Carpenter Technology Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended June 30, 2023. The filing includes unaudited quarterly data; this is not a filing for calendar 2022 Q4. Carpenter manufactures and distributes specialty alloys for aerospace and defense, medical, transportation, energy, industrial and consumer markets through its Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP) segments.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $2,550.3 million | $1,836.3 million |
| Net sales excluding raw-material surcharges (non-GAAP) | $1,848.0 million | $1,400.0 million |
| Gross profit / gross margin | $337.3 million / 13.2% | $149.8 million / 8.2% |
| Operating income (loss) / margin | $133.1 million / 5.2% | $(24.9) million / (1.4)% |
| Net income (loss) | $56.4 million | $(49.1) million |
| Diluted EPS | $1.14 | $(1.01) |
| Cash from operations | $14.7 million | $6.0 million |
| Capital expenditures | $82.3 million | $91.3 million |
| Adjusted free cash flow (non-GAAP) | $(67.6) million | $(83.1) million |
Excluding surcharge revenue, adjusted gross margin was 18.3% versus 9.9%, and adjusted operating margin was 7.2% versus (2.4)%; both are non-GAAP measures. Interest expense, net, rose to $54.1 million from $44.9 million, largely reflecting higher rates on refinanced debt and short-term facility borrowings. No special items were reported in FY2023; FY2022 included COVID-related charges and credits, an environmental charge, an acquisition-related liability release and debt-extinguishment losses.
Sales grew 39% year over year, with sales excluding surcharges up 32% on 14% higher volume. Aerospace and defense sales rose 63% to $1,290.7 million and represented 51% of total sales; medical sales rose 42% and energy sales rose 45%. SAO operating income was $179.1 million, up from $9.6 million; PEP operating income was $31.8 million, up from $18.1 million.
At June 30, 2023, cash was $44.5 million, total debt was $693.0 million and total liquidity was $392.8 million, including $348.3 million available under the revolving facility. Current assets were $1,281.9 million and current liabilities were $459.4 million. The company reported compliance with its credit covenants: interest coverage was 5.35x against a 3.00x minimum, and net leverage was 2.25x against a 4.00x maximum. It paid $39.4 million in dividends ($0.20 per share quarterly).
Outlook, commentary and risks
- Management said it exceeded its goal of returning to FY2019 profitability on a run-rate basis by the end of FY2023, citing productivity gains, improved mix and realized price increases. It expects momentum to continue into FY2024 and targets doubling operating income by FY2027 versus FY2019; these are forward-looking goals, not guarantees.
- Management expects FY2024 capital expenditures of approximately $125 million to $130 million. Firm-order backlog, excluding surcharges, was approximately $2,123.3 million at June 30, 2023, versus $1,539.3 million a year earlier; substantially all was expected to ship in FY2024 and FY2025.
- FY2023 operating cash flow was constrained by working-capital use, including $140.3 million used to build inventory and $144.5 million used by accounts receivable. Inventory increased to $639.7 million from $496.1 million.
- Raw-material and energy price volatility, surcharge timing, supply-chain and labor constraints, production capacity and equipment reliability, and cyclical end markets could affect margins and shipments. Inflation and supply-chain disruption raised operating costs; management said it did not currently expect these factors to materially alter long-term outlook or operational goals.
- Environmental remediation liabilities were $16.5 million at year-end. Additional claims related to an ongoing site study cannot currently be quantified; remediation costs could be material in a particular period. Routine litigation and other claims were not expected by management to have a material long-term effect, though outcomes are uncertain.
- Defined-benefit pension plans had a $193.4 million underfunded status; other postretirement plans had a $61.9 million underfunded status. Management estimated approximately $153.5 million of domestic qualified pension contributions over the next five years, subject to assumptions and market returns.
- Most inventory is valued using LIFO. FIFO inventory would have been $517.2 million higher at year-end; repeal of LIFO could create a substantial tax liability and affect cash flow. The new $350 million secured revolving facility matures in April 2028; outstanding senior notes carry rates of 6.375% (due 2028) and 7.625% (due 2030).
Important facts for investors to verify
- Whether backlog converts into shipments and cash as planned, and whether capacity, maintenance and labor support the targeted production and FY2027 operating-income goal.
- How much sales and margin growth reflects shipment volumes, pricing and mix versus surcharge revenue; reconcile non-GAAP adjusted margins with GAAP results.
- Whether working-capital investment—especially inventory and receivables—reverses sufficiently to improve free cash flow while capital spending increases in FY2024.
- Debt-service capacity under higher interest rates, covenant headroom and the company’s expected pension contributions and benefit obligations.
- Developments in environmental remediation and other contingencies, and the assumptions underlying goodwill valuations. PwC issued an unqualified audit opinion and identified goodwill impairment assessment as a critical audit matter; the filing reported no goodwill impairment in FY2023.