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Investing.com -- On Tuesday, Fitch Ratings upgraded Carpenter Technology (NYSE:CRS) Corporation’s Issuer Default Rating (IDR) and senior unsecured debt rating from ’BB’ to ’BB+’. The company’s secured revolving credit facility rating was affirmed at ’BBB-’ by Fitch. The rating outlook for Carpenter Technology is stable.
The upgrade is based on Fitch’s expectation that Carpenter’s EBITDA leverage will consistently remain under 2.5x, and EBITDA margins will be maintained above 13%. The company’s ratings reflect its strong position in the specialty metal products market, successful operations, minimal commodity price exposure, and significant focus on the aerospace sector. The high barriers to entry and capacity constraints in the aerospace industry also contribute to the company’s ratings.
Carpenter’s diverse aerospace and defense (A&D) offerings are expected to position the company well for a prolonged period of high A&D spend. The A&D sector typically accounts for between 50% and 60% of net sales, excluding surcharge revenues. Fitch’s outlook for the A&D sector in 2025 is improving, reflecting strong aircraft demand and higher deliveries as supply chains improve.
Carpenter recently reported signing several contracts with aerospace customers, which include favorable pricing and expanded share opportunities. The company has a substantial backlog, around $2.0 billion for the last two years, most of which is A&D related.
Fitch views Carpenter’s gains in productivity and operating efficiency as sustainable and supportive of higher profitability. The company’s business model, focusing on specialty alloy products for critical end-use applications, generally supports EBITDA margins in the low to mid-teens.
Carpenter’s debt level remained steady during the aerospace downturn and showed sufficient flexibility in servicing this debt level. EBITDA leverage was 1.2x for the last twelve months ending on Dec. 31, 2024.
Carpenter has managed to mitigate exposure to volatile metal prices by applying surcharges, effectively passing through most raw material price fluctuations. Surcharge revenue as a percentage of total revenue has fluctuated between 13% and 28% since 2016 but tends to rise and fall in line with metal price fluctuations.
In terms of peer analysis, Carpenter’s products are further upstream than those of downstream aluminum peers Kaiser Aluminum (NASDAQ:KALU) Corporation (BB-/Stable) and Arsenal AIC Parent LLC (BB-/Stable). Carpenter is more concentrated in aerospace than Kaiser and Arsenal.
Alcoa (NYSE:AA) Corporation (BB+/Stable) is significantly larger than Carpenter and has exposure to commodity prices, but margins and leverage at midcycle prices are expected to be similar to Carpenter’s figures.
Fitch’s key assumptions include fairly flat volumes on average, peak pricing and mix effects in FY25, and EBITDA margins in FY26-FY28 averaging about 17%. The capital expenditure is expected to be around $175 million in FY25, $300 million in FY26 and FY27, and $125 million in FY28. Dividends are expected to be maintained at roughly historical levels, and excess cash is expected to be used for share repurchases.
As of Dec. 31, 2024, Carpenter had $162 million of cash and cash equivalents, in addition to $349 million available under the $350 million secured revolving credit facility maturing April 12, 2028. Fitch expects free cash flow to be positive on average. The revolving credit facility is subject to financial covenants that include a minimum interest coverage ratio of 3.0x and a consolidated maximum net leverage covenant of 4.0x beginning June 30, 2023.
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