UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

Date of report (Date of earliest event reported): January 24, 2006

Kennametal Inc.

(Exact Name of Registrant as Specified in Its Charter)

(State or Other Jurisdiction of Incorporation)

1-5318		25-0900168
(Commission File Number)		(IRS Employer Identification No.)

(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))

 

 

TABLE OF CONTENTS

Item 2.02 Results of Operations and Financial Condition
Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers
Item 9.01 Financial Statements and Exhibits

Item 2.02 Results of Operations and Financial Condition

On January 25, 2006, the Company issued a press release announcing financial results for its second quarter ended December 31, 2005.

The press release contains adjusted return on invested capital, which is a non-GAAP financial measure and is defined below.

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. This non-GAAP measure should not be considered in isolation or as a substitute for its most comparable GAAP measure. Non-GAAP financial measures utilized by the Company may not be comparable to non-GAAP financial measures used by other companies.

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 non-GAAP financial measures to describe the underlying operating results. 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. Accordingly, we have compiled below certain reconciliations as required by Regulation G.

EBIT

EBIT is an acronym for Earnings Before Interest and Taxes and is a non-GAAP financial measure. 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.

SUPPLEMENTAL INFORMATION AND RECONCILIATIONS

KENNAMETAL INC. EBIT RECONCILIATION (Unaudited)

		Quarter Ended								Six Months Ended
		December 31,								December 31,
(in thousands, except percents)		2005				2004				2005				2004
Net income, as reported		$	31,087			$	28,181			$	59,184			$	50,901
Net income as a percent of sales			5.3	%			5.1	%			5.1	%			4.7	%
Add back:
Interest			7,984				6,121				15,813				12,577
Taxes			14,531				7,277				29,590				20,607
EBIT			53,602				41,579				104,587				84,085
Additional adjustments:
Minority interest			511				928				1,259				1,905
Interest income			(1,107	)			(561	)			(2,041	)			(1,250	)
Securitization fees			1,170				757				2,235				1,337
Adjusted EBIT		$	54,176			$	42,703			$	106,040			$	86,077
Adjusted EBIT as a percent of sales			9.3	%			7.7	%			9.2	%			7.9	%

MSSG SEGMENT (Unaudited)

		Quarter Ended								Six Months Ended
		December 31,								December 31,
(in thousands)		2005				2004				2005				2004
Sales, as reported		$	350,430			$	336,230			$	696,968			$	652,100
Foreign currency exchange			4,919				—				(1,044	)			—
Adjusted sales		$	355,349			$	336,230			$	695,924			$	652,100

AMSG SEGMENT (Unaudited)

		Quarter Ended								Six Months Ended
		December 31,								December 31,
(in thousands)		2005				2004				2005				2004
Sales, as reported		$	169,491			$	122,327			$	327,169			$	240,213
Foreign currency exchange			2,727				—				1,945				—
Adjusted sales		$	172,218			$	122,327			$	329,114			$	240,213

J&L SEGMENT (Unaudited)

		Quarter Ended								Six Months Ended
		December 31,								December 31,
(in thousands)		2005				2004				2005				2004
Sales, as reported		$	65,337			$	61,338			$	130,339			$	122,755
Foreign currency exchange			293				—				373				—
Adjusted sales		$	65,630			$	61,338			$	130,712			$	122,755

Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers

(d) On January 24, 2006, upon the recommendation of the Nominating / Corporate Governance Committee of the Board of Directors of the Company, the Board elected Philip A. Dur as a director. Mr. Dur joins the Board effective January 24, 2006 as a director in the second class, with a term to expire in October 2006. Mr. Dur will serve as a member of the Compensation Committee and Nominating / Corporate Governance Committee. Mr. Dur is not a party to any transaction described in Item 404(a) of Regulation S-K involving the Company or any of its subsidiaries.

Item 9.01 Financial Statements and Exhibits

(c) Exhibits

99.1 Fiscal 2006 Second 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: January 25, 2006		By:		/s/ Timothy A. Hibbard
				Timothy A. Hibbard
				Corporate Controller and Chief Accounting Officer

EXHIBIT 99.1

		FROM:		KENNAMETAL INC. P.O. Box 231 Latrobe, PA 15650 724-539-5000
				Investor Relations Contact: Quynh McGuire 724-539-6559
				Media Relations Contact: Joy Chandler 724-539-4618
		DATE:		January 25, 2006
		FOR RELEASE:		Immediate

KENNAMETAL REPORTS RECORD SECOND QUARTER

- Q2 06 sales up 5 percent, reflect 8 percent organic growth

- Earnings per diluted share (EPS) of $0.79, up 7 percent

- Cash flow from operations of $55 million, another strong quarter

- Increased full year guidance range to $3.70 - $3.90 EPS

LATROBE, Pa., January 25, 2006 — Kennametal Inc. (NYSE: KMT) today reported fiscal 2006 second-quarter EPS of $0.79, including a non-recurring $0.05 per share tax benefit. Prior year second-quarter EPS was $0.74, including a non-recurring $0.17 per share tax benefit.

For the first six months of fiscal 2006, EPS was $1.52 compared with prior year EPS of $1.35.

Kennametal Executive Chairman, Markos I. Tambakeras, said, “We are delighted with our company’s performance in the December quarter, which represents the 8th consecutive quarter of year-over-year growth. This continued growth is evidence of the sustainability of our business model as well as the continuing favorable market environment. We achieved record sales, earnings and return on invested capital and will continue to build on our leadership position by remaining focused on delivering exceptional value to customers and shareowners.”

In addition, President and Chief Executive Officer, Carlos M. Cardoso, said, “Second quarter performance reflects continued strength across our end markets and geographies, despite difficult comparisons to the prior year. Providing superior value to customers through our game-changing technology, end market diversity and global presence results in our competitive advantage.”

Highlights of the Fiscal 2006 Second Quarter

•		Record second quarter sales of $585 million were up 5 percent versus the same quarter last year, including 8 percent organic sales growth, partially offset by 1 percent unfavorable foreign currency exchange as well as the net impact of acquisitions and divestitures.
•		Net income was $31 million compared to $28 million in the prior year, up 10 percent.
•		Second quarter EPS of $0.79 included the effects of stock option expense related to SFAS 123(R) of $0.03 per share, increased domestic pension expense of approximately $0.04 per share related to the change in the discount rate and a $0.05 per share benefit related to the release of a deferred tax valuation allowance.
•		The effective tax rate in the second quarter was 31.5 percent compared to prior year’s rate of 20 percent.
•		Net cash flow from operations was $55 million versus $51 million in the same quarter last year.
•		Record adjusted return on invested capital was up 140 basis points to 10.0 percent versus prior year.

Highlights of the Fiscal 2006 First Half

•		Sales of $1.2 billion were up 6 percent versus prior year, including 8 percent organic growth, partially offset by the net impact of acquisitions and divestitures.
•		Net income was $59 million compared to $51 million in the prior year, up 16 percent.

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. For fiscal 2006, Kennametal continues to expect organic revenue growth in the 7 to 10 percent range, consistently outpacing world-wide industrial production rates by two to three times. The company anticipates the majority of its end markets to continue operating at high levels, with moderating growth rates for certain sectors.

Cardoso said, “We were very pleased with our performance for the second quarter of fiscal 2006, and the outlook for our end markets for the remainder of the year remains positive. As previously discussed, a major challenge for the industry in fiscal year 2006 continues to revolve around raw material costs, especially tungsten. We have demonstrated the ability to meet this challenge through our disciplined strategic pricing process and expect to continue doing so.”

Reported EPS for fiscal year 2006 is now expected to be $3.70 to $3.90, including an approximately $0.25 negative impact from the combination of expensing stock options due to SFAS 123(R) and the effects of the reduction in the discount rate applied to the company’s domestic pension plans. This

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 and regional economic conditions; risks associated with the availability and costs of raw materials; energy costs; commodity prices; risks associated with integrating and divesting businesses and achieving the expected savings and synergies; competition; demands on management resources; risks associated with international markets, such as currency exchange rates and social and political environments; future terrorist attacks; labor relations; 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 $2.3 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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FINANCIAL HIGHLIGHTS

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 adjusted return on invested capital (which is a non-GAAP financial measure), to the most directly comparable GAAP measure. 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. This non-GAAP measure should not be considered in isolation or as a substitute for the most comparable GAAP measure. Non-GAAP financial measures utilized by the Company may not be comparable to non-GAAP financial measures used by other companies.

Consolidated Statements of Income (Unaudited):

		Quarter Ended								Six Months Ended
(in thousands, except per share amounts)		December 31,								December 31,
		2005				2004				2005				2004
Sales		$	585,258			$	556,218			$	1,154,476			$	1,087,654
Cost of goods sold			385,521				374,804				754,869				732,845
Gross profit			199,737				181,414				399,607				354,809
Operating expense			145,282				139,513				292,944				270,462
Amortization of intangibles			1,438				634				2,789				1,171
Operating income			53,017				41,267				103,874				83,176
Interest expense			7,984				6,121				15,813				12,577
Other income, net			(1,096	)			(1,240	)			(1,972	)			(2,814	)
Income before provision for income taxes and minority interest			46,129				36,386				90,033				73,413
Provision for income taxes			14,531				7,277				29,590				20,607
Minority interest			511				928				1,259				1,905
Net income		$	31,087			$	28,181			$	59,184			$	50,901
Basic earnings per share		$	0.81			$	0.77			$	1.56			$	1.39
Diluted earnings per share		$	0.79			$	0.74			$	1.52			$	1.35
Dividends per share		$	0.19			$	0.17			$	0.38			$	0.34
Basic weighted average shares outstanding			38,174				36,744				38,014				36,550
Diluted weighted average shares outstanding			39,278				38,016				39,064				37,702

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FINANCIAL HIGHLIGHTS (Continued)

SEGMENT DATA (Unaudited):

		Quarter Ended								Six Months Ended
		December 31,								December 31,
(in thousands)		2005				2004				2005				2004
Outside Sales:
Metalworking Solutions and Services Group		$	350,430			$	336,230			$	696,968			$	652,100
Advanced Materials Solutions Group			169,491				122,327				327,169				240,213
J&L Industrial Supply			65,337				61,338				130,339				122,755
Full Service Supply			—				36,323				—				72,586
Total Outside Sales		$	585,258			$	556,218			$	1,154,476			$	1,087,654
Sales By Geographic Region:
Within the United States		$	312,219			$	301,524			$	619,618			$	603,307
International			273,039				254,694				534,858				484,347
Total Sales by Geographic Region		$	585,258			$	556,218			$	1,154,476			$	1,087,654
Operating Income (Loss):
Metalworking Solutions and Services Group		$	43,473			$	42,723			$	89,719			$	81,595
Advanced Materials Solutions Group			29,102				13,869				52,430				28,402
J&L Industrial Supply			6,312				5,866				13,156				11,587
Full Service Supply			—				546				—				666
Corporate and eliminations (1)			(25,870	)			(21,737	)			(51,431	)			(39,074	)
Total Operating Income, as reported		$	53,017			$	41,267			$	103,874			$	83,176

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited):

(in thousands)		December 31, 2005				June 30, 2005
ASSETS
Cash and equivalents		$	39,454			$	43,220
Trade receivables, net of allowance			385,299				403,097
Receivables securitized			(100,295	)			(109,786	)
Accounts receivable, net			285,004				293,311
Inventories			410,888				386,674
Deferred income taxes			70,176				70,391
Other current assets			32,121				37,466
Total current assets			837,643				831,062
Property, plant and equipment, net			515,451				519,301
Goodwill and intangible assets, net			666,166				652,791
Other assets			82,504				89,183
Total		$	2,101,764			$	2,092,337
LIABILITIES
Short-term debt, including notes payable		$	17,237			$	50,889
Accounts payable			125,764				154,839
Accrued liabilities			216,112				222,930
Total current liabilities			359,113				428,658
Long-term debt			392,808				386,485
Deferred income taxes			54,591				59,551
Other liabilities			232,360				227,321
Total liabilities			1,038,872				1,102,015
MINORITY INTEREST			16,918				17,460
SHAREOWNERS’ EQUITY			1,045,974				972,862
Total		$	2,101,764			$	2,092,337

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FINANCIAL HIGHLIGHTS (Continued)

RETURN ON INVESTED CAPITAL (Unaudited):

For the Period Ended December 31, 2005 (in thousands, except percents)

		12/31/2005				9/30/2005				6/30/2005				3/31/2005				12/31/2004				Average
Invested Capital
Debt		$	410,045			$	415,250			$	437,374			$	485,168			$	405,156			$	430,599
Accounts receivable securitized			100,295				100,445				109,786				120,749				115,253				109,306
Minority interest			16,918				18,117				17,460				19,664				19,249				18,282
Shareowners’ equity			1,045,974				1,009,394				972,862				1,021,186				1,003,507				1,010,585
Total		$	1,573,232			$	1,543,206			$	1,537,482			$	1,646,767			$	1,543,165			$	1,568,772

										Quarter Ended
		12/31/2005				9/30/2005				6/30/2005				3/31/2005				Total
Interest Expense
Interest expense		$	7,984			$	7,829			$	7,897			$	6,803			$	30,513
Securitization fees			1,170				1,065				981				868				4,084
Total interest expense		$	9,154			$	8,894			$	8,878			$	7,671			$	34,597
Income tax benefit																			12,109
Total Interest Expense, net of tax																		$	22,488

		Quarter Ended
		12/31/2005				9/30/2005				6/30/2005				3/31/2005				Total
Total Income
Net Income, as reported		$	31,087			$	28,097			$	37,740			$	30,650			$	127,574
Restructuring and asset impairment charges			—				—				—				3,306				3,306
Loss on assets held for sale			—				—				—				1,086				1,086
Minority interest expense			511				748				238				1,449				2,946
Total Income, excluding special items		$	31,598			$	28,845			$	37,978			$	36,491			$	134,912
Total Income, excluding special items																		$	134,912
Total Interest Expense, net of tax																			22,488
																		$	157,400
Average invested capital																		$	1,568,772
Adjusted Return on Invested Capital																			10.0	%
Return on Invested Capital calculated utilizing Net Income, as reported is as follows:
Net Income, as reported																		$	127,574
Total Interest Expense, net of tax																			22,488
																		$	150,062
Average invested capital																		$	1,568,772
Return on Invested Capital																			9.6	%

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FINANCIAL HIGHLIGHTS (Continued)

RETURN ON INVESTED CAPITAL (Unaudited):

For the Period Ended December 31, 2004 (in thousands, except percents)

		12/31/2004				9/30/2004				6/30/2004				3/31/2004				12/31/2003				Average
Invested Capital
Debt		$	405,156			$	435,435			$	440,207			$	494,312			$	481,327			$	451,287
Accounts receivable securitized			115,253				115,309				117,480				108,916				101,422				111,676
Minority interest			19,249				17,377				16,232				16,598				16,286				17,148
Shareowners’ equity			1,003,507				924,432				887,152				809,904				791,442				883,288
Total		$	1,543,165			$	1,492,553			$	1,461,071			$	1,429,730			$	1,390,477			$	1,463,399

										Quarter Ended
		12/31/2004				9/30/2004				6/30/2004				3/31/2004				Total
Interest Expense
Interest expense		$	6,121			$	6,456			$	6,405			$	6,332			$	25,314
Securitization fees			757				580				443				356				2,136
Total interest expense		$	6,878			$	7,036			$	6,848			$	6,688			$	27,450
Income tax benefit																			8,784
Total Interest Expense, net of tax																		$	18,666

										Quarter Ended
		12/31/2004				9/30/2004				6/30/2004				3/31/2004				Total
Total Income
Net Income, as reported		$	28,181			$	22,720			$	29,852			$	24,070			$	104,823
Minority interest expense			928				977				(36	)			533				2,402
Total Income, excluding special items		$	29,109			$	23,697			$	29,816			$	24,603			$	107,225
Total Income, excluding special items																		$	107,225
Total Interest Expense, net of tax																			18,666
																		$	125,891
Average invested capital																		$	1,463,399
Adjusted Return on Invested Capital																			8.6	%
Return on Invested Capital calculated utilizing Net Income, as reported is as follows:
Net Income, as reported																		$	104,823
Total Interest Expense, net of tax																			18,666
																		$	123,489
Average invested capital																		$	1,463,399
Return on Invested Capital																			8.4	%

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