Carpenter Technology Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 31, 2018 (quarterly results compared with the same periods ended March 31, 2017). The statements are unaudited. The filing metadata’s “2017 Q3” label does not match the filing period; this is fiscal Q3 2018.
Business context and performance
Carpenter manufactures, fabricates and distributes specialty metals and related products. Its reportable segments are Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP). Management cited stronger demand, product mix and market-share gains, particularly in Aerospace and Defense and Medical, and continued investment in additive manufacturing.
| Metric | Three months ended March 31, 2018 | Nine months ended March 31, 2018 |
|---|---|---|
| Net sales | $572.2 million, up 21% | $1,539.7 million, up 19% |
| Sales excluding raw-material surcharges | $472.5 million, up 14% | $1,297.8 million, up 16% |
| Gross profit / margin | $96.0 million / 16.8%; prior-year margin 17.5% | $267.3 million / 17.4%; prior-year margin 14.9% |
| Operating income / margin | $45.2 million / 7.9%; prior year $35.8 million / 7.6% | $127.7 million / 8.3%; prior year $52.6 million / 4.1% |
| Net income | $30.2 million; diluted EPS $0.63 | $145.7 million; diluted EPS $3.04 |
| Operating cash flow | Not presented quarterly | $90.7 million, versus $36.3 million |
| Free cash flow (company-defined, non-GAAP) | Not presented quarterly | Negative $21.0 million, versus negative $81.4 million |
Financial position and material changes
- Cash was $46.8 million at March 31, 2018, down from $66.3 million at June 30, 2017. Total debt was $601.3 million, including $55.0 million due within one year; debt was $605.0 million at June 30, 2017.
- Reported liquidity was $440.8 million: cash plus $394.0 million available under the $400 million revolving facility. The company reported compliance with covenants: interest coverage of 11.15x against a 3.50x minimum and debt-to-capital of 30.5% against a 55% maximum.
- Receivables rose to $349.3 million from $290.4 million and inventory to $732.6 million from $690.4 million. Management attributed cash-flow effects in part to higher working capital supporting increased demand.
- Capital expenditures were $80.9 million for the nine-month period, versus $63.1 million. Total assets were $2,991.9 million and stockholders’ equity $1,371.1 million at March 31, 2018.
- SAO quarterly sales increased 26% and operating income rose to $58.0 million from $51.9 million. PEP sales increased 9% and operating income was $5.4 million versus $4.7 million. For nine months, PEP operating income increased to $18.1 million from $2.7 million.
Outlook, commentary and notable items
- Management described continued demand and a growing backlog, but did not provide specific sales or earnings guidance. Fiscal 2018 capital expenditures were expected to be approximately $130–$135 million. The company expected about $1.0 million of pension contributions for the remainder of fiscal 2018 and planned to fund the $55.0 million notes due in fiscal Q4 with available cash.
- Reported nine-month net income includes a $67.6 million discrete net tax benefit from U.S. tax legislation, principally deferred-tax remeasurement. Excluding that and other disclosed special items, nine-month diluted EPS was $1.63 versus adjusted $0.50 a year earlier. Third-quarter adjusted diluted EPS was $0.60 versus $0.44 reported in the prior-year quarter. These are company-defined non-GAAP measures.
- Raw-material surcharges increased to $99.7 million in the quarter and $241.9 million year to date. Management estimated surcharge lag reduced operating income by $3.0 million for the quarter and $6.1 million year to date. Excluding surcharge revenue, quarterly gross margin was 20.3% versus 20.1%; year-to-date it was 20.6% versus 17.1%.
- Carpenter acquired CalRAM for $13.3 million in February 2018 to expand into additive-manufacturing part production; purchase accounting remained preliminary. A January 2018 fire at a Dynamet facility partly offset PEP improvement in the quarter.
- Environmental remediation liabilities were $16.3 million. Management considered routine legal matters not expected to have a long-term material effect, while noting outcomes or future developments could affect a particular period. One customer accounted for about 10% of nine-month sales, and one customer represented about 11% of receivables.
- Key risks include cyclical end markets, raw-material and energy costs and surcharge timing, customer and supplier concentration, foreign-exchange movements, pension assumptions, acquisition integration, specialized-facility disruptions, and oil-and-gas volatility. Management was evaluating the revenue-recognition standard, effective for the company July 1, 2018; its adoption method and financial impact were not yet finalized.
Important facts for investors to verify
- How much of revenue and margin growth reflects shipment volume and product mix versus surcharges, and whether surcharge lag persists.
- The sustainability of operating improvement, particularly in SAO and PEP, and the effects of the Dynamet fire and CalRAM integration.
- Cash conversion and working-capital trends, given rising receivables and inventory, negative free cash flow, and planned capital spending.
- The tax benefit’s nonrecurring nature, the final tax-reform calculations, and the effect of future tax provisions on comparable earnings.
- Debt repayment and liquidity after the $55.0 million notes mature, alongside covenant headroom and projected cash needs.
- Customer concentration, environmental and litigation exposures, and the eventual effect of adopting the new revenue-recognition standard.