10-KPeriod: FY2016

CARPENTER TECHNOLOGY CORP Annual Report, Year Ended Jun 30, 2016

Filed August 18, 2016For Securities:CRS

Summary

Carpenter Technology Corporation (CRS) in fiscal year 2016 experienced a significant downturn in its financial performance compared to the previous year, driven primarily by decreased demand in key end-use markets, particularly Energy and Industrial & Consumer sectors. Net sales declined by 19% to $1.81 billion, and net income dropped sharply from $58.7 million to $11.3 million. This performance was further impacted by substantial non-cash charges, including $22.5 million for excess inventory write-downs, $12.5 million for goodwill impairment, and $7.6 million for other asset impairments, alongside $10.4 million in restructuring charges related to an early retirement incentive. The company is strategically repositioning itself as a solutions provider and has implemented the 'Carpenter Operating Model' to drive manufacturing efficiencies, optimize working capital, and improve capital spending discipline. Despite the challenging fiscal year 2016, the Aerospace and Defense segment remained the largest contributor to sales, and the company maintained its commitment to quarterly dividends, demonstrating resilience and a long-term strategic focus amidst cyclical market pressures.

Financial Highlights

54 data points
Beta

Revenue

$1.81B

14.1% Gross Margin

Net Income

$11.30M

0.6% Net Margin

EPS (Diluted)

$0.23

Total Assets

$2.79B

Cash & Equivalents

$82.00M

Free Cash Flow

$257.40M

Financial Statements
Beta
Revenue$1.81B
Cost of Revenue$1.53B
Gross Profit$255.90M
R&D Expenses$16.30M
SG&A Expenses$173.80M
Operating Income$51.60M
Interest Expense$28.00M
Net Income$11.30M
EPS (Basic)$0.23
EPS (Diluted)$0.23
Shares Outstanding (Basic)48.10M
Shares Outstanding (Diluted)48.20M

Key Highlights

  • 1Significant revenue decline of 19% in FY2016 to $1.81 billion, primarily due to weakened demand in the Energy and Industrial/Consumer sectors.
  • 2Net income saw a substantial decrease to $11.3 million in FY2016, down from $58.7 million in FY2015.
  • 3Reported substantial non-cash charges in FY2016, including $22.5M for excess inventory write-downs, $12.5M for goodwill impairment, and $7.6M for asset impairments.
  • 4Aerospace and Defense remains the largest end-use market, accounting for 54% of net sales, although it experienced a 7% decline.
  • 5The company is actively implementing the 'Carpenter Operating Model' to enhance operational efficiencies and financial discipline.
  • 6A sales backlog of $306 million (excluding surcharge) at the end of FY2016 was down from $435 million in the prior year.
  • 7Carpenter Technology maintained its long-standing practice of paying quarterly cash dividends, signaling a commitment to shareholder returns.

Frequently Asked Questions

The primary drivers for the financial performance decline in fiscal year 2016 were significantly reduced demand in the Energy and Industrial & Consumer end-use markets, exacerbated by low oil prices and decreased drilling activity. This was compounded by a 7% decrease in sales to the Aerospace and Defense market and considerable non-cash charges related to inventory write-downs, goodwill impairment, and asset impairments.

The 'Carpenter Operating Model' is a strategic initiative implemented by the company to unlock manufacturing efficiencies, identify commercial opportunities, improve working capital efficiency, and enforce capital spending discipline. Its aim is to help the company navigate near-term cyclical challenges and better position itself for long-term growth and margin improvement.

Carpenter Technology utilizes pricing surcharges, indexing mechanisms, base price adjustments, and raw material forward contracts to mitigate the impact of volatile raw material costs. While these mechanisms generally protect gross profit dollars, there can be a short-term impact on margins due to lags in recovery and firm price sales arrangements.

The Energy market experienced a significant downturn in FY2016 due to low oil prices, leading to a 54% decrease in sales. The Aerospace and Defense market, while still the largest segment, saw a 7% decline, influenced by factors like a decrease in titanium fastener material sales, though defense-related sales showed strength. The company's strategic focus on being a solutions provider aims to enhance its position across these critical markets.