Carpenter Technology Corporation (NYSE: CRS) — Form 10-K Summary
Period: Fiscal year ended June 30, 2019, filed August 29, 2019. The request metadata says “2018 Q4,” but this filing reports FY2019 and includes FY2019 fourth-quarter results; it is not a standalone quarterly filing.
Business context and reporting period
Carpenter manufactures and distributes specialty alloys and engineered products for aerospace and defense, medical, energy, transportation, industrial and consumer markets. Its reportable segments are Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP). Aerospace and defense generated 56% of FY2019 sales.
Financial and operating highlights
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Net sales | $2,380.2 million | $2,157.7 million | Up 10%; excluding raw-material surcharges, up 8% on 1% higher volume |
| Gross profit / margin | $444.8 million / 18.7% | $382.3 million / 17.7% | Excluding surcharge revenue, margin was 22.9% versus 21.3% |
| Operating income / margin | $241.4 million / 10.1% | $189.3 million / 8.8% | Adjusted margin excluding surcharges and special items: 12.5% versus 10.6% |
| Net income | $167.0 million | $188.5 million | Lower principally because FY2018 included $68.3 million of discrete tax benefits |
| Diluted EPS | $3.43 | $3.92 | Adjusted EPS was $3.46 versus $2.50 |
| Operating cash flow | $232.4 million | $209.2 million | Increased $23.2 million |
| Capital spending | $180.3 million | $135.0 million | Higher investment in growth initiatives |
| Free cash flow (company-defined) | $(53.7) million | $34.7 million | Includes acquisitions, capital spending and dividends |
| Cash and cash equivalents | $27.0 million | $56.2 million | Year-end balance decreased $29.2 million |
| Debt | $570.3 million | $545.7 million | Includes $550.6 million long-term debt and $19.7 million short-term borrowings |
Year-end total assets were $3,187.8 million and total liabilities were $1,667.7 million. Total available liquidity was $401.3 million, including $27.0 million cash and $374.3 million available under the credit agreement. The company was in compliance with its covenants; actual interest coverage was 15.03x against a 3.50x minimum, and debt-to-capital was 27% against a 55% maximum.
SAO sales rose 9% to $1,967.3 million and segment operating income increased to $282.2 million from $232.4 million. PEP sales rose 12% to $479.8 million and operating income increased to $30.0 million from $26.1 million; PEP results included an $11.4 million insurance recovery. FY2019 fourth-quarter sales were $641.4 million, operating income $67.9 million and net income $48.9 million, compared with $618.0 million, $60.0 million and $42.8 million, respectively, in FY2018’s fourth quarter.
Material changes versus the prior year
- Sales growth and improved product mix, capacity gains and operating-cost improvements lifted gross and operating margins. Sales excluding surcharges increased across most end markets, led by aerospace and defense, medical and energy.
- Net income and reported EPS declined year over year, but comparison is affected by FY2018’s $68.3 million tax benefit from U.S. tax reform. Adjusted EPS increased to $3.46 from $2.50.
- Cash used for capital expenditures and acquisitions increased. The company acquired LPW Technology Ltd. for $79.0 million net of cash acquired; capital expenditures rose to $180.3 million.
- Backlog excluding surcharges increased to approximately $800 million at June 30, 2019, from $568 million a year earlier; substantially all was expected to ship in FY2020.
- Net pension and postretirement benefit costs decreased to $11.6 million from $14.2 million. The reported pension liability nevertheless increased, with pension-plan underfunding of $374.6 million at year-end versus $292.0 million.
Outlook, risks and unusual items
- Management expected FY2020 capital expenditures of approximately $170 million and required pension contributions of $6.2 million. The filing does not provide a clear numerical earnings or revenue forecast.
- Growth plans emphasize customer share gains, productivity and capacity improvements, additive manufacturing and soft magnetics. Management reported that Athens, Alabama continued to gain aerospace process qualifications.
- Key risks include cyclical aerospace, energy and other end markets; raw-material and energy price or supply volatility; tariffs and trade-policy changes; execution and qualification risks on capacity expansions; and dependence on specialized equipment and concentrated production locations.
- Additional exposures include pension funding and investment performance, environmental regulation and remediation, product quality or liability claims, customer credit concentration, labor negotiations, foreign exchange, cybersecurity and the multi-year ERP implementation.
- Environmental remediation liabilities were $16.1 million. Management considered known contingencies not expected to have a material long-term effect, while noting outcomes could be material in a particular quarter or year.
- The auditor gave an unqualified opinion on the financial statements but concluded internal control over financial reporting was not effective at June 30, 2019. A material weakness involved accuracy and completeness of price, quantity and customer data in billing. No financial-statement misstatements were identified; remediation was underway.
- Other notable items: FY2019 included the $11.4 million insurance recovery and $1.2 million of acquisition-related costs. Raw-material surcharges were $438.1 million of reported sales. The company uses LIFO; FIFO inventory would have been $178.4 million higher at year-end.
Most important facts for investors to verify
- Progress and independent validation of remediation for the revenue-related material weakness, and whether disclosure controls become effective.
- Whether the $800 million backlog converts to shipments and earnings in FY2020, including customer timing, qualifications and mix.
- Returns from the elevated capital program and LPW acquisition, alongside expected FY2020 capital spending of approximately $170 million.
- Cash generation after investment and dividends, and the effect of pension funding needs on liquidity.
- Customer exposure: Arconic represented 11% of FY2019 sales and approximately 12% of year-end receivables; also verify the related commodity-hedge exposure disclosed in the filing.