CARPENTER TECHNOLOGY CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number 1-5828

CARPENTER TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its Charter)

Delaware 23-0458500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1047 North Park Road, Wyomissing, Pennsylvania 19610-1339
(Address of principal executive offices) (Zip Code)

610-208-2000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No

1

Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X No

Indicate the number of shares outstanding of each of the
issuer's classes of common stock as of January 31, 2003.

Common stock, $5 par value 22,351,904
Class Number of shares outstanding

2

CARPENTER TECHNOLOGY CORPORATION
FORM 10-Q
INDEX

Page

PART I FINANCIAL INFORMATION

Item 1 Financial Statements

Consolidated Balance Sheet as of
December 31, 2002 (unaudited) and
June 30, 2002............................ 5

Consolidated Statement of Operations
(unaudited) for the Three and Six
Months Ended December 31, 2002 and
2001..................................... 7

Consolidated Statement of Comprehen-
sive Income (Loss) (unaudited) for
the Three and Six Months Ended
December 31, 2002 and 2001............... 8

Consolidated Statement of Cash Flows
(unaudited) for the Six Months Ended
December 31, 2002 and 2001............... 9

Notes to Consolidated Financial
Statements (unaudited)................... 11-20

Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 21-29

Forward-looking Statements............... 30

Item 3 Quantitative and Qualitative Disclosures
about Market Risk........................ 30

Item 4 Controls and Procedures.................. 31

3

PART II OTHER INFORMATION

Item 1 Legal Proceedings........................ 32

Item 4 Submission of Matters to a Vote of
Security Holders......................... 32

Item 6 Exhibits and Reports on Form 8-K......... 32

Signature................................ 33

Certifications of Periodic Reports ...... 34-38

4

PART I
Item 1. Financial Statements

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 2002 and June 30, 2002
(in millions)

6

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
for the three and six months ended December 30, 2002 and 2001
(in millions, except per share data)

7

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
for the three and six months ended December 31, 2002 and 2001
(in millions)

8

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
for the six months ended December 31, 2002 and 2001
(in millions)

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

Carpenter Technology Corporation has prepared the
accompanying unaudited consolidated financial statements in
accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q.
Accordingly, these statements do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments of a normal and recurring
nature necessary for a fair presentation have been included.
Operating results for the six months ended December 31, 2002 may
not indicate full fiscal year results. The June 30, 2002
condensed balance sheet data were derived from audited financial
statements, but do not include all disclosures required by
generally accepted accounting principles. Consequently, these
financial statements should be read in conjunction with the
consolidated financial statements and footnotes included in
Carpenter's fiscal year 2002 Annual Report on Form 10-K.

To prepare consolidated financial statements that
conform with generally accepted accounting principles,
management must make estimates and assumptions affecting the
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.

Certain reclassifications of prior year's amounts have been
made to conform with the current year's presentation.

New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure" which amends SFAS 123, "Accounting
for Stock-Based Compensation". SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee

11

compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. Management intends to
continue measuring compensation expense using the intrinsic
value method as defined in APB 25. Additional disclosures
concerning stock-based compensation will be required in
Carpenter's third quarter Form 10-Q and fiscal year 2003
Form 10-K.

In November 2002, the FASB issued FASB Interpretation
No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain
guarantees that it has issued. FIN 45 also clarifies that a
guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in this
Interpretation are effective for financial statements of interim
or annual periods ending after December 15, 2002. Carpenter
intends to comply with the initial recognition and initial
measurement provisions effective January 1, 2003, and has
complied with the disclosure requirements of FIN 45 in this
Quarterly Report on Form 10-Q.

12

2. Earnings Per Common Share

Below are the calculations of earnings (loss) per share for
the three and six months ended December 31, 2002 and 2001. No
calculations are presented for the diluted earnings (losses) per
share for the three or six months ended December 31, 2002 or
2001, since the assumed conversion of preferred shares and the
exercise of stock options are anti-dilutive.

13

3. Special Charge

During the six months ended December 31, 2002, Carpenter
incurred a special charge of $27.0 million before taxes. Of this
amount, $14.2 million was incurred during the first quarter and
$12.8 million was incurred during the second quarter. These
actions were taken as part of the Company's strategy to reduce
costs and improve operational effectiveness. The components of
this special charge are indicated below.

- Reductions in workforce of approximately 500 salaried
and hourly positions. The salaried and hourly workforce
reductions were substantially complete as of
December 31, 2002. The pre-tax charges of $17.4 million
consisted primarily of various personnel-related costs
to cover severance payments, enhanced pension benefits,
medical coverage and related items. Approximately $14.3
million of the cumulative six month charge will be paid
from the qualified pension plan. Accordingly, this
portion of the special charge reduced the prepaid
pension cost account on the balance sheet. As of
December 31, 2002, Carpenter has an accrual of $1.7
million related to this restructuring recorded within
accrued liabilities.

- Curtailment loss of $6.7 million pre-tax related to the
effects of the above workforce reduction on the
qualified pension plan. As a result of this charge, the
prepaid pension cost account on the balance sheet has
been correspondingly reduced by $6.7 million.

- Writedown of $2.9 million pre-tax of certain assets
reclassified as held-for-sale. Assets held-for-sale are
included with other current assets on the consolidated
balance sheet and are included in Corporate Assets in
the segment data. Prior to the writedown, the net book
value of these assets was $5.2 million. These assets are
expected to be sold during fiscal year 2003. As of
September 30, 2002, depreciation on these assets ceased.

14

4. Inventories

Cost for inventories is principally determined by the Last-
In, First-Out (LIFO) method. The current cost of LIFO-valued
inventories was $242.1 million at December 31, 2002 and $233.9
million at June 30, 2002. Carpenter also uses the First-In,
First-Out and average cost methods.

5. Property, Plant and Equipment

6. Goodwill and Other Intangible Assets

The $112.3 million cumulative effect of accounting change
is a non-cash, non-operating charge recognized for impairment of
goodwill. Fair values of the reporting units were estimated on

15

July 1, 2001 based upon discounted cash flow analyses and the
use of market multiples. The fair value of certain reporting
units was less than their carrying value. There was no change in
goodwill during the three or six months ended December 31, 2002.
At December 31, 2002 and June 30, 2002, the Specialty Metals
Segment and the Engineered Products Segment accounted for $34.6
million and $11.7 million of goodwill, respectively.

As of December 31, 2002, Carpenter has $25.9 million of
trademarks and trade names that have a gross value of $32.0
million and accumulated amortization of $6.1 million. As of
June 30, 2002, Carpenter had $26.4 million of trademarks and
trade names that had a gross value of $32.0 million and
accumulated amortization of $5.6 million. Carpenter has
recorded $0.5 million of amortization expense during the six
months ended December 31, 2002 and 2001. The estimated annual
amortization expense for each of the succeeding five fiscal
years is $1.1 million.

7. Stockholders' Equity Data

8. Contingencies

Environmental

Carpenter is subject to various stringent federal, state,
local and foreign environmental laws and regulations relating to
pollution, protection of public health and the environment,
natural resource damages and occupational safety and health.

16

Although compliance with these laws and regulations may affect
the costs of Carpenter's operations, compliance costs to date
have not been material. Carpenter has environmental remediation
liabilities at some of its owned operating facilities and has
been designated as a potentially responsible party ("PRP") with
respect to certain third-party Superfund waste disposal sites
and other third party owned sites. Additionally, Carpenter has
been notified that it may be a PRP with respect to other
Superfund sites as to which no proceedings have been instituted
against Carpenter. Neither the exact amount of remediation
costs nor the final method of their allocation among all
designated PRPs at these Superfund sites have been determined.
The liability for future environmental remediation costs is
evaluated by management on a quarterly basis. Carpenter accrues
amounts for environmental remediation costs that represent
management's best estimate of the probable and reasonably
estimable costs related to environmental remediation. An
additional $1.0 million was accrued during the three months
ended December 31, 2002 for a former manufacturing site of
Talley Industries, Inc. Also related to this site, a $1.0
million other asset was established during the three months
ended December 31, 2002 for future considerations from the
current owner and lien holders of the site. No additional
accrual was made during the six months ended December 31, 2002
or December 31, 2001. The liability recorded for environmental
remediation costs at Superfund sites, at other third party-owned
sites and at Carpenter-owned operating facilities remaining at
December 31, 2002 was $6.2 million. The estimated range at
December 31, 2002 of the reasonably possible future costs of
remediation at Superfund sites, at other third party-owned sites
and at Carpenter-owned operating facilities is between $6.2
million and $11.2 million.

Estimates of the amount and timing of future costs of
environmental remediation requirements are necessarily imprecise
because of the continuing evolution of environmental laws and
regulatory requirements, the availability and application of
technology, the identification of currently unknown remediation
sites and the allocation of costs among the PRP's. Based upon
information currently available, such future costs are not
expected to have a material effect on Carpenter's competitive or
financial position. However, such costs could be material to
results of operations in a particular future quarter or year.

17

Guarantees

As of December 31, 2002, Carpenter has $9.6 million of
outstanding letters of credit. Of the $9.6 million, $6.3
million relates to a workers compensation bond for a self-
insured workers compensation plan, $3.1 million relates to
workers compensation claim indemnifications, and $0.2 million
relates to a surety bond. The workers compensation bond and
claim indemnifications were established as a requirement for
self insurance of a workers compensation plan and as a result of
obligations for insurance deductibles for future payments
covering past workers compensation claims. The workers
compensation bond and claim indemnifications mature annually
with automatic rollover provisions. The surety bond was
established as a requirement of an environmental cleanup
obligation and matures in April 2003. Carpenter would be
required to pay a maximum of $9.6 million if the Company would
not meet its underlying future obligations for workers
compensation claims, workers compensation insurance premium
payments and environmental liabilities related to these letters
of credit. Carpenter does not currently carry these letters of
credit on the balance sheet and would not be able to recover
these amounts from third parties.

In connection with the divestitures of several previously
owned companies, Carpenter entered into certain indemnification
agreements with respect to liabilities arising prior to the sale
of the businesses. As of December 31, there is no liability
recorded related to these indemnifications.

Other

Carpenter is also defending various claims and legal
actions, and is subject to contingencies that are common to its
operations. Carpenter provides for costs relating to these
matters when a loss is probable and the amount is reasonably
estimable. The effect of the outcome of these matters on
Carpenter's future results of operations and liquidity cannot be
predicted. The effect would depend on future results of
operations and the amount and timing (both as to recording
future charges to operations and cash expenditures) of the
resolution of such matters. While it is not feasible to
determine the outcome of these matters, management believes that
any total ultimate liability will not have a material effect on
Carpenter's financial position, results of operations or cash
flows.

18

9. Employee Stock Ownership Plan

Carpenter has a leveraged employee stock ownership plan
("ESOP") to assist certain employees with their future retiree
medical obligations. Carpenter issued 461.5 shares of
convertible preferred stock in fiscal 1992 at $65,000 per share
to the ESOP in exchange for a $30.0 million, 15-year 9.345% note
which is included in the stockholders' equity section of the
consolidated balance sheet as deferred compensation. At
December 31, 2002, the ESOP held 373.5 shares of convertible
preferred stock. Each preferred share is convertible into at
least 2,000 shares of common stock.

As a provision of the ESOP, participants are guaranteed a
common share price of $32.50 per share upon conversion. At
December 31, 2002, a net $8.3 million was reclassified from
shareholders' equity to other liabilities representing the
amount that the actual common stock share value is below the
guaranteed conversion share value. The $8.3 million was
comprised of a reduction in convertible preferred stock of $15.0
million offset by a reduction in deferred compensation of $6.7
million.

10. Business Segments

Carpenter is organized on a product basis: Specialty Alloys
Operations, Dynamet, Carpenter Powder Products, and Engineered
Products. For segment reporting, the Specialty Alloys
Operations, Dynamet, and Carpenter Powder Products segments have
been aggregated into one reportable segment, Specialty Metals,
because of the similarities in products, processes, customers,
distribution methods and economic characteristics. Carpenter's
sales are not materially dependent on a single customer or small
group of customers.

December 31, June 30,
2002 2002
------------ ----------
(in millions)
Total assets:
Specialty Metals $ 1,018.8 $ 1,057.7
Engineered Products 84.6 90.4
Corporate assets 329.8 331.4
--------- ---------
Consolidated total assets $ 1,433.2 $ 1,479.5
========= =========

11. Subsequent Event

In January 2003, Carpenter sold the last of the four
Engineered Product Group business units that it had previously
announced would be divested. Proceeds of $6.7 million was
approximately $1.5 million greater than its carrying value. The
operating results of this business were included in the EPG
segment prior to its disposal.

20

Item 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations

Results of Operations - Three Months Ended December 31, 2002 vs.
Three Months Ended December 31, 2001:

The second quarter net loss was $7.1 million or $.34 per
diluted share, compared to net income of $3.5 million or $.14
per diluted share a year ago.

The net loss in the current year second quarter included a
pre-tax special charge of $12.9 million ($7.7 million after-tax
or $.35 per diluted share) related primarily to severance and
pension related costs of an early retirement program for certain
production and maintenance employees.

Net sales for the second fiscal quarter ended December 31,
2002 were $210.2 million compared to $248.1 million the same
period a year ago. The decline in second quarter sales from a
year ago primarily reflected reduced demand for certain high
temperature alloys, titanium alloys and ceramic products due to
lower build rates of commercial aircraft and industrial gas
turbines. Demand for these materials was further affected by
supply chain inventory adjustments. Partially offsetting the
decline in these markets were volume increases for stainless
steel sold to customers serving several consumer and industrial
markets. Tons sold into these two markets increased more than
35% in the second quarter versus the same quarter a year ago.
Despite increased stainless volumes from a year ago, Carpenter's
sales were adversely affected by a shift in product mix towards
lower value materials. In addition, excess global stainless
steel capacity and the availability of low-priced imported
stainless bar, rod and wire continued to place downward pressure
on pricing.

By end use markets, sales to the aerospace and power
generation market fell 44% in the second quarter from a year
ago, reflecting depressed conditions in those markets. Sales to
the automotive market increased 4% in the second quarter from a
year ago, which marks the first year-over-year increase in more
than four quarters. Sales to the industrial sector, which
includes materials used in fittings and other capital goods
applications, increased 16% in the second quarter from the same
period a year ago. Sales to the consumer market decreased 2%.

21

Carpenter's gross margin was 17.1% versus 18.7% a year ago.
The decline largely reflects reduced demand for higher value
materials from customers serving the aerospace and power
generation markets and a reduced net pension credit. The
effects of the weaker sales mix and sustained pricing pressures
on stainless products were partially offset by better
manufacturing efficiencies and reduced costs. The gross margin
also benefited from favorable adjustments of $1.9 million to a
quality reserve and the settlement of an insurance claim.

Selling and administrative expenses for the second quarter
decreased to $30.5 million or 14.5 percent of net sales versus
$36.1 million or 14.6 percent of net sales a year ago. The
decrease was primarily due to a reduction in salary expense and
benefits ($1.9 million), lower depreciation and amortization
expense ($1.2 million) and lower professional fees ($1.4
million).

Interest expense of $7.8 million was $1.3 million lower
than a year ago due to reduced debt levels and lower interest
rates on floating rate debt.

Other income was $3.1 million in the second quarter versus
$3.3 million a year ago. The current second quarter included
$2.5 million received under the "Continued Dumping and Subsidy
Offset Act of 2000" which was lower than the $3.5 million
received a year ago.

In the second quarter, Carpenter incurred a $12.9 million
special charge related to severance costs of an early retirement
program for certain production and maintenance employees and
related pension plan costs. Of this amount, approximately $12.2
million is non-cash, as severance costs will be funded
predominantly by the Company's overfunded pension plan.

Income tax expense in the last year's second quarter
included a benefit associated with a change in estimate relating
to the realization of certain tax assets.

Business Segment Results:

Specialty Metals Segment

Net sales for the quarter ended December 31, 2002 for the
Specialty Metals segment, which includes the Specialty Alloys
Operations (SAO), Dynamet, and Carpenter Powder Products (CPP)

22

business units, were $178.9 million or $36.3 million lower than
in the same quarter a year ago. SAO sales decreased by 16
percent due to a significantly weaker sales mix and reduced
selling prices. SAO volume was eight percent higher than the
same quarter a year ago due mainly to increased sales of lower
value stainless wire and rod products. However, the weaker
sales mix that resulted, combined with decreased shipment levels
of higher value special alloys to the aerospace and power
generation markets and sustained pricing pressures on stainless
products, adversely impacted sales. Coil and bar volumes
increased 18% in the second quarter from a year ago due
primarily to share gain initiatives and renewed demand from
certain customers. This increase was partially offset by a
decline in forged bar and billet volume, which is predominantly
sold into the aerospace and power generation markets. Dynamet's
sales decreased 38 percent in the second quarter versus a year
ago, due primarily to lower sales volumes to the aerospace
market. CPP's sales were 16 percent higher than a year ago due
primarily to increased sales in Europe.

Operating income for the Specialty Metals segment was $4.8
million, which was $3.6 million lower than last year. This
decrease was due primarily to SAO's weaker sales mix and
Dynamet's reduced sales volumes, partially offset by improved
operating efficiencies, lower costs and the favorable adjustment
of a quality reserve.

Engineered Products Segment

Net sales for this segment, which includes sales of
fabricated metal and ceramic components, were $31.6 million as
compared to $33.7 million a year ago. Last year's second
quarter included $1.0 million in sales from businesses that were
subsequently divested. Significant year over year increases in
tubular components sold into the nuclear power market and of
high purity alumina and zirconia based structural ceramics for
the industrial market were offset by a decline in ceramics cores
for metal castings used in the aerospace and power generation
markets.

The operating income for the Engineered Products segment
was $4.4 million in the second quarter versus $2.0 million a
year ago. The increase in operating income primarily reflects
the benefit of cost savings initiatives and the settlement of an
insurance claim.

23

Results of Operations - Six Months Ended December 31, 2002 vs.
Six Months Ended December 31, 2001:

The net loss for the six months ended December 31, 2002 was
$18.0 million or $.85 per diluted share. Carpenter incurred a
pre-tax special charge of $27.0 million ($16.2 million after-tax
or $.73 per diluted share) related primarily to severance and
pension costs due to retirements and terminations in fiscal
2003. For the first six months a year ago, Carpenter had a net
loss of $102.9 million or $4.68 per diluted share. The first
quarter a year ago included a $112.3 million charge, or $5.06
per diluted share, related to the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."

Net sales for the first six months of the current fiscal
year were $424.1 million compared with last year's level of
$499.3 million. The $75.2 million decrease in net sales was
chiefly due to reduced demand for certain high temperature
alloys, titanium alloys and ceramic products due to lower build
rates of commercial aircraft and industrial gas turbines.
Demand for these materials was further affected by supply chain
inventory adjustments. Partially offsetting the decline in
these markets were volume increases for stainless steel sold to
customers serving several consumer and industrial markets.
Despite increased stainless volumes from a year ago, Carpenter's
sales were adversely affected by a shift in product mix towards
lower value materials. In addition, excess global stainless
steel capacity and the availability of low-priced imported
stainless bar, rod and wire continued to place downward pressure
on pricing.

The gross profit of 16.4 percent for the six-month period
was lower than last year's 19.9 percent. This decrease was
primarily due to reduced shipment levels of higher value
products sold to the aerospace and power generation markets,
increased sales of lower valued stainless wire and rod products,
sustained pricing pressures on stainless products and a reduced
net pension credit. These negatives were partially offset by
better manufacturing efficiencies and reduced costs.

Selling and administrative expenses for the first six
months decreased to $62.2 million or 14.7 percent of net sales
versus $72.8 million or 14.6 percent of net sales a year ago.
The $10.6 million decrease was primarily due to a reduction in
salary expense and benefits ($3.6 million), lower depreciation

24

and amortization expense ($2.6 million) and lower professional
fees ($1.6 million).

Interest expense of $15.8 million was lower than last year
by $2.2 million due to reduced debt levels and lower interest
rates on floating rate debt.

Other income was $3.3 million in the current year versus
$5.0 million a year ago. The current year included $2.5 million
received under the "Continued Dumping and Subsidy Offset Act of
2000" which was lower than the $3.5 million received a year ago.

In fiscal 2003, a pre-tax special charge of $27.0 million
($16.2 million after taxes or $.73 per diluted share) was
incurred for severance and pension related costs due to the
retirements and terminations of approximately 500 salaried and
hourly positions ($14.5 million after tax) and for an estimated
loss on asset disposals ($1.7 million after tax). These charges
are predominantly non-cash, including the severance costs, which
will be mostly funded by the Company's overfunded pension plan.

Income tax benefits in the current year include a $1.3
million benefit from research and development credits. Income
tax expense in the last year's second quarter included a benefit
associated with a change in estimate relating to the realization
of certain tax assets.

Business Segment Results:

Specialty Metals Segment

Net sales for the six months ended December 31, 2002 for
this segment, which includes the Specialty Alloys Operations
(SAO), Dynamet, and Carpenter Powder Products (CPP), were $364.9
million, or $66.0 million lower than the $430.9 million for the
same period a year ago. SAO sales decreased by 14 percent from
a year ago due to a weaker sales mix and reduced selling prices.
SAO volume was 11 percent higher than last year due mainly to
increased sales of lower value stainless wire and rod products.
The weaker sales mix combined with decreased shipment levels of
higher value special alloys and sustained pricing pressures on
stainless products, adversely impacted sales. Dynamet's sales
decreased 38 percent during the first six months versus the same
period a year ago. The decline in sales is due primarily to

25

lower volumes sold to the aerospace market. CPP's sales were
seven percent higher than a year ago due primarily to increased
sales in Europe.

Operating income for the Specialty Metals segment was $7.7
million during the first six months of fiscal 2003, which was
$13.0 million lower than the same period a year ago. This
decrease was due primarily to SAO's weaker sales mix and
Dynamet's reduced sales volumes, partially offset by improved
operating efficiencies, lower costs and the favorable adjustment
of a quality reserve.

Engineered Products Segment

Net sales for this segment through the first six months of
fiscal 2003 were $60.1 million as compared to $69.4 million for
the same period a year ago. The six-month period a year ago
included $2.7 million from businesses that were subsequently
divested. This group of companies was largely affected by a
slowdown in the aerospace and industrial gas turbine markets.
The operating income for the Engineered Products segment for the
first six months of fiscal 2003 was $6.6 million versus $5.9
million for the same period a year ago. The increase in
operating income primarily reflects the benefit of cost savings
initiatives and the settlement of an insurance claim.

Net Pension Credit:

The net pension credit represents the income relating to
Carpenter's overfunded defined benefit pension plan less the
expense for the post retirement benefit plans and the other
underfunded defined benefit pension plans. The net pension
credit was $1.5 million for the first half of fiscal 2003 versus
$8.5 million last year. The net pension credit is chiefly a
result of the overfunded position of Carpenter's defined benefit
pension plan. The lower level of the net pension credit versus
the prior year was due primarily to the equity markets'
investment losses on the pension and post retirement plan assets
during fiscal 2002.

Cash Flow and Financial Condition:

Carpenter has maintained the ability to provide cash to
meet its needs through cash flow from operations, management of
working capital and the flexibility to use outside sources of
financing to supplement internally generated funds.

26

Cash from operations was $40.3 million for the current
quarter. For the same period last year, cash provided from
operations was $92.9 million. After adjusting for the effects
of the receivables purchase facility, cash from operations for
the quarter ended December 31, 2001, was $47.9 million. Capital
expenditures for plant, equipment and software consumed $5.3
million in cash during the first six months of fiscal 2003
versus $15.9 million for the same year ago period. Dividends
were $10.0 million this year compared to $15.5 million last
year.

Carpenter uses free cash flow as a measure of cash
generated which is available for debt repayment. Carpenter
defines free cash flow as net cash provided before financing
activities, excluding the change in the accounts receivable
purchase facility, less dividends paid. During the six months
ended December 31, 2002, Carpenter's free cash flow (cash flow
provided before financing activities of $35.7 million less
dividends paid of $10.0 million) was $25.7 million versus $17.0
million a year ago (cash flow provided before financing
activities of $77.5 million less the decrease in the accounts
receivable purchase facility of $45 million, and less dividends
paid of $15.5 million). Carpenter's definition of free cash
flow may not necessarily be the same as that used by other
companies.

Net debt (total debt net of cash and including amounts
outstanding under the Company's receivables purchase facility),
was reduced to $401.1 million at December 31, 2002. This net
debt level was $17.4 million lower than at the end of the
previous quarter and $98.1 million lower than a year ago.

A component of Carpenter's debt management strategy is to
maintain a certain level of floating rate debt relative to its
fixed rate debt. In order to achieve this targeted level, the
Company uses interest rate swaps. These instruments will
obligate the Company to pay a swap counterparty either a
floating rate of interest in return for it receiving a fixed
rate of interest or obligate the Company to pay a fixed rate of
interest in return for it receiving a floating rate of interest.
At December 31, 2002, Carpenter had entered into interest rate
swaps with a notional principal amount of $86.6 million.

Carpenter believes that its current financial resources,
both from internal and external sources, will be more than

27

adequate to meet its foreseeable needs. At the end of the
second quarter, Carpenter had approximately $125.0 million
available under its credit facilities.

Contingencies:

Environmental

Carpenter is subject to various stringent federal, state,
local and foreign environmental laws and regulations relating to
pollution, protection of public health and the environment,
natural resource damages and occupational safety and health.
Although compliance with these laws and regulations may affect
the costs of Carpenter's operations, compliance costs to date
have not been material. Carpenter has environmental remediation
liabilities at some of its owned operating facilities and has
been designated as a potentially responsible party ("PRP") with
respect to certain third-party Superfund waste disposal sites
and other third party owned sites. Additionally, Carpenter has
been notified that it may be a PRP with respect to other
Superfund sites as to which no proceedings have been instituted
against Carpenter. Neither the exact amount of remediation
costs nor the final method of their allocation among all
designated PRPs at these Superfund sites have been determined.
The liability for future environmental remediation costs is
evaluated by management on a quarterly basis. Carpenter accrues
amounts for environmental remediation costs that represent
management's best estimate of the probable and reasonably
estimable costs related to environmental remediation. An
additional $1.0 million was accrued during the three months
ended December 31, 2002 for a former manufacturing site of
Talley Industries, Inc. Also related to this site, a $1.0
million other asset was established during the three months
ended December 31, 2002 for future considerations from the
current owner and lien holders of the site. No additional
accrual was made during the six months ended December 31, 2002
or December 31, 2001. The liability recorded for environmental
remediation costs at Superfund sites, at other third party-owned
sites and at Carpenter-owned operating facilities remaining at
December 31, 2002 was $6.2 million. The estimated range at
December 31, 2002 of the reasonably possible future costs of
remediation at Superfund sites, at other third party-owned sites
and at Carpenter-owned operating facilities is between $6.2
million and $11.2 million.

28

Estimates of the amount and timing of future costs of
environmental remediation requirements are necessarily imprecise
because of the continuing evolution of environmental laws and
regulatory requirements, the availability and application of
technology, the identification of currently unknown remediation
sites and the allocation of costs among the PRP's. Based upon
information currently available, such future costs are not
expected to have a material effect on Carpenter's competitive or
financial position. However, such costs could be material to
results of operations in a particular future quarter or year.

Other

Carpenter is also defending various claims and legal
actions, and is subject to contingencies that are common to its
operations. Carpenter provides for costs relating to these
matters when a loss is probable and the amount is reasonably
estimable. The effect of the outcome of these matters on
Carpenter's future results of operations and liquidity cannot be
predicted. The effect would depend on future results of
operations and the amount and timing (both as to recording
future charges to operations and cash expenditures) of the
resolution of such matters. While it is not feasible to
determine the outcome of these matters, management believes that
any total ultimate liability will not have a material effect on
Carpenter's financial position, results of operations or cash
flows.

Future Outlook:

The Company remains cautious about the economic outlook as
well as the strength of recovery for the U.S. manufacturing
sector. Although some market segments appear to have
stabilized, two key markets, the aerospace and power generation
markets, remain under pressure.

Despite challenging business conditions, Carpenter expects
to be profitable in the second half of fiscal 2003.
Historically, the second half of the fiscal year has been
stronger than the first half. Additionally, the Company
anticipates that it will exceed its previously announced free
cash flow target of $40 million for the current fiscal year.

29

Forward-looking Statements

This Form 10-Q contains various "Forward-looking Statements"
pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These statements,
which represent Carpenter's expectations or beliefs concerning
various future events, include statements concerning future
revenues and continued growth or decline in various market
segments. These forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ from
those projected, anticipated or implied. The most significant of
these uncertainties are described in Carpenter's filings with
the Securities and Exchange Commission, including its Form 10-K
for the year ended June 30, 2002, its Form 10-Q for the three
months ended September 30, 2002, and Carpenter's most recent
registration statement on Form S-4 filed on October 12, 2001, as
amended on November 29, 2001. Such risks include but are not
limited to: 1) the cyclical nature of the specialty materials
business and certain end-use markets, including aerospace, power
generation, automotive and consumer durables, all of which are
subject to changes in general economic and financial market
conditions; 2) the ability of Carpenter to recoup increased
costs of electricity, natural gas, and raw materials, such as
nickel, through increased prices and surcharges; 3) worldwide
excess manufacturing capacity for certain alloys that Carpenter
produces; 4) fluctuations in currency exchange rates, resulting
in increased competition and downward pricing pressure on
Carpenter products; 5) the degree of success of government trade
actions; and 6) fluctuations in stock markets which could impact
the valuation of the assets in Carpenter's pension trusts and
the accounting for pension assets. Any of these factors could
have an adverse and/or fluctuating effect on Carpenter's results
of operations. The forward-looking statements in this document
are intended to be subject to the safe harbor protection
provided by Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Carpenter undertakes no obligation to update or
revise any forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market
Risk

Carpenter uses derivative financial instruments to reduce
certain types of financial risks. Raw material cost fluctuations
for the Specialty Metals Segment are normally offset by selling
price adjustments, primarily through the use of surcharge

30

mechanisms and base price adjustments. Firm price sales
contracts involve a risk of profit margin decline in the event
of raw material increases. Carpenter reduces this risk on
certain raw materials and energy by entering into commodity
forward contracts and commodity price swaps on a portion of its
requirements that are effective hedges of the risk. Fluctuations
in foreign currency exchange rates subject Carpenter to risk of
losses on anticipated future cash flows from its foreign
operations. Foreign currency forward contracts are used to hedge
this foreign exchange risk. These hedging strategies are
reviewed and approved by senior financial management before
being implemented. Senior financial management has established
policies regarding the use of derivative instruments which
prohibit the use of speculative or leveraged derivatives. Market
valuations are performed at least quarterly to monitor the
effectiveness of Carpenter's risk management programs.

Item 4. Controls and Procedures

Within ninety days prior to filing this report, the
Company, under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and
the Chief Financial Officer, evaluated the effectiveness of the
design and operation of the Company's disclosure controls and
procedures. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective.
There were no significant changes to the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.

Securities and Exchange Commission Rule 13a-14 defines
"disclosure controls and procedures" as controls and other
procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the
reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that such
information is accumulated and communicated to the issuer's
management, including its principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.

31

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

Pending legal proceedings involve ordinary routine
litigation incidental to the business of Carpenter. There are no
material legal proceedings involving Carpenter employees,
Directors, investors holding more than five percent of any class
of voting securities of the Company, or their associates that
would be adverse to the Company or has a material interest
adverse to the interest of the Company or its subsidiaries.
There is no administrative or judicial proceeding arising under
any Federal, State or local provisions regulating the discharge
of materials into the environment or primarily for the purpose
of protecting the environment that (1) is material to the
business or financial condition of the Company, (2) involves a
claim for damages, potential sanctions or capital expenditures
exceeding ten percent of the current assets of the Company or
(3) includes a governmental authority as a party and involves
potential monetary sanctions in excess of $100,000.

Item 4. Submission of Matters to a Vote of Security Holders.

Voting results and a description of matters submitted to
stockholders at Carpenter's October 28, 2002 Annual Meeting of
Stockholders were included in the Form 1O-Q for the quarterly
period ended September 30, 2002. Part II, Item 4 of Carpenter's
Form 10- Q filed November 13, 2002 is incorporated herein by
reference.

Item 6. Exhibits and Reports on Form 8-K.

a. No documents are filed as Exhibits.

b. No Current Report on Form 8-K was filed on behalf of
Carpenter during the quarter ended December 31, 2002.

Items 2,3 and 5 are omitted as the answers are negative or
the items are not applicable.

32

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed by
the undersigned duly authorized officer, on its behalf and in
the capacity indicated.

Carpenter Technology Corporation
(Registrant)

Date: February 13, 2003 /s/Terrence E. Geremski
----------------------------------
Terrence E. Geremski
Senior Vice President - Finance
and Chief Financial Officer

33

CERTIFICATIONS OF PERIODIC REPORTS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Dennis M. Draeger, Chairman and Chief Executive Officer
of Carpenter Technology Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of
Carpenter Technology Corporation;

2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;

(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and

34

procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: February 13, 2003 /s/Dennis M. Draeger
------------------------------------
Dennis M. Draeger
Chairman and Chief Executive Officer

35

CERTIFICATION

I, Terrence E. Geremski, Senior Vice President - Finance
and Chief Financial Officer of Carpenter Technology Corporation,
certify that:

1. I have reviewed this quarterly report on Form 10-Q of
Carpenter Technology Corporation;

2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;

(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;

36

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: February 13, 2003 /s/Terrence E. Geremski
----------------------------------
Terrence E. Geremski
Senior Vice President - Finance
and Chief Financial Officer

37

CERTIFICATION OF PERIODIC FINANCIAL REPORTS PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Carpenter
Technology Corporation (the "Issuer") on Form 10-Q for the
quarter ended December 31, 2002, as filed with the Securities
and Exchange Commission on the date hereof (the "Periodic
Report"), I, Dennis M. Draeger, Chairman and Chief Executive
Officer of the Issuer, and I, Terrence E. Geremski, Vice
President - Finance and Chief Financial Officer of the Issuer,
each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the Periodic Report containing the financial statements fully
complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and that information contained
in the Periodic Report fairly presents, in all material
respects, the financial condition and result of operations of
the Issuer.

/s/Dennis M. Draeger /s/Terrence E. Geremski
- -------------------------- ---------------------------------
Dennis M. Draeger Terrence E. Geremski
Chairman and Chief Executive Senior Vice President - Finance
Officer and Chief Financial Officer

Date: February 13, 2003

38