Carpenter Technology Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021, the first quarter of fiscal 2022. Comparisons are with the three months ended September 30, 2020 unless stated otherwise. Amounts are in U.S. dollars.
Business context and operating performance
Carpenter produces and distributes specialty alloys and related products through Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP). Management reported improving demand and backlog up 25% sequentially and 49% year over year. Recovery remained uneven: aerospace demand was still weak, while PEP performed ahead of expectations, led by titanium fasteners for aerospace and defense.
Financial highlights
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $387.6 million | $353.3 million |
| Gross profit / gross margin | $25.2 million / 6.5% | $3.5 million / 1.0% |
| Operating loss | $19.1 million | $48.8 million |
| Net loss | $14.8 million | $47.1 million |
| Diluted loss per share | $0.31 | $0.98 |
| Cash from operations | Use of $47.0 million | Generation of $88.0 million |
| Capital spending | $14.4 million | $33.3 million |
Sales increased 10%, but sales excluding raw-material surcharges rose only 2% to $312.9 million; shipment volume declined 2%. Surcharge revenue increased to $74.7 million from $46.1 million. Gross margin excluding surcharges improved to 8.1% from 1.1%. Management’s adjusted operating margin, excluding surcharges and specified special items, was negative 5.6%, versus negative 10.1%.
Working capital was a significant cash-flow drag. Inventory increased by $66.5 million in the quarter, which management attributed to temporary production delays, COVID-19 isolations, supply-chain disruption and hiring challenges. Free cash flow, as defined by the company and including dividends, was negative $71.2 million, versus positive $62.6 million; the prior-year figure included $17.6 million of Amega West divestiture proceeds.
At September 30, 2021, cash was $213.2 million, long-term debt was $694.8 million and total liquidity was $507.8 million, including $294.6 million available under the revolving facility. Total assets were $2,959.9 million and stockholders’ equity was $1,367.6 million. The company paid a $0.20-per-share quarterly dividend.
Material changes and segment results
- SAO sales rose 10% to $331.9 million, but rose only 1% excluding surcharges; the segment recorded a $5.9 million operating loss. Management cited near-term operating delays and weaker aerospace and energy demand.
- PEP sales rose 21% to $74.6 million, and operating income was $0.6 million versus a $3.6 million loss. The prior-year comparison included Amega West, divested September 30, 2020.
- The consolidated operating loss narrowed from $48.8 million to $19.1 million. The prior-year quarter included $10.0 million of restructuring and impairment charges and $8.2 million of debt-extinguishment losses; neither item recurred in the current quarter.
- COVID-19-related costs were $1.6 million, down from $7.9 million. Current-quarter net loss included a $10.4 million income-tax benefit; adoption of an income-tax accounting update affected interim tax-benefit recognition.
Outlook, liquidity, risks and contingencies
Management described the long-term outlook for end markets as positive and expected aerospace demand conditions to accelerate in calendar 2022, while noting near-term execution challenges. Fiscal 2022 capital expenditures were expected to be approximately $125 million; timing could be affected by labor shortages and supply-chain disruptions. Management expected fiscal 2022 net pension income of $7.3 million and no further contributions to U.S. qualified defined-benefit pension plans during the fiscal year.
The $300 million secured revolving facility matures March 31, 2024, but has a springing maturity of November 30, 2022 if the $300 million of 4.45% notes due March 2023 have not been refinanced, repurchased or redeemed on the specified terms. The company reported compliance with facility covenants. The interest-coverage covenant is waived through the quarter ending March 31, 2022, after which specified minimum ratios apply. Management said liquidity was sufficient for foreseeable needs.
Risks include cyclical end markets, ongoing COVID-19 effects, operational and labor constraints, raw-material and energy costs, supply-chain availability, and customer performance under firm-price arrangements. Approximately 41% of net deferred commodity-hedge gains related to contracts supporting firm-price sales with one customer, in addition to receivables exposure to that customer. Environmental remediation liabilities were $16.1 million; management did not expect a material long-term effect but noted costs could be material in an individual period. Routine litigation and other claims were also disclosed. The filing states that actual results may differ from forward-looking statements.
Important facts for investors to verify
- Whether reported backlog growth and expected aerospace recovery translate into orders, shipments and improved profitability.
- Whether inventory can be converted to sales and operating cash as temporary delays ease, and whether working capital continues to consume cash.
- How much of sales and margin improvement reflects underlying demand versus higher surcharge revenue; review both GAAP and company-defined non-GAAP measures.
- Progress on refinancing or otherwise addressing the March 2023 notes before the credit facility’s November 2022 springing-maturity trigger.
- Whether the $125 million capital-spending outlook and stated liquidity remain achievable amid labor and supply-chain constraints.
- Potential exposure from the firm-price customer concentration, environmental matters and future goodwill impairment assumptions.