10-QPeriod: Q3 FY2016

CARPENTER TECHNOLOGY CORP Quarterly Report for Q3 Ended Mar 31, 2016

Filed May 2, 2016For Securities:CRS

Summary

Carpenter Technology Corporation (CRS) reported a net loss of $23.9 million, or $0.51 per diluted share, for the third quarter of fiscal year 2016, a significant decline from the previous year's net loss of $1.4 million, or $0.03 per diluted share. This performance was largely impacted by a substantial increase in restructuring and asset impairment charges, including a $12.5 million goodwill impairment charge primarily related to its Amega West Services and Specialty Steel Supply reporting units due to the prolonged weakness in the oil and gas sector. Additionally, an excess inventory write-down of $22.5 million contributed to the negative results. Despite these headwinds, the company highlighted operational cost improvements and a more favorable product mix, particularly within its Specialty Alloys Operations (SAO) segment, which saw improved operating margins. Net sales decreased by 20% to $456.3 million, driven by lower demand across several end-use markets, most notably Energy (down 48%) and Industrial and Consumer (down 28%). While the Energy sector remains challenging, the company continues to view it as a long-term growth opportunity. Management is focused on executing its new operating model to drive efficiencies and is managing capital expenditures prudently, resulting in positive free cash flow of $55.4 million for the nine-month period, a significant improvement from the prior year. The company remains compliant with its debt covenants and maintains substantial liquidity through its credit agreement.

Financial Highlights

51 data points
Beta

Revenue

$456.30M

10.4% Gross Margin

Net Income

-$23.90M

-5.2% Net Margin

EPS (Diluted)

$-0.51

Total Assets

$2.79B

Cash & Equivalents

$23.40M

Free Cash Flow

$65.60M

Financial Statements
Beta
Revenue$456.30M
Cost of Revenue$386.30M
Gross Profit$47.50M
SG&A Expenses$41.70M
Operating Income-$24.30M
Interest Expense$7.20M
Net Income-$23.90M
EPS (Basic)$-0.51
EPS (Diluted)$-0.51
Shares Outstanding (Basic)47.10M
Shares Outstanding (Diluted)47.10M

Key Highlights

  • 1Reported a net loss of $23.9 million ($0.51 per diluted share) for Q3 FY16, worsening from a $1.4 million loss ($0.03 per diluted share) in Q3 FY15.
  • 2Total net sales decreased by 20% year-over-year to $456.3 million, impacted by lower volumes across key end-use markets, particularly Energy.
  • 3Significant increase in restructuring and asset impairment charges, totaling $17.6 million in Q3 FY16, including a $12.5 million goodwill impairment charge for Amega West Services and Specialty Steel Supply.
  • 4Recorded a $22.5 million excess inventory write-down, impacting gross profit.
  • 5Specialty Alloys Operations (SAO) segment showed improved operating margins (14.4% excluding surcharge) despite overall sales decline, driven by cost improvements and favorable product mix.
  • 6Generated positive free cash flow of $55.4 million for the nine months ended March 31, 2016, a substantial improvement from negative $32.5 million in the prior year, due to reduced capital expenditures.
  • 7Maintains strong liquidity with $490.8 million in total liquidity (cash and available credit) as of March 31, 2016.

Frequently Asked Questions

The net loss of $23.9 million in the third quarter of fiscal year 2016 was primarily driven by significant restructuring and asset impairment charges, including a $12.5 million goodwill impairment charge related to the Amega West Services and Specialty Steel Supply businesses due to ongoing weakness in the oil and gas sector. An additional $22.5 million excess inventory write-down also negatively impacted results. These factors, combined with a 20% decrease in net sales due to lower demand across several end-use markets, contributed to the loss.

The decline in the Energy sector, particularly oil and gas drilling and exploration, has had a significant negative impact. Sales to the Energy end-use market decreased by 48% year-over-year in the third quarter. This weakness led to the $12.5 million goodwill impairment charge for the Amega West and Specialty Steel Supply units and contributed to lower overall sales volumes. Despite this, the company views the Energy market as a long-term growth opportunity.

Carpenter Technology is focusing on operational cost improvements and driving efficiencies through its 'new Carpenter operating model'. The company also implemented fixed cost restructuring programs in the prior fiscal year. These efforts, along with a focus on a more favorable product mix, are contributing to margin expansion in segments like Specialty Alloys Operations. Furthermore, capital expenditures have been significantly reduced, leading to improved free cash flow generation.

As of March 31, 2016, Carpenter Technology maintained a strong liquidity position with $23.4 million in cash and cash equivalents and an additional $467.4 million available under its credit agreement, totaling $490.8 million. The company generated $137.2 million in cash flow from operations for the nine-month period, demonstrating its ability to fund its operations and meet its obligations through internally generated cash and available credit facilities.