Carpenter Technology Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2013. The request metadata says “2012 Q3,” but the filing is for the quarter ended March 31, 2013.
Business context and financial performance
Carpenter manufactures, fabricates and distributes specialty metals and related products. Its three reportable segments are Specialty Alloys Operations (SAO), Latrobe and Performance Engineered Products (PEP). Results include the Latrobe Specialty Metals acquisition, completed February 29, 2012; the prior-year quarter included Latrobe for only one month.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $581.4 million, up 8% | $1,659.9 million, up 20% |
| Gross profit / margin | $101.0 million / 17.4%; prior year $105.1 million / 19.5% | $313.0 million / 18.9%; prior year $270.6 million / 19.5% |
| Operating income | $53.0 million; prior year $55.7 million | $167.3 million; prior year $143.6 million |
| Net income attributable to Carpenter | $32.9 million; prior year $33.0 million | $105.1 million; prior year $80.3 million |
| Diluted earnings per share | $0.62; prior year $0.69 | $1.97; prior year $1.75 |
| Operating cash flow | Not separately reported for the quarter | $31.7 million; prior year $47.9 million |
| Capital expenditures | Not separately reported for the quarter | $223.5 million; prior year $107.3 million |
Quarterly sales growth reflected the fuller contribution from Latrobe. Excluding surcharge revenue, quarterly sales rose 12%, but gross margin excluding surcharges declined to 21.4% from 25.1%. Management attributed weaker quarterly profitability to customer deferrals, softer SAO volumes, weaker product mix and lower manufacturing-cost absorption. The nine-month sales and profit increases also reflect Latrobe; excluding Latrobe, nine-month sales excluding surcharges rose 4%.
Liquidity, debt and cash flow
- Cash and cash equivalents were $294.7 million at March 31, 2013, versus $211.0 million at June 30, 2012. Total current assets were $1,400.9 million and current liabilities were $557.3 million.
- Total debt, including current maturities, was $705.4 million, up from $406.9 million at June 30, 2012. The company issued $300 million of 4.45% senior notes due 2023; it planned to use proceeds to repay $100 million of notes due May 2013, with remaining proceeds for general corporate purposes.
- The $350 million revolving credit facility had $342.8 million available after $7.2 million of letters of credit. Reported total liquidity was approximately $638 million. Carpenter was in compliance with covenants; actual interest coverage was 20.66:1 against a 3.5:1 minimum, and debt-to-capital was 37% against a 55% maximum.
- Nine-month free cash flow, a company-defined non-GAAP measure, was negative $220.6 million versus negative $95.9 million. Cash generation was absorbed by elevated capital spending, pension contributions and working-capital needs. Cash used in investing was $215.2 million; financing provided $265.9 million.
- Pension contributions were $143.3 million in the first nine months, including $75 million discretionary contributions in the third quarter. The company expected to contribute a further approximately $90 million in the remainder of fiscal 2013.
Outlook, management commentary and risks
- Management said increased customer deferrals and a weak defense-related mix led it to expect full-year earnings below its previous forecast; no specific revised earnings guidance was provided. It also noted that the recent pattern of deferrals had slowed and order intake had increased.
- Management expected approximately $350 million of fiscal 2013 capital expenditures. The Athens, Alabama premium-products facility was under construction at an estimated total cost of approximately $500 million, with expected operation by April 2014 and added hot-working capacity beginning in the second half of fiscal 2014.
- Latrobe was performing ahead of deal economics, with operational synergies above plan. Management had begun a process to sell the Latrobe and Mexico distribution businesses, but they did not qualify as held for sale or discontinued operations as of March 31, 2013.
- Facility start-up, manufacturing-footprint optimization and inventory-reduction initiatives reduced operating income by $4.3 million in the quarter and $8.5 million year to date; reported diluted EPS impacts were $0.05 and $0.10, respectively. Management estimated fiscal 2013 facility start-up costs of approximately $5.5 million.
- Key exposures include cyclical end markets, raw-material and energy price volatility, surcharge timing and margin dilution, pension expense and funding, acquisition integration, foreign exchange, customer deferrals, and dependence on specialized production equipment. About 25% of sales were under firm-price arrangements; $40.8 million of deferred commodity-hedge losses were outstanding, approximately 71% tied to arrangements with one customer.
- Environmental remediation liabilities were $4.9 million. Carpenter reported no additional accruals in the period and did not expect long-term material effects, while noting costs could be material in a particular quarter or year. Routine litigation was described as not expected to have a material long-term effect.
Key facts for investors to verify
- Confirm the intended period: the filing covers fiscal Q3 2013, not 2012 Q3.
- Assess the drivers and persistence of customer deferrals, lower margins, and management’s reduced full-year earnings outlook.
- Track the Athens facility’s schedule, total project cost, capital spending and expected utilization as demand recovers.
- Monitor cash conversion, working capital, pension contributions, debt repayment and the company’s remaining liquidity.
- Review the concentration of commodity-hedge losses linked to one customer and the status of the proposed Latrobe and Mexico distribution business sales.