10-QPeriod: Q2 FY2023

CARPENTER TECHNOLOGY CORP Quarterly Report for Q2 Ended Dec 31, 2022

Filed January 26, 2023For Securities:CRS

Summary

Carpenter Technology Corporation (CRS) reported a significant turnaround in its financial performance for the second quarter of fiscal year 2023, ending December 31, 2022. The company transitioned from a net loss of $29.4 million in the prior year period to a net income of $6.2 million. This recovery was driven by a substantial 46% increase in net sales, reaching $579.1 million, reflecting strong demand across its key end-use markets, particularly in Aerospace and Defense, Medical, and Industrial & Consumer sectors. The company also saw a notable improvement in its gross margin, expanding from 3.3% to 12.1%, and returned to an operating income of $22.6 million after a loss in the previous year. Despite the positive operational trends, the company experienced a negative free cash flow of $215.2 million for the first six months of fiscal year 2023, largely due to a significant increase in inventory levels to meet growing demand. However, Carpenter Technology maintained a strong liquidity position with $20.0 million in cash and cash equivalents and $217.0 million in available borrowing capacity under its credit facility, indicating sufficient resources to manage its financial obligations. The company remains focused on driving operational improvements and expects to realize accelerating sales momentum and improved margins moving forward.

Financial Highlights

50 data points
Beta

Revenue

$579.10M

12.1% Gross Margin

Net Income

$6.20M

1.1% Net Margin

EPS (Diluted)

$0.13

Total Assets

$3.06B

Cash & Equivalents

$20.00M

Free Cash Flow

-$86.50M

Financial Statements
Beta
Revenue$579.10M
Gross Profit$70.00M
SG&A Expenses$47.40M
Operating Income$22.60M
Interest Expense$13.00M
Net Income$6.20M
EPS (Basic)$0.13
EPS (Diluted)$0.13
Shares Outstanding (Basic)48.80M
Shares Outstanding (Diluted)49.00M

Key Highlights

  • 1Shifted from a net loss of $29.4 million in Q2 FY22 to a net income of $6.2 million in Q2 FY23.
  • 2Net sales increased by 46% to $579.1 million in Q2 FY23, driven by strong demand in Aerospace & Defense and Medical sectors.
  • 3Gross margin improved significantly to 12.1% in Q2 FY23 from 3.3% in Q2 FY22, with adjusted gross margin (excluding surcharges) rising to 16.6% from 4.2%.
  • 4Returned to operating income of $22.6 million in Q2 FY23, compared to an operating loss of $31.5 million in Q2 FY22.
  • 5Aerospace and Defense segment saw a 67% increase in net sales, highlighting robust demand in this critical market.
  • 6Despite positive earnings, free cash flow was negative $215.2 million for the first six months of FY23 due to a substantial increase in inventory ($226.7 million).
  • 7Maintained a healthy liquidity position with $20.0 million in cash and $217.0 million in available credit.

Frequently Asked Questions

The primary driver is a significant increase in net sales, up 46% year-over-year to $579.1 million. This growth is attributed to strong demand across key end-use markets, particularly Aerospace and Defense, Medical, and Industrial & Consumer sectors, coupled with higher prices, improved product mix, and operational efficiencies. The transition from a net loss to a net income of $6.2 million reflects this improved operational performance.

The company significantly increased its inventory by $226.7 million in the first six months of fiscal year 2023 compared to the same period last year. This build-up is a strategic response to meet growing demand. However, this has resulted in a substantial use of cash, contributing to a negative free cash flow of $215.2 million for the period. Management views this as an investment to support future sales momentum.

The company sees strong demand across its end-use markets, with particular strength in Aerospace and Defense (up 67% in sales) due to increased aircraft build rates and the Medical sector (up 58% in sales) driven by inventory replenishment and demand for elective procedures. Carpenter Technology's focus on premium specialty alloys for critical applications positions it well to benefit from these ongoing trends. Management expects accelerating sales momentum and improved margins.

Carpenter Technology has a $300 million secured revolving credit facility with $217.0 million available as of December 31, 2022. The company was in compliance with all covenants, including interest coverage and debt-to-capital ratios. This provides significant financial flexibility to fund operations and capital expenditures. The company also has long-term debt totaling $692.4 million, primarily senior unsecured notes.