Direct answer
FY2026 (ended June 30, 2026) was the most profitable year in Carpenter Technology's history: operating income of $702 million (up approximately 34%), diluted EPS of $10.52, and adjusted free cash flow of $362 million. The Q4 FY2026 SAO adjusted OI margin ex-surcharge reached a record 37.8%, up from 30.5% a year earlier. Management guided FY2027 operating income of $850 to $880 million and a FY2029 target of $1.2 to $1.3 billion.
FY2026 annual financial summary
| Metric | FY2026 (ended June 30, 2026) | Notes |
|---|---|---|
| Net sales | $3.124 billion | Headline; includes raw material surcharges |
| Net sales ex-surcharge | $2.528 billion | Economic revenue; use for trend comparison |
| Operating income | $702 million | Up approximately 34% from FY2025 adjusted OI; record |
| Net income | $530 million | Record annual net income |
| Diluted EPS | $10.52 | Record diluted earnings per share |
| Operating cash flow | $605 million | Strong conversion from record earnings |
| Capital expenditures | ~$243 million | Includes brownfield capacity expansion spending |
| Adjusted free cash flow | $362 million | Operating cash flow minus capex, adjusted per management definition |
| Share repurchases | ~$179 million | Under $400 million board authorization |
| A&D net sales ex-surcharge growth | +15% year over year | Aerospace and defense; primary demand driver |
Source: Carpenter Technology Q4 and FY2026 earnings press release
Q4 FY2026 highlights
| Metric | Q4 FY2026 | Q4 FY2025 | Change |
|---|---|---|---|
| SAO adjusted OI margin ex-surcharge | 37.8% | 30.5% | +730 basis points |
| Operating income | $206.9 million | Not stated | Record quarterly |
| Diluted EPS | $3.23 | Not stated | Record quarterly |
| Adjusted FCF | $155 million | Not stated | Strong quarterly conversion |
Q4 FY2026 demonstrated that the full-year earnings improvement was concentrated in the SAO segment's margin expansion. The 37.8% adjusted OI margin ex-surcharge in Q4 was the highest in company history for any individual quarter, providing the basis for management's bullish FY2027 and FY2029 guidance.
SAO segment margin context
The SAO (Specialty Alloys Operations) segment adjusted operating income margin excluding raw material surcharges is the most important financial metric for Carpenter Technology. It measures the real economic return the company earns on its processing expertise, stripped of the raw material pass-through noise that distorts headline margins.
| Period | SAO adjusted OI margin ex-surcharge | Context |
|---|---|---|
| Q4 FY2025 | 30.5% | Strong but not record; pre-expansion capacity |
| Q4 FY2026 | 37.8% | Record; favorable A&D mix plus pricing plus volume |
| Year-over-year change | +730 basis points | Largest four-quarter improvement in recent history |
The 730-basis-point improvement over one year is historically large for a specialty industrial company. Investors should form a view on whether this level of margin is: (a) a permanent structural improvement from repositioning into higher-value aerospace and defense work, (b) the upper bound of a favorable cycle peak that will normalize as conditions change, or (c) something in between. That judgment determines intrinsic value more than any other single factor.
Historical mid-cycle SAO margins (before the most recent aerospace upcycle) were in the mid-to-high 20% range. The movement to 37.8% therefore represents either a durable structural improvement of roughly 10 percentage points or a cyclical expansion of similar magnitude. Bull and bear cases diverge sharply on this question.
Aerospace and defense revenue growth
Aerospace and defense is Carpenter Technology's largest and most profitable end market. A&D net sales excluding surcharge grew approximately 15% in FY2026 year over year, well above the company's other end markets. This growth reflects:
- Continued strength in commercial aircraft production programs driving demand for engine disk alloys and structural materials
- Sustained defense spending on aircraft and missile programs requiring specification-qualified domestic alloy supply
- Aftermarket demand from aging commercial fleets requiring engine overhaul and component replacement
- Customer willingness to contract at favorable pricing in a capacity-constrained market
The 15% growth rate also reflects the upstream supply chain position. Carpenter's customers (forge shops and tier-1 aerospace suppliers) were building inventory and securing supply commitments during a period when specialty alloy capacity was perceived as scarce relative to projected demand. Some portion of the 15% growth may reflect inventory build at customers rather than direct end-user consumption, a distinction that would matter if aerospace production rates were to plateau.
Capital allocation in FY2026
| Capital allocation item | FY2026 amount | Strategic purpose |
|---|---|---|
| Operating cash flow generated | $605 million | Cash available for allocation |
| Capital expenditures (total) | ~$243 million | Brownfield expansion plus maintenance |
| Adjusted free cash flow (after capex) | $362 million | Available for shareholder returns and debt service |
| Share repurchases | ~$179 million | Under $400 million board authorization; reduces share count |
| Remaining buyback authorization | ~$221 million | As of end of FY2026 (approximate) |
The capital allocation framework for FY2026 prioritized capacity expansion (which uses a significant share of capex) and shareholder returns through buybacks. Dividends are also part of the capital return program but were not the primary buyback-equivalent in FY2026. The brownfield capex level of approximately $243 million is elevated relative to normalized maintenance capex, which means adjusted FCF will improve as expansion projects complete and capex returns to maintenance levels.
Management's FY2027 adjusted FCF guidance of $400 to $430 million (compared to $362 million in FY2026) suggests expected capex reduction or operating income improvement more than offsetting any remaining expansion spending in the near term.
Forward financial targets
| Period | Operating income target | Adjusted FCF target | Implied growth vs. FY2026 |
|---|---|---|---|
| FY2026 (actual) | $702 million | $362 million | Baseline |
| FY2027 | $850 to $880 million | $400 to $430 million | OI +21% to +25% |
| FY2029 | $1.2 to $1.3 billion | Not yet disclosed | OI +71% to +85% |
Achieving FY2027 targets requires continued A&D demand strength, brownfield capacity contributing incremental volume, and SAO margins remaining near record levels. Achieving FY2029 targets requires all of the above plus further margin expansion as brownfield capacity reaches design output with favorable mix.
These targets are disclosed by management and represent informed internal projections, but they are not guarantees. Investors should assess whether the assumptions embedded in these targets are consistent with their own view of aerospace demand, competitive dynamics and macroeconomic conditions.
Why ex-surcharge metrics are essential
Carpenter Technology sells specialty alloys whose production requires significant quantities of nickel, cobalt and titanium as raw material inputs. The prices of these metals fluctuate with global commodity markets. Carpenter passes the cost changes through to customers via a surcharge mechanism so that raw material inflation or deflation does not erode or inflate the company's processing margin.
The practical effect for investors is that headline net sales move with nickel and cobalt prices rather than purely with business volume and pricing. Consider a simplified example:
- Year 1: Carpenter ships 1,000 tons of nickel alloy. Nickel costs $10 per pound. Headline sales include a $50 million surcharge component plus $120 million of value-add revenue.
- Year 2: Carpenter ships the same 1,000 tons. Nickel costs $15 per pound. Headline sales include a $75 million surcharge component plus $125 million of value-add revenue.
- Headline revenue grew significantly year over year. Ex-surcharge revenue grew by only 4%.
The ex-surcharge view correctly shows modest growth. The headline view incorrectly implies strong growth that actually just reflects commodity price inflation. For margin analysis, the same principle applies: operating income as a percentage of headline sales will compress when nickel prices rise even if the company's value-add pricing is unchanged. Ex-surcharge margin eliminates this distortion.
Key metrics dashboard
| Metric | FY2026 value | Why investors track it |
|---|---|---|
| Net sales ex-surcharge | $2.528 billion | Real business volume and pricing; comparable across periods |
| SAO adj. OI margin ex-surcharge (Q4) | 37.8% | Primary test of business economics; debate center for bull/bear |
| A&D net sales growth ex-surcharge | +15% YoY | Primary demand driver health |
| Diluted EPS | $10.52 | Per-share profitability; denominator for P/E valuation |
| Adjusted free cash flow | $362 million | Cash generation after investment; denominator for P/FCF valuation |
| Capex as % of operating cash flow | ~40% | Reinvestment intensity; elevated during expansion phase |
| Shares repurchased | ~$179 million | Capital return and share count reduction |
Frequently asked questions
What were Carpenter Technology's FY2026 revenue and earnings?
Carpenter Technology reported FY2026 (fiscal year ended June 30, 2026) net sales of $3.124 billion, or $2.528 billion excluding raw material surcharges. Operating income was $702 million, up approximately 34% from adjusted operating income in FY2025. Net income was $530 million and diluted EPS was $10.52. These were the best results in company history across all key profit metrics.
What is Carpenter Technology's adjusted free cash flow and how is it calculated?
Adjusted free cash flow is operating cash flow minus capital expenditures, with adjustments that management discloses for expansion capex that is discretionary rather than maintenance. In FY2026, operating cash flow was $605 million and capital expenditures were approximately $243 million, producing adjusted free cash flow of $362 million. Management guided FY2027 adjusted FCF of $400 to $430 million, implying expansion as capex is partially completed.
Why did SAO margins improve so significantly in FY2026?
The SAO adjusted OI margin ex-surcharge expanded from approximately 30.5% in Q4 FY2025 to 37.8% in Q4 FY2026. The improvement reflected a combination of favorable aerospace and defense product mix, operating leverage on higher volumes, pricing strength in a supply-constrained market, and efficiency gains. The key investor question is how much of this improvement is structural versus cyclically favorable.
What are Carpenter Technology's FY2027 and FY2029 financial targets?
Management has guided FY2027 operating income of $850 to $880 million and adjusted free cash flow of $400 to $430 million. The longer-range FY2029 target is operating income of $1.2 to $1.3 billion. These targets assume continued aerospace and defense demand growth, successful brownfield capacity expansion, and sustained favorable product mix. They are management aspirations that require continued favorable conditions to achieve.