10-KPeriod: FY2019

CARPENTER TECHNOLOGY CORP Annual Report, Year Ended Jun 30, 2019

Filed August 29, 2019For Securities:CRS

Summary

Carpenter Technology Corporation (CRS) reported a strong fiscal year 2019, with net sales increasing by 10% to $2.38 billion, driven by robust demand in key markets, particularly Aerospace and Defense, which accounted for 56% of sales. The company demonstrated improved operating performance, with operating income rising to $241.4 million, an increase of 28% year-over-year, and operating margin expanding to 10.1% from 8.8%. This growth was supported by the effective implementation of the Carpenter Operating Model, leading to efficiency gains, and strategic acquisitions like LPW Technology Ltd., bolstering its additive manufacturing capabilities. Financially, CRS ended fiscal year 2019 with $27.0 million in cash and cash equivalents. While operating activities generated $232.4 million in cash, free cash flow was negative $53.7 million, largely due to significant capital expenditures of $180.3 million for growth initiatives and the acquisition of LPW Technology Ltd. for $79.0 million. The company also continued its commitment to shareholders by paying dividends, totaling $38.6 million in fiscal year 2019. A noted concern is a material weakness in internal controls related to revenue accuracy, which management is actively working to remediate.

Financial Highlights

54 data points
Beta

Revenue

$2.38B

18.7% Gross Margin

Net Income

$167.00M

7.0% Net Margin

EPS (Diluted)

$3.43

Total Assets

$3.19B

Cash & Equivalents

$27.00M

Free Cash Flow

$232.40M

Financial Statements
Beta
Revenue$2.38B
Cost of Revenue$1.94B
Gross Profit$444.80M
R&D Expenses$23.30M
SG&A Expenses$203.40M
Operating Income$241.40M
Interest Expense$26.00M
Net Income$167.00M
EPS (Basic)$3.46
EPS (Diluted)$3.43
Shares Outstanding (Basic)47.70M
Shares Outstanding (Diluted)48.10M

Key Highlights

  • 1Net sales increased by 10% to $2.38 billion in FY2019, with Aerospace and Defense being the largest segment (56% of sales).
  • 2Operating income grew by 28% to $241.4 million, and operating margin improved to 10.1% from 8.8% in the prior year.
  • 3The company expanded its additive manufacturing capabilities through the acquisition of LPW Technology Ltd.
  • 4Capital expenditures were substantial at $180.3 million, reflecting investments in growth initiatives.
  • 5Free cash flow was negative $53.7 million due to capital spending and acquisitions.
  • 6The company maintained its dividend payments, totaling $38.6 million in FY2019.
  • 7A material weakness in internal controls related to revenue accuracy was identified, with remediation efforts underway.

Frequently Asked Questions

Carpenter Technology's revenue growth in fiscal year 2019 was primarily driven by strong demand in key end-use markets, particularly Aerospace and Defense, which saw a 12% increase in sales. The Medical and Energy sectors also showed significant growth (17% and 24%, respectively). The company's solutions-focused approach and market share gains with both new and existing customers contributed to this performance.

As of June 30, 2019, Carpenter Technology had $27.0 million in cash and cash equivalents. The company has a $400.0 million Credit Agreement, with $374.3 million available, providing significant liquidity. Total debt, net of the current portion, was $550.6 million. The company was in compliance with its debt covenants, including a minimum interest coverage ratio of 3.50 to 1.00 (achieved 15.03 to 1.00) and a debt to capital ratio of less than 55% (achieved 27%).

A significant concern noted is a material weakness in internal controls over financial reporting related to the accuracy and completeness of price, quantity, and customer data during the billing process. While no misstatements were identified in the financial statements, this deficiency could lead to errors. The company is implementing remediation plans. Other risks mentioned include the cyclical nature of its end-use markets (aerospace, defense, energy), raw material price volatility, and potential disruptions to operations.

Carpenter Technology continued to expand its additive manufacturing platform, notably with the acquisition of LPW Technology Ltd. for $79.0 million in October 2018. This acquisition enhanced its metal powder lifecycle management capabilities, aligning with the company's strategy to focus on and invest in core growth areas like additive manufacturing.