(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 January 31, 2000.

The Exhibit Index appears on page E-1.  

See accompanying notes to consolidated financial statements.

(in millions, except per share data)

See accompanying notes to consolidated financial statements.

(in millions)

See accompanying notes to consolidated financial statements.

(in millions)

See accompanying notes to consolidated financial statements.

(Unaudited)

The current cost of LIFO-valued inventories was $329.5 million at December 31, 1999 and $294.9 million at June 30, 1999.

Environmental

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 quarter and six months ended December 1999, the liability for environmental remediation costs was reduced by $.8 million which was included in Other Income. This adjustment related to updated estimates of probable liabilities for sites previously owned by Talley Industries, Inc. No amounts were charged or credited to operations for the three and six months ended December 31, 1998. The liability for environmental remediation costs remaining at December 31, 1999 was $8.6 million. The estimated range of the reasonably possible future costs of remediation at superfund sites and at Carpenter-owned operating facilities is between $8.6 million and $11.1 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.

On January 15, 1999, the Bridgeport, Connecticut, Port Authority issued a Notice of Condemnation for the taking of Carpenter's former plant site in that city. On August 6, 1999, the Port Authority filed a Certificate of Taking, acquiring fee simple ownership of the property. 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 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. 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 commitments and 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.

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 and distribution methods.

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 a Carpenter operated 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.

Effective July 1, 1999, management changed the basis for measuring the business segments' profits to exclude the costs of all corporate functions and the pension credit from the Specialty Metals segment, to transfer the Mexican operations from the Engineered Products segment to the Specialty Metals segment, to allocate certain corporate costs to the business segments, and to show separately both the unallocated corporate costs and the pension credit. All segment data for fiscal 1999 have been restated to reflect the current segment reporting structure.

Carpenter evaluates segment performance based upon income before interest and income taxes (EBIT) and return on assets after 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, and corporate operating assets.

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

During the third quarter of fiscal 1999, Carpenter recorded a pre-tax charge of $14.2 million ($8.5 million after-tax or $.37 per diluted share) related to a salaried work force reduction and a reconfiguration of its U.S. distribution network. The eliminated positions included various salaried positions throughout the Specialty Alloys Operations and corporate offices. The charge consisted chiefly of various personnel-related costs for about 210 employees to cover severance payments, enhanced pension benefits, medical coverage and related items. Approximately $13.0 million of the charge will be paid from pension funds and, accordingly, this portion of the special charge reduced the prepaid pension cost account on the balance sheet. Through December 31, 1999, there was a reduction of approximately 170 employees. The remaining employees are expected to depart by June 30, 2000.

The Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which will be effective for Carpenter's fiscal year 2001. This standard requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in fair value of derivatives will be recorded each period in current earnings or comprehensive income. Carpenter anticipates that, due to its limited use of derivative instruments, the adoption of SFAS No. 133 will not have a significant effect on Carpenter's future results of operations or financial position. 

Net income for the quarter ended December 31, 1999, was $12.7 million compared to $12.2 million for the same quarter a year ago. Diluted earnings per share were $.55 per share compared to $.53 per share for the year-earlier quarter. The higher earnings were primarily the result of the settlement of a foreign income tax issue and several non-recurring adjustments.

Net sales for the second fiscal quarter ended December 31, 1999 of $250.8 million compared with $248.7 million for last year's second quarter. The overall one percent sales increase from the same quarterly period a year ago was primarily a result of a 12 percent increase in the unit sales of the Specialty Alloys Operations (SAO) segment, which was offset by SAO price decreases and mix changes and a 20 percent decrease in sales at Dynamet.

Cost of sales as a percent of net sales increased slightly to 75.2 percent of sales compared to 73.6 percent last year, primarily because of lower SAO selling prices, increases in SAO raw material costs, lower Dynamet sales and a LIFO inventory adjustment at Dynamet.

Selling, general and administrative expenses increased by $1.7 million due primarily to increased costs for legal services, E-business consulting and freight less the favorable effects of staff reductions and higher pension credits.

Other income was more favorable than a year ago by $2.1 million. In the quarter ended December 31, 1999, several favorable effects were realized relating to Talley Industries, Inc. (Talley). A favorable insurance claim of $0.5 million relating to a former Talley site was settled and $1.4 million was realized from the reduction of liabilities for environmental remediation, worker's compensation and other matters based upon information received during the quarter.

During the quarter ended September 30, 1999, Carpenter changed its segment reporting. The changes are described in Note 7 to the Consolidated Financial Statements. All segment data for fiscal 1999 have been restated to reflect the current segment reporting structure.

Net sales for this segment, which aggregates the SAO and Dynamet units of Carpenter were $221.5 million which was one percent higher than those of the same quarter a year ago. The increase in sales was primarily due to higher unit volume sales at SAO, which was partially offset by price decreases and mix changes, as well as a 20% decrease in sales at Dynamet.

Earnings before interest and taxes (EBIT) for the Specialty Metals segment were $14.6 million which was 34% lower than last year's second quarter. Profit margins were reduced as SAO selling prices fell 8 percent despite higher SAO costs for nickel versus a year ago. Dynamet's selling prices were 7 percent lower than the year-earlier quarter, in part because of lower costs of titanium. The margin was also adversely affected by a $1.7 million LIFO accounting adjustment in December 1999, as a result of a decrease in inventories at Dynamet. These effects were partially offset by cost reductions in manufacturing and administrative functions.

Net sales for this segment were $30.1 million which was one percent higher than the same quarter of last year. EBIT was $1.0 million which was $0.8 million higher than last year's second quarter. This profit growth was due to manufacturing cost improvements, mix factors and reduced product development costs.

Pension credits, which result from the significant overfunded position of Carpenter's defined benefit pension plans, were $11.4 million in the December 1999 quarter versus $8.9 million in the same quarter a year ago. The higher level of credits was due primarily to the significant investment returns on the pension plan assets during fiscal 1999. This favorable variance from the previous year's level will continue for the balance of fiscal 2000 because the amount of the credit is based upon an actuarial valuation at the beginning of each fiscal year and changed annually.

The effective tax rate (income taxes as a percent of income before taxes) was 24.2% in the quarter ended December 31, 1999, versus 39.4% in the same quarter of the previous year. The lower rate was primarily due to the resolution of a foreign tax issue. After costs of litigation, the resolution of this matter improved net income by $1.9 million or $.08 per diluted share.

Net income for the six months ended December 31, 1999, was $22.9 million compared to $24.4 million for the same period a year ago. Diluted earnings per share were $.99 per share compared to $1.03 per share for the year-earlier period. The decreased earnings were primarily the result of lower sales to the aerospace industry, reduced selling prices and higher material costs.

Net sales were $489.4 million compared to $499.0 million for the first half of last fiscal year. This decrease was primarily the result of price decreases and mix changes which more than offset a 10 percent volume increase.

Cost of sales as a percent of net sales increased slightly to 74.5 percent of sales compared to 73.5 percent last year, primarily because of the selling price decreases and raw material cost increases for SAO. This margin compression was partially offset by productivity improvements in the SAO unit and higher pension credits.

Selling, general and administrative expenses increased by $.9 million due primarily to increased costs for legal services, E-business consulting and freight less the favorable effects of staff reductions and higher pension credits.

Other income was more favorable than a year ago by $3.4 million, primarily as a result of the previously discussed second quarter effects and recoveries of notes receivable during the quarter ended September 30, 1999.

Net sales for this segment, which aggregates the SAO and Dynamet units of Carpenter were $430.2 million which was three percent lower than those for the same period a year ago. The decrease in sales was primarily due to lower sales to the aerospace industry and reduced selling prices.

EBIT was $32.8 million which was 29 percent lower than the same period last year. Profit margins were lower as SAO selling prices fell 8 percent despite higher SAO costs for nickel versus a year ago. Dynamet's selling prices were 10 percent lower than the same period last year, in part because of lower costs of titanium. These effects were partially offset by cost reductions in manufacturing and administrative functions.

Net sales for this segment were $60.5 million which was 9 percent higher than the same period last year. Increased demand for ceramics, metal injection molded and shaped products accounted for most of the sales improvement.

EBIT was $2.4 million compared to the almost break even level of the first six months of last year. This profit improvement was due to the increased sales, manufacturing cost efficiencies and reduced product development costs.

Pension credits were $22.8 million for the six months ending December 31, 1999 compared to $17.8 million for the same period a year ago. The improved level of credits was due primarily to the significant investment returns on the pension plan assets over the past year. This favorable variance from the previous year's level will continue for the balance of fiscal 2000 because the amount of the credit is based upon an actuarial valuation at the beginning of each fiscal year and changed annually.

The effective tax rate was 32.0% for the six months ended December 31, 1999, versus 38.6% for the same period a year earlier. The reduction in the current year was primarily due to the resolution of a foreign tax issue.

Cash Flow and Financial Condition:

During the six months ended December 31, 1999, Carpenter's cash and cash equivalents increased by $1.3 million, as shown in the consolidated statement of cash flows.

Net cash generated from operating activities was $20.8 million, primarily as a result of net income adjusted for non-cash expenses and credits.

Investing activities for plant and equipment consumed $49.9 million in cash during the first six months of fiscal 2000. Total capital expenditures for all of fiscal 2000 are anticipated to be about $100 million.

Total debt increased by $41.8 million since June 30, 1999 to a level of $552.2 million or 40.9% of total capital employed, including deferred taxes.

At December 31, 1999, current assets exceeded current liabilities by $88.8 million (a ratio of 1.3 to 1). This ratio is conservatively stated because certain inventories are valued $100.6 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 resources, will be adequate to meet its foreseeable short-term and long-term liquidity needs.

As of the filing date of this Form 10-Q, no significant problems have been encountered as a result of computer problems related to operating in calendar year 2000. All known remediation projects and all critical projects throughout Carpenter have been completed. Contingency plans were developed for any process determined to be mission critical to the Corporation. All manufacturing, shipping and administrative functions have operated normally since January 1, 2000 and no significant problems have been experienced with suppliers or customers. Carpenter does not anticipate any significant future problems in its operations or with its suppliers and customers relating to year 2000 computer issues. The total costs to remediate Carpenter's year 2000 issues are estimated to be $7.7 million, of which $7.6 million was spent as of December 31, 1999.

This Form 10-Q contains various "Forward-looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Such 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) excess inventory and the impact of inventory adjustments in Carpenter's aerospace customer base; 3) worldwide excess capacity for certain alloys which Carpenter produces, resulting in increased competition and downward pricing pressure on Carpenter products; 4) 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; 5) 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; 6) 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; 7) the ability of Carpenter, along with other domestic producers of stainless steel products, to obtain favorable rulings in dumping and countervailing duty claims against foreign producers; 8) 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; 9) the effects on operations of changes in U.S. and foreign governmental laws and public policy, including environmental regulations; and 10) the accuracy of Carpenter's belief that the valuation of the Corporation's former plant site by the Bridgeport, Connecticut Port Authority will be overturned and that Carpenter will be absolved from 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.

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or to which any of their properties is subject or which is known by the Company to be contemplated by government authorities. 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.

Voting results and a description of matters submitted to stockholders at the October 25, 1999 Annual Meeting of Stockholders were included in the Form 10-Q for the quarterly period ended September 30, 1999. Part II, Item 4 of Carpenter's Form 10-Q filed November 12, 1999 is incorporated herein by reference.

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.