Kennametal Inc. 8-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): July 25, 2005
Kennametal Inc.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania
(State or Other Jurisdiction of Incorporation)
     
1-5318   25-0900168
(Commission File Number)   (IRS Employer Identification No.)
World Headquarters
1600 Technology Way
P.O. Box 231
Latrobe, Pennsylvania 15650-0231
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (724) 539-5000
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 


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 Exhibit 99.1

 


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Item 2.02 Results of Operations and Financial Condition
On July 27, 2005, Kennametal Inc. (the Company) issued a press release announcing financial results for its fourth quarter ended June 30, 2005.
The press release contains certain non-GAAP financial measures, including net income and diluted earnings per share, in each case excluding special items. The special items include: FSS goodwill impairment charge, loss on assets held for sale, restructuring charges, Widia integration costs, pension curtailment, gain on Toshiba investment and charges related to a note receivable. The press release also contains free operating cash flow, debt to capital and adjusted return on invested capital, which are also non-GAAP measures and are defined below.
Kennametal management excludes these items in measuring and compensating internal performance to more easily compare the Company’s financial performance period to period. Kennametal management believes that presentation of these non-GAAP financial measures provides useful information about the results of operations of the Company for the current, past and future periods.
Management believes that investors should have available the same information that management uses to assess operating performance, determine compensation and assess the capital structure of the Company. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Non-GAAP financial measures utilized by the Company may not be comparable to non-GAAP financial measures used by other companies.
Free Operating Cash Flow
Free operating cash flow is a non-GAAP financial measure and is defined as cash provided by operations (in accordance with GAAP) less capital expenditures plus proceeds from disposals of fixed assets. Management considers free operating cash flow to be an important indicator of Kennametal’s cash generating capability because it better represents cash generated from operations that can be used for strategic initiatives (such as acquisitions), dividends, debt repayment and other investing and financing activities.
Debt to Capital
Debt to equity in accordance with GAAP is defined as total debt divided by shareowners’ equity. Debt to capital is a non-GAAP financial measure and is defined by Kennametal as total debt divided by total shareowners’ equity plus minority interest plus total debt. Management believes that this financial measure provides additional insight into the underlying capital structuring and performance of the Company.
Adjusted Return on Invested Capital
Adjusted Return on Invested Capital is a non-GAAP financial measure and is defined as the previous 12 months’ net income, adjusted for interest expense and special items, divided by the sum of the previous 12 months’ average balances of debt, securitized accounts receivable, minority interest and shareowners’ equity. Management believes that this financial measure provides additional insight into the underlying capital structuring and performance of the Company. Management utilizes this non-GAAP measure in determining compensation and assessing the operations of the Company.
A copy of the Company’s earnings announcement is furnished under Exhibit 99.1 attached hereto. Reconciliations of the above non-GAAP financial measures are included in the earnings announcement.
Additionally, during our quarterly teleconference we may use various other non-GAAP financial measures to describe the underlying operating results. Accordingly, we have compiled below certain reconciliations as required by Regulation G.

 


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Primary Working Capital
Primary working capital is a non-GAAP presentation and is defined as accounts receivable, net plus inventories, net minus accounts payable. The most directly comparable GAAP measure is working capital, which is defined as current assets less current liabilities. We believe primary working capital better represents Kennametal’s performance in managing certain assets and liabilities controllable at the business unit level and is used as such for internal performance measurement.
EBIT
EBIT is an acronym for Earnings Before Interest and Taxes and is not a calculation in accordance with GAAP. The most directly comparable GAAP measure is net income. However, we believe that EBIT is widely used as a measure of operating performance and we believe EBIT to be an important indicator of the Company’s operational strength and performance. Nevertheless, the measure should not be considered in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining liquidity that is calculated in accordance with GAAP. Additionally, Kennametal will adjust EBIT for restructuring charges, interest income and other items. Management uses this information in reviewing operating performance and in the determination of compensation.
Adjusted Sales
Kennametal adjusts current period sales as reported under GAAP for specific items including foreign currency translation. Management believes that adjusting the current period sales as reported under GAAP yields a more consistent comparison of year over year results and provides additional insight into the underlying operations. Management uses this information in reviewing operating performance and in the determination of compensation.

 


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SUPPLEMENTAL INFORMATION AND RECONCILIATIONS
FINANCIAL HIGHLIGHTS
RECONCILIATION OF PRIMARY WORKING CAPITAL TO GAAP WORKING CAPITAL (Unaudited)
                 
    June 30,
    2005   2004
Current assets
  $ 831,062     $ 796,945  
Current liabilities
    428,658       486,527  
 
               
 
               
Working capital in accordance with GAAP
  $ 402,404     $ 310,418  
 
               
 
               
Excluding items:
               
Cash and cash equivalents
    (43,220 )     (25,940 )
Deferred income taxes
    (70,391 )     (95,240 )
Other current assets
    (37,466 )     (40,443 )
 
               
 
               
Total excluded current assets
  $ (151,077 )   $ (161,623 )
 
               
 
               
Adjusted current assets
    679,985       635,322  
 
               
 
               
Short-term debt, including notes payable
    (50,889 )     (126,807 )
Accrued liabilities
    (222,930 )     (211,504 )
 
               
 
               
Total excluded current liabilities
  $ (273,819 )   $ (338,311 )
 
               
 
               
Adjusted current liabilities
    154,839       148,216  
 
               
 
               
Primary working capital
  $ 525,146     $ 487,106  
 
               
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FINANCIAL HIGHLIGHTS (Continued)
KENNAMETAL INC. EBIT RECONCILIATION (Unaudited)
                                 
    Quarter Ended   Twelve Months Ended
    June 30,   June 30,
    2005   2004   2005   2004
Net income, as reported
  $ 37,740     $ 29,852     $ 119,291     $ 73,578  
 
                               
As % of sales
    6.1 %     5.5 %     5.2 %     3.7 %
 
                               
Add back:
                               
 
                               
Interest
    7,897       6,405       27,277       25,884  
 
                               
Taxes
    21,854       14,154       61,394       35,500  
 
                               
 
                               
EBIT
    67,491       50,411       207,962       134,962  
 
                               
Additional adjustments:
                               
 
                               
Minority interest
    238       (36 )     3,592       1,596  
 
                               
Restructuring and asset impairment charges (1)
                4,707       6,520  
 
                               
Loss on assets held for sale
                1,546        
 
                               
Widia integration
                      1,559  
 
                               
Pension curtailment
                      1,299  
 
                               
Gain on Toshiba investment
                      (4,397 )
 
                               
Note receivable
                      2,000  
 
                               
Interest income
    (1,384 )     (369 )     (3,462 )     (1,620 )
 
                               
Securitization fees
    981       443       3,186       1,679  
 
                               
 
                               
Adjusted EBIT
  $ 67,326     $ 50,449     $ 217,531     $ 143,598  
 
                               
 
                               
Adjusted EBIT as % of sales
    10.9 %     9.3 %     9.4 %     7.3 %
 
(1)   For the twelve months ended June 30, 2004, includes charges in cost of goods sold and restructuring expense.
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FINANCIAL HIGHLIGHTS (Continued)
MSSG SEGMENT (Unaudited)
                                 
    Quarter Ended   Twelve Months Ended
    June 30,   June 30,
    2005   2004   2005   2004
Sales, as reported
  $ 369,297     $ 326,377     $ 1,378,594     $ 1,198,505  
 
                               
Foreign currency exchange
    (10,964 )           (46,884 )      
 
                               
 
                               
Adjusted sales
  $ 358,333     $ 326,377     $ 1,331,710     $ 1,198,505  
 
                               
MSSG EBIT (Unaudited)
                                 
    Quarter Ended   Twelve Months Ended
    June 30,   June 30,
    2005   2004   2005   2004
MSSG operating income, as reported
  $ 52,260     $ 43,720     $ 187,410     $ 126,657  
 
                               
As % of sales
    14.2 %     13.4 %     13.6 %     10.6 %
 
                               
Other income (expense)
    3,203       669       4,449       2,608  
 
                               
 
                               
EBIT
    55,463       44,389       191,859       129,265  
 
                               
Adjustments:
                               
 
                               
MSSG restructuring (1)
                      5,023  
Widia integration
                      1,511  
 
                               
 
                               
EBIT, excluding special items
  $ 55,463     $ 44,389     $ 191,859     $ 135,799  
 
                               
 
                               
As % of sales
    15.0 %     13.6 %     13.9 %     11.3 %
 
(1)   Includes charges in cost of goods sold and restructuring expense.
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FINANCIAL HIGHLIGHTS (Continued)
AMSG SEGMENT (Unaudited)
                                 
    Quarter Ended   Twelve Months Ended
    June 30,   June 30,
    2005   2004   2005   2004
Sales, as reported
  $ 171,165     $ 119,227     $ 546,838     $ 419,073  
 
                               
Foreign currency exchange
    (2,211 )           (9,728 )      
 
                               
 
                               
Adjusted sales
  $ 168,954     $ 119,227     $ 537,110     $ 419,073  
 
                               
AMSG EBIT (Unaudited)
                                 
    Quarter Ended   Twelve Months Ended
    June 30,   June 30,
    2005   2004   2005   2004
AMSG operating income, as reported
  $ 30,319     $ 16,793     $ 80,932     $ 53,168  
 
                               
As % of sales
    17.7 %     14.1 %     14.8 %     12.7 %
 
Other (expense) income
    83       902       (1,116 )     2,017  
 
                               
 
                               
EBIT
    30,402       17,695       79,816       55,185  
 
                               
Adjustments:
                               
 
                               
AMSG restructuring (1)
                      1,497  
 
                               
Widia integration
                      48  
 
                               
 
                               
EBIT, excluding special items
  $ 30,402     $ 17,695     $ 79,816     $ 56,730  
 
                               
 
                               
As % of sales
    17.8 %     14.8 %     14.6 %     13.5 %
 
(1)   Includes charges in cost of goods sold and restructuring expense.
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FINANCIAL HIGHLIGHTS (Continued)
J&L SEGMENT (Unaudited)
                                 
    Quarter Ended   Twelve Months Ended
    June 30,   June 30,
    2005   2004   2005   2004
Sales, as reported
  $ 66,031     $ 59,741     $ 255,840     $ 218,295  
 
                               
Foreign currency exchange
    (200 )           (1,715 )      
 
                               
 
                               
Adjusted sales
  $ 65,831     $ 59,741     $ 254,125     $ 218,295  
 
                               
J&L EBIT (Unaudited)
                                 
    Quarter Ended   Twelve Months Ended
    June 30,   June 30,
    2005   2004   2005   2004
J&L operating income, as reported
  $ 7,592     $ 6,137     $ 27,094     $ 19,547  
 
                               
As % of sales
    11.5 %     10.3 %     10.6 %     9.0 %
 
                               
Other (expense) income
    11       3       19       26  
 
                               
 
                               
EBIT
    7,603       6,140       27,113       19,573  
 
                               
Adjustments
                       
 
                               
 
                               
EBIT, excluding special items
  $ 7,603     $ 6,140     $ 27,113     $ 19,573  
 
                               
 
                               
As % of sales
    11.5 %     10.3 %     10.6 %     9.0 %
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FINANCIAL HIGHLIGHTS (Continued)
FSS SEGMENT (Unaudited)
                                 
    Quarter Ended   Twelve Months Ended
    June 30,   June 30,
    2005   2004   2005   2004
Sales, as reported
  $ 12,665     $ 36,513     $ 122,895     $ 135,568  
 
                               
Foreign currency exchange
    (62 )           (650 )      
 
                               
 
                               
Adjusted sales
  $ 12,603     $ 36,513     $ 122,245     $ 135,568  
 
                               
FSS EBIT (Unaudited)
                                 
    Quarter Ended   Twelve Months Ended
    June 30,   June 30,
    2005   2004   2005   2004
FSS operating income (loss), as reported
  $ 265     $ 882     $ (4,105 )   $ 818  
 
                               
As % of sales
    2.1 %     2.4 %     (3.3 %)     0.6 %
 
                               
Other (expense) income
    (173 )           (169 )     2  
 
                               
 
                               
EBIT
    92       882       (4,274 )     820  
 
                               
Adjustments:
                               
 
                               
FSS goodwill impairment charge
                4,707        
 
                               
Loss on assets held for sale
                1,546        
 
                               
 
                               
EBIT, excluding special items
  $ 92     $ 882     $ 1,979     $ 820  
 
                               
 
                               
As % of sales
    0.7 %     2.4 %     1.6 %     0.6 %
Item 8.01 Other Events
On July 25, 2005, the Board of Directors of Kennametal Inc. reaffirmed the Company’s previously authorized share repurchase program to purchase up to 1.8 million shares of the Company’s common stock. A copy of the Company’s announcement is furnished under Exhibit 99.1 attached hereto.
Item 9.01 Financial Statements and Exhibits
(c) Exhibits
99.1 Fiscal 2005 Fourth Quarter Earnings Announcement
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
             
 
          KENNAMETAL INC.
 
           
Date: July 27, 2005
 
    By:   /s/ Timothy A. Hibbard
 
           
 
            Timothy A. Hibbard
 
            Corporate Controller and Chief
 
            Accounting Officer

 

EX-99.1
 

Exhibit 99.1
         
(KENNAMETAL LOGO)
  FROM:   KENNAMETAL INC.
P.O. Box 231
Latrobe, PA 15650
724-539-5000

 
      Investor Relations
724-539-6141
 
       
 
      Media Relations
Contact: Joy Chandler
724-539-4618
 
       
 
  DATE:   July 27, 2005
 
       
 
  FOR RELEASE:   Immediate
KENNAMETAL REPORTS RECORD FOURTH QUARTER AND FULL YEAR 2005 RESULTS
      - Q4 05 sales up 14 percent, earnings per diluted share (EPS) of $.98, up 21 percent
 
      - Full Year sales up 17 percent, adjusted EPS of $3.25, up 51 percent
LATROBE, Pa., July 27, 2005 — Kennametal Inc. (NYSE: KMT) today reported fiscal 2005 fourth quarter EPS at a record level of $0.98 compared with prior year EPS of $0.81 and original guidance of $0.90 to $0.95. There were no special items in either quarter.
For fiscal 2005, adjusted EPS were $3.25, also a record, compared with prior year adjusted EPS of $2.15. Reported EPS for the year were $3.13 and included special items totaling $0.12 related to the FSS divestiture in the third quarter. Prior year reported EPS were $2.02 and included special items totaling $0.13.
Sales for the fourth quarter were $619 million compared with prior year sales of $542 million. Full year sales were $2.3 billion compared with $2.0 billion last year. Both the quarter and full year sales figures were record levels for the Company.
Kennametal Chairman, President and Chief Executive Officer, Markos I. Tambakeras, said, “Each of our three business groups, Metalworking Solutions and Services, Advanced Materials Solutions, and J&L Industrial Supply performed at record levels in both sales and earnings. Market penetration, pricing and the underlying strength of our served end markets all contributed to our performance.”
“Kennametal’s results in FY05 are a function of the successful implementation of our transformation strategy that is rapidly expanding our advanced materials and engineered components portfolio, balancing the mix of our end market sales and further enhancing our value-based selling proposition with our customers. Despite difficult headwinds from rising raw material prices, Kennametal’s team worked hard to generate EPS growth of over 50% for the year; on top of 52% growth in the previous fiscal year.”
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Highlights of the Fiscal 2005 Fourth Quarter
  Sales of $619 million were up 14 percent versus the same quarter last year, including 11 percent organic sales growth, 2 percent benefit from foreign currency exchange and 4 percent from acquisitions offset by 3 percent from the FSS divestiture.
 
  Net income was $38 million versus $30 million, up 26 percent.
 
  Adjusted Return on Invested Capital improved 260 basis points to 9.6 percent versus 7.0 percent in the prior year.
 
  Completed the divestiture of FSS, a distribution business that primarily addressed the North American Automotive market, for a selling price of $39 million, subject to customary post-closing adjustments.
Highlights of Fiscal 2005
  Sales of $2.3 billion were up 17 percent on 13 percent organic sales growth, 3 percent benefit from foreign currency exchange and 2 percent from acquisitions offset by 1 percent from the FSS divestiture.
  Net income was $119 million versus $74 million last year, up 62 percent.
  Acquired Extrude Hone, for approximately $134 million, net of acquired cash and direct acquisition costs, adding to our AMSG segment.
  Cash flow from operations was $202 million, free operating cash flow for the year was $118 million.
  Debt to capital decreased to 31 percent versus 33 percent at the end of the prior year.
Outlook
Economic indicators project continued growth through fiscal 2006 in North America and the rest-of-the world markets, and flat to modest growth in European markets. Kennametal expects to see organic revenue growth in the 7% to 10% range, two to three the underlying growth rates of its addressed markets.
Tambakeras said, “We were delighted with our performance in fiscal 2005, and the outlook for our end markets in 2006 remains good. The major challenge in FY 2006 revolves around raw material costs, especially tungsten; but we remain confident in our ability to continue to realize pricing. Although there is near term uncertainty from these raw material cost increases, over the long-term, the industry should be establishing new higher overall levels of pricing commensurate with the underlying economic benefits of its products.”
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Reported EPS are expected to be in the $3.30 to $3.80 range for FY 2006; including an approximately $0.25 negative impact from expensing options due to SFAS 123R and the effects of the reduction in the discount rates applied to our pension plans. About 65% of the 06 EPS will be realized in the second half of the fiscal year, consistent with the Company’s historical seasonal pattern. First quarter EPS are forecasted to be $0.40 to $0.50, also consistent with our seasonal pattern and additionally reflects the impact of raw material cost increases which will be highest in the first quarter.
Operating margins and ROIC should again improve this year as we stay on track to reach our stated goal of 12% for each by fiscal 2007.
Kennametal anticipates net cash flow provided by operating activities of approximately $200 to $220 million for fiscal 2006. Purchases of property, plant and equipment, net of proceeds from disposals of property, plant and equipment are expected to be approximately $80 million. Adjusting net cash flow provided by operating activities for the above item, Kennametal expects to generate between $120 and $140 million of free operating cash flow for fiscal 2006.
Kennametal advises shareowners to note monthly order trends, for which the Company makes a disclosure ten business days after the conclusion of each month. This information is available on the Investor Relations section of Kennametal’s corporate web site at www.kennametal.com.
Share Repurchase Program
Kennametal announced today that its Board of Directors reaffirmed its previously authorized share repurchase program of up to 1.8 million shares of the Company’s common stock. The program will be used principally to dampen the impact of share dilution from equity issued under employee benefit programs. The Company intends to repurchase shares from time to time in open market transactions or in privately negotiated transactions at the Company’s discretion, in accordance with the Board of Director’s authorization and subject to applicable SEC regulations, market conditions and other factors.
Dividend Declared
Kennametal also announced its Board of Directors approved an increase of $.02 in the quarterly cash dividend to $0.19 per share, payable August 24, 2005, to shareowners of record as of the close of business on August 9, 2005. This increase of nearly 12% reflects management’s confidence in continued strong cash generation and is consistent with Kennametal’s stated cash deployment priorities.
Fourth quarter and full year results will be discussed in a live Internet broadcast at 10:00 a.m. (Eastern) today. Access the live or archived conference by visiting the Investor Relations section of Kennametal’s corporate web site at www.kennametal.com.
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This release contains “forward-looking’’ statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should,” “anticipate,” “estimate,” “approximate,” “expect,” “may,” “will,” “project,” “intend,” “plan,” “believe,” and others words of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements are likely to relate to, among other things, our goals, plans and projections regarding our financial position, results of operations, market position and product development, which are based on current expectations that involve inherent risks and uncertainties, including factors that could delay, divert or change any of them in the next several years. Although it is not possible to predict or identify all factors, they may include the following: global economic conditions; future terrorist attacks; epidemics; risks associated with integrating and divesting businesses and achieving the expected savings and synergies; demands on management resources; risks associated with international markets such as currency exchange rates, and social and political environments; competition; labor relations; commodity prices; demand for and market acceptance of new and existing products; and risks associated with the implementation of restructuring plans and environmental remediation matters. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.
Kennametal Inc. (NYSE:KMT) is a leading global supplier of tooling, engineered components and advanced materials consumed in production processes. The Company improves customers’ competitiveness by providing superior economic returns through the delivery of application knowledge and advanced technology to master the toughest of materials application demands. Companies producing everything from airframes to coal, from medical implants to oil wells and from turbochargers to motorcycle parts recognize Kennametal for extraordinary contributions to their value chains. Customers buy over $2 billion annually of Kennametal products and services—delivered by our 14,000 talented employees in over 60 countries—with almost 50 percent of these revenues coming from outside the United States. Visit us at www.kennametal.com. KMT-E
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4


 

FINANCIAL HIGHLIGHTS
Consolidated Statements of Income (Unaudited)
                                 
    Quarter Ended   Twelve Months Ended
(in thousands, except per share amounts)   June 30,   June 30,
    2005   2004   2005   2004
Sales
  $ 619,158     $ 541,858     $ 2,304,167     $ 1,971,441  
 
                               
Cost of goods sold (1)
    394,695       356,084       1,513,634       1,318,074  
 
                               
 
                               
Gross profit
    224,463       185,774       790,533       653,367  
 
                               
Operating expense (2)
    156,065       134,441       574,495       512,621  
 
                               
Restructuring and asset impairment charges (3)
                4,707       3,670  
 
                               
Amortization of intangibles
    1,566       664       3,460       2,234  
 
                               
 
                               
Operating income
    66,832       50,669       207,871       134,842  
 
                               
Interest expense
    7,897       6,405       27,277       25,884  
 
                               
Other expense (income), net (4)
    (897 )     294       (3,683 )     (1,716 )
 
                               
 
                               
Income before provision for income taxes and minority interest
    59,832       43,970       184,277       110,674  
 
                               
Provision for income taxes
    21,854       14,154       61,394       35,500  
 
                               
Minority interest
    238       (36 )     3,592       1,596  
 
                               
 
                               
Net income
  $ 37,740     $ 29,852     $ 119,291     $ 73,578  
 
                               
 
                               
Basic earnings per share
  $ 1.01     $ 0.83     $ 3.23     $ 2.06  
 
                               
 
                               
Diluted earnings per share
  $ 0.98     $ 0.81     $ 3.13     $ 2.02  
 
                               
 
                               
Dividends per share
  $ 0.17     $ 0.17     $ 0.68     $ 0.68  
 
                               
 
                               
Basic weighted average shares outstanding
    37,510       36,051       36,924       35,704  
 
                               
 
                               
Diluted weighted average shares outstanding
    38,477       36,952       38,056       36,473  
 
                               
 
1)   For the twelve months ended June 30, 2004, these amounts include charges of $0.1 million for integration activities related to the Widia acquisition, $2.9 million related to restructuring programs, and $0.8 million for a pension curtailment.
 
2)   For the twelve months ended June 30, 2005, these amounts include a loss on assets held for sale of $1.5 million. For the twelve months ended June 30, 2004, these amounts include charges of $1.4 million for integration activities related to the Widia acquisition, $1.8 million related to a reserve for a note receivable from a divestiture of a business by Kennametal in 2002, and $0.5 million related to a pension curtailment.
 
3)   For the twelve months ended June 30, 2005, these amounts include $4.7 million related to a FSS goodwill impairment charge. For the twelve months ended June 30, 2004, these amounts include $3.7 million related to restructuring programs.
 
4)   For the twelve months ended June 30, 2004, these amounts include income of $4.4 million related to a gain on the sale of Toshiba Tungaloy investment and a charge of $0.2 million on a reserve for a note receivable from a divestiture of a business by Kennametal in 2002.
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5


 

FINANCIAL HIGHLIGHTS (Continued)
In addition to reported results under generally accepted accounting principles in the United States of America (GAAP), the following financial highlight tables also include, where appropriate, a reconciliation of results excluding special items, free operating cash flow, debt to capital, and adjusted return on invested capital (which are non-GAAP measures), to the most directly comparable GAAP measures. Management believes that the investor should have available the same information that management uses to assess operating performance, determine compensation, and assess the capital structure of the Company. These non-GAAP measures should not be considered in isolation or as a substitute for the most comparable GAAP measures. Non-GAAP financial measures utilized by the Company may not be comparable to non-GAAP financial measures used by other companies.
For the quarters ended June 30, 2005 and 2004, there were no special items.
RECONCILIATION TO GAAP – TWELVE MONTHS ENDED JUNE 30 (Unaudited)
                 
    Net    
    Income   EPS
2005 Reported
  $ 119,291     $ 3.13  
FSS goodwill impairment charge
    3,277       0.09  
Loss on assets held for sale
    1,076       0.03  
 
               
2005 Adjusted, excluding special items
  $ 123,644     $ 3.25  
 
               
Reported EPS of $3.13 is up 55 percent from reported EPS of $2.02 for prior year. Adjusted EPS of $3.25 is up 51 percent from adjusted EPS of $2.15 for prior year.
                 
    Net    
    Income   EPS
2004 Reported
  $ 73,578     $ 2.02  
MSSG restructuring
    3,416       0.09  
AMSG restructuring
    1,018       0.03  
Widia integration costs — MSSG
    1,027       0.03  
Widia integration costs — AMSG
    33        
Pension curtailment
    883       0.02  
Gain on Toshiba investment
    (2,990 )     (0.08 )
Note receivable
    1,360       0.04  
 
               
2004 Adjusted, excluding special items
  $ 78,325     $ 2.15  
 
               
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6


 

FINANCIAL HIGHLIGHTS (Continued)
SEGMENT DATA (Unaudited):
                                 
    Quarter Ended   Twelve Months Ended
    June 30,   June 30,
    2005   2004   2005   2004
Outside Sales:
                               
Metalworking Solutions and Services Group
  $ 369,297     $ 326,377     $ 1,378,594     $ 1,198,505  
Advanced Materials Solutions Group
    171,165       119,227       546,838       419,073  
J&L Industrial Supply
    66,031       59,741       255,840       218,295  
Full Service Supply
    12,665       36,513       122,895       135,568  
 
                               
Total Outside Sales
  $ 619,158     $ 541,858     $ 2,304,167     $ 1,971,441  
 
                               
 
                               
Sales By Geographic Region:
                               
Within the United States
  $ 334,524     $ 307,319     $ 1,261,315     $ 1,098,470  
International
    284,634       234,539       1,042,852       872,971  
 
                               
Total Sales by Geographic Region
  $ 619,158     $ 541,858     $ 2,304,167     $ 1,971,441  
 
                               
 
                               
Operating Income (Loss):
                               
Metalworking Solutions and Services Group
  $ 52,260     $ 43,720     $ 187,410     $ 126,657  
Advanced Materials Solutions Group
    30,319       16,793       80,932       53,168  
J&L Industrial Supply
    7,592       6,137       27,094       19,547  
Full Service Supply
    265       882       (4,105 )     818  
Corporate and eliminations (1)
    (23,604 )     (16,863 )     (83,460 )     (65,348 )
 
                               
Total Operating Income, as reported
  $ 66,832     $ 50,669     $ 207,871     $ 134,842  
 
                               
 
(1)   Includes corporate functional shared services and intercompany eliminations.
RECONCILIATION TO FREE OPERATING CASH FLOW INFORMATION (Unaudited) :
                                 
    Quarter Ended   Twelve Months Ended
    June 30,   June 30,
    2005   2004   2005   2004
Net income
  $ 37,740     $ 29,852     $ 119,291     $ 73,578  
Other non-cash items
    22,483       (1,498 )     39,048       13,959  
Depreciation and amortization
    18,344       17,236       66,884       65,989  
Change in inventory
    13,035       (3,213 )     (8,446 )     10,255  
Change in accounts receivable
    (38,994 )     (986 )     (53,768 )     (4,199 )
Change in accounts payable
    12,006       16,696       12,997       25,776  
Change in other assets and liabilities
    (12,018 )     10,305       26,321       (7,500 )
 
                               
Net cash flow provided by operating activities
    52,596       68,392       202,327       177,858  
 
                               
Purchase of property, plant and equipment
    (31,260 )     (20,902 )     (88,552 )     (56,962 )
Proceeds from disposals of property, plant and equipment
          1,227       3,912       4,225  
 
                               
Free operating cash flow
  $ 21,336     $ 48,717     $ 117,687     $ 125,121  
 
                               
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7


 

FINANCIAL HIGHLIGHTS (Continued)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) :
                                         
    06/30/05   03/31/05   12/31/04   09/30/04   06/30/04
ASSETS
                                       
Cash and equivalents
  $ 43,220     $ 34,792     $ 32,168     $ 28,688     $ 25,940  
Trade receivables, net of allowance
    403,097       382,188       367,940       369,008       364,725  
Receivables securitized
    (109,786 )     (120,749 )     (115,253 )     (115,309 )     (117,480 )
 
                                       
Accounts receivable, net
    293,311       261,439       252,687       253,699       247,245  
Inventories
    386,674       408,713       421,183       404,478       388,077  
Deferred income taxes
    70,391       98,063       99,731       96,144       95,240  
Current assets held for sale
          50,469                    
Other current assets
    37,466       32,353       39,605       37,178       40,443  
 
                                       
Total current assets
    831,062       885,829       845,374       820,187       796,945  
Property, plant and equipment, net
    519,301       512,806       506,253       487,616       484,475  
Goodwill and intangible assets, net
    652,791       661,908       543,062       546,487       542,014  
Assets held for sale
          2,715                    
Other assets
    141,297       135,873       133,451       115,733       115,229  
 
                                       
Total
  $ 2,144,451     $ 2,199,131     $ 2,028,140     $ 1,970,023     $ 1,938,663  
 
                                       
 
                                       
LIABILITIES
                                       
Short-term debt, including notes payable
  $ 50,889     $ 56,225     $ 28,888     $ 116,446     $ 126,807  
Accounts payable
    154,839       142,268       142,465       146,543       148,216  
Current liabilities held for sale
          14,437                    
Accrued liabilities
    222,930       245,534       226,568       217,636       211,504  
 
                                       
Total current liabilities
    428,658       458,464       397,921       480,625       486,527  
Long-term debt
    386,485       428,943       376,268       318,989       313,400  
Deferred income taxes
    59,551       91,088       56,340       65,973       67,426  
Other liabilities
    279,435       179,786       174,855       162,627       167,926  
 
                                       
Total liabilities
    1,154,129       1,158,281       1,005,384       1,028,214       1,035,279  
 
MINORITY INTEREST
    17,460       19,664       19,249       17,377       16,232  
 
SHAREOWNERS’ EQUITY
    972,862       1,021,186       1,003,507       924,432       887,152  
 
                                       
 
Total
  $ 2,144,451     $ 2,199,131     $ 2,028,140     $ 1,970,023     $ 1,938,663  
 
                                       
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8


 

FINANCIAL HIGHLIGHTS (Continued)
Debt to Capital Reconciliation (Unaudited):
                 
    June 30,  
      2005       2004  
Total debt
  $ 437,374     $ 440,207  
Total shareowners’ equity
    972,862       887,152  
 
               
 
Debt to equity, GAAP
    45.0 %     49.6 %
 
Total debt
  $ 437,374     $ 440,207  
Minority interest
    17,460       16,232  
Total shareowners’ equity
    972,862       887,152  
 
               
 
Total capital
  $ 1,427,696     $ 1,343,591  
 
Debt to Capital
    30.6 %     32.8 %
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9


 

FINANCIAL HIGHLIGHTS (Continued)
RETURN ON INVESTED CAPITAL (Unaudited):
For the Period Ended June 30, 2005
                                                 
    6/30/2005   3/31/2005   12/31/2004   9/30/2004   6/30/2004   Average
Invested Capital
                                               
Debt
  $ 437,374     $ 485,168     $ 405,156     $ 435,435     $ 440,207     $ 440,668  
Accounts receivable securitized
    109,786       120,749       115,253       115,309       117,480       115,715  
Minority interest
    17,460       19,664       19,249       17,377       16,232       17,996  
Shareowners’ equity
    972,862       1,021,186       1,003,507       924,432       887,152       961,828  
 
                                               
Total
  $ 1,537,482     $ 1,646,767     $ 1,543,165     $ 1,492,553     $ 1,461,071     $ 1,536,207  
 
                                               
                                         
    Quarter Ended
    6/30/2005   3/31/2005   12/31/2004   9/30/2004   Total
Interest Expense
                                       
Interest expense
  $ 7,897     $ 6,803     $ 6,121     $ 6,456     $ 27,277  
Securitization interest
    981       868       757       580       3,186  
 
                                       
Total interest expense
  $ 8,878     $ 7,671     $ 6,878     $ 7,036     $ 30,463  
 
                                       
Income tax benefit
                                    10,175  
 
                                       
Total Interest Expense, net of tax
                                  $ 20,288  
 
                                       
                                         
      Quarter Ended    
    6/30/2005   3/31/2005   12/31/2004   9/30/2004   Total
Total Income
                                       
Net Income, as reported
  $ 37,740     $ 30,650     $ 28,181     $ 22,720     $ 119,291  
 
Restructuring and asset impairment charges
          3,306                   3,306  
Loss on assets held for sale
          1,086                   1,086  
Minority interest expense
    238       1,449       928       977       3,592  
 
                                       
Total Income, excluding special items
  $ 37,978     $ 36,491     $ 29,109     $ 23,697     $ 127,275  
 
                                       
Total Income, excluding special items
                                  $ 127,275  
Total Interest Expense, net of tax
                                    20,288  
 
                                       
 
                                  $ 147,563  
Average invested capital
                                  $ 1,536,207  
 
                                       
Adjusted Return on Invested Capital
                                    9.6 %
 
Return on Invested Capital calculated utilizing Net Income, as reported is as follows:
                                       
Net Income, as reported
                                  $ 119,291  
Total Interest Expense, net of tax
                                    20,288  
 
                                       
 
                                  $ 139,579  
Average invested capital
                                  $ 1,536,207  
 
                                       
Return on Invested Capital
                                    9.1 %
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10


 

FINANCIAL HIGHLIGHTS (Continued)
RETURN ON INVESTED CAPITAL (Unaudited):
For the Period Ended June 30, 2004
                                                 
    6/30/2004   3/31/2004   12/31/2003   9/30/2003   6/30/2003   Average
Invested Capital
                                               
Debt
  $ 440,207     $ 494,312     $ 481,327     $ 520,138     $ 525,687     $ 492,334  
Accounts receivable securitized
    117,480       108,916       101,422       95,318       99,316       104,490  
Minority interest
    16,232       16,598       16,286       16,089       18,880       16,817  
Shareowners’ equity
    887,152       809,904       791,442       746,562       721,577       791,327  
 
                                               
Total
  $ 1,461,071     $ 1,429,730     $ 1,390,477     $ 1,378,107     $ 1,365,460     $ 1,404,968  
 
                                               
                                         
                    Quarter Ended        
    6/30/2004   3/31/2004   12/31/2003   9/30/2003   Total
Interest Expense
                                       
Interest expense
  $ 6,405     $ 6,332     $ 6,547     $ 6,600     $ 25,884  
Securitization interest
    443       356       483       397       1,679  
 
                                       
Total interest expense
  $ 6,848     $ 6,688     $ 7,030     $ 6,997     $ 27,563  
 
                                       
Income tax benefit
                                    8,820  
 
                                       
Total interest expense, net of tax
                                  $ 18,743  
 
                                       
                                         
      Quarter Ended    
    6/30/2004   3/31/2004   12/31/2003   9/30/2003   Total
Total Income
                                       
Net income, as reported
  $ 29,852     $ 24,070     $ 10,892     $ 8,764     $ 73,578  
 
Minority interest expense
    (36 )     533       404       695       1,596  
MSSG restructuring
                1,109       2,307       3,416  
AMSG restructuring
                1,018             1,018  
Widia integration costs — MSSG
                      1,027       1,027  
Widia integration costs — AMSG
                      33       33  
Pension curtailment
                883             883  
Gain on Toshiba investment
                (2,990 )           (2,990 )
Note receivable
                1,360             1,360  
 
                                       
Total Income, excluding special items
  $ 29,816     $ 24,603     $ 12,676     $ 12,826     $ 79,921  
 
                                       
 
Total Income, excluding special items
                                  $ 79,921  
Total Interest Expense, net of tax
                                    18,743  
 
                                       
 
                                  $ 98,664  
Average invested capital
                                  $ 1,404,968  
 
                                       
Adjusted Return on Invested Capital
                                    7.0 %
 
Return on Invested Capital calculated utilizing Net Income, as reported is as follows:
                                       
Net Income, as reported
                                  $ 73,578  
Total Interest Expense, net of tax
                                    18,743  
 
                                       
 
                                  $ 92,321  
Average invested capital
                                  $ 1,404,968  
 
                                       
Return on Invested Capital
                                    6.6 %
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