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Carpenter Technology Provides Updated Outlook and Continues Actions to Bolster Already Healthy Liquidity Position
“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
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:
Collectively, the actions are expected to generate
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.
The following is selected preliminary fiscal year 2020 and 2021 guidance subject to change and finalization:
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
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 (
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
Based on preliminary estimates subject to finalization and audit, the Company currently expects adjusted operating loss to be in the range of (
Most importantly, the Company currently expects to generate
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
Source: Carpenter Technology Corporation