Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Background and General
We are engaged in the manufacturing, fabrication and distribution of specialty metals. We primarily process basic raw materials such as nickel, cobalt, titanium, manganese, chromium, molybdenum, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire and narrow strip in many sizes and finishes. We also produce certain metal powders. Our sales are distributed directly from our production plants and distribution network as well as through independent distributors. Unlike many other specialty steel producers, we operate our own worldwide network of service and distribution centers. These service centers, located in the United States, Canada, Mexico, Europe and Asia allow us to work more closely with customers and to offer various just-in-time stocking programs. We also manufacture and rent down-hole drilling tools and components used in the oil and gas industry.
As part of our overall business strategy, we have sought out and considered opportunities related to strategic acquisitions, divestitures and joint collaborations as well as possible business unit dispositions aimed at broadening our offering to the marketplace. We have participated with other companies to explore potential terms and structures of such opportunities and expect that we will continue to evaluate these opportunities.
Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in Item 7 of our
2015
Form 10-K. Our discussions here focus on our results during or as of the
three and nine
month periods ended
March 31, 2016
and the comparable period of fiscal year
2015
, and to the extent applicable, on material changes from information discussed in the
2015
Form 10-K and other important intervening developments or information that we have reported on Form 8-K. These discussions should be read in conjunction with the
2015
Form 10-K for detailed background information and with any such intervening Form 8-K.
Impact of Raw Material Prices and Product Mix
We value most of our inventory utilizing the last-in, first-out (“LIFO”) inventory costing methodology. Under the LIFO inventory costing method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials may potentially have been acquired at significantly different values due to the length of time from the acquisition of the raw materials to the sale of the processed finished goods to the customers. In a period of rising raw material costs, the LIFO inventory valuation normally results in higher cost of sales. Conversely, in a period of decreasing raw material costs, the LIFO inventory valuation normally results in lower cost of sales.
The volatility of the costs of raw materials has impacted our operations over the past several years. We, and others in our industry, generally have been able to pass cost increases on major raw materials through to our customers using surcharges that are structured to recover increases in raw material costs. Generally, the formula used to calculate a surcharge is based on published prices of the respective raw materials for the previous month which correlates to the prices we pay for our raw material purchases. However, a portion of our surcharges to customers may be calculated using a different surcharge formula or may be based on the raw material prices at the time of order, which creates a lag between surcharge revenue and corresponding raw material costs recognized in cost of sales. The surcharge mechanism protects our net income on such sales except for the lag effect discussed above. However, surcharges have had a dilutive effect on our gross margin and operating margin percentages as described later in this report.
Approximately 25 percent of our net sales are sales to customers under firm price sales arrangements. Firm price sales arrangements involve a risk of profit margin fluctuations, particularly when raw material prices are volatile. In order to reduce the risk of fluctuating profit margins on these sales, we enter into commodity forward contracts to purchase certain critical raw materials necessary to produce the related products sold. Firm price sales arrangements generally include certain annual purchasing commitments and consumption schedules agreed to by the customers at selling prices based on raw material prices at the time the arrangements are established. If a customer fails to meet the volume commitments (or the consumption schedule deviates from the agreed-upon terms of the firm price sales arrangements), the Company may need to absorb the gains or losses associated with the commodity forward contracts on a temporary basis. Gains or losses associated with commodity forward contracts are reclassified to earnings/loss when earnings are impacted by the hedged transaction. Because we value most of our inventory under the LIFO costing methodology, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period attempting to match the most recently incurred costs with revenues. Gains or losses on the commodity forward contracts are reclassified from other comprehensive income (loss) together with the actual purchase price of the underlying commodities when the underlying commodities are purchased and recorded in inventory. To the extent that the total purchase price of the commodities, inclusive of the gains or losses on the commodity forward contracts, are higher or
lower relative to the beginning of year costs, our cost of goods sold reflects such amounts. Accordingly, the gains and/or losses associated with commodity forward contracts may not impact the same period that the firm price sales arrangements revenue is recognized, and comparisons of gross profit from period to period may be impacted. These firm price sales arrangements are expected to continue as we look to strengthen our long-term customer relationships by expanding, renewing and in certain cases extending to a longer-term, our customer long-term arrangements.
We produce hundreds of grades of materials with a wide range of pricing and profit levels depending on the grade. In addition, our product mix within a period is subject to the fluctuating order patterns of our customers as well as decisions we may make on participation in certain products based on available capacity, including the impacts of capacity commitments we may have under existing customer agreements. While we expect to see positive contribution from a more favorable product mix in our margin performance over time, the impact by period may fluctuate and period-to-period comparisons may vary.
Net Pension Expense
Net pension expense, as we define it below, includes the net periodic benefit costs related to both our pension and other postretirement plans. The net periodic benefit costs are determined annually based on beginning of year balances and are recorded ratably throughout the fiscal year, unless a significant re-measurement event occurs. We currently expect that the total net periodic benefit costs for fiscal year
2016
will be $53.6 million as compared with $44.5 million in fiscal year
2015
. The following is the pension expense for the
three and nine
months ended
March 31, 2016
and
2015
:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
($ in millions)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Pension plans
|
|
$
|
12.7
|
|
|
$
|
8.6
|
|
|
$
|
38.1
|
|
|
$
|
25.8
|
|
Other postretirement plans
|
|
0.7
|
|
|
2.9
|
|
|
2.2
|
|
|
8.8
|
|
Net periodic benefit costs
|
|
$
|
13.4
|
|
|
$
|
11.5
|
|
|
$
|
40.3
|
|
|
$
|
34.6
|
|
The service cost component of net pension expense represents the estimated cost of future pension liabilities earned associated with active employees. The pension earnings, interest and deferrals (“pension EID”) is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans and amortization of actuarial gains and losses and prior service costs.
Net pension expense is recorded in accounts that are included in both the cost of sales and selling, general and administrative expenses based on the function of the associated employees. The following is a summary of the classification of net pension expense for the
three and nine
months ended
March 31, 2016
and
2015
:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Nine Months Ended
March 31,
|
($ in millions)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
7.0
|
|
|
$
|
7.3
|
|
|
$
|
21.1
|
|
|
$
|
22.0
|
|
Pension earnings, interest and deferrals
|
|
3.3
|
|
|
1.3
|
|
|
9.9
|
|
|
3.7
|
|
|
|
10.3
|
|
|
8.6
|
|
|
31.0
|
|
|
25.7
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
1.6
|
|
|
1.8
|
|
|
4.8
|
|
|
5.5
|
|
Pension earnings, interest and deferrals
|
|
1.5
|
|
|
1.1
|
|
|
4.5
|
|
|
3.4
|
|
|
|
3.1
|
|
|
2.9
|
|
|
9.3
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
13.4
|
|
|
$
|
11.5
|
|
|
$
|
40.3
|
|
|
$
|
34.6
|
|
As of
March 31, 2016
and
June 30, 2015
, amounts capitalized in gross inventory were $9.3 million and $9.5 million, respectively.
Operating Performance Overview
To date our fiscal year 2016 results, reflect the ongoing execution of our new Carpenter operating model which began less than one year ago. Our operating model is unlocking manufacturing efficiencies and commercial opportunities, while also driving further improvements in working capital efficiency and capital spending discipline. As a result, during the third quarter of fiscal year 2016 we experienced notable margin expansion in Specialty Alloys Operations (“SAO”) and strong free cash flow in a difficult market. We are aggressively managing our business and leveraging our core strengths as we continue to position Carpenter for long-term growth.
The low price of oil continues to have a significant impact on drilling and exploration activity within the Energy end-use market. The overall market remains volatile and the timing and extent of a recovery in oil prices necessary to spark a sustainable increase in activity from current levels remains unclear. As a result, the Company recognized pre-tax, non-cash asset impairment charges of $42.6 million in the third quarter, related to certain assets in the Company’s oil and gas businesses. Despite the impairment charges, the lingering sector downturn and its negative impact on our business, we continue to believe the Energy end-use market remains a long-term growth opportunity.
The majority of these non-cash impairment charges related to certain assets in the Company’s oil and gas businesses within the Performance Engineered Products (“PEP”) segment and consist of:
|
|
•
|
Goodwill impairment charges totaling $12.5 million
|
|
|
•
|
Impairment of intangible assets and property and equipment charges totaling $7.6 million
|
|
|
•
|
Excess inventory write-down charges of approximately $22.5 million
|
In addition, the Company reported certain other special charges in the current third quarter as follows:
|
|
•
|
Early retirement incentive offered to certain employees that will be funded by the Company’s pension plan totaling $9.4 million
|
|
|
•
|
Consulting costs totaling $2.1 million
|
|
|
•
|
Other severance charges associated with certain position eliminations totaling $0.6 million
|
|
|
•
|
An income tax charge of $0.8 million associated with the completion of the sale of an equity method investment in India
|
Results of Operations — Three Months Ended
March 31, 2016
vs. Three Months Ended
March 31, 2015
For the three months ended
March 31, 2016
, we reported net loss of
$23.9 million
, or
$0.51
loss per diluted share. Excluding special items, earnings per share would have been
$0.30
per diluted share. This compares with net loss for the same period a year earlier of
$1.4 million
, or
$0.03
loss per diluted share. Excluding special items, earnings per share would have been
$0.32
per diluted share for the three months ended
March 31, 2015
. The current period results were in line with our expectations and reflect the impacts of lower volumes principally in our Energy, Industrial and Consumer and Aerospace and Defense end-use markets, partially offset by operating cost improvements and improving product mix.
Net Sales
Net sales for the three months ended
March 31, 2016
were
$456.3 million
, which was a
20
percent
decrease
over the same period a year ago. Excluding surcharge revenue, sales
decreased
13
percent on an
11
percent
decrease
in shipment volume from the same period a year ago. The results reflect lower demand for materials used in the Energy, Industrial and Consumer and Aerospace and Defense end-use markets.
Geographically, sales outside the United States decreased 14 percent from the same period a year ago to $148.3 million for the three months ended
March 31, 2016
. The decrease is due to a reduction in sales primarily to Canada and Asia in the Energy and Aerospace and Defense end-use markets. In addition, there was a decrease in sales to Europe in the Aerospace and Defense and Industrial and Consumer end-use markets. A portion of our sales outside the United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a $1.4 million decrease in sales during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. International sales represented 33 percent and 30 percent of total net sales for the three months ended
March 31, 2016
and
2015
, respectively.
Sales by End-Use Markets
We sell to customers across diversified end-use markets. The following table includes comparative information for our net sales, which includes surcharge revenue by principal end-use markets. We believe this is helpful supplemental information in analyzing the performance of the business from period to period:
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|
|
|
|
|
Three Months Ended
March 31,
|
|
$
Decrease
|
|
%
Decrease
|
($ in millions)
|
|
2016
|
|
2015
|
|
|
Aerospace and Defense
|
|
$
|
236.2
|
|
|
$
|
275.5
|
|
|
$
|
(39.3
|
)
|
|
(14
|
)%
|
Energy
|
|
37.1
|
|
|
71.7
|
|
|
(34.6
|
)
|
|
(48
|
)%
|
Transportation
|
|
39.1
|
|
|
43.0
|
|
|
(3.9
|
)
|
|
(9
|
)%
|
Medical
|
|
30.3
|
|
|
31.6
|
|
|
(1.3
|
)
|
|
(4
|
)%
|
Industrial and Consumer
|
|
82.7
|
|
|
114.7
|
|
|
(32.0
|
)
|
|
(28
|
)%
|
Distribution
|
|
30.9
|
|
|
34.1
|
|
|
(3.2
|
)
|
|
(9
|
)%
|
Total net sales
|
|
$
|
456.3
|
|
|
$
|
570.6
|
|
|
$
|
(114.3
|
)
|
|
(20
|
)%
|
The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
$
Increase
(Decrease)
|
|
%
Increase
(Decrease)
|
($ in millions)
|
|
2016
|
|
2015
|
|
|
Aerospace and Defense
|
|
$
|
200.9
|
|
|
$
|
213.9
|
|
|
$
|
(13.0
|
)
|
|
(6
|
)%
|
Energy
|
|
33.6
|
|
|
60.8
|
|
|
(27.2
|
)
|
|
(45
|
)%
|
Transportation
|
|
34.1
|
|
|
33.4
|
|
|
0.7
|
|
|
2
|
%
|
Medical
|
|
28.9
|
|
|
29.0
|
|
|
(0.1
|
)
|
|
—
|
%
|
Industrial and Consumer
|
|
74.1
|
|
|
92.0
|
|
|
(17.9
|
)
|
|
(19
|
)%
|
Distribution
|
|
30.8
|
|
|
33.8
|
|
|
(3.0
|
)
|
|
(9
|
)%
|
Total net sales excluding surcharge revenue
|
|
$
|
402.4
|
|
|
$
|
462.9
|
|
|
$
|
(60.5
|
)
|
|
(13
|
)%
|
Sales to the Aerospace and Defense end-use market
decreased
14
percent from the
third
quarter a year ago to
$236.2 million
. Excluding surcharge revenue, sales
decreased
6
percent from the
third
quarter a year ago on a
6
percent
decrease
in shipment volume. The results reflect a decrease in sales of engine materials, titanium fasteners and structural applications. This was partially offset by an increase in our defense related sales with continued spending on supported programs.
Sales to the Energy end-use market of $
37.1 million
reflect a
48
percent
decrease
from the
third
quarter a year ago. Excluding surcharge revenue, sales
decreased
45
percent from a year ago on
lower
shipment volume of
38
percent. The results reflect the impact of low oil and gas prices driven primarily by reduced drilling and exploration activity, partially offset by an increase in demand for power generation materials. The North American quarterly average directional rig count decreased 58 percent from the same period a year ago.
Transportation end-use market sales
decreased
9
percent from the
third
quarter a year ago to $
39.1 million
. Excluding surcharge revenue, sales
increased
2
percent on
6
percent
lower
shipment volume from the
third
quarter a year ago. The shift in favorable product mix was a result of increased demand for materials used mainly in fuel system applications.
Medical end-use market sales
decreased
4
percent from the
third
quarter a year ago to $
30.3 million
. Excluding surcharge revenue, sales were
flat
on
4
percent
lower
shipment volume from the
third
quarter a year ago. The results reflect the continued pricing pressure on our transactional business for titanium and stainless steel materials.
Industrial and Consumer end-use market sales
decreased
28
percent from the
third
quarter a year ago to $
82.7 million
. Excluding surcharge revenue, sales
decreased
19
percent on a
13
percent
decrease
in shipment volume. The results reflect a decrease in demand for materials used in capital equipment and industrial components due in part to the depressed oil and gas market.
Gross Profit
Our gross profit in the
third
quarter
decreased
37 percent to
$47.5 million
, or
10.4
percent of net sales as compared with
$75.8 million
, or
13.3
percent of net sales in the same quarter a year ago. Excluding the impacts of the excess inventory write-down and surcharge revenue, our gross margin in the
third
quarter was
17.4
percent as compared
16.4
percent in the same period a year ago. The current quarter results reflect operating cost improvements partially offset by lower volume principally in our Energy, Industrial and Consumer and Aerospace and Defense end-use markets compared to the same period a year ago.
Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin excluding the impact of the excess inventory write-down for the comparative three month periods. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
($ in millions)
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
456.3
|
|
|
$
|
570.6
|
|
Less: surcharge revenue
|
|
53.9
|
|
|
107.7
|
|
Net sales excluding surcharge revenue
|
|
$
|
402.4
|
|
|
$
|
462.9
|
|
|
|
|
|
|
Gross profit
|
|
$
|
47.5
|
|
|
$
|
75.8
|
|
Excess inventory write-down
|
|
22.5
|
|
|
—
|
|
Gross profit excluding the excess inventory write-down
|
|
$
|
70.0
|
|
|
$
|
75.8
|
|
|
|
|
|
|
Gross margin
|
|
10.4
|
%
|
|
13.3
|
%
|
|
|
|
|
|
Gross margin excluding surcharge revenue and excess inventory write-down
|
|
17.4
|
%
|
|
16.4
|
%
|
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $
41.7 million
were
9.1
percent of net sales (
10.4
percent of net sales excluding surcharge) as compared with $
45.7 million
and
8.0
percent of net sales (
9.9
percent of net sales excluding surcharge) in the same quarter a year ago. Selling, general and administrative expenses
decreased
due to lower variable compensation in the recent third quarter.
Restructuring and Asset Impairment Charges
During the recent third quarter, we incurred
$17.6 million
of restructuring and asset impairment charges. As a result of the macroeconomic conditions, principally due to the decline in oil prices, we recognized non-cash impairment charges of $7.6 million to write-down property, plant and equipment and other intangibles. We also recorded $10.0 million of restructuring charges consisting primarily of costs associated with an early retirement incentive that resulted in reducing approximately 130 production and maintenance positions.
During the third quarter of fiscal year 2015, we incurred $25.3 million of restructuring charges. We implemented a reduction of approximately 200, or 10 percent, of the total salaried positions resulting in a charge of $10.6 million consisting primarily of various personnel-related costs to cover severance payments, medical coverage and related items. Also, we exited the ultra-fine grain materials development program resulting in a charge of $13.4 million. In addition, we announced the closure of a facility resulting in a charge of $1.3 million to reflect the write-down of certain property and equipment.
Goodwill Impairment Charge
The Company’s Amega West Services (“Amega”) and Specialty Steel Supply (“SSS”) reporting units have been significantly impacted by the prolonged weakness in oil and gas drilling and exploration activity driven by depressed oil prices. As a result, during the three months ended March 31, 2016 we recorded an impairment charge of
$12.5 million
which represents the entire balance of the goodwill recorded for these reporting units.
Operating Income
Our operating loss in the recent
third
quarter was $
24.3 million
or
5.3
percent of net sales as compared with operating income of $
4.8 million
or
0.8
percent of net sales in the same quarter a year ago. Excluding surcharge revenue, pension EID and other special items, operating margin was
8.7
percent for the current quarter as compared with
7.6
percent a year ago. The increase in our operating margin for the
third
quarter of fiscal year 2016 reflects operating cost improvements and fixed cost reductions partially offset by lower volume principally in our Energy, Industrial and Consumer and Aerospace and Defense end-use markets compared to the same period a year ago.
Operating income has been significantly impacted by our pension EID, which may be volatile based on conditions in the financial markets, as well as special items. The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales, pension EID, excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items. We present and discuss these financial measures because management believes removing these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
($ in millions)
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
456.3
|
|
|
$
|
570.6
|
|
Less: surcharge revenue
|
|
53.9
|
|
|
107.7
|
|
Net sales excluding surcharge revenue
|
|
$
|
402.4
|
|
|
$
|
462.9
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(24.3
|
)
|
|
$
|
4.8
|
|
Pension EID
|
|
4.8
|
|
|
2.4
|
|
Operating (loss) income excluding pension EID
|
|
(19.5
|
)
|
|
7.2
|
|
Special items:
|
|
|
|
|
Excess inventory write-down
|
|
22.5
|
|
|
—
|
|
Restructuring and asset impairment charges
|
|
17.6
|
|
|
25.3
|
|
Goodwill impairment
|
|
12.5
|
|
|
—
|
|
Consulting costs
|
|
2.1
|
|
|
2.6
|
|
Operating income excluding pension EID and other special items
|
|
$
|
35.2
|
|
|
$
|
35.1
|
|
|
|
|
|
|
Operating margin
|
|
(5.3
|
)%
|
|
0.8
|
%
|
|
|
|
|
|
Operating margin excluding surcharge, pension EID and other special items
|
|
8.7
|
%
|
|
7.6
|
%
|
Interest Expense
Interest expense for the three months ended
March 31, 2016
was $
7.2 million
compared with $
7.1 million
in the same period a year ago. We have used interest rate swaps to achieve a level of floating rate debt to fixed rate debt where appropriate. Interest expense for the three months ended
March 31, 2016
includes net gains from interest rate swaps of $0.6 million compared with $0.8 million net gains from interest rate swaps for three months ended
March 31, 2015
.
Other (Expense) Income, Net
Other expense for the three months ended
March 31, 2016
was
$1.5 million
as compared with other income of
$0.0 million
for the three months ended
March 31, 2015
.
Income Taxes
Income taxes in the recent
third
quarter were a benefit of
$9.1 million
, or
27.6 percent
of pre-tax loss versus a benefit of $0.9 million, or 39.1 percent of pre-tax loss in the same quarter a year ago. Income taxes in the current quarter reflect the impact of non-cash impairment charges related to certain assets in the Company’s oil and gas business as well as a discrete tax charge of $0.8 million for the impact of the sale of our equity investment in India.
Business Segment Results
We have two reportable business segments: SAO and PEP.
The following table includes comparative information for volumes by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
Increase
(Decrease)
|
|
%
Increase
(Decrease)
|
(Pounds sold, in thousands)
|
|
2016
|
|
2015
|
|
|
Specialty Alloys Operations
|
|
59,082
|
|
|
67,232
|
|
|
(8,150
|
)
|
|
(12
|
)%
|
Performance Engineered Products *
|
|
2,774
|
|
|
3,806
|
|
|
(1,032
|
)
|
|
(27
|
)%
|
Intersegment
|
|
(518
|
)
|
|
(1,986
|
)
|
|
1,468
|
|
|
74
|
%
|
Consolidated pounds sold
|
|
61,338
|
|
|
69,052
|
|
|
(7,714
|
)
|
|
(11
|
)%
|
* Pounds sold data for PEP segment includes Dynamet and Carpenter Powder Products businesses only.
The following table includes comparative information for net sales by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
$
Increase
(Decrease)
|
|
%
Increase
(Decrease)
|
($ in millions)
|
|
2016
|
|
2015
|
|
|
Specialty Alloys Operations
|
|
$
|
370.5
|
|
|
$
|
469.8
|
|
|
$
|
(99.3
|
)
|
|
(21
|
)%
|
Performance Engineered Products
|
|
91.4
|
|
|
120.4
|
|
|
(29.0
|
)
|
|
(24
|
)%
|
Intersegment
|
|
(5.6
|
)
|
|
(19.6
|
)
|
|
14.0
|
|
|
71
|
%
|
Total net sales
|
|
$
|
456.3
|
|
|
$
|
570.6
|
|
|
$
|
(114.3
|
)
|
|
(20
|
)%
|
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
$
Increase
(Decrease)
|
|
%
Increase
(Decrease)
|
($ in millions)
|
|
2016
|
|
2015
|
|
|
Specialty Alloys Operations
|
|
$
|
316.5
|
|
|
$
|
360.0
|
|
|
$
|
(43.5
|
)
|
|
(12
|
)%
|
Performance Engineered Products
|
|
91.2
|
|
|
120.1
|
|
|
(28.9
|
)
|
|
(24
|
)%
|
Intersegment
|
|
(5.3
|
)
|
|
(17.2
|
)
|
|
11.9
|
|
|
69
|
%
|
Total net sales excluding surcharge revenue
|
|
$
|
402.4
|
|
|
$
|
462.9
|
|
|
$
|
(60.5
|
)
|
|
(13
|
)%
|
Specialty Alloys Operations Segment
Net sales for the quarter ended
March 31, 2016
for the SAO segment
decreased
21
percent to
$370.5 million
, as compared with
$469.8 million
in the same quarter a year ago. Excluding surcharge revenue, net sales
decreased
12
percent on
12
percent
lower
shipment volume from a year ago. The results reflect weakness in the Energy and Industrial and Consumer end-use markets compared to the prior year quarter.
Operating income for the SAO segment was $
45.6 million
or
12.3
percent of net sales (
14.4
percent of net sales excluding surcharge revenue) in the recent
third
quarter, as compared with $
37.9 million
or
8.1
percent of net sales (
10.5
percent of net sales excluding surcharge revenue) in the same quarter a year ago. The
increase
in operating income reflects cost improvement due to the execution of our new Carpenter operating model and the impact of the fixed cost restructuring program implemented in the second half of fiscal year 2015.
Performance Engineered Products Segment
Net sales for the quarter ended
March 31, 2016
for the PEP segment
decreased
24
percent to $
91.4 million
, as compared with $
120.4 million
in the same quarter a year ago. Excluding surcharge revenue, net sales of $
91.2 million
decreased
24
percent from a year ago. The results reflect decreased demand primarily due to the current weakness in the oil and gas businesses.
Operating loss for the PEP segment was $
0.9 million
or
1.0
percent of net sales in the recent
third
quarter, compared with operating income of $
8.5 million
or
7.1
percent of net sales in the same quarter a year ago. The results reflect the impact of the weak oil and gas businesses due to limited drilling activity.
Results of Operations —
Nine Months Ended
March 31, 2016
vs.
Nine Months Ended
March 31, 2015
Net Sales
Net sales for the
nine
months ended
March 31, 2016
were
$1,355.7 million
, which was a
19
percent
decrease
over the same period a year ago. Excluding surcharge revenue, sales
decreased
13
percent on
15
percent
lower
shipment volume from the same period a year ago. The results reflect weakness in demand for materials used in the Energy end-use market primarily the oil and gas sector. In addition, this weakness in the Energy end-use market has affected order patterns for customers in our Industrial and Consumer end-use market.
Geographically, sales outside the United States decreased 14 percent from the same period a year ago to $418.7 million for the
nine
months ended
March 31, 2016
. The decrease is primarily due to sales to Asia and Canada in the Energy and Industrial and Consumer end-use markets. In addition, sales to Europe decreased in the Aerospace and Defense, Industrial and Consumer and Medical end-use markets. A portion of our sales outside the United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in an $8.5 million decrease in sales during the nine months ended March 31, 2016 compared to the nine months ended March 31, 2015. International sales represented 31 percent and 29 percent of total net sales for the
nine
months ended
March 31, 2016
and 2015, respectively.
Sales by End-Use Markets
We sell to customers across diversified end-use markets. The following table includes comparative information for our net sales, which includes surcharge revenue by principal end-use markets. We believe this is helpful supplemental information in analyzing the performance of the business from period to period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
$
(Decrease)
|
|
%
(Decrease)
|
($ in millions)
|
|
2016
|
|
2015
|
|
|
Aerospace and Defense
|
|
$
|
703.6
|
|
|
$
|
753.5
|
|
|
$
|
(49.9
|
)
|
|
(7
|
)%
|
Energy
|
|
100.8
|
|
|
231.0
|
|
|
(130.2
|
)
|
|
(56
|
)%
|
Transportation
|
|
125.3
|
|
|
126.5
|
|
|
(1.2
|
)
|
|
(1
|
)%
|
Medical
|
|
84.9
|
|
|
89.2
|
|
|
(4.3
|
)
|
|
(5
|
)%
|
Industrial and Consumer
|
|
251.9
|
|
|
365.6
|
|
|
(113.7
|
)
|
|
(31
|
)%
|
Distribution
|
|
89.2
|
|
|
103.0
|
|
|
(13.8
|
)
|
|
(13
|
)%
|
Total net sales
|
|
$
|
1,355.7
|
|
|
$
|
1,668.8
|
|
|
$
|
(313.1
|
)
|
|
(19
|
)%
|
The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
$
Increase
(Decrease)
|
|
%
Increase
(Decrease)
|
($ in millions)
|
|
2016
|
|
2015
|
|
|
Aerospace and Defense
|
|
$
|
583.5
|
|
|
$
|
583.7
|
|
|
$
|
(0.2
|
)
|
|
—
|
%
|
Energy
|
|
89.6
|
|
|
198.9
|
|
|
(109.3
|
)
|
|
(55
|
)%
|
Transportation
|
|
105.5
|
|
|
95.4
|
|
|
10.1
|
|
|
11
|
%
|
Medical
|
|
79.7
|
|
|
81.4
|
|
|
(1.7
|
)
|
|
(2
|
)%
|
Industrial and Consumer
|
|
219.9
|
|
|
287.2
|
|
|
(67.3
|
)
|
|
(23
|
)%
|
Distribution
|
|
88.8
|
|
|
102.1
|
|
|
(13.3
|
)
|
|
(13
|
)%
|
Total net sales excluding surcharge revenue
|
|
$
|
1,167.0
|
|
|
$
|
1,348.7
|
|
|
$
|
(181.7
|
)
|
|
(13
|
)%
|
Sales to the Aerospace and Defense end-use market
decreased
7
percent from the same period a year ago to
$703.6 million
. Excluding surcharge revenue, sales were
flat
from the same period a year ago on a
1
percent
decrease
in shipment volume. The results reflect a decrease in sales of engine materials and titanium fastener material partially offset by stronger demand and improved product mix for materials used in structural applications. In addition, we are experiencing strength in our defense related sales with continued spending on supported programs.
Sales to the Energy end-use market of $
100.8 million
reflect a
56
percent
decrease
from the same period a year ago. Excluding surcharge revenue, sales
decreased
55
percent from a year ago on
lower
shipment volume of
52
percent. The results reflect the impact of low oil and gas prices, the slowdown in China and slowing demand, which has significantly reduced drilling and exploration activity. The North American average directional rig count decreased 58 percent from the same period a year ago.
Transportation end-use market sales
decreased
1
percent from the same period a year ago to $
125.3 million
. Excluding surcharge revenue, sales
increased
11
percent on
flat
shipment volume from the same period a year ago. The shift in favorable product mix was a result of increased demand for materials used mainly in fuel system applications.
Medical end-use market sales
decreased
5
percent from the same period a year ago to $
84.9 million
. Excluding surcharge revenue, sales
decreased
2
percent on
2
percent
lower
shipment volume from the same period a year ago. The results reflect pricing pressures on transactional business for titanium and stainless steel materials.
Industrial and Consumer end-use market sales
decreased
31
percent from the same period a year ago to $
251.9 million
. Excluding surcharge revenue, sales
decreased
23
percent on a
26
percent
decrease
in shipment volume. The results reflect decreased demand for materials used in capital equipment and industrial components due in part to the depressed oil and gas market.
Gross Profit
Our gross profit in the
nine months ended
March 31, 2016
decreased
21 percent to
$182.4 million
, or
13.5
percent of net sales as compared with $
229.9 million
, or
13.8
percent of net sales. Excluding the impacts of the excess inventory write-down and surcharge revenue, our gross margin in the
nine months ended
March 31, 2016
was
17.6
percent as compared to
17.0
percent in the same period a year ago. The results reflect lower operating costs partially offset by lower volume principally in our Energy and Industrial and Consumer end-use markets compared to the same period a year ago.
Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin excluding the impact of the excess inventory write-down for the comparative
nine
month periods. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
($ in millions)
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
1,355.7
|
|
|
$
|
1,668.8
|
|
Less: surcharge revenue
|
|
188.7
|
|
|
320.1
|
|
Net sales excluding surcharge revenue
|
|
$
|
1,167.0
|
|
|
$
|
1,348.7
|
|
|
|
|
|
|
Gross profit
|
|
$
|
182.4
|
|
|
$
|
229.9
|
|
Excess inventory write-down
|
|
22.5
|
|
|
—
|
|
Gross profit excluding the excess inventory write-down
|
|
$
|
204.9
|
|
|
$
|
229.9
|
|
|
|
|
|
|
Gross margin
|
|
13.5
|
%
|
|
13.8
|
%
|
|
|
|
|
|
Gross margin excluding dilutive effect of surcharge revenue and excess inventory write-down
|
|
17.6
|
%
|
|
17.0
|
%
|
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $
129.5 million
were
9.6
percent of net sales (
11.1
percent of net sales excluding surcharge) for the
nine
months ended
March 31, 2016
as compared with $
132.7 million
or
8.0
percent of net sales (
9.8
percent of net sales excluding surcharge) in the same period a year ago. Selling, general and administrative expenses decreased due to cost savings as result of the restructuring actions taken in fiscal year 2015 partially offset by consulting costs related to the Business Management Office and strategic business reviews.
Restructuring and Asset Impairment Charges
During the
nine
months ended
March 31, 2016
, we incurred
$18.0 million
of restructuring and asset impairment charges. This included $7.6 million to write-down property, plant and equipment and other intangibles and $10.4 million consisting primarily of an early retirement incentive that resulted in reducing approximately 130 production and maintenance positions.
During the nine months ended March 31, 2015, we incurred $25.3 million of restructuring charges. We implemented a reduction of approximately 200, or 10 percent, of the total salaried positions resulting in a charge of $10.6 million consisting primarily of various personnel-related costs to cover severance payments, medical coverage and related items. Also, we exited the ultra-fine grain materials development program resulting in a charge of $13.4 million during the nine months ended March 31, 2015. In addition, we announced the closure of a facility resulting in a charge of $1.3 million to reflect the write-down of certain property and equipment.
Goodwill Impairment Charge
The Company’s Amega and SSS reporting units have been significantly impacted by the prolonged weakness in oil and gas drilling and exploration activity driven by depressed oil prices. As a result, during the nine months ended March 31, 2016 we recorded an impairment charge of
$12.5 million
which represents the entire balance of the goodwill recorded for these reporting units.
Operating Income
Our operating income in the
nine
months ended
March 31, 2016
was $
22.4 million
, or
1.7
percent of net sales as compared with $
71.9 million
, or
4.3
percent of net sales in the same period a year ago. Excluding surcharge revenue, pension EID and other special items, operating margin was
8.3
percent for the
nine
months ended
March 31, 2016
and
7.9
percent for the same period a year ago. The increase in the operating margin reflects improving product mix, operating cost improvements and overhead cost reductions partially offset by lower volume principally in our Energy and Industrial and Consumer end-use markets compared to the same period a year ago.
Operating income has been significantly impacted by our pension EID, which may be volatile based on conditions in the financial markets, as well as other special items. The following presents our operating income and operating margin, in each case excluding the impact of surcharge on net sales, pension EID, the excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
($ in millions)
|
|
2016
|
|
2015
|
Net sales
|
|
$
|
1,355.7
|
|
|
$
|
1,668.8
|
|
Less: surcharge revenue
|
|
188.7
|
|
|
320.1
|
|
Net sales excluding surcharge revenue
|
|
$
|
1,167.0
|
|
|
$
|
1,348.7
|
|
|
|
|
|
|
Operating income
|
|
$
|
22.4
|
|
|
$
|
71.9
|
|
Pension EID
|
|
14.4
|
|
|
7.1
|
|
Operating income excluding pension EID
|
|
36.8
|
|
|
79.0
|
|
|
|
|
|
|
Special items:
|
|
|
|
|
Excess inventory write-down
|
|
22.5
|
|
|
—
|
|
Restructuring and asset impairment charges
|
|
18.0
|
|
|
25.3
|
|
Goodwill impairment
|
|
12.5
|
|
|
—
|
|
Consulting costs
|
|
7.2
|
|
|
2.6
|
|
Operating income excluding pension EID and other special items
|
|
$
|
97.0
|
|
|
$
|
106.9
|
|
|
|
|
|
|
Operating margin
|
|
1.7
|
%
|
|
4.3
|
%
|
|
|
|
|
|
Operating margin excluding surcharge, pension EID and other special items
|
|
8.3
|
%
|
|
7.9
|
%
|
Interest Expense
Interest expense for the
nine months ended
March 31, 2016
was $
20.8 million
compared with $
20.9 million
in the year ago period. We have used interest rate swaps to achieve a level of floating rate debt to fixed rate debt where appropriate. Interest expense for the
nine months ended
March 31, 2016
includes net gains from interest rate swaps of $1.9 million compared with $2.0 million of net gains from interest rate swaps for the
nine months ended
March 31, 2015
.
Other (Expense) Income, Net
Other expense was $
3.4 million
for the recent
nine months ended
March 31, 2016
compared to other income of $
4.8 million
in the year ago period. The results reflect the negative impacts in foreign exchange losses and unfavorable market return on certain investments for the current period compared to the same period a year ago. In addition, the
nine months ended
March 31, 2015
includes a $4.4 million favorable legal settlement.
Income Taxes
Income tax expense in the
nine months ended
March 31, 2016
was $
1.8 million
, or negative
100.0
percent of pre-tax loss versus $
19.6 million
, or
35.1
percent of pre-tax income in the
nine months ended
March 31, 2015
. Income tax expense in the nine months ended March 31, 2016 includes a net tax benefit of $0.8 million for the December 2015 enactment of the Protecting Americans from Tax Hikes Act of 2015 which permanently extended the research and development credit retroactively from January 1, 2015; and also extended bonus depreciation with a phase down through December 31, 2019. Income tax expense for the nine months ended March 31, 2016 also includes a discrete tax charge of $2.8 million recorded as a result of a decision to sell our equity investment in India. Income tax expense in the nine months ended March 31, 2015 includes a net tax charge of $1.6 million for the December 2014 enactment of the Tax Increase Prevention Act of 2014 that retroactively extended the research and development credit and bonus depreciation.
Business Segment Results
We have two reportable business segments: SAO and PEP.
The following table includes comparative information for volumes by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
Increase
(Decrease)
|
|
%
Increase
(Decrease)
|
(Pounds sold, in thousands)
|
|
2016
|
|
2015
|
|
|
Specialty Alloys Operations
|
|
170,690
|
|
|
202,952
|
|
|
(32,262
|
)
|
|
(16
|
)%
|
Performance Engineered Products
|
|
8,530
|
|
|
11,064
|
|
|
(2,534
|
)
|
|
(23
|
)%
|
Intersegment
|
|
(2,530
|
)
|
|
(5,506
|
)
|
|
2,976
|
|
|
54
|
%
|
Consolidated pounds sold
|
|
176,690
|
|
|
208,510
|
|
|
(31,820
|
)
|
|
(15
|
)%
|
* Pounds sold data for PEP segment includes Dynamet and Carpenter Powder Products businesses only.
The following table includes comparative information for net sales by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
$
Increase
(Decrease)
|
|
%
Increase
(Decrease)
|
($ in millions)
|
|
2016
|
|
2015
|
|
|
Specialty Alloys Operations
|
|
$
|
1,106.7
|
|
|
$
|
1,344.0
|
|
|
$
|
(237.3
|
)
|
|
(18
|
)%
|
Performance Engineered Products
|
|
268.3
|
|
|
384.1
|
|
|
(115.8
|
)
|
|
(30
|
)%
|
Intersegment
|
|
(19.3
|
)
|
|
(59.3
|
)
|
|
40.0
|
|
|
67
|
%
|
Total net sales
|
|
$
|
1,355.7
|
|
|
$
|
1,668.8
|
|
|
$
|
(313.1
|
)
|
|
(19
|
)%
|
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
$
Increase
(Decrease)
|
|
%
Increase
(Decrease)
|
($ in millions)
|
|
2016
|
|
2015
|
|
|
Specialty Alloys Operations
|
|
$
|
917.2
|
|
|
$
|
1,016.4
|
|
|
$
|
(99.2
|
)
|
|
(10
|
)%
|
Performance Engineered Products
|
|
267.8
|
|
|
383.1
|
|
|
(115.3
|
)
|
|
(30
|
)%
|
Intersegment
|
|
(18.0
|
)
|
|
(50.8
|
)
|
|
32.8
|
|
|
65
|
%
|
Total net sales excluding surcharge revenue
|
|
$
|
1,167.0
|
|
|
$
|
1,348.7
|
|
|
$
|
(181.7
|
)
|
|
(13
|
)%
|
Specialty Alloys Operations Segment
Net sales for the
nine months ended
March 31, 2016
for the SAO segment
decreased
18
percent to $
1,106.7 million
, as compared with $
1,344.0 million
in the same period a year ago. Excluding surcharge revenue, net sales
decreased
10
percent on
16
percent
lower
shipment volume from a year ago. The results reflect weakness in the Energy and Industrial and Consumer end-use markets compared to the prior year same period.
Operating income for the SAO segment was $
128.3 million
or
11.6
percent of net sales (
14.0
percent of net sales excluding surcharge revenue) in the recent
nine months ended
March 31, 2016
as compared with $
106.0 million
or
7.9
percent of net sales (
10.4
percent of net sales excluding surcharge revenue) in the same period a year ago. The
increase
in operating income reflects operating cost improvements, an insurance recovery benefit of $4 million and stronger product mix partially offset by lower volume principally in our Energy and Industrial and Consumer end-use markets.
Performance Engineered Products Segment
Net sales for the
nine months ended
March 31, 2016
for the PEP segment
decreased
30
percent to $
268.3 million
, as compared with $
384.1 million
in the same period a year ago. Excluding surcharge revenue net sales
decreased
30
percent from a year ago. The results reflect
decreased
net sales primarily due to the current weakness in the oil and gas businesses.
Operating loss for the PEP segment was $
4.2 million
or
1.6
percent of net sales in the recent
nine months ended
March 31, 2016
, compared with operating income of $
30.8 million
or
8.0
percent of net sales in the same period a year ago. The results reflect the impact of the weak oil and gas businesses due to limited drilling activity.
Liquidity and Financial Resources
During the
nine
months ended
March 31, 2016
, we generated cash flows from operations of $
137.2 million
compared to $
148.4 million
in the same period a year ago.
Our free cash flow, which we define under “Non-GAAP Financial Measures” below, was positive
$55.4 million
as compared to negative
$32.5 million
for the same period a year ago. The increase in free cash flow reflects significantly lower capital spending levels largely related to the winding down in capital expenditures associated with the construction of our Athens facility. Capital expenditures for property, equipment and software were $
66.1 million
for the
nine
months ended
March 31, 2016
as compared to $
152.3 million
for the same period a year ago.
Dividends during the
nine
months ended
March 31, 2016
and
2015
were $
26.3 million
and
$28.8 million
, respectively, and were paid at the same quarterly rate of $
0.18
per share of common stock in both periods.
We have demonstrated the ability to generate cash to meet our needs through cash flows from operations, management of working capital and the availability of outside sources of financing to supplement internally generated funds. We generally target minimum liquidity, consisting of cash and cash equivalents added to available borrowing capacity under our credit agreement of $150 million. Our syndicated revolving credit agreement (“Credit Agreement”) contains a revolving credit commitment of $500 million and expires in June 2018. As of
March 31, 2016
, we had
$7.6 million
of issued letters of credit and
$25.0 million
of short-term borrowings under the Credit Agreement. The balance of the Credit Agreement (
$467.4 million
) remains available to us. As of
March 31, 2016
, we had total liquidity of $490.8 million, including
$23.4 million
of cash and cash equivalents.
We believe that our cash and cash equivalents of
$23.4 million
as of
March 31, 2016
, together with cash generated from operations and available borrowing capacity of
$467.4 million
under our credit facilities will be sufficient to fund our cash needs over the foreseeable future. From time to time during the
nine
months ended
March 31, 2016
, we have borrowed under our Credit Agreement. The weighted average daily borrowing under the Credit Agreement during the
nine
months ended
March 31, 2016
was approximately $17.6 million with daily outstanding borrowings ranging from $0 million to $50.8 million during the period.
During the
nine
months ended
March 31, 2016
, no cash contributions were required to be made to our qualified pension plans, and we do not expect to be required to make any cash contributions to our qualified pension plans for the remainder of fiscal year
2016
.
As of
March 31, 2016
, we had cash and cash equivalents of approximately $22.3 million held at various foreign subsidiaries. Our global cash deployment considers, among other things, the geographic location of our subsidiaries’ cash balances, the locations of our anticipated liquidity needs, and the cost to access international cash balances, as necessary. The repatriation of cash from certain foreign subsidiaries could have adverse tax consequences as we may be required to pay and record U.S. income taxes and foreign withholding taxes in various tax jurisdictions on these funds to the extent they were previously considered permanently reinvested.
During the
nine
months ended
March 31, 2016
, we used
$123.9 million
to purchase 3,762,200 shares of common stock pursuant to the terms of the share repurchase program authorized by our Board of Directors in October 2014. As of
March 31, 2016
,
$251.6 million
remains available for future purchases.
We are subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio (3.50 to 1.00 as of
March 31, 2016
). The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense (“EBITDA”) to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than 55%. The debt to capital ratio is defined in the Credit Agreement as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. As of
March 31, 2016
, the Company was in compliance with all of the covenants of the Credit Agreement.
The following table shows our actual ratio performance with respect to the financial covenants as of
March 31, 2016
:
|
|
|
|
|
|
Covenant
|
|
Covenant Requirement
|
|
Actual Ratio
|
Consolidated interest coverage
|
|
3.50 to 1.00 (minimum)
|
|
8.8 to 1.00
|
Consolidated debt to capital
|
|
55% (maximum)
|
|
35%
|
We continue to believe that we will maintain compliance with the financial and restrictive covenants in future periods. To the extent that we do not comply with the covenants under the Credit Agreement, this could reduce our liquidity and flexibility due to potential restrictions on borrowings available to us unless we are able to obtain waivers or modifications of the covenants.
Non-GAAP Financial Measures
The following provides additional information regarding certain non-GAAP financial measures that we use in this report. Our definitions and calculations of these items may not necessarily be the same as those used by other companies.
Net Sales and Gross Margin Excluding Surcharge Revenue and Other Special Items
This report includes discussions of net sales as adjusted to exclude the impact of raw material surcharge and the resulting impact on gross margins, as well as the excess inventory write-down, which represent financial measures that have not been determined in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales and cost of sales provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding the excess inventory write-down from gross profit and gross margin is helpful in analyzing our operating performance as the excess inventory write-down is not indicative of ongoing operating performance. See our earlier discussion of “Gross Profit” for a reconciliation of net sales and gross margin, excluding surcharge revenue and the excess inventory write-down, to net sales as determined in accordance with U.S. GAAP. Net sales and gross margin excluding surcharge revenue and the excess inventory write-down is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, net sales and gross margin calculated in accordance with U.S. GAAP.
Operating Income and Operating Margin Excluding Surcharge Revenue, Pension EID and Other Special Items
This report includes discussions of operating income and operating margin as adjusted to exclude the impact of raw material surcharge revenue, pension EID, the excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales and cost of sales provides a more consistent and meaningful basis for comparing results of
operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding pension EID, the excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items from operating income and operating margin is helpful in analyzing our operating performance particularly as pension EID may be volatile due to changes in the financial markets and the excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items are not indicative of ongoing operating performance. See our earlier discussion of operating income for a reconciliation of operating income and operating margin excluding pension EID, the excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items to operating income and operating margin determined in accordance with U.S. GAAP. Operating income and operating margin excluding surcharge revenue, pension EID, the excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and special items is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, operating income and operating margin calculated in accordance with U.S. GAAP.
Adjusted Earnings Per Share
The following provides a reconciliation of adjusted earnings per share, to its most directly comparable U.S. GAAP financial measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, except per share amounts)
|
|
(Loss) Income Before Income Taxes
|
|
Income Tax Benefit (Expense)
|
|
Net (Loss) Income
|
|
(Loss) Earnings Per Diluted Share**
|
Three months ended March 31, 2016, as reported
|
|
$
|
(33.0
|
)
|
|
$
|
9.1
|
|
|
$
|
(23.9
|
)
|
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
Special items:
|
|
|
|
|
|
|
|
|
Excess inventory write-down
|
|
22.5
|
|
|
(7.8
|
)
|
|
14.7
|
|
|
0.31
|
|
Restructuring and asset impairment charges
|
|
17.6
|
|
|
(5.6
|
)
|
|
12.0
|
|
|
0.26
|
|
Goodwill impairment
|
|
12.5
|
|
|
(3.2
|
)
|
|
9.3
|
|
|
0.20
|
|
Consulting costs
|
|
2.1
|
|
|
(0.7
|
)
|
|
1.4
|
|
|
0.03
|
|
Income tax item
|
|
—
|
|
|
0.8
|
|
|
0.8
|
|
|
0.01
|
|
Total impact of special items
|
|
54.7
|
|
|
(16.5
|
)
|
|
38.2
|
|
|
0.81
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2016, as adjusted
|
|
$
|
21.7
|
|
|
$
|
(7.4
|
)
|
|
$
|
14.3
|
|
|
$
|
0.30
|
|
** Impact per diluted share calculated using weighted average common shares outstanding of
47.1 million
for the three months ended
March 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, except per share amounts)
|
|
(Loss) Income Before Income Taxes
|
|
Income Tax Benefit (Expense)
|
|
Net (Loss) Income
|
|
(Loss) Earnings Per Diluted Share**
|
Three months ended March 31, 2015, as reported
|
|
$
|
(2.3
|
)
|
|
$
|
0.9
|
|
|
$
|
(1.4
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Special items:
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
25.3
|
|
|
(8.7
|
)
|
|
16.6
|
|
|
0.32
|
|
Consulting costs
|
|
2.6
|
|
|
(0.9
|
)
|
|
1.7
|
|
|
0.03
|
|
Total impact of special items
|
|
27.9
|
|
|
(9.6
|
)
|
|
18.3
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2015, as adjusted
|
|
$
|
25.6
|
|
|
$
|
(8.7
|
)
|
|
$
|
16.9
|
|
|
$
|
0.32
|
|
** Impact per diluted share calculated using weighted average common shares outstanding of
52.6 million
for the three months ended
March 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, except per share amounts)
|
|
(Loss) Income Before Income Taxes
|
|
Income Tax Benefit (Expense)
|
|
Net (Loss) Income
|
|
(Loss) Earnings Per Diluted Share**
|
Nine months ended March 31, 2016, as reported
|
|
$
|
(1.8
|
)
|
|
$
|
(1.8
|
)
|
|
$
|
(3.6
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Special items:
|
|
|
|
|
|
|
|
|
Excess inventory write-down
|
|
22.5
|
|
|
(7.8
|
)
|
|
14.7
|
|
|
0.30
|
|
Restructuring and asset impairment charges
|
|
18.0
|
|
|
(5.7
|
)
|
|
12.3
|
|
|
0.25
|
|
Goodwill impairment
|
|
12.5
|
|
|
(3.2
|
)
|
|
9.3
|
|
|
0.19
|
|
Consulting costs
|
|
7.2
|
|
|
(2.5
|
)
|
|
4.7
|
|
|
0.10
|
|
Income tax item
|
|
—
|
|
|
2.8
|
|
|
2.8
|
|
|
0.06
|
|
Impact of tax law change
|
|
—
|
|
|
(0.8
|
)
|
|
(0.8
|
)
|
|
(0.01
|
)
|
Total impact of special items
|
|
60.2
|
|
|
(17.2
|
)
|
|
43.0
|
|
|
0.89
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31, 2016, as adjusted
|
|
$
|
58.4
|
|
|
$
|
(19.0
|
)
|
|
$
|
39.4
|
|
|
$
|
0.81
|
|
** Impact per diluted share calculated using weighted average common shares outstanding of
48.5 million
for the
nine months ended
March 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, except per share amounts)
|
|
Income Before Income Taxes
|
|
Income Tax (Expense)
|
|
Net Income
|
|
Earnings Per Diluted Share*
|
Nine months ended March 31, 2015, as reported
|
|
$
|
55.8
|
|
|
$
|
(19.6
|
)
|
|
$
|
36.2
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
Special items:
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
25.3
|
|
|
(8.7
|
)
|
|
16.6
|
|
|
0.32
|
|
Consulting costs
|
|
2.6
|
|
|
(0.9
|
)
|
|
1.7
|
|
|
0.03
|
|
Total impact of special items
|
|
27.9
|
|
|
(9.6
|
)
|
|
18.3
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31, 2015, as adjusted
|
|
$
|
83.7
|
|
|
$
|
(29.2
|
)
|
|
$
|
54.5
|
|
|
$
|
1.03
|
|
** Impact per diluted share calculated using weighted average common shares outstanding of
53.3 million
for the
nine months ended
March 31, 2015
.
Management believes that the presentation of earnings per share adjusted to exclude the impacts of the excess inventory write-down, restructuring and asset impairment charges, goodwill impairment and other special items is helpful in analyzing the operating performance of the Company, as these costs are not indicative of ongoing operating performance. Our definitions and calculations of these items may not necessarily be the same as those used by other companies. Adjusted earnings per share is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, earnings per share calculated in accordance with U.S. GAAP.
Free Cash Flow
The following provides a reconciliation of free cash flow, as used in this report, to its most directly comparable U.S. GAAP financial measures:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
($ in millions)
|
|
2016
|
|
2015
|
Net cash provided from operating activities
|
|
$
|
137.2
|
|
|
$
|
148.4
|
|
Purchases of property, equipment and software
|
|
(66.1
|
)
|
|
(152.3
|
)
|
Proceeds from disposals of property and equipment
|
|
0.3
|
|
|
0.2
|
|
Proceeds from the sale of equity method investment
|
|
6.3
|
|
|
—
|
|
Dividends paid
|
|
(26.3
|
)
|
|
(28.8
|
)
|
Other
|
|
4.0
|
|
|
—
|
|
Free cash flow
|
|
$
|
55.4
|
|
|
$
|
(32.5
|
)
|
Management believes that the presentation of free cash flow provides useful information to investors regarding our financial condition because it is a measure of cash generated which management evaluates for alternative uses. It is management’s current intention to use excess cash to fund investments in capital equipment, acquisition opportunities, treasury stock repurchases and consistent dividend payments. Free cash flow is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, cash flows calculated in accordance with U.S. GAAP.
Contingencies
Environmental
We are subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of our operations, compliance costs to date have not been material. We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a potentially responsible party (“PRP”) with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. We accrue amounts for environmental remediation costs that represent our best estimate of the probable and reasonably estimable future costs related to environmental remediation. During the
nine
months ended
March 31, 2016
, we increased the liability for a company-owned former operating site by
$0.2 million
. The liabilities recorded for environmental remediation costs at Superfund sites, other third party-owned sites and Carpenter-owned current or former operating facilities remaining at
March 31, 2016
and
June 30, 2015
were
$16.1 million
and
$15.9 million
, respectively. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRP’s at these Superfund sites have been determined. Accordingly, at this time, we cannot reasonably estimate expected costs for such matters. The liability for future environmental remediation costs that can be reasonably estimated is evaluated on a quarterly basis.
Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRP’s. Based upon information currently available, such future costs are not expected to have a material effect on our financial position, results of operations or cash flows over the long-term. However, such costs could be material to our financial position, results of operations or cash flows in a particular future quarter or year.
Other
We are defending various routine claims and legal actions that are incidental to our business, and that are common to our operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. Like many other manufacturing companies in recent years we, from time to time, have been named as a defendant in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace such as asbestos. We provide for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, we believe that the total liability from these matters will not have a material effect on our financial position, results of operations or cash flows over the long-term. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to our financial position, results of operations or cash flows in a particular future quarter or year.
Critical Accounting Policies and Estimates
A summary of other significant accounting policies is discussed in our 2015 Form 10-K Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and in Note 1, Summary of Significant Accounting Policies, of the Notes to our consolidated financial statements included in Part II, Item 8 thereto.
Goodwill
Goodwill is not amortized, but instead is tested at least annually for impairment, at the reporting unit level. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value, including goodwill. The fair value is estimated based principally upon discounted cash flow analysis. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting unit’s goodwill to its implied fair value. The discounted cash flow analysis for each reporting unit tested requires significant estimates and assumptions related to cash flow forecasts, discount rates, terminal values and income tax rates. The cash flow forecasts are developed based on assumptions about each reporting unit’s markets, product offerings, pricing, capital expenditures and working capital requirements as well as cost performance. The discount rates used in the discounted cash flow are estimated based on a market participant’s perspective of each reporting unit's weighted average cost of capital. The terminal value, which represents the value attributed to the reporting unit beyond the forecast period, is estimated using a perpetuity growth rate assumption. The income tax rates used in the discounted cash flow analysis represent estimates of the long-term statutory income tax rates for each reporting unit based on the jurisdictions in which the reporting units operate.
Since the last annual impairment testing as of June 30, 2015 for the Amega and SSS reporting units, the prolonged weakness in oil and gas drilling and exploration activity, driven by depressed oil prices, has significantly impacted these reporting units’ results of operations. The latest annual impairment test as of June 30, 2015 for these reporting units included discounted cash flows analysis using assumptions regarding the duration of the low oil price environment, the timing of an anticipated increase in activity levels and the related impact on customer buying patterns. We anticipated an increase in sales for these reporting units beginning in the third quarter of fiscal year 2016. However, given current market conditions, customer orders remained depressed and the reporting units’ results were lower than expected. As a result of the current quarter’s results and outlook for the balance of the fiscal year, we determined that an interim impairment test should be performed during the third quarter of fiscal year 2016. As a result of the goodwill impairment testing completed in the third quarter, we determined that the goodwill associated with Amega and SSS was impaired and recorded an impairment charge of
$12.5 million
which represents the entire balance of the goodwill recorded for these reporting units.
In connection with the interim impairment test for Amega and SSS, we also performed an interim goodwill impairment test for the Latrobe Distribution reporting unit, for which results have been below expectations for the last several quarters. The impairment testing indicated that an impairment had not occurred. The goodwill associated with the Latrobe Distribution reporting unit is $14.0 million and the fair value exceeded the carrying value by 13 percent. For purposes of the discounted cash flow analysis for fair value, a weighted average cost capital of 11 percent and a terminal growth rate assumption of 3 percent were used.
As of March 31, 2016, we had 4 remaining reporting units with goodwill recorded. Goodwill associated with our SAO segment is tested at the SAO segment level and represents 80 percent of our total goodwill. All other goodwill is associated with our PEP segment, which includes 3 reporting units with goodwill recorded.
Forward-Looking Statements
This Quarterly Report on Form 10-Q 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, anticipated or implied. The most significant of these uncertainties are described in Carpenter’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended June 30, 2015, Form 10-Q for the quarters ended September 30, 2015 and December 31, 2015 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, industrial, transportation, consumer, medical and energy, or other influences on Carpenter’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 to achieve cash generation, growth, earnings, profitability, cost savings and reductions, 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 degree of success of government trade actions; (7) the valuation of the assets and liabilities in Carpenter’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, 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’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) the success of restructuring actions; and (17) share repurchases are at Carpenter’s discretion and could be affected by changes in Carpenter’s share price, operating results, capital spending, cash flows, inventory, acquisitions, investments, tax laws and general market conditions. Any of these factors could have an adverse and/or fluctuating effect on Carpenter’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, and Section 21E of the Securities Exchange Act of 1934, as amended. Carpenter undertakes no obligation to update or revise any forward-looking statements.