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, 1995
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, 1995
- ---------------------------------------- -------------------------------
Capital Stock, par value $1.25 per share 26,624,461
KENNAMETAL INC.
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1995
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1995 and June 30, 1995
Condensed Consolidated Statements of Income (Unaudited)
Three months ended September 30, 1995 and 1994
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended September 30, 1995 and 1994
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 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,
1995 1995
------------- ---------
ASSETS
Current Assets:
Cash and equivalents $ 12,636 $ 10,827
Accounts receivable, less allowance for
doubtful accounts of $12,067 and $12,106 167,143 175,405
Inventories 212,218 200,680
Deferred income taxes 22,262 22,362
-------- --------
Total current assets 414,259 409,274
-------- --------
Property, Plant and Equipment:
Land and buildings 152,651 151,905
Machinery and equipment 372,274 365,275
Less accumulated depreciation (262,266) (256,838)
-------- --------
Net property, plant and equipment 262,659 260,342
-------- --------
Other Assets:
Investments in affiliated companies 7,001 6,873
Intangible assets, less accumulated
amortization of $19,451 and $19,009 31,810 32,253
Deferred income taxes 51,273 56,629
Other 24,961 16,238
-------- --------
Total other assets 115,045 111,993
-------- --------
Total assets $791,963 $781,609
======== ========
LIABILITIES
Current Liabilities:
Current maturities of term debt
and capital leases $ 16,433 $ 17,475
Notes payable to banks 62,145 53,555
Accounts payable 57,479 60,211
Accrued vacation pay 18,116 18,424
Other 74,131 75,537
-------- --------
Total current liabilities 228,304 225,202
-------- --------
Term Debt and Capital Leases,
Less Current Maturities 78,177 78,700
Deferred Income Taxes 21,154 20,998
Other Liabilities 50,967 51,615
-------- --------
Total liabilities 378,602 376,515
-------- --------
Minority Interest in Consolidated Subsidiaries 13,861 13,209
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 86,285 85,768
Retained earnings 307,490 297,838
Treasury shares, at cost; 2,745 and
2,793 shares held (36,435) (36,737)
Cumulative translation adjustments 5,448 8,304
-------- --------
Total shareholders' equity 399,500 391,885
-------- --------
Total liabilities and shareholders' equity $791,963 $781,609
======== ========
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,
1995 1994
-------- --------
OPERATIONS:
Net sales $254,903 $218,838
Cost of goods sold 148,461 128,051
-------- --------
Gross profit 106,442 90,787
Research and development expenses 4,964 4,419
Selling, marketing and distribution
expenses 59,375 50,768
General and administrative expenses 15,692 12,877
Amortization of intangibles 384 773
-------- --------
Operating income 26,027 21,950
Interest expense 2,939 3,474
Other income (expense) (249) 92
-------- --------
Income before taxes 22,839 18,568
Provision for income taxes 9,200 7,900
-------- --------
Net income $ 13,639 $ 10,668
======== ========
PER SHARE DATA:
Earnings per share $ 0.51 $ 0.40
======== ========
Dividends per share $ 0.15 $ 0.15
======== ========
Weighted average shares outstanding 26,597 26,390
======== ========
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
(in thousands)
Three Months Ended
------------------
September 30,
1995 1994
------- -------
OPERATING ACTIVITIES:
Net income $13,639 $10,668
Adjustments for noncash items:
Depreciation and amortization 9,767 9,935
Other 2,970 227
Changes in certain assets and liabilities
net of effects from acquisitions:
Accounts receivable 2,537 (4,627)
Inventories (13,046) (10,463)
Accounts payable and accrued liabilities (4,848) (12,063)
Other 3,868 5,742
------- -------
Net cash flow from (used for) operating activities 14,887 (581)
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (18,030) (7,713)
Disposals of property, plant and equipment 1,008 1,040
Other (418) 555
------- -------
Net cash flow used for investing activities (17,440) (6,118)
------- -------
FINANCING ACTIVITIES:
Increase in short-term debt 8,498 24
Increase in term debt 1,041 2,288
Reduction in term debt (1,879) (1,831)
Dividend reinvestment and employee stock plans 819 2,299
Cash dividends paid to shareholders (3,987) (3,953)
------- -------
Net cash flow from (used for) financing activities 4,492 (1,173)
------- -------
Effect of exchange rate changes on cash (130) 126
------- -------
CASH AND EQUIVALENTS:
Net increase (decrease) in cash and equivalents 1,809 (7,746)
Cash and equivalents, beginning 10,827 17,190
------- -------
Cash and equivalents, ending $12,636 $ 9,444
======= =======
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 1,654 $ 2,294
Income taxes paid 4,995 1,627
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
three months ended September 30, 1995 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, 1995. 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,
1995 1995
------------- ---------
Finished goods $157,072 $147,231
Work in process and powder blends 67,934 65,231
Raw materials and supplies 26,603 24,629
-------- --------
Inventory at current cost 251,609 237,091
Less LIFO valuation (39,391) (36,411)
-------- --------
Total inventories $212,218 $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 ensure compliance with all 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 to not 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.
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 September 30, 1995. The ratio of current
assets to current liabilities was 1.8 as of September 30, 1995 and June 30,
1995. The debt to capital ratio (i.e., total debt divided by the sum of total
debt and shareholders' equity) was 28 percent as of September 30, 1995
unchanged from 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 September 30, 1995, consolidated sales were $255
million, up 16 percent from $219 million in the same quarter last year. The
increase in consolidated sales is attributable to an increase in sales volume
of 11 percent, modest price increases, newly-consolidated international
subsidiaries and favorable foreign currency translation effects. Excluding
favorable foreign currency translation effects, international sales increased
20 percent and continued to show strong demand in all end markets.
Net income for the September 1995 quarter was $13.6 million, or $0.51 per
share, as compared with net income of $10.7 million, or $0.40 per share in the
same quarter last year. Net income increased from higher sales of
metalcutting tools in North America and Europe, and the continued growth of
catalog sales.
The following table presents the Company's sales by product class and
geographic area (in thousands):
Quarter ended September 30,
1995 1994 % Change
---------- ---------- --------
Sales by Product Class:
Metalworking $216,947 $183,581 18.2
Mining and construction 30,240 28,367 6.6
Metallurgical 7,716 6,890 12.0
-------- --------
Net sales $254,903 $218,838 16.5
======== ========
Sales by Geographic Area:
Within the U.S. $154,940 $140,569 10.2
Foreign and export 99,963 78,269 27.7
-------- --------
Net sales $254,903 $218,838 16.5
======== ========
METALWORKING PRODUCTS
During the September 1995 quarter, worldwide sales of metalworking products
increased 18 percent from last year.
In the United States, direct sales of metalcutting inserts and toolholding
devices increased 5 percent. Total sales of industrial supply products
increased 24 percent as a result of increased sales through mail order
catalogs and full service supply programs.
International sales of metalworking products increased 27 percent from the
previous year primarily because of higher sales volume in Europe, the impact
of favorable foreign currency translation effects, and newly-consolidated
subsidiaries in Japan and China. Excluding the currency translation effect,
international metalworking sales increased an estimated 19 percent.
MINING AND CONSTRUCTION PRODUCTS
During the September 1995 quarter, sales of mining and construction tools
increased 7 percent from the previous year primarily because of additional
domestic demand for mining and construction tools. International sales of
highway construction and mining tools increased because of strong demand in
Canada and Europe.
METALLURGICAL PRODUCTS
During the September 1995 quarter, sales of metallurgical products increased
12 percent from the previous year primarily because of strong international
demand for carbide powders.
GROSS PROFIT
As a percentage of sales, gross profit for the September 1995 quarter was 41.8
percent as compared with 41.5 percent in the prior year. The gross profit
margin benefited from higher production levels, modest price increases and
favorable currency effects of international sales of products manufactured in
the United States. These benefits were largely offset by higher raw material
costs and reduced manufacturing efficiencies.
OPERATING EXPENSES
For the quarter ended September 30, 1995, operating expenses increased
18 percent primarily because of costs necessary to support the higher sales
levels, increased spending on research and development, marketing programs,
additional catalog branch openings and the implementation of new information
systems. As a percentage of sales, operating expenses increased slightly to
31.4 percent as compared with 31.1 percent in the prior year.
INCOME TAXES
The effective tax rate for the September 1995 quarter was 40.3 percent
compared with an effective tax rate of 42.5 percent in the prior year. The
effective tax rate decreased primarily because of lower estimated non-U.S.
taxes and additional benefits derived from the utilization of the foreign
sales corporation.
OUTLOOK
In looking to the second quarter ending December 31, 1995, management expects
consolidated sales to increase from the $230 million achieved in the same
quarter last year. Sales of metalworking products in the United States should
continue to benefit from full service supply programs and catalog sales as a
result of additional branch openings. In addition, international sales are
expected to increase as the European and Asia-Pacific economies continue to
expand. Sales of mining and construction tools should continue to increase
from additional international demand for highway construction and mining
tools.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders on October 30, 1995, the stockholders
of the Company voted on the election of directors and independent auditors,
and for the approval of a new Performance Bonus Stock 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 1998.
For Withheld Broker Non-Vote
---------- ---------- ---------------
A. Peter Held 22,374,882 79,286 0
Aloysius T. McLaughlin, Jr. 22,395,437 58,731 0
Larry Yost 22,156,926 297,242 0
2. With respect to the approval of the new Performance Bonus Stock Plan of 1995.
For Against Abstained Broker Non-Vote
---------- --------- --------- ---------------
Approval of Performance
Bonus Stock Plan of 1995 21,365,723 975,467 112,978 2,352,956
3. With respect to the election of the firm of Arthur Andersen LLP, independent
public accountants, to audit the financial statement of the Company and its
subsidiary companies for the fiscal year ending June 30, 1996.
For Against Abstained Broker Non-Vote
---------- --------- --------- ---------------
Arthur Andersen LLP 22,377,216 31,329 45,623 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reference
(a) Exhibits
(10.1) Performance Bonus Stock Plan of 1995 Filed herewith
(27) Financial Data Schedule Filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended September 30, 1995.
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, 1995 By: /s/ RICHARD J. ORWIG
-------------------------
Richard J. Orwig
Vice President
Chief Financial and Administrative Officer