Carpenter Technology Corporation
10/22/2026 | Press release | Distributed by Public on 10/22/2026 14:06
Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
Background and General
We are a producer and distributor of premium specialty alloys, including titanium alloys, powder metals, stainless steels, alloy steels and tool steels. We are a recognized leader in high-performance specialty alloy 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.
As part of our overall business strategy, we have sought out and considered opportunities related to strategic acquisitions and joint collaborations as well as possible business unit dispositions aimed at broadening our offering to the marketplace. We have participated with other companies to explore potential terms and structures of such opportunities and expect that we will continue to evaluate these opportunities.
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 2026 Form 10-K. Our discussions here focus on our results during or as of the three month period ended September 30, 2026, and the comparable period of fiscal year 2026, and to the extent applicable, on material changes from information discussed in the 2026 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 2026 Form 10-K for detailed background information and with any such intervening Form 8-K.
Impact of Raw Material Prices and Product Mix
We value most of our inventory utilizing the LIFO inventory costing methodology. Under the LIFO inventory costing method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials may have been acquired at potentially significantly different values due to the length of time from the acquisition of the raw materials to the sale of the processed finished goods to the customers. In a period of rising raw material costs, the LIFO inventory valuation normally results in higher cost of sales. Conversely, in a period of decreasing raw material costs, the LIFO inventory valuation normally results in lower cost of sales.
The volatility of the costs of raw materials has impacted our operations over the past several years. We, and others in our industry, generally have been able to pass cost increases on major raw materials through to our customers using surcharges that are structured to recover increases in raw material costs including the impact of tariffs. Generally, the formula used to calculate a surcharge is based on published prices of the respective raw materials for the previous month which correlates to the prices we pay for our raw material purchases. However, a portion of our surcharges to customers may be calculated using a different surcharge formula or may be based on the raw material prices at the time of order, which creates a lag between surcharge revenue and corresponding raw material costs recognized in cost of sales. The surcharge mechanism protects our net income on such sales except for the lag effect discussed above. However, surcharges have had a dilutive effect on our gross margin and operating margin percentages as described later in this report.
During the three months ended September 30, 2026, approximately 43 percent of our net sales were 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 may 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.
We produce hundreds of grades of materials, with a wide range of pricing and profit levels depending on the grade. In addition, our product mix within a period is subject to the fluctuating order patterns of our customers as well as decisions we may make on participation in certain products based on available capacity, including the impacts of capacity commitments we may have under existing customer agreements. While we expect to see positive contribution from a more favorable product mix in our margin performance over time, the impact by period may fluctuate and period-to-period comparisons may vary.
Net Pension Expense
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 re-measurement event occurs. We currently expect the total net pension expense for fiscal year 2027 will be $5.9 million as compared with total net pension expense of $14.6 million in fiscal year 2026. The lower expected expense for fiscal year 2027 reflects higher plan assets and a higher expected return on plan assets compared to fiscal year 2026.
The following is the net pension expense for the three months ended September 30, 2026 and September 30, 2025:
|
Three Months Ended September 30, |
||||||||||||||
| ($ in millions) | 2026 | 2025 | ||||||||||||
| Pension plans | $ | 3.4 | $ | 4.4 | ||||||||||
| Other postretirement plans | (1.9) | (0.8) | ||||||||||||
| Net pension expense | $ | 1.5 | $ | 3.6 | ||||||||||
The service cost component of net pension expense represents the estimated cost of future pension liabilities earned associated with active employees. The pension earnings, interest and deferrals is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans and amortization of actuarial gains and losses and prior service costs and benefits.
Net pension expense is recorded in accounts that are included in cost of sales, selling, general and administrative expenses and other income, 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, 2026 and 2025:
|
Three Months Ended September 30, |
||||||||||||||
| ($ in millions) | 2026 | 2025 | ||||||||||||
| Service cost included in Cost of sales | $ | 1.9 | $ | 1.9 | ||||||||||
| Service cost included in Selling, general and administrative expenses | 0.3 | 0.3 | ||||||||||||
|
Pension earnings, interest and deferrals included in Other income, net
|
(0.7) | 1.4 | ||||||||||||
| Net pension expense | $ | 1.5 | $ | 3.6 | ||||||||||
As of September 30, 2026 and June 30, 2026, service cost amounts related to the net pension expense capitalized in gross inventory were $1.1 million and $1.0 million, respectively.
Operating Performance Overview and Outlook
In the quarter ended September 30, 2026, we reported operating income of $196.4 million compared to $153.3 million in the quarter ended September 30, 2025. The results for the quarter ended September 30, 2026, represent an increase of 28 percent over the quarter ended September 30, 2025, establishing a strong foundation for the rest of the fiscal year. The SAO segment realized $216.3 million of operating income with an operating margin of 29.6 percent, or adjusted operating margin of 37.7 percent. This compares to $170.7 million of operating income with an operating margin of 25.9 percent, or adjusted operating margin of 32.0 percent, during the quarter ended September 30, 2025. The SAO margin expansion was driven by productivity improvements, mix management and the benefits of pricing actions. These factors enabled SAO to deliver its strongest first quarter operating performance to date.
The strong operating performance was accompanied by an increase in operating cash flow, reflecting higher earnings partially offset by changes in working capital, primarily inventory in the three months ended September 30, 2026. We generated $52.8 million of cash from operating activities in the three months ended September 30, 2026, as compared to $39.2 million in the three months ended September 30, 2025. Free cash flow was negative $24.8 million in the three months ended September 30, 2026, as compared with negative $3.4 million in the three months ended September 30, 2025. The unfavorable change in free cash flow reflects increased capital expenditures, namely from the brownfield expansion compared to the three months ended September 30, 2025. With a strong balance sheet and meaningful cash generation from operations, we will continue to take a balanced approach to capital allocation: sustaining our current asset base to achieve our targets, returning cash to stockholders through our stock buyback and dividend programs and investing in incremental growth initiatives, including the brownfield expansion project. During the three months ended September 30, 2026, we repurchased 241,924 shares of our common stock on the open market for an aggregate of $133.9 million. Additionally, we funded dividend payments of $9.9 million.
We continue to closely monitor the evolving conflict among the United States, Israel and Iran and its impact to the end-use markets we serve. We also continue to monitor the ongoing tariff changes and engage with our customers and suppliers to analyze how these items could impact our business. We, as well as others in our industry, have established long-standing surcharge mechanisms to pass through changes in raw material prices to our customers. We have in the past used and plan to continue using these surcharge mechanisms to pass through the impact of any incremental tariffs on our raw material costs to our customers. As such, at this time and based on current information, we believe these items will not have a material impact on the Company.
Results of Operations - Three Months Ended September 30, 2026 vs. Three Months Ended September 30, 2025
For the three months ended September 30, 2026, we reported net income of $162.5 million, or $3.25 earnings per diluted share. This compares with net income for the three months ended September 30, 2025, of $122.5 million, or $2.43 earnings per diluted share. The results for the three months ended September 30, 2026, reflect strengthening demand, productivity improvements, mix management and the benefits of pricing actions compared to the three months ended September 30, 2025.
Net Sales
Net sales for the three months ended September 30, 2026, were $798.2 million, which is a 9 percent increase over the three months ended September 30, 2025. Excluding surcharge revenue, sales increased 5 percent from the three months ended September 30, 2025. The results excluding surcharge revenue primarily reflect the impact of price increases and stronger product demand for materials used in the end-use markets of Aerospace and Defense and Industrial and Consumer during the three months ended September 30, 2026, compared to the three months ended September 30, 2025. Excluding surcharge revenue, sales in the Aerospace and Defense end-use market increased 10 percent compared to the three months ended September 30, 2025.
Geographically, domestic net sales increased 7 percent from the three months ended September 30, 2025, to $464.6 million. Excluding surcharge revenue, domestic sales increased 4 percent from the three months ended September 30, 2025, driven by higher sales in the Aerospace and Defense and Industrial and Consumer end-use markets. Sales outside the United States increased 11 percent from the three months ended September 30, 2025, to $333.6 million for the three months ended September 30, 2026. Excluding surcharge revenue, sales outside the United States increased 7 percent from the three months ended September 30, 2025. This reflects higher sales in the Aerospace and Defense end-use market in all regions partially offset by lower sales in the Energy end-use market in the European region and lower sales in the Medical end-use market in all regions compared to the three months ended September 30, 2025. A portion of our sales outside the United States are denominated in foreign currencies. Fluctuations in foreign currency exchange rates had minimal impact on net sales during the three months ended September 30, 2026, compared to the three months ended September 30, 2025. Net sales outside the United States represented 42 percent and 41 percent of net sales for the three months ended September 30, 2026 and 2025, respectively.
Sales by End-Use Markets
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 principal end-use markets:
|
Three Months Ended September 30, |
$ Increase (Decrease) |
% Increase (Decrease) |
||||||||||||||||||||||||
| ($ in millions) | 2026 | 2025 | ||||||||||||||||||||||||
| Aerospace and Defense | $ | 534.6 | $ | 470.9 | $ | 63.7 | 14 | % | ||||||||||||||||||
| Medical | 65.5 | 74.5 | (9.0) | (12) | % | |||||||||||||||||||||
| Energy | 46.5 | 54.7 | (8.2) | (15) | % | |||||||||||||||||||||
| Transportation | 26.8 | 22.8 | 4.0 | 18 | % | |||||||||||||||||||||
| Industrial and Consumer | 102.7 | 92.9 | 9.8 | 11 | % | |||||||||||||||||||||
| Distribution | 22.1 | 17.9 | 4.2 | 23 | % | |||||||||||||||||||||
| Total net sales | $ | 798.2 | $ | 733.7 | $ | 64.5 | 9 | % | ||||||||||||||||||
The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
|
Three Months Ended September 30, |
$ Increase (Decrease) |
% Increase (Decrease) |
||||||||||||||||||||||||
| ($ in millions) | 2026 | 2025 | ||||||||||||||||||||||||
| Aerospace and Defense | $ | 425.4 | $ | 388.3 | $ | 37.1 | 10 | % | ||||||||||||||||||
| Medical | 51.7 | 61.6 | (9.9) | (16) | % | |||||||||||||||||||||
| Energy | 32.9 | 42.5 | (9.6) | (23) | % | |||||||||||||||||||||
| Transportation | 19.8 | 17.9 | 1.9 | 11 | % | |||||||||||||||||||||
| Industrial and Consumer | 83.2 | 75.0 | 8.2 | 11 | % | |||||||||||||||||||||
| Distribution | 21.8 | 17.8 | 4.0 | 22 | % | |||||||||||||||||||||
| Total net sales excluding surcharge revenue | $ | 634.8 | $ | 603.1 | $ | 31.7 | 5 | % | ||||||||||||||||||
Aerospace and Defense end-use market sales increased 14 percent from the three months ended September 30, 2025, to $534.6 million. Excluding surcharge revenue, sales increased 10 percent from the three months ended September 30, 2025. The results for the three months ended September 30, 2026, reflect double-digit increases in the Aerospace engine, fastener and structural sub-markets driven by increasing build rates and the need to maintain aging fleets.
Medical end-use market sales decreased 12 percent from the three months ended September 30, 2025, to $65.5 million. Excluding surcharge revenue, sales decreased 16 percent from the three months ended September 30, 2025. For the three months ended September 30, 2026, results reflect lower shipments as a result of the medical supply chain managing inventory levels closely, partially offset by share gains in the orthopedic sub-market compared to the three months ended September 30, 2025.
Energy end-use market sales of $46.5 million in the three months ended September 30, 2026, reflect a 15 percent decrease from the three months ended September 30, 2025. Excluding surcharge revenue, sales decreased 23 percent from the three months ended September 30, 2025. The results reflect lower sales in both the power generation and oil and gas sub-markets compared to the three months ended September 30, 2025.
Transportation end-use market sales increased 18 percent from the three months ended September 30, 2025, to $26.8 million. Excluding surcharge revenue, sales increased 11 percent from the three months ended September 30, 2025. The results reflect stronger production rates for light, medium and heavy-duty vehicles compared to the three months ended September 30, 2025.
Industrial and Consumer end-use market sales increased 11 percent from the three months ended September 30, 2025, to $102.7 million. Excluding surcharge revenue, sales increased 11 percent from the three months ended September 30, 2025. The results reflect higher demand across many Industrial sub-markets, including semiconductor and fluid control materials, partially offset by lower demand for consumer electronics materials compared to the three months ended September 30, 2025.
Gross Profit
Our gross profit in the three months ended September 30, 2026, increased to $256.3 million, or 32.1 percent of net sales, as compared with $216.4 million, or 29.5 percent of net sales in the three months ended September 30, 2025. Excluding the impact of surcharge revenue, our adjusted gross margin in the three months ended September 30, 2026, was 40.4 percent as compared to 35.9 percent in the three months ended September 30, 2025. The increased gross profit for the three months ended September 30, 2026, reflects a combination of higher demand in the Aerospace and Defense and Industrial and Consumer end-use markets, productivity improvements, mix management and the benefits of pricing actions compared to the three months ended September 30, 2025.
Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. We present and discuss these financial measures because management believes removing the impact of this item provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. The following represents a summary of the dilutive impact of the surcharge on gross margin.
|
Three Months Ended September 30, |
||||||||||||||
| ($ in millions) | 2026 | 2025 | ||||||||||||
| Net sales | $ | 798.2 | $ | 733.7 | ||||||||||
| Less: surcharge revenue | 163.4 | 130.6 | ||||||||||||
| Net sales excluding surcharge revenue | $ | 634.8 | $ | 603.1 | ||||||||||
| Gross profit | $ | 256.3 | $ | 216.4 | ||||||||||
| Gross margin | 32.1 | % | 29.5 | % | ||||||||||
| Gross margin excluding surcharge revenue | 40.4 | % | 35.9 | % | ||||||||||
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the three months ended September 30, 2026, were $59.9 million or 7.5 percent of net sales (9.4 percent of net sales excluding surcharge) as compared with $63.1 million or 8.6 percent of net sales (10.5 percent of net sales excluding surcharge) in the three months ended September 30, 2025. The selling, general and administrative expenses for the three months ended September 30, 2026, reflect lower variable compensation costs compared to the three months ended September 30, 2025.
Operating Income
Our operating income in the three months ended September 30, 2026, was $196.4 million, or 24.6 percent of net sales, as compared with operating income of $153.3 million, or 20.9 percent of net sales, in the three months ended September 30, 2025. Excluding surcharge revenue, adjusted operating margin was 30.9 percent for the three months ended September 30, 2026, as compared with 25.4 percent for the three months ended September 30, 2025. The operating results for the three months ended September 30, 2026, reflect a combination of higher demand in the Aerospace and Defense and Industrial and Consumer end-use markets, productivity improvements, mix management and the benefits of pricing actions compared to the three months ended September 30, 2025.
The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.
|
Three Months Ended September 30, |
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| ($ in millions) | 2026 | 2025 | ||||||||||||
| Net sales | $ | 798.2 | $ | 733.7 | ||||||||||
| Less: surcharge revenue | 163.4 | 130.6 | ||||||||||||
| Net sales excluding surcharge revenue | $ | 634.8 | $ | 603.1 | ||||||||||
| Operating income | $ | 196.4 | $ | 153.3 | ||||||||||
| Operating margin | 24.6 | % | 20.9 | % | ||||||||||
| Adjusted operating margin excluding surcharge revenue | 30.9 | % | 25.4 | % | ||||||||||
Interest Expense, Net
Interest expense, net for the three months ended September 30, 2026, was $7.1 million compared with $11.5 million in the three months ended September 30, 2025. Capitalized interest reduced interest expense by $3.5 million for the three months ended September 30, 2026, and $1.2 million for the three months ended September 30, 2025. The decrease in interest expense, net in the three months ended September 30, 2026, is due to higher capitalized interest and a lower interest rate on the 2034 Notes as compared to the notes that were prepaid and redeemed in full in November 2025.
Other Income, Net
Other income, net for the three months ended September 30, 2026, was $3.1 million as compared with $3.0 million of other income, net for the three months ended September 30, 2025. The three months ended September 30, 2026, reflect $0.7 million of income from pension earnings, interest and deferrals compared to $1.4 million of expense in the three months ended September 30, 2025, driven primarily by greater expected returns on plan assets during fiscal year 2027.
Income Taxes
Income tax expense was $29.9 million, or 15.5 percent of income before income taxes for the three months ended September 30, 2026, as compared with income tax expense of $22.3 million, or 15.4 percent of income before income taxes for the three months ended September 30, 2025.
Income tax expense for the three months ended September 30, 2026, includes discrete tax benefits of $12.1 million attributable to employee share-based compensation. Income tax expense for the three months ended September 30, 2025 included discrete tax benefits of $10.8 million attributable to employee share-based compensation.
The One Big Beautiful Bill Act ("OBBBA") was signed into law on July 4, 2025. The provisions of the OBBBA have varying effective dates. The OBBBA allows an elective deduction for domestic research and development expenses, a reinstatement of elective 100 percent first-year bonus depreciation and modifies the tax rates on Foreign-Derived Deduction Eligible Income and income from non-U.S. subsidiaries (Net CFC Tested Income), among other provisions. The impact of the provisions in the OBBBA are dependent on our facts in each fiscal year and guidance from the Internal Revenue Service; however, they have not had a material impact on our effective tax rate.
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. In June 2025, the U.S. and the G-7 countries announced the intention to reach an agreement that would exempt U.S. parented multinationals from certain of the Pillar Two rules. In January 2026 additional guidance, the "Side-by-Side Package," was released. We are currently evaluating the guidance. The Pillar Two Framework as it exists today does not have a significant impact on our financial position, results of operations or cash flows.
Business Segment Results
Summary information about our operating results on a segment basis is set forth below. We have two reportable business segments: SAO and PEP. For more detailed segment information, see Note 15 of the Notes to Consolidated Financial Statements included in Item 1.
The following table includes comparative information for our net sales by business segment:
| Net sales |
Three Months Ended September 30, |
$ Increase (Decrease) |
% Increase (Decrease) |
|||||||||||||||||||||||
| ($ in millions) | 2026 | 2025 | ||||||||||||||||||||||||
| Specialty Alloys Operations | $ | 730.4 | $ | 659.6 | $ | 70.8 | 11 | % | ||||||||||||||||||
| Performance Engineered Products | 91.1 | 93.6 | (2.5) | (3) | % | |||||||||||||||||||||
| Intersegment | (23.3) | (19.5) | (3.8) | (19) | % | |||||||||||||||||||||
| Total net sales | $ | 798.2 | $ | 733.7 | $ | 64.5 | 9 | % | ||||||||||||||||||
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
| Net sales excluding surcharge revenue |
Three Months Ended September 30, |
$ Increase (Decrease) |
% Increase (Decrease) |
|||||||||||||||||||||||
| ($ in millions) | 2026 | 2025 | ||||||||||||||||||||||||
| Specialty Alloys Operations | $ | 573.5 | $ | 533.9 | $ | 39.6 | 7 | % | ||||||||||||||||||
| Performance Engineered Products | 83.0 | 87.2 | (4.2) | (5) | % | |||||||||||||||||||||
| Intersegment | (21.7) | (18.0) | (3.7) | (21) | % | |||||||||||||||||||||
| Total net sales excluding surcharge revenue | $ | 634.8 | $ | 603.1 | $ | 31.7 | 5 | % | ||||||||||||||||||
The following presents our operating margin excluding the impact of surcharge revenue on net sales for our SAO segment:
| Specialty Alloys Operations |
Three Months Ended September 30, |
|||||||||||||
| ($ in millions) | 2026 | 2025 | ||||||||||||
| Net sales | $ | 730.4 | $ | 659.6 | ||||||||||
| Less: surcharge revenue | 156.9 | 125.7 | ||||||||||||
| Net sales excluding surcharge revenue | $ | 573.5 | $ | 533.9 | ||||||||||
| Operating income | $ | 216.3 | $ | 170.7 | ||||||||||
| Operating margin | 29.6 | % | 25.9 | % | ||||||||||
| Adjusted operating margin excluding surcharge revenue | 37.7 | % | 32.0 | % | ||||||||||
The following presents our operating margin excluding the impact of surcharge revenue on net sales for our PEP segment:
| Performance Engineered Products |
Three Months Ended September 30, |
|||||||||||||
| ($ in millions) | 2026 | 2025 | ||||||||||||
| Net sales | $ | 91.1 | $ | 93.6 | ||||||||||
| Less: surcharge revenue | 8.1 | 6.4 | ||||||||||||
| Net sales excluding surcharge revenue | $ | 83.0 | $ | 87.2 | ||||||||||
| Operating income | $ | 7.3 | $ | 9.4 | ||||||||||
| Operating margin | 8.0 | % | 10.0 | % | ||||||||||
| Adjusted operating margin excluding surcharge revenue | 8.8 | % | 10.8 | % | ||||||||||
Specialty Alloys Operations Segment
Net sales for the three months ended September 30, 2026, for the SAO segment increased 11 percent to $730.4 million, as compared with $659.6 million in the three months ended September 30, 2025. Excluding surcharge revenue, net sales for the three months ended September 30, 2026 increased 7 percent compared to the three months ended September 30, 2025. The higher sales are driven by increased demand in the Aerospace and Defense and Industrial and Consumer end-use markets compared to the three months ended September 30, 2025.
Operating income for the SAO segment was $216.3 million or 29.6 percent of net sales (37.7 percent of net sales excluding surcharge revenue) in the three months ended September 30, 2026, as compared with operating income of $170.7 million or 25.9 percent of net sales (32.0 percent of net sales excluding surcharge revenue) in the three months ended September 30, 2025. The operating income for the three months ended September 30, 2026, reflects a combination of productivity improvements, mix management and the benefits of pricing actions compared to the three months ended September 30, 2025.
Performance Engineered Products Segment
Net sales for the three months ended September 30, 2026, for the PEP segment decreased 3 percent to $91.1 million, as compared with $93.6 million in the three months ended September 30, 2025. Excluding surcharge revenue, net sales for the three months ended September 30, 2026, decreased 5 percent compared to the three months ended September 30, 2025. The current quarter results reflect lower sales in the Medical end-use market partially offset by growth in the Energy and Distribution end-use markets.
Operating income for the PEP segment was $7.3 million or 8.0 percent of net sales (8.8 percent of net sales excluding surcharge revenue) in the three months ended September 30, 2026, compared with operating income of $9.4 million or 10.0 percent of net sales (10.8 percent of net sales excluding surcharge revenue) in the three months ended September 30, 2025. The results for the three months ended September 30, 2026, reflect a reduction in Medical end-use market sales in Titanium partially offset by improving profitability in Additive compared to the three months ended September 30, 2025.
Liquidity and Financial Resources
During the three months ended September 30, 2026, we generated cash from operating activities of $52.8 million as compared to $39.2 million in the three months ended September 30, 2025. Our free cash flow, which we define under "Non-GAAP Financial Measures" below, was negative $24.8 million in the three months ended September 30, 2026, as compared to negative $3.4 million for the three months ended September 30, 2025. The improvement in cash from operating activities for the three months ended September 30, 2026, reflects higher earnings partially offset by changes in working capital, primarily inventory, compared to the three months ended September 30, 2025. Cash used to build inventory was $61.6 million in the three months ended September 30, 2026, compared to $15.6 million of cash generated from inventory in the three months ended September 30, 2025. The unfavorable change in free cash flow reflects increased capital expenditures compared to the prior year period, namely from the brownfield expansion in Athens, Alabama.
Capital expenditures for property, plant, equipment and software were $77.7 million for the three months ended September 30, 2026, as compared to $42.6 million for the three months ended September 30, 2025. In fiscal year 2027, we expect capital expenditures, including the brownfield expansion, to be in the range of $355.0 million to $375.0 million.
We evaluate liquidity needs for alternative uses including funding external growth opportunities, share repurchases as well as funding consistent dividend payments to stockholders. Dividends for the three months ended September 30, 2026, were $9.9 million as compared to $10.1 million in the three months ended September 30, 2025. In the three months ended September 30, 2026 and 2025 we declared and paid quarterly dividends of $0.20 per share. Additionally, we will discretionarily use excess cash for a share repurchase program up to $1.0 billion of our outstanding common stock. During the three months ended September 30, 2026, we repurchased 241,924 shares of our common stock on the open market for an aggregate of $133.9 million. During the three months ended September 30, 2025, we repurchased 200,000 shares for an aggregate of $49.1 million. As of September 30, 2026, $985.0 million remains available for future purchases under the $1.0 billion share repurchase program.
During the three months ended September 30, 2026, we made pension contributions of $8.6 million to our qualified defined benefit pension plans. We currently expect to make required contributions of $16.9 million to our domestic qualified defined benefit pension plans during the remainder of fiscal year 2027.
We have demonstrated the ability to generate cash to meet our needs through cash flows from operations, management of working capital and the ability to access capital markets to supplement internally generated funds. We anticipate that we will continue to do so for the next twelve months and thereafter for the foreseeable future. We target minimum liquidity of $150.0 million, consisting of cash and cash equivalents added to available borrowing capacity under our Credit Facility.
On November 20, 2025, we entered into the Credit Facility with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer and the other lenders, agents and arrangers party thereto. The Credit Facility amended and restated our then existing Second Amended and Restated Credit Agreement dated as of April 14, 2023, which had been set to expire on April 12, 2028. The third amendment and restatement of the Credit Facility extended the maturity to November 20, 2030.
The Credit Facility is an unsecured revolving credit facility with a commitment of $500.0 million subject to the right, from time to time, to request an increase of the commitment not in excess of $650.0 million and provides for the issuance of letters of credit subject to a $40.0 million sub-limit. We have the right to voluntarily prepay and re-borrow loans, to terminate or reduce the commitments under the Credit Facility, and, subject to certain lender approvals, to join subsidiaries as subsidiary borrowers. As of September 30, 2026, the borrowing rate for the Credit Facility was 5.638%, however, we had no short-term borrowings. As of September 30, 2026, we had $0.9 million of issued letters of credit under the Credit Facility and the balance of the Credit Facility, $499.1 million, remains available to us.
We believe that our total liquidity of $658.6 million as of September 30, 2026, which includes total cash and cash equivalents of $159.5 million and available borrowing capacity of $499.1 million under the Credit Facility, will be sufficient to fund our cash needs over the foreseeable future.
As of September 30, 2026, we had cash and cash equivalents of $55.4 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, 2026, we repatriated no 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.
We are subject to certain financial and restrictive covenants under the Credit Facility which require the maintenance of a minimum interest coverage ratio of 3.00 to 1.00 and a consolidated net leverage ratio of no more than 3.50 to 1.00. The restrictions of these covenants (other than the financial ratio covenants) are subject to certain exceptions or threshold triggering amounts or events specified in the Credit Facility, and in some cases the restrictions may be waived by the lenders. As of September 30, 2026, we were in compliance with all of the covenants of the Credit Facility.
The following table shows our actual ratio performance with respect to the financial covenants as of September 30, 2026:
| Covenant | Covenant Requirement | Actual Ratio | ||||||||||||
| Consolidated interest coverage ratio | 3.00 to 1.00 (minimum) | 27.79 to 1.00 | ||||||||||||
| Consolidated net leverage ratio | 3.50 to 1.00 (maximum) | 0.59 to 1.00 | ||||||||||||
To the extent that we do not comply with the current or modified covenants under the Credit Facility, this could reduce our liquidity and flexibility due to potential restrictions on borrowings available to us unless we are able to obtain waivers or modifications of the covenants.
Non-GAAP Financial Measures
The following provides additional information regarding certain non-GAAP financial measures that we use in this report. Our definitions and calculations of these items may not necessarily be the same as those used by other companies.
Net Sales and Gross Margin Excluding Surcharge Revenue
This report includes discussions of net sales as adjusted to exclude the impact of raw material surcharge and the resulting impact on gross 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 are not U.S. GAAP financial measures and should not be considered in isolation of, or as a substitute for, net sales and gross margin calculated in accordance with U.S. GAAP.
Adjusted Operating Margin Excluding Surcharge Revenue
This report includes discussions of operating margin as adjusted to exclude the impact of raw material surcharge revenue. 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. 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 to operating income and operating margin determined in accordance with U.S. GAAP. Operating 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, operating margin calculated in accordance with U.S. GAAP.
Free Cash Flow
This report includes discussions of free cash flow, which is a non-GAAP financial measure and may not be comparable to free cash flow reported by other companies. The following provides a reconciliation of free cash flow, as used in this report, to its most directly comparable U.S. GAAP financial measure:
|
Three Months Ended September 30, |
||||||||||||||
| ($ in millions) | 2026 | 2025 | ||||||||||||
| Net cash provided from operating activities | $ | 52.8 | $ | 39.2 | ||||||||||
| Purchases of property, plant, equipment and software | (77.7) | (42.6) | ||||||||||||
| Proceeds from disposals of property, plant and equipment | 0.1 | - | ||||||||||||
| Free cash flow | $ | (24.8) | $ | (3.4) | ||||||||||
Management believes that the presentation of free cash flow provides useful information to investors regarding our financial condition because it is a measure of cash generated which management evaluates for alternative uses. It is management's current intention to use excess cash to fund investments in capital equipment, acquisition opportunities and consistent dividend payments. Additionally, we will discretionarily use excess cash for an approved share repurchase program up to $1.0 billion of our outstanding common stock. Free cash flow is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, cash flows calculated in accordance with U.S. GAAP.
Contingencies
Environmental
We are subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of our operations, compliance costs to date have not been material. We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a PRP with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. We accrue amounts for environmental remediation costs that represent our best estimate of the probable and reasonably estimable future costs related to environmental remediation.
During the three months ended September 30, 2026, we did not adjust the liability for environmental remediation costs. The liabilities recorded for environmental remediation costs at Superfund sites, other third party-owned sites and Carpenter-owned current or former operating facilities remaining at September 30, 2026 and June 30, 2026 were $17.3 million and $17.3 million, respectively. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRPs at these Superfund sites have been determined. Accordingly, at this time, we cannot reasonably estimate expected costs for such matters. The liability for future environmental remediation costs that can be reasonably estimated is evaluated on a quarterly basis.
Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRPs. Based upon information currently available, such future costs are not expected to have a material effect on our financial position, results of operations or cash flows over the long-term. However, such costs could be material to our financial position, results of operations or cash flows in a particular future quarter or year.
Other
We are defending various routine claims and legal actions that are incidental to our business, and that are common to our operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws and regulations, personal injury claims and tax issues. Like many other manufacturing companies in recent years we, from time to time, have been named as a defendant in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace such as asbestos. We provide for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, we believe that the total liability from these matters will not have a material effect on our financial position, results of operations or cash flows over the long-term. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to our financial position, results of operations or cash flows in a particular future quarter or year.
Critical Accounting Policies and Estimates
A summary of other significant accounting policies is discussed in our 2026 Form 10-K Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 thereto.
Long-Lived Assets
Long-lived assets are reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable through estimated future undiscounted cash flows. The amount of the impairment loss is the excess of the carrying amount of the impaired assets over the fair value of the assets based upon estimated future discounted cash flows. We evaluate long-lived assets for impairment by individual business unit. Changes in estimated cash flows could have a significant impact on whether or not an asset is impaired and the amount of the impairment.
Goodwill
Goodwill is not amortized but instead is tested at least annually for impairment as of June 1, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. Goodwill may first be assessed based on qualitative factors (Step 0) to determine whether a quantitative goodwill impairment test is necessary. In fiscal year 2025, we performed the Step 0 qualitative assessment rather than immediately performing the Step 1 quantitative valuation as has been done historically. The qualitative assessment includes, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, reporting unit-specific financial performance and other events, such as strategy and primary customer base.
As of September 30, 2026, we have two reporting units with goodwill recorded. Goodwill associated with the SAO reporting unit as of September 30, 2026, was $195.5 million and represents 86 percent of total goodwill. The remaining goodwill recorded as of September 30, 2026, of $31.8 million is associated with the Dynamet reporting unit in the PEP segment.
For fiscal year 2026, we concluded that the qualitative assessment for each of the reporting units as of June 1, 2026 was appropriate given (a) just two years have passed since we performed a full valuation of the reporting units, (b) the June 1, 2024 valuations of our reporting units yielded significant cushions between the fair value and carrying value, and (c) there have been no significant adverse changes to the Company since the prior year. Based on the results of the qualitative analysis, and consideration of the totality of the positive and mitigating events and circumstances with adverse factors, we concluded there was no indication that it was more likely than not that any of our reporting units' carrying values (with allocated goodwill) exceeded their respective fair values as of June 30, 2026.
When preparing the quantitative impairment test, if applicable, potential impairment is identified by comparing the fair value of a reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by the difference between the carrying value of the reporting unit and its fair value, not to exceed the carrying amount of goodwill. The discounted cash flow analysis for each reporting unit tested requires significant estimates and assumptions related to cash flow forecasts, discount rates, terminal values and income tax rates. The cash flow forecasts include significant judgments and assumptions related to revenue growth rates, which include perpetual growth rates, gross margin and weighted average cost of capital. The cash flow forecasts are developed based on assumptions about each reporting unit's markets, product offerings, pricing, capital expenditure and working capital requirements as well as cost performance.
The discount rates used in the discounted cash flow are estimated based on a market participant's perspective of each reporting unit's weighted average cost of capital. The terminal value, which represents the value attributed to the reporting unit beyond the forecast period, is estimated using a perpetuity growth rate assumption. The income tax rates used in the discounted cash flow analysis represent estimates of the long-term statutory income tax rates for each reporting unit based on the jurisdictions in which the reporting units operate.
The estimate of fair value requires significant judgment. We based our fair value estimates on assumptions that we believe to be reasonable but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for our business units. There can be no assurance that our estimates and assumptions made for purposes of our goodwill and identifiable intangible asset testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business projections, competitive environments or anticipated growth rates are not correct, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment testing or earlier, if an indicator of an impairment is present before our next annual evaluation. We continuously monitor for events and circumstances that could negatively impact the key assumptions in determining fair value of the reporting units.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 2 to Notes to Consolidated Financial Statements included in Item 1.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, among other things, statements regarding guidance, outlook, targets, objectives, future operating performance, cash generation, capital allocation, market conditions and strategic initiatives. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected, anticipated, expected or implied. The most significant of these uncertainties are described in Carpenter Technology's filings with the Securities and Exchange Commission, including its report on Form 10-K for the fiscal year ended June 30, 2026, and the exhibits attached to that filing. They include but are not limited to: (1) the cyclical nature of the specialty materials business and certain end-use markets, including aerospace, defense, medical, energy, transportation, industrial and consumer, or other influences on Carpenter Technology's business such as new competitors, the consolidation of competitors, customers, and suppliers or the transfer of manufacturing capacity from the United States to foreign countries; (2) the ability of Carpenter Technology to achieve cash generation, growth, earnings, profitability, operating income, cost savings and reductions, qualifications, productivity improvements or process changes; (3) the ability to recoup increases in the cost of energy, raw materials, freight or other factors; (4) domestic and foreign excess manufacturing capacity for certain metals; (5) fluctuations in currency exchange and interest rates; (6) the effect of government trade actions, including tariffs; (7) the valuation of the assets and liabilities in Carpenter Technology's pension trusts and the accounting for pension plans; (8) possible labor disputes or work stoppages; (9) the potential that our customers may substitute alternate materials or adopt different manufacturing practices that replace or limit the suitability of our products; (10) the ability to successfully acquire and integrate acquisitions; (11) the availability of credit facilities to Carpenter Technology, its customers or other members of the supply chain; (12) the ability to obtain energy or raw materials, especially from suppliers located in countries that may be subject to unstable political or economic conditions; (13) Carpenter Technology's manufacturing processes are dependent upon highly specialized equipment located primarily in facilities in Reading and Latrobe, Pennsylvania and Athens, Alabama for which there may be limited alternatives if there are significant equipment failures or a catastrophic event; (14) the ability to hire and retain a qualified workforce and key personnel, including members of the executive management team, management, metallurgists and other skilled personnel; (15) fluctuations in oil and gas prices and production; (16) the impact of potential cybersecurity incidents, ransomware attacks, malicious AI usage, operational technology disruptions, information technology failures, data security breaches and failures of third-party technology service providers; (17) the ability of suppliers, logistics providers and other supply-chain participants to meet obligations due to capacity constraints, transportation disruptions, energy shortages, geopolitical events, labor shortages or other factors; (18) the ability to meet increased demand, production targets or commitments; (19) the ability to manage the impacts of natural disasters, climate change, pandemics and outbreaks of contagious diseases and other adverse public health developments; (20) geopolitical, economic, regulatory and security risks relating to our global business, including international conflicts, military actions, diplomatic tensions, trade restrictions, sanctions, disruptions to transportation corridors and shipping routes and changes in U.S. and foreign trade, tax and regulatory requirements; (21) challenges affecting the commercial aviation industry or key participants; (22) the consequences of the announcement, maintenance or use of Carpenter Technology's share repurchase program; and (23) the ability to successfully execute major capital projects and brownfield expansion initiatives, including achieving expected costs, schedules, capacity additions, productivity improvements and returns on investment. Any of these factors could have an adverse and/or fluctuating effect on Carpenter Technology's results of operations. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended. We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-Q or as of the dates otherwise indicated in such forward-looking statements. Carpenter Technology undertakes no obligation to update or revise any forward-looking statements.
Carpenter Technology Corporation published this content on October 22, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on October 22, 2026 at 20:13 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]