Carpenter Technology Reports Second Quarter Results
01/30/2015 - Carpenter Technology Corporation announced financial results for the quarter ended 31 December 2014.
Carpenter reported net income of US$24.1 million or US$0.45 per diluted share. Excluding a discrete tax charge of US$1.6 million (US$0.03 per diluted share) related to the enactment of the Tax Increase Prevention Act of 2014, earnings per diluted share would have been US$0.48 in the quarter. This compares to US$29.5 million or US$0.55 per diluted share in the same quarter last year.
Comment
Gregory A. Pratt, Carpenter’s chairman, president and chief executive officer, stated: “Carpenter’s Specialty Alloys Operations (SAO) drove strong year-over-year sales growth in the second fiscal quarter of 2015, and it realized the richer product mix that was evident in the backlog as we exited the first quarter. Operating margins remained below prior year levels due to higher near-term integrated mill operating costs, the Reading press outage and higher depreciation of the Athens facility. Performance Engineered Products (PEP) drove substantial year-over-year financial gains; PEP achieved this through operational improvements and strong end-use market product demand.
“Looking forward, our current backlog provides us with visibility to a stronger mix as we enter the third fiscal quarter. We continue to expect that SAO volumes will grow sequentially, with overall end-use market demand growth and expanded customer approvals for Athens production. To realize higher profitability on this growth, Carpenter remains focused on driving down operating costs. That said, uncertainty remains over the full impact of lower oil prices. We are already experiencing cancellations and deferrals for oil and gas materials as drilling and completion activity slows. With the majority of our capital plan already spent in the first half of the fiscal year, as well as a continued commitment to reduce inventory from current levels, we expect to drive positive free cash flow in the second half of fiscal year 2015.”
Net Sales and Operating Income
Net sales for the second quarter of fiscal year 2015 were US$548.4 million, and net sales excluding surcharge were US$445.7 million, an increase of US$31.1 million (or 8 percent) from the same quarter last year, on flat shipments.
Operating income was US$45.0 million, a decrease of US$2.5 million from the second quarter of the prior year. Operating income—excluding pension earnings, interest and deferrals (EID)—was US$47.4 million, a decrease of US$3.9 million (or 8 percent) from the second quarter of the prior year. This reduction in operating income versus the prior year is primarily due to the Reading press outage in November, higher SAO operating costs, and the additional depreciation expense of the Athens facility, which were all partially offset by lower variable compensation expense and a stronger mix of products.
Cash Flow
Cash flow from operations was US$12.5 million, which included a US$54.2 million increase in working capital and US$1.2 million of pension contributions. This compares to a cash flow from operations of US$23.6 million in the prior year’s second quarter, which included aUS$25.0 million increase in working capital and US$1.5 million of pension contributions. Free cash flow in the second quarter of fiscal year 2015 was negative US$65.5 million, compared to negative US$99.9 million in the same quarter last year. Capital spending in the second quarter, which included US$34.6 million related to the construction of the Athens facility, was US$68.4 million, compared toUS$114.2 million in the prior year’s second quarter, which included US$94.7 million related to Athens.
Total liquidity, including cash and available revolver balance, was US$484 million at the end of the second quarter. This consisted ofUS$29 million of cash, and US$455 million of available revolver.
Aerospace and Defense
| Financial Highlights | ||||||||||||
| (US$ in millions) | Q2 | Q2 | Q1 | |||||||||
| FY2015 | FY2014 | FY2015 | ||||||||||
| Net Sales | US$ | 548.4 | US$ | 503.5 | US$ | 549.8 | ||||||
| Net Sales Excluding Surcharge (a) | US$ | 445.7 | US$ | 414.6 | US$ | 440.1 | ||||||
| Operating Income | US$ | 45.0 | US$ | 47.5 | US$ | 22.1 | ||||||
| Net Income | US$ | 24.1 | US$ | 29.5 | US$ | 13.5 | ||||||
| Free Cash Flow (a) | US$ | (65.5 | ) | US$ | (99.9 | ) | US$ | (53.5 | ) | |||
| Adjusted EBITDA (a) | US$ | 86.6 | US$ | 87.3 | US$ | 63.9 | ||||||
| (a) non-GAAP financial measure explained in the attached tables | ||||||||||||
Gregory A. Pratt, Carpenter’s chairman, president and chief executive officer, stated: “Carpenter’s Specialty Alloys Operations (SAO) drove strong year-over-year sales growth in the second fiscal quarter of 2015, and it realized the richer product mix that was evident in the backlog as we exited the first quarter. Operating margins remained below prior year levels due to higher near-term integrated mill operating costs, the Reading press outage and higher depreciation of the Athens facility. Performance Engineered Products (PEP) drove substantial year-over-year financial gains; PEP achieved this through operational improvements and strong end-use market product demand.
“Looking forward, our current backlog provides us with visibility to a stronger mix as we enter the third fiscal quarter. We continue to expect that SAO volumes will grow sequentially, with overall end-use market demand growth and expanded customer approvals for Athens production. To realize higher profitability on this growth, Carpenter remains focused on driving down operating costs. That said, uncertainty remains over the full impact of lower oil prices. We are already experiencing cancellations and deferrals for oil and gas materials as drilling and completion activity slows. With the majority of our capital plan already spent in the first half of the fiscal year, as well as a continued commitment to reduce inventory from current levels, we expect to drive positive free cash flow in the second half of fiscal year 2015.”
Net Sales and Operating Income
Net sales for the second quarter of fiscal year 2015 were US$548.4 million, and net sales excluding surcharge were US$445.7 million, an increase of US$31.1 million (or 8 percent) from the same quarter last year, on flat shipments.
Operating income was US$45.0 million, a decrease of US$2.5 million from the second quarter of the prior year. Operating income—excluding pension earnings, interest and deferrals (EID)—was US$47.4 million, a decrease of US$3.9 million (or 8 percent) from the second quarter of the prior year. This reduction in operating income versus the prior year is primarily due to the Reading press outage in November, higher SAO operating costs, and the additional depreciation expense of the Athens facility, which were all partially offset by lower variable compensation expense and a stronger mix of products.
Cash Flow
Cash flow from operations was US$12.5 million, which included a US$54.2 million increase in working capital and US$1.2 million of pension contributions. This compares to a cash flow from operations of US$23.6 million in the prior year’s second quarter, which included aUS$25.0 million increase in working capital and US$1.5 million of pension contributions. Free cash flow in the second quarter of fiscal year 2015 was negative US$65.5 million, compared to negative US$99.9 million in the same quarter last year. Capital spending in the second quarter, which included US$34.6 million related to the construction of the Athens facility, was US$68.4 million, compared toUS$114.2 million in the prior year’s second quarter, which included US$94.7 million related to Athens.
Total liquidity, including cash and available revolver balance, was US$484 million at the end of the second quarter. This consisted ofUS$29 million of cash, and US$455 million of available revolver.
| End-Use Markets | ||||||
| Q2 FY15 | Q2 FY15 | Q2 FY15 | ||||
| Sales* | vs. | vs. | ||||
| Ex. Surcharge | Q2 FY14 | Q1 FY15 | ||||
| (in Millions) | ||||||
| Aerospace and Defense | US$189.2 | +6% | +5% | |||
| Energy | US$70.3 | +8% | +4% | |||
| Medical | US$25.7 | +15% | -4% | |||
| Transportation | US$31.3 | +10% | +2% | |||
| Industrial and Consumer | US$96.5 | +9% | -2% | |||
| * Excludes sales through Carpenter’s distribution businesses | ||||||
- Sales for aerospace engine materials were up 5 percent, and sales for fastener materials (titanium and nickel) were up 20 percent year-over-year.
- Demand is returning with a stronger mix for aerospace distribution products.
- Defense related activity is improving, but remains below prior year levels.
- Sales increased year-over-year for both drilling and completions products.
- Amega West posted sales growth in both manufacturing and rentals versus the prior year.
- Depressed oil prices will impact the oil and gas business going forward.
- Sales increased year-over-year for both SAO and PEP products on the strength of increased orthopedic and surgical instrument demand.
- Original equipment manufacturers have resumed more normalized buying patterns.
- The pricing environment in this market remains extremely competitive.
- Higher year-over-year sales were driven by a strong demand for engine component materials; product mix continues to improve.
- 2014 U.S. light vehicle sales increased 6% year-over-year.
- Low fuel prices are driving increased sales of larger vehicles and engines.
- Year-over-year sales growth was driven by high-value consumer electronics and industrial goods applications.
- Sales declined sequentially due to lower volumes of both infrastructure and general distribution products.
