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 March 31, 2003

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 April 30, 2003.

Common stock, $5 par value 22,351,394
-------------------------- ----------------------------
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
March 31, 2003 (unaudited) and
June 30, 2002........................... 5

Consolidated Statement of Operations
(unaudited) for the Three and Nine Months
Ended March 31, 2003 and 2002........... 6

Consolidated Statement of Comprehensive
Income (Loss) (unaudited) for the Three
and Nine Months Ended March 31, 2003
and 2002................................ 7

Consolidated Statement of Cash Flows
(unaudited) for the Nine Months Ended
March 31, 2003 and 2002................. 8

Notes to Consolidated Financial
Statements (unaudited).................. 9-19

Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 20-30

Forward-looking Statements.............. 31

Item 3 Quantitative and Qualitative Disclosures
about Market Risk....................... 32

Item 4 Controls and Procedures................. 32

PART II OTHER INFORMATION

Item 1 Legal Proceedings....................... 34

3

Item 4 Submission of Matters to a Vote of
Security Holders........................ 34

Item 6 Exhibits and Reports on Form 8-K........ 34

Signature............................... 36

Certifications of Periodic Reports...... 37-41

4

PART I

Item 1. Financial Statements

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET
March 31, 2003 and June 30, 2002
(in millions)

See accompanying notes to consolidated financial statements.
5

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
for the three and nine months ended March 31, 2003 and 2002
(in millions, except per share data)

See accompanying notes to consolidated financial statements.
6

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
for the three and nine months ended March 31, 2003 and 2002
(in millions)

See accompanying notes to consolidated financial statements.

7

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
for the nine months ended March 31, 2003 and 2002
(in millions)

See accompanying notes to consolidated financial statements.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial
statements of Carpenter Technology Corporation (hereinafter
called "The Company" or "Carpenter") have been prepared in
accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q.
Accordingly, they 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 consisting only of normal, recurring
adjustments, necessary for a fair presentation have been
included. Operating results for the nine months ended March 31,
2003 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2003. 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. These unaudited
consolidated financial statements should be read in conjunction
with the consolidated financial statements and footnotes thereto
included in Carpenter's fiscal year 2002 Annual Report on
Form 10-K.

The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect 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.

Stock-Based Compensation

As of March 31, 2003, Carpenter has three stock-based
employee compensation plans which are described in detail in
Note 15 of Carpenter's fiscal year 2002 Annual Report on
Form 10-K. Carpenter accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25,

9

"Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following
table illustrates the effect on net income and earnings per
share if Carpenter had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-
Based Compensation", to stock-based employee compensation.

Divestiture

In 2003, Carpenter sold the last two of the four Engineered
Product Group (EPG) business units that it had previously
announced would be divested. Proceeds of $8.5 million exceeded
the carrying value by approximately $1.0 million. The operating
results of this business were included in the EPG segment prior
to the disposal. The $1.0 million gain on sale is included
within other (income) expense, net on the Consolidated Statement
of Operations.
10
New Accounting Pronouncements

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 has
adopted the initial recognition and initial measurement
provisions effective January 1, 2003, and adopted the disclosure
requirements of FIN 45 during the six months ended December 31,
2002.

2. Earnings (Loss) Per Common Share

Below are the calculations of earnings (loss) per share for
the three and nine months ended March 31, 2003 and 2002. No
calculations are presented for the diluted earnings (losses) per
share for the three or nine months ended March 31, 2003 or 2002,
since the assumed conversion of preferred shares and the
exercise of stock options are anti-dilutive.

3. Special Charge

During the nine months ended March 31, 2003, Carpenter
incurred a special charge of $27.0 million before taxes. Of this
amount, $14.2 million was incurred during the first fiscal
quarter and $12.8 million was incurred during the second fiscal
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.

Nine Months Ended
March 31
2003 2002
---- ----
SPECIAL CHARGE
Reductions in workforce $17.4 -
Pension plan curtailment loss 6.7 -
Writedown of certain assets 2.9 -
----- ----
Special charge $27.0 -
12

- 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 charge 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 nine month charge will be paid from the
Company's qualified pension plan, and did not impact the
Company's operating cash flow and is, therefore,
considered non-cash. This portion of the special charge
reduced the prepaid pension cost account on the balance
sheet. As of March 31, 2003, Carpenter has an accrual of
$0.5 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.

4. Inventories

March 31, June 30,
2003 2002
--------- --------
(in millions)
Raw materials and supplies $ 49.3 $ 51.0
Work in process 139.9 145.6
Finished and purchased products 93.8 102.4
------ ------
Total at current cost 283.0 299.0
Less excess of current cost over
LIFO values 108.3 109.0
------ ------
Total inventory $174.7 $190.0
====== ======
13
Cost for inventories is principally determined by the Last-
In, First-Out (LIFO) method. The current cost of LIFO-valued
inventories was $233.2 million at March 31, 2003 and $233.9
million at June 30, 2002. Carpenter also uses the First-In,
First-Out and average cost methods. Reductions in LIFO-valued
inventories resulted in additional costs of $6.5 million before
taxes, or $0.19 per diluted share, during the third quarter of
fiscal 2002.

5. Property, Plant and Equipment

March 31, June 30,
2003 2002
--------- --------
(in millions)
Property, plant and equipment, at cost $1,342.1 $1,354.9
Less accumulated depreciation and
amortization 679.5 641.8
-------- --------
Property, plant and equipment, net $ 662.6 $ 713.1
======== ========

6. Goodwill and Trademarks and Trade Names, Net

Goodwill

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
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 nine months ended March 31, 2003.
At March 31, 2003 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.

Trademarks and Trade Names, Net

March 31, June 30,
2003 2002
--------- --------
(in millions)
Trademarks and trade names, at cost $32.0 $32.0
Less accumulated amortization 6.4 5.6
----- -----
Trademarks and trade names, net $25.6 $26.4
===== ======
14
Carpenter has recorded $0.8 million of amortization expense
during the nine months ended March 31, 2003 and 2002. The
estimated annual amortization expense for each of the succeeding
five fiscal years is $1.1 million.

7. Stockholders' Equity Data

March 31, June 30,
2003 2002
--------- ----------
(in millions)

Preferred shares issued 358.5 388.4
========== ==========
Common shares issued 23,451,719 23,450,019
Common shares in Treasury (1,100,326) (1,104,295)
---------- ----------
Net common shares outstanding 22,351,393 22,345,724
========== ==========

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.
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

15

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 other accruals
were made during the nine months ended March 31, 2003 or 2002.
The liability recorded for environmental remediation costs at
Superfund sites, at other third party-owned sites and at
Carpenter-owned operating facilities at March 31, 2003 was $6.3
million. The estimated range at March 31, 2003 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 $6.3 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.

Guarantees/Indemnification Obligations

In connection with the divestitures of several previously
owned companies, Carpenter undertook certain indemnification
obligations as part of the definitive agreements for sale of
those businesses. The indemnification obligations relate to
Carpenter's covenants, representations and warranties under the
sale agreements, potential liability for operations of the
businesses prior to the sale and other similar matters. The
indemnification obligations are subject to conditions and
limitations that are normal in agreements of this type. The
indemnification obligations with respect to certain liabilities
under the agreements have limitations related to the purchase
price received for the business, although other types of
liabilities may have no limitation in amount. The term of the
indemnification with respect to certain liabilities under the
agreements have limitations on duration that extend for a period
of months or several years after the closing of the sale of the
business, although other types of liabilities are limited only

16

by the applicable statute of limitations or may extend
indefinitely. The obligations to provide indemnification will
normally arise only after the indemnified party makes a claim
subject to review by Carpenter and in compliance with applicable
procedures with respect to the method and timeliness of notice.
Recourse may be available in limited situations against third
parties from whom Carpenter purchased the businesses. Accruals
related to these indemnification obligations are recorded as and
when specific claims are made and the loss is determined to be
probable and the amount is reasonably estimable. As of
March 31, 2003 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.

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
percent note which is included in the stockholders' equity
section of the consolidated balance sheet as deferred
compensation. At March 31, 2003, the ESOP held 358.5 shares of
convertible preferred stock. Each preferred share is convertible
into at least 2,000 shares of common stock.

17

As a provision of the ESOP, participants are guaranteed a
common share price of $32.50 per share upon conversion. At
March 31, 2003, a net $9.4 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 $9.4 million was
comprised of a reduction in convertible preferred stock of $16.0
million offset by a reduction in deferred compensation of $6.6
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.

19

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

Results of Operations - Three Months Ended March 31, 2003 vs.
Three Months Ended March 31, 2002:

Net income for the third fiscal quarter ended March 31,
2003 was $1.7 million or $.06 per diluted share, compared with a
net loss of $10.5 million or $.49 per diluted share a year ago.

Net sales for the third quarter were $234.6 million,
compared to $250.2 million for the same period a year ago. Sales
for the third fiscal quarter declined six percent from a year
ago due to lower demand for high temperature and titanium alloys
as a result of lower commercial aircraft and industrial gas
turbine build rates. Sales to the aerospace and power generation
markets fell 22 percent in the third quarter from a year ago.
The rate of decline in sales to these two key markets for
Carpenter moderated in the third fiscal quarter from the
previous three quarters. Partially offsetting the sales decline
in these markets was an 11 percent increase in sales to the
industrial market due to share gain initiatives, a lower level
of stainless bar and rod imports and increased demand for
product sold into the chemical and oil segments. Sales to the
automotive and consumer markets were relatively flat versus a
year ago.

By product type, stainless steel sales were down one
percent in the third quarter from a year ago, as market share
gains and renewed demand in certain industrial markets were
offset by lower sales to other markets. Sales of special alloys
decreased 9 percent in the third quarter from a year ago, due
primarily to lower build rates of commercial aircraft and
industrial gas turbines. Partially offsetting the decline were
increases in electronic strip business. Titanium sales, which
are strongly influenced by commercial aircraft builds, fell 14
percent from a year ago. The decline in sales reflected the drop
in commercial jet deliveries. Carpenter's sales were adversely
affected by a shift in product mix towards lower value
materials. In addition, excess global stainless steel capacity
continued to place downward pressure on pricing.

Carpenter's gross margin increased 410 basis points to 15.3
percent versus 11.2 percent a year ago. The increase largely
reflected the benefits of the cost reduction efforts that

20

resulted in a lower cost structure and productivity
improvements. The prior year's third quarter gross margin was
negatively impacted by a $6.5 million charge related to a LIFO
inventory layer liquidation and approximately $6.5 million in
expenses related to lower production levels and additional
manufacturing downtime. Adversely effecting current year margins
was reduced demand for higher valued materials from customers
serving the aerospace and power generation markets and a lower
net pension credit.

Selling and administrative expenses for the third quarter
decreased to $28.1 million or 12.0 percent of net sales from
$35.0 million or 14.0 percent of net sales a year ago. The
decrease was primarily due to a reduction in salary expense from
reduced employment levels ($3.5 million) and lower professional
fees and outside services ($2.8 million).

Interest expense of $7.7 million was $0.6 million lower
than a year ago due to reduced debt levels and lower interest
rates on floating rate debt.

Other income was $1.1 million in the third quarter versus
an expense of $0.9 million a year ago. The current third
quarter included $0.9 million from the gain on the sale of
assets.

Also in the current third quarter, Carpenter benefited from
a tax credit equivalent to $.04 per diluted share related to
research and development efforts in a prior fiscal period.

Business Segment Results:

Specialty Metals Segment

Net sales for the quarter ended March 31, 2003 for the
Specialty Metals segment, which includes the Specialty Alloys
Operations (SAO), Dynamet, and Carpenter Powder Products (CPP)
business units, were $204.3 million or $15.5 million lower than
in the same quarter a year ago. SAO sales decreased seven
percent due to a weaker sales mix and reduced selling prices.
SAO volume was five percent higher than last year 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

21

pressures on stainless products, adversely impacted sales. Coil
and bar volumes increased 13 percent in the third quarter from a
year ago due primarily to share gain initiatives both
domestically and internationally. The coil strip business for
thermostat applications in appliances, housing and commercial
buildings benefited from renewed demand. Additionally, strip
volume benefited from increased sales to customers serving the
golf club, theft detection and defense markets. These increases
were 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 16 percent in the third quarter
versus a year ago, due primarily to lower sales volumes to the
aerospace market. Dynamet's non-aerospace related businesses
increased at a double-digit rate, as it continued to focus on
diversification opportunities in order to make it less
susceptible to swings in demand for new commercial aircraft.
These efforts are focused on such areas as medical and high
performance motor sports.

CPP's sales were 24 percent higher than a year ago due
primarily to sales to new customers and increased sales in
Europe.

Operating income for the Specialty Metals segment was $8.1
million, which compared to a loss of $8.6 million a year ago.
The improvement reflects the benefit of cost reduction
initiatives and a reduced impact from inventory reduction
efforts from a year ago.

Engineered Products Segment

Net sales for this segment, which includes sales of
fabricated metal and ceramic components, were $31.1 million
compared to $30.9 million a year ago.

Operating income for the Engineered Products segment was
$2.8 million in the third quarter versus $2.0 million a year
ago. The increase in operating income primarily reflects the
benefit of cost savings initiatives, partially offset by an
increase in claims and allowances.

22

Results of Operations - Nine Months Ended March 31, 2003 vs.
Nine Months Ended March 31, 2002:

The net loss for the nine months ended March 31, 2003 was
$16.4 million or $.79 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 nine months a year ago, Carpenter had a net
loss of $113.4 million or $5.17 per diluted share. The first
quarter last year had a $112.3 million transitional impairment
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 nine months of the current fiscal
year were $658.7 million, compared with $749.5 million from the
same period a year ago. The $90.8 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 reductions. 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 continued to place downward pressure on pricing.

The gross profit of 16.0 percent for the nine-month period
of this fiscal year was lower than last year's 17.0 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 lower costs.
The prior year's third quarter gross margin was negatively
impacted by a $6.5 million charge related to a LIFO inventory
layer liquidation and approximately $6.5 million in expenses
related to lower production levels and additional manufacturing
downtime.

23

Selling and administrative expenses for the first nine
months decreased to $90.3 million or 13.7 percent of net sales
versus $108.0 million or 14.4 percent of net sales a year ago.
The $17.7 million, or 16 percent, decrease was primarily due to
a reduction in salary expense and benefits ($7.2 million), lower
depreciation and amortization expense ($2.6 million) and lower
professional fees and outside services ($4.1 million), partially
offset by the reduced net pension credit ($3.4 million).

Interest expense of $23.5 million was lower than last year
by $2.8 million due to reduced debt levels and lower interest
rates on floating rate debt.

Other income was $4.4 million in the current year versus
$4.2 million a year ago. The current year included a $0.4
million gain on the sale of assets and $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 and for an estimated loss on asset disposals.
These charges are predominantly non-cash, including the
severance costs, which will be mostly funded by the Company's
pension plan.

Income tax benefits in the current year include a $2.1
million benefit from research and development credits. Last
year, income tax expense 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 nine months ended March 31, 2003 for this
segment, which includes the Specialty Alloys Operations (SAO),
Dynamet, and Carpenter Powder Products (CPP), were $569.2
million, or $81.6 million lower than the $650.8 million for the
same period a year ago. SAO sales decreased by 12 percent from
a year ago due to a weaker sales mix and reduced selling prices.
SAO volume was nine percent higher than last year due mainly to

24

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
adversely impacted sales. Dynamet's sales decreased 31 percent
during the first nine months versus the same period a year ago.
The decline in sales is due primarily to lower volumes sold to
the aerospace market. CPP's sales were 13 percent higher than a
year ago due primarily to new customer sales and increased sales
in Europe.

Operating income for the Specialty Metals segment was $15.8
million during the first nine months of fiscal 2003, which was
$3.7 million higher than the same period a year ago. The
increase reflected improved operating efficiencies, lower costs
and the effects on operating income of a more modest level of
inventory reduction versus a year ago.

Engineered Products Segment

Net sales for this segment through the first nine months of
fiscal 2003 were $91.2 million as compared to $100.3 million for
the same period a year ago. This group of companies was largely
affected by a slowdown in the aerospace and industrial gas
turbine markets. Operating income for the Engineered Products
segment for the first nine months of fiscal 2003 was $9.4
million versus $7.9 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 $2.6 million for the first nine months of fiscal 2003
versus $12.8 million for the same period a year ago. 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 as of June 30, 2002.

25

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.

Cash from operations was $55.6 million for the current nine
month period. For the same period last year, cash provided from
operations was $113.8 million. Inventories were $14 million
lower than at the end of the previous quarter and $22 million
lower than a year ago. From its peak in December 2000,
inventories are now $113 million lower. The days sales
outstanding, including receivables outstanding under a
receivables purchase facility, was reduced to 49.7 days versus
54.7 days at the end of the previous quarter and 57.1 days a
year ago. Capital expenditures for plant, equipment and software
consumed $6.8 million in cash during the first nine months of
fiscal 2003 versus $24.0 million for the same year ago period.
Dividends were $12.2 million this year compared to $23.3 million
last year.

Carpenter defines net debt as total debt net of cash and
including amounts outstanding under the Company's receivables
purchase facility. Net debt is a measure of indebtedness because
cash is expected to be used for debt repayments. Net debt was
reduced to $379.4 million at March 31, 2003. This net debt
level was $21.7 million lower than at the end of the previous
quarter and $88.7 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 March 31, 2003, 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
adequate to meet its foreseeable needs. At the end of the third
quarter, Carpenter had approximately $135 million available
under its credit facilities.
26

Selected Financial Measures:

The following tables provide additional information
regarding certain financial measures:

Contingencies:

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 other accruals
were made during the nine months ended March 31, 2003 or 2002.
The liability recorded for environmental remediation costs at
Superfund sites, at other third party-owned sites and at

28

Carpenter-owned operating facilities at March 31, 2003 was $6.3
million. The estimated range at March 31, 2003 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 $6.3 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.

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 as a drop in consumer
confidence and the potential response by businesses to further
curtail capital spending could stall the recovery in many of the
markets Carpenter serves. Based on current market conditions,
Carpenter expects continued profitability in its fourth fiscal
quarter (ending June 30), driven primarily by the cost reduction
initiatives it has undertaken despite depressed conditions in
the aerospace and power generation markets and a sluggish
manufacturing environment. The company expects that its cost

29

reduction efforts and process improvements will have a
sustainable effect on its operating performance going forward;
however, it also expects that pension plan related factors will
negatively impact its earnings in fiscal 2004 (begins July 1,
2003).

The company anticipates that its net pension credit will
change to a net pension expense in fiscal 2004. For fiscal 2003,
the net pension credit is equivalent to $.09 per diluted share.
While the credit will reverse to an expense in fiscal 2004, the
change will be a non-cash item as the company does not expect
that it will be required to make any cash contributions to its
defined benefit pension plan.

The fiscal 2004 net pension expense primarily results from
the accumulated effect of investment losses from more than two
years of declining stock market returns. The stock market
performance coupled with the low interest rate environment will
lead to changes in actuarial assumptions. The changes will
include a lower future rate of expected returns on the pension
assets as well as a lower discount rate, which has the effect of
increasing the company's pension expense. Based on the current
value of its defined benefit pension plan assets, the net
pension expense could be approximately $1.00 per diluted share
for fiscal year 2004. However, the final net pension expense
will be actuarially determined as of June 30, 2003 and held
constant throughout the next fiscal year. The company's current
estimate is subject to change based upon the performance of the
equity markets, bond markets and finalization of certain
actuarial assumptions.

30

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 December 31, 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, industrial
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) domestic and foreign excess manufacturing
capacity for certain alloys that Carpenter produces; 4)
fluctuations in currency exchange rates, resulting in increased
competition and downward pricing pressure on certain Carpenter
products; 5) the degree of success of government trade actions;
6) fluctuations in stock markets which could impact the
valuation of the assets in Carpenter's pension trusts and the
accounting for pension assets; 7) the potential cost advantages
that new competitors or competitors who have reorganized through
bankruptcy may have; 8) the transfer of manufacturing capacity
from the United States to foreign countries; and 9) the
consolidation of customers and suppliers. 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.

31

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
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 that
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

32

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.

33

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) Current Reports on Form 8-K were filed on behalf of
Carpenter on April 22, 2003 and April 25, 2003. The
Reports were dated April 22, 2003 and April 25, 2003,
respectively. The April 22, 2003 Report covered
Item 7, Financial Statements and Exhibits and Item 9,
Regulation FD Disclosure and included Carpenter's
press release discussing third quarter results as an
Exhibit. The April 25, 2003 Report covered Item 5,
Other Events. No financial statements were filed with
the April 25, 2003 Report.

34

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

35

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: May 14, 2003 /s/Terrence E. Geremski
- ------------------- --------------------------------
Terrence E. Geremski
Senior Vice President - Finance
and Chief Financial Officer

36

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 procedures based on our evaluation as of the
Evaluation Date;
37
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: May 14, 2003

/s/Dennis M. Draeger
------------------------------
Dennis M. Draeger
Chairman and Chief Executive
Officer

38

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;

39

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: May 14, 2003

/s/Terrence E. Geremski
-----------------------------
Terrence E. Geremski
Senior Vice President -
Finance and Chief Financial
Officer

40

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 March 31, 2003, 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 Senior Vice President -
Executive Officer Finance and Chief
Financial Officer

Date: May 14, 2003

41