Carpenter Technology Posts Strong Quarter Despite Weather-Related Issues
04/28/2014 - Carpenter Technology Corp. said weather-related expenses mask the company's strong operating performance in the first quarter of the year.
Carpenter Technology Corp. announced financial results for the quarter ended 31 March 2014. Carpenter reported net income of US$30.6 million compared to US$32.9 million in the same quarter last year.
Financial Highlights
“In Carpenter’s third quarter, we made some significant progress toward our short and long term objectives,” said William A. Wulfsohn, president and chief executive officer. “At the same time, as we previously announced, earnings were significantly impacted by approximately US$8 million of additional weather-related expenses. This was primarily due to a spike in electricity rates in the quarter.
“These weather-related expenses mask some strong operating performance. Specialty Alloys Operations (SAO) sales volume grew by 12% sequentially. In addition, our Performance Engineered Products (PEP) segment realized significant operating income growth due to its increased focus on operational excellence. Finally, while our reported operating margins were down sequentially, they would have been up by 120 basis points were it not for the US$8 million of additional weather-related expense.
“Looking forward, we expect sales volume to grow, but gradually. Demand has increased in each of our end markets. Our SAO sales backlog grew 19% during the quarter and is now more than the prior year.
“That said, many of our key SAO work centers are now fully booked. In addition, while the Carpenter team did a great job starting up our new Athens facility ahead of schedule and under budget, the facility can only ship a limited range of products at this time. The site is fully operational, but we are working to obtain the internal and customer approvals required to tap the facility’s full potential. Some of these approvals will come quickly, within the next several quarters, while others will take longer. Thus, while we believe Athens is a game changer for Carpenter, the facility’s impact on our sales growth will be limited in the short-term and it will gain momentum over time.
“We have been able to complete the majority of our Athens-related capital spending while retaining a strong balance sheet. With the Athens capital spending ramping down, we expect to once again become a strong cash flow generator in the fourth quarter.”
Net Sales and Operating Income
Net sales for the third quarter of fiscal year 2014 were US$566.3 million, and net sales excluding surcharge were US$467.2 million, a decrease of US$4.0 million (or 1%) from the same quarter last year, on 8% higher shipments.
Operating income was US$49.5 million, a decrease of US$3.5 million from the third quarter of the prior year. Operating income—excluding pension earnings, interest and deferrals (EID)—was US$55.5 million, a decrease of US$5.5 million (or 9%) from the third quarter of the prior year. Excluding the US$8.0 million of weather-related impacts, and adding back the US$2.9 million of special items in the third quarter of the prior year, operating income excluding pension EID was relatively unchanged year-over-year.
Cash Flow
Cash flow from operations was US$81.0 million, which included a US$6.3 million decrease in working capital and US$1.5 million of pension contributions. This compares to a cash flow from operations of US$26.5 million in the prior year’s third quarter, which included a US$2.6 million increase in working capital and US$85.4 million of pension contributions. Free cash flow in the third quarter was negative US$22.2 million, compared to negative US$66.4 million in the same quarter last year. Capital spending in the third quarter, largely related to the construction of the Athens facility, was US$93.6 million, compared to US$83.6 million in the prior year’s third quarter. Approximately 90% of the Athens project spend has occurred; the remaining spend will occur over the next 15 months.
Total liquidity, including cash and available revolver balance, was US$577 million at the end of the third quarter. This consisted of US$85 million of cash, and US$492 million of available revolver.
End Markets
* Excludes sales through Carpenter’s distribution businesses
Aerospace and Defense
Year-over-year sales growth was driven by:
Demand for materials has been strong in:
Financial Highlights
| (US$ in millions) | Q3 | Q3 | Q2 | |||||||||
| FY2014 | FY2013 | FY2014 | ||||||||||
| Net Sales | US$ | 566.3 | US$ | 581.4 | US$ | 503.5 | ||||||
| Net Sales Excluding Surcharge (a) | US$ | 467.2 | US$ | 471.2 | US$ | 414.6 | ||||||
| Operating Income | US$ | 49.5 | US$ | 53.0 | US$ | 47.5 | ||||||
| Net Income | US$ | 30.6 | US$ | 32.9 | US$ | 29.5 | ||||||
| Free Cash Flow (a) | US$ | (22.2 | ) | US$ | (66.4 | ) | US$ | (99.9 | ) | |||
| Adjusted EBITDA (a) | US$ | 92.0 | US$ | 96.5 | US$ | 87.3 | ||||||
“In Carpenter’s third quarter, we made some significant progress toward our short and long term objectives,” said William A. Wulfsohn, president and chief executive officer. “At the same time, as we previously announced, earnings were significantly impacted by approximately US$8 million of additional weather-related expenses. This was primarily due to a spike in electricity rates in the quarter.
“These weather-related expenses mask some strong operating performance. Specialty Alloys Operations (SAO) sales volume grew by 12% sequentially. In addition, our Performance Engineered Products (PEP) segment realized significant operating income growth due to its increased focus on operational excellence. Finally, while our reported operating margins were down sequentially, they would have been up by 120 basis points were it not for the US$8 million of additional weather-related expense.
“Looking forward, we expect sales volume to grow, but gradually. Demand has increased in each of our end markets. Our SAO sales backlog grew 19% during the quarter and is now more than the prior year.
“That said, many of our key SAO work centers are now fully booked. In addition, while the Carpenter team did a great job starting up our new Athens facility ahead of schedule and under budget, the facility can only ship a limited range of products at this time. The site is fully operational, but we are working to obtain the internal and customer approvals required to tap the facility’s full potential. Some of these approvals will come quickly, within the next several quarters, while others will take longer. Thus, while we believe Athens is a game changer for Carpenter, the facility’s impact on our sales growth will be limited in the short-term and it will gain momentum over time.
“We have been able to complete the majority of our Athens-related capital spending while retaining a strong balance sheet. With the Athens capital spending ramping down, we expect to once again become a strong cash flow generator in the fourth quarter.”
Net Sales and Operating Income
Net sales for the third quarter of fiscal year 2014 were US$566.3 million, and net sales excluding surcharge were US$467.2 million, a decrease of US$4.0 million (or 1%) from the same quarter last year, on 8% higher shipments.
Operating income was US$49.5 million, a decrease of US$3.5 million from the third quarter of the prior year. Operating income—excluding pension earnings, interest and deferrals (EID)—was US$55.5 million, a decrease of US$5.5 million (or 9%) from the third quarter of the prior year. Excluding the US$8.0 million of weather-related impacts, and adding back the US$2.9 million of special items in the third quarter of the prior year, operating income excluding pension EID was relatively unchanged year-over-year.
Cash Flow
Cash flow from operations was US$81.0 million, which included a US$6.3 million decrease in working capital and US$1.5 million of pension contributions. This compares to a cash flow from operations of US$26.5 million in the prior year’s third quarter, which included a US$2.6 million increase in working capital and US$85.4 million of pension contributions. Free cash flow in the third quarter was negative US$22.2 million, compared to negative US$66.4 million in the same quarter last year. Capital spending in the third quarter, largely related to the construction of the Athens facility, was US$93.6 million, compared to US$83.6 million in the prior year’s third quarter. Approximately 90% of the Athens project spend has occurred; the remaining spend will occur over the next 15 months.
Total liquidity, including cash and available revolver balance, was US$577 million at the end of the third quarter. This consisted of US$85 million of cash, and US$492 million of available revolver.
End Markets
|
Q3 FY14 Sales* Ex. Surcharge (in Millions) |
Q3 FY14 vs. Q3 FY13 |
Q3 FY14 vs. Q2 FY14 |
||||
| Aerospace and Defense | US$202.5 | -6% | +14% | |||
| Energy | US$72.5 | +2% | +12% | |||
| Medical | US$28.2 | +11% | +26% | |||
| Transportation | US$30.6 | +8% | +8% | |||
| Industrial and Consumer | US$98.0 | +1% | +10% |
Aerospace and Defense
- Tons were flat versus the prior year, but higher sequentially.
- Revenue per ton was down due to greater sales volume of structural component materials and continued demand weakness for nickel engine and fastener materials.
- Titanium fastener revenues were up 25% year-over-year.
- The directional rig count grew 5% compared to the same quarter last year.
- Energy tons sold were up 10% year-over-year. Revenue per ton was down due to softer demand for oil and gas completion materials.
- Amega West increased sales primarily as a result of higher levels of drill collar rentals.
Year-over-year sales growth was driven by:
- Stabilizing demand for orthopedic and surgical devices.
- Increased distributor demand for titanium materials.
- North American light vehicle sales continue to rise.
- Carpenter results benefit from strong demand for materials used in the next generation of fuel delivery systems.
Demand for materials has been strong in:
- Plant and equipment applications.
- Bridge infrastructure projects.
