Kennametal Announces 4Q and FY 2009 Results

Kennametal Inc. (Latrobe, PA) reported fiscal 2009 fourth quarter earnings (loss) per diluted share (EPS) of ($0.45), compared with prior year quarter reported EPS of $0.77. The current quarter reported EPS included restructuring and divestiture related charges amounting to $0.32 per share. The prior year quarter reported EPS included restructuring related charges of $0.08 per share. Absent these charges, adjusted EPS for the current quarter was ($0.13), compared with the prior year quarter adjusted EPS of $0.85.

Chairman, President and Chief Executive Officer Carlos Cardoso said, "Fiscal 2009 was the most challenging year in our company's 70-year history. We responded aggressively to the severe and rapid global economic downturn by taking a number of measures. We reduced our costs, optimized cash flow and liquidity, and preserved our competitive strengths. As a result, we offset a considerable portion of the impact of the decline in sales volume, achieved a modest profit for the fiscal year on an adjusted basis, generated strong cash flow, and further enhanced our financial position. With our high-performance consumable products, we expect to benefit relatively early and have higher operating leverage in the industrial upturn. We have a worldwide infrastructure, well-balanced business and a highly talented global workforce dedicated to serving customers."

Reconciliations of all non-GAAP financial measures are set forth in the attached tables and descriptions of certain non-GAAP financial measures are contained in our report on Form 8-K to which this release is attached.

FISCAL 2009 FOURTH QUARTER KEY DEVELOPMENTS

— Sales for the quarter were $386 million, compared with $724 million in the same quarter last year. The 47 percent decrease in sales was due to a 43 percent organic decline and a 4 percent decrease from unfavorable foreign currency effects. A net favorable impact from acquisitions and divestitures was offset by the effect of one less workday.

— The company continued to implement certain restructuring plans to reduce costs and improve operating efficiencies. During the June quarter, the company recognized pre-tax charges related to these initiatives of $21 million, or $0.08 per share. Pre-tax charges recorded to date for these initiatives were $82 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 by December 31, 2009, most of which are expected to be cash expenditures. The company realized pre-tax benefits of approximately $50 million from these actions in fiscal 2009 and expects to realize approximately $75 million of additional pre-tax benefits in fiscal 2010. This would bring the total annual ongoing pre-tax benefits from these actions to approximately $125 million.

— Operating loss was $25 million for the current quarter compared to operating income of $80 million for the prior year quarter. Absent restructuring related charges recorded in both periods, operating loss for the current quarter was $3 million compared to operating income of $88 million in the prior year quarter. The adjusted operating loss for the current quarter improved sequentially from the March 2009 quarter despite a sequential decline in sales. This improvement was driven by a higher run rate of restructuring benefits as well as the impact of additional cost reduction actions such as employee furloughs and the suspension of contributions to certain employee benefit plans.

— The reported effective tax rate was 39.1 percent. On an adjusted basis, the effective tax rate was (116.4) percent compared to 19.9 percent in the prior year quarter. The change in the adjusted rate was driven by different jurisdictional mix of pre-tax results.

— On June 30, 2009, Kennametal completed the sale of its high speed steel drills, related product lines and assets as the company continued to focus on shaping its business portfolio and rationalizing its manufacturing footprint. Cash proceeds from this divestiture amount to $29 million, of which $26 million was received through July 2009, with the balance expected to be received in the December 2009 quarter. The pre-tax loss on the sale and related charges of $26 million, as well as the related tax effects, were recorded in discontinued operations. The company expects to incur additional pre-tax charges related to this divestiture of $4 million to $7 million over the next six months.

— Net loss was $33 million for the current year quarter, compared to net income of $60 million in the prior year quarter. Absent the charges related to restructuring and divestiture, net loss for the current quarter was $10 million, compared to net income of $66 million in the prior year quarter.

— Reported EPS was ($0.45), compared with prior year quarter reported EPS of $0.77. Adjusted EPS was ($0.13) compared to prior year quarter adjusted EPS of $0.85.

FISCAL YEAR 2009 KEY DEVELOPMENTS

— Cash flow from operating activities was $192 million for fiscal year 2009, compared with $280 million for the prior fiscal year. Capital expenditures for fiscal year 2009 were $105 million, a reduction of $59 million or 36 percent from fiscal year 2008. Free operating cash flow for the current fiscal year was $90 million, compared with $119 million in the prior fiscal year. The generation of free operating cash flow was bolstered through strong focus on receivable collection, inventory reduction from close management of production levels and reduced capital expenditures.

— Sales of $2.0 billion decreased 23 percent from $2.6 billion in the previous fiscal year. Sales decreased 21 percent organically and 3 percent from unfavorable foreign currency effects. This was partially offset by the net favorable impact of acquisitions and divestitures of 1 percent.

— In the March quarter, the company recorded a non-cash pre-tax charge of $111 million for impairment of goodwill and an indefinite lived trademark.

— Operating loss was $100 million, compared with operating income of $259 million for the prior fiscal year. Absent charges related to restructuring and impairment recorded in both periods, operating income for fiscal year 2009 was $85 million compared to $302 million for the prior fiscal year. This decrease was principally the result of reduced sales volumes and the related lower manufacturing cost absorption as well as higher raw material costs. A considerable portion of the impact of these factors was offset by a combination of restructuring benefits, other cost reduction actions, higher price realization and lower provisions for employee incentive compensation plans.

— The reported effective tax rate was 10.0 percent. On an adjusted basis, the effective tax rate was 16.6 percent compared with 21.2 percent in the prior fiscal year. The decrease in the adjusted rate was driven by the release of a deferred tax valuation allowance and a benefit from the completion of a routine income tax examination.

— Reported EPS was ($1.64) compared to the prior year reported EPS of $2.15. Adjusted EPS of $0.80 decreased 71 percent, compared with prior year adjusted EPS of $2.76.

SEGMENT HIGHLIGHTS OF FISCAL 2009 FOURTH QUARTER

Metalworking Solutions & Services Group (MSSG) sales decreased by 52 percent from the prior year quarter, driven by an organic sales decline of 45 percent, unfavorable foreign currency effects of 5 percent and a 2 percent decrease from the combined impact of divestitures and one less workday. Global industrial production remained extremely weak and substantially below the prior year continuing the further downturn in industrial activity experienced in the March quarter. Consequently, demand in most market sectors remained at very low levels. On a regional basis, Europe and North America reported organic sales declines of 47 percent and 46 percent, respectively, for the June quarter. Latin America, India and Asia Pacific also experienced organic sales declines of 44 percent, 43 percent and 37 percent, respectively.

MSSG operating loss was $29 million for the June quarter compared to operating income of $66 million for the same quarter of the prior year. Excluding restructuring related charges recorded in both periods, MSSG operating loss was $16 million compared with operating income of $71 million in the prior year quarter. The primary drivers of the decline in operating income were reduced sales volumes and the related lower manufacturing cost absorption. This was offset in part by restructuring benefits and other cost reduction actions, including employee furloughs, as well as higher price realization.

Advanced Materials Solutions Group (AMSG) sales decreased 37 percent during the June quarter, driven by a 38 percent organic decline, a 3 percent unfavorable impact from foreign currency effects and a 1 percent decrease from one less workday, partially offset by the favorable impact of acquisitions of 5 percent. The organic decline was primarily driven by lower sales in the engineered products business, as well as reduced demand for energy related products and surface finishing machines and services.

AMSG operating income was $14 million in the current quarter compared to operating income of $33 million in the same quarter of the prior year. Absent restructuring related charges recorded in both periods, AMSG operating income was $18 million in the current quarter compared to $36 million in the prior year quarter. The decline in operating income was primarily due to lower sales and production volumes in the engineered products and energy related businesses. A considerable portion of these impacts was offset by a combination of restructuring benefits and other cost reduction actions, including employee furloughs, as well as higher price realization and lower raw material costs.

Corporate operating loss decreased by 54 percent, or $10 million. This decrease was primarily driven by lower provisions for performance-based employee compensation programs, as well as the impact of cost reduction actions.

RECENT ACTIONS TO ENHANCE LIQUIDITY AND FURTHER STRENGTHEN FINANCIAL POSITION

In July 2009, Kennametal completed two actions to further enhance liquidity and strengthen financial position. The first action involved an amendment to the company's existing $500 million revolving bank credit facility. This amendment provides additional flexibility with respect to financial covenants while maintaining the size and maturity of the facility. The second action involved the issuance of 8,050,000 shares of common stock generating net proceeds of approximately $120 million which were used to pay down outstanding indebtedness under the revolving credit facility.

OUTLOOK

Given the magnitude of the current global economic downturn and the ongoing related uncertainty, visibility remains quite limited regarding global industrial activity and the corresponding demand for the company's products.

While recognizing the difficulty at this time of looking forward with any relative degree of certainty, management presently believes that global industrial activity may now be at or close to a bottom. Assuming that is the case, Kennametal would expect global demand for its products for the first half of fiscal year 2010 to remain around the levels experienced in the June quarter. The company would then expect to see the effects of an economic recovery reflected in its sales and financial results during the second half of the fiscal year.

Under these economic assumptions, Kennametal would expect EPS for fiscal 2010 to be in the range of $0.45 to $0.65 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.

Should global economic conditions develop in line with management's assumptions, the company expects to continue to experience the adverse effects of the global recession during the first half of fiscal 2010 followed by year-over-year sales growth and positive earnings performance in the second half of fiscal 2010. As such, for the first quarter of fiscal 2010, Kennametal expects organic sales to be 35 percent to 40 percent lower than the same quarter of the previous fiscal year and expects to record a loss per diluted share, excluding restructuring and divestiture related charges, that will be greater than the loss per diluted share for the June 2009 quarter, excluding restructuring and divestiture related charges.

DIVIDEND DECLARED

Kennametal also announced today that its Board of Directors declared a regular quarterly cash dividend of $0.12 per share. The dividend is payable August 21, 2009 to shareowners of record as of the close of business on August 6, 2009. Kennametal advises shareowners to note monthly order trends, for which the company makes a disclosure ten business days after the conclusion of each month.

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