10-QPeriod: Q2 FY2009

CARPENTER TECHNOLOGY CORP Quarterly Report for Q2 Ended Dec 31, 2008

Filed February 6, 2009For Securities:CRS

Summary

Carpenter Technology Corporation (CRS) reported a significant decline in financial performance for the six months ended December 31, 2008, compared to the prior year, largely driven by weakening global economic conditions. Net sales decreased by 13% to $775.4 million, and income from continuing operations fell by approximately 50% to $55.6 million. This downturn is reflected across key end-use markets such as automotive, industrial, and energy, with sales volumes also experiencing a decline. The company is actively managing costs and conserving cash in response to the challenging economic environment. While the company's core markets like aerospace and medical show relative strength, the overall decrease in demand impacts profitability. Despite the headwinds, Carpenter Technology maintains a solid financial position and believes its focus on niche, high-value products will allow it to navigate the downturn and maintain profitability.

Key Highlights

  • 1Net sales for the six months ended December 31, 2008, decreased by 13% to $775.4 million, compared to $890.9 million in the prior year.
  • 2Income from continuing operations for the six months ended December 31, 2008, significantly decreased to $55.6 million, down from $112.5 million in the same period last year.
  • 3Earnings per diluted share for continuing operations for the six months ended December 31, 2008, were $1.26, compared to $2.25 in the prior year.
  • 4The company experienced a substantial decline in net sales across most end-use markets, with notable decreases in automotive (41%), industrial (11%), and energy (7%).
  • 5Despite the overall decline, the aerospace market showed resilience with only a 6% decrease in net sales.
  • 6Cash used for operating activities was negative $2.1 million for the six months ended December 31, 2008, a sharp contrast to the $80.5 million generated in the prior year.
  • 7The company is actively implementing cost-reduction measures and managing working capital, including efforts to reduce inventory levels and capital spending.

Frequently Asked Questions

The primary reason for the decline in revenue and profit is the weakening global economic conditions that began to significantly impact demand across various end-use markets starting in the latter half of calendar year 2008. This led to lower sales volumes and pricing pressures.

Carpenter Technology is responding by aggressively cutting costs, conserving cash, and managing working capital. This includes restructuring management layers, reducing anticipated demand, deferring discretionary capital projects, and aiming to reduce inventory levels and capital spending.

The company anticipates that the economic downturn will continue to affect the second half of the fiscal year. They project shipment volumes and revenues (excluding surcharges) to be 20-25% lower than the same period last year. Profits are expected to be negatively impacted by the LIFO effect of reducing inventory levels, though improvements from manufacturing performance and product mix are anticipated.

Yes, investors should be aware of several contingencies. These include an ongoing environmental remediation liability with an accrued liability of $6.9 million as of December 31, 2008. Additionally, the company is appealing a court judgment related to the Boarhead Farms Superfund site, which resulted in a liability of $21.0 million. There is also an ongoing investigation by U.S. Customs regarding duty drawback claims, with a reserve of $3.2 million for estimated probable loss. Potential export regulation violations are also noted, with no liability currently recorded as the Department of Commerce has not responded.