Carpenter Technology Reports Record 1st Quarter Results
11/01/2007 - Carpenter Technology reports net income of $57.7 million on record net sales of $475 million for its fiscal first quarter.
Carpenter Technology Corp. reported net income of $57.7 million on record net sales of $475 million.
First Quarter Results—Net income of $57.7 million ($2.24 per diluted share) compares to net income of $51.2 million ($1.94 per diluted share) in the previous quarter. Results included an income tax provision of 33.3% of pre-tax income versus 30.1% in the same quarter a year ago. The tax provision in the first quarter a year ago was favorably impacted by the reversal of certain deferred tax valuation allowances.
The company said the increase in net income reflects a richer product mix, growth in the energy market, and a continued focus on margin enhancement.
Net sales of $475 million, a first-quarter record, were 17% higher than net sales of $404.5 million for the previous quarter.
“Our focus on higher value materials and growth in energy market sales contributed to record first quarter results,” said Anne Stevens, Chairman, President and CEO. “We are pleased with our results and see opportunity to further improve our performance through an enhanced focus on operational excellence.
“We expect the energy market to remain favorable and are confident about the outlook for our aerospace business in the second half of our fiscal year,” Stevens said.
Segment Results—Carpenter’s sales of $475 million were a first quarter record. Adjusted for surcharges, sales gained 3%. The company’s Premium Alloys Operation shipped 27% more than in the previous quarter; strong demand from the energy market, contributed to the increase. Total volume declined during the quarter due primarily to a reduction in the shipment of lower priced stainless material.
Sales to the energy market, which includes oil and gas and power generation, increased 94% from a year ago to $56 million. Excluding surcharge revenue, sales increased 89%.
Within the energy market, sales to the power generation sector, excluding surcharge revenue, surged 140% to $22 million, due to increased demand for industrial gas turbines, particularly from the Middle East. Sales to the oil and gas sector, excluding surcharge revenue, increased 56% from a year ago to $22 million. The company’s broad product portfolio of high strength and corrosion-resistant materials has allowed it to gain strong acceptance among customers, as growth with key customers and strong international demand helped drive the increase in energy sales.
Automotive and truck market sales grew 19% from the year-ago first quarter to $59 million. Excluding surcharge revenue, sales gained 3% from a year ago. The year-over-year sales increase primarily reflected demand for higher-value materials to support technology changes in engines and exhaust systems. This increase was partially offset by a reduction in pounds shipped due to lower automotive production levels, and a decision not to participate in certain marginally profitable business.
Medical market sales increased to $32 million, up 16% from last year’s first quarter. Adjusted for surcharge revenue, sales increased 5%, reflecting a pick-up in demand relative to last year’s comparatively low shipment levels.
Sales to the industrial market improved by 14% to $109 million. Adjusted for surcharge revenue, sales decreased approximately 3%. During the quarter, the company benefited from increased sales of higher-value materials used in capital equipment and in the manufacture of valves and fittings. This increase was more than offset by reduced shipments of lower value materials sold through distributors.
Sales to the aerospace market increased 9% to $174 million in the first quarter compared to a year ago. Excluding surcharge revenue, sales declined approximately 6% from the record first quarter a year ago. Increased sales of nickel-based alloys used in jet engine components was more than offset by planned inventory adjustments at certain key customers, and by a decline in shipments to a customer who is now procuring some of its aerospace material needs from a recently acquired subsidiary.
The company expects that beginning in the second half of its fiscal year, aerospace sales will more closely reflect the increase in growth rate of commercial jet deliveries projected for 2008.
Consumer market sales increased 4% from the first quarter a year ago to $44 million. Adjusted for surcharge revenue, sales decreased 7%. Lower shipments of materials used in the housing market more than offset increased sales to the sporting goods and electronics markets.
Geographically, sales outside the United States increased 28% from the same quarter a year ago to $157 million. International sales, which represented 33% of total sales, benefited from increased sales to the energy, industrial and medical markets.
Operating Results—Record first quarter gross profit of $121.4 million compared to $103.9 million in the same quarter a year ago. The company said the improvement reflects increased sales of higher-value materials, pricing, cost containment, and the lag effect in the company’s surcharge mechanism.
Gross profit in the recent first quarter was negatively impacted by a $4.6 million reserve for duty drawback claims filed by the company’s licensed broker. Carpenter was notified by U.S. Customs that its licensed broker may have filed claims with inadequate documentation over the past four years. Carpenter is cooperating with U.S. Customs to review all individual claims and working with its suppliers and a new licensed broker to assemble the appropriate documentation where available.
In the recent first quarter, the company had LIFO income of $14.5 million due in part to declining nickel prices during the quarter relative to its previous fiscal year-end. In the first quarter a year ago, the company had LIFO expense of $26.2 million. The LIFO income or expense is mostly offset by changes in surcharge revenue and, therefore, has little impact on gross profit.
Gross profit as a percent of sales in the recent first quarter was 25.6%, compared to 25.7% in the same quarter a year ago.
The company estimated that the lag effect in its surcharge mechanism positively impacted the gross margin by approximately 115 basis points during the recent first quarter. Reported gross margin is also adversely impacted by the amount that the surcharge increases the company’s revenue.
Adjusted for the lag effect in the company’s surcharge mechanism, the dilutive effect of surcharge revenue, and the duty drawback reserve, gross profit as a percent of sales would have been an estimated 35.7% in the recent first quarter versus an estimated 33.6% a year ago. The underlying improvement was largely driven by a richer product mix and the Company’s continued focus on cost.
Record first-quarter operating income of $85.7 million compares to $73.1 million a year ago. The record level of operating income was achieved primarily as a result of a richer product mix, pricing, a continued focus on cost, and the benefit from the lag effect in the company’s surcharge mechanism.
These benefits were partially offset by a $4.9-million increase in selling and administrative expenses. The increase primarily related to higher variable compensation accruals and costs associated with driving the company’s future growth initiatives.
Adjusted for the lag effect, the increase in surcharge revenue, and the duty drawback claims reserve, operating profit as a percent of sales would have been an estimated 25.2% in the recent first quarter versus an estimated 24.1% a year ago.
Share Repurchase Program—During the quarter, Carpenter repurchased $157.7 million (1,341,579 shares) of its common stock on the open market. As of September 30, 2007, Carpenter had repurchased a total of $186.5 million (1,576,651 shares) of its common stock under the program established in September 2006. At September 30, 2007, the company had 24,779,521 shares of common stock outstanding.
Carpenter plans to repurchase, under certain conditions, a total of $250 million of its common stock as currently authorized by its Board of Directors.
Segment Reporting—As announced on October 12, the company realigned its reportable business segments in order to allow it to focus more effectively on customers, end-use markets and operational excellence goals. As a result, the company now has three reportable business segments: Premiums Alloys Operations, Advanced Metals Operations, and Engineered Products Operations.
