Carpenter Technology Corporation — Form 10-Q summary
Reporting period: Second quarter and first six months of fiscal 2022, ended December 31, 2021; comparisons are with the corresponding periods of fiscal 2021. Carpenter produces and distributes specialty alloys and related products. Its reportable segments are Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP). Financial statements are unaudited.
Financial performance and position
| Metric | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2021 |
|---|---|---|
| Net sales | $396.0 million, up 14% | $783.6 million, up 12% |
| Gross profit / margin | $13.1 million / 3.3% | $38.3 million / 4.9% |
| Operating loss | $31.5 million | $50.6 million |
| Net loss / diluted loss per share | $29.4 million / $0.61 | $44.1 million / $0.91 |
| Operating cash flow | Not separately presented for the quarter | Used $136.3 million |
| Capital expenditures | Not separately presented for the quarter | $33.4 million |
Sales excluding raw-material surcharges rose 5% in the quarter and 4% for the six months. Shipment volume increased 9% and 3%, respectively. Gross margin excluding surcharges was 4.2% in the quarter and 6.1% for the six months. Management’s non-GAAP adjusted operating margin, excluding surcharges and specified special items, was negative 9.5% and negative 7.5%, respectively.
For the six months, free cash flow, as defined by the company, was negative $187.6 million, versus positive $113.7 million a year earlier. Cash and equivalents were $96.9 million at December 31, down from $287.4 million at June 30, 2021. Total reported liquidity was $391.6 million, including $294.7 million available under the revolving facility. Long-term debt was $695.0 million, consisting principally of $300 million of 4.45% notes due March 2023 and $400 million of 6.375% notes due July 2028. The company reported compliance with its credit-facility covenants.
Inventory increased to $534.7 million from $425.7 million at June 30. The six-month operating cash outflow included $109.8 million used to build inventory and no cash generated from receivables, compared with $155.8 million generated by inventory reductions and $64.2 million generated from receivables in the prior-year period.
Material changes and operating drivers
- Quarterly sales increased to $396.0 million from $348.8 million; the net loss narrowed to $29.4 million from $84.9 million. The prior-year quarter included a $52.8 million goodwill impairment. For the six-month comparison, the prior year also included $10.0 million of restructuring and asset impairment charges and $8.2 million of net debt-extinguishment losses.
- Quarterly PEP sales rose 56% to $85.7 million and the segment reported $3.0 million of operating income, compared with a $7.2 million operating loss. Quarterly SAO sales rose 10% to $330.8 million, but its operating loss widened to $20.3 million from $11.6 million.
- Medical, transportation, and industrial and consumer demand strengthened. Aerospace and defense sales remained affected by the Reading press outage and operational constraints; six-month aerospace and defense sales excluding surcharges fell 9%.
- Operating conditions included production-employee COVID-19 isolations, labor and hiring challenges, supply-chain disruptions, and the unplanned Reading press outage. Management said these constraints delayed production and contributed to higher inventory.
Outlook, risks, and unusual items
- Management reported backlog up 35% sequentially and 106% year over year, and described demand as improving across end markets. It expected the Reading press to return to service in the third quarter of fiscal 2022, ending March 31, 2022.
- Fiscal 2022 capital expenditures were expected to be approximately $100 million to $110 million; management noted labor shortages and supply-chain disruptions could affect project timing. Management expected fiscal 2022 net pension income of $7.3 million and no further U.S. qualified-plan contributions for the remainder of the fiscal year.
- The $300 million revolving credit facility matures March 31, 2024, but has a springing maturity on November 30, 2022 if the $300 million notes due March 2023 have not been redeemed, repurchased, or refinanced with qualifying later-maturity debt. The interest-coverage covenant waiver runs through the quarter ending March 31, 2022, after which the required ratio is 3.00:1 and later 3.50:1. The company cited a $150 million minimum available-liquidity requirement during the waiver period.
- Other notable items include $1.7 million of quarterly COVID-19-related costs and $3.3 million for the six months; favorable pension-related other income; and the adoption of an income-tax accounting standard that affected the year-to-date tax benefit. The company reported $16.1 million of environmental remediation liabilities. It said routine litigation and currently estimated environmental costs were not expected to have a material long-term effect, while noting costs could be material in a particular period.
- Principal risks include cyclical end-market demand, raw-material and energy costs, the ability to recover cost increases, labor availability, specialized-equipment outages, supply-chain and COVID-19 effects, customer performance under firm-price arrangements, and refinancing or covenant constraints. Management’s forward-looking statements are subject to these and other risks.
Important facts for investors to verify
- Progress in restoring the Reading press and whether labor, supply-chain, or COVID-related disruptions continue to constrain shipments and margins.
- Whether inventory converts into sales and cash, given the $109.8 million six-month inventory cash use and negative operating cash flow.
- Execution against the $100 million to $110 million capital-spending outlook and the company’s liquidity needs, including dividend payments.
- Plans and timing to address the March 2023 notes before the credit facility’s November 2022 springing-maturity trigger.
- Whether improving demand and backlog translate into sustained profitability, particularly in SAO and aerospace and defense, and whether reported trends remain favorable after considering surcharges and non-GAAP adjustments.