Fitch Affirms Kennametal's 'BBB-' Senior Unsecured Debt; Revises Outlook to Positive.

Business Editors

CHICAGO--(BUSINESS WIRE)--May 5, 2004

Fitch Ratings has affirmed the 'BBB-' rating for Kennametal Inc.'s (Kennametal) senior unsecured debt and revised the Rating Outlook to Positive from Stable. The rating affects $300 million of debt securities.

The change to Positive Outlook reflects growing demand in Kennametal's end markets and a reduced cost structure that can be expected to boost EBITDA and eventually support better credit measures. Fiscal third quarter results included higher margins in all segments, although margins remain below historical levels. Comprehensive restructuring of existing and acquired operations has essentially been completed, contributing to improving operating leverage in Kennametal's two primary metalworking segments as well as improving results at J&L Industrial Supply and Full Service Supply businesses.

Actions to reduce working capital requirements combined with limited capital expenditures and share repurchases should contribute to solid free cash flow even as revenues grow. Kennametal is well-positioned to continue rebuilding its credit profile despite the poor operating environment that predominated until recently. The issuance of equity in 2002 and the application of free cash flow to debt reduction have helped to control the impact of debt-funded acquisitions on financial leverage. Fitch believes that, over the long term, Kennametal will remain focused on strengthening its credit profile.

Rating concerns include the cyclicality inherent in the company's end-markets and the potential effect of additional debt-financed acquisitions that could delay improvement in Kennametal's financial measures. While Kennametal has leading market positions, margins are still being pressured by low capacity utilization in the industrial sector and related competitive pressure that may prompt further consolidation in Kennametal's businesses. However, Kennametal has made considerable progress in its efforts to build its proportion of new products that are an important factor in the company's margins.

Debt totaled $494 million at March 31, 2004 (on a preliminary basis) compared to over $600 million at the end of calendar 2002. As of Dec. 31, 2003, adjusted Debt/EBITDAR of 4.5 times (x) (including non-capitalized leases and securitizations) had declined from 4.7x at the end of fiscal 2003 and can be expected to decline further as Kennametal uses free cash flow to reduce debt. Liquidity is provided by a bank facility maturing in June 2005 under which $167 million was drawn as of March 31, 2004. Availability under the facility was approximately $188 million as determined by a leverage covenant. In addition, Kennametal had used $110 million of its $125 million accounts receivable securitization facility.