10-QPeriod: Q3 FY2009

CARPENTER TECHNOLOGY CORP Quarterly Report for Q3 Ended Mar 31, 2009

Filed May 7, 2009For Securities:CRS

Summary

Carpenter Technology Corporation (CRS) reported a significant decrease in net sales and income for the nine months ended March 31, 2009, compared to the prior year, primarily driven by a substantial decline in global industrial activity. The company experienced a 21% drop in net sales, with a notable 35% decrease in the three months ended March 31, 2009, as demand softened across key end-use markets like aerospace, industrial, and automotive. This downturn is attributed to the broader economic recession and its impact on customer demand and production rates. Despite the challenging sales environment, Carpenter Technology took steps to manage costs and optimize operations. These included restructuring charges related to a UK facility closure and efforts to reduce inventory levels. The company maintained its focus on liquidity, reporting approximately $306 million in cash and marketable securities and $188 million in available borrowing capacity, which management believes is sufficient to meet near-term obligations. However, free cash flow turned negative due to higher inventory and investment levels, a significant reversal from the prior year.

Key Highlights

  • 1Net sales decreased by 21% for the nine months ended March 31, 2009, to $1,105.4 million, reflecting a broad economic slowdown.
  • 2Income from continuing operations dropped significantly to $68.7 million for the nine months ended March 31, 2009, from $163.0 million in the prior year.
  • 3The company recorded $2.1 million in restructuring charges related to the closure of its UK manufacturing facility.
  • 4Cash provided from operating activities decreased to $44.8 million for the nine months ended March 31, 2009, compared to $143.5 million in the prior year, and free cash flow turned negative at $(60.3) million.
  • 5Total assets decreased to $1,603.0 million as of March 31, 2009, from $1,712.2 million as of June 30, 2008, largely due to a reduction in current assets like cash and accounts receivable.
  • 6Inventories increased to $263.5 million from $209.0 million, while accounts payable decreased significantly from $158.4 million to $85.1 million, indicating working capital shifts.
  • 7The company is facing legal challenges, including a significant judgment related to the Boarhead Farms Superfund site, and an ongoing investigation by U.S. Customs regarding duty drawback claims.

Frequently Asked Questions

The primary reason for the significant decrease in sales and income is the broad economic downturn and recession, which has led to substantially lower demand across key end-use markets such as aerospace, industrial, and automotive. This reduced demand directly impacts shipment volumes and, consequently, revenue and profitability.

The company is focusing on managing costs by implementing restructuring initiatives, such as the closure of its UK facility, and reducing operational expenses. It is also actively managing its working capital, including efforts to reduce inventory levels. Furthermore, Carpenter Technology maintains a strong liquidity position with a substantial amount of cash and cash equivalents and available borrowing capacity, which management believes is sufficient to meet its obligations.

Yes, the company is involved in several notable contingencies. These include a significant judgment against the company related to the Boarhead Farms Superfund site, where a court found Carpenter liable for a portion of past and future cleanup costs. Additionally, there is an ongoing investigation by U.S. Customs concerning duty drawback claims, which has resulted in a recorded reserve for potential losses. The company also continues to accrue liabilities for environmental remediation at various sites.

The company anticipates that shipment volumes will likely hit bottom in the first quarter of fiscal year 2010, with continued weakness expected in aerospace and energy sectors. Management expects to generate a loss in the fiscal year 2009 fourth quarter due to declining demand, the UK facility closure costs, and significant inventory adjustments. Key concerns include ongoing adverse economic conditions, raw material price volatility, and potential impacts from legal and regulatory matters.