Carpenter Technology Q2 Earnings Call Highlights

Key Points

• Carpenter reported record quarterly operating income of $155 million (up 31% YoY) with SAO margins at 33.1% and a SAO operating income record of $174.6 million, and it raised full‑year fiscal 2026 operating income guidance to $680 million to $700 million.
• Management cited strengthening aerospace and defense demand—bookings up 8% sequentially and commercial aerospace bookings up 23%—plus constrained nickel‑based superalloy supply; the company completed three long‑term contracts with material price increases and expects pricing to remain a tailwind despite a planned brownfield expansion adding 9,000 tons (~7%).
• Carpenter generated strong cash flow—$132.2 million from operations and $85.9 million adjusted free cash flow for the quarter—repurchased $32.1 million of stock (total $183.1 million under a $400 million program), boosted liquidity to $730.8 million, expanded its revolver to $500 million, extended maturities to 2034, and expects at least $280 million of adjusted free cash flow for fiscal 2026.

Carpenter Technology NYSE: CRS reported record profitability for its fiscal 2026 second quarter ended December 31, 2025, as management pointed to continued pricing momentum, expanding margins in its core segment, and strengthening demand signals—particularly in aerospace and defense.

Record quarterly operating income and margin expansion

Chairman and CEO Tony Thene said the company generated $155 million in operating income in the quarter, surpassing the prior quarter’s record and representing a 31% increase versus the second quarter of fiscal 2025. He highlighted four key themes: record earnings, expanding operating margins, strengthening market demand (especially in aerospace and defense), and pricing tailwinds supported by new long-term agreements.

Thene said the company’s Specialty Alloys and Operations (SAO) segment delivered an adjusted operating margin of 33.1%, up from 28.3% a year earlier and 32% in the prior quarter. While he noted quarterly margins can fluctuate with product mix, he said the company’s outlook calls for increasing SAO margins over the next two quarters of fiscal 2026, driven by productivity gains, mix optimization, and pricing actions.

Sales trends and end-market demand signals

Total company sales excluding raw material surcharge were up 8% year-over-year and down 2% sequentially. Thene attributed the sequential decline largely to typical year-end factors such as fewer operating days and customer holiday closures, adding that those factors are not expected to impact the third quarter and that the company expects a sequential increase in net sales.

By end market, management discussed several notable trends:

• Aerospace and defense: Sales were down 1% sequentially and up 15% year-over-year, representing the company’s second-best quarter on record for the end market. Aerospace and defense bookings increased 8% sequentially, with commercial aerospace bookings up 23% sequentially. Thene said defense orders were “down materially” in the quarter due to the government shutdown and defense budget uncertainty.
• Medical: Sales declined 7% sequentially and 22% year-over-year, driven by reduced demand for certain titanium products sold to specific medical distribution customers within the Performance Engineered Products (PEP) segment. Thene emphasized the issue was isolated and not material to the company’s overall results or earnings outlook. He added that orthopedic and dental sales remained strong, near all-time records.
• Energy: Sales were down 10% sequentially and up 19% year-over-year. Thene said power generation demand is accelerating, driven primarily by data center energy needs, and noted that quarterly power generation sales can fluctuate due to order timing and production scheduling.

Financial details, segment performance, and third-quarter outlook

Senior Vice President and CFO Tim Lain said sales excluding surcharge rose 8% year-over-year on 5% higher volume. Sequentially, sales fell 2% despite a 4% volume increase, which he attributed to improving productivity, product mix, and pricing effects that were visible in gross profit. Gross profit increased to $218.3 million, up 23% year-over-year.

SG&A expense was $63.1 million, flat sequentially and higher year-over-year, including corporate costs of $26.2 million. Lain said corporate costs are expected to be about $25 million in the third quarter.

The effective tax rate was 19%, lower than anticipated due to discrete tax benefits tied to certain equity award exercises. For the balance of fiscal 2026, Lain said the company expects an effective tax rate of 22% to 23%, and for the full year, the rate is expected to be on the low end of the previously provided 21% to 23% range.

Adjusted earnings per diluted share were $2.33, excluding the impact of a debt refinancing completed during the quarter.

In SAO, net sales excluding surcharge were $527.3 million, up 10% year-over-year and down 1% sequentially. Lain cautioned that sales per pound can swing with mix and noted mix was affected by planned maintenance and holidays, but emphasized that SAO’s margin expansion continued, marking the 16th consecutive quarter of adjusted operating margin improvement. SAO operating income was $174.6 million, a segment record.

For the third quarter of fiscal 2026, the company expects:

• SAO operating income: $195 million to $200 million
• PEP operating income: roughly $7 million, in line with the second quarter
• Total operating income: $177 million to $182 million, inclusive of about $25 million of corporate costs

In PEP, net sales excluding surcharge were $77.2 million, down 11% sequentially and down 10% year-over-year. Operating income was $6.9 million. Lain said the year-over-year operating margin improvement reflected growth in the additive business and benefits from structural cost actions taken last year.

Cash flow, capital allocation, and balance sheet actions

The company generated $132.2 million of cash from operating activities and spent $46.3 million on capital expenditures, resulting in $85.9 million of adjusted free cash flow for the quarter. Lain reiterated the expectation that capital spending will accelerate in the second half of fiscal 2026 as construction and equipment installation progress on the company’s brownfield capacity expansion project. The company expects at least $280 million of adjusted free cash flow in fiscal 2026.

During the quarter, Carpenter repurchased $32.1 million of shares, bringing total repurchases to $183.1 million under the company’s $400 million authorization announced in July 2024. Management also noted the company continues to pay a quarterly dividend.

Lain also detailed actions taken to strengthen liquidity and extend maturities, including refinancing long-term debt to extend note maturities to 2034 while reducing the interest rate, and amending and restating its revolving credit facility to increase capacity from $350 million to $500 million and extend the term to 2030. Total liquidity at quarter-end was $730.8 million, including $231.9 million of cash and $498.9 million of available revolver borrowings. He said net debt-to-EBITDA remained well below one times.

Aerospace build-rate commentary, superalloy supply, and guidance raise

Thene spent a significant portion of the call addressing aerospace demand and nickel-based superalloy dynamics. He cited Boeing’s milestone of building 42 737 aircraft in December and said Boeing reaffirmed on its own earnings call an intention to increase build rates in calendar 2026, with builds expected to rise faster than deliveries as inventory has been depleted. Thene said this has contributed to increasing demand throughout the supply chain.

He also described nickel-based superalloy supply as constrained, noting no “meaningful increases” in overall qualified supply since 2019 beyond productivity improvements, and said Carpenter is the only company he is aware of to have formally announced capacity expansion in this area. He reiterated details of the company’s brownfield expansion, including investment in a new vacuum induction melting furnace and a plan to add 9,000 additional tons, roughly a 7% increase versus 2019 shipments. Thene argued that even with that addition, industry supply is unlikely to close the projected demand gap given growth across aerospace OEM builds, MRO, defense, space, and power generation.

On pricing, Thene said the company completed three additional long-term agreements with aerospace customers during the quarter “with significant price increases,” and reiterated that management expects pricing actions to remain a tailwind due to the supply-demand imbalance.

Finally, Carpenter raised its full-year fiscal 2026 operating income outlook to $680 million to $700 million from $660 million to $700 million, with Thene describing the range as representing a 30% to 33% increase over fiscal 2025. He also referenced the company’s previously established fiscal 2027 operating income guidance of $765 million to $800 million, stating the company’s focus is on exceeding that target and that management expects to update fiscal 2027 guidance and add longer-term annual guidance in coming quarters.

About Carpenter Technology NYSE: CRS

Carpenter Technology Corporation engages in the manufacture, fabrication, and distribution of specialty metals in the United States, Europe, the Asia Pacific, Mexico, Canada, and internationally. It operates in two segments, Specialty Alloys Operations and Performance Engineered Products. The company offers specialty alloys, including titanium alloys, powder metals, stainless steels, alloy steels, and tool steels, as well as additives, and metal powders and parts. It serves to aerospace, defense, medical, transportation, energy, industrial, and consumer markets.

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