10-QPeriod: Q1 FY2019

CARPENTER TECHNOLOGY CORP Quarterly Report for Q1 Ended Sep 30, 2018

Filed October 24, 2018For Securities:CRS

Summary

Carpenter Technology Corporation (CRS) reported a solid performance for the first quarter of fiscal year 2019, reflecting strong demand across its key end-use markets, particularly Aerospace & Defense and Medical. Net sales increased by a significant 19% year-over-year, driven by both higher volumes and an improved product mix, even after accounting for raw material surcharge revenue. The company's strategic focus on solutions-based selling is resonating with customers, leading to a substantial increase in backlog. While gross margins saw a slight decrease year-over-year on a reported basis due to the dilutive effect of surcharges, margins excluding surcharges remained robust. Operating income and margins also showed improvement, demonstrating the company's ability to capitalize on favorable market conditions. The company also benefited from a lower effective tax rate due to recent tax legislation. Despite increased capital expenditures aimed at growth initiatives, the company's liquidity position remains strong, supported by available credit facilities.

Financial Highlights

50 data points
Beta

Revenue

$572.40M

16.0% Gross Margin

Net Income

$31.50M

5.5% Net Margin

EPS (Diluted)

$0.65

Total Assets

$3.01B

Cash & Equivalents

$17.00M

Free Cash Flow

$9.40M

Financial Statements
Beta
Revenue$572.40M
Cost of Revenue$480.70M
Gross Profit$91.70M
SG&A Expenses$46.70M
Operating Income$45.00M
Interest Expense$6.30M
Net Income$31.50M
EPS (Basic)$0.66
EPS (Diluted)$0.65
Shares Outstanding (Basic)47.60M
Shares Outstanding (Diluted)48.20M

Key Highlights

  • 1Net sales increased 19% to $572.4 million for the three months ended September 30, 2018, compared to $479.8 million in the prior year period.
  • 2Aerospace and Defense remains the largest end-use market, with sales up 20% year-over-year, driven by strong demand in engine and defense applications.
  • 3Operating income increased to $45.0 million from $42.2 million in the prior year, though operating margin decreased slightly to 7.9% from 8.8% due to the dilutive impact of surcharges.
  • 4The effective tax rate decreased significantly to 21.8% in the current quarter from 33.5% in the prior year, primarily due to the reduction in the federal corporate income tax rate.
  • 5Cash flow from operations improved to $9.4 million from a use of $7.4 million in the prior year, although free cash flow remained negative at ($41.7) million due to increased capital expenditures.
  • 6Capital expenditures increased significantly to $41.6 million from $28.9 million in the prior year, reflecting investments in growth areas like additive manufacturing.
  • 7The company maintained compliance with its debt covenants, with a strong interest coverage ratio of 12.35 to 1.00.

Frequently Asked Questions

The 19% increase in net sales to $572.4 million was primarily driven by stronger product demand and an improved product mix across most of Carpenter Technology's end-use markets, particularly Aerospace and Defense and Medical. Excluding surcharge revenue, sales still increased by 11% on a 4% increase in shipment volume.

While reported gross profit margin decreased to 16.0% from 17.9% due to the dilutive effect of raw material surcharges, the gross margin excluding surcharges remained strong at 20.1% compared to 20.9% in the prior year. Operating margin also saw a slight decrease to 7.9% from 8.8% on a reported basis, but excluding surcharges, it was 9.9% compared to 10.3% in the prior year, indicating the underlying business performance was solid despite the surcharge impact.

The company's liquidity remains strong, with $17 million in cash and cash equivalents and $394 million available under its revolving credit facility, totaling $411 million in liquidity. Despite increased capital expenditures of $41.6 million for growth initiatives, the company expects to fund its needs and maintain compliance with debt covenants. Free cash flow was negative at ($41.7) million, primarily due to these investments.

The Tax Cuts and Jobs Act of 2017 has positively impacted the company's results, leading to a significantly lower effective tax rate of 21.8% in the current quarter compared to 33.5% in the prior year. This reduction is due to the lower federal corporate income tax rate and a discrete tax benefit for employee share-based compensation.