Kennametal Reports First Quarter Fiscal 2010 Results

Kennametal Inc. has reported that sales for its first fiscal quarter ended September 30, improved sequentially by 6 percent from the preceding quarter.

In a release on October 29, the Company noted that improvement in sales was driven by a modest uptick in industrial activity in certain markets and follows three consecutive quarters of sharp sequential decline during the global economic downturn. Compared to the record level set for the September quarter one year ago, sales were lower by 36 percent.

Reported fiscal 2010 first quarter earnings (loss) per diluted share (EPS) were ($0.12), compared with prior year quarter reported EPS of $0.47. The current quarter reported EPS included restructuring and divestiture related charges amounting to $0.08 per share. The prior year quarter reported EPS included restructuring related charges of $0.10 per share. Absent these charges, adjusted EPS for the current quarter was ($0.04), compared with the prior year quarter adjusted EPS of $0.57. Adjusted EPS for the current quarter improved sequentially by $0.09 from the quarter ended June 30.

Kennametal's Chairman, President and Chief Executive Officer Carlos Cardoso said, "We are encouraged by the improvement in our business during the September quarter. In addition to the positive impact of higher sequential sales, our results benefited from increased permanent savings from our restructuring programs. We also continued to focus sharply on generating strong cash flow and maintaining a solid financial position. Our September quarter performance demonstrates the positive effect and future potential of the many difficult actions that we took during the global economic downturn. This, along with our market leading capabilities and talented employees worldwide, further enhances our ability to expand our sales and achieve higher levels of profitability in an improving global economy."

Fiscal 2010 First Quarter Key Developments

-- Sales for the quarter were $409 million, compared with $643 million in

the same quarter last year. Sales declined organically by 36 percent,

while the favorable impact of 3 percent from a business acquisition

made in the prior fiscal year was offset by a 3 percent decrease from

unfavorable foreign currency effects.

-- The company continued to realize benefits from cost reductions and

improved operating efficiencies resulting from a series of

restructuring programs that have been undertaken over the past

eighteen months. Pre-tax benefits from these restructuring programs

reached approximately $30 million in the current quarter most of which

were incremental to the same quarter one year ago. As a result, the

company is nearing its target to achieve approximately $125 million in

annual pre-tax benefits from these initiatives. During the September

quarter, the company recognized pre-tax charges related to these

initiatives of $9 million, or $0.06 per share. Pre-tax charges

recorded to date for these initiatives were $90 million. Including

these charges, the company expects to recognize approximately $115

million of pre-tax charges related to its restructuring plans. The

majority of the remaining charges are expected to be incurred over the

next six to nine months, most of which are expected to be cash

expenditures.

-- Operating loss was $10 million for the current quarter compared to

operating income of $52 million for the prior year quarter. Absent

restructuring related charges recorded in both periods, operating loss

for the current quarter was $1 million compared to operating income of

$61 million in the prior year quarter. The adjusted operating loss for

the current quarter improved sequentially from the June 2009 quarter.

This sequential improvement was driven by higher sales, increased

permanent savings from restructuring programs, one-time benefits from

certain labor negotiations in Europe, and ongoing cost discipline. The

combined benefit of these items more than offset a sequential decline

in temporary cost reductions as well as a sequential increase in

corporate costs and expenses. The sequential decline in temporary

cost reductions was related to the difference in savings between

employee furloughs in place during the preceding quarter and salary

reductions placed into effect at the beginning of the current quarter.

-- The reported effective tax rate was 39.6 percent. On an adjusted

basis, the effective tax rate was 41.8 percent compared to an adjusted

rate of 19.0 percent in the prior year quarter. The change in the

adjusted rate was driven primarily by certain favorable tax

settlements amounting to $1.5 million.

-- During the current quarter, the company incurred pre-tax charges of $2

million related to the June 2009 divestiture of its high speed steel

business. The company expects to incur additional pre-tax charges

related to this divestiture of $2 million to $3 million over the next

three to six months. All cash proceeds related to this divestiture

have been received.

-- Reported EPS was ($0.12), compared with prior year quarter reported

EPS of $0.47. Adjusted EPS was ($0.04) compared to prior year quarter

adjusted EPS of $0.57.

Outlook

Global industrial activity has recently exhibited some stability following the severe economic downturn and turbulence experienced during the previous fiscal year. However, the improvement in business conditions at present is considerably uneven and does not yet entail broad-based momentum. Certain market sectors and regions have begun to strengthen while others look to either remain flat or trend further downward in the short to medium term. While there are some overall positive signs of an improving global economy, it remains difficult to predict with any certainty the timing, magnitude and duration of a sustainable recovery.

Management presently believes that global industrial activity and the corresponding demand for the company's products will continue to moderately improve through the remainder of the current fiscal year. Under these assumed conditions, Kennametal would expect EPS for fiscal 2010 to be in the range of $0.50 to $0.70 per share, excluding restructuring and divestiture related charges, on sales that would be 5 percent to 10 percent lower year-to-year on an organic basis. Cash flow from operations would be expected to be in the range of $65 million to $75 million for fiscal 2010, as a considerable portion of the cash generated is expected to be needed to fund higher working capital requirements as business improves. Based on capital expenditures of approximately $60 million, free operating cash flow would be in the range of $5 million to $15 million for fiscal 2010.

For the second quarter of fiscal 2010, Kennametal expects organic sales to be 20 percent to 25 percent lower than for the same quarter of the previous fiscal year and expects EPS to be at or slightly above breakeven, excluding restructuring and divestiture related charges.

Dividend Declared

Kennametal also announced that its Board of Directors declared a regular quarterly cash dividend of $0.12 per share. The dividend is payable November 20, to shareowners of record as of the close of business on November 5.

Kennametal Inc. delivers productivity to customers seeking peak performance in demanding environments by providing custom and standard wear-resistant solutions.

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