Carpenter Technology Corporation (NYSE: CRS) (the “Company”) today
provided a preliminary outlook for fiscal year 2021 and preliminary
results, subject to finalization and audit, for the fourth quarter
of fiscal year 2020.
“We are operating in a challenging environment that makes it
difficult to predict the near term with a reasonable level of
certainty. Many stakeholders continue to ask questions about our
end-use market demand conditions, order book, lead times, workforce
levels, utilization, and liquidity position, among other
indicators,” said Tony R. Thene, President and CEO. “Despite the
near-term challenges associated with the COVID-19 pandemic, our
facilities have been continuously and safely operating during the
crisis, we further strengthened our already healthy liquidity
position and the long-term outlook for our key end-use markets
remains solid.”
In the near-term, the Aerospace supply chain is absorbing
significant downward adjustments to forecasted demand.
Despite a scaled back production rate, the Company is still winning
spot needs due to our ability to continue providing competitive
lead times, quality, reliability and performance. With select
Aerospace customers, the Company has accepted deferrals and order
push outs in exchange for increased share on key growth
platforms. For Medical customers, the Company’s
industry-leading portfolio and sales network has been leveraged to
quickly respond to critical demand for ventilators and
cardiology/trauma devices as well as restocking needs as OEMs
prepare to address pent-up elective surgery demand.
The Company has also enriched and extended supply agreements at
the request of key Aerospace, Medical and Semiconductor customers
who are concerned about the survivability and stability of their
other suppliers. In addition, the Company has pivoted to be
more responsive to less exposed application portfolios like Defense
Hypersonics and Electronics that are urgently pulling for our
high-performance solutions.
Despite an expectation for continued near-term decline, the
Company fully expects that Aerospace demand will return and when it
does, Carpenter Technology’s engine, airframe, fastener and
avionics content on virtually all platforms will be key to
satisfying the market recovery for high performance demand.
In the Medical end-use market, growing and aging populations
require more effective patient outcomes. Carpenter Technology
is uniquely positioned to be the leading material solutions partner
under all recognizable brands due to having the most expansive
metallic material and product portfolio for medical applications.
This includes significant capabilities in emerging technologies
like additive manufacturing and proprietary new products to support
respiratory, wound closure, implants, stents, guidewires and heart
valve procedures.
In addition to solid foundational business, the Company has
strong positions within two significant growth drivers: additive
manufacturing and soft magnetics for electrification. The
Company has built a leading end-to-end additive manufacturing
platform spanning optimized and recycled metal powder processing
through end part production by employing unique powder lifecycle
management to monitor properties during all phases of manufacture
and conveyance in a fully contained and traceable manner. In
electrification, the Company is expanding its leading position by
focusing on proprietary soft magnetic material processing and stack
fabrication techniques that address key electrification design
challenges in aerospace, defense, electric vehicle, consumer and
robotics applications such as range, cargo capacity, efficiency and
cost by maximizing power and reducing size and weight.
Actions Taken to Date
With the positive, long-term macro trends remaining in place,
the Company has taken significant actions to position itself to
manage through the current market disruption caused by COVID-19 and
strengthen its foundation for sustainable long-term growth and
value creation. These measures include:
- Eliminating approximately 20% of global salaried positions,
implementing a global hiring freeze and deferring annual merit
increases for most salaried employees.
- Reviewing and prioritizing capital investments to target
existing and future growth markets, which as a result is expected
to reduce capital expenditures by $50 million in fiscal year 2021
compared to fiscal year 2020.
- Exercising rolling temporary furloughs for certain production,
maintenance and salaried employees.
- Executing targeted portfolio actions including the decision to
exit the Amega West oil and gas business, idling the West Virginia
powder facility and selling the Rhode Island powder facility.
Collectively, the actions are expected to generate $60 to $70
million of annual cost savings starting in fiscal year 2021 in
addition to the significant cash benefits expected to be
realized.
Fiscal Year 2021 Outlook
Based on current market expectations and the
significant actions taken to date, the Company currently expects to
generate positive free cash flow1 and deliver positive adjusted
EBITDA for fiscal year 2021. That expectation includes no change to
the current dividend at this time. “It is a powerful
statement to say, despite the current challenges, we expect to be
free cash flow and EBITDA positive for fiscal year 2021,” said
Thene. “We expect that demand conditions will remain
challenged for the first half of fiscal year 2021 and we have
additional actions available as needed. Carpenter Technology
has ample liquidity to weather the COVID-19 storm and we are
confident that we will emerge stronger.”
The following is selected preliminary fiscal year 2020 and 2021
guidance subject to change and finalization:
$ in millions |
FY20 Preliminary |
FY21 Estimate |
Depreciation and amortization |
$124 |
$130 |
Capital expenditures |
$170 |
$120 |
Pension contributions |
$7 |
$20 |
Pension expense |
$15 |
$23 |
Interest expense |
$20 |
$24 |
The Company’s profitability is influenced by several significant
factors including but not limited to volume, mix, operating costs,
both fixed and variable, as well as the impact of changing raw
material costs combined with changes in inventory levels. We
estimate that approximately 25-30% of our operating costs are
considered fixed costs with the balance considered variable.
Comparisons of operating costs period to period may be difficult as
operating costs are influenced by changing input prices,
inflationary increases in costs as well as actions taken to reduce
costs period to period. In addition, in periods of large
fluctuations in volumes and production levels, variable costs may
not necessarily be capable of being adjusted in the same period as
the volume changes up or down.
Fourth Quarter of Fiscal Year 2020 Preliminary Results,
Subject to Finalization and Audit
Concerning the fourth quarter of fiscal year 2020, the Company
currently expects that volumes in the Specialty Alloys Operations
(SAO) segment will be lower by 20 to 30% on a sequential quarterly
basis driven by the economic disruption across most end-use markets
caused by the COVID-19 pandemic combined with the near-term
challenges across the aerospace supply chain. The Company
currently expects SAO operating income in the fourth quarter of
fiscal year 2020 to be in the range of $4 to $8 million.
The Performance Engineered Products (PEP) segment has also been
negatively impacted by lower volumes primarily due to the impact of
COVID-19 on customer demand. The Company currently expects
PEP operating loss in the fourth quarter of fiscal year 2020 to be
in the range of ($8) to ($10) million. During the fourth quarter,
the Company executed against its announced actions to exit the
Amega West oil & gas business as well as idling one domestic
powder facility and selling another. The Company will provide an
update on these actions on the fourth quarter earnings call.
Our estimated fourth quarter results also
reflect the ongoing incremental costs to ensure the safety of our
employees as well as the productivity impacts associated with the
additional safety protocols to protect against COVID-19 exposures
to our employees. As a result of the near-term demand environment
and the underlying uncertainty related to COVID-19, the Company has
shifted the focus to protecting near-term cash and bolstering an
already healthy liquidity position. Accordingly, in addition to the
restructuring actions discussed above, the Company has taken
aggressive actions to reduce production schedules and is
selectively producing materials based on firm orders for
customers. The Company currently expects to reduce inventory
by $100 to $120 million in the fourth quarter of fiscal year 2020.
The unfavorable margin impact of the reduction in inventory is a
major contributor to the lower than anticipated operating income
results for the quarter.
Based on preliminary estimates subject to finalization and
audit, the Company currently expects adjusted operating loss to be
in the range of ($16) to ($21) million and adjusted earnings per
share (EPS) for the fourth quarter of fiscal year 2020 to be in the
range of ($0.30) to ($0.38). For the avoidance of doubt, the
estimated adjusted operating loss and adjusted EPS, excludes
restructuring and other special items.
Most importantly, the Company currently expects to generate $90
– $100 million of free cash flow in the fourth quarter of fiscal
year 2020 which adds to the $317 million of total liquidity as of
March 31, 2020.
Mr. Thene concluded, “We fully understand that our decision to
reduce inventory further than originally planned will have an
adverse impact on our operating income and earnings-per-share in
the fourth quarter. However, this was a prudent decision to
strengthen our already healthy balance sheet and liquidity position
in this challenging environment. The COVID-19 pandemic has
presented a near-term challenge for Carpenter Technology, as it has
for all in the industry. We have met that challenge by relying
heavily on our safety culture to keep our facilities continuously
operating to address the critical solutions required by our
customers. At the same time, we deployed significant cost and
cash savings actions to mitigate the near-term headwinds and
ultimately strengthen the base for long-term growth.”
About Carpenter Technology
Carpenter Technology Corporation is a recognized leader in
high-performance specialty alloy-based materials and process
solutions for critical applications in the aerospace, defense,
transportation, energy, industrial, medical, and consumer
electronics markets. Founded in 1889, Carpenter Technology has
evolved to become a pioneer in premium specialty alloys, including
titanium, nickel, and cobalt, as well as alloys specifically
engineered for additive manufacturing (AM) processes and soft
magnetics applications. Carpenter Technology has expanded its AM
capabilities to provide a complete “end-to-end” solution to
accelerate materials innovation and streamline parts production.
More information about Carpenter Technology can be found at
www.carpentertechnology.com.
Forward-Looking Statements
This presentation contains forward-looking statements within the
meaning of the Private Securities Litigation Act of 1995. These
forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ from those projected,
expected, anticipated or implied. The most significant of these
uncertainties are described in Carpenter Technology’s filings with
the Securities and Exchange Commission, including its report on
Form 10-K for the year ended June 30, 2019, Form 10-Q for the
quarters ended September 30, 2019, December 31, 2019 and March 31,
2020 and the exhibits attached to those filings. They include but
are not limited to: (1) the cyclical nature of the specialty
materials business and certain end-use markets, including
aerospace, defense, medical, transportation, energy, industrial and
consumer, or other influences on Carpenter Technology’s business
such as new competitors, the consolidation of competitors,
customers, and suppliers or the transfer of manufacturing capacity
from the United States to foreign countries; (2) the ability of
Carpenter Technology to achieve cash generation, growth, earnings,
profitability, operating income, cost savings and reductions,
qualifications, productivity improvements or process changes; (3)
the ability to recoup increases in the cost of energy, raw
materials, freight or other factors; (4) domestic and foreign
excess manufacturing capacity for certain metals; (5) fluctuations
in currency exchange rates; (6) the effect of government trade
actions; (7) the valuation of the assets and liabilities in
Carpenter Technology’s pension trusts and the accounting for
pension plans; (8) possible labor disputes or work stoppages; (9)
the potential that our customers may substitute alternate materials
or adopt different manufacturing practices that replace or limit
the suitability of our products; (10) the ability to successfully
acquire and integrate acquisitions; (11) the availability of credit
facilities to Carpenter Technology, its customers or other members
of the supply chain; (12) the ability to obtain energy or raw
materials, especially from suppliers located in countries that may
be subject to unstable political or economic conditions; (13)
Carpenter Technology’s manufacturing processes are dependent upon
highly specialized equipment located primarily in facilities in
Reading and Latrobe, Pennsylvania and Athens, Alabama for which
there may be limited alternatives if there are significant
equipment failures or a catastrophic event; (14) the ability to
hire and retain key personnel, including members of the executive
management team, management, metallurgists and other skilled
personnel; (15) fluctuations in oil and gas prices and production;
(16) uncertainty regarding the return to service of the Boeing 737
MAX aircraft and the related supply chain disruption; (17) impacts
of the COVID-19 pandemic on our operations, financial results and
financial position; and (18) our ability to successfully carry out
restructuring and business exit activities on the expected terms
and timelines. Any of these factors could have an adverse and/or
fluctuating effect on Carpenter Technology’s results of operations.
The forward-looking statements in this document are intended to be
subject to the safe harbor protection provided by Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), and
Section 21E of the Securities Exchange Act of 1934, as amended.
Carpenter Technology undertakes no obligation to update or revise
any forward-looking statements.
Media
Inquiries: |
Investor
Inquiries: |
Heather
Beardsley |
The Plunkett
Group |
+1
610-208-2278 |
Brad
Edwards |
hbeardsley@cartech.com |
+1
212-739-6740 |
|
brad@theplunkettgroup.com |
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