Carpenter Technology Corporation — FY2016 Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended June 30, 2016, not a 2015 fourth-quarter filing. It also reports FY2016 fourth-quarter results separately.
Business context
Carpenter manufactures, fabricates and distributes specialty metals, including specialty alloys, stainless steel, titanium and metal powders, and makes and rents oil-and-gas drilling tools. Its reportable segments are Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP). Aerospace and defense accounted for 54% of FY2016 net sales; energy and industrial and consumer sales were particularly affected by weak oil-and-gas activity.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $1,813.4 million | $2,226.7 million |
| Net sales excluding surcharge revenue | $1,572.6 million | $1,811.8 million |
| Gross profit / GAAP gross margin | $255.9 million / 14.1% | $318.3 million / 14.3% |
| Operating income | $51.6 million | $111.5 million |
| Net income | $11.3 million | $58.7 million |
| Diluted EPS | $0.23 | $1.11 |
| Cash from operations | $256.9 million | $282.6 million |
| Capital expenditures | $95.2 million | $170.5 million |
| Cash and cash equivalents at year-end | $82.0 million | $70.0 million |
| Long-term debt, net of current portion | $611.3 million | $603.8 million |
Management-reported non-GAAP gross margin excluding surcharge revenue and the excess-inventory write-down was 17.7%, versus 17.6%. Adjusted operating margin excluding surcharge revenue, pension EID and specified special items was 8.5%, versus 8.6%; adjusted diluted EPS was $1.16, versus $1.51. These measures are not GAAP results and should be considered alongside reported results.
Free cash flow, as defined by the company and including dividends and specified other items, was $138.6 million, versus $74.4 million. Total assets were $2,794.3 million and total liabilities were $1,689.4 million. Current assets were $1,010.7 million against current liabilities of $298.8 million. The $500 million revolving credit facility expires in June 2018; $492.9 million remained available at year-end, in addition to cash, for reported total liquidity of approximately $575 million. The company reported compliance with its credit covenants.
Changes versus the prior year
- Sales fell 19%; sales excluding surcharges and shipment volume each fell 13%. Operating income declined 54% and net income declined 81%.
- Energy sales fell 54% to $130.6 million; industrial and consumer sales fell 33% to $300.9 million. Aerospace and defense sales fell 7% including surcharges, but were approximately flat excluding surcharges.
- SAO operating income increased to $176.9 million from $155.2 million, supported by operating-cost improvements, product mix and a $4 million insurance recovery. PEP shifted from $39.1 million operating income to a $5.5 million operating loss as energy-market weakness intensified.
- FY2016 included a $22.5 million excess-inventory write-down, $12.5 million goodwill impairment, $7.6 million long-lived asset impairment and $10.4 million restructuring charges. FY2015 included $29.1 million of restructuring charges.
- Cash from operations decreased, but lower capital spending as the Athens expansion wound down helped increase reported free cash flow. The company repurchased 3.76 million shares for $123.9 million and paid $34.8 million in dividends.
Outlook, commentary and risks
- Management cited cost and working-capital improvements from its Carpenter Operating Model and a shift to a market-focused commercial organization, while noting that lower volumes outweighed operating improvements. The filing provides no formal revenue or earnings guidance.
- Management expected FY2017 capital expenditures of approximately $120 million and required pension contributions of $0.7 million. It estimated approximately $216.6 million of pension contributions over five years, subject to investment returns, interest rates and funding rules.
- Backlog, excluding surcharge, was approximately $306 million at June 30, 2016, down from $435 million a year earlier; substantially all was expected to ship in FY2017. Backlog is not a guarantee of realized sales.
- Key risks include cyclical aerospace, energy and industrial demand; continued low oil prices; raw-material and energy supply, cost and pricing volatility; customer and product-mix changes; execution and qualification of expansion projects; pension funding and market assumptions; and potential equipment, labor, environmental, product-liability, IT and ERP implementation disruptions.
- Environmental remediation liabilities were $16.2 million. The company said known contingencies were not expected to have a material long-term effect, but could be material in an individual quarter or year. Pension and other postretirement plans were underfunded by $519.3 million and $130.4 million, respectively.
- Goodwill impairment testing found the SAO and Latrobe Distribution reporting units’ fair values exceeded carrying values by approximately 10% and 20%, respectively; further impairment could result if forecasts or market conditions weaken. LIFO inventory was $98.2 million below its estimated FIFO value, creating potential tax and cash-flow exposure if LIFO treatment were changed.
For FY2016’s fourth quarter, the filing reports net sales of $457.7 million, operating income of $29.2 million and net income of $14.9 million. FY2015 fourth-quarter net sales were $558.0 million, operating income $39.5 million and net income $22.5 million.
Important facts for investors to verify
- Confirm the period intended: this summary covers FY2016 and includes FY2016 Q4 data, not a 2015 Q4 filing.
- Review how much the earnings decline reflects ongoing volume and mix conditions versus the inventory, impairment, restructuring, pension and tax items; reconcile non-GAAP adjustments to GAAP results.
- Track energy-market exposure, PEP recovery, SAO margins, and whether the lower backlog converts to shipments and revenue.
- Assess cash generation against planned capital spending, share repurchases, debt maturities and the substantial projected pension funding obligations.
- Review pension assumptions, environmental and legal contingencies, and remaining goodwill impairment headroom; the filing’s estimates depend on uncertain forecasts and assumptions.