Kennametal Inc. 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® 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® and the effects of the reduction in the discount rate applied to the company's domestic pension plans. This revised earnings outlook represents an increase from previous 2006 EPS guidance of $3.50 to $3.90. In addition to continuing to narrow the earnings guidance range, the revised outlook reflects an 18 to 25 percent increase from prior year EPS of $3.13.

Sales for the third quarter of fiscal year 2006 are expected to grow 7 to 10 percent, despite tougher comparisons. Market conditions support the company's expectations of continued top line growth in the third quarter, consistent with full year guidance. The company anticipates some continuing pressure on raw material prices. Reported EPS for the third quarter is forecasted to be in the range of $1.00 to $1.10, consistent with historical seasonal patterns and reflecting confidence in the company's ability to maintain the momentum of the first half.

Operating margins and ROIC are expected to continue improving for the remainder of fiscal year 2006. ROIC is expected to be in the 10 to 11 percent range for fiscal 2006.

Kennametal anticipates net cash flow provided by operating activities of approximately $210 million to $230 million for fiscal 2006, reflecting an increase from prior guidance of $200 million to $220 million. Adjusting net cash flow provided by operating activities for the impact of purchases of property, plant and equipment ($80 million), Kennametal expects to generate between $130 million to $150 million of free operating cash flow for fiscal 2006.

Dividend Declared

Kennametal also announced that its Board of Directors declared a quarterly cash dividend of $0.19 per share. The dividend is payable February 22, 2006, to shareowners of record as of the close of business on February 7, 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.

Second quarter 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, just click on the link to "Corporate," and then "Investor Relations." This event also will be available on the company's website through February 8, 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. 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 other 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 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. 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]

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):

  (in thousands, except per         Quarter Ended        Six Months Ended
   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



                          SEGMENT DATA (Unaudited):

                                   Quarter Ended        Six Months Ended
  (in thousands)                    December 31,          December 31,
                                   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

  (1) Includes corporate functional shared services and intercompany
      eliminations.



             CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited):

  (in thousands)                                December 31,     June 30,
                                                   2005             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



  RETURN ON INVESTED CAPITAL (Unaudited):

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

  Invested Capital                      12/31/2005   09/30/2005  06/30/2005

    Debt                                   $410,045    $415,250    $437,374
    Accounts receivable securitized         100,295     100,445     109,786
    Minority interest                        16,918      18,117      17,460
    Shareowners' equity                   1,045,974   1,009,394     972,862
    Total                                $1,573,232  $1,543,206  $1,537,482

                                                   Quarter Ended
  Interest Expense                       12/31/2005  09/30/2005  06/30/2005
    Interest expense                         $7,984      $7,829      $7,897
    Securitization fees                       1,170       1,065         981
    Total interest expense                   $9,154      $8,894      $8,878

                                                    Quarter Ended
  Total Income                           12/31/2005  09/30/2005  06/30/2005
    Net Income, as reported                 $31,087     $28,097     $37,740

    Restructuring and asset impairment
     charges                                      -           -           -
    Loss on assets held for sale                  -           -           -
    Minority interest expense                   511         748         238
    Total Income, excluding special items   $31,598     $28,845     $37,978



  Invested Capital                        03/31/2005  12/31/2004   Average

    Debt                                    $485,168    $405,156    $430,599
    Accounts receivable securitized          120,749     115,253     109,306
    Minority interest                         19,664      19,249      18,282
    Shareowners' equity                    1,021,186   1,003,507   1,010,585
    Total                                 $1,646,767  $1,543,165  $1,568,772

                                         Quarter Ended
  Interest Expense                         03/31/2005     Total
    Interest expense                          $6,803     $30,513
    Securitization fees                          868       4,084
    Total interest expense                    $7,671     $34,597
    Income tax benefit                                    12,109
    Total Interest Expense, net of tax                   $22,488

                                         Quarter Ended
  Total Income                             03/31/2005     Total
    Net Income, as reported                  $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                  1,449       2,946
    Total Income, excluding special items    $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%



  RETURN ON INVESTED CAPITAL (Unaudited):
  For the Period Ended December 31, 2004 (in thousands, except percents)

  Invested Capital                      12/31/2004   09/30/2004  06/30/2004

    Debt                                   $405,156    $435,435    $440,207
    Accounts receivable securitized         115,253     115,309     117,480
    Minority interest                        19,249      17,377      16,232
    Shareowners' equity                   1,003,507     924,432     887,152
    Total                                $1,543,165  $1,492,553  $1,461,071

                                                   Quarter Ended
  Interest Expense                       12/31/2004  09/30/2004  06/30/2004
    Interest expense                         $6,121      $6,456      $6,405
    Securitization fees                         757         580         443
    Total interest expense                   $6,878      $7,036      $6,848

                                                   Quarter Ended
  Total Income                           12/31/2004  09/30/2004  06/30/2004
    Net Income, as reported                 $28,181     $22,720     $29,852

    Minority interest expense                   928         977         (36)
    Total Income, excluding special items   $29,109     $23,697     $29,816



  Invested Capital                        03/31/2004  12/31/2003   Average

    Debt                                 $494,312    $481,327       $451,287
    Accounts receivable securitized       108,916     101,422        111,676
    Minority interest                      16,598      16,286         17,148
    Shareowners' equity                   809,904     791,442        883,288
    Total                              $1,429,730  $1,390,477     $1,463,399

                                     Quarter Ended
  Interest Expense                     03/31/2004     Total
    Interest expense                       $6,332     $25,314
    Securitization fees                       356       2,136
    Total interest expense                 $6,688     $27,450
    Income tax benefit                                  8,784
    Total Interest Expense, net of tax                $18,666

                                     Quarter Ended
  Total Income                         03/31/2004    Total
    Net Income, as reported               $24,070    $104,823

    Minority interest expense                 533       2,402
    Total Income, excluding special items $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%

SOURCE: Kennametal Inc.