Carpenter Technology Corporation — Form 10-Q Summary
Business context and reporting period. The filing covers the three months ended September 30, 2017, Carpenter’s first quarter of fiscal 2018 (not calendar 2017 Q1). Carpenter manufactures, fabricates and distributes specialty metals and related products. Results are unaudited and compared with the three months ended September 30, 2016.
Key financial results
| Metric | Quarter ended Sep. 30, 2017 | Prior-year quarter |
|---|---|---|
| Net sales | $479.8 million | $389.0 million |
| Gross profit / margin | $85.6 million / 17.8% | $46.0 million / 11.8% |
| Operating income / margin | $41.7 million / 8.7% | $1.4 million / 0.4% |
| Net income (loss) | $23.4 million | $(6.2) million |
| Diluted EPS | $0.49 | $(0.13) |
| Operating cash flow | $(7.4) million | $4.1 million |
| Capital expenditures | $28.9 million | $26.6 million |
- Sales rose 23%; excluding raw-material surcharge revenue, sales increased 21% and shipment volume increased 17%. Surcharge revenue was $70.0 million, versus $49.2 million.
- Gross margin excluding surcharge revenue was 20.9%, up from 13.5%. Management attributed improvement to higher sales, better product mix and operating efficiencies.
- Free cash flow, as defined by the company as operating cash flow less capital expenditures and dividends, was negative $44.9 million, compared with negative $31.0 million.
- Cash was $24.9 million at quarter-end, down from $66.3 million at June 30, 2017. Inventory increased to $737.3 million from $690.4 million.
- Debt was $608.1 million, including $3.3 million of revolving-credit borrowings; long-term debt carrying value was $604.8 million, including $55.0 million due within one year. The company reported $390.6 million available under its $400 million revolving facility and total liquidity of $415.5 million.
- Quarterly dividend was $0.18 per share. Stockholders’ equity was $1.231 billion at September 30, 2017.
Segments and material changes
- Specialty Alloys Operations (SAO): Sales were $396.8 million, up 26%; operating income was $50.5 million, versus $25.0 million.
- Performance Engineered Products (PEP): Sales were $100.7 million, up 28%; operating income was $5.3 million, compared with an operating loss of $2.8 million.
- Sales growth reflected stronger demand across most end markets. Aerospace and Defense sales increased 25%; Medical increased 56%; Industrial and Consumer increased 27%. Transportation sales increased 4%, while energy-market conditions remained slow but improved.
- International sales were $159.9 million, or 33% of total sales, compared with 31% a year earlier. One customer represented approximately 11% of current-quarter sales and 10% of receivables at quarter-end.
- Net periodic pension and postretirement benefit costs fell to $3.6 million from $16.8 million, primarily reflecting the pension-plan freeze and lower pension-related expense. A $100 million voluntary pension contribution had been made in October 2016.
Outlook, management commentary and risks
- Management described the quarter as its best first quarter in four years, citing improving end markets, stronger product mix and cost savings from the Carpenter Operating Model. It noted strong aerospace-engine demand and a continuing new-platform ramp.
- Fiscal 2018 capital expenditures were expected to be approximately $120 million. The company expected $2.6 million of additional qualified pension-plan contributions for the remainder of fiscal 2018 and estimated total fiscal 2018 net periodic benefit costs of $14.0 million.
- Management said available cash and borrowing capacity should be sufficient for foreseeable cash needs. The company reported compliance with credit covenants: interest coverage of 10.35:1 against a 3.50:1 minimum, and debt-to-capital of 33.1% against a 55% maximum.
- Key risks include cyclical end markets, raw-material and energy costs, surcharge timing and recovery, customer performance under firm-price arrangements, foreign exchange, pension-asset and liability assumptions, competition, specialized-equipment disruptions, labor issues, and acquisition integration. The company uses commodity, currency and interest-rate derivatives; it reported that specified 10% market shocks would not materially affect results.
- Environmental remediation liabilities were $16.1 million, unchanged from June 30. Other routine legal matters include product, commercial, employment, personal-injury and asbestos-related claims. Management did not expect these matters to have a material long-term effect, but noted a particular quarter or year could be affected.
- The Puris asset acquisition completed in February 2017 for $35.3 million expanded titanium powder and additive-manufacturing capabilities. The Specialty Steel Supply business was divested in fiscal 2017 for $12.0 million in proceeds.
- No special items were reported in the current quarter. The prior-year quarter included a pension-curtailment charge and a discrete tax charge; adjusted diluted EPS was a loss of $0.08, versus the reported loss of $0.13.
Important facts for investors to verify
- Whether higher shipments and improved product mix persist, particularly in Aerospace and Defense, Medical, and Industrial and Consumer markets.
- Whether inventory and working-capital investment converts to cash as demand develops; operating cash flow and free cash flow were negative despite the return to profitability.
- Progress against the approximately $120 million fiscal 2018 capital-spending outlook and the company’s liquidity and covenant headroom.
- The effect of raw-material surcharge timing, commodity hedges and firm-price customer commitments on margins and cash flow.
- Developments in pension costs and contributions, environmental remediation, and outstanding legal matters.