Carpenter Technology Corporation reported net income attributable to Carpenter of $40.8 million for its fiscal fourth quarter ended 30 June 2012.

"We had a very strong finish to an excellent year," said William A. Wulfsohn, President and Chief Executive Officer. "We exceeded our financial goals. These results were driven by solid execution of our strategies to grow premium product output while improving productivity, mix and pricing. For the year, the legacy Carpenter business saw a 68% increase in operating income, excluding pension EID. SAO average profit per pound improved by $0.44 over the course of the year, and we reduced our manufacturing cost per ton for the third straight year. We also shipped 4,500 additional premium tons this year and expect to ship about 4,000 additional premium tons over each of the next two years.

"A highlight of the year was our acquisition of Latrobe Specialty Metals. The integration process is going extremely well, and we are even more excited about the strategic value and synergies from this transaction. As we expected, the acquisition has been immediately accretive to earnings per share, excluding acquisition related costs. We remain confident that we will achieve at least $25 million of net pre-tax synergies by year three.

"Looking forward, we are beginning our new fiscal year with strong momentum. Our business has remained resilient to recent global economic pressures. We are well positioned in growing end markets, and have low exposure to economically sensitive products and market segments, such as flat rolled stainless products. We continue to expand our breadth and market share positions in Aerospace. We have differentiated ourselves, and are benefitting from geographic, product and market share expansion in the Oil & Gas and broader Energy market. And we’ve positioned ourselves for growth in higher value, differentiated products in other segments like Industrial and Transportation, as you’ve seen in our results. Finally, our business model and pricing mechanisms help minimize the impact of raw material price fluctuations on our earnings.

"Our order backlog remains strong, and we are moving forward to add capacity to support our customers’ demand. Along with our actions to increase near term capacity in Reading and Latrobe by roughly 4,000 premium tons over each of the next two years, we are expanding our Dynamet Titanium wire capacity. In addition, we have started construction of our new $500 million state of the art premium products facility in Alabama. When completed in April 2014, this facility will provide the capacity needed to support industry demand through the remainder of the decade and enable Carpenter to significantly reduce lead times. All of these actions support our customers’ growth needs and will have a positive impact on the size, scope and profitability of our business for years to come."

Fourth Quarter Results
Net sales for the fourth quarter were $643.7 million, up 33% from the prior year. Excluding surcharge revenue, net sales were $506.7 million, up 44% from a year ago on 31% higher volume. Excluding the Latrobe impact, fourth quarter revenue excluding surcharge was up 15% on 3% higher volume. Specialty Alloy Operations (SAO) segment sales without surcharge increased 18% on 10% higher volume, while Performance Engineered Products (PEP) segment sales without surcharge increased 15% on 5% lower volume compared with the fiscal year 2011 fourth quarter.

Gross profit was $120.6 million compared with $77.0 million in the fiscal year 2011 fourth quarter. The higher gross profit was driven by improvement in SAO due to increased volume and a higher profit per pound from an improved product mix and higher prices, and the inclusion of Latrobe.

SG&A expense as a percentage of revenue excluding surcharge was 0.5% lower than the prior year fourth quarter. SG&A expense in the current quarter was $54.1 million or 10.7% of revenue excluding surcharge, compared with $39.6 million or 11.2% of revenue excluding surcharge for the fourth quarter of fiscal year 2011. The increase in spending mostly reflects the addition of Latrobe-related overhead costs.

Operating income for the fourth quarter was $66.5 million compared with $35.0 million a year earlier. Latrobe accounted for $17.0 million of operating income, before being reduced by inventory fair value cost adjustments of $8.7 million. Excluding surcharge revenue and pension earnings, interest and deferrals (EID), operating margin was 14.0% compared to 12.4% in the fiscal year 2011 fourth quarter.

The provision for income tax was $21.0 million or 33.9% of pre-tax income compared to $7.7 million or 22.9% of pre-tax income in the fourth quarter of fiscal year 2011. The prior year period included tax benefits associated with exceptional items. The tax rate for the full fiscal year was 35.5%.

Net income attributable to Carpenter was $40.8 million. Excluding the Latrobe inventory fair value cost adjustment, net income attributable to Carpenter would have been $46.5 million. Net income attributable to Carpenter in the same quarter a year ago was $25.5 million.

For the full year, net income attributable to Carpenter was $121.2. Excluding Latrobe acquisition related costs, net income attributable to Carpenter would have been $137.7 million, compared to full fiscal year 2011 net income of $71.0 million.

Markets
Aerospace & Defense market sales were $293.9 million in the fourth quarter, up 49% compared with the same period a year ago. Excluding surcharge revenue, aerospace & defense sales were up 55% on 105% higher volume (or up 24% on 21% higher volume without Latrobe). Aerospace results reflect strength in all areas as airplane build rates remain high. Demand for engine materials remains strong driven by higher build rates of larger engines and share gain. Demand for titanium fastener material grew again in the quarter and is now well above prior peak levels. Nickel and stainless fastener demand has led to eight straight quarters of year-over-year growth and is approaching prior peak levels. Sales of aerospace structural components continue to grow with the success in selling Carpenter’s Custom-series stainless alloys and the addition of Latrobe’s complementary products.

Industrial & Consumer market sales were $139.0 million in the fourth quarter, up 3% compared with the same period a year ago. Excluding surcharge revenue, sales increased 13% on 4% higher volume (or flat revenues on 7% lower volume without Latrobe). The results reflect the continued impact of mix management and pricing actions on the legacy Carpenter business. The%age of volume in differentiated product applications with strategically important customers continues to increase as a result of these actions.

Energy market sales of $79.2 million increased 13% compared to the same period a year ago. Excluding surcharge revenue, energy market sales increased 26% on 34% higher volume (or up 15% on 11% higher volume without Latrobe). Energy growth was led by Oil & Gas which continues to benefit from the Amega West acquisition. While the number of North American directional and horizontal land drilling rigs is level, offshore and international oil & gas exploration activity is increasing. Sales to the industrial gas turbine market were lower than the very strong prior year quarter. However, long term growth trends should remain strong with increasing global demand for peak power and the expectation that natural gas prices remain low.

Transportation market sales were $41.2 million, an increase of 11% from a year earlier. Excluding surcharge revenue, transportation sales increased 22% on 2% higher volume (or up 19% on 1% higher volume without Latrobe). Revenue growth far exceeded volume growth which reflects Carpenter’s focus on higher value material solutions to increase fuel efficiency and lightweight vehicles. Despite economic uncertainty in the region, transportation sales in Europe increased 25% over the prior year led by demand growth for high value materials required in turbo charger, gasket and fuel system applications used in smaller, higher efficiency turbo charged engines.

Medical market sales were $38.3 million in the fourth quarter, up 11% from a year ago. Excluding surcharge revenue, medical market sales increased 13% on 5% higher volume (relatively unchanged without Latrobe). The overall volume growth was consistent with long term industry growth rates.

International sales in the fourth quarter were $205.3 million, an increase of 36% compared with the same quarter a year earlier - driven by a 74% increase in Asia/Pacific sales and a 28% increase in European sales. Growth in Asia/Pacific was led by sales into the aerospace and oil & gas end-markets. Growth in Europe was led by increased demand for materials used for aerospace, oil & gas and high value automotive applications. Total international sales in the quarter represented 32% of total Company revenue, compared with 31% in the prior year.

Outlook
"We continue to expect a further increase in operating income, excluding pension EID and Latrobe acquisition related costs, of at least 30% or $70 million in fiscal year 2013," said Douglas Ralph, Senior Vice President of Finance and Chief Financial Officer. "This represents a $110 million improvement in year-to-year EBITDA including Latrobe. Our business should have a first half-second half split of approximately 45%/55% - in line with historical experience.

"As we’ve said before, free cash flow for fiscal year 2013 is expected to again be negative, with capital spending of about $350 million, due in large part to our new Alabama facility investment. We anticipated this investment in our financing actions last year, and continue to have a strong balance sheet and liquidity."

In January 2012, the company announced it had made changes to its reportable segments. It now has three reportable business segments, Specialty Alloys Operations (SAO), Performance Engineered Products (PEP) and Latrobe. Previously, the Company’s reportable segments consisted of Premium Alloys Operations (PAO), Advanced Metals Operations (AMO) and Emerging Ventures.

The SAO segment is comprised of Carpenter’s major premium alloy and stainless steel manufacturing operations. This includes operations performed at mills primarily in Reading, Pa., and the surrounding area, South Carolina, and the new premium products manufacturing facility being built in Limestone County, Ala.

The PEP segment is comprised of Carpenter’s differentiated operations. This includes Dynamet titanium business, the Carpenter Powder Products (CPP) business, and the Amega West business. The pounds sold data above for the PEP segment includes only the Dynamet and CPP businesses.

The Latrobe segment is comprised of the operations of the Latrobe business acquired effective 29 February 2012. The Latrobe segment provides management with the focus and visibility into the business performance of these newly acquired operations. The Latrobe segment also includes the results of Carpenter’s distribution business in Mexico, which will be managed together with the Latrobe’s distribution business.