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

 
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      

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of October 31, 2000.

The Exhibit Index appears on page E-1.  

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET
September 30, 2000 and June 30, 2000
(in millions)

See accompanying notes to consolidated financial statements.

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
for the three months ended September 30, 2000 and 1999
(in millions, except per share data)

See accompanying notes to consolidated financial statements.

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
for the three months ended September 30, 2000 and 1999
(in millions)

See accompanying notes to consolidated financial statements.

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
for the three months ended September 30, 2000 and 1999
(in millions)

See accompanying notes to consolidated financial statements.

2.   Earnings Per Common Share
     The calculations of earnings per share for the periods ended September 30, 2000
     and 1999 are as follows:

Environmental

     Carpenter is subject to various stringent federal, state and local environmental laws and regulations. The liability for future environmental remediation costs is evaluated by management on a quarterly basis. Carpenter accrues amounts for environmental remediation costs which represent management's best estimate of the probable and reasonably estimable costs relating to environmental remediation. For the three months ended September 30, 2000, the liability for environmental remediation costs was increased by $.6 million, which was included in Cost of Sales. No amounts were charged or credited to operations for the three months ended September 30, 1999. The liability for environmental remediation costs remaining at September 30, 2000 was $8.2 million. The estimated range of the reasonably possible future costs of remediation at superfund sites and at Carpenter-owned operating facilities is between $8.2 million and $11.4 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 presently unknown remediation sites and the allocation of costs among the potentially responsible parties. Based upon information presently 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

     On August 6, 1999, the Bridgeport, Connecticut Port Authority filed a Certificate of Taking, acquiring fee simple ownership of Carpenter's former plant site in that city. The proposed compensation for the site is $2.5 million and the Port Authority has stated its intention to seek reimbursement of any additional site remediation costs. The carrying value for the site on Carpenter's books is approximately $14 million and is based upon a recent appraisal and arms-length negotiated selling prices with interested parties. Carpenter has begun legal proceedings in court to obtain a fair value for the property and a declaratory judgment absolving Carpenter from any remediation costs caused by the Port Authority's development efforts. This matter, pending in the U.S. District Court for the District of Connecticut, is scheduled for trial in early January 2001. While the ultimate outcome of these proceedings is undeterminable, in the opinion of management, the Port Authority's proposed compensation and remediation reimbursement are unreasonable and will not be upheld and accordingly, no provision has been made for an impairment in carrying value.

     Carpenter is also defending various claims and legal actions, and is subject to contingencies which 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 because any such effect depends 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, in the opinion of management, any total ultimate liability will not have a material effect on Carpenter's financial position, results of operations or cash flows.

7.   Business Segments

     Statement of Financial Accounting Standards (SFAS) 131, "Disclosures about Segments of an Enterprise and Related Information," requires companies to disclose segment information on the same basis as that used internally by executive management to evaluate segment performance. Carpenter is organized on a product basis and managed in three segments: Specialty Alloys, Titanium Alloys and Engineered Products. For the following segment reporting, the Specialty Alloys and Titanium Alloys (Dynamet) segments have been aggregated into one reportable segment (Specialty Metals) because of the similarities in products, processes, customers, distribution methods and economic characteristics.

     Specialty Metals includes the manufacture and distribution of stainless, titanium, high temperature, electronic, tool and other alloys in bar, wire, rod, and strip forms. Sales are distributed both directly from producing plants and from Carpenter's distribution network.

     Engineered Products includes structural ceramic products, ceramic cores for the casting industry, metal-injection molded products, tubular metal products for nuclear and aerospace applications, custom shaped bar and ultra hard wear materials.

     Carpenter evaluates segment performance based upon income before interest and income taxes (EBIT) and return on assets. Both of these measures include the allocation of certain corporate costs. Sales between the segments are generally made at market-related prices.

     The pension credit represents the income relating to Carpenter's overfunded defined benefit pension plans. None of the pension credit is allocated to the business segments. The corporate costs primarily represent the unallocated portion of the operating costs of the finance, information services, law and human resource departments and corporate management staff. Corporate assets are primarily cash and cash equivalents, prepaid pension cost, certain assets held for sale, corporate-owned life insurance, other investments and corporate operating assets.

    Carpenter's sales are not materially dependent on a single customer or small group of customers.

8.   Adoption of SFAS 133

     Carpenter adopted SFAS No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities", on July 1, 2000. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in earnings or Other Comprehensive Income, depending on the type of hedging instrument and the effectiveness of the hedges. In accordance with the transition provisions of SFAS 133, Carpenter recorded a cumulative adjustment to Other Comprehensive Income of $.8 million, after taxes, to recognize the fair value of its derivative instruments as of the date of adoption.

     Carpenter’s current risk management strategies include the use of derivative instruments to reduce certain risks. These strategies are:

     All of the derivatives used by Carpenter in its risk management strategies are highly effective because all of the critical terms of the derivative instruments match those of the hedged item. All of the described derivative instruments except for hedges of receivables have been designated as cash flow hedges at the time of adoption of SFAS 133 or at the time they were executed, if later than July 1, 2000. The hedges of inter-company receivables do not qualify for hedge accounting. All derivatives are adjusted to their fair market values at the end of each calendar quarter. Unrealized net gains and losses for cash flow hedges are recorded in Other Comprehensive Income. At the time the anticipated transactions occur, any unrealized gains and losses on the related hedge are reclassified from Other Comprehensive Income to the Statement of Income, thus offsetting the income effects of the anticipated transactions to which they relate. Amounts reclassified to the Statement of Income are included in cost of sales (commodity hedges), interest expense (interest rate swaps) and sales (foreign exchange hedges of anticipated sales). All unrealized gains or losses on hedges of inter-company receivables are recorded in income each calendar quarter, as are changes in the value of the receivables. If an anticipated transaction is no longer expected to occur, unrealized gains and losses on the related hedge are reclassified to the Statement of Income. Cash flow hedges at September 30, 2000 have various settlement dates, the latest of which is June 2004.

     Carpenter evaluates all derivative instruments each quarter to determine that they are highly effective. Any ineffectiveness is recorded in the Statement of Income. The ineffectiveness for existing derivative instruments for the quarter ending September 30, 2000, was primarily related to option premiums and was immaterial. During the quarter ended September 30, 2000, unrealized net gains totaling $1.5 million after taxes was recorded in Other Comprehensive Income, including the $.8 million cumulative effect as of July 1, 2000, and $.4 million of income was reclassified from Other Comprehensive Income to the Statement of Income, net of income taxes. There were no reclassifications from Other Comprehensive Income to earnings during the quarter ended September 30, 2000, that were caused by anticipated transactions which are no longer expected to occur.

     As of September 30, 2000, $1.1 million of net gains from derivative instruments was included in accumulated other comprehensive income, $.7 million of which is expected to be reclassified to the Statement of Income within one year.

9.   Accounting Pronouncements

     The Emerging Issues Task Force (EITF) of the Financial Accounting Standard Board issued a new release (EITF00-10) at the end of July 2000 regarding the classification of freight and handling costs billed to customers. EITF00-10 requires freight and handling costs billed separately on an invoice to be included as part of Sales on the Statement of Income. In addition, the preferred classification of freight and handling costs expensed on the Statement of Income is to include them in Cost of Sales. Carpenter adopted this requirement effective July 1, 2000. Restatement of prior year's quarter resulted in increasing sales by $3.2 million, increasing Cost of Sales by $8.2 million and decreasing Selling and Administrative costs by $5 million.

     The Securities and Exchange Commission (SEC) issued Staff Accounting

Bulletin 101 (SAB101) which sets forth the SEC's guidelines on revenue recognition. This bulletin is effective for Carpenter no later than the fourth quarter of fiscal 2001 (June 2001 quarter). Carpenter has not completed its determination of the impact of SAB101 on its financial statements.

     Net income for the quarter ended September 30, 2000 was $11.1 million compared with $10.2 million in the prior-year period. Diluted earnings per share, including nonrecurring items, increased to $.48 compared with $.44 a year ago, an increase of 9 percent.

     Net sales for the quarter rose 15 percent to $277.7 million, up from $241.7 million for the same period a year ago. This increase was due primarily to an increase in the sales revenue of Specialty Alloys Operations (SAO), resulting from an improved product mix and higher raw material surcharges. Unit volume shipped for SAO decreased by 6.5 percent for the quarter compared with the same quarter last year. Sales of the Engineered Products Group (EPG) increased 19 percent. Dynamet's sales for the quarter, including those of Anval, which was acquired on February 1, 2000, were flat compared with the same quarter of last year.

     Cost of sales as a percentage of net sales was 76.6 percent for the first quarter of fiscal 2001 compared to 76.1 percent for the same quarter last year. This increase was due to higher raw material, energy and outside service costs which were partially offset by an improved sales mix and increased selling prices.

     Selling and administrative expenses for the quarter declined to 13.8 percent of net sales compared with 14.2 percent of net sales for the same quarter in fiscal 2000. Selling and administrative expenses increased $4.1 million compared with the same quarter a year ago due to some nonrecurring consulting and legal fees, start-up costs of Carpenter's e-business initiatives and the selling and administrative expenses of recently acquired Anval.

Interest expense increased to $10.7 million from $7.4 million for the same quarter a year ago, due to higher debt levels, increased interest rates and the completion of our major capital spending program. The latter caused $1.5 million less interest to be capitalized than a year ago.

     First quarter other income was $1.4 million more favorable than a year ago, primarily resulting from a $.6 million environmental settlement, reduced losses on the market valuation of investments in company-owned life insurance policies, and a gain on the sale of one Carpenter warehouse.

     Net sales for this segment, which aggregates the SAO and Dynamet units of Carpenter were $241.7 million, which was 14 percent higher than those of the same quarter a year ago. The increase in sales was primarily due to a 15 percent increase in sales at SAO resulting from improved demand in the power generation and aerospace markets. Dynamet's sales including Anval were relatively flat compared to the same quarter last year.

     Earnings before interest and taxes (EBIT) for the Specialty Metals segment were $19.9 million which was 9 percent higher than in last year's first quarter. This increase was due to an improved sales mix and increased selling prices at SAO, which were partially offset by lower unit SAO sales volume and higher energy, outside service and raw material costs than a year ago. The continued weakness in Dynamet's selling prices and demand for aerospace products also negatively affected this segment's EBIT.

     Net sales for this segment were $36.3 million which was 19 percent higher than the same quarter of last year. EBIT was $3.4 million which was $2.0 million higher than the first quarter of last year. This profit growth was due to higher sales volume and lower administrative costs. Most units within the segment had sales improvements with the ceramic cores products showing the most growth.

     Pension credits, which result from the significant overfunded position of Carpenter's defined benefit pension plans, were $12.0 million in the September 2000 quarter versus $11.4 million in the same quarter a year ago. This slightly higher level of credits was due primarily to the investment returns on the pension plan assets during fiscal 2000. This favorable variance from the previous year's level of pension credits will continue for the balance of fiscal 2001. Carpenter has other retirement obligations such as post-retirement medical benefits and supplemental employee retirement plans that are not included in this pension credit. The net impact of all retirement plans on Carpenter's income statement for the September 2000 quarter was approximately $10.1 million of income before taxes compared to $9.2 million for the same quarter last year. Amounts shown in the consolidated Statement of Cash Flows for pension and postretirement benefits are net of cash payments made to the plans.

Cash Flow and Financial Condition:

     Carpenter has maintained the ability to provide adequate 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.

     During the three months ended September 30, 2000, Carpenter's cash and cash equivalents decreased $.1 million, as shown in the consolidated statement of cash flows.

     Investing activities for plant, equipment and software consumed $14.4 million in cash during the first three months of fiscal 2001 and $25.9 million for the same year ago period. This decrease in capital expenditures reflects the completion of our five-year investment program. Total capital expenditures for all of fiscal 2001 are anticipated to be about $55 million, which is approximately the same as anticipated depreciation. In addition, $5 million in proceeds was received primarily due to the sale of a company airplane and one warehouse.

     Total debt decreased $10.3 million since June 30, 2000 to a level of $572.3 million or 40.8 percent of total capital employed, including deferred taxes. We expect a positive free cash flow (defined as cash flow after capital expenditures/disposals and dividends) in excess of $50 million for fiscal 2001, which will be used to reduce debt.

     Financing of $275 million is available under revolving credit agreements with four banks. Carpenter limits the aggregate commercial paper and credit facility borrowings at any one time to a maximum of $275 million. As of September 30, 2000, $55.3 million was available under the credit facility and commercial paper program.

     At September 30, 2000, current assets exceeded current liabilities by $90 million (a ratio of 1.2 to 1). In addition, Carpenter classifies borrowings from a $200 million revolving credit agreement as current even though the agreement ends February 2002. The current ratio is also conservatively stated because certain inventories are valued $126.4 million less than the current cost as a result of using the LIFO method.

     Carpenter believes that its present financial resources, both from internal and external sources, will be adequate to meet its foreseeable short-term and long-term liquidity needs.

     Statement of Financial Accounting Standard (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" requires that derivative instruments be recorded on the balance sheet at their fair value and that changes in fair value be recorded each period in current earnings or comprehensive income. The adoption of SFAS 133 resulted in recording a cumulative adjustment as of July 1, 2000 for this required change in accounting. This adjustment increased current assets by $1.2 million and other comprehensive income, net of tax, by $.8 million (see note 8 to the consolidated financial statements).

     The Emerging Issues Task Force (EITF) of the Financial Accounting Standard Board issued a new release (EITF00-10) at the end of July 2000 regarding the classification of freight and handling costs billed to customers. EITF00-10 requires freight and handling costs billed separately on an invoice to be included as part of Sales on the Statement of Income. In addition, the preferred classification of freight and handling costs expensed on the Statement of Income is to include them in Cost of Sales. Carpenter adopted this requirement effective July 1, 2000. Restatement of prior year's quarter resulted in increasing sales by $3.2 million, increasing Cost of Sales by $8.2 million and decreasing Selling and Administrative costs by $5 million.

     The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101 (SAB101) which sets forth the SEC's guidelines on revenue recognition. This bulletin is effective for Carpenter no later than the fourth quarter of fiscal 2001 (June 2001 quarter). Carpenter has not completed its determination of the impact of SAB101 on its financial statements.

     Carpenter is subject to various stringent federal, state and local environmental laws and regulations. The liability for future environmental remediation costs is evaluated by management on a quarterly basis. Carpenter accrues amounts for environmental remediation costs which represent management's best estimate of the probable and reasonably estimable costs relating to environmental remediation. For the three months ended September 30, 2000, the liability for environmental remediation costs was increased by $.6 million, which was included in Cost of Sales. No amounts were charged or credited to operations for the three months ended September 30, 1999. The liability for environmental remediation costs remaining at September 30, 2000 was $8.2 million. The estimated range of the reasonably possible future costs of remediation at superfund sites and at Carpenter-owned operating facilities is between $8.2 million and $11.4 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 presently unknown remediation sites and the allocation of costs among the potentially responsible parties. Based upon information presently 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.

     This Form 10-Q contains various "Forward-looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which represent Carpenter's expectation or beliefs concerning various future events, include statements concerning future revenues and continued growth in various market segments. These statements are based on current expectations regarding future events that involve a number of risks and uncertainties which could cause actual results to differ from those of such forward-looking statements. These risks and uncertainties include those set forth in other filings made by Carpenter under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and also include the following factors: 1) the cyclical nature of the specialty materials business and certain end-use markets, including, but not limited to, aerospace, 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 fuel and raw material, such as nickel, through increased prices and surcharges; 3) excess inventory and the impact of inventory adjustments in Carpenter's aerospace customer base; 4) worldwide excess capacity for certain alloys which Carpenter produces, resulting in increased competition and downward pricing pressure on Carpenter products; 5) the impact on the overfunding of Carpenter's pension plans, of an increase in the pension liability or a decrease in plan assets, approximately 70 percent of which are invested in common stock equities; 6) the criticality of certain raw materials acquired from foreign sources, some of which are located in countries that may be subject to unstable political and economic conditions, potentially affecting the prices of these materials; 7) the level of export sales impacted by political and economic instability, particularly in Asia, Eastern Europe and Latin America, resulting in lower global demand for stainless steel products; 8) the ability of Carpenter, along with other domestic producers of stainless steel products, to obtain and retain favorable rulings in dumping and countervailing duty claims against foreign producers; 9) the level of sales impacted by export controls, changes in legal and regulatory requirements, policy changes affecting the markets, changes in tax laws and tariffs, exchange rate fluctuations and accounts receivable collection; 10) the effects on operations of changes in U.S. and foreign governmental laws and public policy, including environmental regulations; and 11) the outcome of the litigation between the Bridgeport, Connecticut, Port Authority and Carpenter concerning the value of the Corporation's former plant site and responsibility for site remediation costs caused by the Port Authority's development efforts. 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.

     On August 6, 1999, the Bridgeport, Connecticut Port Authority filed a Certificate of Taking, acquiring fee simple ownership of Carpenter's former plant site in that city. The proposed compensation for the site is $2.5 million and the Port Authority has stated its intention to seek reimbursement of any additional site remediation costs. The carrying value for the site on Carpenter's books is approximately $14 million and is based upon a recent appraisal and arms-length negotiated selling prices with interested parties. Carpenter has begun legal proceedings in court to obtain a fair value for the property and a declaratory judgment absolving Carpenter from any remediation costs caused by the Port Authority's development efforts. This matter, pending in the U.S. District Court for the District of Connecticut, is scheduled for trial in early January 2001. While the ultimate outcome of these proceedings is undeterminable, in the opinion of management, the Port Authority's proposed compensation and remediation reimbursement are unreasonable and will not be upheld and accordingly, no provision has been made for an impairment in carrying value.

     Other pending legal proceedings involve ordinary routine litigation incidental to the business of Carpenter. There are no material proceedings to which any Director, Officer, or affiliate of the Company, or any owner of more than five percent of any class of voting securities of the Company, or any associate of any Director, Officer, affiliate, or security holder of the Company, is a party 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

     a.   On October 23, 2000, Carpenter Technology Corporation held
           its 2000 Annual Meeting of Stockholders.

     b.   At the 2000 Annual Meeting, stockholders of Carpenter elected
           the following Directors to three-year terms which will expire at the
           2003 Annual Meeting of Stockholders:  Dr. C. McCollister Evarts,
           William J. Hudson, Jr., Peter C. Rossin and Kenneth L. Wolfe.

           Voting for these Directors was as follows:

    The following are Directors whose terms continued following
    the 2000 Annual Meeting:  Marcus C. Bennett, Robert W. Cardy,
    William S. Dietrich II, Dennis M. Draeger, J. Michael Fitzpatrick,
    Robert J. Lawless, Marlin Miller, Jr., Robert N. Pokelwaldt and
    Kathryn C. Turner.

     c.   Stockholders approved the appointment of PricewaterhouseCoopers LLP
           as independent public accountants for Carpenter for fiscal 2001. The voting
           on this matter was as follows:

     d.   Stockholders also approved a proposal (i) to amend the Stock-Based Incentive
           Compensation Plan for Officers and Key Employees to increase the number of
           shares available for awards by 1,800,000 shares and (ii) to re-authorize the
           criteria for granting awards of performance shares under the Plan.  The vote on
           this matter was as follows:

     a.   The following documents are filed as exhibits:

            27. Financial Data Schedule.

     b.   The Company did not file any Reports on Form 8-K
            for events occurring during the quarter of the
            fiscal year covered by this report.

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

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