Dec 10 -
Summary analysis -- Carpenter Technology Corp. -------------------- 10-Dec-2012
CREDIT RATING: BBB/Stable/NR Country: United States
Primary SIC: Blast furnaces
and steel mills
Mult. CUSIP6: 144285
Mult. CUSIP6: 14428M
Mult. CUSIP6: 14428N
Mult. CUSIP6: 14428R
Mult. CUSIP6: 14428T
Credit Rating History:
Local currency Foreign currency
15-Oct-2007 BBB/NR BBB/NR
08-Jan-2004 BBB-/NR BBB-/NR
The rating on Wyomissing, Pa.-based Carpenter Technology Corp. (Carpenter) reflects Standard & Poor's Ratings Services' assessment of the company's "satisfactory" business risk profile and "intermediate" financial risk profile. The company's good market position in specialty steel long products, established customer relationships, and advanced technologies and services capabilities underpin the rating. In our view, the recent acquisition of Latrobe broadens the company's product offerings and adds needed capacity, further supporting its business risk profile. Also underpinning the rating are management's consistently moderate financial policies and the company's ability to generate cash throughout the cycle. Its participation in cyclical and competitive markets and competition from imports in commodity-grade products partly offset these factors.
We expect Carpenter's operating results and end markets to continue to improve based on continued solid demand from the company's key aerospace and energy markets. In addition, we anticipate that the Latrobe acquisition will enhance the company's performance in the aerospace sector. As a result, we expect EBITDA to be $400 million to $450 million in fiscal year 2013 and about $450 million in 2014. This should result in credit metrics in-line with our expectations for the rating, with debt to EBITDA below 2.5x and funds from operations (FFO) to total debt at about 30%.
Operating results for the 12 months ended Sept. 30, 2012, have improved significantly-EBITDA was about $359 million compared with $252 million in the prior year's similar period-leading to debt to EBITDA of 2.4x and adjusted FFO to debt of about 30%.
Carpenter is a leading producer and distributor of specialty metals, including stainless steels, titanium alloys, and specialty alloys. Major end markets include aerospace, energy, transportation, industrial, consumer, and medical, which are generally more mature and cyclical. Carpenter's key end markets, aerospace and energy, which account for about 60% of sales, have been experiencing increasing demand. Commercial aircraft demand has been strong and we believe, airframe manufacturers have a significant backlog, which should support the company's performance and Carpenter's expansion into energy markets through increased product offerings and geographic presence should also boost results. Moreover, during the past several years, Carpenter has shifted its product mix away from commodity products and toward higher-value ones. It has also sold noncore businesses, and currently is in the process of divesting two noncore distribution businesses.
In our view, Carpenter's liquidity position is "strong" based on our liquidity criteria. Relevant aspects of our assessment of the company's liquidity profile include:
-- We expect sources of liquidity to exceed uses by more than 1.5x over the next couple of years;
-- The company's debt maturity schedule is manageable-its next maturity is $100 million senior unsecured notes maturing in May 2013, which we believe the company will seek to refinance, given its large capital program.
-- Sources of liquidity would exceed uses even if EBITDA were to decline by 30%; and
-- The company would remain in compliance with covenants, even if EBITDA declined by 30%.
As of Sept. 30, 2012, Carpenter's liquidity consisted of about $113 million in cash and marketable securities and $343 million in total availability (net of letter of credit outstanding) under its $350 million revolving credit facility due June 2016. We expect the company-based on our current assumptions for better performance-to remain well within its covenants, which include a minimum interest test of 3.5x and a total debt to total capitalization test of 55%.
We believe Carpenter's free cash flow will be modestly negative in fiscal 2013 primarily because of higher capital spending, estimated at about $350 million, primarily related to construction of its new premium melt facility. The company may also make a discretionary contribution to its pension plan, which could be a further draw on its liquidity. We believe free cash flow will be modestly positive in 2014 as growth capital expenditures taper off and pension contributions return to more normal levels. We expect dividends to account for about $45 million of spending annually. We do not foresee significant share repurchases during the next several quarters since we expect the company will need to fund its increased capital program and absorb the Latrobe acquisition.
The stable outlook reflects our assessment that the company's key aerospace and energy markets will continue to steadily improve, resulting in higher volumes and margins. We believe this, coupled with contributions from the Latrobe acquisition, will enable Carpenter to bring adjusted leverage to about 2.2x in fiscal 2013 and 2.0x in fiscal 2014-levels we would consider to be in line with our view of the rating, given Carpenter's intermediate financial risk profile and its cyclical business.
We would consider a negative ratings action if market conditions deteriorate, resulting in credit metrics remaining weak, with adjusted leverage above 3.5x and FFO to debt below 30%, for an extended period of time. This could occur if global slowing causes a decline in the aerospace market or the company's other key end markets.
In our view, an upgrade seems less likely due to the company's limited scope of operations-even with the Latrobe acquisition-and the volatility associated with its end markets somewhat limits further rating upside.
Related Reference And Criteria
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Key Credit Factors: Methodology And Assumptions On Risks In the Metals Industry, June 22, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008