Carpenter Technology Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended June 30, 2021. Although the request metadata refers to 2020 Q4, this filing reports FY2021 annual results, with FY2020 as the principal comparison. Carpenter manufactures and distributes specialty alloys and engineered products through Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP).
Key financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $1,475.6 million | $2,181.1 million |
| Operating income (loss) | $(248.6) million | $25.3 million |
| Net income (loss) | $(229.6) million | $1.5 million |
| Diluted earnings (loss) per share | $(4.76) | $0.02 |
| Cash provided by operating activities | $250.0 million | $231.8 million |
| Free cash flow (company-defined) | $132.0 million | $21.8 million |
| Capital expenditures | $100.5 million | $171.4 million |
Sales declined 32%; sales excluding surcharge revenue fell 31% on 27% lower reported shipment volume. GAAP gross profit was $1.0 million, or 0.1% of sales, versus $329.4 million, or 15.1%, in FY2020. Excluding surcharge revenue and specified special items, gross margin was 4.6% versus 19.7%; adjusted operating margin excluding surcharge revenue and special items was negative 8.4% versus 9.1%. Adjusted diluted loss per share was $2.01, compared with adjusted earnings of $2.36 in FY2020. These adjusted measures are non-GAAP.
At June 30, 2021, cash was $287.4 million, total assets were $2,971.2 million, and long-term debt carrying value was $694.5 million. The company reported total liquidity of $582.0 million, comprising cash and $294.6 million available under its revolving facility; it had no revolver borrowings at year-end. The quarterly dividend remained $0.20 per share, or $0.80 for the year. Backlog, excluding surcharge, was $529.3 million, compared with $539.0 million a year earlier.
Changes and drivers versus FY2020
- COVID-19-related market weakness, particularly in aerospace and defense, drove lower volumes. Aerospace and defense sales fell 46%; medical sales fell 27%; energy sales fell 35%. Transportation sales rose 9%.
- SAO sales fell 31% and the segment reported an $87.4 million operating loss, versus $239.0 million operating income. PEP sales fell 35%; its operating loss widened to $16.5 million from $10.4 million.
- Cost reductions and working-capital actions supported cash generation. Inventory reductions generated $238.5 million of cash, and lower capital spending also lifted reported free cash flow. Free cash flow includes dividends and proceeds from the Amega West divestiture under the company’s definition.
- Carpenter issued $400 million of 6.375% senior notes due 2028, using part of the proceeds to repay $250 million of notes due July 2021. It also replaced its revolver with a $300 million secured facility.
Outlook, risks and unusual items
Management said end markets showed signs of recovery at fiscal year-end and described a broad-based recovery as beginning to take shape. It cited attractive long-term end-market prospects, stronger customer relationships, cost actions, productivity gains and additional Athens, Alabama facility qualifications. No specific earnings or sales guidance was provided. Management expected FY2022 capital expenditures of approximately $125 million; substantially all year-end backlog was expected to ship in FY2022.
- FY2021 included a $52.8 million goodwill impairment that eliminated Additive reporting-unit goodwill; $52.2 million of non-cash LIFO decrement charges; $17.3 million of COVID-19 costs; $16.6 million of restructuring and asset impairment charges; $11.4 million pension settlement charges; and $8.2 million of net debt extinguishment losses.
- The Additive business faced slower-than-expected market growth and was restructured. The Amega West oil-and-gas business was sold in September 2020 for $20.0 million.
- The credit facility matures in March 2024 but has a springing maturity of November 30, 2022 if the $300 million notes due March 2023 are not redeemed, repurchased or refinanced with debt due October 2024 or later. Interest-coverage covenant relief runs through the quarter ended March 31, 2022; Carpenter reported compliance with facility covenants at year-end.
- Principal risks include ongoing COVID-19 effects, commercial aerospace cyclicality and the 737 MAX supply chain, energy-market weakness, raw-material and energy supply/cost volatility, manufacturing concentration and equipment disruption, pension funding, environmental exposure, cybersecurity and implementation of the global ERP system. Environmental remediation liabilities were $16.0 million; the company cautioned that future remediation or litigation costs could be material in an individual period.
- The company’s independent auditor issued an unqualified opinion and identified goodwill impairment assessment for SAO and Dynamet as a critical audit matter. Management and the auditor concluded internal control over financial reporting was effective; the ERP system was implemented January 1, 2021.
Investor verification priorities
- Review the FY2021 GAAP loss and reconcile management’s non-GAAP adjusted results, including excluded items and the treatment of surcharge revenue.
- Track aerospace and medical demand, shipment volumes, backlog conversion and the pace of the recovery against management’s commentary.
- Assess cash generation quality, especially the contribution from inventory reductions, lower capital spending and the Amega West sale.
- Monitor debt refinancing needs and covenant headroom, particularly the revolver’s springing maturity tied to the March 2023 notes.
- Evaluate remaining goodwill impairment exposure, Additive restructuring progress, and pension and environmental obligations.