Carpenter Technology Reports Record First Quarter Results

Carpenter Technology Corporation (NYSE:CRS) today reported record first quarter results. Net income of $57.7 million or $2.24 per diluted share reflected a richer product mix, growth in the energy market, and a continued focus on margin enhancement. Financial highlights from the first quarter include:

(a) non-GAAP financial measures that are explained in the attached tables

(b) includes specialty and titanium alloys, stainless steel, and powder materials

First Quarter – Operating Summary

“Our focus on higher value materials and growth in energy market sales contributed to record first quarter results,” said Anne Stevens, chairman, president and chief executive officer. “We are pleased with our results and see opportunity to further improve our performance through an enhanced focus on operational excellence.

“We expect the energy market to remain favorable and are confident about the outlook for our aerospace business in the second half of our fiscal year,” Stevens said.

Carpenter’s sales of $475 million were a first quarter record and 17 percent more than a year ago. Adjusted for surcharges, sales gained 3 percent. A 27 percent increase in pounds shipped by the Company’s Premium Alloys Operation, which benefited from strong demand from the energy market, contributed to the increase. Total volume declined during the quarter due primarily to a reduction in the shipment of lower priced stainless material.

Sales to the energy market, which includes oil and gas and power generation, increased 94 percent from a year ago to $56 million. Excluding surcharge revenue, sales increased 89 percent.

Within the energy market, sales to the power generation sector, excluding surcharge revenue, surged 140 percent to $22 million, due to increased demand for industrial gas turbines, particularly from the Middle East. Sales to the oil and gas sector, excluding surcharge revenue, increased 56 percent from a year ago to $22 million. The Company’s broad product portfolio of high strength and corrosion resistant materials has allowed it to gain strong acceptance among customers. Growth with key customers and strong international demand helped drive the increase in energy sales.

Automotive and truck market sales grew 19 percent from the first quarter a year ago to $59 million. Excluding surcharge revenue, sales gained 3 percent from a year ago. The year-over-year sales increase primarily reflected demand for higher value materials to support technology changes in engines and exhaust systems. This increase was partially offset by a reduction in pounds shipped due to lower automotive production levels and a decision not to participate in certain marginally profitable business.

Medical market sales increased to $32 million, up 16 percent from last year’s first quarter. Adjusted for surcharge revenue, sales increased 5 percent. The gain reflected a pick-up in demand relative to last year’s comparatively low shipment levels.

Sales to the industrial market improved by 14 percent to $109 million. Adjusted for surcharge revenue, sales decreased approximately 3 percent. During the quarter, the Company benefited from increased sales of higher value materials used in capital equipment and in the manufacture of valves and fittings. This increase was more than offset by reduced shipments of lower value materials sold through distributors.

Sales to the aerospace market increased 9 percent to $174 million in the first quarter compared to a year ago. Excluding surcharge revenue, sales declined approximately 6 percent from the record first quarter a year ago. Increased sales of nickel-based alloys used in jet engine components was more than offset by planned inventory adjustments at certain key customers and by a decline in shipments to a customer who is now procuring some of its aerospace material needs from a recently acquired subsidiary.

The Company expects that beginning in the second half of its fiscal year, aerospace sales will more closely reflect the increase in growth rate of commercial jet deliveries projected for 2008.

Consumer market sales increased 4 percent from the first quarter a year ago to $44 million. Adjusted for surcharge revenue, sales decreased 7 percent. Lower shipments of materials used in the housing market more than offset increased sales to the sporting goods and electronics markets.

Geographically, sales outside the United States increased 28 percent from the same quarter a year ago to $157 million. International sales, which represented 33 percent of total sales, benefited from increased sales to the energy, industrial and medical markets.

Record first quarter gross profit of $121.4 million compared to $103.9 million in the same quarter a year ago. The higher gross profit reflected the increased sales of higher value materials, pricing, cost containment, and the lag effect in the Company’s surcharge mechanism.

Gross profit in the recent first quarter was negatively impacted by a $4.6 million reserve for duty drawback claims filed by the Company’s licensed broker. Carpenter was notified by U.S. Customs that its licensed broker may have filed claims with inadequate documentation over the past four years. Carpenter is cooperating with U.S. Customs to review all individual claims and working with its suppliers and a new licensed broker to assemble the appropriate documentation where available.

In the recent first quarter, the Company had LIFO income of $14.5 million due partly to declining nickel prices during the quarter relative to its previous fiscal year-end. In the first quarter a year ago, the Company had LIFO expense of $26.2 million. The LIFO income or expense is mostly offset by changes in surcharge revenue and, therefore, has little impact on gross profit.

Gross profit as a percent of sales in the recent first quarter was 25.6 percent, compared to 25.7 percent in the same quarter a year ago.

The Company estimated that the lag effect in its surcharge mechanism positively impacted the gross margin by approximately 115 basis points during the recent first quarter. Reported gross margin is also adversely impacted by the amount that the surcharge increases the Company’s revenue.

Adjusted for the lag effect in the Company’s surcharge mechanism, the dilutive effect of surcharge revenue, and the duty drawback reserve, gross profit as a percent of sales would have been an estimated 35.7 percent in the recent first quarter versus an estimated 33.6 percent a year ago. The underlying improvement was largely driven by a richer product mix and the Company’s continued focus on cost.

Record first quarter operating income of $85.7 million compared to $73.1 million a year ago. The record level of operating income was achieved primarily as a result of a richer product mix, pricing, a continued focus on cost, and the benefit from the lag effect in the Company’s surcharge mechanism.

These benefits were partially offset by a $4.9 million increase in selling and administrative expenses. The increase primarily related to higher variable compensation accruals and costs associated with driving the Company’s future growth initiatives.

Adjusted for the lag effect, the increase in surcharge revenue, and the duty drawback claims reserve, operating profit as a percent of sales would have been an estimated 25.2 percent in the recent first quarter versus an estimated 24.1 percent a year ago.

Net income of $57.7 million or $2.24 per diluted share in the first quarter compared with net income of $51.2 million or $1.94 per diluted share a year ago. In the recent first quarter, net income included an income tax provision of 33.3 percent of pre-tax income versus 30.1 percent in the same quarter a year ago.

The tax provision in the first quarter a year ago was favorably impacted by the reversal of certain deferred tax valuation allowances.

Share Repurchase Program

During the quarter, Carpenter repurchased $157.7 million or 1,341,579 shares of its common stock on the open market. As of September 30, 2007, Carpenter had repurchased a total of $186.5 million or 1,576,651 shares of its common stock under the program established in September 2006. At September 30, 2007, the Company had 24,779,521 shares of common stock outstanding.

Carpenter plans to repurchase, under certain conditions, a total of $250 million of its common stock as currently authorized by its Board of Directors.

Segment Reporting

As announced on October 12, the Company realigned its reportable business segments in order to allow it to focus more effectively on customers, end-use markets and operational excellence goals. As a result, the Company now has three reportable business segments: Premiums Alloys Operations, Advanced Metals Operations, and Engineered Products Operations.

Financial information on the business segments is provided in the attached tables.

Conference Call

Carpenter will host a conference call and webcast today, October 31, at 10:00 a.m., ET, to discuss financial results and operations for the first quarter.

Please call 610-208-2800 for details of the conference call. Access to the call will also be made available at Carpenter’s web site (www.cartech.com) and through CCBN (www.ccbn.com). A replay of the call will be made available at www.cartech.com or at www.ccbn.com.

Carpenter produces and distributes specialty alloys, including stainless steels, titanium alloys, and superalloys, and various engineered products. Information about Carpenter can be found on the Internet at www.cartech.com.

Except for historical information, all other information in this news release consists of forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. 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 annual report on Form 10-K for the year ended June 30, 2007 and the exhibits attached to those filings. They include but are not limited to: 1) the cyclical nature of the specialty materials business and certain end-use markets, including aerospace, industrial, automotive, consumer, medical, and energy including power generation, or other influences on Carpenter’s business such as new competitors, the consolidation of customers, and suppliers or the transfer of manufacturing capacity from the United States to foreign countries; 2) the ability of Carpenter to achieve cost savings, productivity improvements or process changes; 3) the ability to recoup increases in the cost of energy and raw materials or other factors; 4) domestic and foreign excess manufacturing capacity for certain metals; 5) fluctuations in currency exchange rates; 6) the degree of success of government trade actions; 7) the valuation of the assets and liabilities in Carpenter’s pension trusts and the accounting for pension plans; 8) possible labor disputes or work stoppages; 9) the potential that our customers may substitute alternate materials or adopt different manufacturing practices that replace or limit the suitability of our products; 10) the ability to successfully acquire and integrate acquisitions; and 11) the ability of Carpenter to implement and manage material capital expansion projects in a timely and efficient manner. 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.

Contacts:

Carpenter Technology Corporation
Investor and Media Inquiries:
Jaime Vasquez, 610-208-2165
jvasquez@cartech.com