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Carpenter Technology Reports Q2 Fiscal 2009 Results

Carpenter Technology Corporation (Carpenter Technology) has reported net sales of $361.8 million for the second quarter of fiscal year 2009, compared with the net sales of $442.8 million in the year-ago quarter. It reported a net income of $29.8 million, or $0.68 per diluted share, for the second quarter of fiscal year 2009, compared with the net income of $56.1 million, or $1.14 per diluted share, in the year-ago quarter.

“Our second quarter results reinforce the strength of our company despite the broad decline in economic activity,” said Anne Stevens, chairman, president and chief executive officer. “Although economic conditions in most of our markets are difficult, Carpenter is in a solid position to operate profitably through this downturn.”

“While we do not expect to see a recovery in the near term,” said Stevens, “the long term prospects in our key markets of aerospace, energy and medical remain strong and we are well positioned. Through the current downturn, our management is aggressively cutting costs and conserving cash. We are closely focused on improving our operations to respond to the lower demand expected during the next few quarters.”

Pounds sold in the second quarter were 10% lower than the second quarter a year ago. Volumes shipped by the Premium Alloys Operations segment decreased 8%, due to lower demand, particularly in the oil and gas market. Pounds sold by the Advanced Metals Operations segment decreased 14% due to lower automotive, industrial and consumer demand.

Gross profit in the second quarter declined to $75.9 million from $116.1 million a year earlier. Gross margin was 21.0% in the second quarter, compared to 26.2% in the second quarter of 2008. Excluding surcharge revenue, gross margin for this quarter was 27.8%, down from 36.9% last year.

Operating income for the second quarter was $39.7 million, down 50% compared with $79.5 million a year earlier. The operating margin for the second quarter was 11.0% compared to 18.0% in the prior year. Excluding surcharge revenue, operating margin for this quarter was 14.5%, down from 25.3% last year. The lower operating profit was primarily due to lower shipment volumes along with higher manufacturing costs, pricing pressures, timing impacts from raw material hedges and other negatives from the low price of nickel.

Selling, general and administrative expenses were $36.2 million, down 1% from last year. Excluding the impact of changes in net pension expense, SG&A decreased by 5%.

Other Income was $6.5 million for the second quarter compared to $12.1 million last year. This includes receipt of $6.0 million from the “Continued Dumping and Subsidy Offset Act of 2000” (the “CDSOA”), compared to receipt of $8.2 million from the CDSOA last year. Other Income also reflects lower interest income on invested cash, partially offset by foreign exchange gains.

The income tax provision for continuing operations in the second quarter was $12.6 million or 29.7% of pre-tax income, compared with an income tax provision of $29.2 million or 33.8% a year ago. This quarter included a $1.4 million favorable impact from the retroactive extension of the research and development credit that was included in the Emergency Economic Stabilization Act, enacted during the quarter. The company expects its full-year effective tax rate to be approximately 33%.

Income from continuing operations for the quarter was $29.8 million or $0.68 per diluted share, compared with income from continuing operations of $57.1 million or $1.16 per diluted share for the second quarter of fiscal 2008.

Free cash flow, defined as cash from operations less capital expenditures and dividends, was negative by $84.8 million in the second quarter. The cash flow results reflected higher inventory levels and lower accounts payable.

Outlook:

“The recession is impacting demand globally,” said Stevens. “Even as most of our markets weaken, we are successfully growing our position with several important customers and implementing new product initiatives with others. Our strong competitive position and focus on niche, high value products allow us to operate profitably with less exposure to the pressures faced by more commodity-oriented businesses.

“We continue to cut costs and manage cash flow while still moving forward with initiatives that are important to our long term success. Processing costs are being re-aligned to meet the lower demand expected through the rest of this fiscal year. We intend to reduce our inventory levels and lower capital spending.

“Despite these efforts,” said Stevens, “we expect the economic downturn will affect the second half of our fiscal year. Based on our current view of the markets, we project our revenues and volume during the second half of our year may be 20-25% lower than the same period last year.”