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Article by DailyStocks_admin    (12-30-09 01:42 AM)

Carpenter Technology Corp. CEO PETER N STEPHANS bought 19000 shares on 12-23-2009 at $27.67

BUSINESS OVERVIEW

(a)General Development of Business:

Carpenter Technology Corporation, incorporated in 1904, is engaged in the manufacturing, fabrication and distribution of specialty metals. As used throughout this report, unless the context requires otherwise, the terms “Carpenter”, the “Company”, “Registrant”, “Issuer”, “we” and “our” refer to Carpenter Technology Corporation.


(b)Financial Information About Segments:

We are organized in two reportable business segments: Advanced Metals Operations and Premium Alloys Operations. See Note 22 to our consolidated financial statements included in Item 8 “Financial Statements and Supplementary Data” for additional segment reporting information.


(c)Narrative Description of Business:


(1)General:

We develop, manufacture and distribute cast/wrought and powder metal stainless steels and special alloys including high temperature alloys, controlled expansion alloys, ultra high strength alloys, implantable alloys, tool and die steels and other specialty metals, as well as cast/wrought titanium alloys. We provide material solutions to the ever-changing needs of the aerospace, industrial, energy, medical, consumer products and automotive industries.

Our Advanced Metals Operations (“AMO”) segment includes the manufacturing and distribution of high temperature and high strength metal alloys, stainless steels, and titanium in the form of small bars and rods, wire, narrow strip and powder. Products in this segment typically go through more finishing operations, such as rolling, turning, grinding, drawing, and atomization, than products in our PAO segment (as described below). Also, sales in the AMO segment are spread across many end-use markets, including the aerospace, industrial, consumer, automotive, and medical industries. AMO products are sold under the Carpenter, Dynamet, Talley, Carpenter Powder Products and Aceros Fortuna brand names.

Our Premium Alloys Operations (“PAO”) segment includes the manufacturing and distribution of high temperature and high strength metal alloys and stainless steels in the form of ingots, billets, large bars and hollows. Also, the PAO segment includes conversion processing of metal for other specialty metals companies. A significant portion of PAO sales are to customers in the aerospace and energy industries. Much of PAO sales are to forging companies that further shape, mill, and finish the metals into more specific dimensions. All such sales are made under the Carpenter brand name.


(2)Classes of Products:

Our major classes of products are:

Special alloys –

Our special alloys are used in critical components such as rings, discs and fasteners and include heat resistant alloys that range from slight modifications of stainless steels to complex nickel and cobalt base alloys as well as alloys for electronic, magnetic and electrical applications with controlled thermal expansion characteristics, or high electrical resistivity or special magnetic characteristics.

Stainless steels –

Our stainless products include a broad range of corrosion resistant alloys including conventional stainless steels and many proprietary grades for special applications.

Titanium products –

Our titanium products include corrosion resistant, highly specialized metal with a combination of high strength and low density. Most common uses are in aircraft fasteners, medical devices, sporting equipment and chemical and petroleum processing.


(3)Raw Materials:

Our business depends on continued delivery of critical raw materials for our day-to-day operations. These raw materials include nickel, cobalt, chromium, manganese, molybdenum, titanium and scrap containing iron and nickel. Some of the sources of these raw materials, many of which are international, could be subject to potential interruptions of supply as a result of political events, labor unrest or other reasons. These potential interruptions could cause material shortages and affect availability and price. We have arrangements with certain vendors to provide consigned materials at our manufacturing facilities available for our consumption as necessary.

We have long-term relationships with major suppliers who provide availability of material at competitive prices. Purchase prices of certain raw materials have historically been volatile, and have been especially volatile over the past few years. We use pricing surcharges, indexing mechanisms, base price adjustments and raw material forward contracts to reduce the impact of increased costs for the most significant of these materials. There can be delays between the time of the increase in the price of raw materials and the realization of the benefits of such mechanisms or actions that could have a short-term impact on our results and could affect the comparability of our results from period to period.


(4)Patents and Licenses:

We own a number of United States and international patents and have granted licenses under some of them. Certain of our products are covered by patents held or owned by other companies from whom licenses have been obtained. Although these patents and licenses are believed to be of value, we do not consider our business to be materially dependent upon any single patent or patent rights.


(5)Seasonality of Business:

Our sales are normally influenced by seasonal factors. Historically, our sales in the first two fiscal quarters (the respective three months ending September 30 and December 31) are typically the lowest – principally because of annual plant vacation and maintenance shutdowns by us as well as by many of our customers. However, the timing of major changes in the general economy or the markets for certain products, as we experienced in the current fiscal year, can alter this historical pattern.

(6)Customers:

On a consolidated basis, we are not dependent upon a single customer, or a very few customers, to the extent that the loss of any one or more particular customers more would have a materially adverse effect on our consolidated statement of operations. There were no significant individual customer sales volumes that accounted for more than 10 percent of the total sales volume during fiscal years 2009, 2008 or 2007.


(7)Backlog:

As of June 30, 2009, we had a backlog of orders, believed to be firm, of approximately $230 million, substantially all of which is expected to be shipped within fiscal year 2010. Our backlog as of June 30, 2008 was approximately $485 million.


(8)Competition:

Our business is highly competitive. We supply materials to a wide variety of end-use market sectors and compete with various companies depending on end-use market, product or geography. We are leaders in specialty materials for critical applications with over 100 years of metallurgical and manufacturing expertise. A significant portion of the products we produce are highly engineered materials for demanding applications. The experience and qualifications we have in our niche markets represent barriers to existing and potential competitors.

There are approximately ten domestic companies producing one or more similar specialty metal products that are considered to be major competitors to the specialty metals operations in one or more of our end-use markets. There are several dozen smaller producing companies and converting companies that are competitors. We also compete directly with several hundred independent distributors of products similar to those distributed by us. Additionally, numerous foreign companies produce various specialty metal products similar to those produced by us. Furthermore, a number of different products may, in certain instances, be substituted for our finished products.

Imports of foreign specialty steels, particularly stainless steels, have long been a concern to the domestic steel industry because of the potential for unfair pricing by certain foreign producers. Certain foreign governments through direct and indirect subsidies have often supported such pricing practices. These unfair trade practices have resulted in high import penetration into the U.S. stainless steel markets, with calendar year 2008 levels at approximately 53 percent for stainless bar, 49 percent for stainless rod and 58 percent for stainless wire.

Because of the unfair trade practices and the resulting injury, we have joined with other domestic producers of specialty metals in the filing of trade actions against foreign producers as well as lobbying various government agencies for the creation of laws and regulations to eliminate the competitive benefits realized by the unfair trade practices. These proposals are aimed at tax and regulatory reform needed to provide incentives to domestic producers and disincentives for foreign producers to import products into the United States unfairly. We will continue to monitor developments related to what we consider unfairly traded imports from foreign competitors and develop appropriate actions in response.

Under the provisions of the Continued Dumping and Subsidy Offset Act of 2000 (the “Act”), which was signed into law on October 28, 2000, we have received distributions from the United States Customs Service (“Customs”). Under the Act, Customs establishes special accounts for funds to be distributed annually to eligible domestic producers. The special accounts are sourced with duties collected by Customs on pre-existing anti-dumping or countervailing duty orders. We have received distributions under the Act totaling $6.1 million, $8.4 million and $6.4 million in fiscal years 2009, 2008 and 2007, respectively. Although, the Act expired in October 2007, we currently believe that we will receive an additional distribution under the Act during fiscal year 2010 and distributions will cease thereafter.


(9)Research, Product and Process Development:

Our expenditures for company-sponsored research and development were $15.4 million, $14.4 million and $11.5 million in fiscal years 2009, 2008 and 2007, respectively. We believe that our ability to be an innovator in special material development and manufacturing processes is an important factor in the success of the Company. Our strong commitment to setting new industry standards is evidenced by our Specialty Alloys Research and Development Center, where teams work in areas such as physical metallurgy, analytical chemistry, applied physics and process and systems development. Our worldwide staff of expert metallurgists, research and development scientists, engineers and service professionals works closely with our customers to find innovative solutions to specific product requirements.


(10)Environmental Regulations:

We are subject to various stringent federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Management evaluates the liability for future environmental remediation costs on a quarterly basis. We accrue amounts for environmental remediation costs representing management’s best estimate of the probable and reasonably estimable costs relating to environmental remediation. For further information on environmental remediation, see the Contingencies section included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data.”

Our costs of maintaining and operating environmental control equipment were $12.6 million, $12.6 million and $12.0 million for fiscal years 2009, 2008 and 2007, respectively. The capital expenditures for environmental control equipment were $0.4 million, $0.2 million and $0.2 million for fiscal years 2009, 2008 and 2007, respectively. We anticipate spending approximately $2.0 million on major domestic environmental capital projects over the next five fiscal years. This includes approximately $0.5 million in fiscal year 2010 and fiscal year 2011. Due to the possibility of future regulatory developments, the amount of future capital expenditures may vary from these estimates.


(11)Employees:

As of June 30, 2009, our total workforce consisted of approximately 3,200 employees, which included approximately 100 production employees in Washington, Pennsylvania who are covered under a collective bargaining agreement which expires on August 31, 2013.

(d)Financial information about foreign and domestic operations and export sales:

Sales outside of the United States, including export sales, were $477.0 million, $655.8 million and $535.5 million in fiscal years 2009, 2008 and 2007, respectively.

For further information on domestic and international sales, see Note 22 to our consolidated financial statements included in Item 8 “Financial Statements and Supplementary Data”.


(e)Available Information:

Our Board of Directors has adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers of Carpenter Technology Corporation, which is also applicable to our other executive officers. There were no waivers of the Code of Ethics in fiscal year 2009. The Code of Ethics and any information regarding any waivers of the Code of Ethics are disclosed on Carpenter’s website at www.cartech.com . Our annual report on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (“SEC”). Our website and the content contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and other information regarding issuers that file electronically. Such information can be accessed through the Internet at www.sec.gov.


CEO BACKGROUND

Committee and Members


Purpose of the Committee
2009 Meetings

Corporate Governance Committee



I. Martin Inglis, Chair

Carl G. Anderson, Jr.

Philip M. Anderson

Stephen M. Ward, Jr.

William A. Wulfsohn



All members are Independent Directors.


• Assist the Board in identifying qualified individuals to become members of the Board (and otherwise functioning as a nominating committee with respect to directors), and determining the overall composition of the Board and its committees.



• Assist the Board in developing, implementing and monitoring a set of corporate governance principles for the Company, and overseeing processes to assess the performance and effectiveness of the Board of Directors, its committees and management of the Company.



• Ensure orderly succession at the Board and management levels.
5


Human Resources Committee



Stephen M. Ward, Jr., Chair

Carl G. Anderson, Jr.

Philip M. Anderson

I. Martin Inglis

Jeffrey Wadsworth

William A. Wulfsohn



All members are Independent Directors.


• Assist the Board with its overall responsibility for supervising the Company’s management and human resources and for reviewing the Company’s strategies and plans to support organizational and employee effectiveness.



• Review and approve compensation of the Company’s executive officers.



• Administer the Company’s incentive compensation programs and plans and provide oversight for the Company’s employee benefits programs generally.
7


Science and Technology Committee



Jeffrey Wadsworth, Chair

Philip M. Anderson

Anne L. Stevens


• Review and monitor major scientific or technological developments that could affect the Company’s current business or operations or implicate significant strategic planning or considerations for the future.



• Make periodic recommendations to the Board concerning such major developments or potential business opportunities for the Company with respect to scientific or technological matters that implicate significant strategic planning or Company prospects.


MANAGEMENT DISCUSSION FROM LATEST 10K

Background and General

Our discussions below in this Item 7 should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this annual report on Form 10-K. Unless specifically stated otherwise, all discussions of operating results reflect continuing operations.

Carpenter is engaged in the manufacturing, fabrication, and distribution of specialty metals. We primarily process basic raw materials such as nickel, cobalt, titanium, manganese, chromium, molybdenum, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire and narrow strip in many sizes and finishes. We also produce certain metal powders. Our sales are distributed directly from our production plants and distribution network as well as through independent distributors. Unlike many other specialty steel producers, we operate our own worldwide network of service/distribution centers. These service centers, located in the United States, Canada, Mexico and Europe, allow us to work more closely with customers and to offer various just-in-time stocking programs. As a result, we often serve as a technical partner in customizing specialty metals or in developing new ones.

Market conditions were challenging throughout the latter half of fiscal year 2009, as the recent economic downturn was broader and more severe than the last downturn that we experienced in 2002-2003. The resulting weak global manufacturing activity affected demand throughout our customer base, including our higher value products, which significantly impacted our results of operations. Despite these prevailing difficult economic conditions, we achieved our financial goal of generating positive free cash flow for fiscal year 2009. We believe this achievement demonstrates our ability to manage effectively through the recent downturn.

Impact of Raw Material Prices and Product Mix

The volatility of the costs of raw materials has impacted our operations over the past several years. We, and others in our industry, generally have been able to pass cost increases on certain materials through to our customers using surcharges that are structured to recover increases in raw material costs. Generally, the formula used to calculate a surcharge is based on published prices of the respective raw materials for the previous month. A portion of our raw material purchases are based on published prices from two months prior, rather than the previous month, which creates a lag between surcharge revenues and corresponding raw material costs recognized in costs of sales. Except for the usually modest effect of the lag, the surcharge mechanism protects our net income on such sales. However, surcharges have had a dilutive effect on our gross margin and operating margin percentages as described later in this discussion.

We value most of our inventory utilizing the last-in, first-out (“LIFO”) inventory costing methodology. Under the LIFO inventory costing method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials may have been acquired at potentially significantly different values due to the length of time from the acquisition of the raw materials to the sale of the processed finished goods to the customers. In a period of rising raw material costs, the LIFO inventory valuation normally results in higher costs of sales. Conversely, in a period of decreasing raw material costs, the LIFO inventory valuation normally results in lower costs of sales.

A portion of our business consists of sales to customers under firm price sales arrangements. Firm price sales arrangements involve a risk of profit margin fluctuations particularly when raw material prices are volatile. Firm price sales arrangements generally include certain annual purchasing commitments and consumption schedules agreed to by the customers at selling prices based on raw material prices at the time the arrangements are established. In order to reduce the risk of fluctuating profit margins on these sales, we enter into commodity forward contracts to purchase certain critical raw materials necessary to produce the related products sold. If a customer fails to meet the volume commitments (or the consumption schedule deviates from the agreed upon terms of the firm price sales arrangements), the Company may need to absorb the gains or losses associated with the commodity forward contracts on a temporary basis. Gains or losses associated with commodity forward contracts are reclassified to earnings/loss when earnings are impacted by the hedged transaction. Because we value most of our inventory under the LIFO costing methodology, the gains and/or losses associated with commodity forward contracts may not impact the same period that the firm price sales contracts revenue is recognized and comparisons of gross profit from period to period may be impacted.

We produce hundreds of grades of materials, with a wide range of pricing and profit levels depending on the grade. In addition, our product mix within a period is subject to the fluctuating order patterns of our customers as well as decisions we may make to participate in certain lower margin business in order to utilize available capacity. While we expect to see positive contribution from a more favorable product mix in our margin performance over time, the impact by period may fluctuate, and period-to-period comparisons may vary.

Net pension expense (income) is determined annually, based on beginning of the year balances. Net pension expense (income) increased significantly during fiscal year 2009 principally due to the decline in market value of the securities held by the plans as of June 30, 2008.

Results of Operations – Fiscal Year 2009 Compared to Fiscal Year 2008

For fiscal year 2009, we reported income from continuing operations of $47.9 million, or $1.08 per diluted share, compared with income from continuing operations of $200.5 million, or $4.12 per diluted share, a year earlier. Continued weak global manufacturing activity affected demand throughout our customer base, and especially in our higher margin markets of energy and aerospace.

Net Sales

Net sales for fiscal year 2009 were $1,362.3 million, which was a 30 percent decrease from fiscal year 2008. Excluding surcharge revenues, sales were 23 percent lower than a year earlier.

Geographically, sales outside the United States decreased 27 percent from a year ago to $477.0 million. International sales remained fairly consistent as a percentage of our total net sales, representing 35 percent and 34 percent for fiscal year 2009 and fiscal year 2008, respectively.

Sales by End-Use Markets

Our sales are to customers across diversified end-use markets. During fiscal year 2009, we changed the manner in which sales are classified by end-use market so that we could better evaluate our sales results from period to period. In order to make the discussion of net sales by end-use market meaningful, we have reclassified the fiscal year 2008 sales by end-use market balances to conform to the fiscal year 2009 presentation. The following table includes comparative information for our estimated net sales by principal end-use markets:

Sales to the aerospace market decreased 22 percent from fiscal year 2008 to $579.3 million. Excluding surcharge revenue, such sales decreased 14 percent on 13 percent lower shipment volume. The sales decline reflects the continued impact of a reduction in airplane build schedules and lower overall passenger miles. Excess inventory in jet engines and fasteners also contributed to the lower volumes in fiscal year 2009.

Industrial market sales decreased 30 percent from fiscal year 2008 to $326.6 million. Adjusted for surcharge revenue, such sales decreased approximately 21 percent as a result of a 24 percent decrease in shipment volume. The results reflect competitive pricing pressures in more commodity-oriented applications and reduced overall demand for materials used in valves, fittings, fasteners, and general industrial applications as customers are purchasing limited quantities on an as-needed basis.

Sales to the energy market of $149.9 million reflected a 35 percent decrease from the fiscal year 2008. Excluding surcharge revenue, such sales decreased 27 percent from a year ago on lower shipment volume of 37 percent. The decline in energy sales and shipment volumes principally reflected lower oil and gas exploration activity in the face of weak demand for oil. Declining market demand and high customer inventory have also reduced shipments and sales levels to the power generation sector.

Sales to the medical market decreased 18 percent to $108.7 million from a year ago. Adjusted for surcharge revenue, such sales decreased 17 percent, while volumes increased 4 percent. The strong shipment volume reflects higher demand in orthopedic implant and medical instrument applications, while the revenue decline reflects the impact of lower titanium costs and a leaner mix of products. Demand is driven primarily by steady increases in the number of implant procedures in the U.S., Japan and the EU.

Sales to the consumer market decreased 39 percent to $103.4 million from a year ago. Adjusted for surcharge revenue, such sales decreased 31 percent with shipment volume lower by 25 percent. The decline reflects lower sales across all sectors, led by housing and electronics as customers and distributors attempt to conserve cash in light of credit availability concerns.

Automotive market sales decreased 56 percent from the fiscal year 2008 to $94.4 million. Excluding surcharge revenue, such sales decreased 51 percent on 46 percent lower shipment volume. Sharply lower consumer spending and tighter credit continued to suppress auto sales, resulting in the further deterioration in production rates. Lower inventory levels in the supply chain reflect customers with demand focused on spot purchases of material with short lead times.

Sales of special alloys products decreased 32 percent in fiscal year 2009 as compared with a year ago to $694.6 million. The sales decrease principally reflects the decline in demand from the aerospace and energy markets.

Sales of stainless steels decreased 31 percent as compared with a year ago. Excluding surcharge revenues, such sales decreased by 24 percent on 28 percent lower shipment volume. The decrease resulted primarily from reduced shipments of materials used in the automotive, industrial and consumer markets

Sales of titanium products decreased 22 percent as compared with a year ago on 10 percent lower shipment volume. The results reflect the impact of significantly lower titanium prices and decreased demand for titanium products used in the aerospace end-use market, which was partially offset by an increase in demand in the medical end-use market.

Gross Profit

Gross profit in fiscal year 2009 decreased to $207.2 million, or 15.2 percent of net sales (19.6 percent of net sales excluding surcharges), from $457.2 million, or 23.4 percent of net sales (33.4 percent of net sales excluding surcharges), a year ago. The results primarily reflected the reduced demand levels and related manufacturing inefficiencies associated with the lower volume.

Our surcharge mechanism is structured to recover increases in raw material costs, although generally with a lag effect. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharges on gross margin for fiscal years 2009 and 2008:

In addition to the impact of the surcharge mechanism, fluctuations in raw material prices (combined with fluctuations in inventory levels) have impacted our gross profit from year to year. We estimate that the effect of such combined fluctuations negatively impacted gross margin by 50 basis points when comparing gross margin for fiscal year 2009 with the prior year. We estimate that the lag effect of the surcharge mechanism positively impacted gross margin by approximately 100 basis points during fiscal year 2009, compared to a positive impact on gross margin of approximately 40 basis points during fiscal year 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in fiscal year 2009 were $133.8 million, or 9.8 percent of net sales (12.7 of net sales excluding surcharges), compared to $163.6 million, or 8.4 percent of net sales (12.0 percent of net sales excluding surcharges), in fiscal year 2008. Excluding the impact of changes in net pension expense discussed above, expenses improved by 22 percent over fiscal year 2008. The reduction reflects the $21.0 million charge for a legal matter that was recorded in the fourth quarter of fiscal year 2008 in addition to reductions in variable compensation and actions taken to reduce headcount and spending across the business.

Restructuring Charges

During fiscal year 2009, we recorded $9.4 million of restructuring charges associated with the closure of our metal strip manufacturing facility in the United Kingdom (“UK”). The closure is expected to reduce our fixed costs and to utilize existing production capacity more efficiently. The charges recorded consisted principally of pension settlement charges from the elimination of a U.K. defined benefit pension plan, certain asset write-downs, payments of employee severance costs and other exit costs.

Interest Expense

Fiscal year 2009 interest expense of $16.1 million decreased 22 percent from $20.5 million in fiscal 2008. Interest on substantially all of our debt was at a fixed rate. The decrease in interest expense is attributable to the reductions in outstanding debt related to current year repayments, as well as a $1.7 million increase in the amount of interest capitalized associated with ongoing construction projects during fiscal year 2009 as compared with fiscal year 2008.

Other Income, Net

Other income for fiscal year 2009 was $15.1 million as compared with $24.2 million a year ago. The decrease principally reflected lower returns on invested cash balances which were partially offset by the favorable impacts of foreign exchange in fiscal year 2009 as compared with fiscal year 2008.

Income Taxes

Our effective tax rate (income tax expense as a percent of income before taxes) for fiscal year 2009 was 24.0 percent as compared to 32.6 percent in fiscal year 2008. The fiscal year 2009 tax rate was more favorable than the statutory rate of 35 percent, primarily due to the following items. We recorded a reduction in income tax expense in the amount of $3.5 million or 5.6 percent of pre-tax income related to research and development tax credits. In addition, there was a reduction in income tax expense in the amount of $3.3 million or 5.2 percent which was primarily due to the reversal of certain unrecognized tax benefits due to the lapse of certain statutes of limitations. These items were partially offset by an increase in tax expense in the amount of $4.6 million or 7.4 percent related to additional valuation allowance on deferred tax assets for state net operating losses. Our lower taxable income level generated a more significant impact on the effective tax rate for these items.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Background and General

Carpenter is engaged in the manufacturing, fabrication, and distribution of specialty metals. We primarily process basic raw materials such as nickel, cobalt, titanium, chromium, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire, narrow strip, special shapes and hollow forms in many sizes and finishes. We also produce certain metal powders. Our sales are distributed directly from our production plants and distribution network as well as through independent distributors.

Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, under Item 8 thereof. Our discussions here focus on our results during or as of the three-month and six-month periods ended December 31, 2008 and the comparable periods of fiscal year 2008, and, to the extent applicable, on material changes from information discussed in that Form 10-K or other important intervening developments or information. These discussions should be read in conjunction with that Form 10-K for detailed background information.

Unless specifically stated otherwise, all discussions of operating results reflect continuing operations.

Raw Material Pricing and Product Mix

The volatility of the costs of raw materials has impacted our operations over the past few years. We, and others in our industry, generally have been able to pass cost increases on certain materials through to our customers using surcharges that are structured to recover increases in raw material costs. In the last several years, as raw material prices have escalated, surcharges have become an increasingly significant component of our net sales, which had a dilutive effect on our gross margin and operating margin percentages as described later in this discussion. Generally, the formula used to calculate a surcharge is based on published prices of the respective raw materials for the previous month. A portion of our raw material purchases is based on published prices from two months prior, rather than the previous month, which creates a lag between surcharge revenues and corresponding raw material costs recognized in costs of sales. Except for the usually modest effect of the lag, the surcharge mechanism protects our net income on such sales. We value most of our inventory utilizing the last-in, first-out (“LIFO”) inventory costing methodology. Under the LIFO inventory costing method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials may have been acquired at potentially significantly different values due to the length of time from the acquisition of the raw materials to the sale of the processed finished goods to the customers. In a period of rising raw material costs, the LIFO inventory valuation normally results in higher costs of sales. Conversely, in a period of decreasing raw material costs, the LIFO inventory valuation normally results in lower costs of sales.

A portion of our business consists of sales to customers under firm price sales arrangements. Firm price sales arrangements involve a risk of profit margin fluctuations particularly as raw material prices have been volatile. Firm price sales arrangements generally include certain annual purchasing commitments and consumption schedules agreed to by the customers at selling prices based on raw material prices at the time the contracts are consummated. In order to effectively reduce the risk of fluctuating profit margins on these sales, we enter into commodity forward contracts to purchase certain critical raw materials necessary to produce the related products sold. If a customer fails to meet the volume commitments or the consumption schedule deviates from the agreed upon terms of the firm price sales arrangements, the Company may need to absorb the gains or losses associated with the commodity forward contracts on a temporary basis. Gains or losses associated with commodity forward contracts are deferred and recognized in earnings as the inventory is sold. Since we value most of our inventory under the LIFO costing methodology, the gains and/or losses associated with commodity forward contracts may not impact the same quarter that the firm price sales contracts revenue is recognized and comparisons of gross profit from quarter to quarter may be impacted.

We produce hundreds of grades of materials, with a wide range of pricing and profit levels depending on the grade. In addition, our product mix within a period is subject to the fluctuating order patterns of our customers as well as decisions we may make to participate in certain lower margin business in order to utilize available capacity. While we expect to see positive contribution from a more favorable product mix in our margin performance over time, the impact by period may fluctuate, and period-to-period comparisons may vary.

Net Pension Expense

Based on the decline in the market value of the securities in our defined benefit pension plans as of June 30, 2008, the Company will experience a pre-tax net pension expense during fiscal 2009 of $20.1 million. This is a non-cash expense that is being amortized equally for each quarterly period during the fiscal year. The pension expense equates to a year-to-year difference in reported earnings of $0.28 per share, with a second quarter year-to-year pre-tax impact of $5.9 million or $0.08 per share and a six-month year-to-year pre-tax impact of $11.8 million or $0.16 per share.

Operating Performance Overview

For the quarter ended December 31, 2008, we reported income from continuing operations of $29.8 million or $0.68 per diluted share, compared with income from continuing operations for the same period a year earlier of $57.1 million or $1.16 per diluted share. For the six months ended December 31, 2008, we reported income from continuing operations of $55.6 million or $1.26 per diluted share, compared with income from continuing operations for the same period a year earlier of $112.5 million or $2.25 per diluted share. In both cases, the lower earnings in the current period reflect lower sales levels, higher operating costs, the impacts of pricing pressures experienced during the current year and the generally prevailing adverse economic conditions that became more severe from the middle of calendar year 2008. Notwithstanding the declines in our earnings during the current periods, we believe we are in a solid position to operate profitably over the near-term during this downturn and that the long-term prospects in our key markets of aerospace, energy and medical remain strong. Through the current downturn, our management will continue to act aggressively to cut costs and conserve cash.

As the domestic and international economies softened, we have taken actions to reduce our costs. These actions include the restructuring of several layers of our upper management and otherwise improving our operations in response to lower demand anticipated during the next few quarters

Results of Operations – Three Months Ended December 31, 2008 vs. Three Months Ended December 31, 2007

Net Sales

Net sales for the three months ended December 31, 2008 were $361.8 million, which was an 18 percent decrease over the same period a year ago. Adjusted for surcharge revenue, sales decreased 13 percent. Overall, pounds shipped were 10 percent lower than the second quarter a year ago.

Geographically, sales outside the United States decreased 14 percent from the same period a year ago to $130.3 million. The sales decline primarily reflects weakness in Europe. International sales represented 36 percent of total sales for the quarter ended December 31, 2008 compared to 34 percent for the quarter ended December 31, 2007.

Sales to the aerospace market decreased 8 percent from the second quarter a year ago to $154.7 million. Excluding surcharge revenue, sales decreased 4 percent from the second quarter a year ago on flat volume. The sales results principally reflect lower demand for materials used in jet engines, while sales for fastener applications have remained strong. The steady shipment volume performance reflects strengthening in our customer positions despite weakening market demand.

Industrial market sales decreased 16 percent from the second quarter a year ago to $88.6 million. Adjusted for surcharge revenue, sales decreased approximately 10 percent as a result of a 4 percent decrease in shipment volume. The results reflect lower sales of materials used in valves and fittings, fasteners and wire rod, partially offset by stronger demand for products used in welding and general industrial applications.

Sales to the energy market of $41.2 million reflected a 24 percent decrease from the second quarter of fiscal year 2008. Excluding surcharge revenue, sales decreased 17 percent from a year ago on lower shipment volume of 20 percent. Most of the decline experienced in the energy market reflects softer demand in the oil and gas exploration sector as excess inventory continues to build up in our customer base and in the overall supply chain. Power generation sector sales and shipments fell somewhat as demand weakened in the U.S. for high-end industrial gas turbines using our materials.

Sales to the medical market decreased 8 percent to $25.2 million from a year ago. Adjusted for surcharge revenue, sales decreased 7 percent, while volumes increased 9 percent. The coupling of strong shipment volume with a sales revenue decline reflects strength in demand for materials used in joint replacements and surgical instruments in the current period and lower titanium raw material prices compared to last year.

Sales to the consumer market decreased 32 percent to $26.8 million from a year ago. Adjusted for surcharge revenue, sales decreased 23 percent with shipment volume lower by 19 percent. The decline reflects lower sales in all sectors, led by housing and electronics.

Automotive market sales decreased 46 percent from the second quarter a year ago to $25.3 million. Excluding surcharge revenue, sales decreased 44 percent on 33 percent lower shipment volume. The continuing weakness in the automotive market has not abated as OEMs in the U.S. implement more plant closings and global auto makers reduce production.

Sales of special alloys products decreased 27 percent from a year ago to $174.6 million. Adjusted for surcharge revenue, sales decreased 22 percent on a 14 percent decrease in shipment volume. The sales decrease principally reflects the decline in demand from the aerospace and energy markets.

Sales of stainless steels decreased 9 percent from a year ago to $131.9 million. Excluding surcharge revenue, sales decreased 3 percent on 9 percent lower shipment volume. The decrease resulted primarily from reduced shipments of materials used in the automotive, industrial and consumer markets.


Sales of titanium products decreased 9 percent from a year ago to $35.0 million on 10 percent higher volume. The coupling of a sales revenue decrease with a shipment volume increase reflects the impact of significantly lower titanium prices together with increased demand for titanium products especially in the medical and aerospace end-use markets.

Gross Profit

Our gross profit in the second quarter decreased 35 percent to $75.9 million, or 21.0 percent of net sales (27.8 percent of net sales excluding surcharges), as compared with $116.1 million, or 26.2 percent of net sales (36.9 percent of net sales excluding surcharges), in the same quarter a year ago. The lower gross profit was primarily due to lower shipment volumes along with higher manufacturing costs, pricing pressures, the timing impact of raw material hedges and other negatives from the low price of nickel.

Our surcharge mechanism is structured to recover increases in raw material costs, although generally with a lag effect. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharges on gross margin for the comparative three-month periods:

In addition to the impact of the surcharge mechanism, fluctuations in raw material prices (combined with fluctuations in inventory levels) have impacted our gross profit from quarter to quarter. We estimate that the effect of such combined fluctuations positively impacted gross margin by 40 basis points when comparing gross margin for the recent quarter with the prior year’s quarter. We estimate that the lag effect of the surcharge mechanism positively impacted gross margin by approximately 90 basis points during the quarter ended December 31, 2008, compared to approximately 150 basis points during the prior year’s quarter.

The biggest contributor to the reduction in gross profit in the current versus the prior year’s quarter, however, is lower shipment volumes. Manufacturing costs were higher than the prior year, but have improved as compared with our first quarter performance, as we have worked through the equipment start-up issues we were experiencing a few months ago. In addition, we also experienced during the second quarter the negative timing impact associated with hedge contracts, as well as other negatives from the current low price of nickel, neither of which was significant during the comparable period of fiscal year 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses of $36.2 million were 10.0 percent of net sales (13.2 percent of net sales excluding surcharges) as compared with $36.6 million or 8.3 percent of net sales (11.6 percent of net sales excluding surcharges) in the same quarter a year ago. The relatively total flat levels of selling, general and administrative expenses reflect an increase in the net pension expense during the recent quarter that served to offset reductions in compensation expense, outside services and travel-related expenses.

Interest Expense

Interest expense for the quarter was $3.8 million, as compared with $5.3 million in the same quarter in the prior year. The decrease in interest expense is attributable to reductions in our outstanding debt and increased amounts of capitalized interest associated with several large construction projects, during the current versus the prior year’s quarter.

Other Income, Net

Other income for the recent quarter was $6.5 million as compared with $12.1 million in the second quarter a year ago. The decrease was due to reduced interest income partially offset by foreign exchange gains. In addition, the recent quarter includes $6.0 million related to funds received under the Continued Dumping and Subsidy Offset Act of 2000 (the “Act”) as compared with $8.2 million in the same period a year ago

Income Taxes

Our tax provision for the recent quarter was $12.6 million, or 29.7 percent of pre-tax income, versus $29.2 million, or 33.8 percent, for the same quarter a year ago. The income tax provision for the recent quarter was favorably impacted by the retroactive extension of the research and development tax credit, which was partially offset by the reduction in tax-exempt interest earned during the recent quarter as compared to the same period a year ago.

Business Segment Results

Following the divestiture during fiscal year 2008 of our ceramics and metals shapes businesses, which historically comprised our Engineered Products Operations segment, we have two reportable business segments: Advanced Metals Operations (“AMO”) and Premium Alloys Operations (“PAO”).

Advanced Metals Operations (“AMO”) Segment

Net sales for the quarter ended December 31, 2008 for the AMO segment decreased 19 percent during the quarter ended December 31, 2008 to $253.0 million, as compared with $313.4 million in the same quarter a year ago. Excluding surcharge revenues, net sales decreased 14 percent on 14 percent lower shipment volume from a year ago. Both the sales and shipment volume decrease reflect lower demand in the automotive, industrial and consumer markets.

Operating income for the AMO segment was $31.2 million or 12.3 percent of net sales (16.1 percent of net sales excluding surcharge revenues) in the recent quarter, as compared with $44.5 million or 14.2 percent of net sales (19.8 percent of net sales excluding surcharge revenues) in the same quarter a year ago. The decrease in operating income principally reflects lower shipment volume and the impacts of higher operating costs and pricing pressures.

Premium Alloys Operations (“PAO”) Segment

Net sales for the quarter ended December 31, 2008 for the PAO segment decreased 16 percent to $112.1 million, as compared with $132.6 million in the same quarter a year ago. Excluding surcharge revenues, net sales decreased 11 percent on 8 percent lower shipment volume from a year ago. Both the sales and shipment volume decrease was due to lower demand, particularly in the oil and gas sector of our energy end use market.

Operating income for the PAO segment was $19.3 million or 17.2 percent of net sales (23.2 percent of net sales excluding surcharge revenues) in the recent quarter, compared with $39.6 million or 29.9 percent of net sales (42.4 percent of net sales excluding surcharge revenues) in the same quarter a year ago. The decrease in operating income principally reflects lower volume as well as the negative timing impacts from raw material hedges and an unfavorable shift in product mix during the recent quarter as compared to the same period in the prior year.

Results of Operations – Six Months Ended December 31, 2008 vs. Six Months Ended December 31, 2007

Net Sales

Net sales for the six months ended December 31, 2008 were $775.4 million, which was a 13 percent decrease from the same period a year ago. Adjusted for surcharge revenue, sales decreased 8 percent. Overall, pounds shipped were 6 percent lower than a year ago.

Geographically, sales outside the United States decreased 6 percent from a year ago to $283.1 million. The sales decline reflects the weakening of sales to customers in Europe and Asia Pacific. International sales represented 37 percent of total sales for the six months ended December 31, 2008 compared to 34 percent for the six months ended December 31, 2007.

Sales to the aerospace market decreased 6 percent from a year ago to $312.0 million. Excluding surcharge revenue, sales decreased 2 percent from a year ago on higher shipment volume of 2 percent. The sales results principally reflect the lower demand for materials used in jet engine components, which was partially offset by modest growth in demand for fasteners in the current year.

Industrial market sales decreased 11 percent from a year ago to $192.1 million. Adjusted for surcharge revenue, sales decreased approximately 4 percent with a 1 percent decrease in shipment volume. The results reflect slowing demand for materials used in semiconductors and in valves and fittings, which was partially offset by growth in materials used in general industrial applications.

Sales to the energy market of $94.6 million reflected a 7 percent decrease from fiscal 2008. Excluding surcharge revenue, sales were essentially flat from a year ago on lower shipment volume of 1 percent. The results reflect a weakening demand for materials used in industrial gas turbines. Oil and gas segment sales growth has slowed in response to excess inventory within the supply chain.

Automotive market sales decreased 41 percent from a year ago to $61.2 million. Excluding surcharge revenue, sales decreased 37 percent on 31 percent lower shipment volume. The results reflect unprecedented declines in the global automotive industry that has been marked by significant reductions in production and extended plant shutdowns.

Sales to the consumer market decreased 20 percent to $62.4 million from a year ago. Adjusted for surcharge revenue, sales decreased 14 percent with shipment volume down 9 percent. The results reflect lower sales volumes in all sectors.

Sales to the medical market decreased 9 percent to $53.1 million from a year ago. Adjusted for surcharge revenue, sales decreased 12 percent, while shipment volume increased 5 percent. The coupling of strong shipment volumes with a sales revenue decline reflects increased demand and the effects of substantially lower titanium prices.

Sales of special alloys products decreased 19 percent from a year ago to $379.8 million. Adjusted for surcharge revenue, sales decreased 13 percent on a 7 percent decrease in shipment volume. The sales decrease principally reflects the decline in demand from the automotive, energy and aerospace markets.

Sales of stainless steels decreased 9 percent from a year ago to $276.9 million. Excluding surcharge revenue, sales decreased 4 percent on 6 percent lower shipment volume. The decrease resulted primarily from reduced shipments of materials used in the industrial and consumer markets.

Sales of titanium products decreased 5 percent from a year ago to $76.8 million on 13 percent higher volume. The coupling of strong shipment volumes with a sales revenue decline reflects increased demand for titanium products, especially in the aerospace and medical markets, together with the impact of significantly lower titanium prices.

CONF CALL

Dave Christiansen
Thank you, Katie. Good morning and welcome to Carpenter’s earnings conference call for the first quarter ended September 30, 2009. This call is also being broadcast over the Internet. With me today are Greg Pratt, Chairman and Interim President and Chief Executive Officer; Doug Ralph, Senior Vice President and Chief Financial Officer; and Mike Shor, Executive Vice President, AMO and PAO operations; as well as other members of the management team.
Statements made by management during this conference call that are forward-looking statements are based on current expectations. Risk factors that could cause actual results to differ materially from these forward-looking statements can be found in Carpenter’s most recent SEC filings, including the company’s June 30, 2009, 10-K and the exhibits attached to that filing.
I will now turn the call over to Greg.
Greg Pratt
Thank you, Dave. Allow me to extend my personal welcome and thank each of you for participating on this call. A couple of weeks ago, Carpenter announced a leadership change, separating the roles of Chairman of the Board and Chief Executive Officer. The decision to split these roles is very much in keeping with emerging best practice trends for governance of public companies.
In taking these steps, Carpenter will join a growing list of US organizations that have determined this to be the best direction for corporate governance. We believe this change will enable the CEO to focus on growing the business and improving operating results. At the same time, it is a formal recognition of the intensity of a separate commitment of running the Board.
I have been involved on the Board of Carpenter for many years and I look forward to continuing to serve on the Board as the Non-Executive Chair. We are actively searching for a successor to permanently fill the role as CEO. In the interim, we will remain committed to our three core principles, which are improving shareholder value, driving operational excellence and meeting our corporate community responsibilities.
Consistent with last quarter’s call, we believe revenue will begin climbing over the remainder of the fiscal year as the global economy slowly recovers. Achieving positive earnings per share and generating positive cash flow remain our financial goals for the year. We are currently seeing some encouraging signs in our leading indicators and more balanced inventories in the key segments of our business, including materials for aerospace engines, power generation and automotive.
We view these developments as green shoots in an uneven, lumpy economic recovery. Finally, Carpenter is a financially strong company with leading positions in attractive end markets. We remain committed to investing in R&D, key emerging markets and collaborative initiatives to facilitate long term growth and create shareholder value.
Now let me turn the call over to Mike Shor to discuss our end markets.
Mike Shor
Thank you, Greg. Good morning, aerospace market sales were $102.9 million in the first quarter down 35% compared to the same period a year ago. Excluding surcharge revenue, aerospace sales were down 30% on 22% lower volume. The decline reflected lower airplane build levels reductions in inventory in the supply chain and a leaner mix. We are seeing signs that supply chain inventories for jet engine materials are in better balance.
This improved balance should result in more pull through in our second quarter and the remainder of the year, as order activity is more closely tied to usage. Fastener demand continues to be soft, with excess inventory remaining at manufacturers and distributors. Inventory destocking is continuing and we don’t expect to see significant demand improvement in the near term.
This delayed demand typically corresponds with the six month difference in lead times between engine materials and fasteners. We continue to be encouraged by the latest airplane build projections that indicate improvements in the second half of our fiscal year. Furthermore, there is now evidence that revenue passenger miles are increasing in the US, Europe and Asia-Pacific.
Industrial market sales in the first quarter were $50.4 million down 49% compared to the first quarter of fiscal 2009. Excluding surcharge, industrial sales decreased 37% on 27% lower volume. The decline reflects continued weak manufacturing demand. We expect slight improvements in this market. This view is supported by the industrial production index that we use as a gauge for this market, as well as the outlook from our major customers.
The industrial production index its low during the fourth quarter and is projected to gradually increase during the remainder of fiscal 2010. Medical market shipments were up 15% in the first quarter, while sales decreased to $25.5 million down 13% from the first quarter of fiscal 2009. Excluding surcharge revenue, medical sales declined 10% from the prior year.
Volume increases reflected higher demand for materials for implant procedures utilizing our CCM Plus products and our improved position in medical instrument applications. These increases more than offset declines in our titanium product volumes. The revenue decline seems from lower titanium raw material costs and a leaner mix of products, as instrumentation growth outpaced growth in implant materials.
Consumer market sales were $23.4 million a decrease of 35% from the first quarter of fiscal 2009. Excluding surcharge revenue, sales declined 25% on 16% lower volume. The decline in revenues reflected lower sales, primarily in the housing and electronic segments. We continue to see evidence in our customer ordering patterns that supply chains may have bottomed up.
Using the US housing starts index as a proxy for consumer market activity, lows were seen in the second half of our last fiscal year and grow is projected for the year ahead. Automotive market sales were $19.4 million a decrease of 49% from a year earlier. Excluding surcharge revenue automotive sector revenues were down 41%, as volumes declined 21% from a year earlier.
Although we have improved our position in select high end applications, we have also increased our participation in some lower value segments. This contributed to the negative mix impact versus the prior year. As expected, order production jumped in the first fiscal quarter, due to the impact of incentive programs and a new model year. Supply chain inventory has been significantly reduced, which should lead to increased demand and strong growth moving forward.
Energy market sales of $12.1 million represented a decline of 77% from the first quarter a year earlier. Excluding surcharge revenue, energy market sales decreased 79% on 81% lower volume. Excess inventories in the oil and gas supply chain continue to drive down already weak demand for materials in oil and gas exploration. We anticipate no significant improvement for several additional quarters.
Inventory levels serving the power generation market have become more stable, which will likely result in increased demand for our products. Carpenter’s international sales in the quarter, including surcharge were $72 million, a 53% decrease over the same period a year ago. International sales represented at 31% of total sales in the first quarter of fiscal 2010 compared to 37% in the prior year.
The reduction reflects declines in energy, aerospace and automotive demand, compounded by continued inventory reductions. This is especially seen in our European customer base. Asia-Pacific continues to be a growth area for Carpenter and we’re beginning to see some results from our focus in that region.
Starting from a small base, pounds shipped in the energy and automotive markets increased 23% and 27%, respectively, over the prior year volumes. Our investment in China has sparked volume growth in that country. Again, on a beginning base that was relatively small, pounds shipped in China alone for the quarter increased 79% and sales increased 32% versus the prior year.
Now, let me shift gears and talk about some exciting developments with our new products that build on Carpenter’s history of developing high value differentiated materials. As we have mentioned during recent calls, Carpenter has continued to invest in research and development with the expectation that it will lead to long term growth and value creation.
I want to discuss three specific developments today that demonstrate that this focus and investment are working. The first is Carpenter’s September announcement of a joint technology agreement with Manhattan Scientifics. Carpenter is using Manhattan Scientifics patented process to develop and commercialize a new class of high strength materials with broad applications in our key markets. We see this as an investment in the next generation of our advanced alloys.
The second development is the new market application for our CTS alloys for use in cutting blades. As we announced in early October, our premium melded stainless steels offer characteristics such as enhanced edge retention, corrosion resistance and consistent surface finish at competitive costs. These attributes make our CTS alloys strong candidates for a variety of blade applications. We are pleased with the customer acceptance of our materials in this market.
Lastly, I want to discuss our upcoming launch this quarter of Permamet, a new type of alloy initially targeted for several applications within the heavy duty engine market. Compared to existing alloys used in these applications, Permamet is stronger, tougher, and has significantly improved fatigue resistance and strength to weight ratio. A patent is pending on this alloy.
In summary, the last 12 months have been very challenging. Significant volume reductions across our key market segments, along with major supply-chain inventory reductions, have caused issues affecting our profitability and our workforce. That being said, I believe we are beginning to see some positive signs.
As we move beyond the bottom of this cycle, we have much to be encouraged about. We’ve recently concluded successful negotiations with key customers in both our stainless and high-temperature product lines. We believe that we are seeing the end of the inventory reduction in the aerospace engine segment, leading to improved ordering activity.
Our cost focus is showing positive results and our momentum is increasing. Our new VIM, VAR and ESR furnaces are now online, and we are well positioned as the economy improves. Our new China distribution facility is now beginning operation. The manufacturing units across Carpenter have significantly improved their collective safety performance.
Finally as just stated, we are beginning to see the results of our research and developing and marketing initiatives, with new products being introduced in the marketplace. Overall, I feel good about our talented workforce and our ability to produce high value, differentiated products to our customers around the world.
At this point, let me turn the call over to Doug, so he can walk you through our financial results.
Doug Ralph
Thanks Mike. Overall, our financial results for the quarter and our current financial projections for the year, are shaping up as expected. We are reporting a first quarter net loss of $9.3 million or $0.21 per diluted share. For perspective, the quarter would have been right around breakeven, without the $0.21 of non-cash pension expense in the period.
Our earnings result reflects production volume efficiencies versus the second half of last year, and our strong focus on cost reduction, which has offset lower revenue in the quarter and a weaker product mix.
Moving on to the elements of the income statement, net sales in the quarter were $234 million, or 44% below a year ago. Excluding raw-material surcharge, sales were down 38%. Overall tonnage volume decreased 30% in the quarter, with special alloy products down 27%, titanium products also off 27%, and stainless steel products down 32%.
First quarter gross profit was $19.2 million, compared with $73.7 million a year ago. Excluding surcharge revenue, our gross margin in the period was 10.2%, versus 24.4% last year. The lower gross margin is primarily due to reduced volume and correspondingly higher volume related costs. The margin was also adversely affected by a leaner mix of products, including lower demand for premium alloys for energy and aerospace, as well as the portion of higher pension expense that hits our cost of sales.
Reported SG&A expenses decreased 3% year-over-year. The decrease was 10% if you adjust out the impact of non-cash pension expense in both years. The lower SG&A continues to reflect the actions we have taken to reduce headcount and spending across the business beginning last fall.
For the quarter we had an operating loss of $13.3 million, compared with income of $40.3 million in last year’s first quarter. Our operating margin excluding surcharge, was a negative 7.1%, down from a positive 13.3% last year. Excluding the increased pension expense, operating margin would have been a negative 2%, which is not a surprise given the low volume level.
Finishing up the income statement, other income was lower by $2.4 million, primarily driven by lower interest income. Cash investment rates have significantly declined since the prior year, especially in the conservative sectors in which we invest. Our first quarter tax provision was a benefit of $6.8 million or 42.2% of the pre-tax loss, compared with an income tax expense of $13.9 million or 35% of pre-tax income in the same period last year.
Despite difficult market conditions, we continue to maintain a strong and conservative balance sheet. We ended the quarter with $18 million of positive free cash flow, $375 million of cash on the balance sheet, and an improved net cash position of $96 million. Note that the positive cash flow result in the quarter, would have been essentially flat without the receipt of a tax refund from overpayments last fiscal.
We continue to tightly manage all aspects of our cash forecast, and expect to achieve our goal of positive free cash flow for the year. Due to strong inventory performance in the first quarter, and the need to build some inventory to replenish stocks and support the increase in second half demand, our second quarter cash flow will likely be negative, but we are doing all the right things to achieve our target over the full year.
There have been changes to our required pension plan funding since our last call that we want to make you aware of. Based on recent changes in pension funding rules regarding interest rates, we are no longer required to make the $7 million contribution to the plan this fiscal that we previously communicated.
In addition, the overall cash contribution to the plan that we were anticipating for calendar year 2010 of about $45 million, will effectively be pushed out a year. Also, the level of those future cash contributions will be recalculated at the end of December, based on the change in plan asset levels, which have improved with equity markets over the last year, as well as other assumptions.
Net, we will almost certainly still be in an under-funded position at the end of the calendar year, but the required cash contribution amount, which will be the first for us since 1986, will be lower and will not begin until calendar year 2011.
We continue to have plenty of liquidity and cushion within our credit facility covenants. As part of this, we are on track to renew our unsecured credit facility before the end of the calendar year. Looking forward, we believe our revenue level hit bottom in the first quarter of this year and will gradually improve off that level quarter-to-quarter during the fiscal.
Overall revenue for the year is still expected to be lower than our fiscal year 2009 level. We continue to target operating margin for the full year, excluding pension, to be in line with last year’s level of about 6%, despite the lower revenue and weaker product mix. This is a good challenge for the company and requires that we are successful with our continuing cost management efforts.
We have established cost targets throughout the operation. that will yield a net reduction in our cost per-ton this fiscal. In addition, we will also leverage our strength in internal processes, to ensure we add labor back prudently as volume recovers.
With that, we will now open the line for your questions.

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