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Kennametal execs win recognition for making strides in science

| Sunday, Aug. 12, 2007

Dr. Aharon Inspektor likens his work with nanotechnology at Kennametal Inc. to a Lego toy --- building from the bottom up.

Inspektor, a senior staff engineer, and his team in Kennametal's metalworking solutions and services group spent years grappling with nanotechnology, the emerging science of building devices from single atoms and molecules.

Their painstaking work paid off this year. His team developed proprietary "nanolayer" coatings that Unity, Westmoreland County-based Kennametal has used to produce metalcutting tools that better withstand the impact and high temperatures of high-speed metals machining, improving durability and performance.

"In short, we put compounds together on an atomic scale. We built it from thousands of tiny layers. By controlling the thickness, we produce new properties for our metalcutting products," Inspektor said.

For their efforts, Inspektor and his team, Parag Hegde and Ronald M. Penich, were recognized in May, winning a Carnegie Science Center Award for Excellence in Advanced Manufacturing and Materials.

Kennametal itself received a Carnegie Science Center Award for Corporate Innovation for developing an internal process called Achieving a Competitive Edge (ACE) that cut new product development cycle times in half. That is important at Kennametal, where new product sales account for about 45 percent of its business.

Also in May, CEO Carlos M. Cardoso was among the top five CEOs named by Institutional Investor Magazine in the capital goods/industrials and machinery categories.

Honors won by Inspektor's team and Cardoso are outward signs of how Kennametal executives -- Cardoso and his predecessor Markos I. Tambakeras -- have been building significant improvements in profits, revenues and stock price in recent years.

In the last five years, revenues have increased 36 percent, to $2.4 billion in fiscal 2007 ended June 30 from $1.8 billion in fiscal 2003. Profits -- measured in earnings per share -- have surged nearly ninefold during the same period to $4.44 a share.

In the year ended June 30, Kennametal reported net income of $174.2 million, down from the previous year's $256.2 million, which benefitted from the sale of J&L Industrial Supply. Even with the loss of J&L, sales rose to $2.4 billion, from $2.3 billion the previous year.

Shareholders can see results in Kennametal's stock. From a low of $16.81 a share on April 6, 1999, shares have skyrocketed to a high of $88.53 a share on July 19 -- a 427 percent jump. Since then, shares have settled back to $79.66, where they closed Friday.

A celebration of sorts came last Tuesday, when CEO Cardoso and members of the company's executive team rang the closing bell at the New York Stock Exchange, marking the 40th anniversary of the company's listing on the Big Board.

Cardoso says the current picture of the company is focused, and there is a strategy to make the company even more profitable.

"Our challenge is how much can we do in one given year• The opportunity is there," said Cardoso, 49, who took over as chief executive in January 2006, succeeding former Tambakeras, who had been CEO since 1999.

Cardoso joined Kennametal in 2003 as vice president and head of the company's metalworking tools group. Previously, he headed the $1.3 billion pump division of Flowserve Corp., after managing industrial businesses at Allied Signal Corp.

The company's strategy, Cardoso says, is to drive growth in both its core metalworking tools business and its advanced materials unit in tandem.

Companies producing everything from airframes to coal, from medical implants to oil wells and automobile engines to motorcycle parts use Kennametal's metalcutting bits to make their products. Its advanced materials unit makes cemented tungsten carbide metalcutting products used in mining, highway construction and other jobs that require extreme wear and corrosion resistance.

"We want the advanced materials business to be the same as metalworking. It will better balance our portfolio, which will make us less cyclical, and ultimately more profitable," said Cardoso.

"I think he's (Cardoso) excellent. Markos Tambakeras did a great job in getting the company in shape to grow. Cardoso has the right personality and leadership skills, and the company has really come together in a positive way," said Walter S. Liptak, a securities analyst who follows Kennametal for Barrington Research Associates in Chicago.

Cardoso says he's pleased with the recognition, but is quick to praise subordinates and workers -- and Tambakeras.

"At the end of the day, what differentiates a great company from an everyday one is that a great company has a good vision of strategy, the processes to implement that strategy and the right people to drive the processes," Cardoso said.

He admits he learned a lot from Tambakeras. "We have very different styles, but there is also a leader for the times, based on where the company is. I'm the right leader for today," he said.

Acquisitions and telling investors the Kennametal story are two ways Cardoso is leading.

Cardoso and Kennametal's top financial officers have conducted presentations with the financial community in more than a dozen cities in the past 16 months.

"People know me well internally, but not Wall Street people," he said. "It's a strategy of ours, but it's driven to get them to know and understand us."

Cardoso said acquisitions remain consistent with the company's strategy. Kennametal acquired five companies during the past year.

"They're in niche areas. In the past 12 months we bought $150 million in sales. They're small in nature, but when you add them up, they're a nice chunk of growth," he said.

Cardoso wants the company to eventually realize one-third of its sales from North America, another third from Western Europe and the final third from developing areas.

Kennametal's multipoint strategy should serve the company well, said Steve Barger, an analyst who follows Kennametal for KeyBanc Capital Markets in Cleveland, Ohio.

"Kennametal's in the middle of a transformation that will result in a stronger company, with better margins. Their change in channel distribution strategy, re-balancing of geographic revenue and exposure and increased focus on their advanced materials and solutions group, all of which should result in continuing margin expansion," Barger said.

KeyBanc's Barger said key markets in China, India and Western Europe continue to see robust growth, and they need Western standards of quality, which plays into Kennametal's strong suits in the technologically advanced cutting tool market.

As an example, Barger said if Conoco has an off-shore drilling rig, they don't want an inferior tool. "If you have a superior drill bit, Conoco cares less about cost than dependability of product. That's what Kennametal is good at," he said.

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