Table:
|  | Fiscal Year |  |
| --- | --- | --- |
| ($ in millions) | 2019 | 2018 |
| Net sales | $2,380.2 | $2,157.7 |
| Less: surcharge revenue | 438.1 | 365.4 |
| Net sales excluding surcharge revenue | $1,942.1 | $1,792.3 |
| Gross profit | $444.8 | $382.3 |
| Gross margin | 18.7% | 17.7% |
| Gross margin excluding surcharge revenue | 22.9% | 21.3% |
Paragraphs:
Gross Profit
Gross profit in fiscal year 2019 increased to $444.8 million, or 18.7 percent of net sales from $382.3 million, or 17.7 percent of net sales for fiscal year 2018. Excluding the impact of the surcharge revenue, our gross margin in fiscal year 2019 was 22.9 percent compared to 21.3 percent in fiscal year 2018. The results reflect the impact of improved product mix coupled with capacity gains and operating cost reductions compared to the same period a year ago. Fiscal year 2019 also reflects an $11.4 million benefit related to an insurance recovery in our third fiscal quarter.
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 surcharge 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.
Question:
How is the surcharge mechanism structured?