Carpenter Technology Corporation — FY2017 Form 10-K
Period clarification: The supplied filing is the annual report for the fiscal year ended June 30, 2017, not a filing limited to 2016 Q4. It includes fourth-quarter results for the three months ended June 30, 2017.
Business context and reporting period
Carpenter manufactures and distributes specialty alloys, titanium and powder metals, stainless and alloy steels, and drilling tools. Its two reportable segments are Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP), serving aerospace and defense, energy, transportation, medical, industrial and consumer, and distribution markets.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $1,797.6 million | $1,813.4 million |
| Gross profit / margin | $284.3 million / 15.8% | $255.9 million / 14.1% |
| Operating income / margin | $97.2 million / 5.4% | $51.6 million / 2.8% |
| Net income | $47.0 million | $11.3 million |
| Diluted EPS | $0.99 | $0.23 |
| Cash from operations | $129.3 million | $256.9 million |
| Capital expenditures | $98.5 million | $95.2 million |
| Free cash flow (company-defined, non-GAAP) | $(17.8) million | $138.6 million |
Gross margin excluding surcharges and FY2016’s excess inventory write-down was 18.2% versus 17.7%. Operating margin excluding surcharges, pension earnings, interest and deferrals (EID), and special items was 8.0% versus 8.5%; these are non-GAAP measures. Fourth-quarter FY2017 sales were $507.7 million, operating income $44.6 million, and net income $25.5 million, compared with $457.7 million, $29.2 million, and $14.9 million, respectively, in fourth-quarter FY2016.
Liquidity, debt, and financial position
- Year-end cash was $66.3 million; total liquidity was approximately $460 million, including $393.9 million available under the $400 million revolving credit facility.
- Total debt carrying value was $605.0 million, including $55.0 million due in FY2018. The company reported compliance with credit covenants: interest coverage of 9.38x versus a 3.50x minimum and debt-to-capital of 34% versus a 55% maximum.
- Operating cash flow declined by $127.6 million year over year, principally reflecting a $100 million voluntary pension contribution and higher working capital, including increased inventory. The company reported FY2017 free cash flow of $(17.8) million.
- Inventory increased to $690.4 million from $628.7 million. The annual dividend remained $0.72 per share.
Material changes versus the prior comparable period
- Sales decreased 1%, while reported operating income and net income rose. FY2016 included $22.5 million of excess-inventory charges, $12.5 million of goodwill impairment, and $18.0 million of restructuring and asset impairment charges; FY2017 included a $3.2 million loss on divestiture.
- Shipment volume fell 3%. SAO sales declined 1% and operating income declined to $172.3 million from $176.9 million. PEP sales increased 2%, and the segment returned to operating income of $8.5 million from an operating loss of $5.5 million.
- Aerospace and defense remained the largest market at 54% of sales. Energy sales rose 6%; transportation sales fell 10%. Management cited improving demand in several markets in the second half, offset by weakness in transportation and a softer first half.
- Adjusted diluted EPS, a company-defined non-GAAP measure, was $1.08 versus $1.16, despite higher reported EPS.
Outlook, management commentary, risks, and unusual items
- Management described FY2017 as a year of progress in its commercial realignment, cost-reduction efforts, and investment in growth capabilities. Backlog excluding surcharges rose to approximately $438 million at year-end from $306 million, substantially all expected to ship in FY2018.
- FY2018 capital expenditures were forecast at approximately $120 million. Required pension contributions were estimated at $6.7 million in FY2018; estimated required contributions over five years were approximately $85.4 million, subject to market and interest-rate assumptions.
- The company acquired substantially all Puris LLC assets for $35.3 million to enter titanium powder and expand additive-manufacturing capabilities. It divested Specialty Steel Supply for $12.0 million in proceeds and recorded the $3.2 million loss.
- Benefits under the largest qualified defined-benefit plan and certain non-qualified plans were frozen effective December 31, 2016; the company also made a $100 million voluntary pension contribution. Pension obligations and expense remain sensitive to asset returns, discount rates, and funding requirements.
- Principal risks include cyclical end markets—particularly aerospace, energy, and transportation—raw-material and energy price or supply volatility, pricing and product substitution, execution of capacity investments, environmental and product-liability exposure, specialized-equipment concentration, and ERP implementation. Environmental remediation liabilities were $16.1 million; management said known contingencies were not expected to be material over the long term, while noting they could affect a particular quarter or year.
- The filing provides no specific earnings or revenue guidance. Management expected improving market conditions and continued cost and productivity efforts, but results remain exposed to demand and execution uncertainties.
Important facts for investors to verify
- Whether backlog growth converts into FY2018 shipments and profitable volume, especially in aerospace and defense.
- Whether improved reported earnings persist after accounting for FY2016 charges and FY2017’s divestiture and pension effects; compare GAAP and non-GAAP measures.
- Cash conversion and working-capital trends, including elevated inventory, planned capital spending, and pension funding needs.
- Debt maturities, covenant headroom, and ongoing access to the revolving facility as business conditions change.
- Actual performance of the Puris acquisition and the company’s ability to manage market, environmental, product-quality, and operational risks.