Carpenter Technology Corporation — FY2012 Form 10-K Summary
Business context and reporting period
Carpenter manufactures, fabricates and distributes specialty metals for aerospace and defense, energy, medical, transportation, industrial and consumer markets. This annual report covers the fiscal year ended June 30, 2012; the fourth quarter ended on that date. Results include Latrobe Specialty Metals from its February 29, 2012 acquisition and Amega West, acquired in December 2010.
Financial performance and position
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $2,028.7 million | $1,675.1 million |
| Gross profit / gross margin | $391.0 million / 19.3% | $249.0 million / 14.9% |
| Operating income | $210.1 million | $96.4 million |
| Net income attributable to Carpenter | $121.2 million | $71.0 million |
| Diluted EPS | $2.53 | $1.59 |
| Cash provided by operating activities | $160.3 million | $64.2 million |
| Capital expenditures | $171.9 million | $79.6 million |
| Company-defined free cash flow | $(58.8) million | $(88.9) million |
Excluding raw-material surcharges, sales rose 27% to $1,569.6 million, on 9% higher volume. Gross margin excluding the dilutive surcharge effect was 24.9%, versus 20.2%. Management also reported a 15.1% operating margin excluding surcharges, pension earnings, interest and deferrals expense, and acquisition-related costs; this is a non-GAAP measure.
Fourth-quarter sales were $643.7 million, gross profit $120.6 million, operating income $66.5 million, net income attributable to Carpenter $40.8 million and diluted EPS $0.77. The filing says sales and profit improved through the fiscal year.
At June 30, 2012, cash and equivalents were $211.0 million; total assets $2,627.8 million; and total equity $1,113.1 million. Debt had a carrying value of $406.9 million, including $101.0 million due in FY2013. The company reported approximately $555 million of total liquidity, including $344.1 million available under its revolving facility, and compliance with debt covenants. Cash declined $281.5 million during the year, principally reflecting debt repayment, investment and dividends.
Material changes versus the prior year
- Revenue increased 21%; gross profit and operating income more than doubled. Management cited stronger demand, pricing, improved product mix and operating performance.
- Latrobe was acquired for a reported $427.0 million net of cash acquired, funded substantially with 8.1 million Carpenter shares. FY2012 included $11.7 million of acquisition-related costs and $11.6 million of inventory fair-value charges. Latrobe contributed $163.2 million of sales since closing.
- Cash capex more than doubled to $171.9 million, while cash and equivalents fell from $492.5 million to $211.0 million. The company paid $30 million into U.S. pension plans, versus $3.9 million in FY2011.
- The reported effective tax rate increased to 35.5% from 18.3%, primarily because of nondeductible Latrobe acquisition expenses. Interest expense rose to $23.8 million from $17.1 million.
- Backlog was approximately $896 million at year-end, compared with $623 million a year earlier; substantially all was expected to ship in FY2013.
Outlook, risks and unusual items
Management forecast FY2013 operating income growth of at least 30%, or $70 million, excluding pension EID and Latrobe acquisition-related costs, and approximately $110 million of year-over-year EBITDA improvement including Latrobe. It expected FY2013 free cash flow of about negative $125 million and capital spending of about $350 million. Management projected negative free cash flow of about $50 million in FY2014, with consistently positive annual free cash flow after peak investment spending.
The planned Alabama facility is expected to cost approximately $500 million, add capacity of about 27,000 tons of premium products annually, and begin operating by April 2014. Management cited continued strength in aerospace and energy, while noting global economic pressures.
- Key exposures include cyclical aerospace and energy markets; raw-material and energy price volatility and supply availability; long project execution and cost risks; product quality/liability claims; environmental regulation; and disruptions at manufacturing facilities, particularly in the Reading area.
- Pension and retiree-benefit obligations are significant: the reported funded status was a $447.2 million pension deficit and a $196.9 million other postretirement deficit. Required FY2013 U.S. pension contributions were estimated at approximately $81.5 million; management estimated about $400 million of contributions over five years, subject to assumptions and market returns.
- Commodity forward contracts had $43.7 million of deferred losses; approximately 62% related to contracts supporting firm-price sales to one customer, in addition to existing trade-receivable exposure to that customer.
- Environmental remediation liabilities were $4.9 million. The Boarhead Farms matter was settled and paid for $21.8 million in FY2012; the duty-drawback matter was settled for $1.1 million. A possible Department of Commerce penalty relating to a past export-control disclosure remained unquantified and unaccrued.
- The company’s annual impairment review found no goodwill impairment. The Latrobe purchase-price allocation was preliminary and expected to be finalized in the first half of FY2013. Management and the auditor excluded Latrobe from their internal-control assessments; Latrobe represented 31% of consolidated assets and 9% of FY2012 sales.
Important facts for investors to verify
- Track whether FY2013 operating-income, EBITDA, free-cash-flow and capital-spending guidance was achieved, and how the Alabama project’s cost and timetable developed.
- Assess Latrobe integration, realized synergies, final purchase accounting and the impact of issued shares on per-share earnings.
- Review pension funding requirements and assumptions, the FY2013 debt maturity, and available liquidity as investment spending rises.
- Monitor customer concentration and the $43.7 million deferred commodity-hedge losses, especially the exposure tied to one customer.
- Reconcile the filing’s two stated FIFO inventory uplifts at June 30, 2012: approximately $330 million in the risk discussion versus $279.8 million in the inventory note.