10-QPeriod: Q1 FY2013

CARPENTER TECHNOLOGY CORP Quarterly Report for Q1 Ended Sep 30, 2012

Filed November 2, 2012For Securities:CRS

Summary

Carpenter Technology Corporation (CRS) reported a significant increase in net sales for the quarter ended September 30, 2012, driven by the recent acquisition of Latrobe Specialty Metals, Inc. (Latrobe) and strong demand in key end-use markets, particularly aerospace and defense. Net sales rose 32% year-over-year to $544.9 million, with a substantial portion attributable to the Latrobe operations. Diluted earnings per share also saw a healthy increase to $0.74, up from $0.53 in the prior year's comparable quarter, reflecting improved operational performance and the accretive impact of the Latrobe acquisition. The company's strategic focus on high-value, ultra-premium products continues to drive growth, evidenced by strong performance in the Specialty Alloys Operations (SAO) segment and an improved product mix. Despite increased inventory levels and higher pension contributions impacting free cash flow negatively, Carpenter Technology maintains a solid liquidity position with substantial availability under its credit facilities. Management remains optimistic about achieving full-year financial targets, supported by a robust backlog and ongoing capacity expansion efforts, including the new facility in Alabama.

Financial Highlights

49 data points
Beta

Revenue

$544.90M

20.1% Gross Margin

Net Income

$39.20M

7.2% Net Margin

EPS (Diluted)

$0.74

Total Assets

$2.60B

Cash & Equivalents

$112.60M

Free Cash Flow

-$36.70M

Financial Statements
Beta
Revenue$544.90M
Cost of Revenue$435.60M
Gross Profit$109.30M
SG&A Expenses$47.70M
Operating Income$61.60M
Interest Expense$5.20M
Net Income$39.20M
EPS (Basic)$0.74
EPS (Diluted)$0.74
Shares Outstanding (Basic)52.80M
Shares Outstanding (Diluted)53.20M

Key Highlights

  • 1Net sales increased by 32% to $544.9 million in Q1 FY2013 compared to Q1 FY2012, largely due to the Latrobe acquisition and strong demand in aerospace and defense.
  • 2Diluted earnings per share improved to $0.74 from $0.53 year-over-year, demonstrating enhanced profitability.
  • 3The Latrobe acquisition, completed in February 2012, contributed significantly to sales and operating income, with early integration showing positive operational synergies.
  • 4Gross profit increased by 35% to $109.3 million, with gross margin expanding slightly to 20.1% (24.8% excluding surcharges), driven by volume growth and improved product mix.
  • 5Operating income grew to $61.6 million from $44.0 million year-over-year, reflecting the positive impact of higher sales and operational efficiencies.
  • 6Cash flow from operations was negatively impacted by increased inventory levels and higher pension contributions, leading to negative free cash flow of ($102.7) million for the quarter.
  • 7The company announced plans to sell the Latrobe and Mexico distribution businesses, intending to reinvest proceeds into more strategic business areas.

Frequently Asked Questions

The acquisition of Latrobe Specialty Metals, Inc., completed in February 2012, significantly contributed to Carpenter Technology's results. It drove a substantial increase in net sales, adding $121.8 million in revenue for the quarter. The Latrobe segment also generated operating income of $15.7 million. Management noted that Latrobe's operations are performing ahead of deal economics, and integration efforts are yielding operational synergies. The acquisition also contributed positively to earnings per share, with an estimated accretion of $0.07 per diluted share.

Carpenter Technology saw strong growth in the aerospace and defense market (up 45% year-over-year) driven by increased demand for premium and ultra-premium products, particularly for engine materials and fastener materials. The energy market also showed robust growth (up 31%), supported by share gains and expanding geographic reach. The medical market experienced a slight decline, attributed to customer cost containment efforts, while industrial and consumer, and transportation markets showed moderate increases.

Carpenter Technology maintained a solid liquidity position, with approximately $113 million in cash and cash equivalents as of September 30, 2012. Additionally, they had $342.8 million available under their revolving credit facility, totaling approximately $455 million in liquidity. While free cash flow was negative for the quarter, primarily due to increased inventory and pension contributions, the company believes its liquidity sources are sufficient to meet its cash needs and fund future investments, including significant capital expenditures for a new manufacturing facility and pension plan contributions.

The company is involved in routine legal proceedings incidental to its business, which management does not believe will have a material adverse effect. They have ongoing environmental remediation liabilities, with $4.9 million accrued for Superfund sites and other third-party owned sites, but future costs are not expected to be material long-term. A significant past legal matter, the Boarhead Farms lawsuit, was settled in September 2011 for $21.8 million, and no further liabilities are expected. Potential export regulation violations were voluntarily disclosed, and the Department of Commerce has not yet responded regarding potential penalties.