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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, 2020
 
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 Street15th Floor 19103
PhiladelphiaPennsylvania
(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 16, 2020 was 48,018,407.


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,
2020
June 30,
2020
ASSETS
Current assets:
Cash and cash equivalents$218.9 $193.1 
Accounts receivable, net250.5 292.3 
Inventories633.9 724.3 
Other current assets84.6 56.6 
Total current assets1,187.9 1,266.3 
Property, plant and equipment, net1,334.1 1,351.1 
Goodwill292.3 290.4 
Other intangibles, net46.5 52.1 
Deferred income taxes4.7 4.9 
Other assets263.2 262.4 
Total assets$3,128.7 $3,227.2 
LIABILITIES  
Current liabilities:  
Short-term credit agreement borrowings$ $170.0 
Accounts payable114.2 124.2 
Accrued liabilities150.3 157.9 
Total current liabilities264.5 452.1 
Long-term debt693.8 551.8 
Accrued pension liabilities386.4 399.5 
Accrued postretirement benefits137.7 137.4 
Deferred income taxes130.7 130.2 
Other liabilities108.1 110.5 
Total liabilities1,721.2 1,781.5 
Contingencies and commitments (see Note 11)
STOCKHOLDERS’ EQUITY  
Common stock — authorized 100,000,000 shares; issued 56,012,748 shares at September 30, 2020 and 56,012,748 shares at June 30, 2020; outstanding 47,981,735 shares at September 30, 2020 and 47,850,468 shares at June 30, 2020
280.1 280.1 
Capital in excess of par value315.9 321.4 
Reinvested earnings1,511.2 1,568.0 
Common stock in treasury (8,031,013 shares and 8,162,280 shares at September 30, 2020 and June 30, 2020, respectively), at cost
(319.3)(325.8)
Accumulated other comprehensive loss(380.4)(398.0)
Total stockholders' equity1,407.5 1,445.7 
Total liabilities and stockholders' equity$3,128.7 $3,227.2 

See accompanying notes to consolidated financial statements.
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CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

Three Months Ended
September 30,
 (in millions, except per share data)20202019
Net sales$353.3 $585.4 
Cost of sales349.8 472.8 
Gross profit3.5 112.6 
Selling, general and administrative expenses42.3 52.8 
Restructuring and asset impairment charges10.0  
Operating (loss) income(48.8)59.8 
Interest expense, net(14.9)(5.4)
Other expense, net(2.3)(0.3)
(Loss) income before income taxes(66.0)54.1 
Income tax (benefit) expense(18.9)12.9 
Net (loss) income $(47.1)$41.2 
(LOSS) EARNINGS PER COMMON SHARE:  
Basic$(0.98)$0.85 
Diluted$(0.98)$0.85 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:  
Basic48.3 47.9 
Diluted48.3 48.3 
 
See accompanying notes to consolidated financial statements.
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CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)

 
Three Months Ended
September 30,
 ($ in millions)20202019
Net (loss) income $(47.1)$41.2 
Other comprehensive (loss) income, net of tax  
Pension and postretirement benefits, net of tax of $(1.1) and $(1.0), respectively
3.6 3.0 
Net gain on derivative instruments, net of tax of $(2.7) and $(8.5), respectively
8.3 26.7 
Foreign currency translation gain (loss)5.7 (5.5)
Other comprehensive income, net of tax17.6 24.2 
Comprehensive (loss) income$(29.5)$65.4 
 
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)20202019
OPERATING ACTIVITIES  
Net (loss) income $(47.1)$41.2 
Adjustments to reconcile net (loss) income to net cash provided from operating activities:  
Loss on debt prepayment8.2  
Depreciation and amortization30.9 30.6 
Non-cash restructuring and asset impairment charges8.7  
Deferred income taxes(3.9)3.5 
Net pension expense4.1 3.8 
Share-based compensation expense2.7 4.1 
Net loss on disposals of property, plant and equipment0.1  
Changes in working capital and other:  
Accounts receivable42.0 (2.1)
Inventories84.9 (51.1)
Other current assets(23.0)(10.1)
Accounts payable(7.4)18.0 
Accrued liabilities(8.0)(30.8)
Pension plan contributions(2.9)(2.4)
Other postretirement plan contributions(0.6)(0.9)
Other, net(0.7)(3.1)
Net cash provided from operating activities88.0 0.7 
INVESTING ACTIVITIES  
Purchases of property, plant, equipment and software(33.3)(47.5)
Proceeds from disposals of property, plant and equipment 0.1 
Proceeds from divestiture of business17.6  
Net cash used for investing activities(15.7)(47.4)
FINANCING ACTIVITIES  
Credit agreement borrowings 88.1 
Credit agreement repayments (38.1)
Net change in short-term credit agreement borrowings(170.0)7.9 
Payments on long-term debt(250.0) 
Proceeds from issuance of long-term debt, net of offering costs395.5  
Payments for debt prepayment costs, net(8.2) 
Payments for debt issue costs(1.1) 
Dividends paid(9.7)(9.7)
Proceeds from stock options exercised 2.6 
Withholding tax payments on share-based compensation awards(2.2)(7.5)
Net cash (used for) provided from financing activities(45.7)43.3 
Effect of exchange rate changes on cash and cash equivalents(0.8)1.0 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS25.8 (2.4)
Cash and cash equivalents at beginning of period193.1 27.0 
Cash and cash equivalents at end of period$218.9 $24.6 
SUPPLEMENTAL CASH FLOW INFORMATION:  
Non-cash investing activities: Acquisition of property, plant, equipment and software$9.0 $19.6 
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, 2020 AND 2019
(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, 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 
 
 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, 2019$279.0 $320.4 $1,605.3 $(332.8)$(351.8)$1,520.1 
Net income  41.2   41.2 
Pension and postretirement benefits gain, net of tax    3.0 3.0 
Net gain on derivative instruments, net of tax    26.7 26.7 
Foreign currency translation    (5.5)(5.5)
Cash Dividends:     
     Common @ $0.20 per share
  (9.7)  (9.7)
Share-based compensation plans0.4 (5.1) 3.3  (1.4)
Stock options exercised0.4 2.2    2.6 
Balances at September 30, 2019$279.8 $317.5 $1,636.8 $(329.5)$(327.6)$1,577.0 
 
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, 2020 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, 2020 (the “2020 Form 10-K”). Operating results for the three months ended September 30, 2020 are not necessarily indicative of the operating results for any future period.

As used throughout this report, unless the context requires otherwise, the terms “Carpenter”, "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, 2020 were $10.0 million. There were no restructuring or asset impairment charges for the three months ended September 30, 2019.

During the first 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 primarily related to various personnel-related costs for severance payments, medical coverage and related items.

In the fourth quarter of fiscal year 2020, the Company approved actions to reduce overhead costs and position the Company to drive long-term, profitable growth. These actions included implementing a restructuring plan aimed at reducing fixed costs by eliminating 20 percent of global salaried positions across all business segments. The restructuring charge consisted primarily of various personnel-related costs for severance payments, medical coverage and related items. In addition, the Company also recorded non-cash asset impairment charges related to the closure of two domestic powder facilities in the PEP segment, non-cash asset impairment charges related to the decision to exit the Amega West business, and a non-cash write-down of software that will no longer be implemented at a particular business unit. At this time, the Company does not expect any additional charges related to these restructuring actions in the future.

The reserve balances and activity for restructuring charges were as follows:

($ in millions)Reserve Balance
Reserve balance at June 30, 2020$9.5 
Restructuring charges1.3 
Cash payments(6.5)
Reserve balance at September 30, 2020$4.3 
    
3.    Recent Accounting Pronouncements
 
Recently Issued Accounting Pronouncements - Adopted in current fiscal year
                
At this time there are no issued pronouncements adopted in the current fiscal year that would materially impact the Company.

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recently Issued Accounting Pronouncements - Pending Adoption

In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848). The guidance in ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform, if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating the potential impact of the adoption of ASU 2020-04 on the consolidated financial statements.

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 or the service is performed. 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.
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 income. 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 $11.3 million and $12.3 million at September 30, 2020 and June 30, 2020, 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.  
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
        
Disaggregation of Revenue

The Company operates in two business segments, Specialty Alloys Operations (“SAO”) and 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, 2020 and 2019 were as follows:
End-Use Market DataThree Months Ended
September 30,
($ in millions)20202019
Aerospace and Defense$172.0 $353.3 
Medical32.8 48.9 
Transportation29.1 40.0 
Energy25.1 39.3 
Industrial and Consumer73.4 73.3 
Distribution20.9 30.6 
Consolidated net sales$353.3 $585.4 
Geographic DataThree Months Ended
September 30,
($ in millions)20202019
United States$224.7 $384.9 
Europe61.3 101.5 
Asia Pacific37.9 53.4 
Mexico13.1 21.9 
Canada7.8 13.4 
Other8.5 10.3 
Consolidated net sales$353.3 $585.4 

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 is held in escrow. 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.    Earnings (Loss) per Common Share
 
The Company calculates basic and diluted (loss) earnings per share using the two class method. Under the two class method, (loss) earnings are allocated to common stock and participating securities (non-vested restricted shares and units that receive non-forfeitable dividends) according to their participation rights in dividends and undistributed earnings. The (loss) earnings available to each class of stock are divided by the weighted average number of outstanding shares for the period in each class. Diluted (loss) earnings per share assumes the issuance of common stock for all potentially dilutive share equivalents outstanding. For the three months ended September 30, 2020, 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.

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The calculations of basic and diluted (loss) earnings per common share for the three months ended September 30, 2020 and 2019 were as follows: 
Three Months Ended
September 30,
(in millions, except per share data)20202019
Net (loss) income$(47.1)$41.2 
Less: (loss) earnings and dividends allocated to participating securities (0.4)
(Loss) earnings available for common stockholders used in calculation of basic (loss) earnings per common share$(47.1)$40.8 
Weighted average number of common shares outstanding, basic48.3 47.9 
Basic (loss) earnings per common share$(0.98)$0.85 
Net (loss) income$(47.1)$41.2 
Less: earnings and dividends allocated to participating securities (0.4)
(Loss) earnings available for common stockholders used in calculation of diluted (loss) earnings per common share$(47.1)$40.8 
Weighted average number of common shares outstanding, basic48.3 47.9 
Effect of shares issuable under share-based compensation plans 0.4 
Weighted average number of common shares outstanding, diluted48.3 48.3 
Diluted (loss) earnings per common share$(0.98)$0.85 
 
The following awards issued under share-based compensation plans were excluded from the above calculations of diluted earnings per share because their effects were anti-dilutive:
 
Three Months Ended
September 30,
(in millions)20202019
Stock options2.1 0.8 
 
7.    Inventories
 
Inventories consisted of the following components as of September 30, 2020 and June 30, 2020:
 
($ in millions)September 30,
2020
June 30,
2020
Raw materials and supplies$192.1 $217.6 
Work in process264.3 312.3 
Finished and purchased products177.5 194.4 
Total inventories$633.9 $724.3 
 
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, 2020 and June 30, 2020, $126.1 million and $136.3 million of inventory, respectively, was accounted for using a method other than the LIFO inventory costing method.
 
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8.    Accrued Liabilities
 
Accrued liabilities consisted of the following as of September 30, 2020 and June 30, 2020:
 
($ in millions)September 30,
2020
June 30,
2020
Accrued compensation and benefits$47.0 $50.4 
Accrued pension liabilities27.3 20.2 
Accrued postretirement benefits14.0 14.0 
Contract liabilities11.3 12.3 
Current portion of lease liabilities11.1 11.5 
Derivative financial instruments7.0 11.1 
Accrued interest expense5.4 10.4 
Accrued income taxes0.7 1.0 
Other26.5 27.0 
Total accrued liabilities$150.3 $157.9 
 
9.    Pension and Other Postretirement Benefits
 
The components of the net periodic benefit cost related to the Company’s pension and other postretirement benefits for the three months ended September 30, 2020 and 2019 were as follows:
 
Three months ended September 30, Pension PlansOther Postretirement Plans
($ in millions)2020201920202019
Service cost$2.4 $2.4 $0.7 $0.7 
Interest cost9.9 11.7 1.9 2.3 
Expected return on plan assets(13.9)(15.5)(1.6)(1.8)
Amortization of net loss4.3 3.9 0.9 0.6 
Amortization of prior service cost (benefit)0.5 0.5 (1.0)(1.0)
    Net periodic benefit costs$3.2 $3.0 $0.9 $0.8 

During the three months ended September 30, 2020 and 2019, the Company made $2.9 million and $2.4 million, respectively, of contributions to its qualified defined benefit pension plans. The Company currently expects to contribute $16.4 million to its qualified defined benefit pension plans during the remainder of fiscal year 2021.

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10.    Debt
 
On July 10, 2020, the Company completed its offering and sale of $400 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 15 and July 15, 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.

The Company maintains a $400.0 million unsecured revolving credit facility (“Credit Agreement”) that extends to March 2022. Interest on the borrowings under the Credit Agreement accrue at variable rates, based upon LIBOR 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 LIBOR ranges from 1.00% to 1.75% (1.25% as of September 30, 2020), and for Base Rate-determined loans, from 0.00% to 0.75% (0.25% as of September 30, 2020). The Company also pays a quarterly commitment fee ranging from 0.125% to 0.400% (0.20% as of September 30, 2020), determined based upon the Debt Rating, of the unused portion of the $400.0 million commitment under the Credit Agreement. In addition, the Company must pay certain letter of credit fees, ranging from 1.00% to 1.75% (1.50% as of September 30, 2020), with respect to letters of credit issued under the Credit Agreement. The Company has the right to voluntarily prepay and re-borrow loans and to terminate or reduce the commitments under the facility. As of September 30, 2020, the Company had $6.0 million of issued letters of credit and no short-term borrowings under the Credit Agreement with the balance of $394.0 million available to the Company. As of September 30, 2020, the borrowing rate for the Credit Agreement was 1.65%.

The Company is subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio of 3.50 to 1.00. The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense (“EBITDA”) to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than 55 percent. The debt to capital ratio is defined in the Credit Agreement as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. As of September 30, 2020 and June 30, 2020, the Company was in compliance with all of the covenants of the Credit Agreement.

Long-term debt outstanding as of September 30, 2020 and June 30, 2020 consisted of the following:
 
($ in millions)September 30,
2020
June 30,
2020
Senior unsecured notes, 5.20% due July 2021 (face value of $250.0 million at June 30, 2020)
$ $252.3 
Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at September 30, 2020 and June 30, 2020)
299.3 299.5 
Senior unsecured notes, 6.375% due July 2028 (face value of $400.0 million at September 30, 2020)
394.5  
Total693.8 551.8 
Less: amounts due within one year  
Long-term debt, net of current portion$693.8 $551.8 
 
At September 30, 2020, capitalized debt issuance costs in connection with the offering and sale of the Notes totaled $5.6 million. Debt issuance costs are amortized to interest expense over the life of the debt instrument, which is eight years. The Company's debt issuance cost amortization was $0.1 million for the three months ended September 30, 2020.

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the three months ended September 30, 2020 and 2019, interest costs totaled $17.7 million and $7.4 million, respectively, of which $2.8 million and $2.0 million, respectively, were capitalized as part of the cost of property, plant, equipment and software. Interest expense for the three months ended September 30, 2020 also includes $10.5 million of debt prepayment costs on the Notes due July 2021 offset by gains of $2.3 million on related interest rate swaps that were terminated in connection with prepayment.

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, 2020, 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, 2020 and June 30, 2020 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

As a result of adoption of ASU 2016-02, 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 nonlease 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. The leases have remaining terms of one to seventeen years.

The following table sets forth the components of the Company’s lease cost for the three months ended September 30, 2020 and September 30, 2019:

Three Months Ended September 30,Three Months Ended September 30,
($ in millions)20202019
Operating lease cost$3.6 $3.4 
Short-term lease cost0.8 0.8 
Variable lease cost0.2 0.1 
Total lease cost$4.6 $4.3 
Operating cash flow payments from operating leases$3.5 $3.3 
Non-cash ROU assets obtained in exchange for lease obligations$1.4 $0.9 

The following table sets forth the Company’s weighted-average remaining lease term and weighted-average discount rate at September 30, 2020 and June 30, 2020:

September 30,
2020
June 30,
2020
Weighted-average remaining lease term - operating leases8.0 years8.1 years
Weighted-average discount rate - operating leases3.9 %3.9 %
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Table of Contents
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, 2020 and June 30, 2020:

($ in millions)September 30,
2020
June 30,
2020
Operating lease assets:
    Other assets$46.6 $52.0 
Operating lease liabilities:
    Other accrued liabilities$11.1 $11.5 
    Other liabilities45.3 50.3 
Total operating lease liabilities$56.4 $61.8