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, 1997 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, 1997 ------------------- ------------------------------- Capital Stock, par value $1.25 per share 26,264,454
KENNAMETAL INC. FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1997 TABLE OF CONTENTS Item No. - -------- PART I. FINANCIAL INFORMATION 1. Financial Statements: Condensed Consolidated Balance Sheets (Unaudited) September 30, 1997 and June 30, 1997 Condensed Consolidated Statements of Income (Unaudited) Three months ended September 30, 1997 and 1996 Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended September 30, 1997 and 1996 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 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) September 30, June 30, 1997 1997 ------------- -------- ASSETS Current Assets: Cash and equivalents $ 45,409 $ 21,869 Accounts receivable, less allowance for doubtful accounts of $7,370 and $7,325 202,144 200,515 Inventories 214,068 210,111 Deferred income taxes 24,949 25,384 ------- ------- Total current assets 486,570 457,879 -------- -------- Property, Plant and Equipment: Land and buildings 160,474 156,292 Machinery and equipment 494,466 473,850 Less accumulated depreciation (344,377) (329,756) -------- -------- Net property, plant and equipment 310,563 300,386 -------- -------- Other Assets: Investments in affiliated companies 14,648 11,736 Intangible assets, less accumulated amortization of $25,031 and $23,960 57,691 49,915 Deferred income taxes 31,644 34,307 Other 18,473 15,086 -------- -------- Total other assets 122,456 111,044 -------- -------- Total assets $919,589 $869,309 ======== ======== LIABILITIES Current Liabilities: Current maturities of term debt and capital leases $ 14,010 $ 13,853 Notes payable to banks 46,784 120,166 Accounts payable 61,306 60,322 Accrued vacation pay 17,818 18,176 Other 88,217 69,485 -------- -------- Total current liabilities 228,135 282,002 -------- -------- Term Debt and Capital Leases, Less Current Maturities 40,464 40,445 Deferred Income Taxes 21,138 21,055 Other Liabilities 55,621 57,060 -------- -------- Total liabilities 345,358 400,562 -------- -------- Minority Interest in Consolidated Subsidiaries 44,162 9,139 -------- -------- 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 148,438 91,049 Retained earnings 419,174 406,083 Treasury shares, at cost; 3,153 and 3,263 shares held (61,101) (62,400) Cumulative translation adjustments (13,154) (11,836) -------- -------- Total shareholders' equity 530,069 459,608 -------- -------- Total liabilities and shareholders' equity $919,589 $869,309 ======== ======== 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, --------------------- 1997 1996 -------- -------- OPERATIONS: Net sales $310,792 $275,203 Cost of goods sold 178,569 160,493 -------- -------- Gross profit 132,223 114,710 Research and development expenses 5,227 5,739 Selling, marketing and distribution expenses 68,571 63,019 General and administrative expenses 24,720 18,206 Amortization of intangibles 1,052 546 -------- -------- Operating Income 32,653 27,200 Interest expense 1,180 2,642 Other income (expense) (440) 627 -------- -------- Income before income taxes and minority interest 31,033 25,185 Provision for income taxes 12,100 9,800 Minority interest 1,385 182 -------- -------- Net income $ 17,548 $ 15,203 ======== ======== PER SHARE DATA: Earnings per share $ 0.67 $ 0.57 ======== ======== Dividends per share $ 0.17 $ 0.15 ======== ======== Weighted average shares outstanding 26,171 26,729 ======== ======== See accompanying notes to condensed consolidated financial statements.
<TABLE> <CAPTION> KENNAMETAL INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - ----------------------------------------------------------- (in thousands) Three Months Ended September 30, ------------------------ 1997 1996 -------- -------- <S> <C> <C> OPERATING ACTIVITIES: Net income $17,548 $15,203 Adjustments for noncash items: Depreciation and amortization 10,326 9,948 Other 1,091 2,335 Changes in certain assets and liabilities, net of effects of acquisitions: Accounts receivable (4,077) 9,647 Inventories (2,319) (2,551) Accounts payable and accrued liabilities 8,903 2,702 Other 9,150 (344) ------- ------- Net cash flow from operating activities 40,622 36,940 ------- ------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (16,695) (14,615) Disposals of property, plant and equipment 193 16 Acquisitions, net of cash (17,031) (14,102) Other 1,116 1,938 ------- ------- Net cash flow used for investing activities (32,417) (26,763) ------- ------- FINANCING ACTIVITIES: Decrease in short-term debt (72,733) (1,406) Increase in term debt - 403 Reduction in term debt (939) (312) Net proceeds from issuance and sale of subsidiary stock 90,462 - Dividend reinvestment and employee stock plans 4,062 1,230 Cash dividends paid to shareholders (4,457) (4,009) ------- ------- Net cash flow from (used for) financing activities 16,395 (4,094) ------- ------- Effect of exchange rate changes on cash (1,060) 254 ------- ------- CASH AND EQUIVALENTS: Net increase in cash and equivalents 23,540 6,337 Cash and equivalents, beginning 21,869 17,090 ------- ------- Cash and equivalents, ending $45,409 $23,427 ======= ======= SUPPLEMENTAL DISCLOSURES: Interest paid $ 520 $ 1,288 Income taxes paid 2,257 3,994 See accompanying notes to condensed consolidated financial statements. </TABLE>
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 1997 Annual Report. The condensed consolidated balance sheet as of June 30, 1997 has been derived from the audited balance sheet included in the Company's 1997 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, 1997 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 45 percent of total inventories at September 30, 1997. 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, 1997 1997 ------------- -------- Finished goods $184,628 $183,961 Work in process and powder blends 51,027 50,351 Raw materials and supplies 17,016 16,494 -------- -------- Inventory at current cost 252,671 250,806 Less LIFO valuation (38,603) (40,695) -------- -------- Total inventories $214,068 $210,111 ======== ======== 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. The Financial Accounting Standards Board (FASB) recently issued SFAS No. 128, "Earnings Per Share" (SFAS No. 128) and SFAS No. 129, "Disclosure of Information about Capital Structures" (SFAS No. 129). SFAS No. 128 was issued in February 1997 and is effective for periods ending after December 15, 1997. This statement, upon adoption, will require all prior ending earnings per share (EPS) data to be restated to conform to the provisions of the statement. This statement's objective is to simplify the computations of EPS and to make the U.S. standard for EPS computations more compatible with that of the International Accounting Standards Committee. The Company will adopt SFAS No. 128 in the second quarter of fiscal 1998 and does not anticipate that the statement will have a significant impact on its reported EPS. SFAS No. 129 was issued in February 1997 and is effective for periods ending after December 15, 1997. This statement, upon adoption, will require all companies to provide specific disclosure regarding their capital structure. SFAS No. 129 will specify the disclosure for all companies, including descriptions of their capital structure and the contractual rights of the holders of such securities. The Company will adopt SFAS No. 129 in the second quarter of fiscal 1998 and does not anticipate that the statement will have a significant impact on its disclosure. Additionally, in June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130) and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 130 is effective for years ending after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company will adopt SFAS No. 130 in fiscal 1998 and does not anticipate that the statement will have a significant impact on its disclosures. SFAS No. 131 introduces a new model for segment reporting called the "management approach." The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company is in the process of evaluating the effect of applying this statement. 6. On July 2, 1997, an initial public offering (IPO) of approximately 4.9 million shares of common stock at a price of $20.00 per share of JLK Direct Distribution Inc. (JLK), a subsidiary of the Company, was consummated. JLK operates the industrial supply operations consisting of the Company's wholly owned J&L Industrial Supply (J&L) subsidiary and its Full Service Supply programs. The net proceeds from the offering were approximately $90 million and represented approximately 20 percent of JLK's common stock. The transaction has been accounted for as a capital transaction in the Company's consolidated financial statements. The net proceeds were used by JLK to repay $20 million of indebtedness related to a dividend to the Company and $20 million related to intercompany obligations to the Company. The Company used these proceeds to repay short-term debt. In connection with the IPO, the remaining net proceeds were loaned to the Company, under an intercompany debt/investment and cash management agreement at a fluctuating rate of interest equal to the Company's short-term borrowing costs. The Company will maintain unused lines of credit to enable it to repay any portion of the borrowed funds as the amounts are due on demand by JLK. The Company today owns approximately 80 percent of the outstanding common stock of JLK and intends to retain a majority of both the economic and voting interests of JLK. 7. On September 1, 1997, the Company acquired Ruebig G.m.b.H. of Munich, Germany, a manufacturer and marketer of precision tools for carbide drilling, milling and other metal removal applications for approximately $16 million. Ruebig had annual sales totaling approximating $21 million. Additionally, subsequent to September 30, 1997, the Company acquired Presto Engineers Cutting Tools Limited of Sheffield, United Kingdom, a manufacturer of industrial high-speed steel cutting tools and entered into an agreement to acquire GRS Industrial Supply Company (GRS) and Car-Max Tool & Cutter Sales, Inc. (Car-Max). GRS and Car-Max are engaged in the distribution of metalcutting tools and industrial supplies. The combined companies had annual sales approximating $45 million. The acquisitions were accounted for using the purchase method of accounting. The consolidated financial statements include the operating results from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not significant. 8. On October 12, 1997, Kennametal and Greenfield Industries, Inc. (Greenfield) signed a definitive merger agreement under which Kennametal will acquire Greenfield in a total transaction valued at $1 billion. Under the terms of the agreement, which has been approved by the Boards of Directors of both companies, Kennametal commenced an all-cash tender offer on October 17, 1997, to acquire all of Greenfield's outstanding common stock for $38.00 per share, including the assumption of outstanding debt and convertible securities, which have a current combined value of approximately $320 million. The tender offer is subject to the conditions set forth in the Offer to Purchase, Exhibit (a)(1) to the Company's Schedule 14D-1 filed with the Securities and Exchange Commission (SEC) on October 17, 1997. The Company will finance the acquisition initially through a new bank credit facility. The Company was informed that the waiting period under the Hart-Scott- Rodino Antitrust Improvements Act of 1976 expired. Following its filing with the German Federal Cartel Office (FCO) and discussions with the FCO, the Company no longer needs to have the applicable one-month waiting period under the German Act Against Restraints of Competition expire in order to proceed with its tender offer and acquisition of Greenfield. The FCO will have the right to continue to review the transaction following Kennametal's acquisition of Greenfield. In addition, on November 12, 1997, the Company learned that the United Kingdom Office of Fair Trade (OFT) had issued an Invitation to Comment Announcement in the United Kingdom in response to Kennametal's prior informal submission to the OFT regarding the acquisition of Greenfield. Kennametal understands that this announcement is part of the OFT's normal procedures and that it will not delay its tender offer or acquisition of Greenfield. The OFT will also have the right to continue to review this matter following Kennametal's acquisition of Greenfield. Kennametal does not expect the relevant German or U.K. agencies to raise any significant objections to the combination in their respective countries following consummation of its acquisition of Greenfield. The tender offer remains subject to the other conditions listed in the Offer to Purchase. The tender offer is scheduled to expire at 12:00 midnight New York City Time on Friday, November 14, 1997. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------ RESULTS OF OPERATIONS SALES AND EARNINGS - ------------------ During the quarter ended September 30, 1997, consolidated sales were $311 million, up 13 percent from $275 million in the same quarter last year. Sales rose 16 percent excluding unfavorable foreign currency translation effects. The increase in sales was primarily attributable to higher sales of metalworking products in North America and from higher sales of industrial supplies sold by J&L Industrial Supply (J&L) and by Full Service Supply programs, both operating within Kennametal's JLK Direct Distribution Inc. (JLK) subsidiary. Net income for the first quarter ended September 30, 1997, was $17.5 million, or $0.67 per share, as compared with net income of $15.2 million, or $0.57 per share in the same quarter last year. The results included expenses of $5.2 million, or $0.12 per share, for the completion of the relocation and related expenses incurred in connection with the construction of the new world headquarters. Earnings benefited from higher sales of metalcutting and related products in North America and Europe as well as from higher production levels and productivity improvements related to the Focused Factory initiative. This was partially offset by unfavorable foreign currency translation effects. The following table presents the Company's sales by market and geographic area (in thousands): Three Months Ended September 30, -------------------------------- 1997 1996 % Change By Market: -------- -------- -------- Metalworking: North America $ 97,267 $ 90,907 7% Europe 60,456 60,694 - Asia Pacific 10,121 10,400 (3) Industrial Supply 99,051 73,278 35 Mining and Construction 43,897 39,924 10 -------- -------- --- Net sales $310,792 $275,203 13% ======== ======== === By Geographic Area: Within the United States $209,963 $177,500 18% International 100,829 97,703 3 -------- -------- --- Net sales $310,792 $275,203 13% ======== ======== === METALWORKING MARKETS - -------------------- During the September 1997 quarter, sales in the North America Metalworking market increased 7 percent from the previous year. Sales of metalcutting inserts and toolholding devices in North America increased due to improved economic conditions in the United States in most major end markets and from continued emphasis on milling and drilling products. Additionally, sales of metalcutting and toolholding devices sold through all sales channels in North America, including sales through the Industrial Supply market, increased 11 percent. Sales in the Europe Metalworking market on a local currency basis increased 13 percent over the same quarter a year ago. Including unfavorable foreign currency translation effects, sales in the Europe Metalworking market were flat. Demand for metalworking products continued to show improvement during the quarter in most key end markets as a result of improved market conditions in Europe, principally in Germany. Sales in the European market have posted double-digit order gains for four consecutive months. Effective September 1, 1997, the Company acquired Ruebig G.m.b.H. of Munich, Germany, a manufacturer and marketer of precision tools for carbide drilling, milling and other metal removal applications. Also, on October 1, 1997, the Company acquired Presto Engineers Cutting Tools Limited of Sheffield, United Kingdom, a manufacturer of industrial high-speed steel cutting tools. The combined companies had annual sales approximating $42 million. The acquisitions were accounted for using the purchase method of accounting. The consolidated financial statements include the operating results from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not significant. In the Asia Pacific Metalworking market, sales decreased slightly as results were affected by weak economic conditions in Korea, Singapore and Thailand. Excluding unfavorable foreign currency translation effects, sales in the Asia Pacific Metalworking market increased 3 percent. Additionally, effective August 1, 1997, the Company acquired a 100 percent interest in Kennako Japan from its joint venture partner Kobe Steel. INDUSTRIAL SUPPLY MARKET - ------------------------ Sales in the Industrial Supply market rose 35 percent as a result of increased sales through mail order, Full Service Supply programs and from acquisitions. Excluding the acquisitions, sales increased approximately 24 percent. Sales increased because of four additional showrooms, from the integration of new showroom locations from acquired companies, from further penetration of existing customers and from an expanded product offering of more than 10,000 new stock keeping units (SKUs) in J&L Industrial Supply's 1998 master catalog issued September 1, 1997. Subsequent to September 30, 1997, the Company's JLK subsidiary opened a new showroom and distribution center in Seattle, Washington, and announced that it has entered into an agreement to acquire GRS Industrial Supply Company (GRS) and Car-Max Tool & Cutter Sales, Inc. (Car-Max). GRS and Car-Max are engaged in the distribution of metalcutting tools and industrial supplies and had sales approximating $23.9 million in the year ended December 31, 1996. The acquisitions were accounted for using the purchase method of accounting. The consolidated financial statements include the operating results from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not significant. MINING AND CONSTRUCTION MARKET - ------------------------------ During the September 1997 quarter, sales in the Mining and Construction market increased 10 percent from the previous year as a result of increased domestic demand for highway construction tools. International sales of mining and highway construction tools also improved as a result of strong market demand in South Africa and China. GROSS PROFIT MARGIN - ------------------- As a percentage of sales, gross profit margin for the September 1997 quarter was 42.5 percent as compared with 41.7 percent in the prior year. The gross profit margin increased primarily as a result of productivity improvements related in part to the Focused Factory initiative and from higher production levels. This increase was partially offset by unfavorable foreign currency translation effects. OPERATING EXPENSES - ------------------ Operating expenses as a percentage of sales were 31.7 percent compared to 31.6 percent last year. Operating expenses increased 13 percent primarily because of relocation and related costs incurred in connection with the construction of the new world headquarters, which amounted to approximately $5.2 million during the first quarter. The project is now successfully completed. Operating expenses also increased because of higher costs related to acquisitions and from the JLK showroom expansion program, including higher direct mail costs and increased direct marketing costs in new territories in the United States and in Europe. INTEREST EXPENSE - ---------------- Interest expense for the September 1997 quarter was $1.2 million compared to $2.6 million in the same quarter of a year ago. Interest expense decreased as a result of lower debt balances as the Company used the proceeds received from the JLK IPO to reduce its overall debt. INCOME TAXES - ------------ The effective tax rate for the September 1997 quarter was 39.0 percent compared to an effective tax rate of 38.9 percent in the prior year. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's cash flow from operations is the primary source of financing for capital expenditures and internal growth. During the quarter ended September 30, 1997, the Company generated $40.6 million in cash from operations. The increase in cash provided by operations resulted primarily from higher net income and slightly lower incremental working capital requirements. Net cash used in investing activities was $32.4 million. The increase in net cash used in investing activities resulted from higher capital expenditures and from the acquisition of Ruebig G.m.b.H. and the remaining interest in Kennako Japan from its joint venture partner Kobe Steel. Capital expenditures were made to complete the construction of a new corporate headquarters in Latrobe, PA, and a manufacturing facility in China, to acquire additional client-server information systems and to upgrade machinery and equipment. Net cash flow from financing activities was $16.4 million. The increase in net cash from financing activities was a result of proceeds received from the issuance of common stock of the Company's JLK subsidiary, offset by repayments of short-term debt and dividends. Additionally, subsequent to September 30, 1997, the Company acquired Presto Engineers Cutting Tools Limited of Sheffield, United Kingdom, a manufacturer of industrial high-speed steel cutting tools, and entered into an agreement to acquire GRS Industrial Supply (GRS) and Car-Max Tool & Cutter Sales, Inc. (Car-Max). GRS and Car-Max are engaged in the distribution of metalcutting tools and industrial supplies. The combined companies had annual sales approximating $45 million. On October 12, 1997, Kennametal and Greenfield Industries, Inc. (Greenfield) signed a definitive merger agreement under which Kennametal will acquire Greenfield in a total transaction valued at $1 billion. Under the terms of the agreement, which has been approved by the Boards of Directors of both companies, Kennametal commenced an all-cash tender offer on October 17, 1997, to acquire all of Greenfield's outstanding common stock for $38.00 per share, including the assumption of outstanding debt and convertible securities, which have a current combined value of approximately $320 million. The tender offer is subject to the conditions set forth in the Offer to Purchase, Exhibit (a) (1) to the Company's Schedule 14D-1 filed with the Securities and Exchange Commission (SEC) on October 17, 1997. The Company will finance the acquisition initially through a new bank credit facility. The Company was informed that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired. Following its filing with the German Federal Cartel Office (FCO) and discussions with the FCO, the Company no longer needs to have the applicable one-month waiting period under the German Act Against Restraints of Competition expire in order to proceed with its tender offer and acquisition of Greenfield. The FCO will have the right to continue to review the transaction following Kennametal's acquisition of Greenfield. In addition, on November 12, 1997, the Company learned that the United Kingdom Office of Fair Trade (OFT) had issued an Invitation to Comment Announcement in the United Kingdom in response to Kennametal's prior informal submission to the OFT regarding the acquisition of Greenfield. Kennametal understands that this announcement is part of the OFT's normal procedures and that it will not delay its tender offer or acquisition of Greenfield. The OFT will also have the right to continue to review this matter following Kennametal's acquisition of Greenfield. Kennametal does not expect the relevant German or U.K. agencies to raise any significant objections to the combination in their respective countries following consummation of its acquisition of Greenfield. The tender offer remains subject to the other conditions listed in the Offer to Purchase. The tender offer is scheduled to expire at 12:00 midnight New York City Time on Friday, November 14, 1997. FINANCIAL CONDITION - ------------------- Kennametal's financial condition continues to remain strong. Total assets were $920 million at September 30, 1997, up 6 percent from $869 million at June 30, 1997. Net working capital was $258 million, up 47 percent from $176 million from the previous quarter, and the ratio of current assets to current liabilities was 2.1 as of September 30, 1997, and 1.6 as of June 30, 1997. Also, the debt to capital ratio (i.e., total debt divided by the sum of total debt and shareholders' equity) was 16.0 percent as of September 30, 1997, and 27.5 percent as of June 30, 1997. The most significant event that affected the Company's financial condition during the quarter was the IPO of approximately 4.9 million shares of JLK's Class A Common Stock at $20.00 per share of JLK. The net proceeds received from the offering were approximately $90 million and were used to repay short- term debt. OUTLOOK - ------- In looking to the second quarter ending December 31, 1997, management expects Kennametal's consolidated sales to increase over the second quarter of a year ago. In addition, second quarter results could be affected to the extent that the proposed acquisition of Greenfield Industries, Inc. would close during the quarter. Sales in the North America Metalworking market should benefit from strong market conditions in the United States. Sales in the Europe Metalworking market are also expected to benefit from improving market conditions throughout Europe, especially in Germany. Sales in the Asia Pacific Metalworking market are expected to remain weak. Sales in the Industrial Supply market should benefit from expansion of locations, increased mail order sales as a result of the expanded product offering in the new J&L Industrial Supply master catalog, and from acquisitions offset in part by the termination of the General Electric Full Service Supply contract. Sales in the Mining and Construction market should increase from additional domestic demand. This Form 10-Q contains "forward-looking statements" as defined in Section 21E of the Securities Exchange Act of 1934. Actual results can materially 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. The Company undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or circumstances occurring after the date hereof. 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, 1997, which is also incorporated by reference herein. Agreement of settlement has been reached, and in management's opinion, based on its evaluation and discussions with outside counsel, the Company has viable defenses to this case and that, in any event, the ultimate resolution of this matter 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 27, 1997, the stockholders of the Company voted on the election of directors and independent public accountants. 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 2000: For Withheld Broker Non-Vote ---------- ---------- --------------- Richard C. Alberding 22,415,230 257,687 0 William R. Newlin 22,163,349 509,568 0 The following other directors' terms of office continued after the meeting: Peter B. Bartlett, A. Peter Held, Warren H. Hollinshead, Robert L. McGeehan, Aloysius T. McLaughlin, Jr. and Larry Yost. 2. 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, 1998: For Against Abstained Broker Non-Vote ---------- --------- --------- --------------- Arthur Andersen LLP 22,614,072 15,445 43,400 0 ITEM 5. OTHER INFORMATION - -------------------------- On October 12, 1997, Kennametal and Greenfield signed a definitive merger agreement pursuant to which Kennametal will acquire Greenfield in a total transaction valued at $1 billion. Under the terms of the agreement, which has been approved by the Boards of Directors of both companies, Kennametal commenced an all-cash tender offer on October 17, 1997, to acquire all of Greenfield's outstanding common stock for $38.00 per share, including the assumption of outstanding debt and convertible securities, which have a current combined value of approximately $320 million. The tender offer is subject to the conditions set forth in the Offer to Purchase, Exhibit (a)(1) to the Company's Schedule 14D-1 filed with the SEC on October 17, 1997. The Company will finance the acquisition initially through a new bank credit facility. The Company was informed that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 expired. Following its filing with the German Federal Cartel Office (FCO) and discussions with the FCO, the Company no longer needs to have the applicable one-month waiting period under the German Act Against Restraints of Competition expire in order to proceed with its tender offer and acquisition of Greenfield. The FCO will have the right to continue to review the transaction following Kennametal's acquisition of Greenfield. In addition, on November 12, 1997, the Company learned that the United Kingdom Office of Fair Trade (OFT) had issued an Invitation to Comment Announcement in the United Kingdom in response to Kennametal's prior informal submission to the OFT regarding the acquisition of Greenfield. Kennametal understands that this announcement is part of the OFT's normal procedures and that it will not delay its tender offer or acquisition of Greenfield. The OFT will also have the right to continue to review this matter following Kennametal's acquisition of Greenfield. Kennametal does not expect the relevant German or U.K. agencies to raise any significant objections to the combination in their respective countries following consummation of its acquisition of Greenfield. The tender offer remains subject to the other conditions listed in the Offer to Purchase. The tender offer is scheduled to expire at 12:00 midnight New York City Time on Friday, November 14, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibits ( 2) Agreement and Plan of Merger by and among Kennametal Inc., Palmer Acquisition Corp. and Greenfield Industries, Inc. dated as of October 10, 1997 (incorporated herein by reference to Exhibit (c) (1) of the Company's Schedule 14D-1 filed with the SEC on October 17, 1997). (27) Financial Data Schedule for three months ended September 30, 1997, submitted to the Securities and Exchange Commission in electronic format, filed herewith (99) Additional Exhibits 99.a Press Release Dated October 12, 1997, filed herewith 99.b Press Release Dated October 17, 1997, filed herewith 99.c Press Release Dated October 31, 1997 (incorporated herein by reference to Exhibit (A)(10) of the Company's Amendment No. 1 to its schedule 14D-1 filed with the SEC on October 31, 1997) 99.d Press Release Dated November 13, 1997 (incorporated herein by reference to Exhibit (A)(11) of the Company's Amendment No. 3 to its schedule 14D-1 filed with the SEC on November 13, 1997) (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1997. 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 14, 1997 By: /s/ RICHARD J. ORWIG -------------------- Richard J. Orwig Vice President Chief Financial and Administrative Officer