CARPENTER TECHNOLOGY CORP

Previous wording

We are a producer and distributor of premium specialty alloys, including titanium alloys, powder metals, stainless steels, alloy steels and tool steels. We are a recognized leader in high-performance specialty alloy-based materials and process solutions for critical applications in the aerospace, defense, medical, transportation, energy, industrial and consumer electronics markets. We have evolved to become a pioneer in premium specialty alloys, including titanium, nickel, and cobalt, as well as alloys specifically engineered for additive manufacturing processes and soft magnetics applications. We primarily process basic raw materials such as nickel, cobalt, titanium, manganese, chromium, molybdenum, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire and narrow strip in many sizes and finishes. We also produce certain metal powders and parts. Our sales are distributed directly from our production plants and distribution network as well as through independent distributors. Unlike many other specialty steel producers, we operate our own worldwide network of service and distribution centers. These service centers, located in the United States, Canada, Mexico, Europe and Asia allow us to work more closely with customers and to offer various just-in-time stocking programs.

Current wording

We are a producer and distributor of premium specialty alloys, including titanium alloys, powder metals, stainless steels, alloy steels and tool steels. We are a recognized leader in high-performance specialty alloy materials and process solutions for critical applications in the aerospace and defense, medical, energy, transportation and industrial and consumer markets. Founded in 1889, we have evolved to become a pioneer in premium specialty alloys including nickel, cobalt, and titanium and material process capabilities that solve our customers' current and future material challenges. We primarily process basic raw materials such as nickel, cobalt, titanium, manganese, chromium, molybdenum, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire and narrow strip in many sizes and finishes. We also produce certain metal powders and parts. Our sales are distributed directly from our production plants and distribution network as well as through independent distributors. Unlike many other specialty steel producers, we operate our own worldwide network of service and distribution centers. These service centers, located in the United States, Canada, Mexico, Europe and Asia allow us to work more closely with customers and to offer various just-in-time stocking programs.

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 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.

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 2024 Form 10-K. Our discussions here focus on our results during or as of the three-month period ended September 30, 2024 and the comparable period of fiscal year 2024, and to the extent applicable, on material changes from information discussed in the 2024 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 2024 Form 10-K for detailed background information and with any such intervening Form 8-K.

Previous 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.

Current 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) 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 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.

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 2025 will be $24.8 million as compared with total net pension expense of $76.0 million in fiscal year 2024. Fiscal year 2024 included a noncash settlement charge of $51.9 million within other expense, net.

Previous wording

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

Current wording

The following is the net pension expense for the three months ended September 30, 2024 and September 30, 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 nine months ended March 31, 2024 and 2023:

Current wording

Net pension expense is recorded in accounts that are included in cost of sales, selling, general and administrative expenses and other expense, net, based on the function of the associated employees and nature of expense. The following is a summary of the classification of net pension expense for the three months ended September 30, 2024 and 2023:

Previous 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.

Current wording

As of September 30, 2024 and June 30, 2024, service cost amounts related to the net pension expense capitalized in gross inventory were $1.5 million and $1.6 million, respectively.

Previous wording

In the quarter ended March 31, 2024 we reported operating income of $75.9 million, an increase of $36.6 million compared to the prior year same quarter. Excluding the noncash special item, as identified below, adjusted operating income was $90.0 million. The strong performance in the quarter ended March 31, 2024 is driven by improved productivity, product mix optimization and pricing actions. Notably, the SAO segment exceeded expectations delivering $103.5 million of operating income with an adjusted operating margin of 21.4 percent driven by higher sales and expanding margins. This represents a meaningful increase over the prior year same quarter of 11.9 percent adjusted operating margin. During the three months ended March 31, 2024, we recorded a noncash goodwill impairment charge of $14.1 million related to our Latrobe Distribution reporting unit.

Current wording

In the quarter ended September 30, 2024, we reported operating income of $113.6 million, an increase of $44.6 million compared to the prior year same quarter. Excluding the special item, as identified below, adjusted operating income was $117.2 million. This represents the most profitable first quarter in the Company's history.

Previous 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.

Current wording

For the three months ended September 30, 2024, we reported net income of $84.8 million, or $1.67 per diluted share. Excluding the special item, as identified below, adjusted earnings per diluted share was $1.73 for the three months ended September 30, 2024. This compares with net income for the three months ended September 30, 2023 of $43.9 million, or $0.88 per diluted share. The results for the three months ended September 30, 2024 reflect an ongoing improvement in product mix with a shift in capacity to more complex, higher value materials as well as pricing actions and expanding operational efficiencies compared to the three months ended September 30, 2023.

Previous 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.

Current wording

Net sales for the three months ended September 30, 2024 were $717.6 million, which was a 10 percent increase over the three months ended September 30, 2023. Excluding surcharge revenue, sales increased 17 percent on a 3 percent increase in shipment volume from the three months ended September 30, 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 Energy during the three months ended September 30, 2024, compared to the three months ended September 30, 2023. Excluding surcharge revenue, sales in the Aerospace and Defense end-use market increased 34 percent compared to the three months ended September 30, 2023.

Previous 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.

Current wording

Geographically, sales in the United States increased 7 percent from the three months ended September 30, 2023, to $421.1 million. Excluding surcharge revenue, domestic sales increased 15 percent from the three months ended September 30, 2023, driven by stronger demand in the Aerospace and Defense end-use market. Sales outside the United States increased 15 percent from the three months ended September 30, 2023, to $296.5 million for the three months ended September 30, 2024. Excluding surcharge revenue, sales outside the United States increased 21 percent from the three months ended September 30, 2023, reflecting stronger demand in the Aerospace and Defense end-use market in the European and South America regions as well as higher sales in the Medical and Energy end-use markets in the European and Asia Pacific regions compared to the three months ended September 30, 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 $0.1 million decrease in net sales during the three months ended September 30, 2024, compared to the three months ended September 30, 2023. Net sales outside the United States represented 41 percent and 40 percent of total net sales for the three months ended September 30, 2024 and 2023, respectively.

Previous 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:

Current wording

We sell to customers across diversified end-use markets. We believe that disclosing 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

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.

Current wording

Sales to the Aerospace and Defense end-use market increased 24 percent from the three months ended September 30, 2023, to $437.4 million. Excluding surcharge revenue, sales increased 34 percent from the three months ended September 30, 2023, on a 24 percent increase in shipment volume. The results for the three months ended September 30, 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, despite near-term Aerospace supply chain uncertainty. The three months ended September 30, 2024, also reflect higher sales in the Defense end-use market in response to global threats.

Previous 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.

Current wording

Medical end-use market sales increased 9 percent from the three months ended September 30, 2023, to $86.9 million. Excluding surcharge revenue, sales increased 10 percent on 16 percent lower shipment volume from the three months ended September 30, 2023. For the three months ended September 30, 2024, results reflect realized price increases particularly in the orthopedic and dental sub-markets compared to the three months ended September 30, 2023.

Previous 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.

Current wording

Sales to the Energy end-use market of $52.5 million in the three months ended September 30, 2024 reflect a 17 percent increase from the three months ended September 30, 2023. Excluding surcharge revenue, sales increased 35 percent on a 29 percent increase in shipment volume from the three months ended September 30, 2023. The results reflect higher demand in the power generation sub-market for industrial gas turbine refurbishments partially offset by decreased rig counts and demand for material used in the oil and gas sub-market compared to the three months ended September 30, 2023.

Previous wording

Transportation end-use market sales decreased 35 percent from the three months ended March 31, 2023, to $34.4 million. Excluding surcharge revenue, sales decreased 23 percent on a 35 percent decrease in shipment volume from the three months ended March 31, 2023. The results reflect declining light and heavy-duty build rates compared to the three months ended March 31, 2023.

Current wording

Transportation end-use market sales decreased 33 percent from the three months ended September 30, 2023, to $28.3 million. Excluding surcharge revenue, sales decreased 28 percent on a 29 percent decrease in shipment volume from the three months ended September 30, 2023. The results reflect declining light and heavy-duty build rates compared to the three months ended September 30, 2023.

Previous wording

Industrial and Consumer end-use market sales decreased 25 percent from the three months ended March 31, 2023, to $97.6 million. Excluding surcharge revenue, sales decreased 19 percent on 37 percent lower shipment volume from the three months ended March 31, 2023. The results reflect lower demand for most applications in the Industrial and Consumer end-use market partially offset by an increase in the electronics sub-market compared to the three months ended March 31, 2023.

Current wording

Industrial and Consumer end-use market sales decreased 13 percent from the three months ended September 30, 2023, to $91.2 million. Excluding surcharge revenue, sales decreased 9 percent on 28 percent lower shipment volume from the three months ended September 30, 2023. The results reflect lower demand for most applications in the Industrial and Consumer end-use market partially offset by an increase in the consumer sporting goods sub-market compared to the three months ended September 30, 2023.

Previous 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.

Current wording

Our gross profit in the three months ended September 30, 2024, increased to $176.3 million, or 24.6 percent of net sales, as compared with $124.1 million, or 19.0 percent of net sales in the three months ended September 30, 2023. Excluding the impact of surcharge revenue, our adjusted gross margin in the three months ended September 30, 2024, was 30.5 percent as compared to 25.2 percent in the three months ended September 30, 2023. The increased gross profit for the three months ended September 30, 2024 reflects an ongoing improvement in product mix with a shift in capacity to more complex, higher value materials as well as pricing actions and expanding operational efficiencies.

Previous wording

While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin for the comparative periods. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.

Current wording

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

Previous 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.

Current wording

Selling, general and administrative expenses in the three months ended September 30, 2024, were $59.1 million or 8.2 percent of net sales (10.2 percent of net sales excluding surcharge) as compared with $55.1 million or 8.5 percent of net sales (11.2 percent of net sales excluding surcharge) in the three months ended September 30, 2023. The selling, general and administrative expenses for the three months ended September 30, 2024 reflect higher salary, benefit and variable compensation costs compared to the three months ended September 30, 2023.

Previous 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.

Current wording

Our operating income in the three months ended September 30, 2024, was $113.6 million, or 15.8 percent of net sales, as compared with operating income of $69.0 million, or 10.6 percent of net sales, in the three months ended September 30, 2023. Excluding surcharge revenue and the special item, adjusted operating margin was 20.3 percent for the three months ended September 30, 2024, as compared with 14.0 percent for the three months ended September 30, 2023. The operating results for the three months ended September 30, 2024 reflect an ongoing improvement in product mix with a shift in capacity to more complex, higher value materials as well as pricing actions and expanding operational efficiencies compared to the three months ended September 30, 2023. During the three months ended September 30, 2024, we recognized restructuring and asset impairment charges of $3.6 million related to actions taken to streamline operations in our Carpenter Additive business in the PEP segment.

Previous 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.

Current wording

Interest expense, net for the three months ended September 30, 2024, was $12.4 million compared with $12.7 million in the three months ended September 30, 2023. Capitalized interest reduced interest expense by $0.4 million for the three months ended September 30, 2024, and $0.5 million for the three months ended September 30, 2023. The lower interest expense, net is due to no short-term borrowings under our Credit Facility in the three months ended September 30, 2024, compared to interest on borrowings in the three months ended September 30, 2023.

Previous 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.

Current wording

Other expense, net for the three months ended September 30, 2024, was $0.1 million as compared with $4.0 million of other expense, net for the three months ended September 30, 2023. The three months ended September 30, 2024, reflects $3.9 million of expense from pension earnings, interest and deferrals partially offset by interest income and favorable market returns on investments used to fund Company-owned life insurance contracts and investments held in rabbi trusts. The three months ended September 30, 2023 includes $3.5 million of expense from pension earnings, interest and deferrals.

Previous 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.

Current wording

Income tax expense was $16.3 million, or 16.1 percent of pre-tax income for the three months ended September 30, 2024, as compared with income tax expense of $8.4 million, or 16.1 percent of pre-tax income for the three months ended September 30, 2023. Income tax expense for the three months ended September 30, 2024 includes discrete tax benefits of $6.8 million attributable to employee share-based compensation and $0.9 million for the impact of restructuring charges. Income tax expense for the three months ended September 30, 2023, included a discrete tax benefit of $4.1 million attributable to employee share-based compensation. Also included was the unfavorable impact of losses in certain foreign jurisdictions for which no tax benefit can be recognized.

Previous wording

On October 8, 2021, the Organization for Economic Co-operation and Development ("OECD") released a statement on the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, which agreed to a two-pillar solution to address tax challenges of the digital economy. On December 20, 2021, the OECD released Pillar Two model rules defining a 15 percent global minimum tax rate for large multinational corporations. The OECD continues to release additional guidance and countries are implementing legislation with widespread adoption of the Pillar Two Framework expected by calendar year 2024. We are continuing to evaluate the Pillar Two Framework and its potential impact on future periods.

Current wording

On October 8, 2021, the Organization for Economic Co-operation and Development ("OECD") released a statement on the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, which agreed to a two-pillar solution to address tax challenges of the digital economy. On December 20, 2021, the OECD released Pillar Two model rules defining a 15 percent global minimum tax rate for large multinational corporations. The OECD continues to release additional guidance and countries are implementing legislation with widespread adoption of the Pillar Two Framework expected by calendar year 2024. We determined the Pillar Two Framework does not have a significant impact on our financial position, results of operations or cash flows.

Previous wording

We have two reportable business segments: SAO and PEP.

Current wording

We have two reportable business segments: SAO and PEP. For more detailed segment information, see Note 16 of the Notes to Consolidated Financial Statements included in Item 1.

Previous 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.

Current wording

Net sales for the three months ended September 30, 2024 for the SAO segment increased 13 percent to $645.1 million, as compared with $570.1 million in the three months ended September 30, 2023. Excluding surcharge revenue, net sales for the three months ended September 30, 2024 increased 22 percent on flat shipment volume compared to the three months ended September 30, 2023. The higher sales excluding surcharge revenue in the SAO segment reflect double-digit percentage growth in the end-use markets of Aerospace and Defense, Medical and Energy driven by productivity gains, stronger product mix and pricing actions compared to the three months ended September 30, 2023.

Previous wording

Operating income for the SAO segment was $103.5 million or 17.0 percent of net sales (21.4 percent of net sales excluding surcharge revenue) in the three months ended March 31, 2024, as compared with operating income of $49.0 million or 8.1 percent of net sales (11.9 percent of net sales excluding surcharge revenue) in the three months ended March 31, 2023. The operating income for the three months ended March 31, 2024 reflects stronger product mix and improved operational efficiencies, partially offset by inflationary cost increases compared to the three months ended March 31, 2023.

Current wording

Operating income for the SAO segment was $134.5 million or 20.8 percent of net sales (26.3 percent of net sales excluding surcharge revenue) in the three months ended September 30, 2024, as compared with operating income of $80.8 million or 14.2 percent of net sales (19.4 percent of net sales excluding surcharge revenue) in the three months ended September 30, 2023. The operating income for the three months ended September 30, 2024 reflects stronger product mix and improved operational efficiencies compared to the three months ended September 30, 2023.

Previous 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.

Current wording

Net sales for the three months ended September 30, 2024 for the PEP segment decreased 1 percent to $100.8 million, as compared with $101.8 million in the three months ended September 30, 2023. Excluding surcharge revenue, net sales for the three months ended September 30, 2024 decreased 1 percent on 14 percent higher shipment volume compared to the three months ended September 30, 2023. The current quarter results reflect lower sales in the Distribution end-use market partially offset by higher sales in the Medical end-use market. The three months ended September 30, 2024 also reflect fewer shipment days due to mandatory weather-related closures.

Previous 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.

Current wording

Operating income for the PEP segment was $7.3 million or 7.2 percent of net sales (7.9 percent of net sales excluding surcharge revenue) in the three months ended September 30, 2024, compared with operating income of $9.1 million or 8.9 percent of net sales (9.8 percent of net sales excluding surcharge revenue) in the three months ended September 30, 2023. The lower results for the three months ended September 30, 2024 reflect weaker demand conditions and lower margins compared to the three months ended September 30, 2023.

Previous wording

During the nine months ended March 31, 2024, we generated cash from operating activities of $105.4 million as compared to cash used for operating activities of $160.2 million in the nine months ended March 31, 2023. Our adjusted free cash flow, which we define under "Non-GAAP Financial Measures" below, was positive $36.6 million as compared to negative $211.7 million for the nine months ended March 31, 2023. The improvement in cash from operating activities and adjusted free cash flow for the nine months ended March 31, 2024 resulted from higher earnings after noncash adjustments to net income, lower use of cash for inventory and improvements in working capital compared to the nine months ended March 31, 2023. Cash used to build inventory was $155.6 million in the nine month period ended March 31, 2024, compared to $213.5 million in the nine month period ended March 31, 2023. During the nine months ended March 31, 2024, we generated $9.3 million of cash from accounts receivable compared to cash used for accounts receivable of $130.6 million in the nine months ended March 31, 2023.

Current wording

During the three months ended September 30, 2024, we generated cash from operating activities of $40.2 million as compared to $7.4 million in the three months ended September 30, 2023. Our adjusted free cash flow, which we define under "Non-GAAP Financial Measures" below, was positive $13.3 million as compared to negative $14.6 million for the three months ended September 30, 2023. The improvement in cash from operating activities and adjusted free cash flow for the three months ended September 30, 2024, resulted from higher earnings after noncash adjustments to net income partially offset by higher pension contributions and capital expenditures compared to the three months ended September 30, 2023. Cash used to build inventory was $16.8 million in the three-month period ended September 30, 2024, compared to $67.8 million in the three month period ended September 30, 2023. During the three months ended September 30, 2024, cash used for accounts receivable was $3.4 million compared to $18.4 million of cash generated from accounts receivable in the three months ended September 30, 2023.

Previous wording

Capital expenditures for property, plant, equipment and software were $68.9 million for the nine months ended March 31, 2024, as compared to $51.5 million for the nine months ended March 31, 2023. In fiscal year 2024, we expect capital expenditures to be approximately $100.0 million.

Current wording

Capital expenditures for property, plant, equipment and software were $26.9 million for the three months ended September 30, 2024, as compared to $22.0 million for the three months ended September 30, 2023. In fiscal year 2025, we expect capital expenditures to be approximately $125.0 million.

Previous wording

During the nine months ended March 31, 2024, we made pension contributions of $4.9 million to our qualified defined benefit pension plans. We currently expect to contribute $6.4 million to our qualified defined benefit pension plans during the remainder of fiscal year 2024.

Current wording

During the three months ended September 30, 2024, we made pension contributions of $9.6 million to our qualified defined benefit pension plans. We currently expect to contribute $17.0 million to our qualified defined benefit pension plans during the remainder of fiscal year 2025.

Previous wording

As of March 31, 2024, the borrowing rate for the Credit Facility was 7.08% however we had no short-term borrowings. As of March 31, 2024, we had $1.2 million of issued letters of credit under the Credit Facility and the balance of the Credit Facility, $348.8 million, remains available to us. From time to time during the nine months ended March 31, 2024, we borrowed under our Credit Facility. The weighted average daily borrowing under the Credit Facility during the nine months ended March 31, 2024, was approximately $25.4 million with daily outstanding borrowings ranging from $0.0 million to $67.8 million.

Current wording

As of September 30, 2024, the borrowing rate for the Credit Facility was 7.09% however, we had no short-term borrowings. As of September 30, 2024, we had $1.1 million of issued letters of credit under the Credit Facility and the balance of the Credit Facility, $348.9 million, remains available to us.

Previous wording

We believe that our total liquidity of $402.3 million as of March 31, 2024, which includes total cash and cash equivalents of $53.5 million and available borrowing capacity of $348.8 million under our Credit Facility, will be sufficient to fund our cash needs over the foreseeable future.

Current wording

We believe that our total liquidity of $499.1 million as of September 30, 2024, which includes total cash and cash equivalents of $150.2 million and available borrowing capacity of $348.9 million under the Credit Facility, will be sufficient to fund our cash needs over the foreseeable future.

Previous wording

As of March 31, 2024, we had cash and cash equivalents of approximately $16.2 million held at various foreign subsidiaries. Our global cash deployment considers, among other things, the geographic and institutional location of our subsidiaries' cash balances, the locations of our anticipated liquidity needs and the cost to access international cash balances, as necessary. During the nine months ended March 31, 2024, we repatriated cash of approximately $4.0 million from foreign jurisdictions. From time to time, we may make short-term intercompany borrowings against our cash held outside the United States in order to reduce or eliminate any required borrowing under our Credit Facility.

Current wording

As of September 30, 2024, we had cash and cash equivalents of $22.2 million held at various foreign subsidiaries. Our global cash deployment considers, among other things, the geographic and institutional location of our subsidiaries' cash balances, the locations of our anticipated liquidity needs and the cost to access international cash balances, as necessary. During the three months ended September 30, 2024, we did not repatriate cash from foreign jurisdictions. From time to time, we may make short-term intercompany borrowings against our cash held outside the United States in order to reduce or eliminate any required borrowing under our Credit Facility.

Previous wording

This report includes discussions of net sales as adjusted to exclude the impact of raw material surcharge and the resulting impact on gross margins, which represent financial measures that have not been determined in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our board of directors and others. See our earlier discussion of "Gross Profit" for a reconciliation of net sales and gross margin, excluding surcharge revenue, to net sales as determined in accordance with U.S. GAAP. Net sales and gross margin excluding surcharge revenue is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, net sales and gross margin calculated in accordance with U.S. GAAP.

Current wording

This report includes discussions of net sales as adjusted to exclude the impact of raw material surcharge and the resulting impact on gross margin, which represent financial measures that have not been determined in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our Board of Directors and others. See our earlier discussion of "Gross Profit" for a reconciliation of net sales and gross margin, excluding surcharge revenue, to net sales as determined in accordance with U.S. GAAP. Net sales and gross margin excluding surcharge revenue is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, net sales and gross margin calculated in accordance with U.S. GAAP.

Previous wording

Adjusted Operating Margin Excluding Surcharge Revenue and Special Items

Current wording

Adjusted Operating Income and Adjusted Operating Margin Excluding Surcharge Revenue and Special Items

Previous wording

This report includes discussions of operating margin as adjusted to exclude the impact of raw material surcharge revenue and special items which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss this financial measure because management believes removing the impact of raw material surcharge from net sales provides a more consistent and meaningful basis for comparing results of operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding special items from operating margin is helpful in analyzing our operating performance, as these items are not indicative of ongoing operating performance. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our board of directors and others. See our earlier discussion of operating income for a reconciliation of operating income and operating margin excluding surcharge revenue and special items to operating income and operating margin determined in accordance with U.S. GAAP. Operating margin excluding surcharge revenue and special items is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, operating margin calculated in accordance with U.S. GAAP.

Current wording

This report includes discussions of operating income and operating margin as adjusted to exclude the impact of raw material surcharge revenue and special items which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales provides a more consistent and meaningful basis for comparing results of operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding special items from operating income and operating margin is helpful in analyzing our operating performance, as these items are not indicative of ongoing operating performance. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our Board of Directors and others. See our earlier discussion of operating income for a reconciliation of adjusted operating income and adjusted operating margin excluding surcharge revenue and special items to operating income and operating margin determined in accordance with U.S. GAAP. Adjusted operating income and adjusted operating margin excluding surcharge revenue and special items are not U.S. GAAP financial measures and should not be considered in isolation of, or as a substitute for, operating income and operating margin calculated in accordance with U.S. GAAP.

Previous wording

The following provides a reconciliation of adjusted free cash flow, as used in this report, to its most directly comparable U.S. GAAP financial measure:

Current wording

This report includes discussions of adjusted free cash flow which is a non-GAAP financial measure and may not be comparable to adjusted free cash flow reported by other companies. The following provides a reconciliation of adjusted free cash flow, as used in this report, to its most directly comparable U.S. GAAP financial measure: