Carpenter Technology Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended June 30, 2020. The filing also reports fourth-quarter results; this is not a standalone “2019 Q4” filing. Carpenter manufactures and distributes specialty metals and related products through Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP).
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $2,181.1 million | $2,380.2 million |
| Gross profit / margin | $329.4 million / 15.1% | $444.8 million / 18.7% |
| Operating income / margin | $25.3 million / 1.2% | $241.4 million / 10.1% |
| Net income | $1.5 million | $167.0 million |
| Diluted EPS | $0.02 | $3.43 |
| Cash from operations | $231.8 million | $232.4 million |
| Capital expenditures | $171.4 million | $180.3 million |
| Free cash flow (company-defined, non-GAAP) | $21.8 million | $(53.7) million |
- Sales fell 8%; sales excluding raw-material surcharge revenue declined 6%, with pounds sold down 13%. The company said first-half demand and mix gains were reversed by COVID-19 disruption and the Boeing 737 MAX production halt in the second half.
- Reported earnings included $29.3 million of inventory write-downs, $68.5 million of restructuring and asset-impairment charges, and a $34.6 million goodwill impairment. Management reported adjusted diluted EPS of $2.21 versus $3.46 in FY2019; this is a non-GAAP measure.
- Gross margin excluding surcharge revenue and inventory write-downs was 19.6%, compared with 22.9%. Adjusted operating margin excluding surcharges and special items was 8.6%, versus 12.5%.
- Fourth-quarter sales were $437.3 million and net loss was $118.4 million, or $(2.46) per diluted share, including $130.1 million of restructuring and asset-impairment charges. FY2020’s first three quarters were profitable.
Segments and material changes
- SAO: FY2020 sales were $1,831.6 million, down 7%; operating income was $239.0 million, versus $282.2 million. Management cited lower second-half demand, productivity losses, and accelerated inventory reduction.
- PEP: Sales were $401.1 million, down 16%; the segment recorded an operating loss of $10.4 million, compared with $30.0 million of operating income. Weak oil-and-gas demand, tariffs, and COVID-19 weighed on results.
- The company approved an exit from its PEP oil-and-gas business, closure of two domestic powder facilities, and a 20% reduction in its global salaried workforce. Backlog excluding surcharge fell to approximately $539 million from $800 million; substantially all was expected to ship in FY2021.
- Sales declined across most end markets: energy 25%, industrial and consumer 20%, distribution 22%, transportation 16%, and medical 4%. Aerospace and defense sales declined 1%; sales excluding surcharges in that market increased 2%.
Cash, debt, and liquidity
- Cash and cash equivalents were $193.1 million at year-end, up from $27.0 million. Total liquidity, including available credit, was $417.1 million. Operating cash flow remained approximately level year over year; working-capital improvement, particularly inventory reduction, supported cash generation.
- Long-term debt was $551.8 million and short-term credit-agreement borrowings were $170.0 million. Of the $400 million revolving facility, $224 million remained available, with $6 million of letters of credit outstanding. The company reported compliance with its covenants: interest coverage of 15.42x versus a 3.50x minimum, and debt-to-capital of 33% versus a 55% maximum.
- After year-end, Carpenter issued $400 million of 6.375% senior notes due 2028 and used $250 million of proceeds to repay 5.20% notes due July 2021. The credit facility extends to March 2022.
- Quarterly dividends were $0.20 per share; FY2020 dividends paid totaled $38.8 million. FY2021 capital expenditures were expected to be approximately $120 million. Required pension contributions were expected to be $19.3 million in FY2021; management estimated approximately $186.8 million over five years, subject to assumptions.
Outlook, commentary, risks, and unusual items
- The filing provides no quantified earnings or sales guidance. Management said the duration and effects of COVID-19 could not be precisely estimated. FY2021 capital expenditure expectations and restructuring completion timing are disclosed, but broader financial forecasts are not.
- Key risks include continued COVID-19 impacts, commercial aerospace weakness and uncertainty around the 737 MAX, cyclical energy markets, raw-material and energy availability and price volatility, tariffs and trade policy, customer demand and credit risk, pension funding, and possible future goodwill or asset impairments.
- Goodwill remaining for the Additive reporting unit was $45.6 million after impairment; its estimated fair value was below carrying value by approximately 24.1%. SAO goodwill fair value exceeded carrying value by only about 4.5%. Further adverse changes in assumptions could lead to additional impairment.
- Environmental remediation liabilities were $16.0 million. Management did not expect known contingencies to materially affect the company over the long term, while noting that costs could be material in an individual period. The company also disclosed routine litigation and significant pension and postretirement obligations.
- The company reported that a previously disclosed billing-process internal-control material weakness was remediated as of June 30, 2020; management and the auditor concluded internal control over financial reporting was effective at that date. The auditor identified goodwill impairment assessment as a critical audit matter.
Important facts for investors to verify
- Whether post-pandemic demand, especially commercial aerospace, recovers and whether backlog converts to shipments and cash as expected.
- Progress and remaining cash costs of the oil-and-gas exit, powder-facility closures, and workforce restructuring.
- Liquidity and refinancing after the 2028 notes issuance, including the repayment of the 2021 notes and the revolving facility’s March 2022 maturity.
- Assumptions supporting Additive and SAO goodwill valuations, and whether further impairment charges arise.
- Actual pension contributions, capital expenditures, and free cash flow compared with the filing’s expectations; distinguish reported GAAP results from management’s non-GAAP adjusted measures.