance sheets. If the Company had chosen to present the derivative contracts on a gross basis, the total asset derivatives would have been $19.2 million and total liability derivatives would have been $6.0 million as of September 30, 2021.

According to the provisions of the Company's derivative arrangements, in the event that the fair value of outstanding derivative positions with certain counterparties exceeds certain thresholds, the Company may be required to issue cash collateral to the counterparties. As of September 30, 2021 and June 30, 2021, the Company had no cash collateral held by counterparties.
 
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company is exposed to credit loss in the event of nonperformance by counterparties on its derivative instruments as well as credit or performance risk with respect to its customer commitments to perform. Although nonperformance is possible, the Company does not anticipate nonperformance by any of the parties. In addition, various master netting arrangements are in place with counterparties to facilitate settlements of gains and losses on these contracts.
 
Cash Flow and Fair Value Hedges
 
For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings or it becomes probable the forecasted transactions will not occur. The following is a summary of the (losses) gains related to cash flow hedges recognized during the three months ended September 30, 2021 and 2020:
 
 Amount of (Loss) Gain
Recognized in AOCI on
Derivatives
 Three Months Ended
September 30,
($ in millions)20212020
Derivatives in Cash Flow Hedging Relationship:  
  Commodity contracts$(0.3)$13.8