Carpenter Technology Corporation (NYSE:CRS) today reported record
third quarter sales and net income. Results reflected strong growth
in several end-use markets and a continued focus on cost
improvements through lean manufacturing. Net sales for the third
fiscal quarter ended March 31, 2007 were $538.4 million, compared
with $426.0 million for the same quarter a year ago. Net income in
the third quarter was $66.6 million, or $2.53 per diluted share,
compared with net income of $60.8 million, or $2.32 per diluted
share, a year ago. Free cash flow in the third quarter was $20.0
million, compared with $53.3 million in the quarter a year ago.
Year-to-Date Results For the nine months ended March 31, 2007, net
sales were $1.4 billion, compared with $1.1 billion for the same
period a year ago. Net income for the first nine months of the
current fiscal year was $165.9 million, or $6.30 per diluted share,
compared to net income of $143.8 million, or $5.51 per diluted
share, a year ago. Free cash flow in the first nine months of
fiscal 2007 was $101.2 million, compared with $95.8 million in the
same period a year ago. Third Quarter � Operating Summary �We are
very pleased with our ability to achieve record quarterly results,
despite all-time high nickel costs and supply chain adjustments
that took place within certain key end-use markets,� said Anne
Stevens, chairman, president and chief executive officer. �The
record operating income is a reflection of the overall
effectiveness of our employees in serving customers, while
maintaining a disciplined cost environment.� �We were particularly
pleased that overall volume increased during the quarter despite
temporary supply chain adjustments in the aerospace and medical
markets, which affected the sale of certain higher value
materials.� For the third quarter, Carpenter�s sales were 26
percent more than a year ago. Higher surcharge revenue and a 5.5
percent increase in pounds shipped were partially offset by a shift
in product mix. Adjusted for surcharges, sales increased 2 percent
from the third quarter a year ago. Sales to the industrial market
improved by 60 percent to a record $124 million. Adjusted for
surcharge revenue, sales increased approximately 28 percent from
the third quarter a year ago. The robust growth was driven by
increased shipments of materials used in capital equipment and in
the manufacture of valves and fittings used in applications such as
the construction and maintenance of chemical and food processing
facilities. Sales to the energy market, which includes oil and gas
and power generation, increased 54 percent from a year ago to $52
million. Sales to the oil and gas sector, excluding surcharge
revenue, increased approximately 70 percent from a year ago. The
Company�s high strength and corrosion resistant materials have
allowed it to successfully expand its presence in this sector as a
result of a greater dedication of resources. The Company is also
experiencing increased market activity in the power generation
sector. Automotive and truck market sales grew 41 percent from the
third quarter a year ago to $69 million. Sales, excluding surcharge
revenue, increased approximately 12 percent from a year ago. The
growth reflected solid demand for specialty alloys and powder metal
materials used primarily in engine components and other critical
applications. Consumer market sales increased 22 percent from the
third quarter a year ago to $59 million. Adjusting for surcharge
revenue, sales decreased 9 percent. Reduced shipments to the
sporting goods and housing markets were the primary contributors to
the decline. Sales to the aerospace market increased 11 percent to
$198 million in the recent third quarter from a year ago. Excluding
surcharge revenue, sales declined approximately 7 percent.
Increased sales of titanium wire used in the manufacture of
structural fasteners and ceramic cores used in the casting of jet
engine turbine blades were more than offset by reduced shipments of
nickel based alloys used in the manufacture of jet engine
components and structural applications. The lower aerospace sales
from last year�s record level reflected supply chain inventory
adjustments and a decline in business with a key customer. Demand
for nickel-based alloys slowed during the quarter due to the
escalation in nickel prices. As a result, many customers became
more cautious about inventory balances. The loss of nickel-based
alloy aerospace sales to that specific customer, who is now
procuring a majority of its material needs from a recently acquired
subsidiary, was more than offset by increased sales of high value
materials to the energy sector as a result of the Company�s
commitment to dedicate more resources to that market. Carpenter�s
future aerospace business is expected to benefit from changing
technology, the need to build more fuel efficient aircraft, and an
increase in the number of aircraft being built. These factors
should allow the Company to grow its aerospace sales by 10 -15
percent annually over the next several years. Medical market sales
decreased 6 percent to $35 million from last year�s third quarter
record. The decline in sales reflected the continued inventory
adjustments taking place within that supply chain, particularly in
titanium. Geographically, sales outside the United States increased
16 percent from the same quarter a year ago to $162 million.
International sales, which represented 30 percent of total sales,
benefited from higher base prices and increased sales of higher
value materials. Third quarter gross profit improved to a quarterly
record $127.9 million, or 23.8 percent of sales, from $124.1
million, or 29.1 percent of sales, in the same quarter a year ago.
The increased gross profit was achieved despite the negative impact
from the dramatic rise in the cost of nickel, a primary raw
material for the Company. Nickel prices on the London Metal
Exchange increased from an average of approximately $6.70 a pound
in the third fiscal quarter a year ago to $18.80 for this year�s
third quarter. As a result of the rise in nickel prices, the
Company�s recent third quarter surcharge revenue increased 209
percent from a year ago to $154 million. The Company�s surcharge
mechanism is structured to recover high raw material costs. While
the surcharge protects the absolute gross profit dollars, it does
have a dilutive effect on gross margin as a percent of sales. In
the recent third quarter, the dilutive effect of the increased
surcharge on gross margin was approximately 580 basis points.
Additionally, Carpenter�s gross profit was negatively impacted by
the lag effect in its surcharge mechanism. This lag effect can
result in margin decline during periods of rapidly escalating raw
material prices, especially for companies using the last-in,
first-out (LIFO) method of accounting for inventory. The Company
estimated that the lag effect negatively impacted the gross margin
by approximately 150 basis points during the recent third quarter.
Adjusted for the dilutive effect of the surcharge and the negative
impact from the lag in the surcharge mechanism, the gross margin
would have improved by approximately 200 basis points in the recent
third quarter from a year ago. The underlying improvement was
largely driven by ongoing cost controls. In this environment of
escalating raw material prices, the Company�s LIFO method of
accounting to value inventories resulted in a $56.1 million LIFO
expense in the third quarter of fiscal 2007. In the third quarter a
year ago, cost of sales included LIFO income of $1.2 million or a
difference of $57.3 million from the current year. Operating income
in the recent third quarter was $95.7 million or 17.8 percent of
sales, compared to $92.3 million or 21.7 percent of sales in the
third quarter a year ago. The record level of operating income was
achieved despite significantly higher raw material costs as a
result of ongoing cost controls, increased volume and better
pricing. Adjusted for the increase in surcharge revenue and the lag
effect, operating income as a percent of sales increased to 23.7
percent or 200 basis points more than a year ago. Shareholder Value
Initiatives Dividend Increase Also today, Carpenter announced a 33
percent increase in its quarterly dividend to $0.30 per common
share. The Company believes that the annualized rate of $1.20 per
common share provides shareholders with an attractive dividend
relative to other materials stocks and indices. The Company expects
that future dividend increases will be made at a measured pace,
consistent with business conditions, and subject to the approval by
its Board of Directors. Share Repurchase Program During the
quarter, Carpenter repurchased $13.9 million or 120,070 shares of
its common stock on the open market. The share repurchase program
is one of the initiatives being undertaken by the Company to
enhance shareholder value, as announced in its Strategic
Initiatives in September 2006. In that announcement, Carpenter
anticipated to repurchase, under certain conditions, a total of
$250 million of its common stock. Capital Investment As part of its
continuous effort to further improve quality and reliability,
Carpenter will invest approximately $16 million to upgrade its
Specialty Alloys Operations� hot rolling facility. This investment
is in addition to the $115 million premium melt capacity expansion
announced in January 2007. The upgrade of the Reading, Pa. hot
rolling facility will provide state-of-the-art electrical control
systems supporting management�s lean initiatives and better yields.
The project is expected to begin in July 2007 and be completed by
August 2008. Outlook �We expect that our fourth quarter operating
performance will remain strong based on current market conditions,�
Stevens said. �While end-use markets are healthy overall, soaring
nickel prices are continuing to impact the ordering and commitment
patterns of many of our customers. We are very pleased with the
continued success we are seeing in new aerospace structural
applications using our patented Custom 465 and Aermet 100 alloys.
�We look to further improve our operating performance through
re-investment in our businesses, which will further enhance our
ability to capitalize on future growth opportunities.
�Additionally, we will continue to focus on furthering shareholder
value through an attractive dividend and the share repurchase
program.� Segment Results � Third Quarter Specialty Metals Net
sales for the quarter ended March 31, 2007 for the Specialty Metals
segment, which includes Specialty Alloys Operations, Dynamet, and
Carpenter Powder Products business units, increased 28 percent to
$512.4 million, compared to $400.3 million in the same quarter a
year ago. Stainless steel sales were $196.3 million or 44 percent
higher than a year ago. Excluding surcharge revenue, stainless
steel sales increased 18 percent. Increased shipments to the
industrial market and higher value stainless steels contributed to
the sales growth. Sales of specialty alloys were $253.7 million or
26 percent higher than the third quarter a year ago. Surcharge
revenue and increased shipments to the energy and automotive
markets contributed to the increase, which was partially offset by
reduced shipments to the aerospace market. Adjusted for surcharge
revenue, specialty alloys sales declined 8 percent. Sales of
titanium decreased 4 percent to $45.2 million. The decrease
reflected lower demand from the medical market, which more than
offset solid demand from the aerospace market for coil products
used in the manufacture of aerospace structural fasteners.
Operating income for the Specialty Metals segment was $95.0 million
or 18.5 percent of sales in the recent third quarter, compared to
$93.1 million or 23.3 percent in the same quarter a year ago. The
Specialty Metals segment was able to increase operating income
despite escalating raw material prices and the lag in recovery of
the Company�s surcharge mechanism. This was achieved as a result of
continued efforts in lean manufacturing, increased shipments, and
higher base prices. Engineered Products Segment Net sales for this
segment, which includes sales of ceramic components and fabricated
metal, of $26.1 million were essentially flat with a year ago. In
the third quarter, operating income for the Engineered Products
segment was $4.1 million or 15.7 percent of sales compared to $4.3
million or 16.3 percent of sales in the same quarter a year ago.
Segment Results � Year-to-Date Specialty Metals Net sales for the
first nine months of fiscal 2007 for the Specialty Metals segment
were $1.3 billion, compared to $1.0 billion for the same period a
year ago. Sales of stainless steel products grew 29 percent to
$495.4 million from $383.6 million for the same period a year ago.
Excluding surcharge revenue, sales increased 13 percent. Stainless
sales benefited from increased shipments to the industrial and
automotive markets and higher base prices. Sales of specialty
alloys increased 28 percent to $625.3 million from $490.4 million
for the same period a year ago. Adjusted for surcharge revenue,
specialty alloys sales increased 4 percent. Pricing actions and
strong demand from the energy market were the primary drivers of
the increase. Titanium sales rose 14 percent to $141.5 million from
$124.2 million for the same period a year ago. Sales benefited from
increased shipments to the aerospace market and higher selling
prices. Operating income for the Specialty Metals segment was
$231.1 million or 17.7 percent of sales compared to $217.4 million
or 20.9 percent of sales generated for the same period a year ago.
The change in operating income reflected a continued focus on
operational improvements, increased shipments, and higher base
pricing. Operating income as a percent of sales decreased due to
the dilutive effect on margins from the increase in surcharge
revenue and the negative impact from the lag effect of the
Company�s surcharge mechanism. Engineered Products Segment Net
sales for the first nine months of fiscal 2007 for the Engineered
Products segment increased 2 percent to $78.4 million from $76.6
million for the same period a year ago. Operating income was $14.3
million or 18.2 percent of sales for the first nine months of
fiscal 2007 compared to $13.7 million or 17.9 percent of sales for
the same period a year ago. Other Items In the third quarter of
fiscal 2007, selling and administrative expenses were $32.2
million, or 6.0 percent of sales, compared to $31.8 million, or 7.5
percent of sales, in the same quarter a year ago. For the first
nine months of fiscal 2007, selling and administrative expenses
were $97.4 million, or 7.0 percent of sales compared to $89.7
million, or 8.0 percent of sales for the same period a year ago.
The increase primarily reflected $3.6 million related to executive
separation obligations incurred in the second quarter of the
current fiscal year, first quarter expenses of $1.6 million
associated with the review of a possible acquisition, and $0.8
million from executive recruitment fees. Interest expense for the
quarter was $5.7 million, compared with $5.9 million in the third
quarter a year ago. For the first nine months of fiscal 2007,
interest expense was $17.2 million, compared with $17.8 million for
the same period a year ago. Other income in the quarter was $6.0
million, compared with $4.0 million in last year�s third quarter.
The change in other income primarily reflected $1.9 million of
increased interest income due to higher investment balances in cash
and marketable securities. For fiscal 2007 year-to-date, other
income rose to $23.6 million from $15.8 million for the comparable
period a year ago. The higher amount reflected $7.3 million of
increased interest income due to higher investment balances in cash
and marketable securities and $1.7 million of increased receipts
from the �Continued Dumping and Subsidy Offset Act of 2000.�
Carpenter�s income tax provision in the recent third quarter was
$29.4 million, or 30.6 percent of pre-tax income, versus $29.6
million, or 32.7 percent, in the same quarter a year ago. The tax
provision in the recent third quarter was impacted by the favorable
settlement of a state tax audit. For the first nine months of
fiscal 2007, Carpenter�s income tax provision was $72.0 million, or
30.3 percent of pre-tax income, compared to $74.0 million, or 34.0
percent of pre-tax income for the same period a year ago. The
Company�s income tax rate also benefited in the first quarter from
the reversal of certain deferred tax valuation allowances due to
changes in specific state tax laws and an improved outlook
regarding the ability to use those benefits, and, in the second
quarter, from Congress� retroactive extension of the Federal
research and development tax credit. The Company expects that its
full-year tax rate will be approximately 32 percent. Cash Flow and
Liquidity Carpenter has maintained the ability to provide cash to
meet its needs through cash flow from operations, management of
working capital, and the flexibility to use outside sources of
financing to supplement internally generated funds. Free cash flow
in the recent third quarter was $20.0 million, compared with free
cash flow of $53.3 million in the quarter a year ago. The lower
free cash flow reflected higher accounts receivable balances due to
significantly higher surcharge revenue during the quarter and
increased capital expenditures from a year ago. For the first nine
months of fiscal 2007, free cash flow was $101.2 million compared
to $95.8 million for the same period a year ago. Carpenter believes
that free cash flow will be approximately $200 million in fiscal
2007. Conference Call Carpenter will host a conference call and
webcast today, April 27, at 10:00 a.m., ET, to discuss financial
results and operations for the third quarter. Please call
610-208-2800 for details of the conference call. Access to the call
will also be made available at Carpenter�s web site
(www.cartech.com) and through CCBN (www.ccbn.com). A replay of the
call will be made available at www.cartech.com or at www.ccbn.com.
Carpenter produces and distributes specialty alloys, including
stainless steels, titanium alloys, and superalloys, and various
engineered products. Information about Carpenter can be found on
the Internet at www.cartech.com. Except for historical information,
all other information in this news release consists of
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, 2006, its subsequent Form 10-Q, 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, industrial, automotive, consumer,
medical, and energy including power generation, or other influences
on Carpenter�s business such as new competitors, the consolidation
of customers, and suppliers or the transfer of manufacturing
capacity from the United States to foreign countries; 2) the
ability of Carpenter to achieve cost savings, productivity
improvements or process changes; 3)�the ability to recoup increases
in the cost of energy and raw materials 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; and 11) the
ability of Carpenter to implement and manage material capital
expansion projects in a timely and efficient manner. 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. PRELIMINARY CONSOLIDATED STATEMENT
OF INCOME (in millions, except per share data) � � Three Months
Ended Nine Months Ended March 31 March 31 � 2007� 2006� 2007� 2006�
� NET SALES $538.4� $426.0� $1,384.2� $1,117.7� � Cost of sales
410.5� 301.9� 1,055.3� 808.2� Gross profit 127.9� 124.1� 328.9�
309.5� � Selling and administrative expenses 32.2� 31.8� 97.4�
89.7� Operating income 95.7� 92.3� 231.5� 219.8� � Interest expense
5.7� 5.9� 17.2� 17.8� Other income, net (6.0) (4.0) (23.6) (15.8) �
Income before income taxes 96.0� 90.4� 237.9� 217.8� Income taxes
29.4� 29.6� 72.0� 74.0� NET INCOME $66.6� $60.8� $165.9� $143.8� �
EARNINGS PER COMMON SHARE: Basic $2.59� $2.39� $6.45� $5.67�
Diluted $2.53� $2.32� $6.30� $5.51� � � WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: Basic 25.7� 25.3� 25.6� 25.2� Diluted 26.3�
26.1� 26.3� 25.9� � Cash dividends per common share $0.225� $0.15�
$0.675� $0.45� PRELIMINARY CONSOLIDATED STATEMENT OF CASH FLOWS (in
millions) � Nine Months Ended March 31 � 2007� 2006� � OPERATING
ACTIVITIES: Net income $165.9� $143.8� Adjustments to reconcile net
income to net cash provided from operations: Depreciation 34.6�
34.1� Amortization 1.2� 1.4� Deferred income taxes (8.4) (3.0) Net
pension expense 3.6� 8.1� Net loss on asset disposals 0.4� 0.3�
Changes in working capital and other: Receivables (58.1) (40.2)
Inventories (32.2) (34.0) Other current assets (6.3) 7.2� Accounts
payable 63.9� 7.8� Accrued current liabilities (16.0) 4.3� Other,
net (1.9) (8.2) Net cash provided from operating activities 146.7�
121.6� � INVESTING ACTIVITIES: Purchases of plant, equipment and
software (27.8) (13.7) Proceeds from disposals of plant and
equipment 0.2� 0.3� Purchases of marketable securities (544.2)
(236.5) Sales of marketable securities 336.7� 253.5� Net cash (used
for) provided from investing activities (235.1) 3.6� � FINANCING
ACTIVITIES: Payments on long-term debt (0.2) (0.2) Payments to
acquire treasury stock (13.9) 0.0� Dividends paid (17.9) (12.4) Tax
benefits on share-based compensation 4.9� 0.0� Proceeds from common
stock options exercised 2.7� 12.4� Net cash used for financing
activities (24.4) (0.2) � Effect of exchange rate changes on cash
and cash equivalents (4.4) 1.1� � (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (117.2) 126.1� Cash and cash equivalents at
beginning of period 352.8� 159.5� Cash and cash equivalents at end
of period $235.6� $285.6� PRELIMINARY CONSOLIDATED BALANCE SHEET
(in millions) � March 31 June 30 2007� 2006� � ASSETS Current
assets: Cash and cash equivalents $235.6� $352.8� Marketable
securities 349.3� 141.8� Accounts receivable, net 296.0� 234.7�
Inventories 258.3� 224.3� Deferred income taxes 6.2� 13.7� Other
current assets 59.8� 32.0� Total current assets 1,205.2� 999.3� �
Property, plant and equipment, net 532.8� 541.1� Prepaid pension
cost 246.8� 247.1� Goodwill 46.4� 46.4� Trademarks and trade names,
net 19.4� 20.1� Other assets 33.0� 33.9� Total assets $2,083.6�
$1,887.9� � LIABILITIES Current liabilities: Accounts payable
$201.8� $137.4� Accrued liabilities 115.3� 133.8� Current portion
of long-term debt 0.2� 0.2� Total current liabilities 317.3� 271.4�
� Long-term debt, net of current portion 332.6� 333.1� Accrued
postretirement benefits 94.6� 102.2� Deferred income taxes 181.0�
189.0� Other liabilities 45.8� 45.9� Total liabilities 971.3�
941.6� � STOCKHOLDERS' EQUITY Convertible preferred stock ---�
18.0� Common stock 136.1� 132.5� Capital in excess of par value -
common stock 320.5� 294.2� Reinvested earnings 697.8� 549.8� Common
stock in treasury, at cost (50.8) (37.3) Deferred compensation ---�
(1.5) Accumulated other comprehensive loss 8.7� (9.4) Total
stockholders' equity 1,112.3� 946.3� � Total liabilities and
stockholders' equity $2,083.6� $1,887.9� PRELIMINARY SEGMENT
FINANCIAL DATA (in millions) � � Three Months Ended Nine Months
Ended March 31 March 31 � 2007� 2006� 2007� 2006� � Net sales:
Specialty Metals $512.4� $400.3� $1,307.1� $1,042.5� Engineered
Products 26.1� 26.3� 78.4� 76.6� Intersegment (0.1) (0.6) (1.3)
(1.4) � Consolidated net sales $538.4� $426.0� $1,384.2� $1,117.7�
� Operating income: Specialty Metals $95.0� $93.1� $231.1� $217.4�
Engineered Products 4.1� 4.3� 14.3� 13.7� Corporate costs (7.1)
(7.2) (25.2) (18.7) Pension earnings, interest & deferrals 3.6�
2.6� 10.9� 7.8� Intersegment 0.1� (0.5) 0.4� (0.4) � Consolidated
operating income $95.7� $92.3� $231.5� $219.8� � � � Carpenter
operates in two business segments, Specialty Metals and Engineered
Products. Specialty Metals includes our Specialty Alloys, Dynamet
and Carpenter Powder Products business operations. These operations
have been aggregated into one reportable segment because of the
similarities in products, processes, customers, distribution
methods and economic characteristics. � The service cost component
of net pension expense, which represents the estimated cost of
future pension liabilities earned associated with active employees,
is included in the operating income of the business segments. The
residual net pension expense, which is comprised of the expected
return on plan assets, interest costs on the projected benefit
obligations of the plans, and amortization of actuarial gains and
losses and prior service costs, is included under the heading
"Pension earnings, interest & deferrals." PRELIMINARY SELECTED
FINANCIAL MEASURES (in millions, except per share data) � � Three
Months Ended Nine Months Ended March 31 March 31 FREE CASH FLOW
2007� 2006� 2007� 2006� � Net cash provided from operations $38.9�
$60.7� $146.7� $121.6� Purchases of plant, equipment and software
(13.2) (3.5) (27.8) (13.7) Proceeds from disposals of plant and
equipment ---� 0.3� 0.2� 0.3� Dividends paid (5.7) (4.2) (17.9)
(12.4) Free cash flow $20.0� $53.3� $101.2� $95.8� � Free cash flow
is a measure of cash generated which management evaluates for
alternative uses.
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