Carpenter Technology Corporation — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2023 (fiscal Q3 and year-to-date FY2023), compared with the corresponding 2022 periods. This differs from the request metadata’s “2022 Q3.” Dollar amounts are in millions unless stated otherwise.
Business context
Carpenter produces and distributes premium specialty alloys and related products. Its two reportable segments are Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP). Aerospace and defense, medical, transportation, energy, industrial and consumer markets are key end uses.
Financial performance
| Metric | Three months ended Mar. 31, 2023 | Three months ended Mar. 31, 2022 | Nine months ended Mar. 31, 2023 | Nine months ended Mar. 31, 2022 |
|---|---|---|---|---|
| Net sales | $690.1 | $489.0 | $1,792.1 | $1,272.6 |
| Gross profit | $93.5 | $39.5 | $218.2 | $77.8 |
| Operating income (loss) | $39.3 | $1.1 | $70.2 | $(49.5) |
| Net income (loss) | $18.6 | $(7.5) | $18.0 | $(51.7) |
| Diluted earnings (loss) per share | $0.38 | $(0.16) | $0.36 | $(1.07) |
- Quarterly GAAP gross margin was 13.5%, versus 8.1%; for nine months it was 12.2%, versus 6.1%. Excluding raw-material surcharge revenue, the company-reported non-GAAP gross margins were 19.0% versus 10.7% for the quarter and 16.9% versus 7.8% year to date.
- Quarterly sales rose 41%; excluding surcharge revenue, sales rose 33% on 15% higher shipment volume. Year-to-date sales rose 41%; excluding surcharge revenue, they rose 29% on 12% higher volume.
- Quarterly SAO operating income increased to $49.0 from $5.8; PEP operating income increased to $10.2 from $4.2. Year-to-date SAO moved from a $20.4 operating loss to $99.1 of income; PEP income rose to $25.9 from $7.8.
- Interest expense rose to $14.5 for the quarter and $40.1 year to date, from $11.2 and $31.5, respectively, reflecting higher rates on refinanced debt and credit-facility borrowings.
Cash flow, debt and liquidity
- Operating cash flow was negative $160.2 for the nine months, compared with negative $101.0 a year earlier. The company attributed the increased use primarily to working-capital investment amid demand growth: inventory used $213.5 of cash and receivables used $130.6.
- Capital expenditures were $51.5 year to date, versus $58.5. Adjusted free cash flow, a non-GAAP measure that also subtracts capital expenditures and dividends, was negative $241.2, versus negative $187.1.
- At March 31, cash was $22.3, short-term credit-facility borrowings were $108.6 and long-term debt was $692.7. The company reported $189.6 of available facility capacity and total liquidity of $211.9; the facility borrowing rate was 6.84%.
- Cash declined by $131.9 from fiscal-year start. Total assets were $3,094.3 and stockholders’ equity was $1,327.2. The company reported compliance with its then-current credit covenants, including a 38% debt-to-capital ratio against a 55% maximum and interest coverage of 4.45 to 1.00 against a 3.50 minimum.
- Dividends paid in the nine-month period were $29.5, or $0.60 per share in total.
Material changes, outlook and risks
- Management said the quarter exceeded expectations, citing stronger demand, improved product mix, pricing, higher productivity and operating efficiencies. It said the company remained on track to return to pre-pandemic profitability levels in fiscal Q4 2023 and expected higher volumes, improved mix and pricing to support sales momentum and margins.
- Fiscal 2023 capital expenditures were expected to be $80–$85. Management said labor shortages and supply-chain disruption could affect project timing.
- On April 14, 2023, after quarter-end, the company amended its credit facility: commitments increased from $300 to $350, maturity extended to April 12, 2028, and covenants changed. The revised terms require minimum interest coverage of 3.00 to 1.00 and net leverage no greater than 4.00 to 1.00, with first tests scheduled for June 30, 2023; the asset-coverage covenant was removed. The amendment also replaced LIBOR references with SOFR-related rates.
- Risks discussed include specialty-materials market cyclicality, inflation and the ability to recover costs, labor availability, supply-chain and equipment disruptions, raw-material and energy sourcing, foreign-exchange movements, pension-plan assumptions, and customer or supplier concentration and performance. Approximately 43% of sales were under firm-price arrangements, which can expose margins to raw-material volatility or customer volume shortfalls.
- Environmental remediation liabilities were $19.1 at March 31, up from $18.3 at June 30, 2022. The company said reasonably estimable long-term costs were not expected to be material overall, but could be material in a particular quarter or year. Routine legal matters were also disclosed; management did not expect their total liability to have a material long-term effect.
- Prior-year comparisons included $2.0 of quarterly and $5.3 of year-to-date COVID-related costs, plus a $4.7 noncash release of an acquisition-related contingent liability. No special items were reported in the 2023 quarter or year-to-date period.
Investor verification points
- Check whether demand, shipment volumes and operating margins continued to improve after March 31, and whether the stated fiscal Q4 profitability objective was achieved.
- Assess whether inventory and receivables growth converted into cash; operating cash flow and adjusted free cash flow were substantially negative despite the return to profitability.
- Review liquidity, borrowing costs and compliance with the amended facility’s new leverage and interest-coverage tests.
- Distinguish reported sales and margins from the company’s non-GAAP measures excluding surcharges and special items.
- Monitor cost inflation, labor and supply constraints, environmental liabilities and other contingencies.