10. Pension and Other Postretirement Benefits

Carpenter provides several noncontributory defined benefit pension plans to certain employees. The plans provide defined benefits based on years of service and final average salary. Effective January 1, 2012, new employees are not eligible to participate in the Company’s largest defined benefit pension plan.

Carpenter also provides other postretirement benefit plans to certain of its employees. The postretirement benefit plans consist of health care and life insurance plans. Benefit payments are currently paid from corporate assets. Plan assets are maintained in a Voluntary Employee Benefit Association Trust (“VEBA”).

The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans:

							Other
	Pension Plans						Postretirement Plans
($ in millions)	2014			2013			2014			2013
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	1,186.7		$	1,218.1		$	259.8		$	282.2
Service cost	32.1			32.5			4.0			4.4
Interest cost	57.5			53.0			12.5			12.2
Benefits paid	(81.0		)	(70.6		)	(13.5		)	(13.1		)
Actuarial loss (gain)	53.2			(45.7		)	22.4			(25.9		)
Plan settlements	(0.2		)	(0.6		)	—			—
Plan amendments	(1.3		)	—			—			—
Projected benefit obligation at end of year	$	1,247.0		$	1,186.7		$	285.2		$	259.8

Change in plan assets:
Fair value of plan assets at beginning of year	$	930.2		$	770.9		$	93.2		$	85.3
Actual return	165.7			82.3			13.7			8.2
Benefits paid	(81.0		)	(70.6		)	(13.5		)	(13.1		)
Contributions	9.8			148.2			13.1			12.8
Plan settlements	(0.3		)	(0.6		)	—			—
Fair value of plan assets at end of year	$	1,024.4		$	930.2		$	106.5		$	93.2

Funded status of the plans	$	(222.6	)	$	(256.5	)	$	(178.7	)	$	(166.6	)

Amounts recognized in the consolidated balance sheets:
Other assets - noncurrent	$	0.1		$	0.1		$	—		$	—
Accrued liabilities - current	(19.3		)	(9.7		)	(15.5		)	(15.4		)
Accrued pension liabilities - noncurrent	(203.4		)	(246.9		)	—			—
Accrued postretirement benefits	—			—			(163.2		)	(151.2		)
	$	(222.6	)	$	(256.5	)	$	(178.7	)	$	(166.6	)

					Other
	Pension Plans				Postretirement Plans
($ in millions)	2014		2013		2014		2013
Amounts recognized in accumulated other comprehensive loss:
Net actuarial loss	$	341.2	$	412.4	$	50.8	$	36.9
Prior service cost (credit)	1.0		2.9		—		(0.1		)

Total	$	342.2	$	415.3	$	50.8	$	36.8

Additional information:

Accumulated benefit obligation for all pension plans	$	1,154.0	$	1,072.3	N/A		N/A

The following is additional information related to plans with projected benefit obligations in excess of plan assets as of June 30, 2014 and 2013:

	Pension Plans				Other Postretirement Plans
($ in millions)	2014		2013		2014		2013
Projected benefit obligation	$	1,246.9	$	1,186.6	$	285.2	$	259.8
Fair value of plan assets	$	1,024.2	$	930.0	$	106.5	$	93.2

The following additional information is for plans with accumulated benefit obligations in excess of plan assets as of June 30, 2014 and 2013:

	Pension Plans				Other Postretirement Plans
($ in millions)	2014		2013		2014		2013
Accumulated benefit obligation	$	1,153.9	$	1,072.2	$	285.2	$	259.8
Fair value of plan assets	$	1,024.2	$	930.0	$	106.5	$	93.2

The components of the net periodic benefit cost related to the Company’s pension and other postretirement benefits for the years ended June 30, 2014, 2013 and 2012 are as follows:

	Pension Plans									Other Postretirement Plans
($ in millions)	2014			2013			2012			2014			2013			2012
Service cost	$	32.1		$	32.5		$	23.0		$	4.0		$	4.4		$	3.7
Interest cost	57.5			53.0			51.3			12.5			12.2			11.8
Expected return on plan assets	(62.9		)	(54.8		)	(54.2		)	(6.5		)	(6.4		)	(6.4		)
Amortization of net loss	21.8			28.1			17.5			1.2			3.2			2.6
Amortization of prior service cost (benefit)	0.5			0.7			0.7			(0.1		)	(4.1		)	(7.9		)
Net periodic benefit costs	$	49.0		$	59.5		$	38.3		$	11.1		$	9.3		$	3.8

The service cost component of Carpenter’s net pension expense, which represents the estimated cost of future pension liabilities earned associated with active employees, is included in the operating income of the business segments. The residual net pension expense, which 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, is included under the heading “Pension earnings, interest & deferrals” in the segment data presented in Note 19.

Historically, the Company capitalized in inventory only the service cost portion of periodic benefit costs associated with manufacturing employees. During the quarter ended December 31, 2013, the Company began to capitalize the portion of periodic benefit costs related to the interest cost, expected return on assets and amortization of actuarial net loss and prior service cost (benefit), which the Company refers to as pension earnings, interest and deferrals (“pension EID”) expense, related to current manufacturing employees in inventory. The impact of this change resulted in an increase in the amount of capitalized periodic benefit costs of $2.2 million during year ended June 30, 2014. This change did not have a material impact on any previously reported amounts.

	Pension Plans						Other Postretirement Plans
	2014		2013		2012		2014		2013		2012
Weighted-average assumptions used to determine benefit obligations at fiscal year end
Discount rate	4.47	%	5.00	%	4.50	%	4.27	%	5.00	%	4.50	%
Rate of compensation increase	3.57	%	3.66	%	3.67	%	N/A		N/A		N/A

	Pension Plans						Other Postretirement Plans
	2014		2013		2012		2014		2013		2012
Weighted-average assumptions used to determine net periodic benefit cost for the fiscal year
Discount rate	5.00	%	4.50	%	5.50	%	4.95	%	4.50	%	5.50	%
Expected long-term rate of return on plan assets	7.00	%	7.00	%	7.50	%	7.00	%	7.50	%	8.00	%
Long-term rate of compensation increase	3.57	%	3.67	%	3.66	%	N/A		N/A		N/A

The following table shows the expected health care rate increase and the future rate and time at which it is expected to remain constant.

	June 30,
	2014		2013
Assumed health care cost trend rate	7.50	%	7.50	%
Rate to which the cost trend rate is assumed to decline and remain (the ultimate trend rate)	5.00	%	5.00	%
Year that the rate reaches the ultimate trend rate	2020		2020

Assumed health care cost trend rates have an effect on the amounts reported for other postretirement benefits. A one percentage point increase in the assumed health care cost trend rate would increase service and interest cost by $0.6 million and increase the postretirement benefit obligation by $10.7 million. A one percentage point decrease in the assumed health care cost trend rate would decrease service and interest cost by $0.5 million and decrease the postretirement benefit obligation by $9.3 million.

Net pension expense, which we define to include the net periodic benefit costs of both the pension and other postretirement plans, is estimated to be $45.9 million for the year ended June 30, 2015, comprised of $34.3 million of net periodic benefit costs for pension plans and $11.6 million of net periodic benefit costs for other postretirement benefit plans. The discount rate and expected long-term rate of return on plan assets used to calculate the net periodic benefit costs for pension plans for the year ended June 30, 2015 were 4.25 - 4.50 percent and 6.25 - 7.00 percent, respectively. The discount rate and expected long-term rate of return on plan assets used to calculate the net periodic benefits costs for other postretirement benefit plans for the year ended June 30, 2015 were 4.25 - 4.50 percent and 6.25 percent, respectively.

Amounts in other comprehensive loss that are expected to be recognized as components of net periodic benefit cost in the year ended June 30, 2015 are:

			Other
	Pension		Postretirement
($ in millions)	Plans		Plans		Total
Amortization of prior service cost	$	0.3	$	—	$	0.3
Amortization of net actuarial loss	16.7		2.0		18.7
Amortization of accumulated other comprehensive loss	$	17.0	$	2.0	$	19.0

Carpenter’s U.S. pension plans’ weighted-average asset allocations at June 30, 2014 and 2013, by asset category are as follows:

	2014		2013
Equity securities	55.1	%	63.5	%
Fixed income securities	44.2		34.3
Cash and cash equivalents	0.7		2.2
Total	100.0	%	100.0	%

Carpenter’s policy for developing a pension plan investment strategy includes the periodic development of an asset and liability study by an independent investment consultant. Management considers this study in establishing an asset allocation that is presented to and approved by the Company’s Plan Committee.

Based on the current funding level, the allocation policy for pension plan assets is to have approximately 60 percent in return seeking assets and 40 percent in liability matching assets. Return seeking assets include domestic and international equities and high yield bond funds. Liability matching assets include long duration bond funds. As the funding level of the plans improves in increments of 5 percent, assets will be shifted from return seeking to liability matching in increments of 4 percent as a de-risking strategy. The assets related to Carpenter’s other postretirement benefit plans were invested approximately 60 percent U.S. and equities and 40 percent fixed income securities of June 30, 2014. Management establishes the expected long-term rate of return assumption by reviewing historical trends and analyzing the current and projected market conditions in relation to the plan’s asset allocation and risk management objectives. In determining the expected long-term rate of return, the Company considered historical returns for individual asset classes and the impact of active portfolio management.

The fair values of the Company’s pension plan assets as of June 30, 2014 and 2013, by asset category and by the levels of inputs used to determine fair value were as follows:

	June 30, 2014						June 30, 2013
	Fair Value Measurements Using Input Type						Fair Value Measurements Using Input Type
($ in millions)	Level 1		Level 2		Total		Level 1		Level 2		Total
Short-term investments	$	—	$	15.3	$	15.3	$	—	$	13.7	$	13.7
Domestic and international equities	142.1		—		142.1		281.8		—		281.8
Commingled funds	64.7		341.4		406.1		52.1		164.4		216.5
Limited partnerships	—		52.0		52.0		—		137.9		137.9
Government agency bonds	4.8		129.8		134.6		7.9		101.9		109.8
Corporate bonds	—		248.1		248.1		—		149.8		149.8
Mutual funds	2.9		—		2.9		2.5		—		2.5
Mortgage/asset backed securities and other	—		23.3		23.3		—		18.2		18.2

	$	214.5	$	809.9	$	1,024.4	$	344.3	$	585.9	$	930.2

The fair values of the Company’s other postretirement benefit plans as of June 30, 2014 and 2013, by asset category and by the level of inputs used to determine fair value, were as follows:

	June 30, 2014						June 30, 2013
	Fair Value Measurements Using Input Type						Fair Value Measurements Using Input Type
($ in millions)	Level 1		Level 2		Total		Level 1		Level 2		Total
Commingled fund	$	—	$	61.2	$	61.2	$	—	$	51.4	$	51.4
Short-term investments	—		17.2		17.2		—		14.2		14.2
Government agency bonds	—		18.6		18.6		—		15.9		15.9
Corporate bonds and other	—		6.8		6.8		—		7.5		7.5
Mortgage backed securities	—		2.7		2.7		—		4.2		4.2

	$	—	$	106.5	$	106.5	$	—	$	93.2	$	93.2

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Investments in domestic and international equities are generally valued at the closing price reported on the active market on which they are traded. Commingled funds are valued based on the net asset value (“NAV”) established for the fund at each valuation date. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. Corporate and government agency bonds and other fixed income securities are valued using closing bid prices on an active market when possible, otherwise using evaluated bid prices.

Cash Flows — Employer Contributions

The Company made contributions to the qualified US pension plans of $6.3 million, $144.9 million and $30.0 million during fiscal years 2014, 2013 and 2012, respectively. The Company currently expects to make approximately $15.5 million in required contributions to the Company’s pension plans during fiscal year 2015. During the years ended June 30, 2014, 2013 and 2012, the Company made contributions of $3.2 million, $3.3 million and $3.2 million to other non-qualified pension plans, respectively.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid. Pension benefits are currently paid from plan assets and other benefits are currently paid from corporate assets:

	Pension		Other
($ in millions)	Benefits		Benefits
2015	$	77.0	$	15.4
2016	$	77.6	$	16.4
2017	$	78.6	$	17.2
2018	$	80.7	$	17.9
2019	$	82.3	$	18.4
2020-2024	$	439.5	$	95.9

Other Benefit Plans

Carpenter also maintains defined contribution retirement and savings plans for substantially all domestic employees. Company contributions to the plan were $10.6 million in fiscal year 2014, $8.9 million in fiscal year 2013 and $6.8 million in fiscal year 2012.