CRS 10-K & 10-Q changes, risk factors and insider trading

Over the last few years, we have undertaken capital projects associated with expanding our production capacity and capability.capability, including our current brownfield expansion project in Athens, Alabama. These projects place a significant demand on management and operational resources. Our success in expanding our operations in a cost-effective manner depends upon numerous factors including the ability of management to ensure the necessary resources are in place to properly execute these projects, our ability to obtain the necessary internal and customer qualifications to produce material from the facilities and our ability to operate the facilities to maximize the potential opportunities with minimal impacts to our existing operations. If we are not able to achieve the anticipated results from our capital expansion projects, or if we incur unanticipated delays, or excess costs, our results of operations and financial position may be materially adversely affected.

As of June 30, 2025,2026, there were 179450 production employees at our Dynamet business unit located in Washington, Pennsylvania are covered by a collective bargaining agreement which expires on August 31, 2025. Negotiations with union representatives are currently in process. As of June 30, 2025, there were 461 production employeesemployees, at our Latrobe business unit located in Latrobe, Pennsylvania arePennsylvania, covered by a collective bargaining agreement which expires on July 31, 2027. As of June 30, 2026, there were 165 production employees, at our Dynamet business unit located in Washington, Pennsylvania, covered by a collective bargaining agreement which expires on August 31, 2029. There can be no assurance that we will succeed in concluding collective bargaining agreements with the unions to replace those that expire which could result in work interruptions and stoppages. From time to time, the employees at our manufacturing facility in Reading, Pennsylvania, participate in election campaigns or union organizing attempts. There is no guarantee that future organization attempts will not result in union representation.

War (such as the currentwar in Iran, the war in Ukraine, the war between Israel and HAMAS, the war between Israel and Hezbollah and the Houthi attacks on commercial shipping vessels and other naval vessels), civil conflict, terrorism, other geopolitical and diplomatic tensions, natural disasters, climate change and public health issues including domestic or international pandemics, other outbreaks of contagious diseases and other adverse public health developments have caused or could cause damage or disruption to domestic or international commerce by creating economic or political uncertainties. Additionally, the volatility in the financial markets could negatively impact our business. These events could result in a decrease in demand for our products, affect the availability of credit facilities to us, our customers or other members of the supply chain necessary to transact business, make it difficult or impossible to deliver orders to customers or receive materials from suppliers, affect the availability or pricing of energy sources or result in other severe consequences that may or may not be predictable. As a result, our business, financial condition and results of operations could be materially adversely affected.

Management relies extensively on IT infrastructure, including hardware, networks, software, people and processes, to provide useful information to conduct our business and support assessments and conclusions about operating performance. Our inability to produce relevant and/or reliable measures of operating performance in an efficient, cost-effective and well-controlled fashion may have significant negative impacts on our future operations. In addition, any material failure, interruption of service, or compromised data security could adversely affect our operations. Security breaches in our IT systems could result in theft, destruction, loss, misappropriation or release of confidential data or intellectual property which could adversely impact our future results.

ApproximatelyDuring 40fiscal year 2026, approximately 43 percent of our net sales arewere 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 revenue.revenues. Gains and/or losses on the commodity forward contracts are reclassified from accumulated other comprehensive income (loss) ("AOCI") together with the actual purchase price of the underlying commodities when the underlying commodities are purchased and recorded in inventory. To the extent that the total purchase price of the commodities, inclusive of the gains or losses on the commodity forward contracts, are higher or lower relative to the beginning of year costs, our cost of goods sold reflects such amounts. Accordingly, the gains and/or losses associated with commodity forward contracts may not impact the same period that the firm price sales arrangements revenue is recognized, and comparisons of gross profit from period to period may be impacted. These firm price sales arrangements are expected to continue as we look to strengthen our long-term customer relationships by expanding, renewing and, in certain cases, extending to a longer term, our customer long-term arrangements.

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 isare 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 periodicpension expense is recorded in accounts that are included in both the cost of sales andsales, selling, general and administrative expenses and other (income) expense, net based on the function of the associated employees and innature otherof expense, net.expense. The following is a summary of the classification of net pension expense for the years ended June 30, 2025,2026, 20242025 and 20232024:

As of June 30, 20252026 and 2024,2025, service cost amounts related to the net pension expense capitalized in gross inventory were $1.6$1.0 million and $1.6 million, respectively.

InThe additionprofitability toimprovement was accompanied by meaningful cash generation, reflecting the stronghigher operatingearnings performance,and wecontinued discipline in working capital management. We generated $440.4$605.0 million of cash from operating activities in fiscal year 2025,2026, as compared with cash generated from operating activities of $274.9$440.4 million in fiscal year 2024.2025. Adjusted free cash flow was $362.3 million in fiscal year 2026, as compared with $287.5 million in fiscal year 2025, as compared with adjusted free cash flow of $179.0 million in fiscal year 2024.2025. With a strong balance sheet and adjusted free cash flow, 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 recently announced brownfield expansion project in Athens, Alabama. During fiscal year 2025,2026, we repurchased 575,000545,000 shares of our common stock in the open market for an aggregate $101.9$179.1 million and paid dividends of $40.3 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 newschanges as well asand engage with our customers and suppliers to analyze how tariffsthese 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 expecthave in the past used and plan to usecontinue 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,time and based on current information, we believe therethese items will not behave a material impact toon the Company.

For fiscal year 2025,2026, we reported net income of $529.8 million, or $10.52 earnings per diluted share. This compares with net income of $376.0 million, or $7.42 earnings per diluted share. This compares with net income of $186.5 million, or $3.70 earnings per diluted share, in fiscal year 2024.2025. Excluding special items, as identified below, adjusted earnings per diluted share was $10.76 in fiscal year 2026, and $7.48 in fiscal year 2025, and $4.74 in fiscal year 2024.2025. The results for fiscal year 20252026 compared to fiscal year 20242025 reflect ancontinued ongoingproductivity improvementgains in product mix with a shift in capacity to more complex, higher value materials as well asand pricing actionsrealization across both long-term and expandingtransactional operational efficiencies.business.

Net sales for fiscal year 20252026 were $2,877.1$3,124.2 million, which represents a 49 percent increase from fiscal year 2024.2025. Excluding surcharge revenue, sales were 8 percent higher than fiscal year 20242025 on 68 percent lowerhigher volume. The results primarily reflect the impact of price increases and stronger product demand for materials used in the end-use markets of Aerospace and Defense and Energy compared to fiscal year 2024.2025.

Geographically, domestic net sales increased 57 percent from fiscal year 2024.2025. Excluding surcharge revenue, domestic sales increased 96 percent driven by a 27 percent increaseincreases in the Aerospace and DefenseDefense, Energy and Industrial and Consumer end-use market.markets. Net sales outside the United States increased 410 percent from fiscal year 20242025 to $1,177.2$1,300.0 million for fiscal year 2025.2026. Excluding surcharge revenue, sales outside the United States increased 810 percent, driven by higher sales in the Aerospace and Defense end-use market in all regions, higher Energy end-use markets sales in the European region andoffset Mexicoby and thelower Energy end-use market sales in the EuropeanAsia Pacific region compared to fiscal year 2024.2025. A portion of our sales outside the United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a $0.5$3.4 million decreaseincrease in sales during fiscal year 20252026 compared to fiscal year 2024.2025. International sales as a percentage of our total net sales represented 4142 percent and 41 percent for fiscal year 20252026 and 2024,2025, respectively.

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

Sales to the Aerospace and Defense end-use market increased 15 percent from fiscal year 20242025 to $1,768.6$2,035.2 million. Excluding surcharge revenue, sales increased 2015 percent. The fiscal year 20252026 results reflect double-digit increases in the Aerospace engine and fastener sub-markets driven by increasing build rates and the need to maintain and replace aging fleets compared to fiscal year 2024.2025. The fiscal year 20252026 results also reflect higher sales in the Defense end-use market for program specific applications, in particular, materials used in missile applications.

Sales to the Medical end-use market decreased 621 percent to $351.2$278.4 million from fiscal year 2024.2025. Excluding surcharge revenue, sales decreased 624 percent. The fiscal year 20252026 results reflect lower shipments as a result of the medical supply chain managing inventory levels closely, partially offset by realized price increases particularly in the orthopedic and dental sub-marketssub-market compared to fiscal year 2024.2025.

Sales to the Energy end-use market of $200.3$230.6 million reflectedreflect ana 815 percent increase from fiscal year 2024.2025. Excluding surcharge revenue, sales increased 1613 percent. The fiscal year 20252026 results reflect higher demand in the power generation sub-market for both new and refurbished industrial gas turbines partially offset by decreased rig counts and decreased shipments for material used in the oil and gas sub-market compared to fiscal year 2024.2025.

Industrial and ConsumerTransportation end-use market sales of $359.5$100.4 million decreasedreflect 13an 11 percent decrease from fiscal year 2024.2025. Excluding surcharge revenue, sales decreased 1011 percent. The fiscal year 20252026 results reflect lower demandproduction rates for internal combustion engines in boththe Industriallight-duty and Consumer end-use markets partially offset by realized price increasessub-market compared to fiscal year 2024.2025.

Gross profit in fiscal year 20252026 increased to $955.5 million, or 30.6 percent of net sales, from $768.6 million, or 26.7 percent of net sales, from $584.3 million, or 21.2 percent of net sales for fiscal year 2024.2025. The fiscal year 20252026 results reflect 49 percent increased sales with an ongoing improvement in productthe mixSAO segment with a shift in capacity to more complex, higher value materials as well as pricing actions and expanding operational efficiencies compared to fiscal year 2024.2025. Excluding the impact of surcharge revenue, our adjusted gross margin in fiscal year 20252026 was 32.837.8 percent. This compares to adjusted gross margin of 27.032.8 percent in fiscal year 2024.2025.

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. The following represents a summary of the dilutive impact of the surcharge on gross margin. 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:

During fiscal year 2025,2026, there were no restructuring and asset impairment charges were $3.6 million, compared to $16.9$3.6 million in fiscal year 2024.2025. The restructuring charges in fiscal year 2025 were a result of actions taken to streamline operations in our Carpenter Additive business in the PEP segment, as announced in the quarter ended June 30, 2024. This included $2.5 million of noncash pre-tax inventory impairment charges and $1.1 million of costs related to the decommissioning of property, plant and equipment previously impaired. Restructuring and asset impairment charges in fiscal year 2024 included $15.8 million of noncash pre-tax impairment charges related to $8.8 million of property, plant, equipment and software and $7.0 million associated with a certain definite lived intangible asset. Also included were $1.1 million of various personnel costs for severance payments, medical coverage and related items.

Our operating income in fiscal year 2026 was $702.0 million, or 22.5 percent of net sales (27.8 percent of net sales excluding surcharge revenue). Operating income in fiscal year 2025 was $521.8 million, or 18.1 percent of net sales, as compared with $323.1 million of operating income, or 11.7 percent of net sales, in fiscal year 2024. Excluding surcharge revenuesales and excluding special items, adjusted operating income was $525.4 million or adjusted operating margin of (22.4 percent forof fiscalnet yearsales 2025excluding comparedsurcharge to $354.1 million, or 16.3 percent for fiscal year 2024.revenue). Results for fiscal year 20252026 reflect ongoing improvement in productthe mix,SAO segment with higher realized prices, as well as expanded operating efficiencies compared to fiscal year 2024.2025.

Interest Expense, Net and Debt Extinguishment Losses

Other (Income) Expense, Net

Other expense,income, net for fiscal year 20252026 was $6.1$7.6 million compared with other expense, net of $60.5$6.1 million in fiscal year 2024. The results for fiscal year 2024 included a noncash pension settlement charge of $51.9 million.2025. Fiscal year 20252026 reflects $15.5$6.0 million of expense from pension earnings, interest and deferrals compared to $14.4$15.5 million of expense in fiscal year 2024,2025, driven by lowerhigher than expected returns on plan assets. Interest income in fiscal year 20252026 is $7.5$8.8 million, as compared to $1.8$7.5 million in fiscal year 2024.2025.

Our effective tax rate (income tax expense (benefit) as a percent of income (loss) before taxes) for fiscal year 20252026 was 19.519.3 percent as compared to 11.919.5 percent for fiscal year 2024.2025. TheTax expense in fiscal year 2026 and 2025 tax expense includes tax benefits of $14.2 million attributable to employee share-based compensation.compensation of $19.6 million and $14.2 million, respectively.

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. We are currently evaluating the impact of these provisions. A quantitative estimate of the specific financial effects cannot be reasonably determined at this time due to the complexity of the changes in the tax reform. The impact of the provisions in the OBBBA will depend on our facts in each fiscal year and anticipated guidance from the Internal Revenue Service.Service; however, we do not expect they will have 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. TheIn detailsJanuary of2026, thatadditional agreementguidance, andthe its"Side-by applicabilitySide globallyPackage", havewas not been finalized.released. We determinedare 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.

Net sales in fiscal year 20252026 for the SAO segment increased 510 percent to $2,563.6$2,826.8 million, as compared with $2,443.8$2,563.6 million in fiscal year 2024.2025. Excluding surcharge revenue, net sales increased 10 percent on 118 percent lowerhigher shipment volume as compared to fiscal year 2024.2025. The SAO segment results reflect higher sales excluding surcharge revenue in the SAO segment reflect double-digit percentage growth in the end-use markets of Aerospace and Defense and Energy end-use markets of 15 percent and 14 percent, respectively. This was driven by realized price increases and improving product mix compared to fiscal year 2024.2025.

Operating income for the SAO segment in fiscal year 20252026 was $782.9 million, or 27.7 percent of net sales (34.7 percent of net sales excluding surcharge revenue), compared to operating income of $588.6 million, or 23.0 percent of net sales (28.6 percent of net sales excluding surcharge revenue), compared to operating income of $408.5 million, or 16.7 percent of net sales (21.8 percent of net sales excluding surcharge revenue), for fiscal year 2024.2025. Fiscal year 2025 results2026 reflects strongera productcombination mixof continued productivity gains and operationalpricing efficiencyrealization gainsacross both long-term and transactional business compared to fiscal year 2024.2025.

Net sales for fiscal year 20252026 for the PEP segment were $405.4$383.0 million as compared with $411.0$405.4 million for fiscal year 2024.2025. Excluding surcharge revenue, net sales decreased 15 percent from fiscal year 20242025 on flat3 percent higher shipment volume. The results reflect higherlower sales in the Medical and Distribution end-use marketmarkets salespartially offset by lowerhigher demandsales in the otherAerospace and Defense and Industrial and Consumer end-use markets compared to fiscal year 2024.2025.

Operating income for the PEP segment for fiscal year 20252026 was $30.1 million, or 7.9 percent of net sales (8.5 percent of net sales excluding surcharge revenue), as compared with operating income of $37.0 million, or 9.1 percent of net sales (9.9 percent of net sales excluding surcharge revenue), as compared with operating income of $36.0 million, or 8.8 percent of net sales (9.5 percent of net sales excluding surcharge revenue) for fiscal year 2024.2025. Fiscal year 20252026 results werereflect flatlower sales and margins compared to fiscal year 2024.2025.

For fiscal year 2024,2025, we reported net income of $376.0 million, or $7.42 earnings per diluted share. This compares with net income of $186.5 million, or $3.70 earnings per diluted share. This compares with net income of $56.4 million, or $1.14 earnings per diluted share in fiscal year 2023.2024. Excluding special items, as identified below, adjusted earnings per diluted share was $7.48 in fiscal year 2025 and $4.74 in fiscal year 2024. There were no reported special items for fiscal year 2023. The results for fiscal year 20242025 compared to fiscal year 20232024 werereflect driven byan ongoing improvement in product mix,mix with a shift in capacity to more complex, higher realizedvalue prices,materials as well as expandedpricing operatingactions and expanding operational efficiencies.

Both periods were impacted by special items. Our fiscal year 2025 results include restructuring and asset impairment charges of $3.6 million as a result of actions taken to streamline operations in the Carpenter Additive business in the PEP segment, as announced in the quarter ended June 30, 2024. Special items included in our fiscal year 2024 results includeincluded a noncash goodwill impairment charge of $14.1 million related to the Latrobe Distribution reporting unit in the PEP segment. We recorded restructuring and asset impairment charges of $16.9 million as a result of actions taken to streamline operations in the Carpenter Additive business. $15.8 million of this amount represents noncash asset impairment charges. We also recorded a noncash pension settlement charge of $51.9 million as a result of executing de-risking actions to annuitize certain pension plan obligations. During fiscal year 2024, we also reduced income tax expense by $18.4 million related to a U.S. tax benefit that was generated as a result of the Carpenter Additive restructuring actions.

Net sales for fiscal year 20242025 were $2,759.7$2,877.1 million, which represents ana 84 percent increase from fiscal year 2023.2024. Excluding surcharge revenue, sales were 178 percent higher than fiscal year 20232024 on 46 percent lower volume. The results reflect double-digit sales growth across Aerospace and Defense, Medical and Energy end-use markets versus the priorimpact year period driven by realizedof price increases and improvedstronger product mix.demand for materials used in the end-use markets of Aerospace and Defense and Energy compared to fiscal year 2024.

Geographically, domestic net sales increased 45 percent from fiscal year 2023.2024. Excluding surcharge revenue, domestic sales increased 159 percent driven by strongera demand27 percent increase in the end-use markets of Aerospace and Defense,Defense Medicalend-use and Energy.market. Net sales outside the United States increased 144 percent from fiscal year 20232024 to $1,136.7$1,177.2 million for fiscal year 2024.2025. Excluding surcharge revenue, sales outside the United States increased 218 percent, reflectingdriven stronger demand inby the end-use markets of Aerospace and Defense,Defense Medicalend-use and Energymarket in the European region and AsiaMexico Pacificand regionsthe Energy end-use market in the European region compared to fiscal year 2023.2024. A portion of our sales outside the United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a $1.9$0.5 million increasedecrease in sales during fiscal year 20242025 compared to fiscal year 2023.2024. International sales as a percentage of our total net sales represented 41 percent and 3941 percent for fiscal year 20242025 and fiscal year 2023,2024, respectively.

We sell to customers across diversified end-use markets. We believe thisthat presenting 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:

Sales to the Aerospace and Defense end-use market increased 1915 percent from fiscal year 20232024 to $1,538.8$1,768.6 million. Excluding surcharge revenue, sales increased 3020 percent on 11 percent higher shipment volume.percent. The fiscal year 20242025 results reflect double-digit increases acrossin allthe Aerospace end-useengine sub-markets.and Thisfastener wassub-markets driven by ramping activity levels across the aerospace supply chain dueneed to highermaintain aircraft build rates toand replace aging fleets andcompared meetto increasingfiscal passengeryear travel demand.2024. The fiscal year 20232025 results reflectedalso increasesreflect acrosshigher allsales Aerospacein the Defense end-use sub-markets.market Thisfor wasprogram drivenspecific by ramping activity levels across the aerospace supply chain due to higher aircraft build rates to replace aging fleets and to meet increasing passenger travel demand.applications.

Sales to the Medical end-use market increaseddecreased 256 percent to $375.6$351.2 million from fiscal year 2023.2024. Excluding surcharge revenue, sales increaseddecreased 316 percent on 14 percent higher shipment volume.percent. The fiscal year 20242025 results reflect higherlower demand across all applicationsshipments as a result of the medical supply chain replenishesmanaging inventory levels closely, partially offset by realized price increases particularly in the orthopedic and dental sub-markets compared to meetfiscal higheryear patient demand for elective medical procedures.2024.

Sales to the Energy end-use market of $185.8$200.3 million reflected aan 148 percent increase from fiscal year 2023.2024. Excluding surcharge revenue, sales increased 2516 percent on 12 percent higher shipment volume.percent. The fiscal year 20242025 results reflect increasinghigher oildemand consumptionin benefitingthe power generation sub-market for both new and refurbished industrial gas turbines partially offset by decreased rig counts and decreased shipments for material used in the oil and gas sub-market and higher demand for power generation materials compared to fiscal year 2023.2024.

Transportation end-use market sales of $149.1$113.3 million reflected a 1924 percent decrease from fiscal year 2023.2024. Excluding surcharge revenue, sales decreased 1121 percent on 23 percent lower shipment volume.percent. The results reflect lower demandshipments acrossin light, mediumlight-duty and heavy-dutyspecialty vehiclesub-markets applications offset partiallydriven by highersupply demandchain in specialty transportation applicationsdisruptions compared to fiscal year 2023.2024. The fiscal year 2024 results also reflectreflected the negative impact of employee union strikes in North AmericaAmerica, which did not occur in fiscal year 2023.2025.

Industrial and Consumer end-use market sales of $415.3$359.5 million decreased 1513 percent from fiscal year 2023.2024. Excluding surcharge revenue, sales decreased 610 percent on 26 percent lower shipment volume.percent. The fiscal year 20242025 results reflect lower demand in both Industrial and Consumer end-use markets partially offset by realized price increases compared to fiscal year 2023.2024.

Gross profit in fiscal year 20242025 increased to $768.6 million, or 26.7 percent of net sales, from $584.3 million, or 21.2 percent of net sales, from $337.3 million, or 13.2 percent of net sales for fiscal year 2023.2024. The fiscal year 20242025 results reflect 84 percent increased sales with aan strongerongoing improvement in product mix drivenwith bya shift in capacity to more complex, higher pricesvalue materials as well as pricing actions and improvedexpanding operational efficiencies,efficiencies compared to fiscal year 2023.2024. Excluding the impact of surcharge revenue, our adjusted gross margin in fiscal year 20242025 was 27.032.8 percent. This compares to adjusted gross margin of 18.327.0 percent in fiscal year 2023.2024.

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. The following represents a summary of the dilutive impact of the surcharge on gross margin. 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:

Selling, general and administrative expenses in fiscal year 20242025 were $243.2 million, or 8.5 percent of net sales (10.4 percent of net sales excluding surcharge revenue), compared to $230.2 million, or 8.3 percent of net sales (10.6 percent of net sales excluding surcharge revenue), compared to $204.2 million, or 8.0 percent of net sales (11.0 percent of net sales excluding surcharge revenue), in fiscal year 2023.2024. The higher selling, general and administrative expenses in fiscal year 20242025 reflect higher salary, benefit and variable compensation charges compared to fiscal year 2023.2024.

During fiscal year 2024,2025, restructuring and asset impairment charges were $16.9$3.6 million, compared to no$16.9 restructuringmillion andin assetfiscal impairmentyear 2024. The charges in fiscal year 2023. Restructuring activities2025 were a result of actions taken to streamline operations in our Carpenter Additive business in the PEP segmentsegment, duringas announced in the quarter ended June 30, 2024. This included $2.5 million of noncash pre-tax inventory impairment charges and $1.1 million of costs related to the decommissioning of property, plant, and equipment previously impaired. Restructuring and asset impairment charges in fiscal year 2024. This2024 included $15.8 million of noncash pre-tax impairment charges related to $8.8 million of property, plant, equipment and software and $7.0 million associated with a certain definite lived intangible asset. Also included were $1.1 million of various personnel costs for severance payments, medical coverage and related items.

No goodwill impairment charges were recognized during fiscal year 2025. During fiscal year 2024, we identified an impairment triggering event in the Latrobe Distribution reporting unit within the PEP segment related to a decline in customer ordering patterns. This combined with market headwinds due to general industrial macroeconomic conditions including rising interest rates contributed to lower sales and profit margins compared to the established annual operation plan for fiscal year 2024. Despite our efforts to mitigate the market challenges, results did not improve for the Latrobe Distribution reporting unit during fiscal year 2024. In light of these market conditions at the time, the pace of growth in the future projections for the Latrobe Distribution reporting unit were lowered. We determined the goodwill associated with the Latrobe Distribution reporting unit was impaired and recorded an impairment charge of $14.1 million during the third quarter of fiscal year 2024, which represented the entire balance of goodwill for this reporting unit. No goodwill impairment charges were recognized during fiscal year 2023.

Our operating income in fiscal year 20242025 was $323.1$521.8 million, or 11.718.1 percent of net sales, as compared with $133.1$323.1 million of operating income, or 5.211.7 percent of net sales in fiscal year 2023.2024. Excluding surcharge revenue and special items, adjusted operating income was $354.1$525.4 million or adjusted operating margin of 22.4 percent for fiscal year 2025 compared to $354.1 million, or 16.3 percent for fiscal year 2024 and 7.2 percent for fiscal year 2023.2024. Results for fiscal year 20242025 reflect ongoing improvement in product mix, higher realized prices, as well as expanded operating efficiencies compared to fiscal year 2023. Our fiscal year 2023 operating results reflected higher sales in key end-use markets, increased productivity at our facilities, improved product mix and realized price increases.2024.

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 2025 Form 10-K. Our discussions here focus on our results during or as of the three and sixnine month periods ended DecemberMarch 31, 2025,2026, and the comparable periods of fiscal year 2025, and to the extent applicable, on material changes from information discussed in the 2025 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 2025 Form 10-K for detailed background information and with any such intervening Form 8-K.

During the sixnine months ended DecemberMarch 31, 20252026, 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 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.

The following is the net pension expense for the three and sixnine months ended DecemberMarch 31, 2026 and March 31, 2025 and December 31, 2024:

Net pension expense is recorded in accounts that are included in cost of sales, selling, general and administrative expenses and other expense (income) 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 and sixnine months ended DecemberMarch 31, 20252026 and 20242025:

As of DecemberMarch 31, 20252026 and June 30, 2025, service cost amounts related to the net pension expense capitalized in gross inventory were $1.2$1.1 million and $1.6 million, respectively.

In the quarter ended DecemberMarch 31, 2025,2026, we reported operating income of $155.2$186.5 million compared to $118.9$137.8 million in the prior year same quarter. The results for the quarter ended DecemberMarch 31, 2025,2026, represent an increase of 3135 percent over the previousprior secondyear fiscalthird quarter and surpassed our firstsecond quarter of fiscal year 2026,2026 by 20 percent, which at that time was a record. The SAO segment realized $174.6$208.0 million of operating income with an operating margin of 26.428.3 percent, or adjusted operating margin of 33.135.6 percent,percent. This compares to $151.4 million of operating income with an increaseoperating over the prior year same quartermargin of 22.523.5 percent, or adjusted operating margin of 28.329.1 percent.percent, during the quarter ended March 31, 2025. The SAO performance,margin its best quarter on record,expansion was driven by highera salescombination of continued productivity gains, pricing realization and expandingimproved marginsproduct andmix. marksThese thefactors sixteenthenabled consecutiveSAO quarterto withdeliver increasingits adjustedstrongest quarterly operating marginsperformance into the SAO segment.date.

InThe additionrecord tooperating theperformance was accompanied by strong operatingcash performance,generation, wereflecting higher earnings and continued discipline in working capital management. We generated $171.4$364.9 million of cash from operating activities in the sixnine months ended DecemberMarch 31, 2025,2026, as compared with cash generatedprovided from operating activities of $108.1$182.3 million in the sixnine months ended DecemberMarch 31, 2024.2025. Adjusted free cash flow was positive $82.5$207.3 million in the sixnine months ended DecemberMarch 31, 2025,2026, as compared with positive adjusted free cash flow of $51.9$86.1 million in the sixnine months ended DecemberMarch 31, 2024.2025. With a strong balance sheet and meaningful cash provided from operations, we will continue to take a balanced approach to capital allocation: by sustaining our current asset base and investing in high value growth initiatives while returning cash to shareholders. As such, we are investing to accelerate our growth with our brownfield expansion project which is expected to add primary and secondary melt capacity. Additionally, during the sixnine months ended DecemberMarch 31, 2025,2026, we repurchased 300,000445,000 shares of our common stock on the open market for an aggregate of $81.2$133.9 million and funded dividend payments of $20.1$30.2 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 newschanges as well asand engage with our customers and suppliers to analyze how tariffsthese 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 are using and will continue to use 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 thatthese tariffsitems will not have a material impact on the Company.

Results of Operations — Three Months Ended DecemberMarch 31, 20252026 vs. Three Months Ended DecemberMarch 31, 20242025

For the three months ended DecemberMarch 31, 2025,2026, we reported net income of $105.3$139.6 million, or $2.09$2.77 earnings per diluted share. During the three months ended December 31, 2025, we recorded debt extinguishment losses of $15.6 million, or $12.0 million net of tax. Excluding this special item, adjusted earnings per diluted share was $2.33 for the three months ended December 31, 2025. This compares with net income for the three months ended DecemberMarch 31, 2024,2025, of $84.1$95.4 million, or $1.66$1.88 earnings per diluted share. The results for the three months ended DecemberMarch 31, 2025,2026, 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 DecemberMarch 31, 2024.2025.

Net sales for the three months ended DecemberMarch 31, 2025,2026, were $728.0$811.5 million, which is ana 812 percent increase over the three months ended DecemberMarch 31, 2024.2025. Excluding surcharge revenue, sales increased 810 percent from the three months ended DecemberMarch 31, 2024.2025. The results excluding surcharge revenue reflect realized price increases and improving product mix during the three months ended DecemberMarch 31, 2025,2026, compared to the three months ended DecemberMarch 31, 2024.2025. Excluding surcharge revenue, sales in the Aerospace and Defense end-use market increased 1517 percent compared to the three months ended DecemberMarch 31, 2024.2025.

Geographically, domestic net sales increased 49 percent from the three months ended DecemberMarch 31, 2024,2025, to $434.0$473.9 million. Excluding surcharge revenue, domestic sales increased 48 percent from the three months ended DecemberMarch 31, 2024,2025, driven by strongerhigher sales in the Aerospace and Defense, Energy and Industrial and Consumer andend-use Energymarkets, partially offset by lower sales in the Medical end-use markets.market. Sales outside the United States increased 1415 percent from the three months ended DecemberMarch 31, 2024,2025, to $294.0$337.6 million for the three months ended DecemberMarch 31, 2025.2026. Excluding surcharge revenue, sales outside the United States increased 13 percent from the three months ended DecemberMarch 31, 2024,2025. reflectingThis reflects higher sales in the Aerospace and Defense end-use market in all regions and higher sales in the Energy end-use marketsmarket in the European region offset by lower shipmentssales in the Energy end-use market in the Asia Pacific region and lower sales in the Aerospace and DefenseMedical end-use market in the MexicoEuropean and South America regionsregion compared to the three months ended DecemberMarch 31, 2024.2025. A portion of our sales outside the United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a $0.9$1.3 million increase in net sales during the three months ended DecemberMarch 31, 2025,2026, compared to the three months ended DecemberMarch 31, 2024.2025. Net sales outside the United States represented 4042 percent and 3840 percent of net sales for the three months ended DecemberMarch 31, 20252026 and 2024,2025, respectively.

Aerospace and Defense end-use market sales increased 1417 percent from the three months ended DecemberMarch 31, 2024,2025, to $472.0$534.2 million. Excluding surcharge revenue, sales increased 1517 percent from the three months ended DecemberMarch 31, 2024.2025. The results for the three months ended DecemberMarch 31, 20252026, reflect double-digitstrong increases in the Aerospace engine and fastener sub-marketsdemand driven by increasing build rates and the need to maintain and replace aging fleets. The three months ended DecemberMarch 31, 20252026, also reflect higher sales in the Defense end-use market for program specific applications.

Medical end-use market sales decreased 1823 percent from the three months ended DecemberMarch 31, 20242025, to $70.7$65.8 million. Excluding surcharge revenue, sales decreased 2229 percent from the three months ended DecemberMarch 31, 2024.2025. For the three months ended DecemberMarch 31, 2025,2026, results reflect lower shipments as a result of the medical supply chain managing inventory levels closely, partially offset by realized price increases particularly in the dental sub-market compared to the three months ended DecemberMarch 31, 2024.2025.

Energy end-use market sales of $50.8$69.0 million in the three months ended DecemberMarch 31, 20252026, reflect a 1749 percent increase from the three months ended DecemberMarch 31, 2024.2025. Excluding surcharge revenue, sales increased 1944 percent from the three months ended DecemberMarch 31, 2024.2025. The results reflect higher demandsales in the power generation sub-market for bothmaterial used in new and refurbished industrial gas turbines primarily driven by the demand for data centers partially offset by decreased rig counts and decreased shipments for material used in the oil and gas sub-market compared to the three months ended DecemberMarch 31, 2024.2025.

Transportation end-use market sales decreased 2012 percent from the three months ended DecemberMarch 31, 20242025, to $22.8$24.7 million. Excluding surcharge revenue, sales decreased 1912 percent from the three months ended DecemberMarch 31, 2024.2025. The results reflect weaker consumerproduction demand and shifting supply chain dynamicsrates for light-duty vehicles and lower build rates for medium and heavy-duty vehicles compared to the three months ended DecemberMarch 31, 2024.2025.

Industrial and Consumer end-use market sales increased 117 percent from the three months ended DecemberMarch 31, 20242025, to $94.5$97.0 million. Excluding surcharge revenue, sales increased 108 percent from the three months ended DecemberMarch 31, 2024.2025. The results reflect higher demand foracross all Industrial sub-markets, particularly semiconductor and fluid control materials, partially offset by lower demand for consumer electronics materials in the Industrial and Consumer end-use market compared to the three months ended DecemberMarch 31, 2024.2025.

Our gross profit in the three months ended DecemberMarch 31, 20252026, increased to $218.3$251.8 million, or 30.031.0 percent of net sales, as compared with $177.5$200.8 million, or 26.227.6 percent of net sales in the three months ended DecemberMarch 31, 2024.2025. Excluding the impact of surcharge revenue, our adjusted gross margin in the three months ended DecemberMarch 31, 20252026, was 37.138.4 percent as compared to 32.433.6 percent in the three months ended DecemberMarch 31, 2024.2025. The increased gross profit for the three months ended DecemberMarch 31, 20252026, reflects an ongoing improvement in product mix in the Aerospace and Defense and Energy end-use markets with a shift in capacity to more complex, higher value materials as well as pricing actions and expanding operational efficiencies.

Selling, general and administrative expenses in the three months ended DecemberMarch 31, 20252026, were $63.1$65.3 million or 8.78.0 percent of net sales (10.710.0 percent of net sales excluding surcharge) as compared with $58.6$63.0 million or 8.7 percent of net sales (10.710.6 percent of net sales excluding surcharge) in the three months ended DecemberMarch 31, 2024.2025. The selling, general and administrative expenses for the three months ended DecemberMarch 31, 20252026, reflect higher salary, benefit and variable compensation costs and an increase in professional service fees compared to the three months ended DecemberMarch 31, 2024.2025.

Our operating income in the three months ended DecemberMarch 31, 20252026, was $155.2$186.5 million, or 21.323.0 percent of net sales, as compared with operating income of $118.9$137.8 million, or 17.619.0 percent of net sales, in the three months ended DecemberMarch 31, 2024.2025. Excluding surcharge revenue, adjusted operating margin was 26.328.4 percent for the three months ended DecemberMarch 31, 2025,2026, as compared with 21.723.1 percent for the three months ended DecemberMarch 31, 2024.2025. The operating results for the three months ended DecemberMarch 31, 2025,2026, reflect an ongoing improvement in product mix in the Aerospace and Defense and Energy end-use markets 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 DecemberMarch 31, 2024.2025.

Other (Income)Interest Expense, Net

Other income,expense, net for the three months ended DecemberMarch 31, 2025,2026, was $0.6$1.1 million as compared with $1.6$3.8 million of other expense, net for the three months ended DecemberMarch 31, 2024.2025. The three months ended DecemberMarch 31, 2025,2026, reflect $1.4 million of expense from pension earnings, interest and deferrals compared to $3.9 million of expense from pension earnings, interest and deferrals in the three months ended DecemberMarch 31, 2024.2025, driven primarily by greater expected returns on plan assets during fiscal year 2026.

Income tax expense was $24.7$37.1 million, or 19.021.0 percent of income before income taxes for the three months ended DecemberMarch 31, 2025,2026, as compared with income tax expense of $21.0$26.6 million, or 20.021.8 percent of income before income taxes for the three months ended DecemberMarch 31, 2024.2025.

Income tax expense for the three months ended DecemberMarch 31, 20252026, includes discrete tax benefits of $4.6$1.6 million attributable to employee share-based compensation and $3.6$2.5 million associatedas witha result of changes in the debtCompany's prepaymentprior costs.year tax positions. Income tax expense for the three months ended DecemberMarch 31, 20242025 included discrete tax benefits of $3.0$3.2 million attributable to employee share-based compensation.

Net sales for the three months ended DecemberMarch 31, 20252026, for the SAO segment increased 1014 percent to $661.6$735.1 million, as compared with $601.5$642.9 million in the three months ended DecemberMarch 31, 2024.2025. Excluding surcharge revenue, net sales for the three months ended DecemberMarch 31, 20252026 increased 1013 percent compared to the three months ended DecemberMarch 31, 2024.2025. The higher sales are driven by realized price increases and improving product mix in the Aerospace and Defense and Energy end-use markets compared to the three months ended DecemberMarch 31, 2024.2025.

Operating income for the SAO segment was $174.6$208.0 million or 26.428.3 percent of net sales (33.135.6 percent of net sales excluding surcharge revenue) in the three months ended DecemberMarch 31, 2025,2026, as compared with operating income of $135.6$151.4 million or 22.523.5 percent of net sales (28.329.1 percent of net sales excluding surcharge revenue) in the three months ended DecemberMarch 31, 2024.2025. This marks the sixteenthseventeenth consecutive quarter with increasing adjusted operating margins in SAO. The operating income for the three months ended DecemberMarch 31, 2025,2026, reflects thea impactcombination of continued productivity gains, pricing realization and improved product mix optimization and operational efficiency gains compared to the three months ended DecemberMarch 31, 2024.2025.

Net sales for the three months ended DecemberMarch 31, 20252026, for the PEP segment decreased 127 percent to $83.2$97.7 million, as compared with $95.0$104.9 million in the three months ended DecemberMarch 31, 2024.2025. Excluding surcharge revenue, net sales for the three months ended DecemberMarch 31, 2025,2026, decreased 106 percent compared to the three months ended DecemberMarch 31, 2024.2025. The current quarter results reflect lower sales in the Medical and Distribution end-use markets partially offset by growth in the Aerospace and Defense and Industrial and Consumer end-use markets.

Operating income for the PEP segment was $6.9$6.7 million or 8.36.9 percent of net sales (8.97.4 percent of net sales excluding surcharge revenue) in the three months ended DecemberMarch 31, 2025,2026, compared with operating income of $7.0$10.9 million or 7.410.4 percent of net sales (8.111.3 percent of net sales excluding surcharge revenue) in the three months ended DecemberMarch 31, 2024.2025. The results for the three months ended DecemberMarch 31, 20252026, reflect lowera reduction in Medical end-use market sales offsetin Titanium partially offset by improvedimproving operationalprofitability efficienciesin Additive compared to the three months ended DecemberMarch 31, 2024.2025.

Results of Operations — SixNine Months Ended DecemberMarch 31, 20252026 vs. SixNine Months Ended DecemberMarch 31, 20242025

For the sixnine months ended DecemberMarch 31, 2025,2026, we reported net income of $227.8$367.4 million, or $4.52$7.29 earnings per diluted share. During the sixnine months ended DecemberMarch 31, 2025,2026, we recorded debt extinguishment losses of $15.6 million, or $12.0 million net of tax. Excluding this special item, adjusted earnings per diluted share was $4.76$7.53 for the sixnine months ended DecemberMarch 31, 2025.2026. This compares with net income for the sixnine months ended DecemberMarch 31, 2024,2025, of $168.9$264.3 million, or $3.33$5.21 earnings per diluted share. During the sixnine months ended DecemberMarch 31, 2024,2025, we recorded restructuring and asset impairment charges of $3.6 million as a result of actions taken to streamline operations in the Carpenter Additive business as announced during the quarter ended June 30, 2024. Excluding this special item, adjusted earnings per diluted share was $3.39$5.27 for the sixnine months ended DecemberMarch 31, 2024.2025. The results for the sixnine months ended DecemberMarch 31, 2025,2026, reflect stronger product mix, pricing actions and improved operational efficiencies compared to the sixnine months ended DecemberMarch 31, 2024.2025.

Net sales for the sixnine months ended DecemberMarch 31, 2025,2026, were $1,461.7$2,273.2 million, a 57 percent increase over the sixnine months ended DecemberMarch 31, 2024.2025. Excluding surcharge revenue, sales increased 67 percent from the sixnine months ended DecemberMarch 31, 2024.2025. The results reflect the impact of price increases in the Aerospace and Defense and Energy end useend-use markets partially offset by lower product demand for materials used in the Medical end-use market compared to the sixnine months ended DecemberMarch 31, 2024.2025.

Geographically, sales in the United States increased 35 percent from the sixnine months ended DecemberMarch 31, 2024,2025, to $866.4$1,340.3 million. Excluding surcharge revenue, domestic sales increased 45 percent from the sixnine months ended DecemberMarch 31, 2024,2025, driven by strongerhigher sales in the Aerospace and Defense, Energy and Industrial and Consumer end-use markets partially offset by lower sales in the Medical and EnergyTransportation end-use markets. Sales outside the United States increased 710 percent from the sixnine months ended DecemberMarch 31, 2024,2025, to $595.3$932.9 million for the sixnine months ended DecemberMarch 31, 2025.2026. Excluding surcharge revenue, international sales increased 910 percent from the sixnine months ended DecemberMarch 31, 2024,2025, driven by stronger demand in the Aerospace and Defense and Energy end-use markets in the European regionand Asia Pacific regions partially offset by lower demand for Medical materials in theall Europeanregions regionexcept andSouth lower demand in the Energy end-use market in the Asia Pacific regionAmerica compared to the sixnine months ended DecemberMarch 31, 2024.2025. A portion of our sales outside the United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a $1.4$2.7 million increase in sales during the sixnine months ended DecemberMarch 31, 2025,2026, compared to the sixnine months ended DecemberMarch 31, 2024.2025. Net sales outside the United States represented 41 percent and 40 percent of net sales for the sixnine months ended DecemberMarch 31, 20252026 and 2024,2025, respectively.

Aerospace and Defense end-use market sales increased 1113 percent from the sixnine months ended DecemberMarch 31, 2024,2025, to $942.9$1,477.2 million. Excluding surcharge revenue, sales increased 1314 percent from the sixnine months ended DecemberMarch 31, 2024.2025. The results for the sixnine months ended DecemberMarch 31, 2025,2026, reflect double-digitstrong increases in the Aerospace engine and fastener sub-marketsdemand driven by increasing build rates and the need to maintain and replace aging fleets compared to the sixnine months ended DecemberMarch 31, 2024.2025. The sixnine months ended DecemberMarch 31, 2025,2026, also reflect higher sales in the Defense end-use market for program specific applications.

Medical end-use market sales decreased 1618 percent from the sixnine months ended DecemberMarch 31, 2024,2025, to $145.2$211.0 million. Excluding surcharge revenue, sales decreased 1922 percent from the sixnine months ended DecemberMarch 31, 2024.2025. The results for the sixnine months ended DecemberMarch 31, 2025,2026, reflect lower shipments as a result of the medical supply chain managing inventory levels closely, partially offset by realized price increases particularly in the dental sub-market compared to the sixnine months ended DecemberMarch 31, 2024.2025.

Energy end-use market sales of $105.5$174.5 million reflect a 1023 percent increase from the sixnine months ended DecemberMarch 31, 2024.2025. Excluding surcharge revenue, sales increased 1323 percent from the sixnine months ended DecemberMarch 31, 2024.2025. The results reflect higher demand in the power generation sub-market for both new and refurbished industrial gas turbines partially offset by decreased rig counts and decreased shipments for material used in the oil and gas sub-market compared to the sixnine months ended DecemberMarch 31, 2024.2025.

Transportation end-use market sales decreased 2017 percent from the sixnine months ended DecemberMarch 31, 2024,2025, to $45.6$70.2 million. Excluding surcharge revenue, sales decreased 1715 percent from the sixnine months ended DecemberMarch 31, 2024.2025. The results for the sixnine months ended DecemberMarch 31, 2025,2026, reflect weakerlower consumerproduction demandrates for both light-duty vehicles and medium and heavy-duty trucks compared to the sixnine months ended DecemberMarch 31, 2024.2025.

Industrial and Consumer end-use market sales increased 67 percent from the sixnine months ended DecemberMarch 31, 2024,2025, to $187.4$284.5 million. Excluding surcharge revenue, sales increased 7 percent from the sixnine months ended DecemberMarch 31, 2024.2025. The results reflect higher demand for materials used in consumernumerous electronicsIndustrial applicationssub-markets, primarily semiconductor materials, compared to the sixnine months ended DecemberMarch 31, 2024.2025.

Our gross profit in the sixnine months ended DecemberMarch 31, 2025,2026, increased $80.9$132.0 million to $434.7$686.6 million, or 29.730.2 percent of net sales, as compared with $353.8$554.6 million, or 25.426.1 percent of net sales in the sixnine months ended DecemberMarch 31, 2024.2025. Excluding the impact of surcharge revenue, our gross margin in the sixnine months ended DecemberMarch 31, 2025,2026, was 36.537.2 percent as compared to 31.432.2 percent in the sixnine months ended DecemberMarch 31, 2024.2025. The increased gross profit for the sixnine months ended DecemberMarch 31, 2025,2026, 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 compared to the sixnine months ended DecemberMarch 31, 2024.2025.

Selling, general and administrative expenses of $126.1$191.5 million were 8.68.4 percent of net sales (10.610.4 percent of net sales excluding surcharge) for the sixnine months ended DecemberMarch 31, 2025,2026, as compared with $117.7$180.6 million or 8.48.5 percent of net sales (10.5 percent of net sales excluding surcharge) in the sixnine months ended DecemberMarch 31, 2024.2025. The selling, general and administrative expenses for the sixnine months ended DecemberMarch 31, 2025,2026, reflect higher salary, benefit and variable compensation costs compared to the sixnine months ended DecemberMarch 31, 2024.2025.

During the sixnine months ended DecemberMarch 31, 2025,2026, there were no restructuring and asset impairment charges compared to $3.6 million of restructuring and asset impairment charges in the sixnine months ended DecemberMarch 31, 2024.2025. The restructuring and asset impairment charges were a result of actions taken to streamline operations in our Carpenter Additive business in the PEP segment, as announced in the quarter ended June 30, 2024.

Our operating income in the sixnine months ended DecemberMarch 31, 2025,2026, was $308.6$495.1 million, or 21.121.8 percent of net sales, as compared with operating income of $232.5$370.4 million, or 16.717.5 percent of net sales, in the sixnine months ended DecemberMarch 31, 2024.2025. Excluding surcharge revenue, operating margin was 25.926.8 percent for the sixnine months ended DecemberMarch 31, 2025,2026, and 21.021.7 percent for the sixnine months ended DecemberMarch 31, 2024,2025, when excluding surcharge revenue and the special item identified below. The operating results for the sixnine months ended DecemberMarch 31, 2025,2026, 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 sixnine months ended DecemberMarch 31, 2024.2025. The sixnine months ended DecemberMarch 31, 20242025 include restructuring and asset impairment charges of $3.6 million.

Interest expense, net for the sixnine months ended DecemberMarch 31, 2025,2026, was $21.7$30.3 million compared with $24.6$36.6 million in the sixnine months ended DecemberMarch 31, 2024.2025. Capitalized interest reduced interest expense by $2.8$4.7 million for the sixnine months ended DecemberMarch 31, 2025,2026, and $0.9$1.6 million for the sixnine months ended DecemberMarch 31, 2024.2025. The lower interest expense, net in the sixnine months ended DecemberMarch 31, 20252026, 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.

Debt extinguishment losses for the sixnine months ended DecemberMarch 31, 2025,2026, were $15.6 million related to the prepayment, in full, of the senior unsecured notes due July 2028 and March 2030. This consisted of $11.4 million of debt prepayment costs and $4.2 million of accelerated issue costs. There were no debt extinguishment losses for the sixnine months ended DecemberMarch 31, 2024.2025.

Other income, net was $3.5$2.3 million for the sixnine months ended DecemberMarch 31, 2025,2026, compared to other expense, net of $1.6$5.6 million in the sixnine months ended DecemberMarch 31, 2024.2025. The sixnine months ended DecemberMarch 31, 2025,2026, reflect interest income of $4.1$6.1 million compared to $3.9$5.5 million in the sixnine months ended DecemberMarch 31, 2024.2025. The sixnine months ended DecemberMarch 31, 2025,2026, includes $2.9$4.3 million of expense from pension earnings, interest and deferrals compared to expense of $7.8$11.6 million in the sixnine months ended DecemberMarch 31, 2024,2025, driven primarily by greater expected returns on plan assets during fiscal year 2026.

Income tax expense for the sixnine months ended DecemberMarch 31, 2025,2026, was $47.0$84.1 million, or 17.118.6 percent of income before income taxes as compared with income tax expense of $37.4$63.9 million, or 18.119.5 percent of income before income taxes for the sixnine months ended DecemberMarch 31, 2024.2025.

Income tax expense for the sixnine months ended DecemberMarch 31, 2025,2026, includes discrete tax benefits of $15.4$17.0 million attributable to employee share-based compensation andcompensation, $3.6 million associated with the debt prepayment costs.costs and $2.5 million as a result of changes in the Company's prior year tax positions. Income tax expense for the sixnine months ended DecemberMarch 31, 2024,2025, includesincluded discrete tax benefits of $9.8$13.0 million attributable to employee share-based compensation and $0.9 million for the impact of restructuring charges.compensation.

Net sales for the sixnine months ended DecemberMarch 31, 20252026, for the SAO segment increased 69 percent to $1,321.2$2,056.3 million, as compared with $1,246.6$1,889.5 million in the sixnine months ended DecemberMarch 31, 2024.2025. Excluding surcharge revenue, net sales increased 79 percent on 3 percent lowerhigher shipment volume from the sixnine months ended DecemberMarch 31, 2024.2025. The SAO segment results reflect realized price increases and improving product mix particularly in the Aerospace and Defense and Energy end-use markets compared to the sixnine months ended DecemberMarch 31, 2024.2025. In particular, sales excluding surcharge increased 1314 percent for the Aerospace and Defense end-use market and increased 24 percent in the sixEnergy end-use market in the nine months ended DecemberMarch 31, 2025,2026, compared to the sixnine months ended DecemberMarch 31, 2024.2025.

Operating income for the SAO segment was $345.2$553.2 million or 26.126.9 percent of net sales (32.533.6 percent of net sales excluding surcharge revenue) in the sixnine months ended DecemberMarch 31, 2025,2026, as compared with operating income of $270.2$421.5 million or 21.722.3 percent of net sales (27.327.9 percent of net sales excluding surcharge revenue) in the sixnine months ended DecemberMarch 31, 2024.2025. The operating income for the sixnine months ended DecemberMarch 31, 2025,2026, reflects thea impactcombination of continued productivity gains, pricing realization and improved product mix optimization and operational efficiency gains compared to the sixnine months ended DecemberMarch 31, 2024.2025.

Net sales for the sixnine months ended DecemberMarch 31, 2025,2026, for the PEP segment decreased 109 percent to $176.7$274.5 million, as compared with $195.8$300.8 million in the sixnine months ended DecemberMarch 31, 2024.2025. Excluding surcharge revenue, net sales decreased 87 percent compared to the sixnine months ended DecemberMarch 31, 2024.2025. The results for the sixnine months ended DecemberMarch 31, 20252026, reflect lower sales in the Medical and Distribution end-use markets partially offset by higher sales in the Aerospace and Defense and Industrial and Consumer end-use markets compared to the sixnine months ended DecemberMarch 31, 2024.2025.

Operating income for the PEP segment was $16.3$23.0 million or 9.28.4 percent of net sales (9.99.0 percent of net sales excluding surcharge revenue) in the sixnine months ended DecemberMarch 31, 2025,2026, compared with operating income of $14.3$25.3 million or 7.38.4 percent of net sales (8.09.2 percent of net sales excluding surcharge revenue) in the sixnine months ended DecemberMarch 31, 2024.2025. The results for the sixnine months ended DecemberMarch 31, 20252026, reflect lower sales offsetand byflat improvedoperating operational efficienciesmargins compared to the sixnine months ended DecemberMarch 31, 2024.2025.

During the sixnine months ended DecemberMarch 31, 2025,2026, we generated cash from operating activities of $171.4$364.9 million as compared to $108.1$182.3 million in the sixnine months ended DecemberMarch 31, 2024.2025. Our adjusted free cash flow, which we define under "Non-GAAP Financial Measures" below, was $82.5$207.3 million in the sixnine months ended DecemberMarch 31, 2025,2026, as compared to $51.9$86.1 million for the sixnine months ended DecemberMarch 31, 2024.2025. The improvement in cash from operating activities for the sixnine months ended DecemberMarch 31, 2025,2026, reflects higher earnings after noncash adjustments to net income and less cash used to build inventory and lower required pension contributions partially offset by higher cash used for other working capital needs compared to the sixnine months ended DecemberMarch 31, 2024.2025. Cash used to build inventory was $27.9$45.1 million in the sixnine months ended DecemberMarch 31, 2025,2026, compared to $80.7$93.3 million of cash used to build inventory in the sixnine months ended DecemberMarch 31, 2024.2025. During the sixnine months ended DecemberMarch 31, 2025,2026, cash flow was negatively impacted by $73.2$31.0 million of cash used for accrued liabilities compared to $36.9$14.0 million in the sixnine months ended DecemberMarch 31, 2024.2025.

Capital expenditures for property, plant, equipment and software were $88.9$157.6 million for the sixnine months ended DecemberMarch 31, 2025,2026, as compared to $56.2$96.3 million for the sixnine months ended DecemberMarch 31, 2024.2025. In fiscal year 2026, we expect capital expenditures, including the brownfield expansion, to be inapproximately the range of $300.0 million to $315.0$260.0 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 sixnine months ended DecemberMarch 31, 2025,2026, were $20.1$30.2 million as compared to $20.2$30.2 million in the sixnine months ended DecemberMarch 31, 2024.2025. In the sixnine months ended DecemberMarch 31, 20252026 and 20242025 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 $400.0 million of our outstanding common stock. During the sixnine months ended DecemberMarch 31, 2025,2026, we repurchased 300,000445,000 shares of our common stock on the open market for an aggregate of $81.2$133.9 million. During the sixnine months ended DecemberMarch 31, 2024,2025, we repurchased 275,000475,000 shares of our common stock on the open market for an aggregate of $40.3$77.8 million. As of DecemberMarch 31, 2025,2026, $216.9$164.2 million remained available for future purchases.