10-QPeriod: Q2 FY2008

CARPENTER TECHNOLOGY CORP Quarterly Report for Q2 Ended Dec 31, 2007

Filed February 1, 2008For Securities:CRS

Summary

Carpenter Technology Corporation (CRS) reported strong financial performance for the quarter and six months ended December 31, 2007. Net income increased significantly year-over-year, driven by robust demand in key end markets, particularly energy, and increased international sales. The company's strategic focus on higher-value specialty alloys is evident in its growing sales and improved gross margins, despite a slight decline in overall volume when excluding surcharge revenues. The divestiture of the ceramics operations is on track, expected to close in the second half of fiscal 2008, with significant proceeds anticipated. Investors should note the company's proactive approach to managing raw material costs through surcharges and the positive impact of product mix and pricing strategies on profitability. While the company anticipates potential softening in some U.S. markets due to economic conditions, it projects continued strength in the energy sector and a rebound in aerospace. Significant share repurchases underscore management's confidence and commitment to returning value to shareholders.

Key Highlights

  • 1Net income increased by 27% year-over-year for the three months ended December 31, 2007.
  • 2Net sales increased by 6% year-over-year for the three months ended December 31, 2007, reaching $446.4 million.
  • 3Energy market sales saw a substantial 55% increase year-over-year, driven by oil and gas and power generation demand.
  • 4Gross profit margin improved significantly to 26.3% from 21.7% in the prior year's comparable period, benefiting from a richer product mix and pricing actions.
  • 5The company is on track to divest its ceramics operations, with expected pre-tax proceeds of $147 million.
  • 6Carpenter Technology repurchased approximately $225.8 million of its common stock during the six months ended December 31, 2007, and authorized a new $250 million repurchase program.
  • 7International sales increased by 33% year-over-year for the three months ended December 31, 2007, representing 34% of total sales.

Frequently Asked Questions

Carpenter Technology has entered into a definitive agreement to sell its ceramics operations for an expected pre-tax proceeds of $147 million. The transaction is expected to close in the second half of fiscal 2008. The assets and liabilities of these operations have been classified as discontinued operations in the financial statements for all periods presented.

The company utilizes a surcharge mechanism to pass on increases in raw material costs to customers. While this protects absolute gross profit dollars, it can dilute gross margin percentages. The company also benefits from a richer product mix and strategic pricing actions to mitigate the impact of cost fluctuations.

The company anticipates continued strength in the energy market and expects a resumption of growth in the aerospace market in the second half of fiscal 2008, driven by increasing commercial jet deliveries. While some U.S. markets may experience softening due to economic conditions, overall performance is expected to remain strong.

Carpenter Technology actively repurchases its common stock. During the six months ended December 31, 2007, the company spent $225.8 million on share repurchases and authorized a new $250 million repurchase program. The company also pays quarterly cash dividends.