Carpenter Technology Corporation (NYSE:CRS) today reported record
fourth quarter operating income despite a rapid rise in nickel
prices which reached a record high during the quarter. Net income
of $61.3 million or $2.33 per diluted share reflected an effective
tax rate of 34.2 percent as compared to 25.6 percent in the fourth
quarter a year ago. The fourth quarter results also reflected LIFO
expense of $79.3 million due primarily to escalating nickel prices
and higher year-end inventory levels. This expense is mostly offset
through the Company�s surcharge mechanism. In the fourth quarter a
year ago, the Company had LIFO expense of $19.8 million. For fiscal
2007, Carpenter generated record sales and net income. Sales
growth, excluding surcharge, was driven primarily by the Company�s
increased focus on the energy market and strong demand from the
industrial market. Record fiscal year net income was achieved
primarily as a result of the Company�s continued focus on
operational excellence. Financial highlights from the fourth
quarter and fiscal year included: (millions except e.p.s.) Q4-2007
Q4-2006 � FY-2007 FY-2006 Sales $560.5 $450.5 $1,944.8 $1,568.2
Operating Income $92.4 $90.9 $323.8 $310.7 Net Income $61.3 $68.0
$227.2 $211.8 Diluted E.P.S. $2.33 $2.58 $8.63 $8.08 Free Cash Flow
$101.1 $106.9 $202.3 $202.8 Pounds Sold (millions)* 55,994 61,416
223,246 221,329 * includes specialty and titanium alloys, stainless
steel, and powder materials Fourth Quarter � Operating Summary �Our
fourth quarter and fiscal year results are particularly pleasing
given the challenges from record high nickel prices throughout most
of the year and temporary inventory adjustments in some of our key
end-use markets,� said Anne Stevens, chairman, president and chief
executive officer. �Carpenter�s strong financial performance
reflected the underlying leverage of its business operating model
and solid manufacturing execution. �We continued to experience
sales momentum in the oil and gas sector during the fourth quarter
as we gained increasing customer acceptance for our products and
supporting technical expertise. Additionally, there was a
significant step-up in demand for material sold into the power
generation market. Although shipments of our premium products
remained solid in the quarter, lower shipments of non-premium
products resulted in a reduction in pounds shipped from a year ago.
�Our record results for fiscal 2007 are a strong reflection of our
product portfolio strength and the dedicated efforts of our
employees to continually work towards operational excellence and
focus on satisfying the unique needs of our customers.� Fourth
Quarter Overview For the fourth quarter, Carpenter�s sales were 24
percent more than a year ago. Adjusted for surcharges, sales were
flat with a year ago. Pricing actions and a better mix were mostly
offset by a 9 percent decline in pounds shipped from a year ago.
Sales to the energy market, which includes oil and gas and power
generation, increased 122 percent from a year ago to $77 million.
Within the energy market, sales to the oil and gas sector,
excluding surcharge revenue, increased approximately 100 percent
from a year ago to $29 million. The Company continued to find
strong acceptance for its high strength and corrosion resistant
materials. Additionally, growth with key customers and the
successful introduction of new Carpenter products into the oil and
gas sector helped drive the sales increase. Also within the energy
market, sales to the power generation sector surged 78 percent to
$27 million, excluding surcharge, due to increased demand for
industrial gas turbines, particularly from the Middle East. The
increase in demand had a favorable impact for the Company�s ceramic
and nickel based alloy materials. Sales to the industrial market
improved by 60 percent to a record $127 million. Adjusted for
surcharge revenue, sales increased approximately 33 percent from
the fourth quarter a year ago. The growth was driven by increased
shipments of higher value 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. Also, increased shipments to the semiconductor sector
contributed to the sales gain. Consumer market sales increased 33
percent from the fourth quarter a year ago to $62 million. Adjusted
for surcharge revenue, sales decreased 3 percent. Reduced sales of
materials used in consumer electronics and sporting goods were the
primary contributors to the decline. Automotive and truck market
sales grew 24 percent from the fourth quarter a year ago to $65
million. Sales, excluding surcharge revenue, decreased 8 percent
from a year ago. The year-over-year decline primarily reflected
supply chain adjustments due to lower production rates in North
America and Europe. Additionally, the Company elected not to
participate in certain marginally profitable business. Sales to the
aerospace market decreased 3 percent to $194 million in the recent
fourth quarter from a year ago. Excluding surcharge revenue, sales
declined approximately 21 percent from the record level a year ago.
Reduced shipments of nickel-based alloys used in the manufacture of
jet engine components and structural applications and titanium wire
used in the manufacture of structural fasteners contributed to the
decline. The lower aerospace sales from last year�s record level
partly reflected customer inventory adjustments stemming from the
robust demand for nickel-based alloys and titanium coil that took
place in the second half of fiscal 2006. This resulted in reduced
purchases by customers throughout fiscal 2007. The reduced sales to
the aerospace market also reflected a decline in business with a
key customer, who is now procuring some of its material needs from
a recently acquired subsidiary. This accounted for approximately
one-third of the decline in sales to the aerospace market in the
quarter. Medical market sales decreased 5 percent to $36 million
from last year�s fourth quarter. Adjusted for surcharge revenue,
sales declined 17 percent. The decline mostly reflected continuing
inventory adjustments taking place within the supply chain for
titanium and specialty alloy materials. Geographically, sales
outside the United States increased 15 percent from the same
quarter a year ago to $169 million. International sales, which
represented 30 percent of total sales, benefited from pricing
actions and increased sales to the energy market. Fourth quarter
gross profit improved to a quarterly record $128.8 million, or 23.0
percent of sales, from $126.6 million, or 28.1 percent of sales, in
the same quarter a year ago. The increased gross profit was
achieved despite the negative impact from record high nickel prices
throughout most of the quarter. Nickel prices on the London Metal
Exchange increased from an average of approximately $9.04 a pound
in the fourth fiscal quarter a year ago to an average of $21.80 for
this year�s fourth quarter. As a result of the rise in nickel
prices, the Company�s recent fourth quarter surcharge revenue
increased to approximately $177 million or 170 percent more than a
year ago. The Company�s surcharge mechanism is structured to
recover high raw material costs. While the surcharge protects the
absolute gross profit dollars over time, it does have a dilutive
effect on gross margin as a percent of sales. In the recent fourth
quarter, the dilutive effect on the gross margin from the increased
surcharge amount versus a year ago was approximately 570 basis
points. Additionally, Carpenter�s gross profit was negatively
impacted by the lag effect in its surcharge mechanism. This lag
effect can result in additional margin decline during periods of
rapidly escalating raw material prices. The Company estimated that
the lag effect negatively impacted the gross margin by
approximately 40 basis points during the recent fourth 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 100 basis points in the recent
fourth quarter from a year ago. The underlying improvement was
largely driven by a richer mix and ongoing cost controls. Record
quarterly operating income of $92.4 million or 16.5 percent of
sales, was achieved in the fourth quarter. This compared to
operating income of $90.9 million or 20.2 percent of sales in the
fourth quarter a year ago. The record level of operating income was
achieved despite significantly higher raw material costs as a
result of a richer product mix and ongoing cost controls. Adjusted
for the increase in surcharge revenue and the lag effect, operating
income as a percent of sales would have been 21.0 percent or 80
basis points more than a year ago. Share Repurchase Program During
the quarter, Carpenter repurchased $15.0 million or 115,002 shares
of its common stock on the open market. In total, Carpenter has
repurchased $28.9 million or 235,072 shares of its common stock on
the open market. Carpenter anticipates to repurchase, under certain
conditions, a total of $250 million of its common stock. Outlook
"We anticipate another year of record earnings for fiscal 2008,
despite some initial headwinds from continued supply chain
adjustments in the medical market and reduced sales to the
industrial market,� Stevens said. �We expect sales to the aerospace
market will strengthen in the second half of our fiscal year as a
result of increasing demand for nickel-based alloys used in engine
and structural applications. �Our focus on high performance
materials leaves us well positioned to capitalize on growth
opportunities in our key end-use markets. We are excited about our
future and are making significant investments to further deepen our
commitment to growth in these markets,� said Stevens. �We will
invest approximately $150 million in capital expenditures in fiscal
2008 to support our customers as well as invest in markets where we
have significant opportunity based on our portfolio of products.�
Carpenter expects that cash flow from operations will approach $300
million in fiscal 2008. The company anticipates that free cash flow
(cash from operations, less capital expenditures and dividends)
will be approximately $100 million. Planned capital expenditures of
approximately $150 million includes almost $75 million associated
with the Company�s previously announced $115 million expansion of
its premium melt operations. Additionally, the planned capital
expenditures include approximately $14 million related to the
Company�s previously announced upgrade of its hot rolling facility.
Segment Results � Fourth Quarter Specialty Metals Net sales for the
quarter ended June 30, 2007 for the Specialty Metals segment, which
includes Specialty Alloys Operations, Dynamet, and Carpenter Powder
Products business units, increased 26 percent to $533.8 million,
compared to $424.6 million in the same quarter a year ago. Adjusted
for surcharge, sales were essentially flat with a year ago.
Stainless steel sales were $201.4 million or 39 percent higher than
a year ago. Excluding surcharge revenue, stainless steel sales
increased 18 percent. Increased shipments to the industrial market
and the sale of higher value stainless steels contributed to the
growth. Sales of specialty alloys were $270.2 million or 27 percent
higher than the fourth quarter a year ago. Adjusted for surcharge
revenue, sales declined 11 percent. Increased shipments to the
energy market were more than offset by reduced shipments to the
automotive, aerospace and medical markets. Sales of titanium
decreased 11 percent to $46.3 million. The decrease reflected lower
demand from both the medical and aerospace markets as a result of
ongoing inventory adjustments within those supply chains. Operating
income for the Specialty Metals segment was $91.8 million or 17.2
percent of sales in the recent fourth quarter, compared to $94.4
million or 22.2 percent in the same quarter a year ago. The decline
in operating income primarily reflected reduced income from
titanium sales as a result of lower volume and declining market
prices. In addition to reduced income from titanium sales,
operating income as a percent of sales for the Specialty Metals
segment also declined as a result of the dilutive effect of
surcharge revenue. In the recent fourth quarter, surcharge revenue
totaled approximately $177 million as compared to approximately $66
million in the same quarter a year ago. Also, the lag effect in the
Company�s surcharge mechanism negatively impacted margins due to
the rapid escalation of nickel prices that were sustained
throughout most of the quarter. Engineered Products Segment Net
sales for this segment, which includes sales of ceramic components
and fabricated metal, were $27.4 million compared to $26.3 million
a year ago. In the fourth quarter, operating income for the
Engineered Products segment was $4.8 million or 17.5 percent of
sales compared to $3.4 million or 12.9 percent of sales in the same
quarter a year ago. The improvement in operating income primarily
reflected increased sales and better operating efficiencies at
Certech, which produces ceramic cores used in the casting of
turbine blades for jet engines and industrial gas turbines. Segment
Results � Fiscal Year Specialty Metals Fiscal 2007 net sales for
the Specialty Metals segment were $1.84 billion, compared to $1.47
billion for the previous fiscal year. Adjusted for surcharge, sales
increased 6 percent from a year ago. Sales of stainless steel
products grew 32 percent to $696.8 million from $528.1 million a
year ago. Excluding surcharge revenue, sales increased 11 percent.
Stainless sales benefited primarily from increased shipments to the
industrial market and from the sale of higher value products. Sales
of specialty alloys increased 27 percent to $895.6 million from
$703.8 million a year ago. Adjusted for surcharge revenue,
specialty alloys sales increased 2 percent. Growth in the energy
market and increased sales of higher value products were the
primary drivers of the sales growth which was partially offset by
reduced shipments to the aerospace and medical markets. Titanium
sales rose 6 percent to $187.7 million from $176.3 million a year
ago. Sales benefited from increased shipments of fastener wire to
the aerospace market. Operating income for the Specialty Metals
segment was a record $323.0 million or 17.6 percent of sales
compared to $311.8 million or 21.3 percent a year ago. The change
in operating income primarily reflected the Company�s continued
focus on operational improvements. 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 Fiscal 2007 net sales for the Engineered Products segment
increased 3 percent to $105.7 million from $102.9 million for the
same period a year ago. Operating income was $19.1 million or 18.1
percent of sales for fiscal 2007 compared to $17.1 million or 16.6
percent of sales a year ago. Increased volume and better operating
efficiencies at Certech were the primary drivers of the increase.
Other Financial Items In the fourth quarter of fiscal 2007, selling
and administrative expenses were $36.4 million, or 6.5 percent of
sales, compared to $35.7 million, or 7.9 percent of sales, in the
same quarter a year ago. For fiscal 2007, selling and
administrative expenses were $133.9 million, or 6.9 percent of
sales compared to $125.5 million, or 8.0 percent of sales a year
ago. The increase primarily reflected $3.6 million related to
executive separation obligations, $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 $5.6
million, compared with $5.5 million in the fourth quarter a year
ago. For fiscal 2007, interest expense was $22.8 million, compared
with $23.3 million a year ago. Other income in the quarter was $6.3
million, compared with $6.0 million in last year�s fourth quarter.
For fiscal 2007, other income rose to $30.0 million from $21.7
million a year ago. The higher amount reflected $8.4 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 fourth quarter was
$31.8 million, or 34.2 percent of pre-tax income, versus $23.4
million, or 25.6 percent, in the same quarter a year ago. The tax
provision in the fourth quarter a year ago reflected a favorable
impact of $5.0 million from a reduction in valuation allowances
related to state tax operating loss carry-forwards and additional
U.S. export incentives. For fiscal 2007, Carpenter�s income tax
provision was $103.8 million, or 31.4 percent of pre-tax income,
compared to $97.3 million, or 31.5 percent of pre-tax income a year
ago. Conference Call Carpenter will host a conference call and
webcast today, July 26, at 10:00 a.m., ET, to discuss financial
results and operations for the fourth 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 Year Ended June 30 June 30 � � 2007 � � 2006 � � 2007 � �
2006 � � NET SALES $ 560.5 $ 450.5 $ 1,944.8 $ 1,568.2 � Cost of
sales � 431.7 � � 323.9 � � 1,487.1 � � 1,132.1 � Gross profit
128.8 126.6 457.7 436.1 � Selling and administrative expenses �
36.4 � � 35.7 � � 133.9 � � 125.4 � Operating income 92.4 90.9
323.8 310.7 � Interest expense 5.6 5.5 22.8 23.3 Other income, net
� (6.3 ) � (6.0 ) � (30.0 ) � (21.7 ) � Income before income taxes
93.1 91.4 331.0 309.1 Income taxes � 31.8 � � 23.4 � � 103.8 � �
97.3 � NET INCOME $ 61.3 � $ 68.0 � $ 227.2 � $ 211.8 � � EARNINGS
PER COMMON SHARE: Basic $ 2.34 � $ 2.66 � $ 8.79 � $ 8.33 � Diluted
$ 2.33 � $ 2.58 � $ 8.63 � $ 8.08 � � � WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: Basic � 26.2 � � 25.4 � � 25.7 � � 25.2 �
Diluted � 26.3 � � 26.2 � � 26.3 � � 26.1 � � Cash dividends per
common share $ 0.30 � $ 0.15 � $ 0.975 � $ 0.60 � PRELIMINARY
CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) � Year Ended
June 30 � � 2007 � � 2006 � � OPERATING ACTIVITIES: Net income $
227.2 $ 211.8 Adjustments to reconcile net income to net cash
provided from operations: Depreciation 47.1 45.8 Amortization 1.6
1.8 Deferred income taxes 5.7 (11.0 ) Net pension expense 4.9 10.8
Net loss on asset disposals 1.3 1.0 Changes in working capital and
other: Receivables (63.9 ) (39.5 ) Inventories (8.1 ) 3.6 Other
current assets (4.5 ) 7.2 Accounts payable 77.8 4.0 Accrued current
liabilities (14.6 ) 16.6 Other, net � 0.6 � � (14.5 ) Net cash
provided from operating activities � 275.1 � � 237.6 � � INVESTING
ACTIVITIES: Purchases of plant, equipment and software (47.1 )
(19.3 ) Proceeds from disposals of plant and equipment --- 1.0
Purchases of marketable securities (680.3 ) (411.8 ) Sales of
marketable securities � 449.4 � � 381.1 � Net cash (used for)
provided from investing activities � (278.0 ) � (49.0 ) � FINANCING
ACTIVITIES: Payments on long-term debt (0.2 ) (0.2 ) Payments to
acquire treasury stock (28.9 ) --- Dividends paid (25.7 ) (16.5 )
Tax benefits on share-based compensation 7.7 8.0 Proceeds from
common stock options exercised � 4.2 � � 15.0 � Net cash (used for)
provided from financing activities � (42.9 ) � 6.3 � � Effect of
exchange rate changes on cash and cash equivalents � (6.2 ) � (1.6
) � (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (52.0 ) 193.3
Cash and cash equivalents at beginning of period � 352.8 � � 159.5
� Cash and cash equivalents at end of period $ 300.8 � $ 352.8 �
PRELIMINARY CONSOLIDATED BALANCE SHEET (in millions) � June 30 June
30 � 2007 � � 2006 � � ASSETS Current assets: Cash and cash
equivalents $ 300.8 $ 352.8 Marketable securities 372.7 141.8
Accounts receivable, net 303.2 234.7 Inventories 235.0 224.3
Deferred income taxes 13.3 13.7 Other current assets � 30.7 � �
32.0 � Total current assets 1,255.7 999.3 � Property, plant and
equipment, net 537.4 541.1 Prepaid pension cost 132.4 247.1
Goodwill 46.4 46.4 Trademarks and trade names, net 19.2 20.1 Other
assets � 34.6 � � 33.9 � Total assets $ 2,025.7 � $ 1,887.9 � �
LIABILITIES Current liabilities: Accounts payable $ 215.9 $ 137.4
Accrued liabilities 117.1 133.8 Current portion of long-term debt �
33.2 � � 0.2 � Total current liabilities 366.2 271.4 � Long-term
debt, net of current portion 299.5 333.1 Accrued postretirement
benefits 90.9 102.2 Deferred income taxes 143.5 189.0 Other
liabilities � 59.5 � � 45.9 � Total liabilities � 959.6 � � 941.6 �
� STOCKHOLDERS' EQUITY Convertible preferred stock --- 18.0 Common
stock 136.4 132.5 Capital in excess of par value - common stock
326.4 294.2 Reinvested earnings 751.3 549.8 Common stock in
treasury, at cost (65.7 ) (37.3 ) Deferred compensation --- (1.5 )
Accumulated other comprehensive loss � (82.3 ) � (9.4 ) Total
stockholders' equity � 1,066.1 � � 946.3 � � Total liabilities and
stockholders' equity $ 2,025.7 � $ 1,887.9 � PRELIMINARY SEGMENT
FINANCIAL DATA (in millions) � � Three Months Ended Year Ended June
30 June 30 � � 2007 � � 2006 � � 2007 � � 2006 � � Net sales:
Specialty Metals $ 533.8 $ 424.6 $ 1,840.9 $ 1,467.1 Engineered
Products 27.4 26.3 105.7 102.9 Intersegment � (0.7 ) � (0.4 ) �
(1.8 ) � (1.8 ) � Consolidated net sales $ 560.5 � $ 450.5 � $
1,944.8 � $ 1,568.2 � � Operating income: Specialty Metals $ 91.8 $
94.4 $ 323.0 $ 311.8 Engineered Products 4.8 3.4 19.1 17.1
Corporate costs (7.8 ) (9.6 ) (33.1 ) (28.2 ) Pension earnings,
interest & deferrals 3.6 2.6 14.5 10.4 Intersegment � --- � �
0.1 � � 0.3 � � (0.4 ) � Consolidated operating income $ 92.4 � $
90.9 � $ 323.8 � $ 310.7 � � � � 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 Year
Ended June 30 June 30 FREE CASH FLOW � 2007 � � 2006 � � 2007 � �
2006 � � Net cash provided from operations $ 128.4 $ 115.9 $ 275.1
$ 237.6 Purchases of plant, equipment and software (19.3 ) (5.6 )
(47.1 ) (19.3 ) Proceeds from disposals of plant and equipment (0.2
) 0.7 --- 1.0 Dividends paid � (7.8 ) � (4.1 ) � (25.7 ) � (16.5 )
Free cash flow $ 101.1 � $ 106.9 � $ 202.3 � $ 202.8 � � Free cash
flow is a measure of cash generated which management evaluates for
alternative uses.
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