Kennametal announces 15 percent increase in second-quarter earnings

<%=company1%> reported solid second-quarter earnings, once more leveraging incremental benefits from operational improvements to achieve targets. Despite weakening North American economic conditions, Kennametal's earnings per share (EPS) increased by 15 percent to $0.47 per share, excluding special items, compared to $0.41 per share last year. On a reported basis, earnings per share were $0.44 against $0.27 last year.

Kennametal President and Chief Executive Officer Markos I. Tambakeras said, "We continue to deliver strong earnings growth despite the weakening economy. This is the result of an intense focus on sales programs, increased operational flexibility and improved efficiency in our balance sheet. We quickly recognized the potential for softening market conditions and activated contingency plans to mitigate any earnings impact from top-line shortfall. Furthermore, although we have reduced expenses significantly, we continue to fund our key growth programs. We also continue to generate cash at a higher- than-expected rate and maintain our unyielding focus on managing debt. I am also particularly pleased that despite top-line pressure our gross margins continue to expand. Finally, we have further continued our management development with the addition of two new executives; Michael P. Wessner as COO at J&L Industrial Supply and Michael R. Gallagher to lead our global metalworking marketing and sales organization. We remain focused on the ongoing transformation of Kennametal; investing in strategic initiatives to drive consistent growth, optimizing our cost structure and the revitalization of JLK."

Second-Quarter Highlights

• Excluding the unfavorable impact of foreign currency (4 percent) and fewer business days (3 percent) sales grew 4 percent. Actual sales were $440.5 million, a decrease of 3 percent compared to last year. The organic growth in sales was delivered despite weakening in North American end markets, particularly automotive, and benefited from significant growth in Europe and Asia.
• The gross profit margin was 37.9 percent, an improvement of 70 basis points from the second quarter of fiscal 2000 or 140 basis points excluding unfavorable foreign currency impact. The improvement in the gross margin reflects significant progress in improving the efficiency and effectiveness of operations. Specific benefits were derived from lean manufacturing initiatives and price discipline despite highly competitive markets.
• Operating expense for the quarter, excluding special charges, was reduced 2 percent to $121.6 million. Cost control and productivity improvement efforts reduced operating expense on an absolute basis. This decrease was secured despite incremental funding of key growth initiatives. Excluding this funding, which includes our e-commerce initiatives and the global inventory turns improvement program; operating expense would have declined nearly 4 percent.
• The effective tax rate for the second quarter was 38.8 percent compared to 44.5 percent last year, reflecting the combined benefit of successful tax-planning programs in Europe and the extension of the Foreign Sales Corporation tax benefit in the United States. Correspondingly, the full-year tax rate is now forecast to be 39.5 percent.
• Excluding special items, net income was $14.2 million, an increase of 14 percent compared to $12.4 million last year.
• Special charges of $1.1 million, or $0.03 per share, were included in the quarter's results related primarily to the J&L business improvement plan. Prior-year results included special charges of $7.5 million, or $0.14 per share related to business improvement programs in the core businesses and a charge for environmental remediation.
• Cash flow and balance sheet management continued to generate incremental benefit ahead of expectations. Free operating cash flow of $38 million benefited from a 290-basis-point reduction in primary working capital as a percent of sales to 28 percent. Total debt was $687 million, down from $699 million at the beginning of the year despite the unforecasted investment in a share repurchase program ($16.5 million), and the JLK buy-in ($40.4 million).

Outlook
In recognition of the weakened economic environment, Kennametal is revising its outlook for the year. Sales are now anticipated to be level with last year based on softer North American markets, and the significant decline in the automotive sector in particular. Nonetheless, earnings are anticipated to increase significantly, with EPS expected to be up between 8 percent and 13 percent.

Tambakeras added, "The second quarter results, in the face of rapidly declining end-markets, demonstrate Kennametal's discipline, flexibility and organizational resolve. Looking ahead to the remainder of our fiscal year, it is prudent to moderate our top-line expectations due to the uncertain outlook for the manufacturing sector in North America. We are confident in our new earnings guidance and fully determined not to be distracted from the implementation of our business strategies."

JLK
In commenting on the company's recent reacquisition of its subsidiary JLK Direct Distribution Inc., Tambakeras added, "We have already completed the integration of JLK and have realigned the organization to optimize efficiencies. Full Service Supply (FSS) will now be managed as a separate unit. J&L Industrial Supply will return to its traditional focus as a catalog and showroom distribution business. The new management team is fully engaged and is continuing the execution of the ongoing business improvement plan. As previously announced, the business improvement plan for both units is expected to incur charges at the high end of our original $15 to $20 million guidance, and we anticipate annual savings of $6 to $8 million. The program will begin to generate the full level of savings by the second half of fiscal 2002. To date, we have already seen significant operational improvements at J&L, but these benefits are dampened by weak sales due to poor conditions in the automotive market. We have a clear strategy in place and are now focused on implementation."

Dividend Announcement
Kennametal also announced its Board of Directors declared a quarterly cash dividend of 17 cents per share, payable February 23, 2001, to holders of record as of February 9, 2001.
Kennametal Inc. aspires to be the premier tooling solutions supplier in the world with operational excellence throughout the value chain and best-in- class manufacturing and technology. Kennametal strives to deliver superior shareowner value through top-tier financial performance. The company provides customers a broad range of technologically advanced tools, tooling systems and engineering services aimed at improving customers' manufacturing competitiveness. With 13,000 employees worldwide, the company's annual sales are approximately $1.9 billion, with a third coming from sales outside the United States. Kennametal has been named one of the Best Places to Work in Pennsylvania and has operations in more than 60 countries. Kennametal operations in Europe are headquartered in Furth, Germany. Kennametal Asia Pacific operations are headquartered in Singapore.

<%=company1%>, 1600 Technology Way, PO Box 231, Latrobe, PA 15650. Tel: 800-446-7738. Fax: 412-539-5022.

Source: Kennametal, Inc.