Carpenter Technology Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended June 30, 2015. The filing also reports fourth-quarter results; it is not a standalone quarterly filing. Carpenter manufactures and distributes specialty alloys, stainless and tool steels, titanium and powder metals, and oil-and-gas drilling tools through Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP).
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $2,226.7 million | $2,173.0 million |
| Gross profit / margin | $318.3 million / 14.3% | $398.9 million / 18.4% |
| Operating income | $111.5 million | $212.0 million |
| Net income | $58.7 million | $132.8 million |
| Diluted EPS | $1.11 | $2.47 |
| Operating cash flow | $282.6 million | $239.6 million |
| Capital expenditures | $170.5 million | $349.2 million |
| Free cash flow (company-defined) | $74.4 million | $(147.8) million |
- Sales rose 2%, but shipments fell 4%; higher sales excluding surcharges on lower volume reflected a more favorable product mix. Gross margin excluding surcharge revenue was 17.6%, versus 22.4%.
- Profitability was pressured by higher operating costs, weak oil-and-gas demand, manufacturing issues at Reading and Latrobe, Athens facility depreciation and $29.1 million of restructuring charges. Adjusted diluted EPS, excluding specified items, was $1.51; this is a non-GAAP measure.
- Cash and equivalents were $70.0 million at year-end, down $50.0 million. Total liquidity was approximately $563 million, including $492.9 million available under the revolving credit facility after letters of credit.
- Long-term debt was $607.1 million, compared with $604.3 million. The company reported compliance with covenants: interest coverage of 10.40x against a 3.50x minimum, and debt-to-capital of 32% against a 55% maximum.
- Inventory declined to $655.8 million from $699.2 million. Total assets were $2,905.9 million; stockholders’ equity was $1,325.9 million.
Material changes and segment performance
- Net income declined 56% and operating income declined 47% year over year despite higher sales. Consolidated pounds sold fell from 290.4 million to 277.5 million.
- SAO sales increased 3% to $1,796.6 million, while segment operating income fell to $155.2 million from $232.7 million. PEP sales were essentially flat at $497.7 million; operating income decreased to $39.1 million from $45.5 million, partly due to oil-and-gas weakness.
- Aerospace and defense sales increased 4%, transportation 12% and medical 10%; energy sales decreased 6%. Special-alloy sales rose 8%, while stainless-steel and alloy/tool-steel sales fell 4% and 9%, respectively.
- Fourth-quarter FY2015 sales were $558.0 million, operating income $39.5 million and net income $22.5 million, versus $604.6 million, $59.2 million and $38.1 million, respectively, in fourth-quarter FY2014.
Outlook, management commentary, risks and unusual items
- Management expected FY2016 capital expenditures of approximately $120 million and approximately $30 million of annual overhead savings from restructuring. The actions were expected to be substantially complete by the end of FY2016’s first quarter. No formal earnings or revenue guidance is provided in the supplied filing text.
- Management cited lower oil prices and drilling activity, unplanned production problems, higher operating costs and Athens-related depreciation as key FY2015 challenges. It reported achieving a $67 million inventory reduction from the end of FY2015’s first quarter.
- Restructuring charges of $29.1 million included workforce reductions, facility closures and exit from an ultra-fine-grain materials development program. A $4.4 million favorable legal settlement increased other income. Reported FY2015 cash flow also benefited from tax-related timing and legislation effects.
- Key risks include cyclical aerospace and energy demand, continuing low oil prices, execution and utilization of expanded capacity, volatile raw-material and energy costs, supply disruptions, pension funding and investment risk, environmental liabilities, product-quality claims, equipment concentration, and goodwill impairment sensitivity. Goodwill impairment testing found no impairment, but Amega West, Specialty Steel Supply and Carpenter Powder Products had fair value cushions of 9%, 6% and 4%, respectively.
- Environmental remediation liabilities were $15.9 million; management said long-term effects were not expected to be material, while noting costs could be material in a particular period. Other routine litigation was not expected to have a material long-term effect, subject to uncertainty.
- Approximately 200 salaried positions were eliminated, along with several hourly positions; the company also announced facility closures. Tony R. Thene became CEO effective July 1, 2015, following leadership changes.
Important facts for investors to verify
- Whether oil-and-gas demand and activity recover, and the resulting effect on PEP and goodwill impairment headroom.
- Whether the restructuring delivers the targeted annual savings and operating performance improves at Reading, Latrobe and Athens.
- Whether positive free cash flow persists as capital spending falls, while funding dividends, repurchases and pension obligations.
- How raw-material surcharge timing, derivatives and inventory valuation affect reported margins and cash flows; most inventory is valued using LIFO.
- Progress on the $500 million share-repurchase authorization: $124.5 million was spent in FY2015, with $375.5 million remaining at year-end.