Carpenter Technology Reports First Quarter Results
10/29/2013 - Carpenter Technology said its team executed at a high level within the context of generally soft market conditions during the quarter ended 30 September 2013.
Carpenter Technology Corporation reported net income of US$34.6 million or US$0.65 per diluted share for the quarter ended 30 September 2013 compared to US$39.2 million or US$0.74 per diluted share in the prior year first quarter.
Financial Highlights
“Our first quarter earnings were in-line with our expectations,” said William A. Wulfsohn, president and chief executive officer. “The team executed at a high level within the context of generally soft market conditions. Our core markets remained relatively weak as continued supply chain destocking in the aerospace and energy markets reduced demand for our premium and ultra-premium products. At the same time, the commercial team executed well by bringing in more 'value' sales to meet growing demand from the Transportation and Industrial & Consumer markets. Thus our sales, excluding surcharge, declined by 7% but our volume increased by 1%.
“Our strong manufacturing performance contributed significantly to our earnings. The team executed on multiple fronts to reduce production and overhead costs. We achieved these results while successfully performing a significant planned maintenance overhaul on our Reading forge, positioning this critical piece of hot working equipment to support future growth.
“Our second quarter now looks weaker than we initially anticipated at the start of the year. Even as volumes stabilize, our mix will remain weak. We could see a similar change in earnings from Q1 to Q2 as we saw last year. The timing and duration of seasonal customer closures can impact, positively or negatively, shipments near the end of the calendar year.
“That said, we are just now beginning to see some very early indications that demand is stabilizing. If this continues, we could see a recovery in the second half of the fiscal year. We remain confident that market fundamentals will significantly improve in calendar 2014. This will coincide with the completion of Athens enabling us to target sustained sales growth, margin improvement and strong positive cash flow.”
Net Sales and Operating Income
Net sales were US$498.6 million and net sales excluding surcharge were US$412.1 million in the first quarter. Net sales, excluding surcharge, decreased by US$28.7 million or 7% from the first quarter of fiscal year 2013 on 1% higher shipments. The sales decline can be attributed to the continued Aerospace and Energy supply chain adjustments that impacted near- term order activity of premium and ultra-premium products. This was partly offset by higher volumes of materials sold into the Transportation and Industrial & Consumer markets.
Operating income, excluding pension earnings, interest, and deferrals (EID) decreased by US$7.8 million or 11% from the prior year first quarter. This reduction mainly reflects the sales mix impact, partially offset by improved manufacturing performance.
Cash Flow
Free cash flow in the first quarter was negative US$60.5 million, compared to negative US$102.7 million in the prior year first quarter. Cash flow from operations in the first quarter was US$64 million which included US$10 million of increased working capital and US$1.5 million of pension contributions. This compares to cash flow from operations of negative US$36.7 million in the prior year first quarter, which included US$71 million of increased working capital and US$48.1 million of pension contributions. These year-over-year changes helped offset US$114.9 million of capital spending, largely related to the Athens facility construction, compared to US$56.4 million of capital spending in the prior year.
Total liquidity, including cash and available revolver balance, was US$693 million at the end of the first quarter. This consisted of US$201 million of cash and US$492 million of available revolver.
End Markets:
* Excludes sales through Carpenter’s Distribution business
Aerospace and Defense
Energy
Medical
Transportation
Industrial and Consumer
Beginning with the fiscal year 2014 first quarter results, the company changed its reportable segments. The company has two reportable segments, Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP). The change reflects the completion of the integration of the businesses acquired by the company in the acquisition of Latrobe Specialty Metals, Inc. (Latrobe) in February 2012. Prior to this change, the Latrobe businesses were reported as a separate segment to provide management with the focus and visibility into the business of the acquired operations. The previously reported Latrobe segment also included the results of the company’s distribution business in Mexico. Since the Latrobe businesses are now fully integrated, the previously reported Latrobe segment has been merged into the company’s operating model, in which the company’s integrated steel mill operations are managed distinctly from the collection of other differentiated operations.
The SAO segment is comprised of Carpenter's major premium alloy and stainless steel manufacturing operations. This includes operations performed at mills primarily in Reading and Latrobe and surrounding areas in Pennsylvania, South Carolina, and the new premium products manufacturing facility being built in Limestone County, Alabama.
The PEP segment is comprised of the company’s differentiated operations. This segment includes the Dynamet titanium business, the Carpenter Powder Products ("CPP") business, the Amega West business, the Specialty Steel Supply business and the Latrobe and Mexico distribution businesses. The businesses in the PEP segment are managed with an entrepreneurial structure to promote speed and flexibility, and drive overall revenue and profit growth. The pounds sold data above for the PEP segment included only the Dynamet and CPP businesses.
The service cost component of net pension expense, which represents the estimated cost of future pension liabilities earned associated with active employees, is included in the operating results of the business segments. The residual net pension expense, or pension earning, interest and deferrals (pension EID), is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans, and amortization of actuarial gains and losses and prior service costs, is included under the heading "Pension earnings, interest & deferrals."
Financial Highlights
| (US$ in millions) | Q1 | Q1 | Q4 | ||||||||
| FY2014 | FY2013 | FY2013 | |||||||||
| Net Sales | US$ | 498.6 | US$ | 544.9 | US$ | 611.8 | |||||
| Net Sales Excluding Surcharge (a) | US$ | 412.1 | US$ | 440.8 | US$ | 496.6 | |||||
| Operating Income | US$ | 55.8 | US$ | 61.6 | US$ | 65.4 | |||||
| Net Income Attributable to Carpenter | US$ | 34.6 | US$ | 39.2 | US$ | 40.9 | |||||
| Free Cash Flow (a) | US$ | (60.5 | ) | US$ | (102.7 | ) | US$ | 61.3 | |||
| Adjusted EBITDA (a) | US$ | 97.4 | US$ | 104.3 | US$ | 109.5 | |||||
“Our first quarter earnings were in-line with our expectations,” said William A. Wulfsohn, president and chief executive officer. “The team executed at a high level within the context of generally soft market conditions. Our core markets remained relatively weak as continued supply chain destocking in the aerospace and energy markets reduced demand for our premium and ultra-premium products. At the same time, the commercial team executed well by bringing in more 'value' sales to meet growing demand from the Transportation and Industrial & Consumer markets. Thus our sales, excluding surcharge, declined by 7% but our volume increased by 1%.
“Our strong manufacturing performance contributed significantly to our earnings. The team executed on multiple fronts to reduce production and overhead costs. We achieved these results while successfully performing a significant planned maintenance overhaul on our Reading forge, positioning this critical piece of hot working equipment to support future growth.
“Our second quarter now looks weaker than we initially anticipated at the start of the year. Even as volumes stabilize, our mix will remain weak. We could see a similar change in earnings from Q1 to Q2 as we saw last year. The timing and duration of seasonal customer closures can impact, positively or negatively, shipments near the end of the calendar year.
“That said, we are just now beginning to see some very early indications that demand is stabilizing. If this continues, we could see a recovery in the second half of the fiscal year. We remain confident that market fundamentals will significantly improve in calendar 2014. This will coincide with the completion of Athens enabling us to target sustained sales growth, margin improvement and strong positive cash flow.”
Net Sales and Operating Income
Net sales were US$498.6 million and net sales excluding surcharge were US$412.1 million in the first quarter. Net sales, excluding surcharge, decreased by US$28.7 million or 7% from the first quarter of fiscal year 2013 on 1% higher shipments. The sales decline can be attributed to the continued Aerospace and Energy supply chain adjustments that impacted near- term order activity of premium and ultra-premium products. This was partly offset by higher volumes of materials sold into the Transportation and Industrial & Consumer markets.
Operating income, excluding pension earnings, interest, and deferrals (EID) decreased by US$7.8 million or 11% from the prior year first quarter. This reduction mainly reflects the sales mix impact, partially offset by improved manufacturing performance.
Cash Flow
Free cash flow in the first quarter was negative US$60.5 million, compared to negative US$102.7 million in the prior year first quarter. Cash flow from operations in the first quarter was US$64 million which included US$10 million of increased working capital and US$1.5 million of pension contributions. This compares to cash flow from operations of negative US$36.7 million in the prior year first quarter, which included US$71 million of increased working capital and US$48.1 million of pension contributions. These year-over-year changes helped offset US$114.9 million of capital spending, largely related to the Athens facility construction, compared to US$56.4 million of capital spending in the prior year.
Total liquidity, including cash and available revolver balance, was US$693 million at the end of the first quarter. This consisted of US$201 million of cash and US$492 million of available revolver.
End Markets:
|
Q1 FY14 Sales* Ex. Surcharge US$ in Millions |
Q1 FY14 vs. Q1 FY13 |
Q1 FY14 vs. Q4 FY13 |
||||
| Aerospace and Defense | 182.9 | -6% | -20% | |||
| Energy | 59.1 | -15% | -27% | |||
| Medical | 25.0 | -10% | -5% | |||
| Transportation | 25.5 | -2% | -9% | |||
| Industrial and Consumer | 85.8 | -1% | -12% |
Aerospace and Defense
- Airplane delivery rates (Boeing and Airbus) up 9% August year-to-date 2013 versus 2012
- Numerous customers have publicly announced temporary production reductions
- Achieved solid year-over-year growth in titanium fastener demand
Energy
- Rig count down 1% compared to same quarter last year, but clear shift toward drill collar rentals versus purchases
- Gas turbine orders down versus prior year
Medical
- Volumes stabilizing but industry cost reduction efforts continue
- Expect modest demand recovery as OEM inventories reach structurally low levels
- Titanium pricing extremely competitive — lead times remained short
Transportation
- Strong volume growth — North American auto sales up 3% August year-to-date 2013 versus 2012
- European light vehicle sales down 4% year-over-year for the first six months of 2013
- Carpenter directly benefiting from strong demand growth for materials used in newest engine platform fuel delivery systems
Industrial and Consumer
- Strong demand for materials used in sporting goods, and industrial valve and infrastructure materials
- Softer demand within electronics and distribution channels
Beginning with the fiscal year 2014 first quarter results, the company changed its reportable segments. The company has two reportable segments, Specialty Alloys Operations (SAO) and Performance Engineered Products (PEP). The change reflects the completion of the integration of the businesses acquired by the company in the acquisition of Latrobe Specialty Metals, Inc. (Latrobe) in February 2012. Prior to this change, the Latrobe businesses were reported as a separate segment to provide management with the focus and visibility into the business of the acquired operations. The previously reported Latrobe segment also included the results of the company’s distribution business in Mexico. Since the Latrobe businesses are now fully integrated, the previously reported Latrobe segment has been merged into the company’s operating model, in which the company’s integrated steel mill operations are managed distinctly from the collection of other differentiated operations.
The SAO segment is comprised of Carpenter's major premium alloy and stainless steel manufacturing operations. This includes operations performed at mills primarily in Reading and Latrobe and surrounding areas in Pennsylvania, South Carolina, and the new premium products manufacturing facility being built in Limestone County, Alabama.
The PEP segment is comprised of the company’s differentiated operations. This segment includes the Dynamet titanium business, the Carpenter Powder Products ("CPP") business, the Amega West business, the Specialty Steel Supply business and the Latrobe and Mexico distribution businesses. The businesses in the PEP segment are managed with an entrepreneurial structure to promote speed and flexibility, and drive overall revenue and profit growth. The pounds sold data above for the PEP segment included only the Dynamet and CPP businesses.
The service cost component of net pension expense, which represents the estimated cost of future pension liabilities earned associated with active employees, is included in the operating results of the business segments. The residual net pension expense, or pension earning, interest and deferrals (pension EID), is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans, and amortization of actuarial gains and losses and prior service costs, is included under the heading "Pension earnings, interest & deferrals."
