Kennametal to reduce workforce 5%

Kennametal Inc., Latrobe, PA, citing continued uncertainty in its markets, said it will reduce its global salaried workforce by 5%, and temper its global financial projections for the second half of its fiscal 2003. For the quarter, sales for its Metalworking Solutions and Services Group were up 9.2%, down 4.5% for its Advanced Materials Solutions Group, down 18.5% for J&L Industrial Supply, and down 25% for its Full Service Supply division.

Outlook

'We have become more cautious regarding the pace and strength of the economic recovery during the second half of our fiscal year (i.e., first six months of CY2003),' said Kennametal Chairman, President and CEO, Markos I. Tambakeras. 'This view is based on the continuing uncertainty caused by the confluence of weakened economic indicators in North America and Europe, concern over consumer confidence, ambivalence in the financial markets and international geo-political tension. However, while the short-term economic outlook is tougher than we planned, Kennametal's fundamentals continue in excellent shape due to the durable systems we have put in place to sustain competitiveness, generate strong clash flow and continue strictly controlling costs.'

Economic data considered includes, the September ISM reading of 49.5%, which fell below the 50% line of no growth for the first time since January of this year. The European purchasing manager's index was 48.9% in September versus a reading of 50.8 in August and 51.6 in July. The MAPI capital investment index, which increased from 36% in June to 45% in September, but remains below 50%. In addition, the Euro Zone Purchasing Managers Index slipped to 48.9% in September from 50.8% the prior month. The Euro Zone production and new orders index each also dropped below 50% and manufacturing employment contracted for the 16th month.

'In response to the uncertainty of the strength of the economic recovery, we are reducing our global salaried workforce by 5%, tempering our original robust growth assumptions for the second half of fiscal 2003, and moderating our full year earnings guidance to growth of 5% to 15%, before Widia. We continue to be pleased with the performance of the company in a tough environment, and remain focused on completing the successful integration of Widia.'

The salaried workforce reduction will primarily result from the efficient realignment of certain support functions. The reduction is expected to cost between $9 million to $10 million, and is expected to generate in excess of $10 million in cash savings during the remainder of fiscal 2003. The annualized level of savings associated with the actions is anticipated to range between $18 and $20 million.

First quarter financials

Kennametal reported first quarter sales ending Sep. 30 of $404.2 million were 1% below last year's $406.7 million. Excluding the positive benefit from net acquisitions and divestitures (4%), foreign currency exchange (2%), and incremental workdays (1%), sales were 8% below the prior year. Excluding special items, net income was $11.2 million, a 17% decrease compared with net income of $13.5 million last year. Reported net income was $10.8 million against net loss of $238.0 million in the same quarter last year.

Segment data

Metalworking Solutions and Services Group had $245.5 million in sales in the first quarter ended Sep. 30, up 9.2% from $223.0 million in the first quarter of 2001. Advanced Materials Solutions Group reported $79.3 million in sales, down 4.5% from $83.0 million in the first quarter of 2001. J&L Industrial Supply reported $48.2 million in sales, down 18.5% from %59.1 million in the same period last year. And Full Service Supply reported $31.2 million in sales, down 25% from $41.6 million in the first quarter of 2001.

Free operating cash flow for the first quarter was $28.0 million, versus $1.4 million in the same period last year. Primary

working capital continues to be tightly controlled with its ratio to sales at 27.9%, up slightly versus last year. Primary working capital of $523.1 million was up 10%, or $48 million, from the same period last year including the impact of the Widia acquisition. Total debt was $616.6 million, up $205.2 million from June 2002, primarily due to the closing of the Widia acquisition. The Widia business performed at a break-even level for the quarter.

Gross profit margin, excluding special charges in both periods, of 32.4% increased 50 basis points compared with the first quarter of fiscal 2002. Manufacturing efficiencies from the Kennametal Lean Enterprise and a benefit from foreign currency exchange offset the combined negative pressure of underutilized capacity due to volume declines, unfavorable customer and product mix and $1.1 million in decreased pension income.

Operating expense for the quarter increased 4%, to $104.1 million, excluding special charges. Excluding $5.2 million in Widia operating expense, $2.2 million unfavorable foreign currency exchange and $0.7 million in decreased pension income, operating expense was 4% below prior year.