Carpenter Technology Reports Record 2nd Quarter Results
01/30/2008 - Carpenter Technology reports net income from continuing operations of $57.7 million on net sales of $446.4 million for the fiscal second quarter, and net income from continuing operations of $113.8 million on net sales of $897.7 million in the first six months of the fiscal year. These results exclude the effects of the company’s soon-to-be-sold ceramics businesses.
Carpenter Technology Corp. reported net income from continuing operations of $57.7 million on net sales of $446.4 million for the fiscal second quarter, and net income from continuing operations of $113.8 million on net sales of $897.7 million in the first six months of the fiscal year. These results do not include the effect of discontinued operations.
Second Quarter Results—Net income of $$57.7 million ($1.17 per diluted share) from continuing operations compares to net income of $45.6 million ($0.86 per diluted share) from continuing operations in the year-ago quarter. Net sales of $446.4 million compare to net sales of $420.8 million in the year-ago second quarter.
These sales and operating results exclude Carpenter’s ceramics businesses, which the company is planning to sell to The Morgan Crucible Co. plc. Including the effect of discontinued operations and related divestiture expenses, the current quarter’s net income would be $56.1 million ($1.14 per diluted share).
"Our record second quarter results reflected the benefits of our end-use market diversification and international footprint,” said Anne Stevens, Chairman, President and CEO. "We continued to experience strong demand from the energy market, which also contributed to the 33% jump in our international sales. Growth in these markets helped offset domestic weakness in our economically sensitive markets, including automotive, consumer, and industrial.
Operating Summary—Net sales of $446.4 million were 6% higher than a year ago. Adjusted for surcharge revenue, sales decreased 1%, primarily as a result of a 9% decline in pounds shipped from the second quarter a year ago.
Geographically, sales including surcharge outside the United States were $152.0 million, an increase of 33% from the year-ago second quarter. These sales represented 34% of the company’s consolidated sales in the second quarter.
Sales in Europe, which gained 49% from a year ago, accounted for most of the increase. Sales to this market benefited from growth with key customers in aerospace, strong demand from the power-generation market, and higher sales to the automotive and consumer markets.
Gross profit was $117.4 million in the second quarter, compared with $91.1 million a year earlier. The increase reflected the increased sales of higher-value materials, pricing actions, and the difference in the lag effect of the company's surcharge mechanism.
The company had LIFO income of $33.8 million in the second quarter due primarily to declining nickel prices during the quarter (relative to the first quarter of fiscal 2008). This compares to a LIFO expense of $53.0 million in the year-ago second quarter. The LIFO income or expense has little impact on gross profit, according to the company, as it is primarily offset by changes in surcharge revenue.
Gross margin in the second quarter was 26.3%, compared to 21.7% in the same quarter a year ago.
The company said the lag effect of its surcharge mechanism positively impacted the gross margin by an estimated 120 basis points during the second quarter. In the year-ago second quarter, the company estimated that the lag effect negatively impacted gross margin by 450 basis points.
Adjusted for the lag effect in the company's surcharge mechanism and the dilutive effect of surcharge revenue, gross margin would have been an estimated 35.2% versus an estimated 34.2% in the year-ago second quarter. The underlying improvement was largely driven by a richer product mix and higher pricing, according to the company.
Second-quarter operating income was $80.5 million compared with $59.0 million a year ago. The company said the record level of operating income was achieved primarily as a result of a richer product mix, higher pricing, and the benefit from the lag effect in the surcharge mechanism. These benefits were partially offset by a $4.8 million increase in selling, general, and administrative expenses, which primarily related to investments associated with driving the company's future growth initiatives.
Adjusted for the lag effect and the increase in surcharge revenue, operating margin would have been an estimated 23.6% in the recent second quarter versus an estimated 24.2% a year ago.
Other income in the quarter was $12.1 million, compared with $11.8 million in last year’s second quarter. The increase was primarily due to increased receipts from the “Continued Dumping and Subsidy Offset Act of 2000”. Receipts under this Act in the recent second quarter were $8.2 million compared to $6.4 million a year ago.
Cash flow from operations was $31.6 million as compared to $43.8 million a year ago. Capital expenditures increased to $24.4 million, as compared to capital expenditures of $7.3 million a year ago. The higher capital expenditures reflected the company’s investment in various growth initiatives, including its previously announced premium melt project.
Outlook—“As we look at the second half of our fiscal year, we remain on track for another record year. Our third quarter performance might not surpass the exceptionally strong third quarter results of a year ago due to softening U.S. economic conditions. While we expect continued strength in energy market sales and resumption in sales growth to the aerospace market for the third quarter, sales to our other end-use markets could offset this growth.”
Stevens added, “We expect our fiscal fourth quarter will show year-over-year improvement as increasing momentum in aerospace and solid demand in energy should more than offset any weakness in our economically sensitive businesses.”
The company continues to expect that its free cash flow, which is defined as cash from operations less capital expenditures and dividends, for fiscal 2008 will be approximately $100 million.
Carpenter produces and distributes specialty alloys, including stainless steels, titanium alloys, and superalloys, and various engineered products.
