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CARPENTER TECHNOLOGY CORP (CRS)·Q2 2025 Earnings Summary

Executive Summary

  • Record second quarter operating income of $118.9M and diluted EPS of $1.66; SAO segment achieved an all‑time high adjusted operating margin of 28.3% on $135.6M operating income .
  • FY25 operating income guidance raised to $500–$520M (from the high end of $460–$500M), with Q3 total operating income guided to $126–$134M; SAO Q3 guided to $140–$145M, PEP to $10–$12M .
  • Positive cash generation: $67.9M cash from operations and $38.6M adjusted free cash flow; continued shareholder returns with $8.2M repurchases and $0.20 dividend declared .
  • Near‑term aerospace supply chain noise (Boeing re‑ramp) managed through mix optimization, productivity gains, and backlog pull‑ins; management expects sequential net sales to increase in Q3 on higher operating days and continued execution .

What Went Well and What Went Wrong

What Went Well

  • SAO delivered record Q2 operating income of $135.6M and 28.3% adjusted operating margin, reflecting improved productivity, mix optimization, and pricing actions . “We increased adjusted operating margins in our SAO segment again, reaching 28.3%, a new all‑time high.” — Tony Thene .
  • Raised FY25 operating income outlook to $500–$520M and guided Q3 total operating income to $126–$134M, signaling confidence in continued earnings growth .
  • Cash generation strengthened: $67.9M CFO and $38.6M adjusted FCF; liquidity at $511.0M (cash $162.1M + revolver $348.9M) .

What Went Wrong

  • Sequential sales and volumes declined (Net Sales ex surcharge down to $548.0M from $577.4M; pounds sold fell to 46,170 from 51,568) due to fewer operating days and customer year‑end shutdowns; management held certain shipments and paused operations on holidays .
  • PEP segment impacted by additive order deferrals over the last two quarters, limiting segment operating income to $7.0M; visibility is improving but still a headwind .
  • Energy end‑use sales down sequentially (–18% ex surcharge) driven by timing of shipments to power generation customers; management emphasized the small revenue share (2–3%) despite attractive margins .

Financial Results

MetricQ4 FY2024Q1 FY2025Q2 FY2025
Net Sales ($MM)$798.7 $717.6 $676.9
Net Sales ex. Surcharge ($MM)$635.8 $577.4 $548.0
Operating Income ($MM)$108.3 $113.6 $118.9
Adjusted Operating Income ($MM)$125.2 $117.2 $118.9
Diluted EPS$1.85 $1.67 $1.66
Adjusted Diluted EPS$1.82 $1.73 $1.66
Operating Margin (%)13.6% 15.8% 17.6%
Adj. Op Margin (ex surcharge, special items) (%)19.7% 20.3% 21.7%
Pounds Sold (000s)56,782 51,568 46,170

Segment performance

Segment MetricQ4 FY2024Q1 FY2025Q2 FY2025
SAO Net Sales ($MM)$715.8 $645.1 $601.5
SAO Net Sales ex. Surcharge ($MM)$559.5 $510.9 $479.6
SAO Operating Income ($MM)$140.9 $134.5 $135.6
SAO Adj. Op Margin (ex surcharge) (%)25.2% 26.3% 28.3%
PEP Net Sales ($MM)$111.2 $100.8 $95.0
PEP Net Sales ex. Surcharge ($MM)$102.3 $92.4 $86.2
PEP Operating Income ($MM)$10.6 $7.3 $7.0
PEP Adj. Op Margin (ex surcharge) (%)10.4% 7.9% 8.1%

End‑use market net sales (ex surcharge)

End‑UseQ4 FY2024 ($MM)Q1 FY2025 ($MM)Q2 FY2025 ($MM)
Aerospace & Defense$376.3 $349.9 $333.8
Medical$91.7 $73.4 $73.4
Energy$36.5 $39.4 $32.2
Transportation$26.6 $21.1 $21.4
Industrial & Consumer$82.8 $72.4 $67.4
Distribution$21.9 $21.2 $19.8
Total ex. surcharge$635.8 $577.4 $548.0

KPIs and cash metrics

KPIQ4 FY2024Q1 FY2025Q2 FY2025
Cash from Operations ($MM)$169.5 $40.2 $67.9
Adjusted Free Cash Flow ($MM)$142.4 $13.3 $38.6
Capital Expenditure ($MM)$27.7 $26.9 $29.3
Total Liquidity ($MM)$547.9 $499.1 $511.0
Cash ($MM)$199.1 $150.2 $162.1
Available Revolver ($MM)$348.8 $348.9 $348.9
Share Repurchases ($MM)—$32.1 $8.2

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Operating Income ($MM)FY2025High end of $460–$500 $500–$520 Raised
Operating Income ($MM)Q3 FY2025 (Total Co.)—$126–$134 New
SAO Operating Income ($MM)Q3 FY2025—$140–$145 New
PEP Operating Income ($MM)Q3 FY2025—$10–$12 New
Adjusted Free Cash Flow ($MM)FY2025$250–$300 $250–$300 Maintained
Effective Tax Rate (%)FY2025 (remaining quarters)21–23% ~23% per quarter (no further discrete benefits) Maintained
Corporate Costs ($MM/qtr)FY2025~$23–$24 ~$23–$24 Maintained
Dividend per ShareQ2 FY2025$0.20 (run‑rate)$0.20 declared, payable Mar 6, 2025 Maintained

Earnings Call Themes & Trends

TopicQ4 FY2024 (Q‑2)Q1 FY2025 (Q‑1)Q2 FY2025 (Current)Trend
Aerospace supply chain & BoeingStrong demand; can navigate near‑term build‑rate noise via backlog and mix Destocking/wait‑and‑see for Boeing‑tied customers; backlog >3x pre‑COVID; lead times ~65+ weeks Boeing strike impact created pauses; lead times pulled in slightly for engine materials; expect sequential net sales increase in Q3 Improving visibility; near‑term caution; sequential sales set to rise
Pricing & mix optimizationSAO margins 25.2%; pricing power evident Higher realized prices and improving mix drove margins Price per pound up; focus on maximizing profit vs tons Continued expansion
Defense demandElevated urgent orders; prioritized Robust demand Urgent requests; sustained strength Sustained strong
Medical demandRecord quarter; strong procedure backlogs Sequential dip (fewer operating days, hurricane); outlook positive Stable YoY; destocking persists but customers seeking long‑term agreements and new products Stable to positive
Energy/Power generation+31% sequential; AI data centers boost demand +35% YoY; urgent demand; aerospace‑like margins Sequential down on timing; small share but attractive margins; AI supports growth Volatile sequential, structurally positive
Tariffs/macro——Minimal expected impact; cost pass‑through if needed Monitoring; low risk
Lead times~65+ weeks extended Extended; backlog support Pulled in by a few weeks on engines; low 60s cited Slight improvement
Capacity/productivityPrimary melting productivity unlocks profitability Focus on reducing rework; throughput improvements Continued gains driving margin expansion and lead‑time improvement Improving
BacklogRecord; strong order intake >$2B; majority wanted earlier ~$1.9B; ~2.5x pre‑COVID; majority wanted earlier Still elevated

Management Commentary

  • Strategic positioning: “We are delivering record profits while projecting a future of even higher earnings growth potential.” — Tony Thene .
  • SAO margin expansion: “We increased adjusted operating margins in our SAO segment again, reaching 28.3%, a new all‑time high.” — Tony Thene .
  • Guidance confidence: “We are raising our guidance for the full fiscal year 2025 again to the range of $500 million to $520 million.” — Tony Thene .
  • Demand/lead times: “We’ve actually been able to pull in our lead times slightly… by a couple of weeks… due to… productivity improvements.” — Tony Thene .
  • Defense urgency: “Our conversations… I would use the word urgent.” — Tony Thene .
  • Pricing vs mix: “We are not a commodity supplier. I’m trying to maximize profit… actively manage that mix optimization.” — Tony Thene .
  • Tax guidance: “For the upcoming quarters… we expect the effective tax rate to be more in line with our normalized rate of 23% each quarter.” — Tim Lain .

Q&A Highlights

  • Boeing channel impact: Customers closely tied to Boeing paused orders; CRS limited intake and leveraged backlog optionality to backfill .
  • Pricing environment: Spot discounts may exist where capacity is available, but long‑term pricing supported by supply/demand tightness; customers focus on surety of supply .
  • Lead times: Slight pull‑in for engine materials (from 65+ weeks to low‑60s), supported by primary melt productivity improvements .
  • Segment mix: Engines down sequentially in Q2 but expected to see “meaningful increase” in Q3; fasteners up sequentially ~2.5% .
  • Tariffs: Any input cost pressure expected to be passed through; minimal impact historically .

Estimates Context

  • Wall Street consensus (S&P Global) for Q2 FY2025 EPS and revenue was unavailable at time of analysis due to SPGI request limits, so we cannot benchmark reported results versus estimates in this recap. The company increased FY25 operating income guidance, which typically drives upward revisions to models for margins and profitability .

Key Takeaways for Investors

  • Mix/pricing/productivity are the core drivers: SAO’s sustained margin expansion to 28.3% shows structural earnings power independent of near‑term aerospace noise .
  • Guidance upgraded: FY25 operating income raised to $500–$520M with Q3 OI $126–$134M; segment guidance (SAO $140–$145M, PEP $10–$12M) provides near‑term visibility .
  • Cash generation supports capital allocation: $38.6M adjusted FCF and $511.0M liquidity underpin buybacks and dividend; FCF guidance $250–$300M maintained .
  • Backlog optionality mitigates OEM perturbations: ~$1.9B backlog, majority wanted earlier, allows pull‑ins; management expects sequential net sales increase in Q3 on more operating days .
  • Power generation/AI as incremental demand lever: While small revenue share, margins are attractive and provide optional fill for capacity during aerospace pauses .
  • Additive remains a drag in PEP near‑term but visibility improving; watch Q3 PEP delivery vs $10–$12M OI guidance for confirmation .
  • Tax and corporate cost cadence: Expect ~23% quarterly tax rate, corporate costs ~$23–$24M; reinforces predictability of below‑the‑line items .