10-QPeriod: Q3 FY2018

CARPENTER TECHNOLOGY CORP Quarterly Report for Q3 Ended Mar 31, 2018

Filed April 26, 2018For Securities:CRS

Summary

Carpenter Technology Corporation (CRS) reported a strong third quarter for fiscal year 2018, with net sales increasing by 21% to $572.2 million compared to the prior year period. This growth was primarily driven by robust demand in key end-use markets, particularly Aerospace & Defense and Medical, along with a more favorable product mix. Excluding raw material surcharge revenue, sales rose 14%, indicating solid underlying demand and volume growth. The company's profitability also improved, with gross profit up 16% and operating income increasing to $45.2 million. While the reported gross margin slightly decreased year-over-year due to the dilutive effect of the surcharge mechanism, the gross margin excluding surcharges remained strong and improved slightly. The acquisition of CalRAM in February 2018 signals Carpenter's strategic move into the additive manufacturing sector, aiming to strengthen its position in emerging high-growth areas. Financially, Carpenter demonstrated improved cash generation from operations, nearly tripling year-over-year to $90.7 million for the nine-month period. Despite a negative free cash flow primarily due to increased inventory and capital expenditures for growth initiatives, the company maintains a healthy liquidity position with significant available borrowing capacity under its credit agreement. The positive impact of recent U.S. tax reform, including a lower corporate tax rate, is also expected to benefit future earnings.

Financial Highlights

52 data points
Beta

Revenue

$572.20M

16.8% Gross Margin

Net Income

$30.20M

5.3% Net Margin

EPS (Diluted)

$0.63

Total Assets

$2.99B

Cash & Equivalents

$46.80M

Free Cash Flow

$73.40M

Financial Statements
Beta
Revenue$572.20M
Cost of Revenue$476.20M
Gross Profit$96.10M
SG&A Expenses$50.30M
Operating Income$45.70M
Interest Expense$7.50M
Net Income$30.20M
EPS (Basic)$0.63
EPS (Diluted)$0.63
Shares Outstanding (Basic)47.70M
Shares Outstanding (Diluted)48.10M

Key Highlights

  • 1Net sales increased by 21% year-over-year to $572.2 million in Q3 FY18, driven by strong demand in Aerospace & Defense and Medical markets.
  • 2Operating income rose to $45.2 million, reflecting improved sales volume and a favorable product mix.
  • 3Acquisition of CalRAM in February 2018 diversifies the company into additive manufacturing, a strategic growth area.
  • 4Cash flow from operations significantly improved, up to $90.7 million for the nine months ended March 31, 2018.
  • 5Company remains compliant with debt covenants, maintaining strong liquidity with $46.8 million in cash and $394 million available under its credit facility.
  • 6Gross margin excluding surcharge revenue improved slightly to 20.3%, indicating underlying profitability strength.
  • 7Impact of U.S. tax reform is expected to lower future tax expenses due to a reduced federal corporate tax rate.

Frequently Asked Questions

The primary drivers of the 21% increase in net sales to $572.2 million were higher product demand and a more favorable product mix, particularly in the Aerospace and Defense, Medical, and Industrial and Consumer end-use markets. Excluding raw material surcharge revenue, sales grew by 14% due to a 9% increase in shipment volume.

The acquisition of MB CalRAM LLC for $13.3 million on February 21, 2018, provides Carpenter Technology with direct entry into the growing additive manufacturing part production segment. This strategic move aims to strengthen the company's capabilities in advanced solutions and capitalize on future growth opportunities in this sector.

Carpenter Technology maintained a strong liquidity position as of March 31, 2018, with $46.8 million in cash and cash equivalents and $394 million available under its $400 million revolving credit facility. The company expects this to be sufficient to fund its cash needs.

The Tax Cuts and Jobs Act of 2017 reduced the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. For the nine months ended March 31, 2018, the company recorded a significant net tax benefit of $39.1 million, largely due to the re-measurement of deferred tax assets and liabilities at the lower rate. This tax reform is expected to positively impact future earnings.