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Carpenter Technology Reports Strong Second Quarter Results
01/31/2013 - As it reported its earnings for its fiscal second quarter, Carpenter Technology Corp. noted that it is continuing to see strong end market demand for its premium and ultra-premium products and believes its investments in aerospace and energy markets will continue to drive growth over the next few years.
Carpenter Technology Corporation reported net income of US$33.0 million for the quarter ended 31 December 2012, which was up from $23.6 million in the prior year second quarter.
“We are continuing to see strong end market demand for our premium and ultra-premium products, improving overall product mix, and delivering higher than expected Latrobe synergies,” said William A. Wulfsohn, president and CEO. “At the same time, we see weaker demand for lower value mill product lines and destocking in the titanium medical supply chain. We currently expect a full year operating income improvement of 20 to 30% versus our last fiscal year, with strong second half revenue and earnings. We continue to believe that our sustained investment in aerospace and energy markets will continue to drive profitable growth over the next several years.”
Fiscal 2013 operating income growth projections exclude:
· Any impacts from the previously announced potential sale of the distribution businesses.
· Expected one-time impacts of about $3 million for various restructuring opportunities - mainly Latrobe-related ($0.3 million already expensed in YTD results).
· Up to $3 million for system inventory consulting fees communicated as part of the Latrobe deal economics ($1.6 million already expensed in YTD results).
Second Quarter Results
Net sales for the second quarter were $533.5 million, up 24% from the prior year. Excluding surcharge revenue, net sales were $430.7 million, up 30% from a year ago on 28% higher volume, due largely to the acquisition of Latrobe. Excluding the Latrobe impact, second quarter net sales excluding surcharge revenue were up 5% on 2% higher volume.
Net sales for the second quarter were $533.5 million, up 24% from the prior year. Excluding surcharge revenue, net sales were $430.7 million, up 30% from a year ago on 28% higher volume, due largely to the acquisition of Latrobe. Excluding the Latrobe impact, second quarter net sales excluding surcharge revenue were up 5% on 2% higher volume.
Specialty Alloy Operations (SAO) segment net sales excluding surcharge revenue increased 7% on 1% higher volume compared with the fiscal year 2012 second quarter. Most of this growth occurred in high value Ultra-Premium and Premium products. SAO operating income was $49.6 million, with a 17.9% operating margin on net sales excluding surcharge revenue.
The Latrobe segment, which currently includes the Latrobe and Mexico distribution businesses that are potentially going to be divested, contributed $13.2 million of operating income in the quarter, with a 13.0% operating margin. Latrobe continues to perform ahead of pace on announced deal economics due to strong progress on operational synergies.
Performance Engineered Products (PEP) segment sales increased 13% in the same period, due largely to the inclusion of the Specialty Steel Supply (SSS) energy distribution business acquired in connection with Latrobe. PEP operating income was $8.9 million, with a 9.7% operating margin.
Gross profit was $102.6 million compared with $84.3 million in the fiscal year 2012 second quarter. The higher gross profit was driven by the addition of Latrobe, and improvement in SAO due to a higher profit per pound from a richer product mix and higher prices.
SG&A in the current quarter was $49.9 million or 11.6% of net sales excluding surcharge revenue, compared with $38.0 million or 11.5% of revenue excluding surcharge for the second quarter of fiscal year 2012. The increase in spending primarily reflects the addition of Latrobe-related overhead costs.
Operating income for the second quarter was $52.7 million compared with $43.9 million a year earlier. Excluding surcharge revenue and pension earnings, interest and deferrals (EID), operating margin was 14.1% compared to 14.4% in the fiscal year 2012 second quarter.
Interest expense in the quarter was $4.4 million compared to $5.8 million in the year-ago period due to the inclusion of capitalized interest as part of the Athens facility construction project.
Other income was $1.3 million compared to $0.4 million in the fiscal year 2012 second quarter due principally to the gain recorded from unwinding the Sandvik powder joint ventures.
The provision for income tax was $16.4 million or 33.1% of pre-tax income compared to $14.7 million or 38.2% of pre-tax income in the second quarter of fiscal year 2012. The second half tax rate is projected to be 33.5%.
Net income attributable to Carpenter was $33.0 million. Net income attributable to Carpenter in the same quarter a year ago was $23.6 million.
Free cash flow, defined as cash from operations less capital expenditures, dividends, and the net impact from the purchase and sale of businesses, was negative $51.6 million in the current quarter. Strong net income was offset by higher capital spending, largely related to the Athens facility construction, pension contributions, and increased working capital levels.
The company continues to plan for a debt refinancing transaction in the third fiscal quarter that would replace the $100 million May 2013 debt maturity and could provide the opportunity to make a discretionary pension contribution of up to $165 million that would eliminate similar required cash contributions over the next several years. As a result of the net positive impact of these actions, the proceeds from the anticipated distribution business sale, and inventory reduction versus the original planned level, the company expects to end the fiscal year with a cash and liquidity position that is near its beginning fiscal year position, despite $350 million of capex investment for Athens and other projects.
The debt refinancing and discretionary pension contribution will drive a one-time negative earnings impact in the current year, which is expected to be approximately $0.13 per share from related higher interest and income tax expense. Beginning in fiscal year 2014, and continuing for the next several years, these actions are expected to drive an annual earnings improvement of approximately $0.08 per share and increase free cash flow by about $17 million per year.
Markets:
Aerospace & Defense market sales were $250.3 million in the second quarter, up 30% compared with the same period a year ago. Excluding surcharge revenue, aerospace & defense sales were up 36% on 83% higher volume (or up 10% on 8% higher volume without Latrobe). Demand for Carpenter’s and Latrobe’s Premium and Ultra-Premium aerospace products remains strong. Demand for super-alloy engine materials remains strong due to higher build rates and initial pull through for new engine programs. Demand for nickel and stainless fastener material increased year-over-year for the tenth consecutive quarter – while shipments of titanium fastener material set a new second quarter record, up slightly from the very strong year-ago period. The addition of Latrobe’s structural, bearing and other complementary products also contributed to the year-to-year growth rate.
Aerospace & Defense market sales were $250.3 million in the second quarter, up 30% compared with the same period a year ago. Excluding surcharge revenue, aerospace & defense sales were up 36% on 83% higher volume (or up 10% on 8% higher volume without Latrobe). Demand for Carpenter’s and Latrobe’s Premium and Ultra-Premium aerospace products remains strong. Demand for super-alloy engine materials remains strong due to higher build rates and initial pull through for new engine programs. Demand for nickel and stainless fastener material increased year-over-year for the tenth consecutive quarter – while shipments of titanium fastener material set a new second quarter record, up slightly from the very strong year-ago period. The addition of Latrobe’s structural, bearing and other complementary products also contributed to the year-to-year growth rate.
Energy market sales of $79.5 million increased 30% compared to the same period a year ago. Excluding surcharge revenue, energy market sales increased 33% (or up 6% without Latrobe and SSS). Demand growth for material used in oil & gas applications outpaced weaker demand for power generation materials. Despite lower North American rig activity, demand for Carpenter materials used in oil & gas drilling increased as Amega West remained strong by expanding its footprint and gaining share. In addition, there are a significant number of wells that have been drilled and still require completion, which is leading to growth of Ultra-Premium products. Build schedules at major industrial gas turbine manufacturers are pointing toward anticipated stronger second half growth in that sector after temporary slowness in this area.
Medical market sales were $26.6 million in the second quarter, down 16% from a year ago. Excluding surcharge revenue, medical market sales decreased 14% on 21% lower volume. Uncertainty surrounding pending legislative impacts and economic sentiment continues to affect short-term demand for medical materials. In addition, as largely seen in the PEP segment results, continued inventory destocking within the titanium supply chain is being influenced by falling titanium prices. Longer-term, Carpenter remains well positioned to support the anticipated positive demand trend for medical market materials.
Transportation market sales were $31.8 million, an increase of 1% from a year earlier. Excluding surcharge revenue, transportation sales increased 8% on 1% lower volume (or up 5% on 3% lower volume without Latrobe). Increasing fuel efficiency standards require automobiles to become lighter and engines to operate at higher temperatures. These design specifications continue to create demand for higher-value materials used for turbo-charger, gasket, valve and fuel system applications. This has led to revenue growth outpacing volume growth. The recent announcement with United States Steel to develop additional high volume transportation applications from Carpenter’s proprietary high-strength, low-weight alloy, Temper ToughTM, further demonstrates Carpenter’s strong growth opportunities within this end-market.
Industrial & Consumer market sales were $111.6 million in the second quarter, up 6% compared with the same period a year ago. Excluding surcharge revenue, sales increased 13% on 8% higher volume (or up 4% on 1% lower volume without Latrobe). This market remains more sensitive to economic uncertainty which is reflected in the powder metal portion of the PEP segment and Value products within Latrobe. Carpenter’s strategy to focus on specialized, high value niche applications with strategically important customers has offset overall demand softness in more commodity type products and distributor channels.
International sales in the second quarter were $158.1 million, an increase of 11% compared with the same quarter a year earlier - driven by a 30% increase in Asia/Pacific sales, a 49% increase in sales to Canada and a 3% increase in European sales. Growth in Asia/Pacific was led by strong demand from the aerospace end market as the supply chain grows in that geography. Growth in Europe and Canada was led by demand for materials used for aerospace and oil & gas applications.
Carpenter produces and distributes premium alloys, including special alloys, titanium alloys and powder metals, as well as stainless steels, and alloy and tool steels.
