Carpenter Technology Corporation — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2023, ended December 31, 2022. Financial statements are unaudited. Carpenter produces and distributes premium specialty alloys and engineered products through its Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP) segments.
Financial performance
| Metric | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2022 |
|---|---|---|
| Net sales | $579.1 million, up 46% | $1,102.0 million, up 41% |
| Gross profit / margin | $70.0 million / 12.1% | $124.8 million / 11.3% |
| Operating income (loss) | $22.6 million | $30.9 million |
| Net income (loss) | $6.2 million; diluted EPS $0.13 | $(0.6) million; diluted EPS $(0.02) |
| Operating cash flow | Not provided for the quarter | $(164.5) million |
| Capital expenditures | Not provided for the quarter | $31.0 million |
Excluding surcharge revenue, a non-GAAP presentation, quarterly sales increased 34% and gross margin was 16.6%, versus 4.2% a year earlier. Six-month sales excluding surcharges increased 27%, and gross margin on that basis was 15.7%, versus 6.1%. Surcharges supported gross profit dollars but diluted reported margin percentages.
Quarterly results improved from a year-earlier operating loss of $31.5 million and net loss of $29.4 million. Six-month results also improved from an operating loss of $50.6 million and net loss of $44.1 million in the prior-year period. Prior-year comparisons included COVID-19 costs of $1.7 million for the quarter and $3.3 million for the six months; no special items were reported for the current periods.
Both segments improved. Quarterly SAO operating income was $30.3 million, versus a $20.3 million loss; PEP operating income was $9.3 million, versus $3.0 million. Aerospace and Defense sales rose 67% in the quarter and 62% for the six months. Transportation remained comparatively weak: six-month sales excluding surcharges fell 15%, with lower shipment volume amid supply constraints.
Cash, liquidity and debt
- Cash was $20.0 million at December 31, down from $154.2 million at June 30, 2022. Current assets were $1,283.4 million and current liabilities $510.3 million.
- Six-month operating cash use was $164.5 million, compared with $136.3 million in the prior year. Management-defined free cash flow was negative $215.2 million, versus negative $187.6 million. Inventory absorbed $226.7 million of cash, and receivables absorbed $58.5 million.
- Long-term debt was $692.4 million; short-term credit-facility borrowings were $81.2 million. The company had $217.0 million of available facility capacity and reported total liquidity of $237.0 million. Management targets minimum liquidity of $150 million and believes liquidity is sufficient for foreseeable needs.
- The $300 million revolving facility matures March 31, 2024; its borrowing rate was 6.38% at period-end. The company reported compliance with covenants: debt-to-capital 37% against a 55% maximum, interest coverage 4.03x against a 3.50x minimum, and asset coverage 5.81x against a 1.10x minimum.
- Dividends paid during the six months were $19.7 million, or $0.40 per share. Capital spending is expected to be approximately $90 million for fiscal 2023.
Outlook, commentary and risks
Management described the quarter as a meaningful step toward pre-pandemic levels, citing strong demand across end markets, growing backlog, higher manufacturing throughput, improved product mix and operational efficiencies. It expects accelerating sales momentum and improved margins, but provided no specific revenue or earnings guidance in the supplied filing text. Inflationary costs remain a partial offset to operating gains.
- Demand and output depend on cyclical end markets, particularly aerospace, and on the company’s ability to expand throughput and improve productivity. Transportation is exposed to ongoing supply shortages.
- Working-capital needs increased materially as the company built inventory for demand growth; cash declined and the company drew on its revolving facility.
- Raw-material, energy, freight and labor cost increases may not be fully or promptly recovered through surcharges. About 40% of sales are under firm-price arrangements; customer nonperformance could also expose the company to losses on related commodity hedges.
- Other stated risks include specialized-equipment disruptions, labor availability and potential work stoppages, foreign-exchange movements, pension-asset performance, and access to credit and raw materials. A Latrobe labor agreement covering approximately 408 production employees expires August 1, 2023.
- Recorded environmental remediation liabilities were $18.8 million. Management does not expect environmental or routine legal matters to have a material long-term effect based on current information, but notes that costs could be material in a particular quarter or year.
Important facts for investors to verify
- Whether sales, backlog, throughput and margins continue to improve, especially in SAO and aerospace, and whether transportation demand recovers.
- Whether inventory and receivables convert to cash, given negative operating cash flow and the substantial working-capital build.
- Liquidity, revolver usage and covenant headroom as operating performance and interest costs evolve.
- Progress against the approximately $90 million fiscal 2023 capital-spending expectation and management’s qualitative outlook for accelerating sales and better margins.
- Potential effects of inflation, supply constraints, labor negotiations, environmental matters and other disclosed contingencies.