CARPENTER TECHNOLOGY CORP

Previous wording

Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in Item 7 of our 2023 Form 10-K. Our discussions here focus on our results during or as of the three and six-month periods ended December 31, 2023 and the comparable periods of fiscal year 2023, and to the extent applicable, on material changes from information discussed in the 2023 Form 10-K and other important intervening developments or information that we have reported on Form 8-K. These discussions should be read in conjunction with the 2023 Form 10-K for detailed background information and with any such intervening Form 8-K.

Current wording

Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in Item 7 of our 2023 Form 10-K. Our discussions here focus on our results during or as of the three and nine-month periods ended March 31, 2024 and the comparable periods of fiscal year 2023, and to the extent applicable, on material changes from information discussed in the 2023 Form 10-K and other important intervening developments or information that we have reported on Form 8-K. These discussions should be read in conjunction with the 2023 Form 10-K for detailed background information and with any such intervening Form 8-K.

Previous wording

Approximately 40 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.

Current wording

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) 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 arrangements.

Previous wording

Net pension benefit, 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 remeasurement event occurs. We currently expect the total net pension expense for fiscal year 2024 will be $23.5 million as compared with total net pension expense of $19.9 million in fiscal year 2023.

Current wording

Net pension expense, as we define it below, includes the net periodic benefit costs related to both our pension and other postretirement plans. The net periodic benefit costs are determined annually based on beginning of year balances and are recorded ratably throughout the fiscal year, unless a significant remeasurement event occurs. We currently expect the total net pension expense for fiscal year 2024 will be $76.0 million as compared with total net pension expense of $19.9 million in fiscal year 2023.

Previous wording

The following is the net pension expense for the three and six months ended December 31, 2023 and December 31, 2022:

Current wording

The following is the net pension expense for the three and nine months ended March 31, 2024 and March 31, 2023:

Previous wording

Net pension expense is recorded in accounts that are included in cost of sales and selling, general and administrative expenses based on the function of the associated employees and in other expense, net. The following is a summary of the classification of net pension expense for the three and six months ended December 31, 2023 and 2022:

Current wording

Net pension expense is recorded in accounts that are included in cost of sales and selling, general and administrative expenses based on the function of the associated employees and in other expense, net. The following is a summary of the classification of net pension expense for the three and nine months ended March 31, 2024 and 2023:

Previous wording

As of December 31, 2023 and June 30, 2023, service cost amounts related to the net pension expense capitalized in gross inventory were $1.3 million and $2.8 million, respectively.

Current wording

As of March 31, 2024 and June 30, 2023, service cost amounts related to the net pension expense capitalized in gross inventory were $1.4 million and $2.8 million, respectively.

Previous wording

In the quarter ended December 31, 2023 we reported operating income of $69.8 million, an improvement of $47.2 million compared to the prior year same quarter. Notably, the SAO segment demonstrated improvement, reaching $83.3 million of operating income with an adjusted operating margin of 20.0 percent, a meaningful increase over the prior year same quarter of 8.8 percent adjusted operating margin. Further, our operating income in the six months ended December 31, 2023, was $138.8 million, an improvement of $107.9 million as compared with operating income of $30.9 million in the six months ended December 31, 2022. In addition to the strong operating performance, we generated $21.9 million of cash from operating activities in the six months ended December 31, 2023, as compared with cash used for operating activities of $164.5 million in the six months ended December 31, 2022.

Current wording

Further, our operating income in the nine months ended March 31, 2024, was $214.8 million. Excluding the noncash special item, adjusted operating income for the nine months ended March 31, 2024 was $228.9 million compared with operating income of $70.2 million in the nine months ended March 31, 2023. In addition to the strong operating performance, we generated $105.4 million of cash from operating activities in the nine months ended March 31, 2024, as compared with cash used for operating activities of $160.2 million in the nine months ended March 31, 2023.

Previous wording

Looking ahead, we anticipate an even stronger second half of fiscal year 2024, which if obtained, would result in the most profitable fiscal year on record. Further, our fiscal year 2024 projection would be a meaningful step towards our fiscal year 2027 goal of doubling our fiscal year 2019 operating income. And with improving productivity and expanding margins, we see opportunity to accelerate the attainment of our fiscal year 2027 goal.

Current wording

Looking ahead, our fiscal year 2024 projection represents a meaningful step towards our goal of doubling our fiscal year 2019 operating income. With improving productivity and expanding margins, we see opportunity to accelerate the attainment of our goal to fiscal year 2026 versus our original target of fiscal year 2027.

Previous wording

For the three months ended December 31, 2023, we reported net income of $42.7 million, or $0.85 per diluted share. This compares with net income for the three months ended December 31, 2022 of $6.2 million, or $0.13 per diluted share. The results for the three months ended December 31, 2023 reflect higher prices, improving product mix and increased productivity, partially offset by inflationary cost increases compared to the three months ended December 31, 2022.

Current wording

For the three months ended March 31, 2024, we reported net income of $6.3 million, or $0.12 per diluted share. Excluding special items, as identified below, adjusted earnings per diluted share was $1.19 for the three months ended March 31, 2024. This compares with net income for the three months ended March 31, 2023 of $18.6 million, or $0.38 per diluted share. The results for the three months ended March 31, 2024 reflect stronger product mix, higher prices and improved operational efficiencies, partially offset by inflationary cost increases compared to the three months ended March 31, 2023. During the three months ended March 31, 2024, we recognized a noncash goodwill impairment charge of $14.1 million related to our Latrobe Distribution reporting unit. The current quarter results also include a noncash pension settlement charge of $51.9 million which did not occur in the prior year period.

Previous wording

Net sales for the three months ended December 31, 2023 were $624.2 million, which was an 8 percent increase over the three months ended December 31, 2022. Excluding surcharge revenue, sales increased 15 percent on a 3 percent decrease in shipment volume from the three months ended December 31, 2022. The results reflect realized price increases, improving product mix as well as higher demand in the key end-use markets of Aerospace and Defense, Medical and Energy during the three months ended December 31, 2023, compared to the three months ended December 31, 2022. Net sales in the Aerospace and Defense end-use market increased 15 percent compared to the three months ended December 31, 2022.

Current wording

Net sales for the three months ended March 31, 2024 were $684.9 million, which was a 1 percent decrease over the three months ended March 31, 2023. The decrease in net sales is a result of lower commodity prices driving lower raw material surcharge revenue. Excluding surcharge revenue, sales increased 13 percent on a 12 percent decrease in shipment volume from the three months ended March 31, 2023. The results excluding surcharge revenue reflect realized price increases, improving product mix as well as stronger demand in the end-use markets of Aerospace and Defense and Medical during the three months ended March 31, 2024, compared to the three months ended March 31, 2023. Excluding surcharge revenue, sales in the Aerospace and Defense end-use market increased 30 percent compared to the three months ended March 31, 2023.

Previous wording

Geographically, sales in the United States increased 6 percent from the three months ended December 31, 2022, to $374.0 million. The increase in domestic sales is driven by higher demand in the key end-use markets of Aerospace and Defense, Medical and Energy. Sales outside the United States increased 11 percent from the three months ended December 31, 2022, to $250.2 million for the three months ended December 31, 2023. The results reflect higher demand in key end-use markets of Aerospace and Defense, Medical and Energy in the European region compared to the three months ended December 31, 2022. A portion of our sales outside the United States are denominated in foreign currencies. The fluctuations in foreign currency exchange rates resulted in a $0.6 million increase in sales during the three months ended December 31, 2023, compared to the three months ended December 31, 2022. Net sales outside the United States represented 40 percent and 39 percent of total net sales for the three months ended December 31, 2023 and 2022, respectively.

Current wording

Geographically, sales in the United States decreased 9 percent from the three months ended March 31, 2023, to $383.3 million. Excluding surcharge revenue, domestic sales increased 5 percent from the three months ended March 31, 2023 driven by stronger demand in the end-use markets of Aerospace and Defense and Medical. Sales outside the United States increased 11 percent from the three months ended March 31, 2023, to $301.6 million for the three months ended March 31, 2024. Excluding surcharge revenue, sales outside the United States increased 24 percent from the three months ended March 31, 2023, reflecting stronger demand in the end-use markets of Aerospace and Defense, Medical and Energy in the European and Asia Pacific regions compared to the three months ended March 31, 2023. A portion of our sales outside the United States are denominated in foreign currencies. The fluctuations in foreign currency exchange rates resulted in a $0.4 million increase in sales during the three months ended March 31, 2024, compared to the three months ended March 31, 2023. Net sales outside the United States represented 44 percent and 39 percent of total net sales for the three months ended March 31, 2024 and 2023, respectively.

Previous wording

We sell to customers across diversified end-use markets. We believe that net sales by principal 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:

Current wording

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 end-use markets:

Previous wording

The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:

Current wording

The following table includes comparative information for our net sales by the same end-use markets, but excluding surcharge revenue:

Previous wording

Sales to the Aerospace and Defense end-use market increased 15 percent from the three months ended December 31, 2022, to $321.0 million. Excluding surcharge revenue, sales increased 23 percent from the three months ended December 31, 2022, on a 9 percent increase in shipment volume. The results for the three months ended December 31, 2023 reflect increasing activity levels across the aerospace supply chain due to higher aircraft build rates to replace aging fleets and meet increasing passenger travel demand. The three months ended December 31, 2023, also reflect higher sales in the Defense end-use market in response to global threats.

Current wording

Sales to the Aerospace and Defense end-use market increased 14 percent from the three months ended March 31, 2023, to $391.1 million. Excluding surcharge revenue, sales increased 30 percent from the three months ended March 31, 2023, on a 6 percent increase in shipment volume. The results for the three months ended March 31, 2024 reflect increasing activity levels across the aerospace supply chain due to higher aircraft build rates to replace aging fleets and meet increasing passenger travel demand. The three months ended March 31, 2024, also reflect higher sales in the Defense end-use market in response to global threats.

Previous wording

Medical end-use market sales increased 19 percent from the three months ended December 31, 2022, to $87.7 million. Excluding surcharge revenue, sales increased 16 percent on 22 percent higher shipment volume from the three months ended December 31, 2022. For the three months ended December 31, 2023, results reflect stronger demand as a result of the medical supply chain replenishing inventory levels and meeting increased demand for elective medical procedures particularly in the orthopedic, cardiology and dental sub-markets compared to the three months ended December 31, 2022.

Current wording

Medical end-use market sales increased 16 percent from the three months ended March 31, 2023, to $99.6 million. Excluding surcharge revenue, sales increased 35 percent on 10 percent higher shipment volume from the three months ended March 31, 2023. For the three months ended March 31, 2024, results reflect stronger demand as a result of the medical supply chain replenishing inventory levels and meeting increased demand for elective medical procedures particularly in the orthopedic, cardiology and dental sub-markets compared to the three months ended March 31, 2023.

Previous wording

Sales to the Energy end-use market of $52.1 million in the three months ended December 31, 2023 reflect a 50 percent increase from the three months ended December 31, 2022. Excluding surcharge revenue, sales increased 63 percent on a 41 percent increase in shipment volume from the three months ended December 31, 2022. The results reflect higher global oil consumption benefiting the oil and gas sub-market and stronger demand for power generation materials compared to the three months ended December 31, 2022.

Current wording

Sales to the Energy end-use market of $38.7 million in the three months ended March 31, 2024 reflect a 17 percent decrease from the three months ended March 31, 2023. Excluding surcharge revenue, sales decreased 3 percent on an 8 percent decrease in shipment volume from the three months ended March 31, 2023. The results reflect lower demand for power generation materials partially offset by higher global oil consumption benefiting the oil and gas sub-market compared to the three months ended March 31, 2023.

Previous wording

Our gross profit in the three months ended December 31, 2023, increased to $122.6 million, or 19.6 percent of net sales, as compared with $70.0 million, or 12.1 percent of net sales in the three months ended December 31, 2022. Excluding the impact of surcharge revenue, our adjusted gross margin in the three months ended December 31, 2023, was 25.3 percent as compared to 16.6 percent in the three months ended December 31, 2022. The increased gross profit for the three months ended December 31, 2023 reflects 8 percent increased sales driven by a stronger product mix, higher prices and significant productivity gains, partially offset by inflationary cost increases.

Current wording

Our gross profit in the three months ended March 31, 2024, increased to $147.0 million, or 21.5 percent of net sales, as compared with $93.5 million, or 13.5 percent of net sales in the three months ended March 31, 2023. Excluding the impact of surcharge revenue, our adjusted gross margin in the three months ended March 31, 2024, was 26.5 percent as compared to 19.0 percent in the three months ended March 31, 2023. The increased gross profit for the three months ended March 31, 2024 reflects realized price increases, lower material costs and significant productivity gains.

Previous wording

Selling, general and administrative expenses in the three months ended December 31, 2023, were $52.8 million or 8.5 percent of net sales (10.9 percent of net sales excluding surcharge) as compared with $47.4 million and 8.2 percent of net sales (11.3 percent of net sales excluding surcharge) in the three months ended December 31, 2022. The selling, general and administrative expenses for the three months ended December 31, 2023 reflect higher salary, benefit and variable compensation costs compared to the three months ended December 31, 2022.

Current wording

Selling, general and administrative expenses in the three months ended March 31, 2024, were $57.0 million or 8.3 percent of net sales (10.3 percent of net sales excluding surcharge) as compared with $54.2 million or 7.9 percent of net sales (11.0 percent of net sales excluding surcharge) in the three months ended March 31, 2023. The selling, general and administrative expenses for the three months ended March 31, 2024 reflect higher salary, benefit and variable compensation costs compared to the three months ended March 31, 2023.

Previous wording

Our operating income in the three months ended December 31, 2023, was $69.8 million, or 11.2 percent of net sales, as compared with operating income of $22.6 million or 3.9 percent of net sales in the three months ended December 31, 2022. Excluding surcharge revenue, adjusted operating margin was 14.4 percent for the three months ended December 31, 2023, as compared with 5.4 percent in the three months ended December 31, 2022. The operating results for the three months ended December 31, 2023 reflect stronger product mix, higher prices and improved operational efficiencies, partially offset by inflationary cost increases compared to the three months ended December 31, 2022.

Current wording

Our operating income in the three months ended March 31, 2024, was $75.9 million, or 11.1 percent of net sales, as compared with operating income of $39.3 million or 5.7 percent of net sales in the three months ended March 31, 2023. Excluding surcharge revenue and the noncash special item, adjusted operating margin was 16.3 percent for the three months ended March 31, 2024, as compared with 8.0 percent for the three months ended March 31, 2023. The operating results for the three months ended March 31, 2024 reflect stronger product mix, higher prices and improved operational efficiencies, partially offset by inflationary cost increases compared to the three months ended March 31, 2023. During the three months ended March 31, 2024, we recognized a noncash goodwill impairment charge of $14.1 million related to our Latrobe Distribution reporting unit.

Previous wording

The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales. We present and discuss these financial measures because management believes removing these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.

Current wording

The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales and excluding the special item. We present and discuss these financial measures because management believes removing these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.

Previous wording

Interest expense, net for the three months ended December 31, 2023, was $13.0 million compared with $13.0 million in the three months ended December 31, 2022. Capitalized interest reduced interest expense by $0.3 million for the three months ended December 31, 2023, and $0.3 million for the three months ended December 31, 2022.

Current wording

Interest expense, net for the three months ended March 31, 2024, was $12.9 million compared with $14.5 million in the three months ended March 31, 2023. Capitalized interest reduced interest expense by $0.4 million for the three months ended March 31, 2024, and $0.5 million for the three months ended March 31, 2023. The lower interest expense, net is largely due to less short-term borrowings under our Credit Facility compared to the three months ended March 31, 2023.

Previous wording

Other expense, net for the three months ended December 31, 2023, was $1.6 million as compared with $1.9 million of other expense, net for the three months ended December 31, 2022. The three months ended December 31, 2023, reflects $3.5 million of expense from pension earnings, interest and deferrals compared to $2.5 million of expense from pension earnings, interest and deferrals in the three months ended December 31, 2022, driven by lower expected returns on plan assets.

Current wording

Other expense, net for the three months ended March 31, 2024, was $52.9 million as compared with $0.8 million of other expense, net for the three months ended March 31, 2023. The three months ended March 31, 2024, reflects $3.7 million of expense from pension earnings, interest and deferrals compared to $2.5 million of expense from pension earnings, interest and deferrals in the three months ended March 31, 2023, driven by lower than expected returns on plan assets. The results for the three months ended March 31, 2024 also include a noncash pension settlement charge of $51.9 million.

Previous wording

Income tax expense was $12.5 million, or 22.6 percent of pre-tax income for the three months ended December 31, 2023, as compared with income tax expense of $1.5 million, or 19.5 percent of pre-tax income for the three months ended December 31, 2022. Income tax expense for the three months ended December 31, 2022 included a discrete tax benefit of $0.6 million for anticipated interest on IRS income tax refund claims. Also included was the unfavorable impact of losses in certain foreign jurisdictions for which no tax benefit can be recognized.

Current wording

Income tax expense was $3.8 million, or 37.6 percent of pre-tax income for the three months ended March 31, 2024, as compared with income tax expense of $5.4 million, or 22.5 percent of pre-tax income for the three months ended March 31, 2023. Income tax expense for the three months ended March 31, 2024 includes the unfavorable impacts of the $14.1 million non-deductible goodwill impairment charge and losses in certain foreign jurisdictions for which no tax benefit can be recognized. Also included are discrete tax benefits of $12.4 million associated with the pension settlement charge and $1.4 million as a result of changes in our prior year tax positions. Excluding the discrete tax impacts of the pension settlement charge, non-deductible goodwill impairment charge and changes in our prior year tax positions, the tax rate for the three months ended March 31, 2024, would have been 23.1 percent. Income tax expense for the three months ended March 31, 2023, included the unfavorable impact of losses in certain foreign jurisdictions for which no tax benefit can be recognized. Also included was a discrete tax benefit of $0.2 million for anticipated interest on IRS income tax refund claims and a discrete tax charge of $0.2 million as a result of changes in our prior year tax positions.

Previous wording

Net sales for the three months ended December 31, 2023 for the SAO segment increased 11 percent to $549.4 million, as compared with $495.8 million in the three months ended December 31, 2022. Excluding surcharge revenue, net sales for the three months ended December 31, 2023 increased 20 percent on 1 percent higher shipment volume compared to the three months ended December 31, 2022. The higher sales excluding surcharge revenue in the SAO segment reflect double-digit percentage growth in key end-use markets of Aerospace and Defense, Medical and Energy driven by higher shipment volume from productivity gains, stronger product mix and price increases compared to the three months ended December 31, 2022.

Current wording

Net sales for the three months ended March 31, 2024 for the SAO segment increased 1 percent to $608.5 million, as compared with $603.4 million in the three months ended March 31, 2023. Excluding surcharge revenue, net sales for the three months ended March 31, 2024 increased 17 percent on 10 percent lower shipment volume compared to the three months ended March 31, 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 and Medical driven by productivity gains, stronger product mix and pricing actions compared to the three months ended March 31, 2023.

Previous wording

Net sales for the three months ended December 31, 2023 for the PEP segment decreased 10 percent to $95.7 million, as compared with $106.7 million in the three months ended December 31, 2022. Excluding surcharge revenue, net sales for the three months ended December 31, 2023 decreased 10 percent on 22 percent lower shipment volume compared to the three months ended December 31, 2022. The results reflect lower sales in the Industrial and Consumer and Distribution end-use markets partially offset by higher demand for titanium materials in the Aerospace fastener sub-market.

Current wording

Net sales for the three months ended March 31, 2024 for the PEP segment decreased 11 percent to $102.4 million, as compared with $115.1 million in the three months ended March 31, 2023. Excluding surcharge revenue, net sales for the three months ended March 31, 2024 decreased 9 percent on 19 percent lower shipment volume compared to the three months ended March 31, 2023. The results reflect lower sales in the Distribution end-use market.

Previous wording

Operating income for the PEP segment was $7.1 million or 7.4 percent of net sales (8.1 percent of net sales excluding surcharge revenue) in the three months ended December 31, 2023, compared with operating income of $9.3 million or 8.7 percent of net sales (9.5 percent of net sales excluding surcharge revenue) in the three months ended December 31, 2022. The lower results for the three months ended December 31, 2023 reflect weaker demand conditions and lower margins compared to the three months ended December 31, 2022.

Current wording

Operating income for the PEP segment was $9.2 million or 9.0 percent of net sales (9.7 percent of net sales excluding surcharge revenue) in the three months ended March 31, 2024, compared with operating income of $10.2 million or 8.9 percent of net sales (9.8 percent of net sales excluding surcharge revenue) in the three months ended March 31, 2023. The lower results for the three months ended March 31, 2024 reflect weaker demand conditions and lower margins compared to the three months ended March 31, 2023.

Previous wording

Net sales for the six months ended December 31, 2023 were $1,276.1 million, which was a 16 percent increase over the six months ended December 31, 2022. Excluding surcharge revenue, sales increased 23 percent on 4 percent higher shipment volume from the six months ended December 31, 2022. The results reflect the impact of price increases and stronger product demand for materials used in the key end-use markets of Aerospace and Defense, Medical and Energy, compared to the six months ended December 31, 2022.

Current wording

Net sales for the nine months ended March 31, 2024 were $1,961.1 million, a 9 percent increase over the nine months ended March 31, 2023. Excluding surcharge revenue, sales increased 19 percent on 2 percent lower shipment volume from the nine months ended March 31, 2023. The results reflect the impact of price increases and stronger product demand for materials used in the end-use markets of Aerospace and Defense, Medical and Energy, compared to the nine months ended March 31, 2023.

Previous wording

Geographically, sales in the United States increased 14 percent from the six months ended December 31, 2022, to $767.4 million. The increase in domestic sales is driven by higher demand in the key end-use markets of Aerospace and Defense, Medical and Energy. Sales outside the United States increased 19 percent from the six months ended December 31, 2022, to $508.7 million for the six months ended December 31, 2023. The results reflect higher demand in the key end-use markets of Aerospace and Defense, Medical and Energy in the European and Asia Pacific regions compared to the six months ended December 31, 2022. 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 $1.4 million increase in sales during the six months ended December 31, 2023, compared to the six months ended December 31, 2022. Net sales outside the United States represented 40 percent and 39 percent of total net sales for the six months ended December 31, 2023 and 2022, respectively.

Current wording

Geographically, sales in the United States increased 5 percent from the nine months ended March 31, 2023, to $1,150.7 million. Excluding surcharge revenue, domestic sales increased 16 percent from the nine months ended March 31, 2023, driven by stronger demand in the end-use markets of Aerospace and Defense, Medical and Energy. Sales outside the United States increased 16 percent from the nine months ended March 31, 2023, to $810.4 million for the nine months ended March 31, 2024. Excluding surcharge revenue, international sales increased 23 percent from the nine months ended March 31, 2023, driven by stronger demand in the end-use markets of Aerospace and Defense, Medical and Energy in the European and Asia Pacific regions compared to the nine months ended March 31, 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 $2.0 million increase in sales during the nine months ended March 31, 2024, compared to the nine months ended March 31, 2023. Net sales outside the United States represented 41 percent and 39 percent of total net sales for the nine months ended March 31, 2024 and 2023, respectively.

Previous wording

We sell to customers across diversified end-use markets. We believe that net sales by principal 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:

Current wording

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 end-use markets:

Previous wording

The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:

Current wording

The following table includes comparative information for our net sales by the same end-use markets, but excluding surcharge revenue:

Previous wording

Sales to the Aerospace and Defense end-use market increased 24 percent from the six months ended December 31, 2022, to $673.5 million. Excluding surcharge revenue, sales increased 32 percent from the six months ended December 31, 2022, on 14 percent higher shipment volume. The results for the six months ended December 31, 2023 reflect increases across all Aerospace end-use sub-markets 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 compared to the six months ended December 31, 2022. The six months ended December 31, 2023 also reflect higher sales in the Defense end-use market in response to global threats.

Current wording

Sales to the Aerospace and Defense end-use market increased 20 percent from the nine months ended March 31, 2023, to $1,064.7 million. Excluding surcharge revenue, sales increased 32 percent from the nine months ended March 31, 2023, on 11 percent higher shipment volume. The results for the nine months ended March 31, 2024 reflect double-digit increases in the Aerospace engine, fastener and structural components end-use sub-markets 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 compared to the nine months ended March 31, 2023. The nine months ended March 31, 2024 also reflect higher sales in the Defense end-use market in response to global threats.

Previous wording

Medical end-use market sales increased 26 percent from the six months ended December 31, 2022, to $167.6 million. Excluding surcharge revenue, sales increased 24 percent on 25 percent higher shipment volume from the six months ended December 31, 2022. The results for the six months ended December 31, 2023 reflect realized price increases and higher demand across all applications as the medical supply chain replenished inventory levels to meet higher patient demand for elective medical procedures compared to the six months ended December 31, 2022.

Current wording

Medical end-use market sales increased 22 percent from the nine months ended March 31, 2023, to $267.2 million. Excluding surcharge revenue, sales increased 28 percent on 20 percent higher shipment volume from the nine months ended March 31, 2023. The results for the nine months ended March 31, 2024 reflect realized price increases and higher demand as the medical supply chain replenishes inventory levels to meet higher patient demand for elective medical procedures compared to the nine months ended March 31, 2023.

Previous wording

Transportation end-use market sales increased 1 percent from the six months ended December 31, 2022, to $79.2 million. Excluding surcharge revenue, sales increased 10 percent on 8 percent lower shipment volume from the six months ended December 31, 2022. The results for the six months ended December 31, 2023 reflect an improved mix from recent price increases, particularly in light-duty vehicle and specialty transportation applications, offset by reduced demand for materials used in medium and heavy-duty truck applications compared to the six months ended December 31, 2022. The six months ended December 31, 2023 also reflect the negative impact of employee union strikes in North America which did not occur in the six months ended December 31, 2022.

Current wording

Transportation end-use market sales decreased 13 percent from the nine months ended March 31, 2023, to $113.7 million. Excluding surcharge revenue, sales decreased 3 percent on 18 percent lower shipment volume from the nine months ended March 31, 2023. The results for the nine months ended March 31, 2024 reflect lower demand across light, medium and heavy-duty vehicle applications offset partially by higher demand in specialty transportation applications compared to the nine months ended March 31, 2023. The nine months ended March 31, 2024 also reflect the negative impact of employee union strikes in North America which did not occur in the nine months ended March 31, 2023.

Previous wording

Sales to the Energy end-use market of $96.8 million reflect a 54 percent increase from the six months ended December 31, 2022. Excluding surcharge revenue, sales increased 61 percent on 42 percent higher shipment volume from the six months ended December 31, 2022. The results reflect increasing global oil consumption benefiting the oil and gas sub-market along with slightly higher demand for power generation materials compared to the six months ended December 31, 2022.

Current wording

Sales to the Energy end-use market of $135.4 million reflect a 24 percent increase from the nine months ended March 31, 2023. Excluding surcharge revenue, sales increased 35 percent on 22 percent higher shipment volume from the nine months ended March 31, 2023. The results reflect increasing global oil consumption benefiting the oil and gas sub-market with flat demand for power generation materials compared to the nine months ended March 31, 2023.

Previous wording

Industrial and Consumer end-use market sales decreased 7 percent from the six months ended December 31, 2022, to $209.4 million. Excluding surcharge revenue, sales increased 9 percent on 17 percent lower shipment volume from the six months ended December 31, 2022. The results reflect realized price increases offset by lower demand in both Industrial and Consumer end-use markets compared to the six months ended December 31, 2022.

Current wording

Industrial and Consumer end-use market sales decreased 14 percent from the nine months ended March 31, 2023, to $307.0 million. Excluding surcharge revenue, sales decreased 2 percent on 25 percent lower shipment volume from the nine months ended March 31, 2023. The results reflect lower demand in both Industrial and Consumer end-use markets partially offset by realized price increases compared to the nine months ended March 31, 2023.

Previous wording

Our gross profit in the six months ended December 31, 2023 increased $121.9 million to $246.7 million, or 19.3 percent of net sales, as compared with $124.8 million, or 11.3 percent of net sales in the six months ended December 31, 2022. Excluding the impact of surcharge revenue, our gross margin in the six months ended December 31, 2023, was 25.2 percent as compared to 15.7 percent in the six months ended December 31, 2022. The increased gross profit for the six months ended December 31, 2023 reflects 16 percent increased sales with a stronger product mix driven by higher prices and improved operational efficiencies, partially offset by inflationary cost increases compared to the six months ended December 31, 2022.

Current wording

Our gross profit in the nine months ended March 31, 2024 increased $175.5 million to $393.7 million, or 20.1 percent of net sales, as compared with $218.2 million, or 12.2 percent of net sales in the nine months ended March 31, 2023. Excluding the impact of surcharge revenue, our gross margin in the nine months ended March 31, 2024, was 25.7 percent as compared to 16.9 percent in the nine months ended March 31, 2023. The increased gross profit for the nine months ended March 31, 2024 reflects 9 percent increased sales with a stronger product mix driven by higher prices and improved operational efficiencies, partially offset by inflationary cost increases compared to the nine months ended March 31, 2023.

Previous wording

Selling, general and administrative expenses of $107.9 million were 8.5 percent of net sales (11.0 percent of net sales excluding surcharge) for the six months ended December 31, 2023, as compared with $93.9 million or 8.5 percent of net sales (11.8 percent of net sales excluding surcharge) in the six months ended December 31, 2022. The selling, general and administrative expenses for the six months ended December 31, 2023 reflect higher salary, benefit and variable compensation costs compared to the six months ended December 31, 2022.

Current wording

Selling, general and administrative expenses of $164.8 million were 8.4 percent of net sales (10.8 percent of net sales excluding surcharge) for the nine months ended March 31, 2024, as compared with $148.0 million or 8.3 percent of net sales (11.5 percent of net sales excluding surcharge) in the nine months ended March 31, 2023. The selling, general and administrative expenses for the nine months ended March 31, 2024 reflect higher salary, benefit and variable compensation costs compared to the nine months ended March 31, 2023.

Previous wording

Our operating income in the six months ended December 31, 2023 was $138.8 million, or 10.9 percent of net sales, as compared with operating income of $30.9 million, or 2.8 percent of net sales in the six months ended December 31, 2022. Excluding surcharge revenue, operating margin was 14.2 percent for the six months ended December 31, 2023, and 3.9 percent for the six months ended December 31, 2022. The operating results for the six months ended December 31, 2023 reflect increased sales with a stronger product mix driven by higher prices and improved operational efficiencies, partially offset by inflationary cost increases compared to the six months ended December 31, 2022.

Current wording

Our operating income in the nine months ended March 31, 2024 was $214.8 million, or 11.0 percent of net sales, as compared with operating income of $70.2 million, or 3.9 percent of net sales in the nine months ended March 31, 2023. Excluding surcharge revenue and the noncash special item, operating margin was 14.9 percent for the nine months ended March 31, 2024, and 5.5 percent for the nine months ended March 31, 2023. The operating results for the nine months ended March 31, 2024 reflect increased sales with a stronger product mix driven by higher prices and improved operational efficiencies, partially offset by inflationary cost increases compared to the nine months ended March 31, 2023. The results for the nine months ended March 31, 2024 reflect a noncash goodwill impairment charge of $14.1 million recognized for our Latrobe Distribution reporting unit.

Previous wording

The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales. We present and discuss these financial measures because management believes removing these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.

Current wording

The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales and the special item. We present and discuss these financial measures because management believes removing these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.

Previous wording

Interest expense, net for the six months ended December 31, 2023, was $25.7 million compared with $25.6 million in the six months ended December 31, 2022. Capitalized interest reduced interest expense by $0.8 million for the six months ended December 31, 2023, and $0.5 million for the six months ended December 31, 2022.

Current wording

Interest expense, net for the nine months ended March 31, 2024, was $38.6 million compared with $40.1 million in the nine months ended March 31, 2023. Capitalized interest reduced interest expense by $1.2 million for the nine months ended March 31, 2024, and $1.0 million for the nine months ended March 31, 2023. The lower interest expense, net is largely due to less short-term borrowings under our Credit Facility and an increase in capitalized interest compared to the nine months ended March 31, 2024.