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Kennametal Inc. today reported solid second-quarter earnings, once more leveraging incremental benefits from operational improvements to achieve targets. Despite weakening North American economic conditions, Kennametal's earnings per share (EPS) increased by 15 percent to $0.47 per share, excluding special items, compared to $0.41 per share last year. On a reported basis, earnings per share were $0.44 against $0.27 last year.
Kennametal President and Chief Executive Officer Markos I. Tambakeras said, "We continue to deliver strong earnings growth despite the weakening economy. This is the result of an intense focus on sales programs, increased operational flexibility and improved efficiency in our balance sheet. We quickly recognized the potential for softening market conditions and activated contingency plans to mitigate any earnings impact from top-line shortfall. Furthermore, although we have reduced expenses significantly, we continue to fund our key growth programs. We also continue to generate cash at a higher- than-expected rate and maintain our unyielding focus on managing debt. I am also particularly pleased that despite top-line pressure our gross margins continue to expand. Finally, we have further continued our management development with the addition of two new executives; Michael P. Wessner as COO at J&L Industrial Supply and Michael R. Gallagher to lead our global metalworking marketing and sales organization. We remain focused on the ongoing transformation of Kennametal; investing in strategic initiatives to drive consistent growth, optimizing our cost structure and the revitalization of JLK."
Second-Quarter Highlights -- Excluding the unfavorable impact of foreign currency (4 percent) and fewer business days (3 percent) sales grew 4 percent. Actual sales were $440.5 million, a decrease of 3 percent compared to last year. The organic growth in sales was delivered despite weakening in North American end markets, particularly automotive, and benefited from significant growth in Europe and Asia. -- The gross profit margin was 37.9 percent, an improvement of 70 basis points from the second quarter of fiscal 2000 or 140 basis points excluding unfavorable foreign currency impact. The improvement in the gross margin reflects significant progress in improving the efficiency and effectiveness of operations. Specific benefits were derived from lean manufacturing initiatives and price discipline despite highly competitive markets. -- Operating expense for the quarter, excluding special charges, was reduced 2 percent to $121.6 million. Cost control and productivity improvement efforts reduced operating expense on an absolute basis. This decrease was secured despite incremental funding of key growth initiatives. Excluding this funding, which includes our e-commerce initiatives and the global inventory turns improvement program; operating expense would have declined nearly 4 percent. -- The effective tax rate for the second quarter was 38.8 percent compared to 44.5 percent last year, reflecting the combined benefit of successful tax-planning programs in Europe and the extension of the Foreign Sales Corporation tax benefit in the United States. Correspondingly, the full-year tax rate is now forecast to be 39.5 percent. -- Excluding special items, net income was $14.2 million, an increase of 14 percent compared to $12.4 million last year. -- Special charges of $1.1 million, or $0.03 per share, were included in the quarter's results related primarily to the J&L business improvement plan. Prior-year results included special charges of $7.5 million, or $0.14 per share related to business improvement programs in the core businesses and a charge for environmental remediation. -- Cash flow and balance sheet management continued to generate incremental benefit ahead of expectations. Free operating cash flow of $38 million benefited from a 290-basis-point reduction in primary working capital as a percent of sales to 28 percent. Total debt was $687 million, down from $699 million at the beginning of the year despite the unforecasted investment in a share repurchase program ($16.5 million), and the JLK buy-in ($40.4 million). Outlook
In recognition of the weakened economic environment, Kennametal is revising its outlook for the year. Sales are now anticipated to be level with last year based on softer North American markets, and the significant decline in the automotive sector in particular. Nonetheless, earnings are anticipated to increase significantly, with EPS expected to be up between 8 percent and 13 percent.
Tambakeras added, "The second quarter results, in the face of rapidly declining end-markets, demonstrate Kennametal's discipline, flexibility and organizational resolve. Looking ahead to the remainder of our fiscal year, it is prudent to moderate our top-line expectations due to the uncertain outlook for the manufacturing sector in North America. We are confident in our new earnings guidance and fully determined not to be distracted from the implementation of our business strategies."
In commenting on the company's recent reacquisition of its subsidiary JLK Direct Distribution Inc., Tambakeras added, "We have already completed the integration of JLK and have realigned the organization to optimize efficiencies. Full Service Supply (FSS) will now be managed as a separate unit. J&L Industrial Supply will return to its traditional focus as a catalog and showroom distribution business. The new management team is fully engaged and is continuing the execution of the ongoing business improvement plan. As previously announced, the business improvement plan for both units is expected to incur charges at the high end of our original $15 to $20 million guidance, and we anticipate annual savings of $6 to $8 million. The program will begin to generate the full level of savings by the second half of fiscal 2002. To date, we have already seen significant operational improvements at J&L, but these benefits are dampened by weak sales due to poor conditions in the automotive market. We have a clear strategy in place and are now focused on implementation."
Kennametal also announced its Board of Directors declared a quarterly cash dividend of 17 cents per share, payable February 23, 2001, to holders of record as of February 9, 2001.
Kennametal Inc. aspires to be the premier tooling solutions supplier in the world with operational excellence throughout the value chain and best-in- class manufacturing and technology. Kennametal strives to deliver superior shareowner value through top-tier financial performance. The company provides customers a broad range of technologically advanced tools, tooling systems and engineering services aimed at improving customers' manufacturing competitiveness. With 13,000 employees worldwide, the company's annual sales are approximately $1.9 billion, with a third coming from sales outside the United States. Kennametal has been named one of the Best Places to Work in Pennsylvania and has operations in more than 60 countries. Kennametal operations in Europe are headquartered in Furth, Germany. Kennametal Asia Pacific operations are headquartered in Singapore.
This release contains "forward-looking statements" as defined by Section 21E of the Securities Exchange Act of 1934 as amended. Actual results may differ materially from those expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, the extent that global economic conditions do not change materially, risks associated with integrating businesses and restructuring programs, demands on management resources, risks associated with international markets such as currency exchange rates, and competition. The company undertakes no obligation to publicly release any revisions to forward- looking statements to reflect events or circumstances occurring after the date hereof.
Consolidated financial highlights for Kennametal Inc. for the quarter and six months ended December 31, 2000 and 1999 are shown in the following tables (in thousands, except per share amounts). All fiscal year 2001 data is subject to year-end (June 30) adjustment and audit by independent public accountants.
Consolidated Statements of Income Quarter Ended Six Months Ended December 31 December 31 2000 1999 2000 1999 Operations: Net sales $440,521 $453,928 $891,226 $896,871 Cost of goods sold 273,583 285,061 555,635 564,675 Gross profit 166,938 168,867 335,591 332,196 Operating expense(A) 121,823 126,702 250,247 249,189 Restructuring and asset impairment charges 812 3,981 2,347 3,981 Amortization of intangibles 6,147 6,597 12,470 13,600 Operating income 38,156 31,587 70,527 65,426 Interest expense 13,400 13,753 26,595 28,280 Other expense, net(B) 1,200 510 2,657 252 Income before provision for income taxes and minority interest 23,556 17,324 41,275 36,894 Provision for income taxes 9,128 7,709 16,304 16,418 Minority interest 904 1,104 1,506 2,052 Income before extraordinary loss and cumulative effect of change in accounting principle 13,524 8,511 23,465 18,424 Extraordinary loss on early extinguishments of debt, net of tax - (267) - (267) Cumulative effect of change in accounting principle, net of tax - - (599) - Net income $13,524 $8,244 $22,866 $18,157 Per Share Data: Diluted earnings per share $0.44 $0.27 $0.75 $0.60 Dividends per share $0.17 $0.17 $0.34 $0.34 Diluted weighted average shares outstanding 30,548 30,330 30,639 30,255 (A) For the quarter and six months ended December 31, 2000, these amounts include charges of $0.3 million and $2.0 million, respectively, primarily related to the tender offer to acquire the outstanding shares of JLK. For the quarter and six months ended December 31, 1999, these amounts include a charge of $3.0 million for environmental remediation. (B) For the quarters ended December 31, 2000 and 1999, these amounts include charges of $1.6 million and $1.3 million, respectively, for fees incurred in connection with the company's accounts receivable securitization program. For the six months ended December 31, 2000 and 1999, these amounts include similar charges of $3.2 million and $2.5 million, respectively. For the six months ended December 31, 1999, these amounts include one-time gains of $1.4 million from the sales of underutilized assets. Supplemental Data Sheet SELECTED OPERATING DATA: Quarter Ended Six Months Ended December 31 December 31 2000 1999(A) 2000 1999(A) Sales: Metalworking Services and Solutions Group $244,065 $253,450 $490,881 $495,614 Advanced Materials Solutions Group 83,613 82,936 170,392 167,736 JLK/Industrial Supply 112,843 117,542 229,953 233,521 Total $440,521 $453,928 $891,226 $896,871 Sales By Geographic Region: Within the United States $293,037 $296,687 $595,470 $592,782 International 147,484 157,241 295,756 304,089 Total $440,521 $453,928 $891,226 $896,871 Operating Income (Loss), including special charges: Metalworking Services and Solutions Group $31,014 $26,049 $58,936 $55,306 Advanced Materials Solutions Group 8,735 7,941 19,922 18,564 JLK/Industrial Supply 4,352 7,089 4,904 14,068 Corporate and Eliminations (5,945) (9,492) (13,235) (22,512) Total $38,156 $31,587 $70,527 $65,426 Operating Income (Loss), excluding special charges: Metalworking Services and Solutions Group $31,051 $29,568 $58,940 $58,825 Advanced Materials Solutions Group 8,760 8,312 19,948 18,935 JLK/Industrial Supply 5,364 7,089 9,233 14,068 Corporate and Eliminations (5,944) (6,301) (13,254) (19,321) Total $39,231 $38,668 $74,867 $72,507 Diluted EPS excluding special charges and amortization expense $0.67 $0.63 $1.25 $1.19 Diluted EPS excluding special charges $0.47 $0.41 $0.84 $0.74 Free Operating Cash Flow: Net Income $13,524 $8,244 $22,866 $18,157 Non-cash Items (997) 6,401 1,992 6,481 Depreciation & Amortization 24,499 25,221 49,065 51,285 Change in Working Capital 12,655 22,560 30,159 47,717 Capital Expenditures (11,509) (10,897) (22,980) (21,676) Free Operating Cash Flow $38,172 $51,529 $81,102 $101,964 Supplemental Data Sheet (Continued) SELECTED BALANCE SHEET DATA: Quarter Ended 12/31/2000 09/30/2000 06/30/2000 12/31/1999 Accounts Receivable $203,344 $218,863 $231,917 $224,022 Inventory 389,460 392,741 410,885 417,473 Accounts Payable (102,217) (111,873) (118,908) (111,056) Total Primary Working Capital (PWC) $490,587 $499,731 $523,894 $530,439 PWC % Sales(B) 28.0% 28.5% 29.4% 30.9% Debt $687,487 $672,593 $699,242 $771,417 Debt/Total Capital 46.7% 44.7% 45.6% 48.9% (A) Kennametal now reports three global business units consisting of Metalworking Services and Solutions Group, Advanced Materials Solutions Group and JLK/Industrial Supply, and corporate functional shared services. Certain amounts in prior year sales and operating income (loss) have been restated to conform to this new reporting structure. (B) Calculated by averaging the current and the previous four quarter-end balances for PWC, divided by sales for the most recent 12-month period.
SOURCE: Kennametal Inc.
Contact: Beth A. Riley, Director, Investor Relations of Kennametal,