Carpenter Technology Corporation (NYSE:CRS) today reported net
income attributable to Carpenter of $9.3 million or $0.21 per share
for the quarter ended December 31, 2010. This compares to net
income of $3.5 million or $0.08 per share for the same quarter a
year earlier.
Second quarter earnings benefited from a lower tax rate due to
the retroactive extension of the research and development tax
credit, which was largely offset by Amega West transaction costs,
unplanned equipment outages and customer requested volume shifts
into the third quarter.
Free cash flow for the quarter was negative $89.9 million
including the impact of the Amega West acquisition and further
inventory build. The higher inventory is mostly needed to support
strong expected second half shipments. In certain areas, there was
a build-up of excess inventory that will be reduced over the second
half of the year.
“We are pleased with the continued strong volume and revenue
momentum, which we expect to carry over into the second half of our
fiscal year,” said William A. Wulfsohn, President and Chief
Executive Officer. “Our operating margins should noticeably improve
over the next several quarters as pricing and mix improvement
efforts hit the bottom line. We remain on track to achieve our
fiscal year goals for revenue growth and operating margin
improvement.”
“Longer term, we are increasingly excited about how we are
positioned for growth in our key end-markets of aerospace and
energy. In aerospace, we expect to benefit from a strong projected
build rate, a higher material content per plane and increasing
overall market share with customers who are also improving their
position in the industry. In energy, our recently announced
acquisition of Amega West gives us a stronger position in the fast
growing oil and gas market with key customers, and expands the
opportunities for our high-end alloys.”
Second Quarter Results
Financial highlights for the second quarter include:
(in millions, except per share amounts & pounds sold)
2Q FY 2011 2Q FY 2010
YTD FY 2011 YTD FY 2010
Net Sales $375.6 $263.8 $727.3
$497.5 Net Sales Excluding Surcharge (a) $277.0
$207.3 $540.7 $395.2 Operating Income
Excluding Pension Earnings, Interest and Deferrals (a) $20.9
$11.5 $43.8 $7.7 Net Income (Loss)
Attributable to Carpenter $9.3 $3.5 $16.9
$(5.9 ) Diluted Earnings (Loss) per Share $0.21
$0.08 $0.38 $(0.14 ) Net Pension Expense per
Diluted Share (a) $(0.21 ) $(0.21 ) $(0.43 ) $(0.42 ) Free
Cash Flow (a) $(89.9 ) $6.9 $(136.4 ) $24.7
Pounds Sold (000) 52,732 36,904 100,922
71,462
(a) non-GAAP financial measure that is explained in the attached
tables
Net sales for the second quarter were $375.6 million, up 42
percent from the prior year. Excluding surcharge revenue, net sales
were $277.0 million, up 34 percent from a year ago. Total pounds
sold in the second quarter were 43 percent higher than the fiscal
year 2010 second quarter.
Gross profit was $49.1 million compared with $35.6 million in
the fiscal year 2010 second quarter. The higher gross profit in
this year’s second quarter was driven by significantly higher
volumes and better overall cost performance, partially offset by a
weaker product mix.
SG&A expenses were $37.0 million, compared with $33.6
million for the second quarter of fiscal year 2010. The
year-over-year increase is primarily due to higher variable
compensation expense versus the prior period. SG&A, as a
percentage of sales is nearly 3 percent lower than the prior
year.
Operating income for the second quarter was $12.1 million
compared with $2.0 million a year earlier. Excluding surcharge
revenue and pension earnings, interest and deferrals (EID),
operating margin was 7.5 percent for the quarter compared to 5.5
percent in the fiscal year 2010 second quarter.
Other income was $3.0 million compared to $6.7 million in the
fiscal year 2010 second quarter. The reduction is primarily due to
the close out of the Continued Dumping and Subsidy Offset Act of
2000 (CDSOA) program, which contributed $5.8 million in the prior
year versus only $0.4 million in the current period.
The provision for income tax was $1.4 million or 13 percent of
pre-tax income, reflecting the impact of the recent retroactive
extension of the R&D tax credit. This compares to $0.7 million
or 17 percent of pre-tax income a year ago. The full fiscal year
tax rate is now expected to be about 24 percent.
Net income attributable to Carpenter was $9.3 million or $0.21
per diluted share, compared with second quarter net income of $3.5
million or $0.08 per diluted share in fiscal year 2010.
Free cash flow, which we define as cash from operations less
capital expenditures and dividends, and the net cash impact from
the purchase and sale of businesses, was a negative $89.9 million
in the quarter. The negative cash flow mainly reflects the Amega
West acquisition and an increase in inventory levels to support
second half customer demand. Cash flow performance is expected to
improve over the second half of the year.
Markets:
Aerospace market sales were $150.2 million in the second
quarter, up 27 percent compared with the same period a year ago.
Excluding surcharge revenue, aerospace sales were up 24 percent on
32 percent higher volume. Aerospace results reflect the fifth
consecutive quarter of strong demand for engine components and
returning demand for titanium fastener material. Channel activity
within the nickel and stainless fastener segments still indicates a
pick-up in fastener demand during the second half of the fiscal
year.
Industrial market sales were $88.2 million, up 60 percent
compared with the second quarter of fiscal year 2010. Excluding
surcharge revenue, industrial sales increased 42 percent on 48
percent higher volume. The year-over-year growth reflects increased
demand and supply chain restocking for materials that go into niche
industrial applications.
Energy market sales of $41.8 million increased 104
percent from the second quarter a year earlier. Excluding surcharge
revenue, energy market sales increased 90 percent on 104 percent
higher volume. The increase reflects sharply higher demand for
materials used in oil and gas applications and recovering demand
for high value materials used in industrial gas turbines.
Consumer market sales were $35.7 million, an increase of
49 percent from the second quarter of fiscal year 2010. Excluding
surcharge revenue, sales increased 33 percent on 30 percent higher
volume. Increases in volumes and revenues are due to demand for
fasteners and electronic components used within housing and
appliances.
Automotive market sales were $33.7 million, an increase
of 42 percent from a year earlier. Excluding surcharge revenue,
automotive sales rose 24 percent as volumes increased 36 percent.
The growth rates reflect continued sales of lower value materials
used in valves, combined with renewed demand growth for materials
used in high value turbo charger products and fuel system
components.
Medical market sales were $26.0 million in the second
quarter, up 18 percent from a year ago. Excluding surcharge
revenue, medical market sales increased 20 percent on 26 percent
higher volume. Increased sales of high-end stainless products
outpaced demand growth of the higher value titanium and cobalt
materials.
International sales in the second quarter were $122.0
million, an increase of 42 percent compared with the same quarter a
year earlier. Sales in Europe were up 47 percent on 61 percent
higher volume driven mainly by increased demand in Aerospace,
Energy and Automotive. Asia revenues increased 39 percent on 62
percent higher volume driven by significant broad based growth in
most markets with particular strength in the energy and automotive
sectors. Total international sales in the quarter represented 32.5
percent of total sales, unchanged from the prior year.
Pension Effects
During the second quarter, the Company recorded expense
associated with its pension and other post retirement benefit plans
of $15.1 million or $0.21 per diluted share which reflects our
planned non-cash net pension expense for fiscal 2011 of $61
million, or $0.85 per diluted share. The expense will be allocated
equally through the fiscal year. The Company will make a cash
contribution of approximately $4 million in the fourth quarter of
fiscal year 2011.
Non-GAAP Financial Measures
This press release includes discussions of financial measures
that have not been determined in accordance with U.S. generally
accepted accounting principles ("GAAP"). The non-GAAP financial
measures, accompanied by reasons why the Company believes the
measures are important, are included in the attached schedules.
Conference Call
Carpenter will host a conference call and webcast today, January
25, at 10:00 a.m., ET, to discuss financial results and operations
for the fiscal first quarter. Please call 610-208-2222 for details
of the conference call. Access to the call will also be made
available at Carpenter's web site (http://www.cartech.com) and
through CCBN (http://www.ccbn.com). A replay of the call will be
made available at http://www.cartech.com or at
http://www.ccbn.com.
About Carpenter Technology
Carpenter produces and distributes specialty alloys, including
stainless steels, titanium alloys, and superalloys. Information
about Carpenter can be found on the Internet at
http://www.cartech.com.
Forward Looking Statements
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, 2010 and the quarterly report on Form 10-Q
for the quarter ended September 30, 2010 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, 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 cost savings, 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) our manufacturing
processes are dependent upon highly specialized equipment located
primarily in one facility in Reading, Pennsylvania for which there
may be limited alternatives if there are significant equipment
failures or catastrophic event; and (14) our future success depends
on the continued service and availability of key personnel,
including members of our executive management team, management,
metallurgists and other skilled personnel and the loss of these key
personnel could affect our ability to perform until suitable
replacements are found. 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 BALANCE SHEETS (in millions)
December 31, June 30, 2010 2010 ASSETS
Current assets: Cash and cash equivalents $157.2 $265.4 Marketable
securities 66.7 105.2 Accounts receivable, net 202.6 188.5
Inventories 327.8 203.6 Deferred income taxes 19.1 21.5 Other
current assets 45.3 36.0
Total current assets
818.7 820.2 Property, plant and equipment, net 633.2 617.5
Goodwill 35.2 35.2 Other intangibles, net 38.6 17.6 Deferred income
taxes 7.8 16.2 Other assets 96.5 76.5 Total assets
$1,630.0 $1,583.2 LIABILITIES Current
liabilities: Accounts payable $129.6 $130.5 Accrued liabilities
95.6 87.6 Current portion of long-term debt 100.0 --
Total current liabilities 325.2 218.1 Long-term debt, net of
current portion 159.1 259.6 Accrued pension liability 313.0 322.6
Accrued postretirement benefits 145.1 146.7 Other liabilities 64.9
62.8 Total liabilities 1,007.3 1,009.8
EQUITY Carpenter stockholders' equity: Common stock 273.3
273.2 Capital in excess of par value 228.0 223.3 Reinvested
earnings 984.0 983.2 Common stock in treasury, at cost (533.5 )
(535.2 ) Accumulated other comprehensive loss (338.4 ) (371.1 )
Total Carpenter stockholders' equity 613.4 573.4
Noncontrolling interest 9.3 -- Total equity 622.7
573.4 Total liabilities and equity $1,630.0
$1,583.2 PRELIMINARY CONSOLIDATED STATEMENTS
OF INCOME (in millions, except per share data)
Three Months Ended Six Months Ended December 31,
December 31, 2010 2009 2010 2009 NET SALES $375.6
$263.8 $727.3 $497.5 Cost of sales 326.5 228.2
628.4 442.7 Gross profit 49.1 35.6 98.9 54.8
Selling, general and administrative expenses 37.0 33.6
72.7 66.1 Operating income (loss) 12.1 2.0
26.2 (11.3 ) Interest expense (4.3 ) (4.5 ) (8.5 ) (8.8 )
Other income, net 3.0 6.7 4.5 8.2
Income (loss) before income taxes 10.8 4.2 22.2 (11.9 )
Income tax expense (benefit) 1.4 0.7 5.2 (6.0
) Net income (loss) 9.4 3.5 17.0 (5.9 ) Less: Net
income attributable to noncontrolling interest 0.1 -- 0.1 --
NET INCOME (LOSS) ATTRIBUTABLE TO CARPENTER
$9.3 $3.5 $16.9 ($5.9 ) EARNINGS (LOSS)
PER SHARE: Basic $0.21 $0.08 $0.38 ($0.14 )
Diluted $0.21 $0.08 $0.38 ($0.14 )
WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 44.1 44.0
44.1 43.9 Diluted 44.7 44.2 44.6
43.9 Cash dividends per common share $0.18
$0.18 $0.36 $0.36 PRELIMINARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)
Six Months Ended December 31, 2010 2009 OPERATING
ACTIVITIES: Net income (loss) $17.0 ($5.9 ) Adjustments to
reconcile net income (loss) to net cash (used for) provided from
operating activities: Depreciation and amortization 30.1 29.2
Deferred income taxes (4.2 ) (9.0 ) Net pension expense 30.3 30.5
Net loss (gain) on disposal of property and equipment 0.5 (0.7 )
Changes in working capital and other: Accounts receivable (4.5 )
1.3 Inventories (116.5 ) (1.8 ) Other current assets 4.3 19.3
Accounts payable (5.5 ) 11.8 Accrued liabilities (15.4 ) (3.4 )
Other, net (0.2 ) (12.4 ) Net cash (used for) provided from
operating activities (64.1 ) 58.9 INVESTING
ACTIVITIES: Purchases of property, equipment and software (17.7 )
(19.1 ) Proceeds from disposals of property and equipment 0.1 0.9
Acquisition of business (41.6 ) -- Acquisition of equity method
investment (6.2 ) -- Purchases of marketable securities (63.0 )
(51.5 ) Proceeds from sales and maturities of marketable securities
101.4 15.0 Net cash used for investing activities
(27.0 ) (54.7 ) FINANCING ACTIVITIES: Payments on long-term
debt assumed in connection with acquisition of business (12.4 ) --
Proceeds received from sale of noncontrolling interest 9.1 --
Dividends paid (16.0 ) (16.0 ) Payments of debt issue costs - (2.0
) Tax benefits on share-based compensation 0.1 0.1 Proceeds from
common stock options exercised 0.3 0.2 Net cash used
for financing activities (18.9 ) (17.7 ) Effect of exchange
rate changes on cash and cash equivalents 1.8 0.9
DECREASE IN CASH AND CASH EQUIVALENTS (108.2 ) (12.6 ) Cash
and cash equivalents at beginning of period 265.4 340.1
Cash and cash equivalents at end of period $157.2
$327.5 PRELIMINARY SEGMENT FINANCIAL DATA (in
millions) Three
Months Ended Six Months Ended December 31, December 31, 2010
2009 2010 2009 Net sales: Advanced Metals Operations:
Net sales excluding surcharge $199.1 $147.9 $390.0 $293.6 Surcharge
65.9 35.0 121.6 64.7 Advanced
Metals Operations net sales 265.0 182.9 511.6
358.3 Premium Alloys Operations: Net sales excluding
surcharge $80.4 $59.9 $155.7 $102.9 Surcharge 32.7 21.5
65.0 37.6 Premium Alloys Operations net
sales 113.1 81.4 220.7 140.5
Intersegment (2.5 ) (0.5 ) (5.0 ) (1.3 ) Consolidated net sales
$375.6 $263.8 $727.3 $497.5
Operating income (loss): Advanced Metals Operations $9.4 $0.1 $17.9
($2.5 ) Premium Alloys Operations 22.2 20.3 46.4 28.1 Corporate
costs (10.6 ) (8.9 ) (20.5 ) (17.9 ) Pension earnings, interest
& deferrals (8.8 ) (9.5 ) (17.6 ) (19.0 ) Intersegment (0.1 )
-- -- -- Consolidated operating income
(loss) $12.1 $2.0 $26.2 ($11.3 ) We
have two reportable business segments: Advanced Metals Operations
and Premium Alloys Operations. The Advanced Metals
Operations (AMO) segment includes the manufacturing and
distribution of high temperature and high strength metal alloys,
stainless steels and titanium in the form of small bars and rods,
wire, narrow strip and powder. AMO sales are spread across many of
our end-use markets including aerospace, industrial, consumer,
automotive, and medical. The Premium Alloys Operations (PAO)
segment includes the manufacturing and distribution of high
temperature and high strength metal alloys and stainless steels in
the form of ingots, billets, large bars and hollows and primarily
services the aerospace and energy markets. 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 results 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 NON-GAAP FINANCIAL MEASURES (in millions, except per
share data) Three Months
Ended Six Months Ended December 31, December 31, FREE CASH FLOW
2010 2009 2010 2009 Net cash (used for) provided from
operating activities ($33.6 ) $22.7 ($64.1 ) $58.9 Purchases of
property, equipment and software (9.6 ) (7.8 ) (17.7 ) (19.1 )
Proceeds from disposals of property and equipment -- -- 0.1 0.9
Acquisition of equity method investment (6.2 ) -- (6.2 ) --
Proceeds received from sale of noncontrolling interest 9.1 -- 9.1
-- Acquisition of business (41.6 ) -- (41.6 ) -- Dividends paid
(8.0 ) (8.0 ) (16.0 ) (16.0 ) Free cash flow ($89.9 ) $6.9
($136.4 ) $24.7 Management believes that the free
cash flow measure provides useful information to investors
regarding our financial condition because it is a measure of cash
generated which management evaluates for alternative uses.
Three Months Ended Six Months Ended December 31,
December 31, NET PENSION EXPENSE PER DILUTED SHARE 2010 2009 2010
2009 Pension plans expense $13.4 $13.5 $26.9 $27.0 Other
postretirement benefits expense 1.7 1.7 3.4
3.5 Net pension expense 15.1 15.2 30.3 30.5 Income tax
benefit (5.6 ) (5.9 ) (11.3 ) (11.9 ) Net pension expense, net of
tax $9.5 $9.3 $19.0 $18.6 Net
pension expense per diluted share $0.21 $0.21 $0.43
$0.42 Weighted average diluted common shares
44.7 44.2 44.6 43.9 Management
believes that net pension expense per diluted share is helpful in
analyzing the operating performance of the Company, as net pension
expense tends to be volatile due to changes in the financial
markets, which may result in significant fluctuations in operating
results from period to period. OPERATING
MARGIN EXCLUDING SURCHARGE AND Three Months Ended Six Months Ended
PENSION EARNINGS, INTEREST AND DEFERRALS December 31, December 31,
2010 2009 2010 2009 Net sales $ 375.6 $ 263.8 $ 727.3 $
497.5 Less: surcharge revenue 98.6 56.5 186.6
102.3 Consolidated net sales excluding surcharge $277.0
$207.3 $540.7 $395.2 Operating
income (loss) $12.1 $2.0 $26.2 ($11.3 ) Pension earnings, interest
& deferrals 8.8 9.5 17.6 19.0
Operating income excluding pension earnings, interest and deferrals
$20.9 $11.5 $43.8 $7.7 Operating
margin excluding surcharge and pension earnings, interest and
deferrals 7.5 % 5.5 % 8.1 % 1.9 % Management believes that
removing the impacts of raw material surcharges from net sales
provides a more consistent basis for comparing results of
operations from period to period. In addition, management believes
that excluding the impact of pension earnings, interest and
deferrals, which may be volatile due to changes in the financial
markets, is helpful in analyzing the true operating performance of
the Company. PRELIMINARY SUPPLEMENTAL SCHEDULES (in
millions) Three Months Ended Six
Months Ended December 31, December 31, NET SALES BY MAJOR PRODUCT
LINE 2010 2009 2010 2009 Product Line Excluding Surcharge:
Special alloys $ 130.3 $ 108.5 $ 252.6 $ 196.7 Stainless steel
100.0 65.3 191.4 126.3 Titanium products 29.5 23.7 63.4 50.5 Tool
and other steel 13.7 7.9 26.0 17.1 Other materials 3.5 1.9 7.3 4.6
Consolidated net sales excluding surcharge $277.0 $207.3
$540.7 $395.2 Surcharge revenue 98.6 56.5 186.6 102.3
Consolidated net sales $375.6 $263.8 $727.3 $497.5
Three Months Ended Six Months Ended December 31, December 31, NET
SALES BY END USE MARKET 2010 2009 2010 2009 End Use Market
Excluding Surcharge: Aerospace $ 112.1 $ 90.5 $ 219.8 $ 171.7
Industrial 61.3 43.3 121.4 84.6 Energy 33.0 17.4 57.3 26.9 Consumer
25.1 18.9 49.9 37.2 Automotive 23.7 19.1 45.8 35.3 Medical 21.8
18.1 46.5 39.5 Consolidated net sales excluding surcharge
$277.0 $207.3 $540.7 $395.2 Surcharge revenue 98.6 56.5
186.6 102.3 Consolidated net sales $375.6 $263.8 $727.3
$497.5
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