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Carpenter Technology Reports 3rd Quarter Results

04/30/2008 - Carpenter Technology reports net income of $120.0 million ($50.8 million from continuing operations) on sales of $509.8 million for the fiscal third quarter ended March 31, 2008.

Carpenter Technology Corp. reported net income of $120.0 million ($50.8 million from continuing operations) on sales of $509.8 million for the fiscal third quarter ended March 31, 2008.
 
Third Quarter Results—The $50.8 million net income from continuing operations ($1.05 per diluted share) compares with record net income from continuing operations a year earlier of $64.3 million ($1.22 per diluted share). Net sales from continuing operations, $509.8 million, were 1% lower than a year ago. Adjusted for surcharge revenue, sales from continuing operations were essentially flat with a year ago
 
Results reflect reduced demand in Carpenter’s economically sensitive industrial, automotive, and consumer end-use markets, combined with higher operating costs. Third-quarter demand was strong in the global energy and aerospace markets.
 
Net income—including results of discontinued operations, and the net gain on the sale of Carpenter’s ceramics business—was $120.0 million ($2.49 per diluted share). This compares to net income of $66.6 million ($1.27 per share) for the year-ago third quarter.
 
Operating Results—"Our third quarter financial results fell short of our original expectations due to reduced demand in our economically sensitive markets, and higher operating costs,” said Anne Stevens, Chairman, President and CEO. "However, we have good overall top-line momentum on the business moving forward, and we achieved record sales this quarter in the energy and aerospace markets as a result of strong demand, particularly in international markets. Based on current conditions, fourth-quarter sales and earnings should be at or above this quarter’s performance. We expect our full-year financial results to be at record levels for the fourth consecutive year.”
 
Overall, pounds shipped were 7% below an exceptionally strong third quarter a year ago. The Premium Alloys Operations generated a 12% increase in pounds shipped due largely to strong demand from the global energy and aerospace markets. This was more than offset by a 9% decline in pounds shipped by the Advanced Metals Operations, due principally to lower demand prompted by weakness in the domestic industrial base.
 
Sales to the aerospace market were a record $210.6 million, an 11% increase compared with the prior year’s third quarter. Adjusted for surcharge revenue, aerospace sales grew 6% year-over-year. The increase was largely driven by higher sales of specialty alloys used in jet engines and fasteners, as well as titanium coil used in fasteners.
 
Energy market sales, which include oil and gas and power generation, reached $57.9 million, a 25% increase from a year ago. Excluding surcharge revenue, sales improved by 38%, which the company attributes primarily to strong demand for specialty alloys used in the manufacture of industrial gas turbines and increased global sales of high-strength corrosion resistant materials to the oil and gas market.
 
Medical market sales were $35.5 million, a 6% increase compared with the year-ago third quarter. Excluding surcharge revenue, sales grew 3%.
 
Sales to the industrial market were $104.7 million (19%) lower than last year's third quarter. Adjusted for surcharge revenue, sales decreased 16%. The decrease reflected lower demand primarily for materials used in the manufacture of capital goods and valves and fittings.
 
Automotive and truck market sales, $55.1 million, reflect a 14% decline compared with a year earlier. Excluding surcharge revenue, sales declined 12%. The decrease primarily reflected the general slowdown in the domestic automotive industry.
 
Sales to the consumer market were $46.0 million, a 15% decline compared with sales of $54.2 million a year earlier. Excluding surcharge revenue, consumer sales were 4% lower. The reduction in sales primarily reflected the negative impact on demand for materials used in the housing sector and the weakening domestic economy.
 
Geographically, sales outside the United States were a quarterly record $178.6 million—18% higher than the third quarter a year ago. Sales to Europe were particularly strong, increasing 26% over last year’s third quarter, driven largely by the aerospace and power generation markets. International sales represented 35% of total sales during the recent third quarter.
 
Gross profit was $109.3 million, compared with $122.4 million a year earlier. According to the company, the decrease primarily reflects reduced volume against a strong year-ago period, higher operating costs due to production inefficiencies in the quarter, and investments in its Manufacturing systems to drive long-term operational effectiveness. The company said these expenses were partially offset by continued favorable mix improvement.
 
Gross margin was 21.4%, vs. 23.7% in the year-ago quarter. Adjusted for the dilutive impact of the surcharge revenue, the year-to-year difference in the lag effect in the company’s surcharge mechanism, and other inventory effects, gross margin on a comparable basis would have been an estimated 32.6% in the third quarter vs. an estimated 34.3% in the same quarter a year earlier.
 
Operating income was $75.3 million compared with $92.5 million in the 2007 third quarter. According to the company, the decrease was the result of the lower gross profit and a $4.1 million increase in selling, general and administrative expenses, primarily from investments to drive future growth initiatives.
 
Adjusted for the lag effect, surcharge revenue and other inventory effects, operating margin would have been an estimated 23.1% in the third quarter compared to an estimated 25.9% in the third quarter of 2007.
 
Other income was $3.7 million, compared with other income of $6.0 million in the third quarter of 2007. The decrease was primarily due to reduced interest income from invested cash as a result of lower interest rates.
 
The income tax provision on continuing operations was $23.1 million (31.3% of pre-tax income), which compares to an income tax provision of $28.5 million (30.7%) for the 2007 third quarter.
 
Net income from continuing operations was $50.8 million ($1.05 per diluted share), compared with net income of $64.3 million ($1.22 per diluted share) in the third quarter of 2007.
 
Free cash flow was $162.4 million for the third quarter 2008, and $186.5 million for the fiscal nine-month period. Excluding cash amounts associated with the acquisition and divestitures in the quarter, free cash flow was $26.0 million for the quarter and $50.1 million for the nine-month period.
 
Capital expenditures were $29.9 million, primarily reflecting Carpenter’s expansion of its premium melt capacity. The company reconfirmed its fiscal year 2008 free cash flow of approximately $100 million after capital expenditures of about $125 million.
 
Discontinued Operations—On March 31, 2008, Carpenter completed the sale of its ceramics businesses, Certech and Carpenter Advanced Ceramics, to the Morgan Crucible Co. plc for $144.5 million, and paid $1.5 million in expenses related to the sale. Carpenter recorded a pre-tax gain in the quarter of $102.7 million, or $1.43 per share on an after tax basis.
 
Third-quarter results for the ceramics business were reported as discontinued operations. The income from discontinued operations of $69.2 million compares with income of $2.3 million for the third quarter of 2007.
 
Carpenter Technology produces and distributes specialty alloys, including stainless steels, titanium alloys, and superalloys, and various engineered products.