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.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
(in thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
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.
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):
Three Months Ended March 31, Nine Months Ended March 31,
------------------------------- -----------------------------
Percent Percent
1996 1995 Change 1996 1995 Change
-------- -------- ------- -------- -------- -------
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.
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