10-QPeriod: Q2 FY2018

CARPENTER TECHNOLOGY CORP Quarterly Report for Q2 Ended Dec 31, 2017

Filed February 1, 2018For Securities:CRS

Summary

Carpenter Technology Corporation (CRS) reported a significant improvement in financial performance for the quarter and six months ended December 31, 2017, compared to the prior year period. Net sales increased notably, driven by strong demand across key end-use markets, particularly Aerospace & Defense and Medical. The company also saw a substantial increase in gross profit and operating income, benefiting from higher volumes, improved product mix, and a recovery in market conditions. The company's operating income saw a dramatic increase, driven by the Specialty Alloys Operations (SAO) segment which posted its best results since fiscal year 2014. The Performance Engineered Products (PEP) segment also performed well, exceeding expectations. A significant factor influencing reported net income was the impact of the U.S. tax reform, enacted in December 2017, which led to a substantial tax benefit due to the remeasurement of deferred tax assets and liabilities, despite a provisional charge for the transition tax. This tax adjustment significantly boosted the reported net income and earnings per share for the period. Operationally, the company is seeing positive trends in its core markets, with increasing customer demand and backlog growth. Management plans to strategically invest in growth areas like additive manufacturing and soft magnetics, aided by the recent tax reform. The company maintains a strong liquidity position with ample availability under its credit facility.

Financial Highlights

52 data points
Beta

Revenue

$487.80M

17.6% Gross Margin

Net Income

$92.10M

18.9% Net Margin

EPS (Diluted)

$1.92

Total Assets

$2.94B

Cash & Equivalents

$20.70M

Free Cash Flow

$24.70M

Financial Statements
Beta
Revenue$487.80M
Cost of Revenue$402.10M
Gross Profit$85.70M
SG&A Expenses$44.30M
Operating Income$41.40M
Interest Expense$7.30M
Net Income$92.10M
EPS (Basic)$1.93
EPS (Diluted)$1.92
Shares Outstanding (Basic)47.70M
Shares Outstanding (Diluted)48.00M

Key Highlights

  • 1Significant year-over-year increase in Net Sales, up 14% for the quarter and 19% for the six months, driven by higher volumes and strong demand in key markets like Aerospace & Defense and Medical.
  • 2Dramatic improvement in Operating Income, which rose to $40.8 million from $15.4 million in the prior year's quarter and $82.5 million from $16.8 million for the six-month period.
  • 3Net income surged to $92.1 million ($1.92/diluted share) for the quarter and $115.5 million ($2.41/diluted share) for the six months, largely due to a significant discrete tax benefit from the U.S. tax reform enacted in December 2017.
  • 4Gross margin improved to 17.6% (20.6% excluding surcharge) for the quarter and 17.7% (20.8% excluding surcharge) for the six months, reflecting better product mix and higher volumes.
  • 5Specialty Alloys Operations (SAO) segment posted its best second quarter and first half results since fiscal year 2014, with sales up 17% and operating income up significantly.
  • 6Performance Engineered Products (PEP) segment also showed strong growth, with sales up 26% for the quarter and operating income improving substantially to $7.5 million from $0.8 million.
  • 7Company maintained strong liquidity with $405.4 million in total liquidity (cash and available credit) as of December 31, 2017, and remains in compliance with its debt covenants.

Frequently Asked Questions

The primary driver of the significant increase in net income was the U.S. tax reform enacted in December 2017. This legislation led to a substantial discrete tax benefit of $66.0 million recorded in the quarter, primarily from re-measuring deferred tax assets and liabilities at the new lower federal corporate income tax rate. While there was a provisional charge for the transition tax, the net effect was a large boost to reported net income.

Both segments showed strong performance. The Specialty Alloys Operations (SAO) segment reported its best results since fiscal year 2014, with net sales increasing 17% and operating income significantly improving. The Performance Engineered Products (PEP) segment also exceeded expectations, with net sales up 26% and operating income seeing a substantial rise year-over-year, driven by demand in the Energy and Medical markets.

Following the U.S. tax reform, Carpenter Technology plans to accelerate investments in key growth areas such as additive manufacturing and soft magnetics. This aligns with their strategy to be a leading solutions provider for their customers and capitalize on market opportunities.

The company maintained strong liquidity with $405.4 million in total liquidity as of December 31, 2017, comprising cash and cash equivalents ($20.7 million) and substantial availability under its $400 million revolving credit facility ($384.7 million available). They are compliant with their debt covenants and anticipate that these resources will be sufficient to meet their cash needs.