Carpenter Technology Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014. The filing also reports fourth-quarter results; “2013 Q4” in the request does not match the 10-K’s fiscal-year reporting period.
Business context
Carpenter manufactures, fabricates and distributes specialty metals for aerospace and defense, energy, transportation, medical, industrial and consumer markets. Its two reportable segments are Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP). No customer accounted for 10% or more of sales.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $2,173.0 million | $2,271.7 million |
| Gross profit / margin | $398.9 million / 18.4% | $433.5 million / 19.1% |
| Operating income | $212.0 million | $232.7 million |
| Net income attributable to Carpenter | $132.8 million | $146.1 million |
| Diluted EPS | $2.47 | $2.73 |
| Operating cash flow | $239.6 million | $188.5 million |
| Capital spending | $349.2 million | $310.2 million |
| Free cash flow, company-defined | $(147.8) million | $(159.3) million |
Sales fell 4% year over year, while volume increased 6%; sales excluding raw-material surcharges declined 3%. The resulting mix was less favorable. Gross margin excluding surcharges was 22.4%, compared with 23.6% a year earlier. Management cited weak demand for premium aerospace and energy products, start-up costs at the Alabama facility and about $8 million of weather-related expenses; lower variable production costs and SG&A partly offset these pressures. Adjusted EBITDA, a non-GAAP measure, was $381.8 million, down from $405.6 million.
Cash and equivalents were $120.0 million at year-end, versus $257.5 million; total assets were $3,057.5 million. Long-term debt was $604.3 million. The company reported approximately $612 million of total liquidity, including $491.8 million available under its $500 million revolving facility, and said it complied with its credit covenants. The annual common dividend remained $0.72 per share.
Material changes and segment trends
- SAO sales were $1,741.6 million, down 4%; operating income declined to $232.7 million from $268.5 million. Shipment volume rose 7%, but product mix weakened.
- PEP sales were $498.6 million, down 4%; operating income was broadly flat at $45.5 million versus $45.2 million.
- Aerospace and defense sales declined 8% to $980.7 million; energy sales declined 8% to $310.4 million. Transportation sales increased 8%, and industrial and consumer sales increased 2%.
- Backlog increased to approximately $680 million from $524 million; substantially all was expected to ship in FY2015.
- The reportable-segment structure changed in FY2014 following integration of Latrobe; prior-year segment data was recast for comparison.
Outlook, risks and unusual items
Management said it expected a strengthening demand cycle, while acknowledging FY2014’s weaker premium-product demand. The new 400,000-square-foot Alabama facility produced 1,000 saleable tons in Q4 and was progressing through internal and customer qualifications; eventual capacity is expected to be about 27,000 tons annually. Management forecast FY2015 capital expenditures of $160–$175 million, excluding special growth projects, and approximately $16 million of pension contributions. A superalloy powder facility was under construction following a long-term Pratt & Whitney supply agreement; construction was estimated at $20 million, with supply subject to customer qualification.
Key risks include cyclical aerospace and energy demand, raw-material and energy price or supply volatility, the ability to qualify and ramp new capacity, product substitution and pricing pressure, pension funding and investment assumptions, environmental remediation, product-liability claims, and dependence on specialized equipment. Environmental remediation liabilities were $15.5 million; management did not expect a long-term material effect but noted costs could be material in an individual period. Other routine legal contingencies were not expected to have a long-term material effect, though outcomes remain uncertain.
FY2014 cash flow statements included a nonmaterial reclassification of prior-period property and equipment purchases not yet paid in cash: operating cash flow was reduced by $26.7 million for FY2013 and $14.1 million for FY2012, with corresponding changes to investing cash flow and no change to total cash movement. The company also began capitalizing certain pension costs in inventory during FY2014; the reported impact was $2.2 million. No goodwill impairment was recorded, though the Carpenter Powder Products reporting unit’s fair value exceeded carrying value by only 5%.
Important facts for investors to verify
- Whether premium aerospace and energy demand improves, and whether the larger backlog converts to shipments and earnings.
- Alabama facility qualification, utilization, start-up costs and remaining investment; also progress and economics of the powder-facility agreement.
- Inventory growth, working-capital requirements, capital spending and the path from negative company-defined free cash flow toward cash generation.
- Pension plan assumptions, funding needs and sensitivity to discount rates and investment returns.
- Raw-material surcharge timing and the effect of LIFO accounting; FY2014 inventory would have been about $195.7 million higher under FIFO.
- Potential changes in environmental, product-liability and other legal exposures, and the limited valuation cushion at the powder reporting unit.