Business context and reporting period
Carpenter Technology Corporation produces and distributes specialty alloys and related materials for aerospace and defense, medical, transportation, energy, industrial and consumer markets. This filing is for the fiscal quarter ended March 31, 2022 (fiscal Q3) and the nine months then ended; the filing’s financial statements are unaudited.
Financial performance
| Metric | Three months ended March 31, 2022 | Prior-year quarter | Nine months ended March 31, 2022 | Prior-year period |
|---|---|---|---|---|
| Net sales | $489.0 million | $351.9 million | $1,272.6 million | $1,054.0 million |
| Gross profit | $39.5 million | $12.8 million | $77.8 million | $22.3 million |
| Operating income (loss) | $1.1 million | $(40.0) million | $(49.5) million | $(177.8) million |
| Net loss | $(7.5) million | $(40.5) million | $(51.7) million | $(172.5) million |
| Diluted loss per share | $(0.16) | $(0.84) | $(1.07) | $(3.58) |
Quarterly sales rose 39%; excluding raw-material surcharges, sales increased 24% on 32% higher shipment volume. Gross margin was 8.1%, versus 3.6%; excluding surcharge revenue and prior-year inventory write-downs, management reported adjusted gross margin of 10.7% versus 5.2%. Quarterly adjusted loss per diluted share was $0.20 versus $0.54. These adjusted measures are non-GAAP. For the nine months, sales increased 21% (10% excluding surcharges), while the operating loss narrowed; the prior-year comparison included a $52.8 million goodwill impairment and restructuring charges.
Cash flow and liquidity: Operating cash flow was a use of $101.0 million for the nine months, compared with $175.4 million generated a year earlier. Free cash flow, as defined by the company, was negative $187.1 million versus positive $89.2 million. Inventory growth used $101.4 million of cash; accounts receivable used $29.9 million. At March 31, cash was $393.9 million and revolver availability was $294.2 million, for stated total liquidity of $688.1 million. Capital expenditures were $58.5 million.
Debt: Debt totaled $990.9 million, including $300.0 million classified as current at quarter-end. The company issued $300.0 million of 7.625% senior notes due 2030 in March and used the proceeds in April to repay the $300.0 million 4.45% notes due March 2023. The company reported compliance with credit-facility covenants at March 31.
Material changes and management commentary
- Management reported improving demand across end markets, backlog up 164% year over year, and accelerating aerospace and defense recovery. Transportation and industrial and consumer demand had returned to pre-COVID levels, according to management.
- Quarterly segment operating results improved: Specialty Alloys Operations (SAO) recorded $5.8 million of operating income versus a $9.9 million loss; Performance Engineered Products (PEP) recorded $4.2 million versus a $3.3 million loss. For the nine months, SAO remained loss-making while PEP returned to operating income.
- Management cited the Reading press outage, labor shortages and supply-chain disruptions, alongside inflation in production supplies, freight and labor, as drags on results. It said press repairs were completed and most hiring challenges addressed.
- Quarterly results included approximately $2.0 million of COVID-related costs and a noncash $4.7 million benefit from reversal of a historical acquisition-related contingent liability. No restructuring or asset impairment charges were recorded in the current quarter or nine-month period.
Outlook, risks and contingencies
Management expressed confidence in long-term growth, citing demand tailwinds and realized pricing gains, but did not provide specific earnings guidance. Fiscal 2022 capital expenditures were expected to be approximately $90 million, subject to labor and supply-chain constraints. The company did not expect further qualified pension-plan contributions during the rest of fiscal 2022.
Credit-facility interest-coverage minimums step up from 2.00x at June 30, 2022 to 3.00x at September 30 and 3.50x at December 31 and thereafter. The company noted that failure to comply could constrain borrowing and flexibility. Other risks include demand cyclicality, recovering aerospace markets, raw-material and energy costs, customer performance under firm-price arrangements, operational concentration in specialized equipment, labor availability, COVID-19 effects, and foreign-exchange movements. Environmental remediation liabilities were $16.2 million; the company said some additional site costs cannot currently be estimated. Routine legal matters were not expected to have a material long-term effect, although future developments could be material in a particular period.
Important facts for investors to verify
- Whether the Reading press repairs and staffing improvements translate into sustained production, shipments and margin recovery.
- Whether demand, backlog and pricing gains continue, particularly in aerospace and defense, and how much reported sales growth reflects surcharges versus underlying volume and mix.
- Working-capital needs and cash conversion as inventory is built to support demand; nine-month operating cash flow and free cash flow were negative.
- Compliance with rising interest-coverage tests and the impact of the 7.625% 2030 notes on interest expense and liquidity after the April refinancing.
- Exposure to inflation, supply-chain disruption, firm-price customer commitments and the commodity hedges linked to one customer, which represented approximately 19% of those contracts.