By Kari Williamson
“We had another strong quarter of results and are poised to continue our business momentum with the addition of Latrobe,” says William A. Wulfsohn, Carpenter Technology's President and CEO.
“The continued positive impacts from pricing and mix management actions are evident in our revenue growth and further improvement in our operating margin and average Specialty Alloy Operations profit per pound. We continue to maintain a strong order backlog and are progressing rapidly on our commitment to exceed our prior peak level of EBITDA, excluding any Latrobe contribution.”
Latrobe acquisition
The company also benefited from the Latrobe acquisition, which was closed on 29 February.
“The integration process is going well, and now that our teams have combined, we are even more encouraged by the synergy potential of the combination. The Latrobe business is already accretive to earnings excluding final transaction costs and short-term inventory accounting impacts that will end after the next quarter,” Wulfsohn says.
He adds that the company is benefiting from what he believes is a “strong growth cycle in the aerospace and energy markets”.
Carpenter Technology is also moving to enhance Latrobe's premium products capacity with the addition of three VAR furnaces. “With the additional capacity from Latrobe and other investments we have made in Reading, we believe we can create another roughly 4000 tonnes of premium products capacity over each of the next two years. This additional capacity will bridge our ability to meet increased customer demand until our new facility in Alabama is operational in April, 2014.”
The Alabama facility will have a capacity of 27,000 tonnes of premium products.
“These actions, combined with our investments in Titanium wire and powder metal capacity, will effectively double Carpenter’s capacity to produce premium products,” Wulfsohn says.
Sales by markets
Aerospace & Defense market sales were US$240.5m, up 21% compared with the same period a year ago. The aerospace results reflect strength in all areas. Demand for titanium fastener material is now exceeding prior peak levels, and nickel and stainless fastener demand has shown significant growth over the prior year. Demand for engine components remains strong, driven by high build rates. Sales of aerospace structural components also increased significantly due to the addition of Latrobe and continued progress selling Carpenter’s Custom-series stainless alloys.
Industrial & Consumer market sales were US$128.7m, down 3%. The year-over-year revenue growth and volume declines reflect the continued impact of mix management and pricing actions. The percentage of volume in differentiated product applications with strategically important customers is increasing as a result of these actions.
Energy market sales increased 28% to US$68.6m. Power Generation and Oil & Gas each demonstrated strength in the quarter. Mix was impacted as sales of non-magnetic drill collars increased at a faster rate than materials into power generation. Activity in the industrial gas turbine market continues to grow as natural gas prices remain low, causing increased customer demand. The oil & gas segment also continued to grow with the directional drilling rig count hitting a new peak this quarter and shifts from gas to oil.
Medical market sales were US$37.8m, up 15% percent from a year ago. The revenue growth is attributable to customer shifts to tighter specification medical grade alloys which creates increased demand for Carpenter premium products.
Transportation market sales were US$38.2m, representing an increase of 6%. Revenue and volume increases reflect demand growth for high value materials required in turbo charger, gasket and fuel system applications used in smaller, higher efficiency turbo charged engines, particularly in Europe.
International sales in the third quarter were US$178.7m, up 30% – driven by a 38% increase in European sales and a 33% increase in Asia/Pacific sales. Growth in Europe was led by increased demand for materials used for aerospace, industrial gas turbines and high value automotive applications. Growth in Asia/Pacific was led by material sales into the automotive, oil & gas and industrial end-markets. Total international sales in the quarter represented 33% of total company revenue, compared with 30% in the prior year.
FY outlook
“We expect to finish the year strong, and should see an increase in our total fiscal year 12 operating income of about US$100m or 70% higher than last year, excluding non-cash pension EID expense and including Latrobe. This is higher than our targeted 50% increase excluding Latrobe, and includes about 10 points of growth due to Latrobe. We continue to expect free cash flow will be positive in the fourth quarter, with lower inventory levels, but modestly negative for the full year,” Wulfsohn says.
“As we complete our planning for next fiscal year, we anticipate a further increase in operating income, excluding pension EID and including Latrobe, of at least 30%, or US$70 million. Within this, Latrobe will achieve our objective of being immediately accretive to earnings over the first full year of ownership including all prior acquisition costs.”