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Article by DailyStocks_admin    (07-31-08 03:17 AM)

The Daily Magic Formula Stock for 07/31/2008 is Carpenter Technology Corp. According to the Magic Formula Investing Web Site, the ebit yield is 20% and the EBIT ROIC is 25-50 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Business


(a) General Development of Business:

Carpenter Technology Corporation (“Carpenter”), incorporated in 1904, is engaged in the manufacturing, fabrication and distribution of specialty metals and engineered products. We made no significant changes in the form of our organization or mode of conducting business during the year ended June 30, 2007.


(b) Financial Information About Segments:

We are organized in the following business units: Specialty Alloys Operations, Dynamet, Carpenter Powder Products, and Engineered Products. For segment reporting, the Specialty Alloys Operations, Dynamet and Carpenter Powder Products operating units have been aggregated into one reportable segment, Specialty Metals, because of the similarities in products, processes, customers, distribution methods and economic characteristics. See Note 20 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) Products:

We primarily process basic raw materials such as nickel, 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 and fabricated metal products. In addition, ceramic products are produced from various raw materials using molding, heating and other processes.

Our Specialty Metals segment includes the manufacturing and distribution of stainless steels, titanium, high temperature alloys, electronic alloys, tool steels and other alloys in billet, bar, wire, rod, strip and powder forms. Specialty Metals sales are distributed directly from our production plants and distribution network as well as through independent distributors.

Our Engineered Products segment includes the manufacture and sale of structural ceramic products, ceramic cores for the investment casting industry and custom shaped bar.

Our major classes of products are:

Special alloys –

Special purpose alloys used in critical components such as bearings and fasteners. Heat resistant alloys that range from slight modifications of stainless steels to complex nickel and cobalt base alloys. Alloys for electronic, magnetic and electrical applications with controlled thermal expansion characteristics, or high electrical resistivity or special magnetic characteristics.

Stainless steels –

A broad range of corrosion resistant alloys including conventional stainless steels and many proprietary grades for special applications.

Titanium products –

A 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.

Ceramics and other materials –

Certain engineered products, including ceramic cores for investment castings ranging from small simple configurations to large complex shapes and structural ceramic components, as well as drawn solid shapes.

Tool and other steels –

Tool and die steels, which are extremely hard metal alloys, used for tooling and other wear-resisting components in metalworking operations such as stamping, extrusion and machining. Other steels include carbon and alloy steels purchased for distribution and other miscellaneous products.


(2) Classes of Products:

(3) Raw Materials:

Our Specialty Metals segment depends on continued delivery of critical raw materials for its day-to-day operations. These raw materials include nickel, ferrochrome, cobalt, molybdenum, titanium, manganese and scrap. Some of these raw materials sources, 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 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 and base price adjustments 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.

(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 (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 can alter this pattern, particularly when certain raw materials are in short supply.

The chart below summarizes the percent of net sales by quarter for the past three fiscal years:

(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 would have a materially adverse effect on our consolidated statement of operations. In our Engineered Products segment (see Note 20 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” for further segment discussion), which accounted for $105.7 million, $102.9 million and $129.1 million of our sales in fiscal years 2007, 2006 and 2005, respectively, approximately 27 percent ($28.0 million), 24 percent ($24.6 million) and 18 percent ($23.6 million) of segment sales were attributable to one customer in fiscal 2007, 2006 and 2005, respectively. There were no other significant individual customer sales volumes during fiscal years 2007, 2006 or 2005.


(7) Backlog:

As of June 30, 2007 we had a backlog of orders, believed to be firm, of approximately $438 million, substantially all of which is expected to be shipped within fiscal year 2008. Our backlog as of June 30, 2006 was approximately $481 million. Our backlogs have become less indicative of future sales levels due to shifting product mixes and customer ordering patterns.

(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.

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 end-use markets. There are several dozen smaller producing companies and converting companies in the United States that are competitors. We also compete directly with several hundred independent distributors of products similar to those distributed by us. Additionally, numerous foreign producers export into the United States 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 product.

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 foreign producers. 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 2006 levels at approximately 52 percent for stainless bar, 44 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. 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 $6.4 million, $4.7 million and $4.1 million in fiscal years 2007, 2006 and 2005, respectively.


(9) Research, Product and Process Development:

Our expenditures for company-sponsored research and development were $11.5 million, $10.2 million and $10.0 million in fiscal 2007, 2006 and 2005, respectively. We believe that our ability to be a product innovator in special material development and manufacturing 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 such areas as physical metallurgy, analytical chemistry, materials characterization and process and systems development. We have highly skilled engineering teams specializing in specific products at each of our operations. We anticipate continued increases in our devotion of resources for these efforts in fiscal 2008.

(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 Note 13 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Our costs of maintaining and operating environmental control equipment were $12.0 million, $11.3 million and $11.2 million for fiscal 2007, 2006 and 2005, respectively. The capital expenditures for environmental control equipment were $0.2 million for each of the fiscal years ending June 30, 2007, 2006 and 2005, respectively. We anticipate spending approximately $1.0 million on major domestic environmental capital projects over the next five fiscal years. This includes approximately $0.2 million in fiscal 2008 and $0.2 million in fiscal 2009. 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, 2007, our total workforce was 4,152 employees, of which approximately 400 employees were covered under collective bargaining agreements. The largest agreement, which covers 280 employees of Certech, Inc., in Wood-Ridge and Carlstadt, New Jersey, is effective through January 2010. The collective bargaining agreement for our Dynamet production employees in Washington, Pennsylvania covers 113 employees and will expire on August 31, 2007.

CEO BACKGROUND

I. MARTIN INGLIS , age 56, is Executive Vice President and Chief Financial Officer of Battelle, a $4 billion Research and Development enterprise headquartered in Columbus, Ohio. Previously, he had retired as Group Vice President, Business Strategy for Ford Motor Company. He joined Ford of Europe in London in 1971 and held various finance and operations positions in international and domestic markets during his career. Mr. Inglis was named head, Global Products and Business Strategy and elected a corporate Vice President in 1996; President, Ford South America in 1999; head, Ford North America in 2000; Chief Financial Officer in 2001; and Group Vice President, Business Strategy in 2002. Mr. Inglis also serves on the Advisory Board of three venture funds (Fletcher Spaght, Reservoir Ventures, and Battelle Ventures) and is the Audit Chairman of Brookhaven Science Associates LLC; Battelle Energy Associates LLC; and UT-B LLC. He holds a bachelor’s degree in business economics from Strathclyde University, Glasgow, Scotland. Mr. Inglis has been a director of Carpenter since 2003 and is Chairman of the Audit/Finance Committee.

PETER N. STEPHANS , age 64, is Chairman and Chief Executive Officer of Trigon Holding, Inc., parent company for its subsidiary manufacturing forged and machined components for aerospace and medical applications and its subsidiary that designs, develops and markets orthopedic implants. Prior to Trigon, Mr. Stephans served as President and Chief Operating Officer of Dynamet Incorporated, a privately-held titanium processor that Carpenter purchased in 1997. He was appointed Vice President and Technical Director in October 1972 and Executive Vice President in October 1982. He began his career at IBM Corporation, ultimately serving as Manufacturing Manager for one of the company’s divisions in New York. Mr. Stephans holds a bachelor’s and master’s degree in electrical engineering from the South Dakota School of Mines and Technology. He also serves on the Boards of Directors/Trustees of Washington and Jefferson College and World Affairs Council of Pittsburgh. Mr. Stephans has been a director of Carpenter since 2003 and is a member of the Audit/Finance Committee.

KATHRYN C. TURNER , age 59, is Chairperson, Chief Executive Officer and President of Standard Technology, Inc. Ms. Turner founded Standard Technology, Inc., a management and technology solutions firm with a focus in the healthcare sector, in 1985. Standard Technology, Inc. is headquartered in Falls Church, VA, with employees in approximately 12 states. Ms. Turner also serves on the Board of Directors of Conoco Phillips and Schering-Plough Corporation (both of which are listed on the NYSE and are subject to the periodic reporting requirements of the Exchange Act), and the Children’s Hospice International, and she has served as a director for the Urban League (Northern Virginia Chapter). In 1994, she received a Presidential appointment to serve on the President’s Export Council, after serving a one-year term on the ExIm Bank Advisory Committee. In 1993, she was appointed to the Commission on the Future of Worker-Management Relations, a joint commission of the Departments of Labor and Commerce, established by President Clinton. In 1992, she was the first woman appointed by Secretary Cheney to the Defense Policy Advisory Committee on Trade (DPACT). Ms. Turner is the 1998 Black Engineer Entrepreneur of the Year, a 1994 recipient of the Northern Virginia Urban League’s Shining Star Award, and a 1994 recipient of the National Association of Black Telecommunications Professionals, Inc.’s Granville T. Woods Award. Ms. Turner has been a director of Carpenter since 1994, and is a member of the Human Resources and the Corporate Governance Committees.

STEPHEN M. WARD, JR ., age 52, is the retired President and Chief Executive Officer of Lenovo Corporation, the international PC company formed by the acquisition of IBM’s PC business by Lenovo of China. Prior to joining Lenovo, he was senior vice president and general manager of IBM’s Personal Systems Group, responsible for the Personal Computing Division, the Retail Store Solutions Division and the Printing Systems Division. In his 26-year career with IBM, Mr. Ward also served as IBM’s chief information officer and vice president, Business Transformation, directing business process and information technology investments. Mr. Ward was also general manager of IBM’s Global Industrial Sector, responsible for the marketing, sales, and service of IBM e-business solutions. In the mid-1990’s, he served as vice president, Information Technology and was later named general manager, IBM ThinkPad, in the IBM Personal Computer Company. He first joined IBM in Tucson, Arizona as an engineer in the Storage Products Division. He held various management positions in manufacturing, production control and project development for disk drive, tape and optical storage projects and software development, and was also an assistant to the IBM chairman at company headquarters in Armonk, New York. He holds a B.S. degree in mechanical engineering from California Polytechnic State University at San Luis Obispo. Mr. Ward is also a member of the Board of eZopen, a maker of enterprise software, where he serves on the Audit Committee, and e-lnk, a maker of electronic paper displays. Mr. Ward has been a director of Carpenter since 2001, and is Chairman of the Human Resources Committee and a member of the Corporate Governance Committee.

CARL G. ANDERSON, JR. , age 62, is the former Chairman of the Board, President and Chief Executive Officer of Arrow International, Inc., a leading manufacturer of medical devices. He previously served as Vice-Chairman of the Board of Directors and General Manager of Arrow’s Critical Care Business. From 1997 to 2002, he was President and Chief Executive Officer of ABC School Supply Inc., a manufacturer and marketer of educational products. Prior to joining ABC School Supply in May 1997, Mr. Anderson served as Vice President – General Manager of the Retail Consumer Products Division of James River Corporation from 1994 to 1997 and as Vice President of Marketing from May 1992 to August 1994. He was Vice President and General Manager at Nestle Foods Corporation from 1984 to 1992 and a marketing executive at Procter & Gamble from 1972 to 1984. Mr. Anderson served as a director of Arrow International, Inc. (which is listed on NASDAQ and is subject to the periodic reporting requirements of the Exchange Act), a director of IWT Tesoro (IWTT), and as a trustee of Lafayette College and Alvernia College. Mr. Anderson has been a director of Carpenter since 2003 and is a member of the Audit/Finance Committee.

DR. PHILIP M. ANDERSON , age 59, is a professor of physics at Ramapo College of New Jersey, where he has taught since 1990. He holds more than 100 foreign and 34 U.S. patents, and was named Inventor of the Year by the New Jersey Inventor’s Hall of Fame in 2001. He also is a respected consultant on technical and intellectual property on new technology and product development for Fortune 100 companies, with particular emphasis on security systems, medical devices, sensors, magnetics, acoustics and materials. Prior to teaching, he was founder, president and chief executive officer of Identitech Corp., 1986-1988; and new venture manager and senior research physicist at Allied Corp. (now Honeywell Corp.) from 1979-1986. Dr. Anderson received his B.A. in physics in 1970 from Widener University, M.S. degrees in both physics and electrical engineering from Drexel University in June 1977, and a Ph.D. in physics from Drexel in 1979. He served as a pilot in the U.S. Air Force and National Guard from 1970-1975. He currently is a director of Aerco International, and is a former director of Sigma-Netics. From 1997-2001, he was a member of the Peer Review Board of the U.S. Army’s ARDEC, Picatinny Arsenal. Dr. Anderson has been a director of Carpenter since April, 2007 and is a member of Carpenter’s Corporate Governance and Human Resources Committees.

DR. JEFFREY WADSWORTH , age 57, is Executive Vice President for Laboratory Operations at Battelle, a $4 billion Research and Development enterprise headquartered in Columbus, Ohio. He formerly was Director of Oak Ridge National Laboratory and Chief Executive Officer and President of UT-Battelle LLC and Senior Vice President for U.S. Department of Energy Science Programs at Battelle. Previously, he was director of Homeland Security Programs at Battelle and part of the White House Transition Planning Office for the newly formed U.S. Department of Homeland Security. From 1992 to 2002, Dr. Wadsworth was at the Lawrence Livermore National Laboratory in Livermore, California and from 1995 he was deputy director for Science and Technology. Prior to that, he was with Lockheed Missiles and Space Company, Research and Development Division. He was elected to the National Academy of Engineering in 2005, and has been elected Fellow of several technical societies. Dr. Wadsworth holds a bachelor’s degree in metallurgy, Ph.D., D.Met and D.Eng. degrees from Sheffield University, England. Dr. Wadsworth has been a director of Carpenter since January, 2006.

ROBERT R. McMASTER , age 59, held various positions at KPMG from May 1970 to June 1997, including Ohio Valley Area Managing Partner. He served from 1992 to 1997 as a member of KPMG’s Management Committee. From June 1997 to February 2005, McMaster was chairman and chief executive officer of Westward Communications, and president and chief executive officer of its successor company, ASP Westward Holdings, publishers of community newspapers in Texas, Arkansas, and Colorado. He is also a director of Sally Beauty Holdings (chairman, Audit Committee; member, Finance Committee) (which is listed on the NYSE and is subject to the periodic reporting requirements of the Exchange Act), Dominion Homes Inc., (member Audit Committee) (which is listed on NASDAQ and is subject to the periodic reporting requirements of the Exchange Act), and Minimally Invasive Devices, LLC. He also is a former board member of American Eagle Outfitters, Inc. He is active in a wide variety of community affairs organizations in the Columbus, Ohio, region. He received his B.S. magna cum laude, in accounting from Miami University, Oxford, Ohio, in 1970, and is the recipient of the Haskins & Sells Foundation Award for excellence in accounting. He has been a director of Carpenter since April, 2007 and is a member of Carpenter’s Audit/Finance Committee.

ANNE L. STEVENS , age 57, is Chairman, President and Chief Executive Officer of Carpenter Technology Corporation. Ms. Stevens held various management positions at Ford Motor Company, most recently serving as Executive Vice President of Ford Motor Company and Chief Operating Officer of Ford in The Americas, with responsibility for Ford’s North and South American product development, vehicle launch, manufacturing and material purchasing activities. She joined Ford in 1990 as a marketing specialist in the Plastics Products division. Among her positions at the Company, she served as Group Vice President for business operations in Canada, Mexico and South America. As Vice President of North American Vehicle Operations, she was responsible for nearly thirty plants in Canada, Mexico and the United States. Before joining Ford, Ms. Stevens held engineering, manufacturing and marketing positions for over ten years at Exxon Corporation. She earned a B.S. in Mechanical and Materials Engineering from Drexel University and did post graduate work at Rutgers University. She also received an honorary Ph.D. in Communication Sciences from Central Michigan University. Ms. Stevens has been a member of the Board of Directors of Lockheed Martin since 2002. Lockheed Martin is listed on the NYSE and is subject to the periodic reporting requirements of the Exchange Act. She is a member of the National Academy of Engineering and received a distinguished service citation from the Automotive Hall of Fame. She has been named four times to Fortune magazine’s list of “50 Most Powerful Women in Business” and was named by Automotive News as a 2005 “Leading Woman in the North American Automotive Industry”. Ms. Stevens has been a director of Carpenter since November, 2006.

GREGORY A. PRATT , age 58, is Vice Chairman and a director of OAO Technology Solutions, Inc. (OAOT), an information technology and professional services company. He joined OAOT in 1998 as President and CEO after OAOT acquired Enterprise Technology Group, Inc., a software engineering firm founded by Mr. Pratt. Mr. Pratt served as President and COO of Intelligent Electronics, Inc. from 1991 through 1996, and was co-founder, and served variously as CFO and President of Atari (US) Corporation from 1984 through 1991. He also serves as a director and audit committee chairman of AmeriGas Propane, Inc. AmeriGas Propane, Inc. is listed on the NYSE and is subject to the periodic reporting requirements of the Exchange Act. Mr. Pratt has been a director of Carpenter since 2002, is a member of the Human Resources Committee, and chairs the Corporate Governance Committee.


MANAGEMENT DISCUSSION FROM LATEST 10K

Business

Carpenter is engaged in the manufacturing, fabrication, and distribution of specialty metals and engineered products. We primarily process basic raw materials such as nickel, 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 and fabricated metal products. In addition, ceramic products are produced from various raw materials using molding, heating and other processes.

Our Specialty Metals segment includes the manufacturing and distribution of stainless steels, titanium, high temperature alloys, electronic alloys, tool steels and other alloys in billet, bar, wire, rod, strip and powder forms. Specialty Metals sales are distributed directly from our production plants and distribution network as well as through independent distributors.

Our Engineered Products segment includes the manufacture and sale of structural ceramic products, ceramic cores for the investment casting industry and custom shaped bar.

In July 2007, we announced certain changes to our organization which management believes will allows us to better focus on the customer, end-use markets and to reach our operational excellence goals. The announcement included the key appointments of a Senior Vice President – Advanced Metals Operations and a Senior Vice President – Premium Alloys Operations. These changes will impact the Company’s financial reporting related to segment information. The Company is currently evaluating the impact of the changes and expects that the segment information reported during fiscal 2008 will reflect the organizational changes discussed above.

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.

In an effort to increase revenue and profits, we have increased our presence in fast-growing international markets. In recent years, we have expanded our sales and marketing efforts in Europe, Asia, and North America. Our European headquarters are based in Brussels, with our Asian sales directed from Singapore. Outside the United States, company-owned distribution facilities are located in Mexico, Canada, the United Kingdom and Belgium. In addition to the United States, where the majority of our manufacturing exists, we have manufacturing facilities in the United Kingdom, Mexico, Sweden and Australia. In fiscal 2007, 2006 and 2005, 29.6 percent ($574.7 million), 31.7 percent ($496.4 million) and 27.8 percent ($365.0 million) of our sales were to customers outside of the United States, respectively.

We believe that our ability to be a product innovator in special material development and manufacturing 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 such areas as physical metallurgy, analytical chemistry, materials characterization and process and systems development. We have highly skilled engineering teams specializing in specific products at each of our operations.

As part of our overall business strategy, we have sought out and considered opportunities related to strategic divestitures, acquisitions, and joint venture propositions. Management has participated in discussions with other companies to explore potential terms and structure of such opportunities. The Company expects that it will continue to evaluate these opportunities.

Our results of operations have improved significantly over the past three fiscal years largely as a result of favorable market conditions and our focus on lean and waste reduction, especially in the aerospace, energy and medical markets. The key components of our business strategy are as follows:


•

A shift in product mix to higher value materials;


•

Improved margins from an intentional reduction in the sale of marginally profitable products;


•

Pricing products for the value delivered;


•

Expansion of sales in markets outside of the U.S.;


•

Efforts to achieve operational excellence through our focus on lean and waste reduction.

Specifically, we use the phrase “lean and waste reduction” to refer to eliminating or reducing non-value added activities, process variation reduction, process control, work concentration, product flow based on specific customer quantity demand and constraint removal. Our lean and waste reduction philosophy applies to all aspects of our business, including product development, order taking and scheduling, manufacturing, logistics and administrative processes.

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 time the raw materials are acquired to the time the processed finished goods are sold to the customer. In a period of rising raw material costs, the LIFO inventory valuation normally results in higher costs of sales. Increases in the cost of raw materials have impacted our operations over the past few years. We, and others in our industry, generally have been able to pass these cost increases through to our customers using surcharges which are structured to recover high 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. This has impacted our sales numbers and had a dilutive effect on our gross margin and operating margin percentages as described later in this discussion. The formula used to calculate the surcharge is based on prices quoted on the London Metal Exchange (“LME”) for the previous month for the respective raw materials. Surcharge revenues, which are included in net sales, were $497.1 million, $199.6 million and $148.9 million for the years ended June 30, 2007, 2006 and 2005, respectively.

Special Items Recorded in Fiscal Years 2005

During the fourth quarter of 2005, we recorded a gain of $8.7 million before taxes on the sale of our subsidiary, Carpenter Special Products Corporation (“CSPC”). The divestiture was part of the Company’s strategy to focus on its specialty material businesses. CSPC had sales of less than $30 million in fiscal 2005 and accounted for less than 2 percent of consolidated operating income.

Results of Operations – Fiscal 2007 compared to Fiscal 2006

Our net income for fiscal 2007 was $227.2 million, or $8.63 per diluted share, versus net income of $211.8 million, or $8.08 per diluted share, for fiscal 2006.

For fiscal 2007, Carpenter generated record sales and net income. Sales growth, excluding surcharge, was driven primarily by the Company’s increased focus on the energy market and strong demand from the industrial market.

Record fiscal year net income was achieved primarily as a result of the Company’s growth in sales and continued focus on operational excellence.

Free cash flow (see page 30 for Carpenter’s definition and a reconciliation to GAAP) was $202.3 million in fiscal 2007. At June 30, 2007, our cash and marketable securities exceeded our total debt by $340.8 million.

Net Sales

Net sales for fiscal 2007 were $1.9 billion, which was an increase of 24 percent from $1.6 billion in fiscal 2006. The $376.6 million increase in net sales was due to increases in surcharge revenues and volume as well as improved product mix. Excluding surcharges, fiscal 2007 sales increased by 6 percent compared to fiscal 2006.

International sales in fiscal 2007 increased 16 percent from fiscal 2006 to $574.7 million primarily as a result of higher surcharges and increased shipments to the energy market. Sales outside of the U.S. accounted for 29.6 percent of total sales in fiscal 2007 compared to 31.7 percent in fiscal 2006. Details of sales by geographical region for the past three fiscal years are presented in Note 20 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

In terms of end-use markets, sales to the aerospace market of $725.8 million in fiscal 2007 increased 14 percent from fiscal 2006. Excluding surcharge revenues, sales to the aerospace market increased by 1 percent. The static sales level reflects supply chain inventory adjustments stemming from the robust demand for nickel based alloys and titanium coil that took place in the second half of fiscal 2006, which resulted in reduced purchasing levels by customers throughout fiscal 2007. In addition, sales reflected a decline in business with a key customer during fiscal 2007, who is now procuring a portion of its material needs internally from a recently acquired subsidiary.

Sales to the industrial sector of $440.2 million, which includes materials used in equipment and other capital goods applications, increased by 46 percent in fiscal 2007 from fiscal 2006. Excluding surcharge revenues, sales to the industrial market increased by 25 percent. The growth was driven by increased shipments of higher value materials used in capital equipment and the manufacture of valves and fittings used in applications such as the construction and maintenance of chemical and food processing facilities. Additionally, the sales growth reflected increased shipments to the semiconductor sector.

Consumer market sales increased by 17 percent from the prior year, to $206.5 million. Adjusted for surcharge revenues, sales decreased by 9 percent. The reduction was primarily a result of reduced sales of materials used in consumer electronics and fasteners used in consumer products.

Sales to the automotive market in fiscal 2007 increased 30 percent to $236.8 million during fiscal 2007. Sales, excluding surcharge revenue, increased 4% from the prior year. The marginal increase reflected the lower automotive production rates in North America and Europe. In addition, the Company elected not to participate in certain marginally profitable business.

Sales to the medical market of $131.2 million were 6 percent below a year ago. Adjusted for surcharge revenue, sales declined 13 percent. The decline mostly reflected continuing inventory adjustments taking place within the supply chain for titanium and specialty alloy materials.

Gross Profit

Gross profit in fiscal 2007 grew to $457.7 million, or 23.5 percent of sales, from $436.1 million, or 27.8 percent of sales, a year ago. The increased gross profit was achieved despite the negative impact from record high nickel prices throughout most of the year. As a result of the rise in nickel prices, the Company’s surcharge revenue increased to approximately $497 million or 150 percent more than fiscal 2006. The Company’s surcharge mechanism is structured to recover high raw material costs. While the surcharge protects the absolute gross profit dollars, it does have a dilutive effect on gross margin. In fiscal 2007, the dilutive effect on the gross margin from the increased surcharge versus fiscal 2006 was approximately 450 basis points.

Additionally, the Company’s gross profit was negatively impacted by the lag effect in the surcharge mechanism. This lag effect can result in additional margin decline during periods of rapidly escalating raw material prices. The Company has estimated that the lag effect negatively impacted gross margin by approximately 140 basis points when comparing fiscal 2007 to fiscal 2006.

Adjusted for the dilutive effect of the surcharge and the negative impact from the lag in the surcharge mechanism, the gross margin would have improved in fiscal 2007 by 170 basis points from fiscal 2006. The underlying improvement was driven by a richer product mix as well as ongoing cost controls.

Selling and Administrative Expenses

Selling and administrative expenses in fiscal 2007 were $133.9 million, or 6.9 percent of net sales, compared to $125.4 million, or 8.0 percent of net sales, in fiscal 2006. The increase primarily reflected $4.4 million related to executive transition costs and $1.6 million associated with the review of a possible acquisition.

Interest Expense

Fiscal 2007 interest expense of $22.8 million decreased 2 percent from $23.3 million in fiscal 2006. Interest on substantially all of our debt was at a fixed rate and the level of debt was consistent throughout the two-year period.

Other Income, Net

The higher amount reflected $8.1 million of increased interest income due to higher investment balances in cash and marketable securities and $1.7 million of increased receipts from the “Continued Dumping and Subsidy Offset Act of 2000.”

Income Taxes

Our effective tax rate (income tax expense as a percent of income before taxes) for fiscal 2007 was 31.4 percent as compared to 31.5 percent last year. The fiscal year 2007 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 of $3.5 million, or 1.1 percent of pretax income, reflecting the reversal of valuation allowances that had been recorded against state net operating loss carryforwards in prior years. Under Statement of Financial Accounting Standards No. 109 (SFAS109), valuation allowances should be reviewed each year and an assessment must be made as to the likelihood of recovery of those deferred taxes. Based on current year and forecasted taxable income in certain jurisdictions, we determined that it was appropriate to reverse a portion of this valuation allowance in fiscal 2007. We recognized a benefit of $4.2 million, or 1.3 percent due to a favorable state tax settlement. We recognized a benefit of $2.8 million, or 0.8 percent of pretax income, in connection with the domestic manufacturing deduction, which was part of the American Jobs Creation Act of 2004 allowing a special deduction for qualified manufacturing activities.

The fiscal year 2006 tax rate was more favorable than the statutory rate of 35 percent due to several reasons. We recorded a reduction in income tax expense of $5.8 million, or 1.9 percent of pretax income, reflecting the reversal of valuation allowances that had been recorded against state and foreign net operating loss carryforwards in prior years. Based on fiscal 2006 and forecasted taxable income in certain jurisdictions, we determined that it was appropriate to reverse a portion of this valuation allowance in fiscal 2006. We recognized a benefit of $4.6 million, or 1.5 percent of pretax income, related to US export incentives. We recognized a benefit of $3.2 million, or 1.0 percent of pretax income, in connection with the domestic manufacturing deduction, which was part of the American Jobs Creation Act of 2004 allowing a special deduction for qualified manufacturing activities.

See Note 18 to the consolidated financial statements in Item 8. “Financial Statements and Supplementary Data” for a full reconciliation of the statutory federal tax rate to the effective tax rates.

Business Segment Results (See Note 20 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”):

Specialty Metals Segment

Net sales in fiscal 2007 for this segment, which aggregates the Specialty Alloys Operations (SAO), Dynamet, and Carpenter Powder Products (CPP), of $1.84 billion were $371 million, or 25 percent, higher than the $1.47 billion for fiscal 2006. Adjusted for surcharge revenue, sales increased 6 percent from the prior year.

Sales of stainless steel products grew 32 percent to $696.8 million from $528.1 million a year ago. Excluding surcharge revenue, sales increased 11 percent. Stainless sales benefited primarily from increased shipments to the industrial market and from the sale of higher value products.

Sales of specialty alloys increased 27 percent to $895.6 million from $703.8 million a year ago. Adjusted for surcharge revenue, specialty alloys sales increased 2 percent. Growth in the energy market and increased sales of higher value products were the primary drivers of the sales growth which was partially offset by reduced shipments to the aerospace and medical markets.

Titanium sales rose 6 percent to $187.7 million from $176.3 million a year ago. Sales benefited from increased shipments of fastener wire to the aerospace market.

Operating income for the Specialty Metals segment was a record $323.0 million or 17.6 percent of sales compared to $311.8 million or 21.3 percent a year ago. The change in operating income primarily reflected the Company’s growth in sales, a richer product mix and the Company’s continued focus on operational improvements.

Operating income as a percent of sales decreased due to the dilutive effect on margins from the increase in surcharge revenue and the negative impact from the lag effect of the Company’s surcharge mechanism.

Engineered Products Segment

Fiscal 2007 net sales for the Engineered Products segment increased 3 percent to $105.7 million from $102.9 million for the same period a year ago.

Operating income was $19.1 million or 18.1 percent of sales for fiscal 2007 compared to $17.1 million or 16.6 percent of sales a year ago. Increased volume and better operating efficiencies at certain operating locations were the primary drivers of the increase.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

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

Unless specifically stated otherwise, all discussion of the results of operations reflect the Company’s continuing operations.

Operating Performance Overview

For the fiscal quarter ended March 31, 2008, we reported net income from continuing operations of $50.8 million or $1.05 per diluted share, compared with record net income from continuing operations a year earlier of $64.3 million or $1.22 per diluted share. Our results reflected reduced demand in our economically sensitive industrial, automotive and consumer end-use markets, combined with higher operating costs. Demand in the global energy and aerospace end-use markets was strong in the third quarter.

Net Sales

Net sales for the three months ended March 31, 2008 were $509.8 million, which was a 1 percent decrease over the same period a year ago. Adjusted for surcharge revenue, sales were essentially flat. Overall, pounds shipped were 7 percent below an exceptionally strong third quarter a year ago. Our Premium Alloys Operations generated a 12 percent increase in pounds shipped largely due to strong demand from the global energy and aerospace markets. This increase was more than offset by a 9 percent decline in pounds shipped by our Advanced Metals Operations, due principally to lower demand related to the current weakness in the domestic industrial base.

Geographically, sales outside the United States increased 18 percent from a year ago to a quarterly record of $178.6 million. International sales represented 35 percent of total sales for the three months ended March 31, 2008 compared to 29 percent for the three months ended March 31, 2007. Sales to Europe were particularly strong, increasing 26 percent over last year’s third quarter, driven largely by the aerospace and power generation markets.

Sales to the aerospace market increased 11 percent from the third quarter a year ago to a record $210.6 million. Excluding surcharge revenue, sales increased approximately 6 percent from the third quarter a year ago. The increase was largely driven by higher sales of special alloys used in jet engines and fasteners as well as titanium coil, used in fasteners.

Industrial market sales decreased 19 percent from the third quarter a year ago to $104.7 million. Adjusted for surcharge revenue, sales decreased approximately 16 percent. The decrease during the quarter ended March 31, 2008 reflected lower demand for material used in the manufacture of capital goods as well as valves and fittings.

Sales to the energy market of $57.9 million reflected a 25 percent increase from the third quarter of fiscal 2007. Excluding surcharge revenue, sales increased 38 percent from a year ago. The improvement resulted from strong demand for special alloys used in the manufacture of industrial gas turbines and increased global sales of high-strength corrosion-resistant materials to the oil and gas market.

Automotive and truck market sales decreased 14 percent from the third quarter a year ago to $55.1 million. Excluding surcharge revenue, sales decreased 12 percent. The decrease primarily reflected the general slowdown in the domestic automotive industry.

Sales to the consumer market decreased 15 percent to $46.0 million from a year ago. Adjusted for surcharge revenue, sales decreased 4 percent. This reduction in sales primarily reflected the negative impact on demand for materials used in the housing sector and the weakening domestic economy.

Sales to the medical market increased 6 percent to $35.5 million from a year ago. Adjusted for surcharge revenue, sales increased 3 percent.

Sales of special alloys products increased 4 percent from a year ago to $268.4 million. Adjusted for surcharge revenue, sales increased 8 percent. The sales increase principally reflected the growth that we have experienced in our energy end-use market as a result of increased oil exploration activity, coupled with more demanding material requirements that has fueled strong growth for our portfolio of special alloy products, particularly in Europe and Asia.

Sales of stainless steels decreased 8 percent from a year ago to $172.9 million. Excluding surcharge revenue, sales also decreased 8 percent. The decrease resulted primarily from reduced shipments of lower value materials sold through distributors.

Sales of titanium products increased 6 percent from a year ago to $48.2 million. The increase is primarily a result of increased shipments of titanium coil used to make fasteners for the aerospace industry, as compared with the third quarter a year ago.

Gross Profit

Our gross profit in the third quarter decreased 11 percent to $109.3 million, or 21.4 percent of net sales, as compared with $122.4 million, or 23.7 percent of net sales, in the same quarter a year ago. The lower gross profit primarily reflected reduced volume against a strong period one year ago and higher operating costs due to production inefficiencies in the quarter, as well as the costs of investments in our manufacturing systems to drive long-term operational effectiveness. These expenses were partially offset by continued favorable mix improvement.

In addition to the impact of the surcharge mechanism that is discussed below, fluctuations in raw material prices combined with fluctuations in inventory levels have impacted our gross profit from quarter to quarter. We estimated that the effect of the raw material fluctuations combined with changes in inventory levels negatively impacted gross profit by $10.7 million when comparing gross profit for the quarter ended March 31, 2008 to the gross profit for the quarter ended March 31, 2007.

Our surcharge mechanism is structured to recover increases in raw material costs, although generally with a one month 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.

We estimate that the lag effect of the surcharge mechanism, which results from calculating the surcharge amount for each month using the previous month’s raw material prices, negatively impacted gross margin by approximately 10 basis points during the quarter ended March 31, 2008, and negatively impacted gross margin by approximately 70 basis points during the prior year’s quarter.

After considering the dilutive effect of surcharges as well as the lag effect of the surcharge mechanism and other inventory effects, the lower gross margin reflected higher operating costs due to production inefficiencies in the third quarter of this year relative to a year ago, as well as the costs of investments in our manufacturing systems to drive long-term operational effectiveness.

Selling, General and Administrative Expenses

Selling, general and administrative expenses of $34.0 million were 6.7 percent of net sales as compared with $29.9 million or 5.8 percent of net sales in the same quarter a year ago. The increase in the third quarter of this year is primarily attributable to investments in systems and resources needed to drive our future growth initiatives.

Interest Expense

Interest expense for the quarter was $5.1 million, as compared with $5.7 million in the same quarter in the prior year.

Other income

Other income for the recent third quarter was $3.7 million as compared with $6.0 million in the third quarter a year ago. The decrease was primarily due to reduced interest income from invested cash as a result of lower interest rates.

Income taxes

Our tax provision in the recent third quarter was $23.1 million, or 31.3 percent of pre-tax income, versus $28.5 million, or 30.7 percent, in the same quarter a year ago. The tax provision for the quarter ended March 31, 2007 was favorably impacted by $2.2 million due to a favorable settlement of a state tax audit.

Discontinued Operations

Income from discontinued operations for the third quarter of this year was $69.2 million as compared with $2.3 million in the third quarter a year ago. On March 31, 2008, we completed the sale of our ceramics operations to Morgan Crucible Company plc, a U.K.-based advanced materials company. The ceramics operations consisted of our Certech and Carpenter Advanced Ceramics business units that have historically been included in our Engineered Products Operations business segment. The net proceeds from the sale were $143.0 million, which included $144.5 million of sales price net of $1.5 million of deal costs. As a result of the sale, we recorded a pre-tax gain on sale in the quarter ended March 31, 2008 of $102.7 million.

CONF CALL

David A. Christiansen - Vice President of Investor Relations and Business Development

Thank you Jackie. Good morning everyone. Welcome to Carpenter's earnings conference call for the third fiscal quarter ended March 31, 2008. This call is also being broadcast over the internet. With me today are Anne Stevens, Chairman, President and Chief Executive Officer; Doug Ralph, Senior Vice President and Chief Financial Officer; Tom Cramsey, Vice President and Chief Accounting Officer; and from our operations we have Mike Shor, Senior Vice President of our Premium Alloys Operations and Mark Kamon, Senior Vice President of our Advanced Metals 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 fillings, including the company's June 30, 2007 10-K or subsequent 10-Qs and the exhibits attached to those fillings.

I will now turn the call over to Anne who will start with a brief overview.

Anne L. Stevens - Chairman, President and Chief Executive Officer

Thank you Dave and good morning everyone. Before we get into the quarterly review, I want to notice few changes within the Finance Group. We are pleased to announce that Tom Cramsey has been promoted to Vice President and Chief Accounting Officer. Tom has more than 20 years experience with Carpenter in various accounting and finance roles. Tom takes over the accounting responsibilities from Rick Simons, who recently left Carpenter to become Chief Operating Officer of another manufacturing company.

As many of you probably, already know our Vice President and Treasurer Jaime Vasquez has been promoted to President of our Asia Pacific operations and will be relocating to Shanghai later this year. Jaime will be responsible for expanding our operations and footprints in the Asia Pacific regions. Dave Christiansen, who has been with Carpenter for 15 years, has taken on Jaime's responsibility for Investor Relations. Dave is also responsible for business development at Carpenter. Having served as Carpenter's Corporate Council, Dave comes to the IR function with a firm understanding of our business.

As we reflect on our third quarter performance, the results we achieved in our continuing operations for the third quarter were not where we wanted to be. As we mentioned on our last call, we knew it would be a challenge to surpass the exceptionally strong result of the third quarter a year ago. In 2007, the third quarter represented the highest operating income of any quarter in Carpenter's history. We did experience strong sales this quarter in energy and in aerospace, both domestically and internationally just as we expected we would. But sales to our economically sensitive domestic market, automotive, industrial and consumer weakened at a rate we had not anticipated.

In addition, there were a variety of items that negatively impacted our performance in the third quarter. These items include, implementation of new planning processes and production disciplines to streamline product flow and reduce inventories; and production inefficiencies related to the processing of new products. At the end of the day though, these are necessary investments in improving operating systems for the company, investments that we are confident will deliver future benefits to the business.

Looking ahead, we expect current favorable trends in the energy and aerospace to continue to the fourth quarter and beyond. However, we anticipate that automotive, industrial may have some weak soft spots in the U.S. market. On balance, we believe our fourth quarter results should meet or exceed the third quarter. For the 2008 fiscal year, we expect to report record results for the fourth consecutive year.

Next, I'll review our end-use markets, and then Doug will cover the financial highlights. After that, we'll take your questions. To provide some insight into our performance, the year-over-year comparisons exclude surcharge with revenue. Aerospace sales were $142.9 million, a 6% increases over a year ago. The aerospace sales momentum, the improvement came from higher sales of specialty alloys, used in jet engines and fasteners as well as titanium coil used in fasteners. We are seeing the rebound in our shipments to both the U.S. and European aerospace markets that we had expected to see during this second half of our fiscal year.

Our aerospace volume grew at a double-digit rate this quarter and should continued to grow at least at the rate of airline bills going forward. Energy market sales were $42.5 million, up 38% from last year. The growth in energy reflects strong demand for specialty alloys used in industrial gas turbines for power generation. We again saw increased global demand for high strength corrosion resistant materials in the oil and gas markets. The exploration for oil and gas in ever more difficult drilling environment is driving this demand.

Medical market sales increased 3% over a year ago to $29.4 million. This slight improvement in medical occurs at a time when orders for titanium by both medical OEM and by distributors to the medical markets are beginning to show signs of returning to more normal buying patterns.

Now, turning to the economically sensitive end markets. Carpenter sales to the industrial market were $70.7 million, a decline of 16% compared with the third quarter last year. Most of the decline in industrial was due to lower domestic demand for materials used in capital goods and valves and fittings. Automotive and truck market sales were down 12% to $38.3 million. The decline reflects the general slowdown in the domestic automotive industry, a trend over the past several quarters. Now on the other hand we are benefiting from a more positive product mix in automotive and from stronger sales outside the U.S.

Compared with the third quarter a year ago, Carpenter sales to the consumer market were down 4% to $31.9 million. Again, the factors were the same as in recent quarters; lower demand for materials from the housing and from the consumer durable sectors and the weakening domestic economy. Some of the decline in consumer sales was offsets by increases in the sports and electronics segments and by a richer product mix.

Including surcharge, Carpenter's international sales in the third quarter reached a record $178.6 million, now that's a 18% increase over the 2007 third quarter. Most of the gains were in Europe, which was up 26% over a year ago. Overall international sales represented 35% of total sales during the quarter. We are seeing some benefit from the weak dollar, particularly with strip and wire products sold into Europe and Asia.

At the end of the third quarter, we closed on the sale of our ceramics businesses to Morgan Crucible. These were strong businesses but not strategic to Carpenter's future growth. Having sold them for $145 million, it will enable us to further concentrate our focus on core operations.

Last quarter we also made a small acquisition, but one that is strategic to Carpenter's growth plan. Our Carpenter Powder Products subsidiary acquired UltraFine Powder Technology, a small facility in Rhode Island. UltraFine manufactures and sells, buying gas atomized powders from metal injection molding and other specialty markets.

Carpenter remains well positioned in the right end-use market. The outlook for our global aerospace and energy businesses remains strong, and we expect energy and aerospace volume to continue to build in the fourth quarter and to the next fiscal year. We also expect that our international growth will continue to outpace our overall growth. Now, Doug will walk us through the third quarter financial highlights.

K. Douglas Ralph - Senior Vice President - Finance and Chief Financial Officer

Thanks Anne, and good morning everyone. I will now provide some additional perspective on our third quarter financial results. Please note that all income statement comparisons are for continuing operations excluding ceramics. Net sales in the quarter were $509.8 million or 1% below a year ago. Backing out the surcharge, sales from continuing operations were essentially flat. The results reflect lower overall volume of 7% offset by a higher value sales mix.

You've heard us just talk about the exceptionally strong third quarter comparison from last year. For perspective we shipped almost 64 million pounds in the third quarter of 2007 which was 13% higher than any other quarter last year. In this year's third quarter we shipped a little over to 59 million pounds, which is almost 20% above our first half run rate, but still 7% below last year. So, we feel our business has good top line momentum that doesn't fully show up due to the tough third quarter comparison.

As further evidence of the momentum in the more strategic parts of our portfolio, our Premium Alloys Operations, which is about 90 aerospace and energy, increased pounds shipped by 12% in the quarter. This was offset by a 9% decline in pound shipped by our Advanced Metals Operations which contains the more economically sensitive parts of the business.

Returning back to the sales line, I would also point out that our third quarter sales excluding surcharge on specialty alloy products were up 8% from last year. Titanium products were up 6% and stainless steel products experienced all the decline at minus 8%.

Continuing down the income statement, third quarter gross profit was $109.3 million compared with $122.4 million a year ago. The decrease in gross profit primarily reflected lower volume as well as higher operating costs in the quarter as Anne has already covered. These areas were partially offset by continued favorable mix improvement.

Our second half inventory reduction also has an unusually higher impact on the third quarter profit comparison due to the difference in nickel price trends between this year and last. In both years, our inventory pattern was similar with a build in the first half and reductions in the second half. However, this fiscal nickel prices have declined from over $18 a pound at the beginning of the year to about $13 a pound currently. While in fiscal 2007, prices climbed from about $10 a pound at the beginning of the year to well over $20 a pound by the second half.

Normally, our inventory pattern during the year would not have a significant impact on the bottom line, but in combination with the difference in nickel price trends the negative year-to-year profit impact in the third quarter this year amounted to just under $11 million. Note that there would be similarly large negative impact on our fourth quarter profit comparison. However, our expected fourth quarter inventory reduction plans will result in a partially offsetting $6 million benefit from the liquidation of LIFO inventory layers.

Overall, third quarter gross margin was 21.4% compared to 23.7% in the third quarter last year. Adjusted for the dilutive impact of the surcharge, the year-to-year difference in the lag effect in our surcharge mechanism and the inventory effect we just discussed, gross margin on a comparable basis would have been an estimated 32.6% in the third quarter versus an estimated 34.3% in the same quarter a year ago.

Operating income was $75.3 million compared with $92.5 million in the 2007 third quarter. The decrease in operating income is a function of lower gross profit and $4.1 million in higher selling, general and administrative expenses. As discussed in prior quarters, the higher SG&A expenses this year are largely capability building investments in systems and resources needed to drive our future growth initiatives.

Adjusted for the impact of surcharge revenue, the lag in the surcharge and the year-to-year inventory effect, our estimated operating margin on a comparable basis would have been 23.1% in the third quarter compared to 25.9% a year ago. Other income in the quarter was $3.7 million compared to $6 million in last year's third quarter. This primarily reflects lower interest income on our invested cash, as a result of lower interest rates.

Our income tax provision on continuing operations was $23.1 million or 31.3% versus $28.5 million or 30.7% for the third quarter last year. We expect an effective income tax rate for the full year of about 33%.

Third quarter net income from continuing operations was $50.8 million or $1.5 per diluted share. The record third quarter a year ago had comparable net income of $64.3 million or $1.22 per diluted share. We continue to expect a free cash flow for the fiscal year excluding the cash associated with our third quarter acquisition and divestitures will be about $100 million. Within this, our estimated capital spending for the year remains at $125 million.

On our March ending balance sheet, we had a cash and marketable securities balance of $600.6 million which includes the ceramics sale proceeds. Our priorities for deploying this cash remain the same as we have previously communicated.

Now I'll turn it over to Anne for some closing thoughts.

Anne L. Stevens - Chairman, President and Chief Executive Officer

Thank you, Doug. Before we turn to your questions, I want to briefly comment on how our business is changing. One of the key drivers in Carpenter's growth plan is the pursuit of global growth. We are continuing to strengthen our relationship with strategic customers. In addition, we are following the migration of our customers overseas and we are reaching out to new customers as well.

I have been spending a considerable amount of time visiting with current and potential customers overseas, particularly in Europe and Asia. These visits are to ensure that we better understand their needs. I am also here to let them know how Carpenter is able to support them.

Our capabilities and technology leadership represent quality sourcing for our customers and good growth opportunities for Carpenter. We are committing more capital and human resources to promote our growth throughout the world. A good example is what we are doing in China to further our growth sales and provide additional technical support to our customers. Carpenter has devoted much time and effort in the past to improving our agility and lowering our fixed cost structure.

Moving forward, we are taking the next steps to streamline both our business practices and our manufacturing techniques. We are maintaining our focus on strengthening and growing our core businesses. We have been shutting non-core operations to better utilize our assets and to reduce complexity and we will continue to invest in the lean manufacturing environment, adding people only where necessary and improving systems and processes. I can tell you that the senior management team understands what is required to grow and understands to continuously improve our processes to achieve operational excellence.

Now, with that in hand I'd like to open the line to take your questions.

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