PHILADELPHIA – Cyclical companies, like Carpenter Technology, can go through some rough times when the U.S. economy is bad, like now.
The company, which has several manufacturing facilities in Berks County, reported negative results Thursday for the second quarter of fiscal 2021 in most financial measurements, and the stock dropped close to 4% in mid-morning trading.
In a call with stock analysts, however, Carpenter management was optimistic. A big reason for the optimism, said Tony Thene, Carpenter’s President and CEO, is that the company “continues to secure beneficial contracts with key end-use customers,” especially in aerospace and defense, the largest of Carpenter’s end-use markets.
“We are also well positioned to benefit from a recovery in the medical end-use market as the supply chain gains confidence to meet pent up demand for elective procedures,” Thene noted.
Plus, thus far in the COVID-19 crisis, the company has been able to keep every operating facility open, he said.
Thene pointed out that, to keep the business viable, Carpenter has generated $214 million in free cash flow over the past nine months and finished the quarter with $665 million in total liquidity, including $271 million in cash. At the end of the fiscal second quarter of 2019, the company had generated just $29.9 million in cash.
Tim Wayne, Carpenter’s chief financial officer, told the analysts that two big reasons for the improved cash flow was “a large decrease in inventory to $155.8 million and the elimination of 20% of our salaried positions.”
Fiscal 2021 2Q results
The following financial measurements were reported on a non-GAAP (generally accepted accounting principles) basis:
Net sales for the second quarter of fiscal year 2021 were $348.8 million, compared with $353.3 million in the previous quarter and $573.0 million in the second quarter of fiscal year 2020, a decrease of $224.2 million (negative 39%), on 33% lower volume.
Operating loss was $89 million, compared to operating income of $55 million in the prior year period and a $48.8 million loss in the previous quarter. A loss attributable to COVID-19 of $3.9 million was excluded from non-GAAP operating loss. These COVID-19 costs principally consisted of incremental costs, including outside services to execute enhanced cleaning protocols, additional personal protective equipment, isolation pay for production employees potentially exposed to COVID-19, and various operating supplies necessary to maintain the operations while keeping employees safe against possible exposure in the company’s facilities.
Cash provided from operating activities in the second quarter of fiscal year 2021 was $83.6 million, compared to $21.8 million in the same quarter last year. Free cash flow in the second quarter of fiscal year 2021 was positive $51 million, compared to negative $34.5 million in the same quarter last year. The increases in operating cash flow and free cash flow primarily reflect the impact of inventory reduction in the current quarter partially offset by lower earnings relative to the same quarter a year ago, officials said.
Earnings per share (EPS) for the second quarter were -$1.76 compared to $0.80 in the previous year’s quarter.
Business segment results
Carpenter has two reportable segments, specialty alloys operations (“SAO”) and performance engineered products (“PEP”).
The SAO segment sold 38.602 million pounds in the fiscal second quarter compared to 56.6 million pounds in fiscal 2019’s second quarter. The PEP segment sold 1.5 million pounds this quarter compared to 3.4 million pounds in the previous year’s second quarter.
SAO net sales were $251.6 million in the quarter, compared to $382.5 million in fiscal 2019. PEP net sales were $54.8 million, down $51.2 million from sales of $106.0 million in the second quarter of the previous year.
Consolidated net sales were $348.8 million this quarter, compared to $573 last year.
The SAO segment reported an operating loss of $11.6 million versus a profit of $76.3 million the previous year. The PEP results were -$7.2 million and $0.4 million, respectively.
By end-use markets, net sales in the quarter were $148.5 million for aerospace and defense; $29 million for medical; $25.8 million for transportation; $17.7 million for energy; $56.3 million for industrial and consumer; and $22.1 million for distribution.
“Overall,” said Thene, “we believe end-use market conditions will gradually improve during the second half of fiscal year 2021 and are working hard to capitalize on the recovery. We remain a critical supply chain partner today and have made strategic investments to build upon that position in the years to come.”
He also said he believes the addition of a new hot strip mill in Reading will significantly strengthen the company’s soft magnetic capabilities at a time when electrification is helping to shape the long-term profile of many of Carpenter’s end-use markets.
The company also has built an additive manufacturing platform focused on powder lifecycle management.
“These investments,” Thene said, “are a strategic extension of our core business and consistent with our mandate to deliver increasing value to our customers and our stakeholders.”