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

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 9.01		Financial Statements and Exhibits
EX-99.1

Item 2.02 Results of Operations and Financial Condition

On July 26, 2006, Kennametal Inc. (the “Company”) issued a press release announcing financial results for its fourth quarter and year ended June 30, 2006.

The press release contains certain non-GAAP financial measures, including gross profit, operating expense, operating income, income from continuing operations, net income and diluted earnings per share, in each case excluding special items. The special items include: (a) J&L Industrial Supply gain on sale and transaction-related charges, loss on sale of Kemmer Praezision electronics business, tax impact of cash repatriation under the American Jobs Creation Act, consumer products group goodwill impairment and transaction-related charges, loss on sale of UK-based high speed steel business and favorable resolution to tax contingencies, all for the quarter and year ended June 30, 2006; and (b) Full Service Supply goodwill impairment and loss on sale for the year ended June 30, 2005. The press release also contains adjusted free operating cash flow, adjusted sales and adjusted return on invested capital, which are also non-GAAP measures and are defined below.

Management excludes these items in measuring and compensating internal performance to more easily compare the Company’s financial performance period to period. 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.

Adjusted 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) plus proceeds from disposals of fixed assets less capital expenditures. Management has further adjusted free operating cash flow for the following significant one-time cash items: repayment of our Accounts Receivable Securitization Program and pension funding. 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. Management considers adjusted free operating cash flow to be an important indicator of Kennametal’s future cash generating capability because it excludes significant one-time items.

Adjusted Sales
Kennametal adjusts current period sales as reported under GAAP for specific items including foreign currency translation and adjusts current and prior period sales for the net effect of acquisitions, divestitures and inter-segment reclasses. Management believes that adjusting 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.

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, securitization fees, minority 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. Accordingly, we have compiled below certain reconciliations as required by Regulation G.

Adjusted 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 minority interest expense, interest income, securitization fees and special items. Management uses this information in reviewing operating performance and in the determination of compensation.

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.

Primary Working Capital

Primary working capital is a non-GAAP financial measure 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.

SUPPLEMENTAL INFORMATION AND RECONCILIATIONS

KENNAMETAL INC. EBIT RECONCILIATION (Unaudited)

		Quarter Ended								Twelve Months Ended
		June 30,								June 30,
(in thousands, except percents)		2006				2005				2006				2005
Net income, as reported		$	164,196			$	37,740			$	256,283			$	119,291
Net income as a percent of sales			26.8	%			6.4	%			11.0	%			5.4	%
Add back:
Interest			7,478				7,897				31,019				27,277
Taxes			123,536				21,842				172,902				60,967
EBIT			295,210				67,479				460,204				207,535
Additional adjustments:
Minority interest expense			525				238				2,566				3,592
Interest income			(1,821	)			(1,384	)			(4,838	)			(3,426	)
Securitization fees			1,288				981				4,764				3,186
Special Items:
Gain on sale of J&L			(234,875	)			—				(234,875	)			—
J&L transaction-related charges			5,436				—				7,307				—
Loss on sale of Presto			1,410				—				9,457				—
Loss (income) from discontinued operations, net of income taxes			11,440				(1,496	)			15,968				(5,372	)
FSS goodwill impairment charge			—				—				—				4,707
FSS loss on sale			—				—				—				1,546
Adjusted EBIT		$	78,613			$	65,818			$	260,553			$	211,768
Adjusted EBIT as a percent of sales			12.8	%			11.1	%			11.2	%			9.6	%

RECONCILIATION OF PRIMARY WORKING CAPITAL TO GAAP WORKING CAPITAL (Unaudited)

		June 30,
(in thousands, except percents)		2006				2005
Current assets		$	1,086,857			$	831,062
Current liabilities			461,591				428,658
Working capital in accordance with GAAP		$	625,266			$	402,404
Excluding items:
Cash and cash equivalents			(233,976	)			(43,220	)
Deferred income taxes			(55,328	)			(70,391	)
Current assets held for sale			(24,280	)			—
Other current assets			(51,610	)			(37,466	)
Total excluded current assets		$	(365,194	)		$	(151,077	)
Adjusted current assets			721,663				679,985
Short-term debt, including notes payable			(2,214	)			(50,889	)
Accrued liabilities			(331,405	)			(222,930	)
Total excluded current liabilities			(333,619	)			(273,819	)
Adjusted current liabilities			127,972				154,839
Primary working capital		$	593,691			$	525,146
Primary working capital as a percentage of sales			25.5	%			23.8	%

DEBT TO CAPITAL RECONCILIATION (Unaudited):

		June 30
(in thousands)		2006				2005
Total debt		$	411,722			$	437,374
Total shareowners’ equity			1,295,365				972,862
Debt to equity, GAAP			31.8	%			45.0	%
Total debt		$	411,722			$	437,374
Minority interest			14,626				17,460
Total shareowners’ equity			1,295,365				972,862
Total capital		$	1,721,713			$	1,427,696
Debt to capital			23.9	%			30.6	%

EFFECTIVE TAX RATE RECONCILIATION TO GAAP — (Unaudited)

2006 Reported Quarter Effective Tax Rate			41.2	%
Gain on sale of J&L and transaction-related charges			(8.4	)
Tax impact of cash repatriation under AJCA			(3.7	)
Loss on sale of Presto			(0.6	)
Favorable resolution of tax contingencies			3.6
2006 Adjusted Quarter Effective Tax Rate			32.1	%

Item 9.01 Financial Statements and Exhibits

(c) Exhibits

99.1 Fiscal 2006 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.

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:		July 26, 2006
		FOR RELEASE:		Immediate

KENNAMETAL REPORTS STRONG FOURTH QUARTER AND
FULL YEAR RESULTS FOR FISCAL 2006

			- Q4 reported earnings per diluted share (EPS) of $4.11; adjusted EPS of $1.25
			- Fiscal 2006 reported EPS of $6.48, adjusted EPS of $3.95
			- Record adjusted ROIC of 11.4 percent

LATROBE, Pa., July 26, 2006 — Kennametal Inc. (NYSE: KMT) today reported fourth quarter EPS of $4.11, including special items of $2.86 per share. Fourth quarter adjusted EPS were $1.25 compared with prior year EPS of $0.98, an increase of 28 percent.

Fiscal 2006 reported EPS were $6.48, including special items of $2.53, compared with prior year reported EPS of $3.13, including special charges of $0.12 per share, an increase of 107 percent. Fiscal 2006 adjusted EPS were $3.95 compared to prior year adjusted EPS of $3.25, an increase of 22 percent.

Fiscal 2006 fourth quarter performance reflects continuing operational excellence as well as the impact of previously announced divestitures. These transactions are consistent with the company’s strategy of exiting non-core businesses. Therefore, fourth quarter results included charges associated with the sale of UK-based high speed steel business (Presto), the sale of Kemmer Praezision electronics business (Electronics) and the previously announced sale of South Deerfield Industrial’s consumer retail product line (CPG). These dispositions are expected to improve future overall EBIT margins.

In addition, fourth quarter results included a gain, net of transaction related costs, from the divestiture of J&L Industrial Supply (J&L). The divestiture of J&L is in line with Kennametal’s strategy to focus on its core manufacturing businesses. This transaction completes the company’s planned exit from owned distribution and Kennametal will continue building new distributor relationships while growing existing ones.

As previously disclosed, the company evaluated options for cash repatriation and the corresponding tax impact under the American Jobs Creation Act of 2004 (AJCA). The Act provides for a special one-time tax deduction on foreign earnings that are repatriated to the United States. The company repatriated $89 million, which resulted in an $11 million tax cost which was recorded during fourth quarter of fiscal 2006.

President and Chief Executive Officer Carlos M. Cardoso said, “We are very pleased with the results for fourth quarter and fiscal year 2006, which reflect all that we have accomplished. Through the Kennametal Value Business System (KVBS), our team is successfully executing on our strategy. The fourth quarter performance represents the 10^th consecutive quarter of year over year growth. Kennametal’s strong sales, EPS and return on invested capital validate our market leadership position as well the continuing global opportunity for our company. We are excited to be essentially done with the divestiture of non-core businesses. We now have created a stronger foundation, which positions our company for long-term growth and profitability. By continually enhancing our portfolio to ensure the appropriate mix of businesses, Kennametal is focused on serving customers’ needs through innovative technology and solutions.”

Reconciliation of all non-GAAP financial measures are set forth in the attached tables.

Highlights of Fiscal 2006 Fourth Quarter

•		Fourth quarter sales of $612 million increased 3 percent versus the same quarter last year, including 8 percent organic sales growth, offset by 5 percent from a prior year divestiture. Sales in the quarter included two months of J&L activity prior to its divestiture.
•		Income from continuing operations was $176 million for the fourth quarter. Income from continuing operations, excluding special items, was $48 million for the fourth quarter versus prior year of $36 million, an increase of 33 percent. This year over year improvement was driven by strong performance across all business units coupled with ongoing cost containment.
•		Fourth quarter reported EPS were $4.11, including special items of $2.86 per share. Fourth quarter adjusted EPS were $1.25 compared with prior year EPS of $0.98, an increase of 28 percent. A reconciliation follows:

Earnings Per Diluted Share Reconciliation

Fourth Quarter FY 2006						Fourth Quarter FY 2005
Reported EPS		$	4.11			Reported EPS		$	0.98
Gain on sale of J&L and transaction-related charges			(3.24	)		No special items.
Loss on sale Electronics			0.39
Tax impact of cash repatriation under AJCA			0.28
CPG goodwill impairment and transaction-related charges, net of tax benefit			(0.06	)
Loss on sale of Presto			0.04
Favorable resolution of tax contingencies			(0.27	)
Adjusted EPS		$	1.25					$	0.98

•		Special items related to ongoing portfolio shaping included the divestitures of J&L, Electronics and Presto. The company also recorded pre-tax charges related to its previously announced divestiture of CPG including industrial saw blades, which is expected to close in the first quarter of fiscal 2007.
•		Cash repatriation of $89 million under the AJCA. The tax impact of this repatriation was a charge of $11 million, or $0.28 per diluted share.
•		Record adjusted return on invested capital was up 180 basis points to 11.4 percent from 9.6 percent in the prior year.
•		Repayments of the company’s Accounts Receivable Securitization Program totaled $107 million.
•		Repurchased 1.3 million shares totaling $79 million.
•		Funded $40 million related to one of the company’s US pension plans.

Highlights of Fiscal 2006

•

Sales of $2.3 billion were up 6 percent versus prior year, including 9 percent organic growth, partially offset by a 2 percent net impact of acquisitions and divestitures and 1 percent of unfavorable foreign currency exchange. Sales for the year included 11 months of J&L activity prior to its divestiture.

•

Income from continuing operations was $272 million compared to prior year of $114 million. Income from continuing operations, excluding special items, was $154 million versus prior year of $118 million, an increase of 30 percent.

•

Fiscal 2006 reported EPS were $6.48, including special items of $2.53, compared with prior year reported EPS of $3.13, including special charges of $0.12 per share, an increase of 107 percent. Fiscal 2006 adjusted EPS were $3.95 compared to prior year adjusted EPS of $3.25, an increase of 22 percent. A reconciliation follows:

Earnings Per Diluted Share Reconciliation

Year ended June 30, 2006						Year ended June 30, 2005
Reported EPS		$	6.48			Reported EPS		$	3.13
Gain on sale of J&L and transaction-related charges			(3.24	)		Loss on sale of Full Service Supply and transaction-related charges			0.12
Loss on sale of Electronics			0.39
Tax impact of cash repatriation under AJCA			0.28
CPG goodwill impairment and transaction-related charges, net of tax benefit			0.07
Loss on sale of Presto			0.24
Favorable resolution of tax contingencies			(0.27	)
Adjusted EPS		$	3.95			Adjusted EPS		$	3.25

•

Adjusted free operating cash flow for fiscal 2006 and 2005 was $125 million in each period. Current year adjustments include $110 million of repayments related to the company’s Accounts Receivable Securitization Program and $73 million of pension funding. Capital expenditures for fiscal 2006 totaled $80 million.

•

Repurchased 1.6 million shares totaling $93 million.

Business Segment Highlights of Fiscal 2006 Fourth Quarter

Metalworking Solutions & Services Group (MSSG) growth continues to outpace the growth in its major markets, demonstrating the effects of further market penetration through the company’s channel saturation and branding strategy, as well as price realization. North American sales growth was leveraged with the divestiture of J&L that spurred opportunities with new distributors. General engineering, distribution and energy market segments each exhibited strong year over year growth. The divestiture of Presto and the previously announced divestiture of CPG support the company’s long-term strategy of continued focus on its core businesses.

In the June quarter, MSSG adjusted sales were up 6 percent on volume and price. North American cemented carbide and high-speed steel grew 10 percent and 8 percent, respectively. Europe sales were increased 4 percent. Rest of the world grew 3 percent.

MSSG operating income was up 18 percent on reported sales growth of 6 percent and the operating margin of 16 percent was up 200 basis points over the same period last year due to ongoing cost containment and price realization.

Advanced Materials Solutions Group (AMSG) delivered significant top line growth in the current quarter. The underlying markets in mining and energy remain strong for Kennametal. The overall AMSG segment continues to report considerable growth. Overall market conditions, price realization and market share penetration are primary factors contributing to favorable results.

In the June quarter, AMSG adjusted sales grew 14 percent on volume and price. Energy product sales were up 37 percent, Conforma Clad sales increased 24 percent, engineered products grew 12 percent and mining and construction product sales increased 9 percent.

AMSG operating income grew 11 percent versus last year, on 18 percent reported sales growth. Operating margin of 18 percent was down 100 basis points over the same period last year due primarily to the impact of raw material price increases period over period, particularly tungsten.

Outlook

Worldwide market conditions support the company’s expectations of continued top line growth in fiscal year 2007. Global economic indicators show that North America is expected to remain strong, modest growth is expected in Europe, and emerging markets are forecasted to be robust. While there remain some uncertainties and risks related to the macro-economic environment, fundamental drivers for global demand appear to be stable.

Cardoso said, “We are optimistic about the outlook for our end markets. The global manufacturing forecast is in line with our belief that the industrial sector will continue to show strength. We will continue to balance and diversify our end markets and world geographic mix. We again expect to outperform the market by effectively delivering volume growth, gaining market share and realizing price through innovative customer solutions that provide value and performance.”

Kennametal expects organic revenue growth in the 7 to 10 percent range for fiscal year 2007, continuing the trend of consistently outpacing worldwide industrial production rates by two to three times. The company anticipates the majority of its end markets to continue operating at high levels throughout the year, with moderating growth rates for some sectors.

The expectation of ongoing expansion around the globe supports Kennametal’s projection of 6 to 9 percent organic sales growth in the first quarter of fiscal 2007, relative to very strong performance from the prior year quarter.

Reported EPS are expected to be in the $4.20 to $4.40 range for fiscal year 2007, despite some dilution from recent divestitures of non-core businesses, reflecting confidence in the company’s ability to maintain its strong performance. This forecasted range also includes costs related to the company’s ongoing SG&A initiatives that will result in increased profitability for the long term. The fiscal year 2007 guidance midpoint represents a 9 percent year over year growth. On a comparable basis, fiscal year 2007 guidance midpoint represents approximately 25 percent growth, a substantial increase over prior year. Approximately 65 percent of the forecasted EPS will be realized in the second half of fiscal year 2007, consistent with historical seasonal patterns. First quarter 2007 EPS are expected to be $0.60 to $0.70.

Improvements in operating margins are expected to continue and return on invested capital is solidly on track for the projected 11 to 12 percent range for fiscal year 2007.

Kennametal anticipates net cash flow provided by operating activities of approximately $275 million to $285 million for fiscal 2007. Based on anticipated capital expenditures of $90 million, Kennametal expects to generate between $185 million to $195 million of free operating cash flow for fiscal 2007. However, approximately $100 million to $110 million will be used for tax payments, due to recent divestitures and cash repatriation related to the AJCA.

Dividend Declared

Kennametal also announced that its Board of Directors declared a quarterly cash dividend of $0.19 per share. The dividend is payable August 23, 2006 to shareowners of record as of the close of business on August 8, 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.

Fourth quarter and full year results will be discussed in a live Internet broadcast at 10:00 a.m. Eastern time today. This event will be broadcast live on the company’s website, www.kennametal.com. Once on the homepage, click “Corporate,” and then “Investor Relations.” Also, the replay of this event will be available on the company’s website through August 9, 2006.

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. Forward-looking statements are statements that do not relate strictly to historical or current facts. You can identify forward-looking statements by the fact they use words such as “should,” “anticipate,” “estimate,” “approximate,” “expect,” “may,” “will,” “project,” “intend,” “plan,” “believe” and other words of similar meaning and expression in connection with any discussion of future operating or financial performance. These statements are likely to relate to, among other things, our strategy, 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. It is not possible to predict or identify all factors; however, they may include the following: global and regional economic conditions; energy costs; risks associated with the availability and costs of raw materials; commodity prices; risks associated with integrating recent acquisitions, as well as any future acquisitions, and achieving the expected savings and synergies; risks relating to business divestitures; competition; demands on management resources; risks associated with international markets, such as currency exchange rates and social and political environments or instability; future terrorist attacks or acts of war; 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 billion annually of Kennametal products and services — delivered by our approximately 13,000 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

Consolidated Statements of Income (Unaudited):

		Quarter Ended								Year Ended
(in thousands, except per share amounts)		June 30,								June 30,
		2006				2005 (1)				2006 (1)				2005 (1)
Sales		$	612,167			$	593,599			$	2,329,628			$	2,202,832
Cost of goods sold			388,133				373,492				1,497,462				1,431,716
Gross profit			224,034				220,107				832,166				771,116
Operating expense			146,316				153,171				579,907				559,293
Goodwill impairment charge			—				—				—				4,707
(Gain) loss on assets held for sale			(230,578	)			—				(229,886	)			1,546
Amortization of intangibles			1,428				1,566				5,626				3,460
Operating income			306,868				65,370				476,519				202,110
Interest expense			7,478				7,897				31,019				27,277
Other income, net			(307	)			(851	)			(2,219	)			(3,645	)
Income from continuing operations before income taxes and minority interest			299,697				58,324				447,719				178,478
Provision for income taxes			123,536				21,842				172,902				60,967
Minority interest			525				238				2,566				3,592
Income from continuing operations			175,636				36,244				272,251				113,919
(Loss) income from discontinued operations, net of income taxes			(11,440	)			1,496				(15,968	)			5,372
Net income		$	164,196			$	37,740			$	256,283			$	119,291
Basic earnings per share — continuing operations		$	4.52			$	0.97			$	7.08			$	3.09
Basic (loss) earnings per share — discontinued operations			(0.30	)			0.04				(0.41	)			0.14
Basic earnings per share		$	4.22			$	1.01			$	6.67			$	3.23
Diluted earnings per share — continuing operations		$	4.40			$	0.94			$	6.88			$	2.99
Diluted (loss) earnings per share — discontinued operations			(0.29	)			0.04				(0.40	)			0.14
Diluted earnings per share		$	4.11			$	0.98			$	6.48			$	3.13
Dividends per share		$	0.19			$	0.17			$	0.76			$	0.68
Basic weighted average shares outstanding			38,888				37,510				38,432				36,924
Diluted weighted average shares outstanding			39,923				38,477				39,551				38,056

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FINANCIAL HIGHLIGHTS (Continued)

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited):

(in thousands)		June 30, 2006				June 30, 2005
ASSETS
Cash and equivalents		$	233,976			$	43,220
Trade receivables, net of allowance			386,714				403,097
Receivables securitized			—				(109,786	)
Accounts receivable, net			386,714				293,311
Inventories			334,949				386,674
Deferred income taxes			55,328				70,391
Current assets held for sale			24,280				—
Other current assets			51,610				37,466
Total current assets			1,086,857				831,062
Property, plant and equipment, net			530,379				519,301
Goodwill and intangible assets, net			618,423				652,791
Long term assets held for sale			11,285				—
Other assets			136,562				89,183
Total		$	2,383,506			$	2,092,337
LIABILITIES
Short-term debt, including notes payable		$	2,214			$	50,889
Accounts payable			124,907				154,839
Current liabilities held for sale			3,065				—
Accrued liabilities			331,405				222,930
Total current liabilities			461,591				428,658
Long-term debt			409,508				386,485
Deferred income taxes			73,338				59,551
Other liabilities			129,078				227,321
Total liabilities			1,073,515				1,102,015
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES			14,626				17,460
SHAREOWNERS’ EQUITY			1,295,365				972,862
Total		$	2,383,506			$	2,092,337

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FINANCIAL HIGHLIGHTS (Continued)

SEGMENT DATA (Unaudited):

		Quarter Ended								Year Ended
(in thousands)		June 30,								June 30,
		2006				2005(1)				2006(1)				2005(1)
Outside Sales:
Metalworking Solutions and Services Group		$	373,839			$	352,591			$	1,401,777			$	1,313,525
Advanced Materials Solutions Group			191,758				162,312				676,556				510,572
J&L Industrial Supply			46,570				66,031				251,295				255,840
Full Service Supply			—				12,665				—				122,895
Total Outside Sales		$	612,167			$	593,599			$	2,329,628			$	2,202,832
Sales By Geographic Region:
United States		$	322,903			$	315,167			$	1,239,449			$	1,185,146
International			289,264				278,432				1,090,179				1,017,686
Total Sales by Geographic Region		$	612,167			$	593,599			$	2,329,628			$	2,202,832
Operating Income (Loss):
Metalworking Solutions and Services Group		$	59,390			$	50,487			$	197,525			$	178,313
Advanced Materials Solutions Group			34,061				30,630				121,058				84,268
J&L Industrial Supply			238,284				7,592				260,894				27,094
Full Service Supply			—				265				—				(4,105	)
Corporate and eliminations (2)			(24,867	)			(23,604	)			(102,958	)			(83,460	)
Total Operating Income, as reported		$	306,868			$	65,370			$	476,519			$	202,110

(1)

Amounts have been reclassified to reflect discontinued operations related to the divestiture of Electronics (AMSG) and CPG including industrial saw blades (MSSG).

(2)

Includes corporate functional shared services and intercompany eliminations.

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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 gross profit, operating expense, operating income, income from continuing operations, net income and diluted earnings per share, in each case excluding special items, adjusted free operating cash flow, adjusted segment sales, and adjusted return on invested capital (which are non-GAAP financial 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.

RECONCILIATION TO GAAP — QUARTER ENDED JUNE 30, 2006 (Unaudited)

														Income from
(in thousands, except per share						Operating				Operating				Continuing				Net				Diluted
amounts)		Gross Profit				Expense				Income				Operations				Income				EPS
2006 Reported Results		$	224,034			$	146,316			$	306,868			$	175,636			$	164,196			$	4.11
Gain on sale of J&L			(1,935	)			—				(233,949	)			(132,009	)			(132,009	)			(3.31	)
J&L transaction-related charges			—				(4,510	)			4,510				2,796				2,796				0.07
Loss on sale of Electronics			—				—				—				—				15,366				0.39
Tax impact of cash repatriation under AJCA			—				—				—				11,176				11,176				0.28
CPG goodwill impairment and transaction-related charges			—				—				—				—				(2,192	)			(0.06	)
Loss on sale of Presto			(26	)			—				1,410				1,410				1,410				0.04
Favorable resolution of tax contingencies			—				—				—				(10,873	)			(10,873	)			(0.27	)
2006 Results, excluding special items		$	222,073			$	141,806			$	78,839			$	48,136			$	49,870			$	1.25

For the quarter ended June 30, 2005, there were no special items.

RECONCILIATION TO GAAP — YEAR ENDED JUNE 30, 2006 (Unaudited)

														Income from
(in thousands, except per share						Operating				Operating				Continuing				Net				Diluted
amounts)		Gross Profit				Expense				Income				Operations				Income				EPS
2006 Reported Results		$	832,166			$	579,907			$	476,519			$	272,251			$	256,283			$	6.48
Gain on sale of J&L			(1,935	)			—				(233,949	)			(132,001	)			(132,001	)			(3.34	)
J&L transaction-related charges			—				(6,381	)			6,381				3,956				3,956				0.10
Loss on sale of Electronics			—				—				—				—				15,366				0.39
Tax impact of cash repatriation under AJCA			—				—				—				11,176				11,176				0.28
CPG goodwill impairment and transaction-related charges			—				—				—				—				2,838				0.07
Loss on sale of Presto			7,329				—				9,457				9,457				9,457				0.24
Favorable resolution of tax contingencies			—				—				—				(10,873	)			(10,873	)			(0.27	)
2006 Results, excluding special items		$	837,560			$	573,526			$	258,408			$	153,966			$	156,202			$	3.95

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FINANCIAL HIGHLIGHTS (Continued)

RECONCILIATION TO GAAP —YEAR ENDED JUNE 30, 2005 (Unaudited)

						Income from
		Operating				Continuing				Net				Diluted
		Income				Operations				Income				EPS
2005 Reported		$	202,110			$	113,919			$	119,291			$	3.13
FSS goodwill impairment charge			4,707				3,277				3,277				0.09
FSS loss on sale			1,546				1,076				1,076				0.03
2005 Results, excluding special items		$	208,363			$	118,272			$	123,644			$	3.25

RECONCILIATION OF ADJUSTED FREE OPERATING CASH FLOW INFORMATION (Unaudited):

		Year Ended
		June 30,
		2006				2005
Net cash flow provided by operating activities		$	19,053			$	202,327
Purchase of property, plant and equipment			(79,593	)			(88,552	)
Proceeds from disposals of property, plant and equipment			2,961				3,912
Free operating cash flow		$	(57,579	)		$	117,687
Adjustments:
Repayments of accounts receivable securitization program			109,786				7,694
Pension funding			72,956				—
Adjusted free operating cash flow		$	125,163			$	125,381

MSSG SEGMENT

		Quarter Ended								Year Ended
		June 30,								June 30,
(in thousands)		2006				2005				2006				2005
Sales, as reported		$	373,839			$	352,591			$	1,401,777			$	1,313,525
Foreign currency exchange			440				—				12,859				—
Divestiture-related and inter-segment reclasses			—				(290	)			—				17,332
Adjusted sales		$	374,279			$	352,301			$	1,414,636			$	1,330,857

AMSG SEGMENT

		Quarter Ended								Year Ended
		June 30,								June 30,
(in thousands)		2006				2005				2006				2005
Sales, as reported		$	191,758			$	162,312			$	676,556			$	510,572
Foreign currency exchange			553				—				7,261				—
Acquisition-related and inter-segment reclasses			(1,910	)			4,963				(54,003	)			12,711
Adjusted sales		$	190,401			$	167,275			$	629,814			$	523,283

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FINANCIAL HIGHLIGHTS (Continued)

RETURN ON INVESTED CAPITAL (Unaudited):

For the Year Ended June 30, 2006 (in thousands, except percents)

Invested Capital		6/30/2006				3/31/2006				12/31/2005				9/30/2005				6/30/2005				Average
Debt		$	411,722			$	365,906			$	410,045			$	415,250			$	437,374			$	408,060
Accounts receivable securitized			0				106,106				100,295				100,445				109,786				83,326
Minority interest			14,626				18,054				16,918				18,117				17,460				17,035
Shareowners’ equity			1,295,365				1,115,110				1,045,974				1,009,394				972,862				1,087,741
Total		$	1,721,713			$	1,605,176			$	1,573,232			$	1,543,206			$	1,537,482			$	1,596,162
		Quarter Ended
Interest Expense			6/30/2006				3/31/2006				12/31/2005				9/30/2005			Total
Interest expense		$	7,478			$	7,728			$	7,984			$	7,829			$	31,019
Securitization fees			1,288				1,241				1,170				1,065				4,764
Total interest expense		$	8,766			$	8,969			$	9,154			$	8,894			$	35,783
Income tax benefit																			13,311
Total interest expense, net of tax																		$	22,472
Total Income			6/30/2006				3/31/2006				12/31/2005				9/30/2005			Total
Net Income, as reported		$	164,196			$	32,903			$	31,087			$	28,097			$	256,283
Gain on sale of J&L			(132,001	)			—				—				—				(132,001	)
J&L transaction-related charges			2,796				1,160				—				—				3,956
Loss on sale of Electronics			15,366				—				—				—				15,366
Tax impact of cash repatriation under AJCA			11,176				—				—				—				11,176
CPG goodwill impairment and transaction-related charges			(2,192	)			5,030				—				—				2,838
Loss on sale of Presto			1,410				8,047				—				—				9,457
Favorable resolution of tax contingencies			(10,873	)			—				—				—				(10,873	)
Minority interest expense			525				782				511				748				2,566
Total Income, excluding special items		$	50,403			$	47,922			$	31,598			$	28,845			$	158,768
Total Income, excluding special items																		$	158,768
Total interest expense, net of tax																			22,472
																		$	181,240
Average invested capital																		$	1,596,162
Adjusted Return on Invested Capital																			11.4	%
Return on invested capital calculated utilizing net income, as reported is as follows:
Net Income, as reported																		$	256,283
Total Interest Expense, net of tax																			22,472
																		$	278,755
Average invested capital																		$	1,596,162
Return on Invested Capital																			17.5	%

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FINANCIAL HIGHLIGHTS (Continued)

RETURN ON INVESTED CAPITAL (Unaudited):

For the Year Ended June 30, 2005 (in thousands, except percents)

Invested Capital		6/30/2005				3/31/2005				12/31/2004				9/30/2004				6/30/2004				Average
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
Interest Expense			6/30/2005				3/31/2005				12/31/2004				9/30/2004			Total
Interest expense		$	7,897			$	6,803			$	6,121			$	6,456			$	27,277
Securitization fees			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
Total Income			6/30/2005				3/31/2005				12/31/2004				9/30/2004			Total
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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