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 SEPTEMBER 30, 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 OCTOBER 31, 1996 - ---------------------------------------- ------------------------------- Capital Stock, par value $1.25 per share 26,747,827
KENNAMETAL INC. FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1996 TABLE OF CONTENTS Item No. - -------- PART I. FINANCIAL INFORMATION 1. Financial Statements: Condensed Consolidated Balance Sheets (Unaudited) September 30, 1996 and June 30, 1996 Condensed Consolidated Statements of Income (Unaudited) Three months ended September 30, 1996 and 1995 Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended September 30, 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 4. Submission of Matters to a Vote of Security Holders 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) September 30, June 30, 1996 1996 ASSETS -------- -------- Current Assets: Cash and equivalents $ 23,427 $ 17,090 Accounts receivable, less allowance for doubtful accounts of $9,811 and $9,296 184,511 189,820 Inventories 213,418 204,934 Deferred income taxes 24,924 24,620 -------- -------- Total current assets 446,280 436,464 -------- -------- Property, Plant and Equipment: Land and buildings 157,888 156,064 Machinery and equipment 437,112 415,443 Less accumulated depreciation (318,261) (304,400) -------- -------- Net property, plant and equipment 276,739 267,107 -------- -------- Other Assets: Investments in affiliated companies 10,361 8,742 Intangible assets, less accumulated amortization of $21,379 and $20,795 43,363 33,756 Deferred income taxes 41,172 41,757 Other 13,016 11,665 -------- -------- Total other assets 107,912 95,920 -------- -------- Total assets $830,931 $799,491 ======== ======== LIABILITIES Current Liabilities: Current maturities of term debt and capital leases $ 17,773 $ 17,543 Notes payable to banks 56,418 57,549 Accounts payable 58,033 64,663 Accrued vacation pay 20,344 19,228 Other 79,325 59,830 -------- -------- Total current liabilities 231,893 218,813 -------- -------- Term Debt and Capital Leases, Less Current Maturities 56,389 56,059 Deferred Income Taxes 20,685 20,611 Other Liabilities 55,708 52,559 -------- -------- Total liabilities 364,675 348,042 -------- -------- Minority Interest in Consolidated Subsidiaries 13,048 12,500 -------- -------- SHAREHOLDERS' EQUITY Shareholders' Equity: Preferred stock, 5,000 shares authorized; none issued - - Capital stock, $1.25 par value; 70,000 shares authorized; 29,370 shares issued 36,712 36,712 Additional paid-in capital 88,085 87,417 Retained earnings 362,788 351,594 Treasury shares, at cost; 2,622 and 2,667 shares held (35,171) (35,734) Cumulative translation adjustments 794 (1,040) -------- -------- Total shareholders' equity 453,208 438,949 -------- -------- Total liabilities and shareholders' equity $830,931 $799,491 ======== ======== See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - ------------------------------------------------------- (in thousands, except per share data) Three Months Ended September 30, -------------------- 1996 1995 OPERATIONS: -------- -------- Net sales $275,203 $254,903 Cost of goods sold 160,493 148,461 -------- -------- Gross profit 114,710 106,442 Research and development expenses 5,739 4,964 Selling, marketing and distribution expenses 63,019 59,375 General and administrative expenses 18,206 15,692 Amortization of intangibles 546 384 -------- -------- Operating Income 27,200 26,027 Interest expense 2,642 2,939 Other income (expense) 445 (249) -------- -------- Income before taxes 25,003 22,839 Provision for income taxes 9,800 9,200 -------- -------- Net income $ 15,203 $ 13,639 ======== ======== PER SHARE DATA: Earnings per share $ 0.57 $ 0.51 ======== ======== Dividends per share $ 0.15 $ 0.15 ======== ======== Weighted average shares outstanding 26,729 26,597 ======== ======== See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - ----------------------------------------------------------- (in thousands) Three Months Ended September 30, ----------------------- 1996 1995 OPERATING ACTIVITIES: ------- ------- Net income $15,203 $13,639 Adjustments for noncash items: Depreciation and amortization 9,948 9,767 Other 2,335 2,970 Changes in certain assets and liabilities, net of effects of acquisitions: Accounts receivable 9,647 2,537 Inventories (2,551) (13,046) Accounts payable and accrued liabilities 2,702 (4,848) Other (344) 3,868 ------- ------- Net cash flow from operating activities 36,940 14,887 ------- ------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (14,615) (18,030) Disposals of property, plant and equipment 16 1,008 Acquisitions, net of cash (14,102) - Other 1,938 (418) ------- ------- Net cash flow used for investing activities (26,763) (17,440) ------- ------- FINANCING ACTIVITIES: Increase (decrease) in short-term debt (1,406) 8,498 Increase in term debt 403 1,041 Reduction in term debt (312) (1,879) Dividend reinvestment and employee stock plans 1,230 819 Cash dividends paid to shareholders (4,009) (3,987) ------ ------ Net cash flow from (used for) financing activities (4,094) 4,492 ------ ------ Effect of exchange rate changes on cash 254 (130) ------ ------ CASH AND EQUIVALENTS: Net increase in cash and equivalents 6,337 1,809 Cash and equivalents, beginning 17,090 10,827 ------- ------- Cash and equivalents, ending $23,427 $12,636 ======= ======= SUPPLEMENTAL DISCLOSURES: Interest paid $ 1,288 $ 1,654 Income taxes paid 3,994 4,995 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 1996 Annual Report. The condensed consolidated balance sheet as of June 30, 1996 has been derived from the audited balance sheet included in the Company's 1996 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 three months ended September 30, 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 September 30, 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): September 30, June 30, 1996 1996 -------- -------- Finished goods $172,899 $169,108 Work in process and powder blends 58,125 59,326 Raw materials and supplies 21,861 16,514 -------- -------- Inventory at current cost 252,885 244,948 Less LIFO valuation (39,467) (40,014) -------- -------- Total inventories $213,418 $204,934 ======== ======== 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. Effective July 1, 1996, the company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption of SFAS No. 121 did not have an impact on the financial statements, as the statement is consistent with existing company policy. 6. During the quarter and on October 1, 1996, the company acquired three companies, with annual sales totaling approximately $22 million, for a total consideration of approximately $19 million. The acquisitions have been accounted for using the purchase method of accounting. The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not significant. 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, 1996 and September 30, 1996. The ratio of current assets to current liabilities was 1.9 as of September 30, 1996 and 2.0 as of June 30, 1996. The debt to capital ratio (i.e., total debt divided by the sum of total debt and shareholders' equity) was 22 percent as of September 30, 1996, and 23 percent as of June 30, 1996. Capital expenditures are estimated to be $70-$80 million in fiscal year 1997. Expenditures will be used primarily to construct a new corporate headquarters and a manufacturing facility in China, to acquire additional client-server information systems and to upgrade machinery and equipment. 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 September 30, 1996, consolidated sales were $275 million, up 8 percent from $255 million in the same quarter last year. Net income was $15.2 million, or $0.57 per share, as compared with net income of $13.6 million, or $0.51 per share in the same quarter last year. For the quarter ended September 30, 1996, sales increased in all markets with the exception of the Europe Metalworking market. The Industrial Supply market accounted for the largest sales gain as a result of increased mail order sales through J&L Industrial Supply as well as additional Full Service Supply programs. Earnings benefited from productivity improvements related to the Focused Factory initiative and modest price increases. This was offset by a less favorable sales mix and slightly lower production levels. The following table presents the Company's sales by market and geographic area (in thousands): Three Months Ended September 30, ------------------------------ 1996 1995 % Change By Market: -------- -------- -------- Metalworking: North America $ 90,907 $ 87,560 4% Europe 60,694 65,383 (7) Asia-Pacific 10,400 7,994 30 Industrial Supply 73,278 56,251 30 Mining and Construction 39,924 37,715 6 -------- -------- --- Net sales $275,203 $254,903 8% ======== ======== === By Geographic Area: Within the United States $177,500 $154,940 15% International 97,703 99,963 (2) -------- -------- --- Net sales $275,203 $254,903 8% ======== ======== === METALWORKING MARKETS - -------------------- During the September 1996 quarter, sales in the North America Metalworking market increased 4 percent from the previous year. Direct sales of domestic metalcutting inserts and toolholding devices increased 2 percent due to slightly improved economic conditions in the United States and due to additional emphasis of milling and drilling products. Sales of metalworking products increased 14 percent in Canada. Sales in the Europe Metalworking market decreased 7 percent. Demand for metalworking products continues to be slow due to weak economic conditions in Europe, primarily in Germany. Sales in the United Kingdom and France posted modest gains. Excluding the impact of unfavorable foreign currency translation effects, sales in the Europe Metalworking market decreased 3 percent. In the Asia-Pacific Metalworking market, sales rose 6 percent, excluding the consolidation of a majority-owned subsidiary in China, as sales were impacted by soft economic conditions in the Asian region and Korea. Excluding unfavorable foreign currency translation effects, sales in the Asia-Pacific Metalworking market increased 11 percent. INDUSTRIAL SUPPLY MARKET - ------------------------ During the September 1996 quarter, sales in the Industrial Supply market increased 30 percent as a result of increased sales through mail order and Full Service Supply programs. The increase in sales was driven by the ongoing geographic expansion program at J&L Industrial Supply, new and existing Full Service Supply programs with large customers and innovative marketing programs. During the September quarter, J&L opened a new location in Dallas, Texas, and three additional J&L locations are scheduled to open by the end of calendar 1996. MINING AND CONSTRUCTION MARKET - ------------------------------ During the September 1996 quarter, sales in the Mining and Construction market increased 6 percent from the previous year as a result of increased domestic demand for mining and highway construction tools. International sales of highway construction tools decreased as a result of weak economic conditions in Europe. GROSS PROFIT MARGIN - ------------------- As a percentage of sales, gross profit margin for the September 1996 quarter was 41.7 percent as compared with 41.8 percent in the prior year. The gross profit margin benefited from productivity improvements related to the Focused Factory initiative and modest price increases. These benefits were offset by a less favorable sales mix and slightly lower production levels. OPERATING EXPENSES - ------------------ For the quarter ended September 30, 1996, operating expenses as a percentage of sales were 31.6 percent compared to 31.4 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, costs necessary to support Full Service Supply programs, marketing and branch expansion at J&L, and higher costs related to acquisitions. INCOME TAXES - ------------ The effective tax rate for the September 1996 quarter was 39.2 percent compared to an effective tax rate of 40.3 percent in the prior year. The reduction in the effective tax rate resulted from certain tax benefits derived from international operations. ACQUISITIONS - ------------ During the quarter and on October 1, 1996, the company acquired three companies, with annual sales totaling approximately $22 million, for a total consideration of approximately $19 million. The acquisitions have been accounted for using the purchase method of accounting. The consolidated financial statements will include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not significant. OUTLOOK - ------- In looking to the second quarter ending December 31, 1996, management expects consolidated sales to increase over the second quarter of a year ago. Sales in the North America Metalworking market should benefit from slowly improving economic condition in the United States. Sales in the Europe Metalworking market, which are principally driven by the German market, are not expected to improve in the next quarter. Sales demand in the Asia-Pacific Metalworking market is expected to slow. Sales in the Industrial Supply market should continue to grow and benefit from expansion of locations, increased catalog sales and new Full Service Supply programs. Sales in the Mining and Construction market should increase from domestic demand. This Form 10-Q, including the prior two paragraphs, contains "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 anticipated 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, 1996, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ At the Annual Meeting of Stockholders on October 28, 1996, the stockholders of the Company voted on the election of directors and independent public accountants, and for the approval of a new Stock Option and Incentive Plan. The following is the number of shares voted in favor of and against each matter, and the number of shares having authority to vote on each matter but withheld. 1. With respect to the votes cast for directors whose terms expire in 1999. For Withheld Broker Non-Vote ---------- -------- --------------- Peter B. Bartlett 21,921,616 352,357 0 Warren H. Hollinshead 21,922,297 351,676 0 Robert L. McGeehan 21,922,216 351,757 0 The following other directors' terms of office continued after the meeting: Richard C. Alberding, A. Peter Held, Quentin C. McKenna, Aloysius T. McLaughlin, Jr., William R Newlin and Larry Yost. 2. With respect to the approval of the new Stock Option and Incentive Plan of 1996. For Against Abstained Broker Non-Vote ---------- ------- --------- --------------- Approval of Stock Option and Incentive Plan of 1996 18,998,102 891,258 94,537 2,290,076 3. With respect to the election of the firm of Arthur Andersen LLP, independent public accountants, to audit the financial statements of the Company and its subsidiary companies for the fiscal year ending June 30, 1997. For Against Abstained Broker Non-Vote ---------- ------- --------- --------------- Arthur Andersen LLP 22,191,369 37,683 44,921 0 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits (10.14) Stock Option and Incentive Plan of 1996 (27) Financial Data Schedule for three months ended September 30, 1996, submitted to the Securities and Exchange Commission in electronic format (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 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: November 13, 1996 By: /S/ RICHARD J. ORWIG ------------------------- Richard J. Orwig Vice President Chief Financial and Administrative Officer