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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 DECEMBER 31, 2000
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.)
WORLD HEADQUARTERS
1600 TECHNOLOGY WAY
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650-0231
(Address of registrant's principal executive offices)
Registrant's telephone number, including area code: (724) 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 February 1, 2001
- ---------------------------------------- -------------------------------
Capital Stock, par value $1.25 per share 30,451,022
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KENNAMETAL INC.
FORM 10-Q
FOR QUARTER ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Item No. Page
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PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Statements of Income (Unaudited)
Three and six months ended December 31, 2000 and 1999.......................................... 1
Condensed Consolidated Balance Sheets (Unaudited)
December 31, 2000 and June 30, 2000............................................................ 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended December 31, 2000 and 1999.................................................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited)............................... 4
2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 10
3. Quantitative and Qualitative Disclosures about Market Risk..................................... 17
PART II. OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders............................................ 18
6. Exhibits and Reports on Form 8-K............................................................... 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------
(in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
OPERATIONS
Net sales $440,521 $453,928 $891,226 $896,871
Cost of goods sold 273,583 285,061 555,635 564,675
-------- -------- -------- --------
Gross profit 166,938 168,867 335,591 332,196
Operating expense 121,823 126,702 250,247 249,189
Restructuring and asset impairment charge 812 3,981 2,347 3,981
Amortization of intangibles 6,147 6,597 12,470 13,600
-------- -------- -------- --------
Operating income 38,156 31,587 70,527 65,426
Interest expense 13,400 13,753 26,595 28,280
Other expense, net 1,200 510 2,657 252
-------- -------- -------- --------
Income before provision for income taxes
and minority interest 23,556 17,324 41,275 36,894
Provision for income taxes 9,128 7,709 16,304 16,418
Minority interest 904 1,104 1,506 2,052
-------- -------- -------- --------
Income before extraordinary loss and cumulative
effect of change in accounting principle 13,524 8,511 23,465 18,424
Extraordinary loss on early extinguishment of
debt, net of tax of $178 -- (267) -- (267)
Cumulative effect of change in accounting
principle, net of tax of $399 -- -- (599) --
-------- -------- -------- --------
Net income $ 13,524 $ 8,244 $ 22,866 $ 18,157
======== ======== ======== ========
PER SHARE DATA
Basic earnings per share before extraordinary loss and
cumulative effect of change in accounting principle $ 0.44 $ 0.28 $ 0.77 $ 0.61
Extraordinary loss per share -- (0.01) -- (0.01)
Cumulative effect of change in accounting
principle per share -- -- (0.02) --
-------- -------- -------- --------
Basic earnings per share $ 0.44 $ 0.27 $ 0.75 $ 0.60
======== ======== ======== ========
Diluted earnings per share before extraordinary loss and
cumulative effect of change in accounting principle $ 0.44 $ 0.28 $ 0.77 $ 0.61
Extraordinary loss per share -- (0.01) -- (0.01)
Cumulative effect of change in accounting
principle per share -- -- (0.02) --
-------- -------- -------- --------
Diluted earnings per share $ 0.44 $ 0.27 $ 0.75 $ 0.60
======== ======== ======== ========
Dividends per share $ 0.17 $ 0.17 $ 0.34 $ 0.34
======== ======== ======== ========
Basic weighted average shares outstanding 30,384 30,184 30,543 30,146
======== ======== ======== ========
Diluted weighted average shares outstanding 30,548 30,330 30,639 30,255
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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(in thousands)
December 31, June 30,
2000 2000
---- ----
ASSETS
Current assets:
Cash and equivalents $ 18,293 $ 22,323
Marketable equity securities available-for-sale 16,006 27,614
Accounts receivable, less allowance for
doubtful accounts of $8,688 and $12,214 203,344 231,917
Inventories 389,460 410,885
Deferred income taxes 52,552 42,911
Other current assets 18,368 13,065
---------- ----------
Total current assets 698,023 748,715
---------- ----------
Property, plant and equipment:
Land and buildings 235,926 230,448
Machinery and equipment 746,032 720,556
Less accumulated depreciation (499,465) (452,220)
----------- ----------
Net property, plant and equipment 482,493 498,784
---------- ----------
Other assets:
Investments in affiliated companies 3,621 2,571
Intangible assets, less accumulated amortization
of $101,363 and $88,458 644,929 661,172
Other 32,486 29,879
---------- ----------
Total other assets 681,036 693,622
---------- ----------
Total assets $1,861,552 $1,941,121
========== ==========
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases $ 3,385 $ 3,855
Notes payable to banks 6,825 57,701
Accounts payable 102,217 118,908
Accrued vacation pay 29,094 28,217
Accrued income taxes 26,968 30,226
Accrued payroll 20,943 20,605
Other current liabilities 94,031 91,800
---------- ----------
Total current liabilities 283,463 351,312
---------- ----------
Long-term debt and capital leases, less current maturities 677,277 637,686
Deferred income taxes 31,261 31,727
Other liabilities 85,773 85,036
---------- ----------
Total liabilities 1,077,774 1,105,761
---------- ----------
Minority interest in consolidated subsidiaries 10,514 55,106
---------- ----------
SHAREOWNERS' EQUITY
Preferred stock, no par value; 5,000 shares authorized; none issued -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
33,419 and 33,200 shares issued 41,773 41,500
Additional paid-in capital 343,796 335,314
Retained earnings 521,228 508,733
Treasury shares, at cost; 3,032 and 2,677 shares held (68,852) (55,236)
Unearned compensation (3,375) (2,814)
Accumulated other comprehensive loss (61,306) (47,243)
----------- ----------
Total shareowners' equity 773,264 780,254
---------- ----------
Total liabilities and shareowners' equity $1,861,552 $1,941,121
========== ==========
See accompanying notes to condensed consolidated financial statements.
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KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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(in thousands)
Six Months Ended
December 31,
-------------------------------
2000 1999
---- ----
OPERATING ACTIVITIES
Net income $ 22,866 $ 18,157
Adjustments for noncash items:
Depreciation 36,595 37,685
Amortization 12,470 13,600
Restructuring and asset impairment charge 524 2,673
Cumulative effect of change in accounting principle, net of tax 599 --
Loss on early extinguishment of debt, net of tax -- 267
Other 869 3,541
Changes in certain assets and liabilities:
Accounts receivable 27,296 3,586
Proceeds from accounts receivable securitization 600 --
Inventories 17,695 13,894
Accounts payable and accrued liabilities (22,453) 20,335
Other (9,885) (288)
-------- ---------
Net cash flow from operating activities 87,176 113,450
-------- ---------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (22,980) (21,676)
Disposals of property, plant and equipment 844 5,964
Purchase of subsidiary stock (42,628) --
Other (196) 405
-------- ---------
Net cash flow used for investing activities (64,960) (15,307)
-------- ---------
FINANCING ACTIVITIES
Net decrease in notes payable (693) (9,965)
Net increase (decrease) in revolver and other lines of credit (9,100) 39,100
Term debt borrowings 675 336
Term debt repayments (944) (121,629)
Dividend reinvestment and employee benefit and stock plans 9,862 4,549
Cash dividends paid to shareowners (10,371) (10,248)
Purchase of treasury stock (16,494) --
Other (805) (409)
-------- ---------
Net cash flow used for financing activities (27,870) (98,266)
-------- ---------
Effect of exchange rate changes on cash and equivalents 1,624 (27)
-------- ---------
CASH AND EQUIVALENTS
Net decrease in cash and equivalents (4,030) (150)
Cash and equivalents, beginning of year 22,323 17,408
-------- ---------
Cash and equivalents, end of period $ 18,293 $ 17,258
======== =========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 27,741 $ 31,092
Income taxes paid 18,571 7,128
See accompanying notes to condensed consolidated financial statements.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. The condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements
included in the company's 2000 Annual Report. The condensed
consolidated balance sheet as of June 30, 2000 has been derived from
the audited balance sheet included in the company's 2000 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 and six months ended December 31, 2000 and 1999 are not
necessarily indicative of the results to be expected for a full fiscal
year. Unless otherwise specified, any reference to a "year" is to a
fiscal year ended June 30. Certain amounts in the prior years'
consolidated financial statements have been reclassified to conform
with the current year presentation.
2. On July 20, 2000, the company proposed to the Board of Directors of JLK
Direct Distribution Inc., an 83-percent owned subsidiary of the
company, to acquire the outstanding shares of JLK it does not already
own. On September 11, 2000, the company and JLK announced that they
entered into a definitive merger agreement for the company to acquire
all the outstanding minority shares. Pursuant to the agreement, JLK
agreed to commence a cash tender offer for all of its shares of Class A
Common Stock at a price of $8.75 per share. The tender offer commenced
on October 3, 2000 and expired on November 15, 2000 resulting in JLK
reacquiring the 4.3 million shares for $37.5 million. Following JLK's
purchase of shares in the tender offer, the company acquired the
remainder of the minority shares at the same price in a merger. The
company incurred transaction costs of $2.9 million, which were included
in the total cost of the transaction. JLK incurred costs of $2.0
million associated with the transaction, which were expensed as
incurred. The transaction was unanimously approved by the JLK Board of
Directors, including its special committee comprised of independent
directors of the JLK Board.
In July 2000, the company, JLK and the JLK directors (including one
former director) were named as defendants in several putative class
action lawsuits. The lawsuits seek an injunction, rescission, damages,
costs and attorney fees in connection with the company's proposal to
acquire the outstanding stock of JLK not owned by the company.
On November 3, 2000, the parties to the lawsuits entered into a
Memorandum of Understanding (MOU) with respect to a proposed settlement
of the lawsuits. The proposed settlement would provide for complete
releases of the defendants, as well as among other persons their
affiliates and representatives, and would extinguish and enjoin all
claims that have been, could have been or could be asserted by or on
behalf of any member of the class against the defendants which in any
manner relate to the allegations, facts, or other matters raised in the
lawsuits or which otherwise relate in any manner to the agreement, the
offer and the merger. The MOU also provides, among other matters, for
the payment by JLK of up to approximately $0.3 million in attorneys'
fees and expenses to plaintiffs' counsel. No payment is to be made for
liability or damages. The final settlement of the lawsuits, including
the amount of attorneys' fees and expenses to be paid, is subject to
the execution of a definitive stipulation of settlement and to court
approval.
3. 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
U.S. inventories and the first-in, first-out (FIFO) or average cost
methods for other inventories. The company used the LIFO method of
valuing its inventories for approximately 47 percent of total
inventories at December 31, 2000. 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.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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Inventories as of the balance sheet dates consisted of the following
(in thousands):
December 31, June 30,
2000 2000
---- ----
Finished goods $290,585 $306,334
Work in process and powder blends 95,137 96,101
Raw materials and supplies 33,448 35,707
-------- --------
Inventory at current cost 419,170 438,142
Less LIFO valuation (29,710) (27,257)
-------- --------
Total inventories $389,460 $410,885
======== ========
4. The company has been involved in various environmental cleanup and
remediation activities at several of its manufacturing facilities. In
addition, the company is currently named as a potentially responsible
party (PRP) at several Superfund sites in the United States. In
December 1999, the company recorded a remediation reserve of $3.0
million with respect to its involvement in these matters, which was
recorded as a component of operating expense. This represents
management's best estimate of its undiscounted future obligation based
on its evaluations and discussions with outside counsel and independent
consultants, and the current facts and circumstances related to these
matters. The company recorded this liability because certain events
occurred, including sufficient progress made by the government and the
PRPs in the identification of other PRPs and review of potential
remediation solutions, that clarified the level of involvement in these
matters by the company and its relationship to other PRPs. This led the
company to conclude that it was probable that a liability had been
incurred.
In addition to the amount currently reserved, the company may be
subject to loss contingencies related to these matters estimated to be
up to an additional $3.3 million. The company believes that such
undiscounted unreserved losses are reasonably possible but are not
currently considered to be probable of occurrence. The reserved and
unreserved liabilities could change substantially in the near term due
to factors such as the nature and extent of contamination, changes in
remedial requirements, technological changes, discovery of new
information, the financial strength of other PRPs and the
identification of new PRPs.
The company maintains a Corporate Environmental, Health and Safety
(EH&S) Department, as well as an EH&S Policy Committee, to ensure
compliance with environmental regulations and to monitor and oversee
remediation activities. In addition, the company has established an
EH&S administrator at 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 basis, management establishes or adjusts
financial provisions and reserves for environmental contingencies in
accordance with Statement of Financial Accounting Standard (SFAS) No.
5, "Accounting for Contingencies."
5. For purposes of determining the number of dilutive shares outstanding,
weighted average shares outstanding for basic earnings per share
calculations were increased due to the dilutive effect of unexercised
stock options by 164,457 and 145,834 for the three months ended
December 31, 2000 and 1999, respectively and 95,951 and 108,417 for the
six months ended December 31, 2000 and 1999, respectively.
Earnings per share amounts for each quarter are required to be computed
independently and, therefore, may not equal the amount computed for a
six-month period.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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6. Comprehensive income for the three and six months ended December 31,
2000 and 1999 is as follows (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
Net income $13,524 $ 8,244 $22,866 $18,157
Cumulative effect of change in accounting
principle, net of tax -- -- 1,571 --
Unrealized loss on derivatives designated and
qualified as cash flow hedges, net of tax (1,838) -- (2,140) --
Reclassification of unrealized gains or losses
on matured derivatives, net of tax (455) -- (513) --
Unrealized loss on marketable equity securities
available-for-sale, net of tax (4,253) (1,328) (5,871) (3,326)
Minimum pension liability adjustment, net of tax (46) 73 1 47
Foreign currency translation adjustments 3,016 (6,968) (7,111) (2,906)
------- ------- ------- -------
Comprehensive income $ 9,948 $ 21 $ 8,803 $11,972
======= ======= ======= =======
The components of accumulated other comprehensive loss consist of the
following (in thousands):
December 31, June 30,
2000 2000
---- ----
Unrealized gain on marketable equity securities
available-for-sale, net of tax $ 2,792 $ 8,663
Unrealized losses on derivatives designated and
qualified as cash flow hedges, net of tax (1,082) --
Minimum pension liability adjustment, net of tax (849) (850)
Foreign currency translation adjustments (62,167) (55,056)
-------- --------
Total accumulated other comprehensive loss $(61,306) $(47,243)
======== ========
7. On July 1, 2000, SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," was adopted resulting in the recording of
current assets of $1.6 million, long-term assets of $1.4 million,
current liabilities of $1.3 million, long-term liabilities of $0.7
million, a decrease in accumulated other comprehensive loss of $1.6
million, net of tax, and a loss from the cumulative effect from the
change in accounting principle of $0.6 million, net of tax.
Forward contracts, purchased options and range forward contracts,
designated as cash flow hedges, hedge anticipated cash flows from
cross-border intercompany sales of product and services. These
contracts mature at various times through October 2001. Gains and
losses realized on these contracts at maturity are recorded in
accumulated other comprehensive loss, net of tax, and are recognized as
a component of other expense, net when the underlying sales of product
or services are recognized into earnings. The company recognized
expense of $0.1 million and $0.2 million, as a component of other
expense, net, for the three and six months ended December 31, 2000,
respectively, related to hedge ineffectiveness. Floating-to-fixed
interest rate swap agreements, designated as cash flow hedges, hedge
the company's floating rate debt and mature at various times through
June 2003. The fair value of these contracts is recorded in the balance
sheet, with the offset to accumulated other comprehensive loss, net of
tax. Forward contracts hedging significant cross-border intercompany
loans are considered other derivatives and therefore, not eligible for
hedge accounting. These contracts are recorded at fair value in the
balance sheet, with the offset to other expense, net. Based upon
foreign exchange and interest rates at December 31, 2000, the company
expects to recognize net current assets of $0.4 million into earnings
in the next 12 months related to all derivative instruments.
In December 2000, the company entered into Euro-denominated forward
contracts to hedge the foreign exchange exposure in the company's net
investment in Euro-based subsidiaries. The company's objective for
entering into these contracts is to reduce its exposure to fluctuations
in accumulated other comprehensive loss due to exchange rate
fluctuations. These forward contracts had a notional amount of EUR
212.0 million and matured in January 2001. At December 31, 2000, the
company recorded the fair value of these contracts, net of tax, of $4.1
million as a reduction of the cumulative translation adjustment.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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8. In the September 2000 quarter, the company's management began to
implement a business improvement plan in the JLK/Industrial Supply
segment. For the three and six months ended December 31, 2000, the
company recorded a restructuring and asset impairment charge of $0.2
million and $1.6 million, respectively, associated with the closure of
eight underperforming satellite locations and $0.5 million and $0.7
million, respectively, for severance for certain individuals. This
includes a $0.3 million noncash writedown of the book value of certain
property, plant and equipment, net of salvage value, that management
determined would no longer be utilized in ongoing operations. The costs
accrued for these plans were based on management estimates using the
latest information available at the time that the accrual was
established. Through December 31, 2000, the costs charged against the
accrual for satellite closures and employee severance were $0.4 million
and $0.4 million, respectively. The company incurred period costs of
$0.1 million related to these initiatives in the December 2000 quarter
which were included in operating expense as incurred. The company
continues to review its business strategies and pursue other
cost-reduction activities in all business segments, some of which
could result in future charges.
In 2000, the company announced plans to close, consolidate or downsize
several plants, warehouses and offices, and associated work force
reductions as part of its overall plan to increase asset utilization
and financial performance, and to reposition the company to become the
premier tooling solutions supplier. The costs charged against the
restructuring accrual for the 2000 programs as of December 31, 2000
were as follows (in thousands):
June 30, Cash December 31,
2000 Expenditures Adjustments 2000
---- ------------ ----------- ----
Employee severance $2,533 $(1,830) $(52) $ 651
Facility rationalizations 3,518 (255) -- 3,263
------ ------- ---- ------
Total $6,051 $(2,085) $(52) $3,914
====== ======= ==== ======
Through December 31, 2000, the company incurred period costs of $0.1
million related to these initiatives which were included in cost of
goods sold as incurred. The adjustment to the accrual for employee
severance is due to a reduction in actual amounts paid to certain
individuals compared to what was initially anticipated. This adjustment
was recorded as a component of restructuring and asset impairment
charge.
In 1999, management implemented restructuring plans including several
programs to reduce costs, improve operations and enhance customer
satisfaction. Accruals for these 1999 programs were $1.3 million at
December 31, 2000. Costs charged against the accrual for the voluntary
early retirement plan and the plant closure through December 31, 2000
were $0.2 million and $0.1 million, respectively.
9. In September 2000, management reorganized the financial reporting of
its operations to focus on global business units consisting of
Metalworking Services & Solutions Group (MSSG), Advanced Materials
Solutions Group (AMSG) and JLK/Industrial Supply, and corporate
functional shared services. The results for all periods presented have
been restated to conform to the new reporting structure. The company's
external sales, intersegment sales and operating income by segment for
the three and six months ended December 31, 2000 and 1999 are as
follows (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
External sales:
MSSG $244,065 $253,450 $490,881 $495,614
AMSG 83,613 82,936 170,392 167,736
JLK/Industrial Supply 112,843 117,542 229,953 233,521
-------- -------- -------- --------
Total external sales $440,521 $453,928 $891,226 $896,871
======== -------- ======== ========
Intersegment sales:
MSSG $ 25,274 $ 28,567 $ 49,240 $ 70,470
AMSG 6,498 5,624 13,672 12,228
JLK/Industrial Supply 948 2,187 4,289 4,523
-------- -------- -------- --------
Total intersegment sales $ 32,720 $ 36,378 $ 67,201 $ 87,221
======== ======== ======== ========
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Total sales:
MSSG $269,339 $282,017 $540,121 $566,084
AMSG 90,111 88,560 184,064 179,964
JLK/Industrial Supply 113,791 119,729 234,242 238,044
-------- -------- -------- --------
Total sales $473,241 $490,306 $958,427 $984,092
======== ======== ======== ========
Operating income:
MSSG $ 31,014 $ 26,049 $ 58,936 $ 55,306
AMSG 8,735 7,941 19,922 18,564
JLK/Industrial Supply 4,352 7,089 4,904 14,068
Corporate and eliminations (5,945) (9,492) (13,235) (22,512)
-------- -------- -------- --------
Total operating income $ 38,156 $ 31,587 $ 70,527 $ 65,426
======== ======== ======== ========
JLK/Industrial Supply operating income for the three and six months
ended December 31, 2000 was reduced by $0.7 million and $2.3 million,
respectively, related to restructuring and asset impairment charges,
and $0.3 million and $2.0 million, respectively, of costs primarily
related to the tender offer to acquire the outstanding shares of JLK.
MSSG operating income for the three and six months ended December 31,
1999 was reduced by $3.5 million related to asset impairment charges,
and costs associated with employee severance and product and facility
rationalizations. AMSG operating income for the three and six months
ended December 31, 1999 was reduced by $0.4 million related to asset
impairment charges and costs associated with employee severance.
Corporate operating income for the three and six months ended December
31, 1999 was reduced by $3.0 million and $0.2 million related to
environmental remediation costs and costs associated with employee
severance, respectively. MSSG operating income for the six months ended
December 31, 1999 includes a gain of $4.7 million on the sale of
inventory to the JLK/Industrial Supply segment. The elimination of this
gain from consolidated results is included in Corporate and
eliminations.
The company's assets by segment at December 31, 2000 and June 30, 2000
are as follows (in thousands):
December 31, 2000 June 30, 2000
----------------- -------------
Assets:
MSSG $ 940,125 $ 978,188
AMSG 457,796 475,741
JLK/Industrial Supply 293,265 287,682
Corporate 170,366 199,510
---------- ----------
Total assets $1,861,552 $1,941,121
========== ==========
10. In September 2000, SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125" was issued. SFAS No. 140 revises
criteria for accounting for asset securitizations, other
financial-asset transfers, and collateral and introduces new
disclosures, but otherwise carries forward most of SFAS No. 125's
provisions without amendment. SFAS No. 140 has an immediate impact
through new disclosure requirements and amendments of the collateral
provisions of SFAS No. 125. These changes must be applied for fiscal
years ending after December 15, 2000. The company is currently
evaluating the effects of SFAS No. 140 and is preparing a plan for
implementation.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
In September 2000, the Emerging Issues Task Force (EITF) finalized EITF
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs", to
address the diversity in the income statement classification of amounts
charged to customers for shipping and handling, as well as for costs
incurred related to shipping and handling. The Issue requires all
amounts billed to a customer in a sale transaction related to shipping
and handling be classified as revenue. The Issue further requires
companies to adopt and disclose a policy on the accounting for shipping
and handling costs. Such costs may not be netted against revenue,
however, disclosure of the amount and classification of these costs is
required. This Issue becomes effective for the June 2001 quarter and
should not affect reported earnings, however, it may result in the
reclassification of amounts in previously reported financial
statements. The company is currently evaluating the effects of this
Issue and is preparing a plan for implementation.
11. On December 20, 2000, the company entered into a EUR 212.0 million
Euro-denominated revolving credit facility (Euro Credit Agreement) to
hedge the foreign exchange exposure in the company's net investment in
Euro-based subsidiaries, to take advantage of Euro-based borrowing
rates that are currently lower than the borrowing rates available to
the company under the Bank Credit Agreement and to diversify the
company's interest rate exposure. Amounts borrowed under the Euro
Credit Agreement are to be used to repay indebtedness under the Bank
Credit Agreement, and to the extent the Bank Credit Agreement is
repaid, for working capital and general corporate purposes. At December
31, 2000, the Euro Credit Agreement bears interest at EURIBOR plus
1.00%, includes a commitment fee of 0.275% of the unused balance and
matures in December 2003.
There were no amounts outstanding under the Euro Credit Agreement at
December 31, 2000. On January 8, 2001, the company borrowed EUR 212.0
million under this facility to meet its obligation under the
Euro-denominated forward contracts. The proceeds from the
Euro-denominated forward contracts of $191.1 million were used to repay
amounts borrowed under the Bank Credit Agreement. Subsequently, the
availability under the Bank Credit Agreement was permanently reduced to
$700.0 million.
The company has designated the foreign exchange exposure under the Euro
Credit Agreement as a hedge of the company's net investment in
Euro-based subsidiaries. The company's objective for this designation
is to reduce its exposure to fluctuations in accumulated other
comprehensive loss due to exchange rate fluctuations. Future changes in
the value of borrowings under the Euro Credit Agreement due to exchange
rate fluctuations will be recorded as a component of cumulative
translation adjustment, net of tax.
9
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
SALES
Sales for the December 2000 quarter were $440.5 million, a decline of three
percent from $453.9 million in the year-ago quarter. Sales increased four
percent excluding unfavorable foreign currency effects of four percent and fewer
workdays in the December 2000 quarter. Sales benefited from broad-based growth
in Europe despite weakening in North American end markets, particularly
automotive.
Sales for the six months ended December 31, 2000 were $891.2 million compared to
$896.9 million in the same period a year ago, a decline of one percent. Sales
increased five percent excluding unfavorable foreign currency effects of three
percent and fewer workdays in the six months ended December 31, 2000. Sales were
affected by the factors mentioned above.
GROSS PROFIT MARGIN
The consolidated gross profit margin for the December 2000 quarter was 37.9
percent, a 70 basis point improvement compared with 37.2 percent in the prior
year. This increase is the result of implementing lean manufacturing techniques,
resulting in ongoing reductions in manufacturing variances coupled with pricing
discipline.
Consolidated gross profit margin was 37.7 percent for the six months ended
December 31, 2000, compared with 37.0 percent in same period a year ago. Period
costs included in gross profit in 2001 and 2000 were $0.1 million related to the
Kingswinford plant downsizing and $2.0 million related to the Solon, Ohio plant
closure, respectively. Excluding these costs, gross profit margin was affected
by the factors mentioned above.
OPERATING EXPENSE
Consolidated operating expense for the December 2000 quarter was $121.8 million,
including $0.3 million of costs primarily related to the tender offer to acquire
the outstanding shares of JLK, compared to $126.7 million in the same period a
year ago. Operating expense for the December 1999 quarter included a $3.0
million charge for environmental remediation costs. Excluding these costs,
operating expense declined two percent due to cost reduction efforts coupled
with productivity programs aimed at reducing the overall cost structure. Despite
the decline, the company incurred costs of approximately $4.0 million on
investments for strategic initiatives, new sales and marketing programs,
productivity programs and the company's e-commerce initiative.
For the six months ended December 31, 2000, operating expense was $250.2
million, including $2.0 million of costs related primarily to the JLK tender
offer, compared to $249.2 million for the same period a year ago, which includes
a $3.0 million charge for environmental remediation costs. Operating expense
increased due to the investment in strategic initiatives, partially offset by
continued cost reduction efforts.
10
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESTRUCTURING AND ASSET IMPAIRMENT CHARGE
In the September 2000 quarter, the company's management began to implement a
business improvement plan in the JLK/Industrial Supply segment. Management
expects to incur total costs of $15 to $20 million associated with this plan.
For the three and six months ended December 31, 2000, the company recorded a
restructuring and asset impairment charge of $0.2 million and $1.6 million,
respectively, associated with the closure of eight underperforming satellite
locations and $0.5 million and $0.7 million, respectively, for severance for
certain individuals. This includes a $0.3 million noncash writedown of the book
value of certain property, plant and equipment, net of salvage value, that
management determined would no longer be utilized in ongoing operations. The
costs accrued for these plans were based on management estimates using the
latest information available at the time that the accrual was established.
Through December 31, 2000, the costs charged against the accrual for satellite
closures and employee severance were $0.4 million and $0.4 million,
respectively. The company incurred period costs of $0.1 million related to these
initiatives in the December 2000 quarter which were included in operating
expense as incurred. Annualized benefits of $1.0 million are expected to be
realized beginning in the June 2001 quarter. The company continues to review its
business strategies and pursue other cost-reduction activities in all business
segments, some of which could result in future charges.
In 2000, the company announced plans to close, consolidate or downsize several
plants, warehouses and offices, and associated work force reductions as part of
its overall plan to increase asset utilization and financial performance, and to
reposition the company to become the premier tooling solutions supplier. The
costs charged against the restructuring accrual for the 2000 programs as of
December 31, 2000 were as follows (in thousands):
June 30, Cash December 31,
2000 Expenditures Adjustments 2000
---- ------------ ----------- ----
Employee severance $2,533 $(1,830) $(52) $ 651
Facility rationalizations 3,518 (255) -- 3,263
------ ------- ---- ------
Total $6,051 $(2,085) $(52) $3,914
====== ======= ==== ======
Through December 31, 2000, the company incurred period costs of $0.1 million
related to these initiatives which were included in cost of goods sold as
incurred. The adjustment to the accrual for employee severance is due to a
reduction in actual amounts paid to certain individuals compared to what was
initially anticipated. This adjustment was recorded as a component of
restructuring and asset impairment charge.
In 1999, management implemented restructuring plans including several programs
to reduce costs, improve operations and enhance customer satisfaction. Accruals
for these 1999 programs were $1.3 million at December 31, 2000. Costs charged
against the accrual for the voluntary early retirement plan and the plant
closure through December 31, 2000 were $0.2 million and $0.1 million,
respectively.
INTEREST EXPENSE
Interest expense for the December 2000 quarter declined to $13.4 million due to
reduced debt levels, partially offset by higher borrowing rates. Average U.S.
borrowing rates of 7.48 percent were up 89 basis points from a year ago due to
Federal Reserve rate increases.
Interest expense for the six months ended December 31, 2000 declined to $26.6
million due to reduced debt levels, partially offset by higher borrowing rates
as the average U.S. borrowing rate was 7.46 percent in 2001, compared to 6.49
percent for 2000.
OTHER EXPENSE, NET
Other expense for the December 2000 and 1999 quarters included fees of $1.6
million and $1.3 million, respectively, incurred in connection with the accounts
receivable securitization program. In 1999, this was partially offset by gains
from the sale of miscellaneous underutilized assets and dividend income. For the
six months ended December 31, 2000 and 1999, other expense included fees of $3.2
million and $2.5 million, respectively, related to the accounts receivable
securitization program. In the six months ended December 31, 1999, this was
partially offset by a net one-time gain of $1.4 million from the sale of
miscellaneous underutilized assets.
11
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
INCOME TAXES
The effective tax rate for the three and six months ended December 31, 2000 was
38.8 percent and 39.5 percent, respectively, compared to an effective tax rate
of 44.5 percent for the comparable periods in the prior year. The effective rate
for the December 2000 quarter reflects the latest full-year income projections
and regulatory changes. The decline in the effective tax rate is attributable to
successful tax planning initiatives in Europe as well as the extension of the
Foreign Sales Corporation tax benefit in the United States.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
In November 1999, the company repaid its term loan under the Bank Credit
Agreement. This resulted in an acceleration of the write-off of deferred
financing fees of $0.4 million, which has been recorded as an extraordinary item
of $0.3 million, net of tax.
CHANGE IN ACCOUNTING PRINCIPLE
On July 1, 2000, SFAS No. 133 was adopted, resulting in the recording of a loss
from the cumulative effect from the change in accounting principle of $0.6
million, net of tax, or $0.02 per share. The loss primarily relates to the
write-down of previously paid option premiums.
NET INCOME
Net income for the quarter ended December 31, 2000 was $13.5 million, or $0.44
per share, compared to net income of $8.2 million, or $0.27 per share, in the
same quarter last year. Excluding special charges in both quarters, net income
was $14.2 million, or $0.47 per share in the December 2000 quarter, compared to
$12.4 million, or $0.41 per share, in the same quarter last year. The earnings
improvement is attributable to higher gross margins reflecting improved
efficiency from lean manufacturing techniques and price discipline, and a
reduction in the company's effective tax rate. Special charges in the December
2000 quarter of $1.1 million, or $0.03 per share, related to the JLK business
improvement plan and costs associated with the tender offer to acquire the
outstanding shares of JLK. Special charges in the December 1999 quarter were
$7.5 million, or $0.14 per share, related to business improvement programs in
the core businesses, a charge for environmental remediation and an extraordinary
loss on early extinguishment of debt.
Net income for the six months ended December 31, 2000 was $22.9 million, or
$0.75 per share, compared to $18.2 million, or $0.60 per share, in the same
period last year and was affected by the same factors mentioned above.
METALWORKING SERVICES & SOLUTIONS GROUP
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
External sales $244,065 $253,450 $490,881 $495,614
Intersegment sales 25,274 28,567 49,240 70,470
Operating income 31,014 26,049 58,936 55,306
MSSG sales increased two percent compared to the December 1999 quarter,
excluding unfavorable foreign exchange effects of six percent due to the
stronger U.S. dollar. Most major markets experienced year-over-year growth, with
particular strength in Europe. In North America, sales were down three percent
as gains in the machine tool builder and light engineering markets were more
than offset by a decline in demand in the automotive market, driven by increased
December shutdowns at customer plants. In Europe, sales increased nine percent,
in local currency, due to broad-based growth reflecting strength in the machine
tool and engineering markets. Demand in the European automotive end market
remained strong, though at a diminished rate compared to the prior quarter.
Sales in Asia continued to grow, up three percent compared to a year ago.
12
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Operating income was $31.0 million compared to $26.0 million last year. The
December 1999 quarter results were reduced by $3.5 million related to asset
impairment charges, and costs associated with employee severance and product and
facility rationalizations. Additionally, the company incurred period costs of
$0.6 million in the December 1999 quarter related to the Solon plant closing,
which were included in cost of goods sold as incurred. Excluding these charges,
operating income increased $0.9 million due primarily to improved manufacturing
performance from operational improvement programs and lean manufacturing
techniques.
For the six months ended December 31, 2000, sales increased three percent
compared to the prior year, excluding unfavorable foreign exchange effects of
four percent, due to the same factors mentioned above. Operating income
increased to $58.9 million and was affected by the same factors as mentioned
above. Additionally, the results for the six months ended December 31, 1999
include a gain of $4.7 million on the sale of $12.7 million of inventory to the
JLK/Industrial Supply segment. This purchase by JLK was necessary in order for
JLK to have access to Kennametal's branded inventory subsequent to the new
business system implementation. The company incurred period costs of $0.1
million related to the Kingswinford plant downsizing in the six months ended
December 31, 2000, compared to $2.0 million related to the Solon plant closing
in the six months ended September 30, 1999, both of which were included in cost
of goods sold as incurred.
ADVANCED MATERIALS SOLUTIONS GROUP
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
External sales $83,613 $82,936 $170,392 $167,736
Intersegment sales 6,498 5,624 13,672 12,228
Operating income 8,735 7,941 19,922 18,564
AMSG sales increased five percent, from the December 1999 quarter, excluding
unfavorable foreign exchange effects of four percent. Continued strength in
electronics, driven by strong demand for computer circuit boards and cellular
phones, and higher demand for products used for oil and gas exploration,
contributed to the growth in sales. This was partially offset by soft demand for
construction tools in North America as highway funds are being spent on
infrastructure programs and new roads.
Operating income increased to $8.7 million compared to $7.9 million a year ago
due to margin improvement in the energy and engineered products businesses from
higher sales levels, partially offset by weakness in the high-margin
construction tool business and operating inefficiencies in the electronics
business due to accelerated growth. AMSG operating income for the three months
ended December 31, 1999 was reduced by $0.4 million related to asset impairment
charges and costs associated with employee severance.
For the six months ended December 31, 2000, AMSG sales increased five percent
excluding unfavorable foreign currency effects of three percent due to the
factors mentioned above. Operating income increased to $19.9 million due to the
factors mentioned above. Additionally, operating income for the six months ended
December 31, 1999 was reduced by the restructuring and asset impairment charges
of $0.4 million as mentioned above.
13
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
JLK/INDUSTRIAL SUPPLY
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2000 1999 2000 1999
---- ---- ---- ----
External sales $112,843 $117,542 $229,953 $233,521
Intersegment sales 948 2,187 4,289 4,523
Operating income 4,352 7,089 4,904 14,068
Industrial Supply sales declined three percent, excluding unfavorable foreign
exchange effects of one percent, compared to last year as higher sales through
Full Service Supply (FSS) programs, which contributed two percent to sales
growth, were offset by a decline in sales through the catalog business and
acquired distributors of six percent. The increase in FSS sales is due to the
continued penetration in existing accounts coupled with curtailed growth in the
December 1999 quarter as a result of the implementation of its new business
system. Sales in the catalog business and at the acquired distributors declined
due to reduced demand in the automotive end market, including increased
shutdowns at customer plants.
Operating income was $4.4 million and included a restructuring and asset
impairment charge of $0.7 million, special charges of $0.3 million related to
the tender offer to acquire the outstanding shares of JLK and $0.1 million
related to period costs associated with the satellite closures. Excluding these
charges, operating income of $5.5 million was primarily affected by lower sales
levels, partially offset by higher margins in the catalog business due to a
better product mix and operational improvement. As part of a business
improvement plan, JLK recorded a restructuring and asset impairment charge
associated with the closure of three underperforming satellite locations and
severance for certain individuals.
For the six months ended December 31, 2000, sales declined one percent excluding
unfavorable foreign exchange effects of one percent, due to the factors
mentioned above. Operating income of $4.9 million was reduced by $2.3 million
related to restructuring and asset impairment charges and $2.0 million of costs
primarily related to the tender offer to acquire the outstanding shares of JLK.
Excluding these costs, operating income was reduced due to overall lower gross
margins in the FSS business due to a shift in end markets served, lower sales
levels and higher operating expense due to higher shipping costs incurred to
provide enhanced customer service.
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 six months ended December
31, 2000, the company generated $87.2 million in cash flow from operations, a
decline of $26.3 million compared to a year ago. The decline resulted primarily
from lower working capital improvements of $24.3 million.
Net cash used for investing activities was $65.0 million, an increase of $49.7
million compared to the prior year. The increase is due primarily to the
purchase of the outstanding shares of JLK for $40.4 million coupled with a $5.1
million reduction in proceeds from the disposal of underutilized assets that
occurred in the six months ended December 31, 1999.
Net cash used for financing activities was $27.9 million, a decline of $70.4
million compared to the prior year. This decline is due to lower debt repayments
of $82.1 million coupled with higher company contributions of capital stock to
U.S. defined contribution pension plans of $5.3 million. This was partially
offset by treasury stock repurchases of $16.5 million. Lower debt repayments are
the result of the purchase of the JLK minority interest, lower cash flow from
operations and the repurchase of treasury stock.
The company generated free operating cash flow (FOCF) of $81.1 million and
$102.0 million for the six months ended December 31, 2000 and 1999,
respectively. The decline in FOCF is primarily due to lower working capital
improvements in the six months ended December 31, 2000.
14
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
In October 2000, the company continued its program to repurchase, from time to
time, up to a total of 1.6 million shares of its outstanding capital stock for
investment or other general corporate purposes. This repurchase program was
announced on January 31, 1997. During October 2000, the company purchased
600,000 shares of its capital stock at a total cost of $16.5 million, bringing
the total purchased under the authority of this program to approximately 1.4
million shares. The repurchases were financed principally by cash from
operations and short-term borrowings. Additionally, the Board of Directors
authorized the company to repurchase, from time to time, up to a total of 2.0
million additional shares of its outstanding capital stock. No repurchases have
been made under this new program. Repurchases may be made from time to time in
the open market, in negotiated or other permissible transactions.
On December 20, 2000, the company entered into a EUR 212.0 million
Euro-denominated revolving credit facility (Euro Credit Agreement) to hedge the
foreign exchange exposure in the company's net investment in Euro-based
subsidiaries, to take advantage of Euro-based borrowing rates that are currently
lower than the borrowing rates available to the company under the Bank Credit
Agreement and to diversify the company's interest rate exposure. Amounts
borrowed under the Euro Credit Agreement are to be used to repay indebtedness
under the Bank Credit Agreement, and to the extent the Bank Credit Agreement is
repaid, for working capital and general corporate purposes. At December 31,
2000, the Euro Credit Agreement bears interest at EURIBOR plus 1.00%, includes a
commitment fee of 0.275% of the unused balance and matures in December 2003.
There were no amounts outstanding under the Euro Credit Agreement at December
31, 2000. On January 8, 2001, the company borrowed EUR 212.0 million under this
facility to meet its obligation under the Euro-denominated forward contracts.
The proceeds from the Euro-denominated forward contracts of $191.1 million were
used to repay amounts borrowed under the Bank Credit Agreement. Subsequently,
the availability under the Bank Credit Agreement was permanently reduced to
$700.0 million.
FINANCIAL CONDITION
Total assets were $1,861.6 million at December 31, 2000, a four percent decline
from June 30, 2000. Net working capital was $414.6 million, up four percent from
$397.4 million at June 30, 2000. The ratio of current assets to current
liabilities at December 31, 2000 was 2.5 compared to 2.1 at June 30, 2000.
Primary working capital as a percentage of sales (PWC%) at December 31, 2000 was
28.0 percent, compared to 29.4 percent at June 30, 2000 and 30.9 percent at
December 31, 1999. The improvements in net working capital, the current ratio
and PWC% are primarily due to company sponsored programs to reduce primary
working capital. Additionally, net working capital and the current ratio
benefited from repayment of $50.9 million of short-term notes payable to banks.
The total debt-to-total capital ratio was 46.7 percent at December 31, 2000, an
increase from 45.6 percent at June 30, 2000 and a decline from 48.9 percent at
December 31, 1999. The increase from June 30, 2000 is due to the reduction in
minority interest from the acquisition of the JLK minority shares and the share
repurchase program. The decline from December 31, 1999 is due to the $83.9
million reduction in debt during this twelve-month period, partially offset by
lower minority interest.
15
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
ACQUISITION OF JLK MINORITY INTEREST
On July 2000, the company proposed to the Board of Directors of JLK Direct
Distribution Inc., an 83-percent owned subsidiary of the company, to acquire the
outstanding shares of JLK it does not already own. On September 11, 2000, the
company and JLK announced that they entered into a definitive merger agreement
for the company to acquire all the outstanding minority shares. Pursuant to the
agreement, JLK agreed to commence a cash tender offer for all of its shares of
Class A Common Stock at a price of $8.75 per share. The tender offer commenced
on October 3, 2000 and expired on November 15, 2000 resulting in JLK reacquiring
the 4.3 million shares for $37.5 million. Following JLK's purchase of shares in
the tender offer, the company acquired the remainder of the minority shares at
the same price in a merger. The company incurred transaction costs of $2.9
million, which were included in the total cost of the transaction. JLK incurred
costs of $2.0 million associated with the transaction, which were expensed as
incurred. The transaction was unanimously approved by the JLK Board of
Directors, including its special committee comprised of independent directors of
the JLK Board.
In July 2000, the company, JLK and the JLK directors (including one former
director) were named as defendants in several putative class action lawsuits.
The lawsuits seek an injunction, rescission, damages, costs and attorney fees in
connection with the company's proposal to acquire the outstanding stock of JLK
not owned by the company.
On November 3, 2000, the parties to the lawsuits entered into a Memorandum of
Understanding (MOU) with respect to a proposed settlement of the lawsuits. The
proposed settlement would provide for complete releases of the defendants, as
well as among other persons their affiliates and representatives, and would
extinguish and enjoin all claims that have been, could have been or could be
asserted by or on behalf of any member of the class against the defendants which
in any manner relate to the allegations, facts, or other matters raised in the
lawsuits or which otherwise relate in any manner to the agreement, the offer and
the merger. The MOU also provides, among other matters, for the payment by JLK
of up to approximately $0.3 million in attorneys' fees and expenses to
plaintiffs' counsel. No payment is to be made for liability or damages. The
final settlement of the lawsuits, including the amount of attorneys' fees and
expenses to be paid, is subject to the execution of a definitive stipulation of
settlement and to court approval.
STRATEGIC ALTERNATIVES
The company is considering strategic alternatives for two subsidiaries, Strong
Tool Company and Abrasive & Tool Specialties Company, including the possible
divestiture of these businesses or a portion thereof. In 2000, these businesses
represented approximately $90 million in sales. The company is currently not a
party to any written or oral agreement regarding the divestiture of these
businesses.
NEW ACCOUNTING STANDARDS
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a replacement of FASB
Statement No. 125" was issued. SFAS No. 140 revises criteria for accounting for
asset securitizations, other financial-asset transfers, and collateral and
introduces new disclosures, but otherwise carries forward most of SFAS No. 125's
provisions without amendment. SFAS No. 140 has an immediate impact through new
disclosure requirements and amendments of the collateral provisions of SFAS No.
125. These changes must be applied for fiscal years ending after December 15,
2000. The company is currently evaluating the effects of SFAS No. 140 and is
preparing a plan for implementation.
In September 2000, the Emerging Issues Task Force (EITF) finalized EITF Issue
00-10, "Accounting for Shipping and Handling Fees and Costs", to address the
diversity in the income statement classification of amounts charged to customers
for shipping and handling, as well as for costs incurred related to shipping and
handling. The Issue requires all amounts billed to a customer in a sale
transaction related to shipping and handling be classified as revenue. The Issue
further requires companies to adopt and disclose a policy on the accounting for
shipping and handling costs. Such costs may not be netted against revenue,
however, disclosure of the amount and classification of these costs is required.
This Issue becomes effective for the June 2001 quarter and should not affect
reported earnings, however, it may result in the reclassification of amounts in
previously reported financial statements. The company is currently evaluating
the effects of this Issue and is preparing a plan for implementation.
16
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" as defined by Section 21E
of the Securities Exchange Act of 1934, as amended. Actual results may differ
materially from those expressed or implied in the forward-looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to, the extent that the economic conditions in the United States and
Europe, and to a lesser extent, Asia Pacific are not sustained, risks associated
with integrating businesses, demands on management resources, risks associated
with international markets such as currency exchange rates, competition, and
risks associated with the implementation of restructuring actions and
environmental remediation activities. The company undertakes no obligation to
publicly release any revisions to forward-looking statements to reflect events
or circumstances occurring after the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
In December 2000, the company entered into Euro-denominated forward contracts to
hedge the foreign exchange exposure in the company's net investment in
Euro-based subsidiaries. The company's objective for entering into these
contracts is to reduce its exposure to fluctuations in accumulated other
comprehensive loss due to exchange rate fluctuations. These forward contracts
had a notional amount of EUR 212.0 million and matured in January 2001. At
December 31, 2000, the company recorded the fair value of these contracts, net
of tax, of $4.1 million as a reduction of the cumulative translation adjustment.
On December 20, 2000, the company entered into a EUR 212.0 million
Euro-denominated revolving credit facility (Euro Credit Agreement) to hedge the
foreign exchange exposure in the company's net investment in Euro-based
subsidiaries, to take advantage of Euro-based borrowing rates that are currently
lower than the borrowing rates available to the company under the Bank Credit
Agreement and to diversify the company's interest rate exposure. Amounts
borrowed under the Euro Credit Agreement are to be used to repay indebtedness
under the Bank Credit Agreement, and to the extent the Bank Credit Agreement is
repaid, for working capital and general corporate purposes. At December 31,
2000, the Euro Credit Agreement bears interest at EURIBOR plus 1.00%, includes a
commitment fee of 0.275% of the unused balance and matures in December 2003.
There were no amounts outstanding under the Euro Credit Agreement at December
31, 2000. On January 8, 2001, the company borrowed EUR 212.0 million under this
facility to meet its obligation under the Euro-denominated forward contracts.
The proceeds from the Euro-denominated forward contracts of $191.1 million were
used to repay amounts borrowed under the Bank Credit Agreement. Subsequently,
the availability under the Bank Credit Agreement was permanently reduced to
$700.0 million.
The company has designated the foreign exchange exposure under the Euro Credit
Agreement as a hedge of the company's net investment in Euro-based subsidiaries.
The company's objective for this designation is to reduce its exposure to
fluctuations in accumulated other comprehensive loss due to exchange rate
fluctuations. Future changes in the value of borrowings under the Euro Credit
Agreement due to exchange rate fluctuations will be recorded as a component of
cumulative translation adjustment, net of tax.
There were no additional material changes in the company's exposure to market
risk from June 30, 2000.
17
20
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
The information set forth in Part II, Item 4 of the company's September 30, 2000
Form 10-Q is incorporated by reference herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
(10) Material Contracts
10.1 Amendment to Credit Agreement with Mellon
Bank, N.A. and various creditors dated as of
December 6, 2000. Filed herewith.
10.2 Credit Agreement with Deutsche Bank AG and
various creditors dated as of December 20,
2000. Filed herewith.
10.3 Guarantee and Suretyship Agreement with
Deutsche Bank AG dated as of December 20,
2000. Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENNAMETAL INC.
Date: February 14, 2001 By: /s/ FRANK P. SIMPKINS
----------------------
Frank P. Simpkins
Corporate Controller and
Chief Accounting Officer
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