Carpenter Technology Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2020. This is the company’s fiscal second quarter of fiscal 2021, despite the request metadata’s “2020 Q2” label. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Carpenter produces and distributes specialty alloys and engineered products for aerospace and defense, medical, transportation, energy, industrial and consumer markets. Its reportable segments are Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP). Results were materially affected by COVID-19, weak aerospace demand and the Boeing 737 MAX production halt. The company sold its Amega West business on September 30, 2020.
Key financial metrics
| Metric | Quarter ended Dec. 31, 2020 | Six months ended Dec. 31, 2020 | Comparable 2019 period |
|---|---|---|---|
| Net sales | $348.8 | $702.1 | $573.0 quarter; $1,158.4 six months |
| Gross profit / margin | $6.0 / 1.7% | $9.5 / 1.4% | $112.6 / 19.7% quarter; $225.3 / 19.4% six months |
| Operating income (loss) | $(89.0) | $(137.8) | $55.0 quarter; $114.8 six months |
| Net income (loss) | $(84.9) | $(132.0) | $38.8 quarter; $80.0 six months |
| Diluted EPS | $(1.76) | $(2.74) | $0.79 quarter; $1.64 six months |
| Cash provided by operations | Not stated for quarter | $171.6 | $22.6 six months |
| Free cash flow, company-defined | Not stated for quarter | $113.7 | $(91.0) six months |
Quarterly sales fell 39%; six-month sales fell 39%. Excluding raw-material surcharges, sales declined 36% for the quarter and 37% for the six-month period. Adjusted operating margin excluding surcharges and special items was negative 10.8% for the quarter and negative 10.4% for six months, versus 12.2% in each comparable 2019 period. Adjusted diluted EPS, a non-GAAP measure, was a loss of $0.61 for the quarter and $1.19 for six months, compared with adjusted earnings of $0.83 and $1.67, respectively.
Cash and cash equivalents were $271.4 at December 31, 2020, up from $193.1 at June 30, 2020. Total current assets were $1,152.6 and current liabilities $265.8. Long-term debt was $694.0, compared with $551.8 at June 30; there were no short-term credit-agreement borrowings at quarter-end. The company reported total liquidity of $665.4, including $394.0 available under its revolving credit facility. It reported compliance with the facility’s covenants: interest coverage ratio 3.80 against a 3.50 minimum and debt-to-capital ratio 34.2% against a 55% maximum.
Six-month capital expenditures were $59.9, down from $94.3. The company paid $19.5 in dividends during the six months and declared a quarterly dividend of $0.20 per share. Its company-defined free cash flow includes $20.0 of Amega West sale proceeds and subtracts dividends.
Material changes versus prior comparable periods
- Sales declines reflected lower shipments across end markets; consolidated pounds sold fell 33% in the quarter and 31% over six months.
- Aerospace and defense sales fell 50% in the quarter and 51% over six months. Medical sales declined 34% and 33%, respectively.
- Inventory reductions generated $155.8 of cash during the six-month period, versus $108.2 of cash use in the prior-year period. Receivables generated $64.2 of cash, versus $5.0 previously.
- SG&A declined to $42.2 for the quarter and $84.5 for six months, from $55.3 and $108.2. Management attributed savings partly to restructuring, including lower salaries and benefits.
- The company issued $400.0 of 6.375% senior notes due 2028 and used part of the proceeds to repay $250.0 of notes due July 2021. Six-month results included $8.2 of net debt-extinguishment losses.
Outlook, management commentary, risks and unusual items
- Management said it expects end-market conditions to improve gradually in the second half of fiscal 2021, and cited new long-term aerospace and defense contracts and anticipated recovery in medical demand. No specific revenue or earnings guidance was provided.
- Management expects approximately $120 of capital expenditures in fiscal 2021 and $15.0 of additional qualified pension contributions during the remainder of the fiscal year. It said cash and available borrowing capacity should fund foreseeable needs.
- The quarter included a $52.8 non-cash goodwill impairment, the full goodwill balance of the Additive reporting unit, following slower-than-expected growth, COVID-related customer shifts and a decision to reduce resources allocated to that business. The company cautioned that further impairment could arise if assumptions deteriorate.
- COVID-19 costs were $3.9 in the quarter and $11.8 for six months. Restructuring and asset impairment charges were $10.0 for six months, primarily related to Additive operations; management said the fiscal 2021 actions were substantially complete by the second quarter.
- Key risks include continued pandemic effects, aerospace and 737 MAX recovery, cyclical end markets, raw-material and energy costs, customer volume commitments, foreign exchange, pension assumptions, supply-chain disruption and the company’s ability to deliver cost savings and execute restructuring.
- Environmental remediation liabilities were $16.1 at December 31. Management said routine litigation and currently estimable environmental matters were not expected to be material over the long term, while noting that costs could be material in a particular quarter or year. Potential costs at certain other sites could not be reasonably estimated.
- Approximately 44% of commodity forward contracts supporting firm-price sales arrangements related to one customer, in addition to trade receivables exposure; management said customers had historically performed. The company reported no material effect under its disclosed hypothetical 10% commodity-price decline or 10% U.S.-dollar strengthening scenarios.
Important facts for investors to verify
- Whether demand and shipment volumes recover as management expects, particularly in aerospace, medical and transportation markets.
- Whether the company sustains positive operating cash flow as inventory reductions normalize; six-month cash generation benefited substantially from working-capital releases.
- Whether Additive and other reporting-unit forecasts support carrying values and avoid further impairment charges.
- Debt-service and covenant headroom, including the refinancing profile and the March 2022 expiration of the $400.0 revolving credit facility.
- Whether the planned fiscal 2021 capital expenditures and pension contributions align with liquidity needs and operating recovery.
- The ongoing impact of customer concentration in commodity-hedging exposure, environmental obligations and litigation on future results and cash flows.