Carpenter Technology Corporation (“Carpenter” or the “Company”)
today announced restructuring actions to reduce fixed overhead
costs and position the Company to drive long-term, profitable
growth. The actions are precipitated by the Company’s desire to
improve operating cost performance and the current weakness in the
Oil and Gas market, and they are part of an overall plan to deliver
greater value to shareholders by strengthening the Company's
performance as a specialty alloys leader. The Company's
restructuring actions are expected to yield approximately $30
million of annual fixed overhead cost savings and will be
complemented by additional strategies to reduce costs.
Carpenter’s Chairman, President and Chief Executive Officer
Gregory A. Pratt stated, “We are confident in the technology,
manufacturing capabilities, customer connections and employee
dedication within our Company. We are clearly disappointed with our
performance over the last several quarters and are taking decisive
actions to return to the level of operational and financial
performance we are capable of achieving, and which we and our
shareholders expect and deserve.”
Taking Actions to Cut Costs, Improve Profitability and
Strengthen Operations
Expected to yield approximately $30 million of annual fixed
overhead cost savings, the restructuring plan includes reducing the
Company’s salaried positions by approximately 200 or 10% of the
total salaried workforce. In addition, the restructuring plan
includes the elimination of approximately 60 outsourced positions
as well as other non-labor related costs. The Company expects to
record a pre-tax charge of approximately $11 million in the third
quarter of fiscal year 2015 (Q3 FY15) as a result of implementing
this plan.
In connection with the Company’s ongoing strategic planning,
Carpenter has exited the ultra-fine grain materials development
program. The Company will record a pre-tax charge of approximately
$13 million in Q3 FY15 that reflects the cost to exit a licensing
agreement as well as the associated non-cash asset impairment
charges.
In addition to the restructuring plan announced today, the
Company has recently taken a series of other actions to drive
long-term growth and stockholder value, including:
- Repurchased 1.2 million shares for
approximately $50 million in Q3 FY15. In the program to date,
repurchased 1.4 million shares for approximately $60 million.
- Targeted a $50 million inventory
reduction by the end of fiscal year 2015 compared to ending first
quarter fiscal year 2015 level. Further, an additional $50 million
reduction is targeted in fiscal year 2016.
- Reduced targeted capital spending to
$100-$120 million for fiscal year 2016.
- Strengthened its “continuous
improvement process” in January 2015, with the introduction of the
Business Management Office (BMO). This in-depth improvement effort
is being led by the CEO and CFO with support provided by external
management consultants. The BMO is focused on profit optimization,
operating cost improvement and inventory reduction. To date, the
efforts of the BMO have yielded several quick wins with additional
improvements in progress. Longer term, the BMO will continue to be
refined and the processes developed as a result of this effort will
be incorporated into the Company’s ongoing operating
procedures.
Q3 FY 2015 Outlook
Based on the Company’s preliminary estimates, subject to
finalization and additional change, the Company currently expects
earnings per share (EPS) for Q3 FY15 to be in the range of ($0.05)
to ($0.09), inclusive of the restructuring and other special
charges detailed below.
The Company currently expects that the Specialty Alloys
Operations (SAO) segment will continue to realize benefits of an
improving product sales mix. Compared to the third quarter of
fiscal year 2014, SAO revenue is expected to be higher in all of
the end markets with the exception of Industrial & Consumer.
Aerospace market revenue is expected to grow year over year in the
quarter due to increased engine and fastener activity. Revenue in
the Energy market is expected to be up slightly in the current
quarter year over year but looking forward, lower oil prices are
anticipated to have a negative impact. Medical market revenue is
expected to be up year over year in the quarter with a
normalization of demand for orthopedic and instrumentation
products. Expected year over year growth in transportation revenue
is due to higher demand for engine component materials in the
current quarter. Overall, order lead times have stabilized relative
to Q2 FY15 and the key work centers for high-value products remain
at or near full capacity.
In addition, consistent progress is being made in gaining the
required qualifications for the Athens facility. Customers
understand and appreciate that Carpenter is doing what is necessary
to support growth in key markets with investments in the best
technology available. The Athens facility provides the necessary
capacity to capitalize on anticipated growth in key markets and the
game changing capability to improve the supply chain metrics of our
customers.
The improved year over year and sequential SAO revenue trend in
Q3 FY15 will be more than offset by higher than planned operating
costs in Q3 FY15 as compared to the year ago quarter. In addition,
the SAO Q3 FY15 results will include unfavorable impacts resulting
from reducing inventory levels relative to the previous
quarter.
The Performance Engineered Products (PEP) segment has been
negatively impacted by lower demand primarily due to the impact of
the decline in oil prices. The Company currently expects PEP
operating income in Q3 FY15 will be down 40-50% as compared to the
third quarter of fiscal year 2014.
Q3 FY15 vs Q3 FY14
EPS Impact
Q3 FY14 Reported $0.57 Weather-related Impact in
Prior Year
$0.10
Q3 FY14 Adjusted $0.67 Athens Depreciation ($0.05)
Less Capitalized Interest ($0.06) SAO Mix Improvement $0.06 PEP Oil
and Gas Impact ($0.07)
Operating Costs(-labor productivity,
-yield, -fixed costs, +variable comp, +corporate costs)
($0.13) Inventory Reduction Impacts
($0.14)
Q3 FY15 Estimate Prior to Restructuring & Special
Charges $0.26 - $0.30 Restructuring & Special
Charges: Reduction in Force ($0.13) Ultra-fine Grain Materials
Development Exit ($0.17) Facility Closure ($0.02) Consulting Costs
($0.03)
Q3 FY15 Estimate ($0.09) - ($0.05)
Preliminary, unaudited estimates, subject
to finalization and additional change
Mr. Pratt further stated, “Given the improvements in our SAO
product sales mix and consistent progress at Athens, we would have
expected to see stronger Q3 FY15 performance. The current weakness
in the oil and gas market has had a negative impact on our business
and we will continue to monitor and take the necessary actions. Our
operating cost performance remains a challenge and we are
responding by taking aggressive action in the areas of labor
productivity, yield and fixed costs. Although our inventory
reduction efforts have resulted in some unfavorable cost absorption
issues, as we work to right size our cost base, we remain committed
to this important effort to improve cash generation and our overall
working capital utilization.
“Carpenter has a long and proud history that has included
successfully responding to many challenges. We have taken decisive
and corrective action to address the latest challenge. We believe
the decisions we announced today, and the actions we have initiated
over the last several months, will give us a strong foundation to
deliver greater value to our customers and shareholders."
About Carpenter Technology
Carpenter produces and distributes premium alloys, including
special alloys, titanium alloys and powder metals, as well as
stainless steels, alloy steels and tool steels. Information about
Carpenter can be found at http://www.cartech.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,
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, 2014, Form 10-Q for the quarters ended
September 30, 2014 and December 31, 2014 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, Latrobe and Athens 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.
Carpenter Technology CorporationMedia Inquiries:William J.
Rudolph Jr., +1 610-208-3892wrudolph@cartech.comorInvestor
Inquiries:Michael A. Hajost, +1 610-208-3476mhajost@cartech.com
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