Carpenter Technology Q1 Earnings Call Highlights

Key Points

• Record profitability: Carpenter Technology reported fiscal Q1 2027 operating income of $196.4 million, up 28% year over year, while sales excluding surcharges rose 5% to $656.5 million despite planned maintenance outages.
• Aerospace demand strengthened: Aerospace bookings increased sharply, with distribution and structural bookings up 49% year over year and engine bookings up 22%. Management expressed greater confidence in demand and pricing, although defense orders remained constrained by funding delays.
• Strong outlook and shareholder returns: Carpenter projected Q2 operating income of $192 million to $197 million, maintained its fiscal 2027 free-cash-flow target of $400 million to $430 million, and launched a new $1 billion share-repurchase authorization after completing its prior program.

Carpenter Technology NYSE: CRS reported record first-quarter operating income for fiscal 2027 as productivity improvements, product mix management and pricing actions offset lower production time from planned maintenance outages.

Operating income totaled $196.4 million for the quarter ended Sept. 30, up 28% from a year earlier and down 5% sequentially. Diluted earnings per share were $3.25. Sales excluding raw-material surcharges increased 5% year over year to $656.5 million, though they declined 7% from the prior quarter as maintenance activity reduced available operating time.

Chief Executive Officer Tony Thene said the company viewed the quarter as a solid start to the fiscal year, citing continued booking growth in commercial aerospace, rising prices for nickel superalloys and opportunities for further margin expansion.

Aerospace bookings rise despite maintenance-related sales decline

Aerospace and defense sales declined 5% sequentially but rose 10% year over year. Thene said the quarterly decline was expected because of planned facility outages, while commercial aerospace sales still reached their second-highest quarterly level on record.

The company reported that bookings from aerospace distribution and structural customers increased 23% sequentially and 49% from a year earlier. Aerospace engine bookings rose 10% sequentially and 22% year over year. Thene said distribution customers have reported expanding backlogs and declining inventories, while engine customers’ outlooks for 2027 and 2028 have strengthened as original equipment manufacturers increase ordering activity.

“My outlook on demand is stronger than it was a quarter ago,” Thene said during the question-and-answer session. “My outlook on pricing is stronger than it was a quarter ago, and my confidence in 2027, 2029 is stronger than it was a quarter ago.”

Thene said aerospace fastener bookings declined sequentially, which he described as normal variability for that market. Customers in that segment, he said, continue to indicate that their activity has not fully caught up with current aircraft production rates.

Defense bookings were down both sequentially and year over year. Management attributed the weakness to funding challenges that have limited its direct customers’ ability to place orders. Thene said Carpenter has seen increased engagement from the Department of Defense and original equipment manufacturers regarding future needs, including work on the supply chain for Boeing’s F/A-XX fighter program.

The company expects defense demand to improve when budget clarity permits funding to flow through the supply chain. Thene said the company anticipates “a rush for material” once those constraints are resolved.

SAO margin holds at record level

Carpenter’s Specialty Alloys Operations, or SAO, segment generated $573.5 million in sales excluding surcharge, up 7% from a year earlier and down 6% sequentially. The segment’s adjusted operating margin held at 37.7%, matching the prior quarter’s record despite fewer operating days and greater preventive maintenance activity.

SAO operating income was $216.3 million. For the fiscal second quarter, Carpenter forecast SAO operating income of $214 million to $218 million, reflecting reduced production time during the holiday period. Management said gains from productivity and mix optimization are expected to partly offset the lower operating time.

Thene said the company is pursuing productivity improvements across multiple areas of its operations rather than relying on one bottleneck removal or project. He said higher utilization, pricing and productivity remain the principal factors that could support further SAO margin expansion, although quarterly margins can vary depending on the shipment mix.

Performance Engineered Products, or PEP, posted sales excluding surcharge of $83 million, down 5% year over year and 15% sequentially. Operating income was $7.3 million, slightly above the company’s guidance. The year-over-year decline reflected lower titanium sales to the medical market, partly offset by additive-business strength. Carpenter expects PEP operating income of about $7 million in the second quarter.

Second-quarter outlook and cash deployment

For the fiscal second quarter, Carpenter projected total operating income of $192 million to $197 million, broadly consistent with first-quarter results and representing expected growth of 24% to 27% from the prior-year second quarter. The outlook includes approximately $28 million to $29 million of corporate costs.

Chief Financial Officer Tim Lain said the company expects its fiscal 2027 effective tax rate to be near the low end of its previously stated 20% to 22% range, following a first-quarter rate of 15.5% that benefited from the vesting of certain equity awards.

First-quarter cash from operations totaled $52.8 million, while capital expenditures were $77.7 million, producing negative free cash flow of $24.8 million. Lain said the company built inventory during the quarter and expects to reduce it as production days increase later in the fiscal year. Carpenter maintained its forecast for fiscal 2027 free cash flow of $400 million to $430 million.

The company spent $133.9 million on share repurchases during the quarter, completing its prior $400 million authorization and beginning purchases under a newly authorized $1 billion program. It also continued to pay its quarterly dividend.

At quarter-end, Carpenter had $658.6 million of liquidity, including $159.5 million in cash and $499.1 million in available credit-facility borrowings. Net debt to EBITDA was 0.6 times, and the company said it has no debt maturities until 2034.

Capacity expansion remains on schedule

Carpenter said its brownfield capacity expansion project remains on budget and on track for completion by the start of fiscal 2028. Major equipment installation is underway. Thene said the added capacity is expected to be absorbed by demand from existing long-term aerospace agreements as it comes online.

Management reiterated its expectation that operating income could reach approximately $1.2 billion to $1.3 billion by fiscal 2029. Thene said the company sees potential to exceed its fiscal 2027 and 2029 targets through higher volume, continued pricing gains and productivity initiatives, including the use of artificial intelligence in operations.

About Carpenter Technology (NYSE:CRS)

Carpenter Technology Corporation is a manufacturer of premium specialty metals and engineered materials for demanding applications. The company produces stainless steels, nickel- and cobalt-based alloys, titanium, powder metals, and other high-performance materials designed to withstand extreme temperatures, corrosion, stress, and wear.

Its products are used in aerospace and defense, medical devices, energy, transportation, industrial equipment, and other specialized markets. Carpenter Technology supplies materials in forms such as bar, wire, strip, sheet, and powder, and also provides processing and engineered component solutions through its performance-engineered products operations.

Founded in 1889 as Carpenter Steel Company, the company has developed a global customer base supported by manufacturing, research, and service operations in the United States and international markets.

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