FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 Commission file number 1-5318 KENNAMETAL INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0900168 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) ROUTE 981 AT WESTMORELAND COUNTY AIRPORT P.O. BOX 231 LATROBE, PENNSYLVANIA 15650 (Address of registrant's principal executive offices) Registrant's telephone number, including area code: (412) 539-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: TITLE OF EACH CLASS OUTSTANDING AT APRIL 30, 1996 - ---------------------------------------- ----------------------------- Capital Stock, par value $1.25 per share 26,655,200
KENNAMETAL INC. FORM 10-Q FOR QUARTER ENDED MARCH 31, 1996 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item No. - -------- 1. Financial Statements: Condensed Consolidated Balance Sheets (Unaudited) March 31, 1996 and June 30, 1995 Condensed Consolidated Statements of Income (Unaudited) Three months and nine months ended March 31, 1996 and 1995 Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended March 31, 1996 and 1995 Notes to Condensed Consolidated Financial Statements (Unaudited) 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION 1. Legal Proceedings 5. Other Information 6. Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KENNAMETAL INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - ------------------------------------------------- (in thousands) March 31, June 30, 1996 1995 ASSETS ---------- ---------- Current Assets: Cash and equivalents $ 12,624 $ 10,827 Accounts receivable, less allowance for doubtful accounts of $10,227 and $12,106 192,442 175,405 Inventories 211,944 200,680 Deferred income taxes 22,262 22,362 -------- -------- Total current assets 439,272 409,274 -------- -------- Property, Plant and Equipment: Land and buildings 150,636 151,905 Machinery and equipment 390,889 365,275 Less accumulated depreciation (278,218) (256,838) -------- -------- Net property, plant and equipment 263,307 260,342 -------- -------- Other Assets: Investments in affiliated companies 7,875 6,873 Intangible assets, less accumulated amortization of $20,355 and $19,009 33,768 32,253 Deferred income taxes 41,064 56,629 Other 7,560 16,238 -------- -------- Total other assets 90,267 111,993 -------- -------- Total assets $792,846 $781,609 ======== ======== LIABILITIES Current Liabilities: Current maturities of term debt and capital leases $ 20,249 $ 17,475 Notes payable to banks 57,760 53,555 Accounts payable 58,223 60,211 Accrued vacation pay 19,929 18,424 Other 59,105 75,537 -------- -------- Total current liabilities 215,266 225,202 -------- -------- Term Debt and Capital Leases, Less Current Maturities 68,482 78,700 Deferred Income Taxes 21,458 20,998 Other Liabilities 51,327 51,615 -------- -------- Total liabilities 356,533 376,515 -------- -------- Minority Interest in Consolidated Subsidiaries 11,750 13,209 -------- -------- SHAREHOLDERS' EQUITY Shareholders' Equity: Preferred stock, 5,000 shares authorized; none issued - - Capital stock, $1.25 par value; 70,000 and 30,000 shares authorized; 29,370 shares issued 36,712 36,712 Additional paid-in capital 86,712 85,768 Retained earnings 336,739 297,838 Treasury shares, at cost; 2,714 and 2,793 shares held (36,097) (36,737) Cumulative translation adjustments 497 8,304 -------- -------- Total shareholders' equity 424,563 391,885 -------- -------- Total liabilities and shareholders' equity $792,846 $781,609 ======== ======== See accompanying notes to condensed consolidated financial statements.
<TABLE> KENNAMETAL INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - ------------------------------------------------------- (in thousands, except per share data) <CAPTION> Three Months Ended Nine Months Ended March 31, March 31, -------------------- ------------------- 1996 1995 1996 1995 -------- -------- -------- -------- <S> <C> <C> <C> <C> OPERATIONS: Net sales $286,095 $268,064 $800,172 $717,237 Cost of goods sold 162,129 148,839 461,960 412,604 -------- -------- -------- -------- Gross profit 123,966 119,225 338,212 304,633 Research and development expenses 5,346 4,695 15,287 13,477 Selling, marketing and distribution expenses 61,037 56,743 181,044 159,847 General and administrative expenses 16,810 14,954 48,484 41,396 Amortization of intangibles 417 363 1,199 1,891 -------- -------- -------- -------- Operating Income 40,356 42,470 92,198 88,022 Interest expense 2,896 3,136 9,008 9,602 Other income (expense) 204 (784) 889 (829) -------- -------- -------- -------- Income before taxes 37,664 38,550 84,079 77,591 Provision for income taxes 14,300 16,400 33,200 32,900 -------- -------- -------- -------- Net income $ 23,364 $ 22,150 $ 50,879 $ 44,691 ======== ======== ======== ======== PER SHARE DATA: Earnings per share $0.88 $0.84 $1.91 $1.69 ======== ======== ======== ======== Dividends per share $0.15 $0.15 $0.45 $0.45 ======== ======== ======== ======== Weighted average shares outstanding 26,644 26,524 26,622 26,463 ======== ======== ======== ======== See accompanying notes to condensed consolidated financial statements. </TABLE>
KENNAMETAL INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - ----------------------------------------------------------- (in thousands) Nine Months Ended March 31, -------------------------- 1996 1995 ---------- ---------- OPERATING ACTIVITIES: Net income $50,879 $44,691 Adjustments for noncash items: Depreciation and amortization 29,889 29,138 Other 11,950 9,136 Changes in certain assets and liabilities: Accounts receivable (21,042) (26,287) Inventories (15,091) (26,075) Accounts payable and accrued liabilities (3,880) (14,735) Other (4,147) 6,726 ------- ------- Net cash flow from operating activities 48,558 22,594 ------- ------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (40,537) (27,323) Disposals of property, plant and equipment 5,131 984 Other 304 (1,369) ------- ------- Net cash flow used for investing activities (35,102) (27,708) ------- ------- FINANCING ACTIVITIES: Increase in short-term debt 4,993 11,093 Increase in term debt 7,734 5,206 Reduction in term debt (13,713) (4,791) Dividend reinvestment and employee stock plans 1,583 3,910 Cash dividends paid to shareholders (11,978) (11,901) ------- ------- Net cash flow from (used for) financing activities (11,381) 3,517 ------- ------- Effect of exchange rate changes on cash (278) 767 ------- ------- CASH AND EQUIVALENTS: Net increase (decrease) in cash and equivalents 1,797 (830) Cash and equivalents, beginning 10,827 17,190 ------- ------- Cash and equivalents, ending $12,624 $16,360 ======= ======= SUPPLEMENTAL DISCLOSURES: Interest paid $ 7,753 $ 8,285 Income taxes paid 31,378 18,707 See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ---------------------------------------------------------------- 1. The condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's 1995 Annual Report. The condensed consolidated balance sheet as of June 30, 1995 has been derived from the audited balance sheet included in the Company's 1995 Annual Report. These interim statements are unaudited; however, management believes that all adjustments necessary for a fair presentation have been made and all adjustments are normal, recurring adjustments. The results for the nine months ended March 31, 1996 are not necessarily indicative of the results to be expected for the full fiscal year. 2. Inventories are stated at lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for a significant portion of domestic inventories and the first-in, first-out (FIFO) method or average cost for other inventories. The Company used the LIFO method of valuing its inventories for approximately 55 percent of total inventories at March 31, 1996. Because inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year, the interim LIFO valuations are based on management's projections of expected year-end inventory levels and costs. Therefore, the interim financial results are subject to any final year-end LIFO inventory adjustments. 3. The major classes of inventory as of the balance sheet dates were as follows (in thousands): March 31, June 30, 1996 1995 ---------- ---------- Finished goods $168,077 $147,231 Work in process and powder blends 62,389 65,231 Raw materials and supplies 21,369 24,629 -------- -------- Inventory at current cost 251,835 237,091 Less LIFO valuation (39,891) (36,411) -------- -------- Total inventories $211,944 $200,680 ======== ======== 4. The Company has been involved in various environmental cleanup and remediation activities at several of its manufacturing facilities. In addition, the Company has been named as a potentially responsible party at four Superfund sites in the United States. However, it is management's opinion, based on its evaluations and discussions with outside counsel and independent consultants, that the ultimate resolution of these environmental matters will not have a material adverse effect on the results of operations, financial position or cash flows of the Company. The Company maintains a Corporate Environmental, Health and Safety (EH&S) Department to facilitate compliance with environmental regulations and to monitor and oversee remediation activities. In addition, the Company has established an EH&S administrator at each of its domestic manufacturing facilities. The Company's financial management team periodically meets with members of the Corporate EH&S Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly and annual basis, management establishes or adjusts financial provisions and reserves for environmental contingencies in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies." 5. Prior to its acquisition by the Company, a non-U.S. subsidiary recorded sales of approximately $60 million in calendar 1993 under contracts with a certain customer to provide various equipment, know-how and training for a manufacturing facility. Upon the acquisition by the Company, the subsidiary decided to complete performance under the contracts with this customer but not to enter into any such contracts in the future. Pursuant to a United States embargo effective June 6, 1995, the subsidiary suspended performance under the contracts pending issuance by the U.S. government of definitive embargo regulations. Other than finalizing the transfer of know-how and training to commence production, performance was substantially completed prior to the suspension. The estimated costs to complete performance are not material and were accrued in the consolidated financial statements. The customer disputed the suspension and advised that it might file suit to require completion of performance as well as for compensation for alleged damages. However, the subsidiary reinstituted performance following the issuance of definitive embargo regulations in September of 1995. Management believes that the ultimate resolution of this matter will not have a material adverse impact on the financial position of the Company. 6. On January 29, 1996, the Company's Board of Directors approved a plan to build a manufacturing facility in Shanghai, China at a cost of approximately $20 million. The Company will own 100 percent of the plant, which will manufacture tools made of cemented carbides and other hard materials for metalcutting applications. Construction is expected to begin during fiscal 1996, with manufacturing planned to begin in January 1998. The Board of Directors also approved a capital expenditure to begin a pilot project to manufacture solid carbide drills in Pennsylvania. 7. On April 29, 1996, the Board of Directors approved the Company's plan to relocate its North American Metalworking Headquarters from Raleigh, N.C. to Latrobe, Pa. (the Plan). The relocation is being made to globalize key functions and to provide a more efficient and focused corporate structure. The action will affect approximately 300 employees in Raleigh, N.C., all of whom will be offered the opportunity to move to Latrobe, Pa. As a result, an estimated pretax charge of approximately $3.5 million will occur in the fourth quarter of fiscal 1996. The charge will be taken to cover the one-time costs of employee separation arrangements and early retirement costs of those who choose not to move. Implementation of the Plan is expected to be completed during fiscal 1998. In connection with the Plan, the Company will construct a new headquarters building at an estimated cost of $20 million. The costs resulting from the relocation of employees, hiring and training new employees, and other costs resulting from the temporary duplication of certain operations have not been included in the one-time charge and will be included in operating expenses as incurred. The costs related to these items are estimated to be approximately $9 million pretax and will be incurred during the next two fiscal years. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES There were no material changes in financial position, liquidity or capital resources between June 30, 1995 and March 31, 1996. The ratio of current assets to current liabilities was 2.0 as of March 31, 1996 and 1.8 as of June 30, 1995. The debt to capital ratio (i.e., total debt divided by the sum of total debt and shareholders' equity) was 26 percent as of March 31, 1996, and 28% as of June 30, 1995. Capital expenditures are estimated to be $60-70 million in fiscal year 1996. Expenditures are being made to modernize facilities, upgrade machinery and equipment, and acquire new information technology. Capital expenditures are being financed with cash from operations and borrowings under existing revolving credit agreements with banks. RESULTS OF OPERATIONS SALES AND EARNINGS During the quarter ended March 31, 1996, consolidated sales were $286 million, up 7 percent from $268 million in the same quarter last year. Net income was $23.4 million, or $0.88 per share, as compared with net income of $22.2 million, or $0.84 per share in the same quarter last year. During the nine month period ended March 31, 1996, consolidated sales were $800 million, up 12 percent from $717 million last year. Net income was $50.9 million, or $1.91 per share, compared to $44.7 million, or $1.69 per share last year. For the quarter ended March 31, 1996, sales increased in the Europe and Asia- Pacific Metalworking markets, in the Industrial Supply market, and in the Mining and Construction market. Sales declined in the North America Metalworking market, which contributed to a less favorable sales mix. The Industrial Supply market accounted for the largest gain as a result of increased sales through mail order and full service supply programs. Earnings were impacted due to higher costs associated with the focused factory initiative, and ongoing investments related to the implementation of SAP client server information systems. Earnings were also reduced by higher manufacturing costs due to lower production levels. The following table presents the Company's sales by market and geographic area (in thousands): <TABLE> <CAPTION> Three Months Ended March 31, Nine Months Ended March 31, ------------------------------- ----------------------------- Percent Percent 1996 1995 Change 1996 1995 Change -------- -------- ------- -------- -------- ------- <S> <C> <C> <C> <C> <C> <C> By Market:* Metalworking: North America $ 97,524 $101,631 (4)% $274,600 $272,848 1% Europe 73,417 71,667 2 206,548 181,976 14 Asia-Pacific 9,144 6,066 51 25,715 17,740 45 Industrial Supply 69,677 56,433 23 185,354 146,338 27 Mining and Construction 36,333 32,267 13 107,955 98,335 10 -------- -------- ---- -------- -------- --- Net sales $286,095 $268,064 7% $800,172 $717,237 12% ======== ======== ==== ======== ======== === By Geographic Area: Within the United States $175,813 $164,605 7% $488,173 $446,504 9% Non United States 110,282 103,459 7 311,999 270,733 15 -------- -------- --- -------- -------- --- Net sales $286,095 $268,064 7% $800,172 $717,237 12% ======== ======== === ======== ======== === * Historically, sales were classified into three product classes: Metalworking, Mining and Construction, and Metallurgical Powders. Previously, the Industrial Supply market was included as a component of Metalworking products. The balance of Metalworking now is categorized three ways: North America, Europe and Asia-Pacific. Metallurgical Powders will be combined with the Mining and Construction market. Prior year amounts have been reclassified to conform to the current presentation. </TABLE> METALWORKING MARKETS During the March 1996 quarter, sales in the North America Metalworking market decreased 4 percent from the previous year. Sales of domestic metalcutting inserts and toolholding devices decreased 4 percent as sales growth was affected by poor weather conditions and the slowing U.S. economy. Sales of metalworking products increased 12 percent in Canada. Sales in the Europe Metalworking market increased 5 percent. Demand for metalworking products was slow in Germany, while sales grew at a faster pace in the United Kingdom and France. Including the impact of unfavorable foreign currency translation effects, sales in the Europe Metalworking market increased 2 percent. Sales were affected by declining economic conditions, primarily in Germany. In the Asia-Pacific Metalworking market, sales rose 12 percent as a result of increased demand. Including unfavorable foreign currency translation effects, sales in the Asia-Pacific Metalworking market increased 9 percent. Effective July 1, 1995, Kennametal began to consolidate its majority owned subsidiaries in China and Japan. For the nine month period, sales in the North America Metalworking market were up 1 percent on slightly lower volumes and modest price increases. Sales were impacted by lower demand due to slowing economic conditions in the United States. In the Europe Metalworking market, sales increased 14 percent because of higher sales volumes and the impact of favorable foreign currency translation effects. In the Asia-Pacific Metalworking market, sales increased 45 percent because of increased demand and the impact of newly-consolidated subsidiaries in Japan and China. Excluding foreign currency translation effects, sales in the Europe Metalworking market increased 9 percent from last year. INDUSTRIAL SUPPLY MARKET During the March 1996 quarter, sales in the Industrial Supply market increased 23 percent as a result of increased sales through mail order and full service supply programs. The Industrial Supply market now represents almost 25 percent of total sales. Sales rose as a result of innovative marketing programs and the successful geographic expansion program at J&L Industrial Supply, and because of new and existing full service supply programs with large customers. Also, on April 15, 1996, J&L opened a location in Phoenix, Az., and one additional J&L location, St. Louis, Mo., is scheduled to open during the fourth quarter of fiscal 1996. For the nine month period, sales in the Industrial Supply market increased 27 percent due to innovative marketing programs and the geographic expansion program at J&L, and due to new and existing full service supply programs with large customers. During the nine month period ending March 31, 1996, J&L opened 5 locations and now operates a total of 16 locations in the United States and one location in the United Kingdom. MINING AND CONSTRUCTION MARKET During the March 1996 quarter, sales in the Mining and Construction market increased 13 percent from the previous year as a result of strong domestic demand for mining and highway construction tools. International sales of highway construction tools decreased 30 percent due to a slow start of the construction season while mining tools increased slightly due to the start-up of a joint venture in China. For the nine month period, sales of mining and construction tools increased 10 percent from the prior year primarily because of increased domestic demand for highway construction and mining tools and because of the start-up of a joint venture in China. GROSS PROFIT MARGIN As a percentage of sales, gross profit margin for the March 1996 quarter was 43.3 percent as compared with 44.5 percent in the prior year. The gross profit margin benefited from higher sales volume and modest price increases. These benefits were offset by a less favorable sales mix, higher costs associated with the implementation of focused factories, and reduced manufacturing efficiencies due to lower production volumes. For the nine month period, the gross profit margin was 42.3 percent, compared with 42.5 percent last year. The gross profit margin benefited from higher sales volumes and modest price increases. However, these benefits were partially offset by a less favorable sales mix, higher costs associated with the implementation of focused factories, and reduced manufacturing efficiencies due to lower production volumes. OPERATING EXPENSES For the quarter ended March 31, 1996, operating expenses as a percentage of sales were 29.1 percent compared to 28.5 percent last year. Operating expenses increased 9 percent primarily because of costs related to implementation of new SAP client server information systems, costs necessary to support the higher sales levels, increased spending on research and development, and marketing and branch program expansion. For the nine month period, operating expenses as a percentage of sales were 30.6 percent compared to 29.9 percent last year. Operating expenses increased primarily because of costs related to implementation of new SAP client server information systems, costs necessary to support the higher sales levels, increased spending on research and development, and marketing and branch program expansion. INCOME TAXES The effective tax rate for the March 1996 quarter was 38 percent compared to an effective tax rate of 42.5 percent in the prior year. The reduction in the effective tax rate resulted from certain tax benefits derived from international operations. For the nine month period, the effective tax rate was 39.5 percent compared to 42.4 percent in the prior year. The decrease in the effective tax rate for the nine month period is the result of lower estimated non-U.S. taxes and additional benefits derived from international operations. OUTLOOK In looking to the fourth quarter ending June 30, 1996, management expects consolidated sales to be comparable to the third quarter of fiscal 1996. Sales in the Metalworking markets will be similar to the previous quarter given the current economic conditions. Sales in the Industrial Supply market should benefit from the expansion of locations, catalog sales and full service supply programs. Sales in the Mining and Construction market should increase from additional domestic and international demand. The foregoing are "forward-looking statements" as defined in Section 21E of the Securities Exchange Act of 1934. Actual results can differ from those in the forward-looking statements to the extent that the economic conditions in the United States and Europe are not sustained. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information set forth in Note 4 to the condensed consolidated financial statements, contained in Part I, Item 1 of this Form 10-Q, is incorporated by reference herein and supplements the information previously reported in Part I, Item 3 of the Company's Form 10-K for the year ended June 30, 1995, which is also incorporated by reference herein. It is management's opinion, based on its evaluation and discussions with outside counsel, that the Company has viable defenses to these cases and that, in any event, the ultimate resolutions of these matters will not have a materially adverse effect on the results of operations, financial position or cash flows of the Company. ITEM 5. OTHER INFORMATION The Board of Directors approved the Company's plan to further consolidate its global headquarters in Latrobe, Pa., including the relocation of its North American Metalworking Headquarters from Raleigh, N.C. (the Plan). The relocation is being made to globalize key functions and to provide a more efficient and focused corporate structure. As a result, an estimated pretax charge will occur in the fourth quarter of fiscal 1996 of approximately $3.5 million. Implementation of the Plan is expected to be completed during fiscal 1998. On April 30, 1996, the Company issued a press release announcing the Plan. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K REFERENCE (a) Exhibits --------- (10.17) Credit Agreement dated April 19, 1996 by and among Kennametal Inc. and Deutsche Bank AG; Mellon Bank, N.A.; and PNC Bank, National Association Filed herewith (27) Financial Data Schedule for nine months ended March 31, 1996 Filed herewith (99) Press Release Dated April 30, 1996 Filed herewith (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KENNAMETAL INC. Date: May 13, 1996 By: /s/ RICHARD J. ORWIG ------------------------- Richard J. Orwig Vice President Chief Financial and Administrative Officer