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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 MARCH 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
capital stock, as of the latest practicable date:
Title Of Each Class Outstanding at April 30, 2003
- ---------------------------------------- -----------------------------
Capital Stock, par value $1.25 per share 35,389,350
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KENNAMETAL INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended March 31, 2003 and 2002.................................................... 1
Condensed Consolidated Balance Sheets
March 31, 2003 (Unaudited) and June 30, 2002........................................................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months ended March 31, 2003 and 2002.............................................................. 3
Notes to Condensed Consolidated Financial Statements (Unaudited)....................................... 4
2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 15
3. Quantitative and Qualitative Disclosures about Market Risk............................................. 25
4. Controls and Procedures................................................................................ 25
PART II. OTHER INFORMATION
5. Other Information...................................................................................... 26
6. Exhibits and Reports on Form 8-K....................................................................... 26
Signatures............................................................................................. 27
Certifications......................................................................................... 28
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 Nine Months Ended
March 31, March 31,
--------------------------- ----------------------------
2003 2002 2003 2002
---- ---- ---- ----
OPERATIONS
Net sales $ 459,243 $ 393,852 $ 1,295,192 $ 1,180,844
Cost of goods sold 307,582 266,205 875,079 806,893
----------- ----------- ----------- -----------
Gross profit 151,661 127,647 420,113 373,951
Operating expense 122,592 95,695 343,104 288,711
Restructuring and asset impairment charge 3,269 3,944 11,649 22,650
Amortization of intangibles 1,196 728 3,310 2,107
----------- ----------- ----------- -----------
Operating income 24,604 27,280 62,050 60,483
Interest expense 8,979 7,421 27,058 25,076
Other (income) expense, net 713 (14) (414) (179)
----------- ----------- ----------- -----------
Income before provision for income taxes
and minority interest 14,912 19,873 35,406 35,586
Provision for income taxes 4,474 6,359 10,622 11,387
Minority interest 739 370 1,786 1,071
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle 9,699 13,144 22,998 23,128
Cumulative effect of change in accounting
principle, net of tax of $2,389 -- -- -- (250,406)
----------- ----------- ----------- -----------
Net income (loss) $ 9,699 $ 13,144 $ 22,998 $ (227,278)
=========== =========== =========== ===========
PER SHARE DATA
Basic earnings per share before cumulative
effect of change in accounting principle $ 0.28 $ 0.42 $ 0.65 $ 0.75
Cumulative effect of change in accounting
principle per share -- -- -- (8.08)
----------- ----------- ----------- -----------
Basic earnings (loss) per share $ 0.28 $ 0.42 $ 0.65 $ (7.33)
=========== =========== =========== ===========
Diluted earnings per share before cumulative
effect of change in accounting principle $ 0.27 $ 0.42 $ 0.65 $ 0.74
Cumulative effect of change in accounting
principle per share -- -- -- (7.96)
----------- ----------- ----------- -----------
Diluted earnings (loss) per share $ 0.27 $ 0.42 $ 0.65 $ (7.22)
=========== =========== =========== ===========
Dividends per share $ 0.17 $ 0.17 $ 0.51 $ 0.51
=========== =========== =========== ===========
Basic weighted average shares outstanding 35,243 31,089 35,137 31,002
=========== =========== =========== ===========
Diluted weighted average shares outstanding 35,480 31,553 35,412 31,454
=========== =========== =========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-1-
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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(in thousands)
March 31, June 30,
2003 2002
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 17,250 $ 10,385
Marketable equity securities available-for-sale 9,839 10,728
Accounts receivable, less allowance for
doubtful accounts of $22,449 and $12,671 235,908 179,101
Inventories 408,996 345,076
Deferred income taxes 81,651 71,375
Other current assets 34,447 20,719
----------- -----------
Total current assets 788,091 637,384
----------- -----------
Property, plant and equipment:
Land and buildings 247,173 227,539
Machinery and equipment 925,589 847,196
Less accumulated depreciation (696,554) (639,619)
----------- -----------
Net property, plant and equipment 476,208 435,116
----------- -----------
Other assets:
Investments in affiliated companies 12,141 11,681
Intangible assets, less accumulated amortization
of $78,989 and $75,390 491,987 367,992
Other 95,018 71,438
----------- -----------
Total other assets 599,146 451,111
----------- -----------
Total assets $ 1,863,445 $ 1,523,611
=========== ===========
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases $ 3,201 $ 16,554
Notes payable to banks 11,867 6,926
Accounts payable 120,981 101,586
Accrued income taxes 16,170 4,066
Accrued vacation pay 32,397 28,190
Accrued payroll 32,624 22,696
Restructuring liability 25,425 6,595
Other current liabilities 102,200 75,487
----------- -----------
Total current liabilities 344,865 262,100
----------- -----------
Long-term debt and capital leases, less current maturities 565,067 387,887
Deferred income taxes 38,382 52,570
Pension and other post-employment benefits 133,291 87,027
Other liabilities 7,259 9,394
----------- -----------
Total liabilities 1,088,864 798,978
----------- -----------
Minority interest in consolidated subsidiaries 18,070 10,671
----------- -----------
Commitments and contingencies -- --
SHAREOWNERS' EQUITY
Preferred stock, no par value; 5,000 shares authorized; none issued -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
37,529 and 37,383 shares issued 46,912 46,729
Additional paid-in capital 503,264 491,263
Retained earnings 312,149 307,631
Treasury shares, at cost; 2,220 and 2,573 shares held (67,938) (72,026)
Unearned compensation (9,258) (4,856)
Accumulated other comprehensive loss (28,618) (54,779)
----------- -----------
Total shareowners' equity 756,511 713,962
----------- -----------
Total liabilities and shareowners' equity $ 1,863,445 $ 1,523,611
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-2-
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------
(in thousands)
Nine Months Ended
March 31,
--------------------------
2003 2002
---- ----
OPERATING ACTIVITIES
Net income (loss) $ 22,998 $(227,278)
Adjustments for non-cash items:
Depreciation 58,509 53,130
Amortization 3,310 2,107
Stock-based compensation expense 7,682 7,930
Restructuring and asset impairment charges (181) 12,914
Cumulative effect of change in accounting principle, net of tax -- 250,406
Other 1,829 (3,168)
Changes in certain assets and liabilities (excluding acquisitions)
Accounts receivable 3,134 37,469
Accounts receivable securitization (2,286) 3,200
Inventories 14,644 25,948
Accounts payable and accrued liabilities 12,030 (31,886)
Other (6,235) (18,748)
--------- ---------
Net cash flow provided by operating activities 115,434 112,024
--------- ---------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (35,966) (30,349)
Disposals of property, plant and equipment 1,504 5,799
Acquisition, net of cash (165,521) --
Purchase of subsidiary stock (6,691) --
Other 1,267 (6,350)
--------- ---------
Net cash flow used for investing activities (205,407) (30,900)
--------- ---------
FINANCING ACTIVITIES
Net decrease in notes payable (13,320) (5,104)
Net decrease in revolver and other lines of credit (40,678) (53,022)
Term debt borrowings 186,665 455
Term debt repayments (23,473) (8,076)
Purchase of treasury stock -- (12,417)
Dividend reinvestment and employee benefit and stock plans 4,115 12,118
Cash dividends paid to shareowners (18,480) (15,807)
Other (1,060) (1,654)
--------- ---------
Net cash flow provided by (used for) financing activities 93,769 (83,507)
--------- ---------
Effect of exchange rate changes on cash and equivalents 3,069 148
--------- ---------
CASH AND EQUIVALENTS
Net increase (decrease) in cash and equivalents 6,865 (2,235)
Cash and equivalents, beginning of year 10,385 12,940
--------- ---------
Cash and equivalents, end of period $ 17,250 $ 10,705
========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 19,003 $ 24,705
Income taxes paid 793 27,078
Increase in fair value of interest rate swaps 19,025 --
Businesses acquired:
Fair value of assets acquired 303,117 --
Liabilities assumed 132,192 --
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-3-
KENNAMETAL INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION
Kennametal Inc. was incorporated in Pennsylvania in 1943 and maintains its
world headquarters in Latrobe, Pennsylvania. Kennametal Inc. and its
subsidiaries (collectively, "Kennametal") is a leading global manufacturer,
marketer and distributor of a broad range of cutting tools, tooling
systems, supplies and technical services, as well as wear-resistant parts.
We believe that our reputation for manufacturing excellence and
technological expertise and innovation in our principal products has helped
us achieve a leading market presence in our primary markets. We believe we
are the second largest global provider of metalcutting tools and tooling
systems. End users of our products include metalworking manufacturers and
suppliers in the aerospace, automotive, machine tool and farm machinery
industries, as well as manufacturers and suppliers in the highway
construction, coal mining, quarrying and oil and gas exploration
industries.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements, which include our accounts
and those of our majority-owned subsidiaries, should be read in conjunction
with the Notes to Consolidated Financial Statements included in our 2002
Annual Report. The condensed consolidated balance sheet as of June 30, 2002
was derived from the audited balance sheet included in our 2002 Annual
Report. These interim statements are unaudited; however, we believe that
all adjustments necessary for a fair presentation were made and all
adjustments are normal, recurring adjustments. The results for the nine
months ended March 31, 2003 and 2002 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. When used in
this Form 10-Q, unless the context requires otherwise, the terms "we,"
"our" and "us" refer to Kennametal Inc. and its subsidiaries. We
reclassified certain amounts in the prior years' consolidated financial
statements to conform with the current year presentation.
3. STOCK-BASED COMPENSATION
Stock options generally are granted to eligible employees at fair market
value at the date of grant. Options are exercisable under specific
conditions for up to 10 years from the date of grant. Under provisions of
the plans, participants may deliver stock, owned by the holder for at least
six months, in payment of the option price and receive credit for the fair
market value of the shares on the date of delivery.
Kennametal accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations using the intrinsic
value method. In addition to stock option grants, several plans permit the
award of restricted stock to directors, officers and key employees. Costs
associated with restricted stock grants are amortized to expense over the
vesting period. The Company has recognized $0.9 million, $0.4 million, $2.6
million and $1.0 million of stock-based compensation expense, net of tax,
related to stock awards and option grants for the three months and nine
months ended March 31, 2003 and 2002, respectively.
Kennametal's net income and earnings per share would have been reduced to
the pro forma amounts shown below if compensation cost had been determined
based on the fair value at the grant dates in accordance with SFAS Nos. 123
and 148, "Accounting for Stock-Based Compensation."
-4-
KENNAMETAL INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Quarter Ended Nine Months Ended
March 31, March 31,
-------------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported $ 9,699 $ 13,144 $ 22,998 $ (227,278)
Less: incremental compensation cost determined under
the fair value method, net of tax 1,416 911 4,250 2,624
--------- -------- --------- ----------
Pro forma net income (loss) $ 8,283 $ 12,233 $ 18,748 $ (229,902)
Basic earnings (loss) per share:
As reported $ 0.28 $ 0.42 $ 0.65 $ (7.33)
Pro forma 0.24 0.39 0.53 (7.42)
Diluted earnings (loss) per share:
As reported $ 0.27 $ 0.42 $ 0.65 $ (7.22)
Pro forma 0.23 0.39 0.53 (7.35)
4. ACQUISITIONS
On August 30, 2002, we purchased the Widia Group (Widia) in Europe and
India from Milacron Inc. for EUR188 million ($185.3 million) subject to a
purchase price adjustment. On February 12, 2003, Milacron Inc. and
Kennametal signed a settlement agreement with respect to the calculation of
the post-closing purchase price adjustment for the Widia acquisition
pursuant to which Milacron paid Kennametal EUR 18.8 million ($20.1 million)
in cash. The net cash purchase price of $166.5 million includes the actual
purchase price of $185.3 million less the settlement of $20.1 million plus
$5.6 million of direct acquisition costs ($1.2 million paid in fiscal year
2002 and $4.4 million paid during the nine month period ended March 31,
2003) less $4.3 million of acquired cash. We financed the acquisition with
funds borrowed under our new three-year, multi-currency, revolving credit
facility which we entered into on June 27, 2002 with a group of financial
institutions. The acquisition of Widia improves our global competitiveness,
strengthens our European position and represents a strong platform for
increased penetration in Asia. Widia's operating results have been included
in our consolidated results since the acquisition date of August 30, 2002.
In accordance with SFAS No. 141, "Business Combinations", we accounted for
the acquisition using the purchase method of accounting. Accordingly, the
preliminary purchase price allocations have been made based upon an
estimated fair value of net assets acquired resulting in the recognition of
approximately $70.6 million of goodwill and $36.4 million of other
intangibles. In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets" the goodwill will not be amortized but will instead be
subject to an annual impairment test. The preliminary purchase price
allocations are subject to adjustment and may be modified within one year
from the acquisition when additional information concerning asset and
liability valuations are obtained. In accordance with the integration plan,
we are also finalizing our analysis of any potential environmental
exposures related to the Widia acquisition. Subsequent changes are not
expected to have a material effect on our consolidated financial position.
The unaudited pro forma consolidated financial data presented below gives
effect to the Widia acquisition as if it had occurred as of the beginning
of each period presented. The pro forma adjustments are based upon
available information and certain assumptions that we believe are
reasonable, including additional interest expense and amortization that
resulted from the transaction, net of any applicable income tax effects.
The unaudited pro forma consolidated financial data is not necessarily
indicative of the operating results that would have occurred had the
acquisition been consummated on the date indicated, nor are they indicative
of future operating results. Except for actions actually taken as of and
since the close of the transaction and for which any related impact would
be included in the actual results through the period end, anticipated cost
savings have not been reflected in this pro forma presentation. The
unaudited pro forma consolidated financial data should be read in
conjunction with the historical consolidated financial statements and
accompanying notes.
-5-
KENNAMETAL INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three Months Ended Nine Months Ended
Pro Forma Consolidated Financial Data March 31, March 31,
------------------------------------- -------------------------- ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 459,243 $ 447,926 $ 1,330,586 $ 1,349,452
Income before cumulative effect of
change in accounting principle 9,699 7,934 18,357 14,304
Net income (loss) 9,699 7,934 18,357 (236,102)
Basic earnings per share before cumulative
effect of change in accounting principle 0.28 0.26 0.52 0.46
Basic earnings (loss) per share 0.28 0.26 0.52 (7.62)
Diluted earnings per share before cumulative
effect of change in accounting principle 0.27 0.25 0.52 0.45
Diluted earnings (loss) per share 0.27 0.25 0.52 (7.51)
Additionally, during the first quarter of the current year, we acquired the
remaining nine percent minority interest of our subsidiary in Poland for
total consideration of $0.2 million. This subsidiary is now wholly-owned by
Kennametal. During the second and third quarter of the current year, we
acquired an additional one percent ownership interest from minority
shareowners of our subsidiary in Germany for a total consideration of $4.2
million bringing our ownership to 99.3 percent. An additional payment of
$2.3 million was made during the second quarter related to minority
shareowners that sold their shares in the prior year. Total goodwill
resulting from these transactions was $5.2 million.
5. INVENTORIES
Inventories are stated at the lower of cost or market. We use the last-in,
first-out (LIFO) method for determining the cost of a significant portion
of our U.S. inventories. The cost for the remainder of our inventories is
determined under the first-in, first-out (FIFO) or average cost methods. We
used the LIFO method of valuing inventories for approximately 42 and 49
percent of total inventories at March 31, 2003 and June 30, 2002,
respectively. 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 our projections of expected
year-end inventory levels and costs. Therefore, the interim financial
results are subject to any final year-end LIFO inventory adjustments.
Inventories as of the balance sheet dates consisted of the following (in
thousands):
March 31, June 30,
2003 2002
---- ----
Finished goods $ 283,442 $ 260,783
Work in process and powder blends 116,835 91,871
Raw materials and supplies 37,626 34,452
---------- ---------
Inventory at current cost 437,903 387,106
Less: LIFO valuation (28,907) (42,030)
---------- ---------
Total inventories $ 408,996 $ 345,076
========== =========
-6-
KENNAMETAL INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ENVIRONMENTAL MATTERS
We are involved in various environmental cleanup and remediation activities
at several of our manufacturing facilities. In addition, we are currently
named as a potentially responsible party (PRP) at the Li Tungsten Superfund
site in Glen Cove, New York. In December 1999, we recorded a remediation
reserve of $3.0 million with respect to our involvement in these matters,
which was recorded as a component of operating expense. This represents our
best estimate of the undiscounted future obligation based on our
evaluations and discussions with outside counsel and independent
consultants, and the current facts and circumstances related to these
matters. We recorded this liability because certain events occurred,
including the identification of other PRPs, an assessment of potential
remediation solutions and direction from the government for the remedial
action plan that clarified our level of involvement in these matters and
our relationship to other PRPs. This led us to conclude that it was
probable a liability had been incurred. At March 31, 2003, we have an
accrual of $2.8 million remaining relative to this environmental issue. No
cash payments have been made nor additional charges incurred against this
reserve during the current quarter and nine months ended March 31, 2003.
In addition to the amount currently reserved, we may be subject to loss
contingencies related to these matters estimated to be up to an additional
$3.0 million. We believe that such undiscounted unreserved losses are
reasonably possible but are not currently considered to be probable of
occurrence. The reserved and unreserved liabilities for all environmental
concerns 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, the identification of new PRPs and the involvement of and
direction taken by government agencies on these matters.
Additionally, we also maintain reserves for other potential environmental
issues associated with domestic operations and a location operated by our
German subsidiary. At March 31, 2003, the total of these accruals was $1.3
million and represents anticipated costs associated with the remediation of
these issues. Cash payments of $0.1 million have been made against this
reserve during the quarter.
We maintain 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, we have established an EH&S administrator at all
our global manufacturing facilities. Our 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, we
establish or adjust financial provisions and reserves for environmental
contingencies in accordance with Statement of Financial Accounting Standard
(SFAS) No. 5, "Accounting for Contingencies."
-7-
KENNAMETAL INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of
shares outstanding during the period, while diluted earnings per share is
calculated to reflect the potential dilution that occurs related to
issuance of capital stock under stock option grants. The difference between
basic and diluted earnings per share relates solely to the effect of
capital stock options.
For purposes of determining the number of diluted shares outstanding,
weighted average shares outstanding for basic earnings per share
calculations were increased due solely to the dilutive effect of
unexercised stock options by 236,673 and 464,218 for the three months ended
March 31, 2003 and 2002, respectively, and 274,718 and 452,505 for the nine
months ended March 31, 2003 and 2002, respectively. Unexercised stock
options to purchase our capital stock of 2.0 million and 0.6 million shares
for the three months ended March 31, 2003 and 2002, respectively, and 1.7
million and 1.2 million for the nine months ended March 31, 2003 and 2002,
respectively, are not included in the computation of diluted earnings per
share because the option exercise price was greater than the average market
price for the respective period.
8. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three and nine months ended March 31,
2003 and 2002 is as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Income before cumulative effect of change
in accounting principle $ 9,699 $ 13,144 $ 22,998 $ 23,128
Cumulative effect of change in accounting
principle, net of tax -- -- -- (250,406)
Unrealized (loss) gain on derivatives designated
and qualified as cash flow hedges, net of tax (754) 1,547 (1,434) 1,058
Reclassification of unrealized gain (loss)
on matured derivatives, net of tax 1,879 (362) 3,224 (1,412)
Unrealized gain (loss) on marketable equity
securities available-for-sale, net of tax 1,059 1,120 (184) (1,506)
Minimum pension liability adjustment, net of tax (64) 49 (215) (105)
Foreign currency translation adjustments 8,059 1,441 24,770 5,276
--------- --------- --------- ---------
Comprehensive income (loss) $ 19,878 $ 16,939 $ 49,159 $(223,967)
========= ========= ========= =========
-8-
KENNAMETAL INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of accumulated other comprehensive after-tax loss consist of
the following (in thousands):
March 31, 2003
------------------------------------------
Pre-tax Tax After-Tax
-------- -------- ---------
Unrealized loss on marketable equity
securities available-for-sale $ (1,087) $ 413 $ (674)
Unrealized loss on derivatives designated and
qualified as cash flow hedges (6,461) 2,455 (4,006)
Minimum pension liability adjustment (7,541) 2,861 (4,680)
Foreign currency translation adjustments (29,133) 9,875 (19,258)
-------- -------- --------
Total $(44,222) $ 15,604 $(28,618)
======== ======== ========
June 30, 2002
------------------------------------------
Pre-tax Tax After-Tax
-------- -------- ---------
Unrealized loss on marketable equity
securities available-for-sale $ (791) $ 301 $ (490)
Unrealized loss on derivatives designated and
qualified as cash flow hedges (9,339) 3,543 (5,796)
Minimum pension liability adjustment (7,195) 2,730 (4,465)
Foreign currency translation adjustments (47,520) 3,492 (44,028)
-------- -------- --------
Total $(64,845) $ 10,066 $(54,779)
======== ======== ========
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill attributable to each segment at March 31,
2003 and June 30, 2002 is as follows (in thousands):
March 31, June 30,
2003 2002
--------- ---------
MSSG $ 235,104 $ 147,157
AMSG 166,596 167,542
J&L Industrial Supply 39,649 39,649
Full Service Supply 4,707 4,707
--------- ---------
Total $ 446,056 $ 359,055
========= =========
The increase in the goodwill carried by the Metalworking Solutions and
Services Group (MSSG) is associated with the acquisition of Widia and the
acquisition of outstanding minority interests of our subsidiaries in
Germany and Poland.
Material amounts of recorded goodwill attributable to each of our reporting
units were tested for impairment during 2002 by comparing the fair value of
each reporting unit with its carrying value. This testing resulted in a
2002 non-cash, net of tax, charge of $250.4 million, specific to the
electronics (Advanced Materials Solutions Group (AMSG) segment - $82.1
million) and the industrial product group (MSSG segment - $168.3 million)
businesses, which were acquired in 1998 as part of the acquisition of
Greenfield Industries. The initial phase of the impairment tests were
performed within six months of adoption of SFAS No. 142, or December 31,
2001, and are required at least annually thereafter. On an ongoing basis
(absent any impairment indicators), we expect to perform our impairment
tests during the June quarter of each fiscal year, in connection with our
annual budgeting process.
-9-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
The components of our other intangible assets are as follows (in
thousands), the remaining lives of which range from one to fifteen years.
March 31, 2003 June 30, 2002
--------------------------------- ----------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------- ------------ ----------- ------------
Contract based $ 11,626 $ (10,519) $ 11,910 $ (9,488)
Estimated intangibles
associated with Widia 39,917 (1,470) -- --
Technology based and other 3,374 (2,699) 3,374 (2,423)
Intangible pension asset 5,702 -- 5,564 --
----------- ----------- ----------- -----------
Total $ 60,619 $ (14,688) $ 20,848 $ (11,911)
=========== =========== =========== ===========
10. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
2003 Workforce Restructuring Program In October 2002, we announced a global
salaried workforce reduction of approximately five percent. The reduction
is expected to cost between $9 million and $10 million. The components of
the restructuring accrual at March 31, 2003 for this program are as follows
(in thousands):
Accrual Accrual at
at June 30, Cash March 31,
2002 Expense Expenditures 2003
-------- -------- ----------- --------
Employee severance $ -- $ 7,859 $ (4,373) $ 3,486
-------- -------- -------- --------
Total $ -- $ 7,859 $ (4,373) $ 3,486
======== ======== ======== ========
The restructuring accrual at March 31, 2003 represents expected future cash
payments for these obligations over the next six months.
Widia Integration In addition to the 2003 Workforce Restructuring Program,
we have implemented two Widia acquisition-related integration programs
(Kennametal Integration Restructuring Program and Widia Integration) which
together are expected to result in a global headcount reduction of between
650 and 700 positions, approximately 80% of which is expected to be
completed in 2003. We will also close a number of manufacturing facilities
and warehouses throughout Europe.
Kennametal Integration Restructuring Program This program currently will
include employee severance costs associated with existing Kennametal
facilities.
The components of the restructuring accrual at March 31, 2003 for this
program are as follows (in thousands):
Accrual Accrual at
at June 30, Cash March 31,
2002 Expense Expenditures 2003
-------- -------- ----------- --------
Employee severance $ -- $ 4,029 $ (785) $ 3,244
-------- -------- -------- --------
Total $ -- $ 4,029 $ (785) $ 3,244
======== ======== ======== ========
The restructuring accrual at March 31, 2003 represents future cash
payments for these obligations over the next twelve months.
-10-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------------
Widia Integration Plan In connection with the acquisition, we have
established a Widia integration plan that will consolidate certain Widia
and Kennametal operations and functions. This integration plan is to
establish centers of excellence in functional areas and enable long-term
growth and competitive advantages. Certain costs that are incurred under
this plan will be accounted for under EITF 95-3 "Recognition of
Liabilities in Connection with a Purchase Business Combination." As a
result, these costs have been recorded as an adjustment to goodwill and
not charged to expense.
Accrual Adjustment Non- Accrual at
at June 30, to Cash Cash March 31,
2002 Goodwill Expenditures Adjustment 2003
--------- -------- ------------ ---------- -------
Facility rationalizations $ -- $ 1,237 $ (265) $ 118 $ 1,090
Employee severance -- 16,482 (3,281) 1,481 14,682
Terminated contracts -- 1,326 (410) 125 1,041
--------- ------- ------- ------- -------
Total $ -- $19,045 $(3,956) $ 1,724 $16,813
========= ======= ======= ======= =======
Widia Restructuring In connection with our acquisition of Widia, we assumed
$2.4 million of restructuring accruals related to restructuring programs
initiated by Widia prior to the acquisition date. These programs, initiated
in December 2001, relate to the severance of 156 European employees in both
production and administration. The accrual balance at March 31, 2003 of
$0.2 million represents a decrease of $2.2 million related to cash payments
made during the period since acquisition.
2002 AMSG and MSSG Restructuring In November 2001, we announced a
restructuring program whereby we expected to recognize special charges of
$15 to $20 million, including period costs, for the closure of three
manufacturing locations and the relocation of the production of a certain
product line to another plant, and associated workforce reductions. This
was done in response to continued steep declines in the end market demand
in the electronics and industrial products groups businesses. Additionally,
we implemented other worldwide workforce reductions and facility closures
in these segments in reaction to the declines in our end markets. All
initiatives under this program have been implemented. Total restructuring
and asset impairment charges of $17.3 million were recognized in 2002 and
$2.5 million were recognized as a component of cost of goods sold in 2002.
We implemented the measures associated with the closing and consolidation
of the AMSG electronics facility in Chicago, IL, and MSSG industrial
product group's Pine Bluff, AR, and Monticello, IN locations, the
production of a particular line of products in Rogers, AR and several
customer service centers. The components of the restructuring accrual at
March 31, 2003 for this program are as follows (in thousands):
Accrual Accrual at
at June 30, Expense Cash March 31,
2002 Expense Adjustment Expenditures 2003
--------- ------- ---------- ------------ -------
Facility rationalizations $ 2,977 $ 15 $ (110) $(1,849) $ 1,033
Employee severance 1,220 110 -- (1,121) 209
------- ------- ------- ------- -------
Total $ 4,197 $ 125 $ (110) $(2,970) $ 1,242
======= ======= ======= ======= =======
The restructuring accrual at March 31, 2003 represents future cash payments
for these obligations, of which the majority are expected to occur over the
next two quarters.
Previous Programs
During the current quarter, we completed the 2000 Restructuring Program,
the 2001 Core-Business Resize Program and the J&L and FSS Business
Improvement Program. Cash expenditures during 2003 related to these
programs were $0.1 million, $0.2 million and $1.1 million, respectively.
There were no material adjustments to the accruals under these programs.
-11-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
11. SEGMENT DATA
We operate four global business units consisting of Metalworking Solutions
& Services Group (MSSG), Advanced Materials Solutions Group (AMSG), J&L
Industrial Supply (J&L) and Full Service Supply (FSS), and corporate
functional shared services. Our external sales, intersegment sales and
operating income by segment for the three and nine months ended March 31,
2003 and 2002 are as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ --------------------------------
2003 2002 2003 2002
---- ---- ---- ----
External sales:
MSSG $ 297,995 $ 224,971 $ 824,143 $ 666,006
AMSG 79,039 72,879 231,038 227,498
J&L 51,729 58,873 148,012 173,997
FSS 30,480 37,129 91,999 113,343
----------- ----------- ----------- -----------
Total external sales $ 459,243 $ 393,852 $ 1,295,192 $ 1,180,844
=========== =========== =========== ===========
Intersegment sales:
MSSG $ 28,615 $ 29,071 $ 81,085 $ 86,680
AMSG 8,361 5,934 22,867 18,014
J&L 480 533 1,531 1,602
FSS 871 639 2,403 1,995
----------- ----------- ----------- -----------
Total intersegment sales $ 38,327 $ 36,177 $ 107,886 $ 108,291
=========== =========== =========== ===========
Total sales:
MSSG $ 326,610 $ 254,042 $ 905,228 $ 752,686
AMSG 87,400 78,813 253,905 245,512
J&L 52,209 59,406 149,543 175,599
FSS 31,351 37,768 94,402 115,338
----------- ----------- ----------- -----------
Total sales $ 497,570 $ 430,029 $ 1,403,078 $ 1,289,135
=========== =========== =========== ===========
Operating income (loss):
MSSG $ 24,156 $ 25,999 $ 66,488 $ 68,080
AMSG 8,757 6,988 25,153 16,699
J&L 1,323 1,208 5,209 (1,725)
FSS 31 380 (320) 1,799
Corporate and eliminations (9,663) (7,295) (34,480) (24,370)
----------- ----------- ----------- -----------
Total operating income $ 24,604 $ 27,280 $ 62,050 $ 60,483
=========== =========== =========== ===========
12. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived
asset. The adoption of this standard, effective July 1, 2002, had no
material impact on the results of our operations or financial position.
-12-
KENNAMETAL INC.
- -------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of and supersedes SFAS No. 121. This
statement retains the fundamental provisions of SFAS No. 121 for
recognition and measurement of the impairment of long-lived assets to be
held and used and measurement of long-lived assets to be disposed of by
sale. The provisions of this statement are effective for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The adoption of this standard effective July 1, 2002, did not have a
material impact on our consolidated financial statements.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections," was
issued. This statement updates, clarifies and simplifies existing
accounting pronouncements. While the technical corrections to existing
pronouncements are not substantive in nature, in some instances they may
change accounting practice. The provisions of this standard related to SFAS
No. 13 are effective for transactions occurring after May 15, 2002.
Prospectively, as a result of the adoption of SFAS No. 145, debt
extinguishment costs previously classified as extraordinary items will be
reclassified as interest expense.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities," which addresses significant issues regarding the
recognition, measurement and reporting of costs that are associated with
exit and disposal activities, including restructuring activities. SFAS No.
146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity," under which a liability for an exit cost was recognized
at the date of an entity's commitment to an exit plan. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized at fair value when the liability is incurred. The
provisions of this statement have been applied to any exit or disposal
activities entered into after January 1, 2003.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements of
FASB Statement No. 5, "Accounting for Contingencies," relating to a
guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation
it assumes under that guarantee, FIN 45 also requires enhanced disclosures
in company's interim and annual filings. FIN 45 is effective for guarantees
issued or modified after December 31, 2002. The disclosure requirements
were effective for financial statements of both interim and fiscal years
ending after December 15, 2002. The adoption of this standard did not have
a material impact on our consolidated financial statements.
In January 2003, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation Transition and Disclosure," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. This statement
also amends the disclosure provisions of that statement to require
prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, the statement amends APB Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in interim
financial information. The amendments to APB Opinion No. 28 are effective
for financial reports containing Condensed Financial Statements for interim
periods beginning after December 15, 2002. The disclosure provisions of
this statement were adopted on January 1, 2003.
-13-
KENNAMETAL INC.
- -------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In January 2003 the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities - an interpretation of ARB No. 51" ("FIN 46"). FIN 46
clarifies the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for the Company after July 31, 2003 and will not have a material
impact on the Company's results of operations or financial condition.
In January 2003, the EITF released Issue No. 00-21, ("EITF 00-21"), "Revenue
Arrangements with Multiple Deliverables," which addresses certain aspects of the
accounting by a vendor for arrangement under which it will perform multiple
revenue-generating activities. Specifically, EITF 00-21 addresses whether an
arrangement contains more than one unit of accounting and the measurement and
allocation to the separate units of accounting in the arrangement. EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Management is currently assessing the details of the
standard and is preparing a plan of implementation.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
SALES
Sales for the March 2003 quarter were $459.2 million, an increase of $65.4
million or 16.6 percent from $393.9 million in the year-ago quarter. The
increase in sales is attributed to the positive benefit of $54.4 million from
the Widia acquisition and the favorable foreign currency effects of $16.5
million. This was offset by the sale of Strong Tool which comprised $7.8 million
of the third quarter 2002 revenue. After taking these factors into
consideration, the significant components of the remaining change in sales was
attributed to increased sales of $2.7 million in South America, $5.9 million in
the industrial products group and $2.6 million in the engineered products
markets, all in local currency. This was offset by declining sales of $6.7
million in the FSS segment and in Europe of $1.1 million.
Sales for the nine months ended March 31, 2003 were $1,295.2 million compared to
$1,180.8 million in the same period a year ago, an increase of $114.3 million or
9.7 percent. The increase in sales is attributed to the Widia acquisition which
had sales of $132.3 million for the nine-month period. Additionally, favorable
foreign currency effects of $27.5 million contributed to the increase in sales.
This was offset by the sale of Strong Tool which comprised $24.2 million of 2002
revenue for the nine month period and FSS which had a decrease in sales of $21.3
million.
GROSS PROFIT MARGIN
The gross profit margin for the March 2003 quarter was 33.0 percent, a 60 basis
point increase compared with 32.4 percent in the year-ago quarter. The increase
is a result of favorable raw material prices, manufacturing efficiencies from
the Kennametal Lean Enterprise initiatives and a benefit from foreign currency
exchange of $12.0 million, or 260 basis points, offset, in part, by a
combination of lower Widia margins of $1.8 million or 40 basis points,
unfavorable product mix and $0.5 million, or 10 basis points, in decreased
pension income.
Consolidated gross profit margin was 32.4 percent for the nine months ended
March 31, 2003, a 70 basis point increase compared with 31.7 percent in the same
period a year ago. Gross profit margin was affected by the factors mentioned
above.
OPERATING EXPENSE
Operating expense for the March 2003 quarter was $122.6 million or 26.7 percent
of sales compared to $95.7 million or 24.3 percent of sales for the prior year,
resulting in a increase of $26.9 million or 28.1 percent. The increase in
operating expenses is associated with the Widia acquisition, unfavorable foreign
exchange of $7.4 million, reinstatement of the Company match to the 401(k) plans
of approximately $0.7 million, $1.7 million of decreased pension income and
increased insurance costs which was offset, in part, by the Strong tool
divestiture which comprised $1.5 million of the March 2002 quarterly operating
expense.
For the nine months ended March 31, 2003, operating expense was $343.1 million
or 26.5 percent of sales, an increase of $54.4 million or 18.8 percent compared
to the same period a year ago. The increase in operating expenses is associated
with the Widia acquisition, $12.2 million of unfavorable foreign currency
effects, a decrease in pension income of $2.8 million and lower expenses in the
prior year due to last year's temporary cost reductions offset, in part, by the
Strong Tool divestiture which comprised $4.6 million of the nine months ended
March 2002 operating expense.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
RESTRUCTURING AND ASSET IMPAIRMENT CHARGE
2003 Workforce Restructuring Program In October 2002, we announced a global
salaried workforce reduction of approximately five percent. The reduction is
expected to cost between $9 million and $10 million, and is anticipated to
generate in excess of $10 million in cash savings during fiscal 2003. The
components of the restructuring accrual at March 31, 2003 for this program are
as follows (in thousands):
Accrual Accrual at
at June 30, Cash March 31,
2002 Expense Expenditures 2003
--------- ------- ------------ -------
Employee severance $ -- $ 7,859 $(4,373) $ 3,486
--------- ------- ------- -------
Total $ -- $ 7,859 $(4,373) $ 3,486
========= ======= ======= =======
The restructuring accrual at March 31, 2003 represents expected future
cash payments for these obligations over the next six months.
Widia Integration In addition to the 2003 Workforce Restructuring Program, we
have implemented two Widia acquisition-related integration programs (Kennametal
Integration Restructuring Program and Widia Integration) which together are
expected to result in a global headcount reduction of between 650 and 700
positions, approximately 80% of which is expected to be completed in 2003. We
will also close a number of manufacturing facilities and warehouses throughout
Europe.
Kennametal Integration Restructuring Program This program currently will
include employee severance costs associated with existing Kennametal
facilities.
The components of the restructuring accrual at March 31, 2003 for this
program are as follows (in thousands):
Accrual Accrual at
at June 30, Cash March 31,
2002 Expense Expenditures 2003
--------- ------- ------------ -------
pppp
Employee severance $ -- $4,029 $ (785) $3,244
--------- ------ ------ ------
Total $ -- $4,029 $ (785) $3,244
========= ====== ====== ======
The restructuring accrual at March 31, 2003 represents future cash payments
for these obligations over the next twelve months.
Widia Integration Plan In connection with the acquisition, we have
established a Widia integration plan that will consolidate certain Widia
and Kennametal operations and functions. This integration plan is to
establish centers of excellence in functional areas and enable long-term
growth and competitive advantages. Certain costs that are incurred under
this plan will be accounted for under EITF 95-3 "Recognition of Liabilities
in Connection with a Purchase Business Combination." As a result, certain
of these costs have been recorded as an adjustment to goodwill and not
charged to expense.
Accrual Adjustment Non- Accrual at
at June 30, to Cash Cash March 31,
2002 Goodwill Expenditures Adjustment 2003
--------- -------- ------------ ---------- -------
Facility rationalizations $ -- $ 1,237 $ (265) $ 118 $ 1,090
Employee severance -- 16,482 (3,281) 1,481 14,682
Terminated contracts -- 1,326 (410) 125 1,041
--------- ------- ------- ------- -------
Total $ -- $19,045 $(3,956) $ 1,724 $16,813
========= ======= ======= ======= =======
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
Widia Restructuring In connection with our acquisition of Widia, we assumed $2.4
million of restructuring accruals related to restructuring programs initiated by
Widia prior to the acquisition date. These programs, initiated in December 2001,
relate to the severance of 156 European employees in both production and
administration. The accrual balance at March 31, 2003 of $0.2 million represents
a decrease of $2.2 million related to cash payments made during the period since
acquisition.
2002 AMSG and MSSG Restructuring In November 2001, we announced a restructuring
program whereby we expected to recognize special charges of $15 to $20 million,
including period costs, for the closure of three manufacturing locations and the
relocation of the production of a certain product line to another plant, and
associated workforce reductions. This was done in response to continued steep
declines in the end market demand in the electronics and industrial products
groups businesses. Additionally, we implemented other worldwide workforce
reductions and facility closures in these segments in reaction to the declines
in our end markets. All initiatives under this program have been implemented.
Total restructuring and asset impairment charges of $17.3 million were
recognized in 2002 and $2.5 million were recognized as a component of cost of
goods sold in 2002.
We implemented the measures associated with the closing and consolidation of the
AMSG electronics facility in Chicago, IL, and MSSG industrial product group's
Pine Bluff, AR, and Monticello, IN locations, the production of a particular
line of products in Rogers, AR and several customer service centers. The
components of the restructuring accrual at March 31, 2003 for this program are
as follows (in thousands):
Accrual Accrual at
at June 30, Expense Cash March 31,
2002 Expense Adjustments Expenditures 2003
-------- ------- ----------- ------------ -------
Facility rationalizations $ 2,977 $ 15 $ (110) $(1,849) $ 1,033
Employee severance 1,220 110 -- (1,121) 209
------- ------- ------- ------- -------
Total $ 4,197 $ 125 $ (110) $(2,970) $ 1,242
======= ======= ======= ======= =======
The restructuring accrual at March 31, 2003 represents future cash payments for
these obligations, of which the majority are expected to occur over the next two
quarters.
Previous Programs
During the current quarter, we completed the 2000 Restructuring Program, the
2001 Core-Business Resize Program and the J&L and FSS Business Improvement
Program. Cash expenditures during 2003 related to these programs were $0.1
million, $0.2 million and $1.1 million, respectively. There were no material
adjustments to the accruals under these programs.
INTEREST EXPENSE
Interest expense for the March 2003 quarter increased 21.0 percent to $9.0
million from $7.4 million a year ago. This increase was primarily due to the
greater average level of borrowings which increased by $185.3 million to fund
the Widia acquisition. As indicated in Note 4, the original purchase price was
reduced by approximately $20.1 million in February 2003 as a result of the
settlement agreement with Milacron. The proceeds from the Milacron settlement
were used to reduce Euro denominated borrowings. For the nine months ended March
31, 2003, interest expense increased approximately 7.9 percent to $27.1 million
from $25.1 million a year ago for the same reasons. Our average U.S. borrowing
rate for the quarter and nine month period was 5.17 and 5.40 percent,
respectively, compared to 4.61 and 5.06 percent for the three month and nine
month periods of a year ago. The increase is due primarily to the ten-year note
issue, partially offset by lower short-term interest rates.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
OTHER (INCOME) EXPENSE, NET
For the three months ended March 31, 2003 and 2002, other expense, net was $0.7
million versus other income, net of $0.01 million, respectively. Included in
these amounts were fees of $0.4 million and $0.5 million, respectively, incurred
in connection with the accounts receivable securitization program. The decline
in these fees is due to lower interest rates in the commercial paper market.
Also included in other (income) expense is interest income which has increased
from $0.3 million in the prior year to $0.8 million in the current year. The
benefits associated with the securitization program and interest income were
offset by an increase in expense related to foreign exchange hedging losses
which increased by $1.5 million, and equity losses which increased by $0.4
million.
For the nine months ended March 31, 2003 and 2002, other income, net was $0.4
million and $0.2 million, respectively. Fees associated with the accounts
receivable securitization program declined $0.5 million to $1.5 million in 2003
due to the factor mentioned above. Interest income increased $1.3 million to
$2.3 million due to higher cash balances. The other significant components of
the increase were higher foreign exchange losses of $0.4 million and equity
losses which increased by $0.5 million.
PROVISION FOR INCOME TAXES
The effective tax rate for the three and nine months ended March 31, 2003 was 30
percent compared to an effective rate of 32 percent for the three and nine month
period ended March 31, 2002. Management has updated the tax provision to reflect
the impact of the Widia acquisition on our effective tax rate. During the three
and nine months ended March 31, 2003, we have benefited from foreign tax
planning which has resulted in a lower effective tax rate.
CHANGE IN ACCOUNTING PRINCIPLE
We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective July
1, 2001, which establishes new accounting and reporting requirements for
goodwill and other intangible assets, including new measurement techniques for
evaluating the recoverability of such assets. Under SFAS No. 142, all goodwill
amortization ceased effective July 1, 2001. Material amounts of recorded
goodwill attributable to each of our reporting units, including those affected
by the restructuring program announced in November 2001, were tested for
impairment by comparing the fair value of each reporting unit with its carrying
value. As a result of the adoption of this rule, we recorded a non-cash, net of
tax charge of $250.4 million, or $7.96 per diluted share specific to the
electronics (AMSG segment - $82.1 million) and the industrial product group
(MSSG segment - $168.3 million) businesses, which were acquired in 1998 as part
of the acquisition of Greenfield Industries. The fair values of these reporting
units were determined using a combination of discounted cash flow analysis and
market multiples based upon historical and projected financial information.
Under SFAS No. 142, the impairment adjustment recognized at adoption of this
standard was reflected as a cumulative effect of a change in accounting
principle, effective July 1, 2001.
NET INCOME
Net income for the quarter ended March 31, 2003 was $9.7 million, or $0.27 per
diluted share, compared to $13.1 million, or $0.42 per diluted share, in the
same quarter last year. The decline in earnings is attributable to the dilutive
effect of the Widia acquisition, increased operating costs and interest expense,
partially offset by improved margins and a decline in restructuring charges.
Net income for the nine months ended March 31, 2003 was $23.0 million, or $0.65
per diluted share, compared to a net loss of $227.3 million, or $7.22 per
diluted share, in the same period last year. The significant change in net
income on a year-over-year basis is the result of a prior year cumulative effect
of change in accounting principles which was $250.4 million. The remainder of
the change in earnings is attributable to the factors mentioned above.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------------------------
BUSINESS SEGMENT REVIEW
We operate four global business units consisting of Metalworking Solutions &
Services Group (MSSG), Advanced Materials Solutions Group (AMSG), J&L Industrial
Supply (J&L) and Full Service Supply (FSS), and corporate functional shared
services.
METALWORKING SOLUTIONS & SERVICES GROUP
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ----------------------------
2003 2002 2003 2002
---- ---- ---- ----
External sales $ 297,995 $ 224,971 $ 824,143 $ 666,006
Intersegment sales 28,615 29,071 81,085 86,680
Operating income 24,156 25,999 66,488 68,080
MSSG external sales increased $73.0 million or 32.5 percent compared to the
March 2002 quarter due primarily to the acquisition of Widia, favorable foreign
exchange and increased sales in South America and industrial product markets.
Widia external sales were $54.4 million or 74.5 percent of the increase in
MSSG's March quarter external sales. Favorable foreign exchange effects
accounted for $12.4 million or 17.0 percent of the increase in MSSG's March
quarter external sales due to a weaker U.S. dollar. Excluding the benefits from
the Widia acquisition and foreign exchange, North America sales were flat, while
in Europe, sales were down $1.1 million or 1.6 percent. Automotive in North
America continued to show weakening market conditions during the quarter while
light and general engineering and aerospace remained weak. Heavy engineering,
machine tool builders and tool and die makers had modest improvements over the
quarter. Product pricing levels were maintained in both the North American and
European markets. The industrial products group helped offset these other
factors with an increase in sales of $5.9 million or 12.4 percent over the same
quarter last year.
For the quarter ended March 31, 2003, operating income of $24.2 million
decreased 7.1 percent compared to $26.0 million last year. Included in operating
income is $1.1 million and $1.9 million of restructuring costs for the March 31,
2003 and 2002 quarters, respectively. Additionally, included in the March 31,
2003 operating income is $1.9 million of costs associated with the Widia
integration. The decline in operating income is due to the Widia integration
costs and the dilutive effect of the Widia acquisition. These increased costs
are offset by the Kennametal Lean Enterprise initiatives, lower raw material
prices, lower restructuring expense, and on-going cost controls.
For the nine months ended March 31, 2003, MSSG external sales increased $158.1
million or 23.7 percent compared to the same period last year. Most of this
increase was associated with the Widia acquisition which contributed $132.3
million in external sales during the nine month period. Additionally, the
favorable benefits of foreign exchange contributed $20.7 million of the increase
in external sales. Excluding the Widia acquisition and favorable foreign
exchange effects, sales in North America and Europe were down $7.9 million or
3.4 percent and $8.0 million or 4.1 percent, respectively. This was offset by
increases in sales (excluding Widia) in South America of $6.7 million or 78.8
percent, Asia of $2.6 million or 5.7 percent and the industrial products group
which increased $9.2 million or 6.3 percent, all in local currency.
For the nine-month period, operating income was $66.5 million compared to $68.1
million last year representing a decrease of $1.6 million or 2.3 percent
compared to the prior year. Included in operating income for the nine-month
period is $6.0 million and $8.1 million of restructuring costs for 2003 and
2002, respectively. The reduction in restructuring expense was offset, in part,
by $4.0 million of Widia integration costs. The remainder of the change in
operating income is due to the factors mentioned above.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
ADVANCED MATERIALS SOLUTIONS GROUP
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
External sales $ 79,039 $ 72,879 $ 231,038 $ 227,498
Intersegment sales 8,361 5,934 22,867 18,014
Operating income 8,757 6,988 25,153 16,699
For the quarter ended March 31, 2003, AMSG external sales increased by $6.2
million or 8.5 percent. The increase in external sales for the quarter is
attributed to favorable foreign exchange of $3.4 million and increased sales of
$2.6 million in the engineered products market, in local currency.
Operating income for the quarter was $8.8 million compared to $7.0 million last
year. The increase in operating income is attributable to increased sales,
improved manufacturing efficiencies, lower raw material costs, and the benefits
derived from the previously implemented restructuring efforts. Restructuring
expense for the quarter increased from $0.6 million in 2002 to $1.1 million in
2003.
For the nine months ended March 31, 2003, external sales increased by $3.6
million or 1.6 percent. The most significant components of the increase are
favorable foreign exchange effects which contributed $5.3 million and the Carmet
acquisition which contributed $4.9 million. Excluding the benefits of foreign
exchange and the Carmet acquisition, sales for the nine-month period declined
$6.6 million or 2.9 percent. Lower demand for products used for oil and gas
exploration and mining contributed to the decline. Improved year-over-year sales
in the engineered products market partially mitigated this decrease.
Operating income was $25.2 million compared to $16.7 million last year. The
increase is due to the cost cutting programs mentioned above and due to
restructuring expense which has decreased from $6.6 million in 2002 to $3.2
million in 2003.
J&L INDUSTRIAL SUPPLY
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
External sales $ 51,729 $ 58,873 $ 148,012 $ 173,997
Intersegment sales 480 533 1,531 1,602
Operating income 1,323 1,208 5,209 (1,725)
For the three months ended March 31, 2003, J&L external sales decreased $7.1
million or 12.1 percent from $58.9 million to $51.7 million. The decrease in
external sales is attributed to the Strong Tool divestiture which comprised $7.8
million of the $58.9 million March 2002 external sales. Sales for this segment
relate primarily to automotive and aerospace customers which continue to
experience weak market conditions. Operating income for the current quarter was
$1.3 million compared to $1.2 million in the March 2002 quarter. The increase in
operating income is attributed to the reduction in restructuring expense which
decreased from $2.4 million for the 2002 quarter to $0.8 million for the 2003
quarter, mostly offset by continued sales volume and pricing pressures.
For the nine months ended March 31, 2003, J&L external sales declined by $26.0
million or 14.9 percent from $174.0 million to $148.0 million. The decline is
attributed to the Strong Tool divestiture which comprised $24.2 million of the
$174.0 million external sales for the nine-month period ended March 2002.
Additionally, slower sales in automotive and aerospace markets also contributed
to the decline in external sales. Operating income for the nine-month period
increased by $6.9 million from a loss of $1.7 million in 2002 to income of $5.2
million in 2003. The most significant component of the increase was the decline
in restructuring expense which decreased by $8.6 million from $9.8 million in
2002 to $1.3 million in 2003. The decline in restructuring expense was offset by
increased marketing costs.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
FULL SERVICE SUPPLY
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
External sales $ 30,480 $ 37,129 $ 91,999 $ 113,343
Intersegment sales 871 639 2,403 1,995
Operating income 31 380 (320) 1,799
FSS external sales decreased for the quarter by $6.6 million or 17.9 percent
compared to last year due to the loss of sales associated with the
discontinuance of certain customer relationships. Operating income for the March
2003 quarter has decreased by $0.3 million over the March 2002 quarter due to
the inability of the margins associated with the reduced volume to cover fixed
costs. This issue is being remedied through right-sizing efforts, as described
in Note 10 - Restructuring and Asset Impairment Charges, as well as through a
continuous program to reduce operating expense. Additionally, new marketing and
business development programs are underway to replace the lost sales.
Compared to the same period last year, FSS external sales declined $21.3 million
or 18.8 percent for the nine months ended March 31, 2003. For the nine month
period, FSS had an operating loss of $0.3 million, a decline of $2.1 million
compared to the same period last year. These declines are due to the same
factors as mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
Our cash flow from operations is the primary source of financing for capital
expenditures and internal growth. During the nine months ended March 31, 2003,
we generated $115.4 million in cash flow from operations, an increase of $3.4
million compared to the year-ago period. The increase resulted primarily from
cash generated by a federal income tax refund of $15.0 million, partially offset
by an increase in cash payments for restructuring expense which increased to
$14.8 million in the nine-month period ended March 31, 2003 from $6.9 million
for the same period last year.
Net cash used for investing activities was $205.4 million, an increase of $174.5
million compared to the nine months ended March 31, 2002. The increase is almost
entirely due to the net cost paid for Widia of $165.5 million. Additionally,
capital expenditures of $36.0 million were incurred during the current period.
We have projected our capital expenditures for 2003 to be in the range of $50 to
$55 million and will be primarily used to support new strategic initiatives, new
products and to upgrade machinery and equipment. We believe this level of
capital spending is sufficient to maintain competitiveness and improve
productivity.
On February 12, 2003, Milacron Inc. and Kennametal signed a settlement agreement
with respect to the calculation of the post-closing purchase price adjustment
for the Widia acquisition pursuant to which Milacron paid us, on February 24,
2003, Euro 18.8 million ($20.1 million) in cash. The proceeds from the Milacron
settlement were used to reduce Euro denominated borrowings.
Fiscal 2003 restructuring and integration programs are expected to result in
cash payment of $50 to $60 million during the fourth quarter of fiscal year 2003
and into fiscal 2004. We anticipate that cash provided from operating activities
will exceed capital expenditures and cash restructuring charges, and debt will
be further reduced throughout fiscal 2003.
Net cash provided from financing activities was $93.8 million, an increase of
$177.3 million compared to the same period last year. This increase is due to
the incremental borrowings required to finance the Widia acquisition of $165.5
million, partially offset by debt repayments, lower purchases of treasury stock
and increased cash payments for dividends due to additional shares being issued
in June 2002.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
In September 2001, we continued our program to repurchase, from time to time,
our outstanding capital stock for investment or other general corporate
purposes. During the first quarter of the prior fiscal year, we purchased
375,000 shares of our capital stock at a total cost of $12.4 million. No shares
were repurchased during the current quarter or the nine month period ending
March 31, 2003. As a result of last year's repurchases, we had completed our
repurchase program announced January 31, 1997 of 1,600,000 shares and brought
the total purchased under the authority of the second repurchase program
announced in October 2000 to approximately 200,000 shares, of a total 2,000,000
authorized. The repurchases were financed principally by cash from operations
and short-term borrowings. Cumulatively, we have repurchased 1,755,900 shares
under the authority of these programs. Repurchases may be made from time to time
in the open market, in negotiated or other permissible transactions.
FINANCIAL CONDITION
Total assets were $1,863.4 million at March 31, 2003, compared to $1,523.6
million at June 30, 2002. Net working capital was $443.2 million, up 18.1
percent from $375.3 million at June 30, 2002. The increase in total assets
(including goodwill) and net working capital is primarily related to the Widia
acquisition which increased total assets by $303.1 million and working capital
by $55.8 million. The Widia acquisition also was the primary reason for
increases in accounts receivable, the allowance for doubtful accounts,
inventories, net property, plant and equipment, long-term debt and pension and
other post-employment benefits.
We measure our working capital management performance and our ability to
generate cash flow by monitoring selected components of working capital. In
particular, we focus on accounts receivable, inventories and accounts payable
since these working capital items are controllable at the business unit level.
The following summarizes these selected working capital items:
Quarter Ended
Quarter Ended March 31, June 30,
--------------------------- -------------
2003 2002 2002
---- ---- ----
Accounts receivable, net $ 235,908 $ 168,094 $ 179,101
Inventories 408,996 351,129 345,076
Less: accounts payable (120,981) (93,810) (101,586)
--------- --------- ---------
Total $ 523,923 $ 425,413 $ 422,591
Inventory turnover increased to 3.1 at March 31, 2003, compared to 2.9 at June
30, 2002 and 2.9 at March 31, 2002, due to continued initiatives aimed at
maintaining favorable inventory turns. The total debt-to-total capital ratio
increased to 43 percent at March 31, 2003 from 37 percent at June 30, 2002,
primarily due to the borrowings to fund the Widia acquisition.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset. The adoption of this
standard, effective July 1, 2002, did not have a material impact on our
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of and supersedes SFAS No. 121. This statement retains the
fundamental provisions of SFAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be disposed of by sale. The provisions of this statement
are effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. The adoption of this standard effective July
1, 2002, had no material impact on the results of our operations or financial
position.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," was issued. This
statement updates, clarifies and simplifies existing accounting pronouncements.
While the technical corrections to existing pronouncements are not substantive
in nature, in some instances they may change accounting practice. The provisions
of this standard related to SFAS No. 13 are effective for transactions occurring
after May 15, 2002. Prospectively, as a result of the adoption of SFAS No. 145,
debt extinguishment costs previously classified as extraordinary items will be
reclassified as interest expense.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities," which addresses significant issues regarding the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities, including restructuring activities. SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability incurred. The provisions of this statement have been applied to
any exit or disposal activities entered into after January 1, 2003.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements of FASB
Statement No. 5, "Accounting for Contingencies," relating to a guarantor's
accounting for, and disclosure of, the issuance of certain types of guarantees.
FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize
a liability for the fair value of the obligation it assumes under that
guarantee, FIN 45 also requires enhanced disclosures in company's interim and
annual filings. FIN 45 is effective for guarantees issued or modified after
December 31, 2002. The disclosure requirements were effective for financial
statements of both interim and fiscal years ending after December 15, 2002. The
adoption of this standard did not have a material impact on our consolidated
financial statements.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
In January 2003, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation Transition and Disclosure," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. This statement also amends
the disclosure provisions of that statement to require prominent disclosure
about the effects of reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, the
Statement amends APB Opinion No. 28, Interim Financial Reporting, to require
disclosure about those effects in interim financial information. The amendments
to APB Opinion No. 28 are effective for financial reports containing Condensed
Financial Statements for interim periods beginning after December 15, 2002. The
disclosure provisions of this statement were adopted January 1, 2003.
In January 2003 the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities - an interpretation of ARB No. 51" ("FIN 46"). FIN 46
clarifies the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for the Company after July 31, 2003 and will not have a material
impact on the Company's results of operations or financial condition.
In January 2003, the EITF released Issue No. 00-21, ("EITF 00-21"), "Revenue
Arrangements with Multiple Deliverables," which addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, EITF 00-21 addresses whether an
arrangement contains more than one unit of accounting and the measurement and
allocation to the separate units of accounting in the arrangement. EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Management is currently assessing the details of the
standard and is preparing a plan of implementation.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking" statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. You can identify these
forward-looking statements by the fact they use words such as "should,"
"anticipate," "estimate," "approximate," "expect," "may," "will," "project,"
"intend," "plan," "believe" and other words of similar meaning and expression in
connection with any discussion of future operating or financial performance. One
can also identify forward-looking statements by the fact that they do not relate
strictly to historical or current facts. These statements are likely to relate
to, among other things, our goals, plans and projections regarding our financial
position, results of operations, cash flows, market position and product
development, which are based on current expectations that involve inherent risks
and uncertainities, including factors that could delay, divert or change any of
them in the next several years. Although it is not possible to predict or
identify all factors, they may include the following: global economic
conditions; future terrorist attacks; epidemics; risks associated with
integrating and divesting businesses and achieving the expected savings and
synergies; demands on management resources; risks associated with international
markets such as currency exchange rates, and social and political environments;
competition; labor relations; commodity prices; demand for and market acceptance
of new and existing products, and risks associated with the implementation of
restructuring plans and environmental remediation matters. We can give no
assurance that any goal or plan set forth in forward-looking statements can be
achieved and readers are cautioned not to place undue reliance on such
statements, which speak only as of the date made. We undertake no obligation to
release publicly any revisions to forward-looking statements as a result of
future events or developments.
-24-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------------------
We have experienced certain changes in our exposure to market risk from June 30,
2002.
During the quarter and nine months ended March 31, 2003, we recognized non-cash
increases of $0.2 million and $19.0 million, respectively, in our long-term debt
associated with our fixed-to-floating interest rate swap agreements. In April of
2003, we terminated the interest rate swap resulting in Kennametal receiving
cash of $15.5 million.
Additionally, as a result of the recent acquisition of Widia, we now have an
increased exposure to fluctuations in the value of the Euro. As a result of the
acquisition, management believes that there now exists a more balanced
distribution of investment in the North American and European markets which is
subject to foreign currency fluctuation.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------------------------------------------------------
Within 90 days before filing this report, an evaluation was performed under the
supervision and with the participation of our management, including the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, management, including the CEO and CFO,
concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed in reports that we file or submit
under the Securities and Exchange Act of 1934 is recorded, processed, summarized
and reported in accordance with the rules and forms of the Securities and
Exchange Commission. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote. There have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls subsequent to
their evaluation.
-25-
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
- -------------------------------------------------------------------------------
During the three-month period ended March 31, 2003, the Audit Committee approved
new or recurring engagements of PricewaterhouseCoopers LLP for tax compliance
and planning.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------------
(a) Documents filed as part of this Form 10-Q
(99) Additional Exhibits
(99.1) Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 executed by Markos I. Tambakeras, Chief
Executive Officer of Kennametal Inc. and F. Nicholas
Grasberger III, Chief Financial Officer of Kennametal
Inc.
A signed original of this written statement required by Section 906
has been provided to Kennametal Inc. and will be retained by
Kennametal Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
The foregoing certification is being furnished in accordance with
Securities and Exchange Commission Release No. 34-47551 and shall not
be considered filed as part of the Form 10-Q.
(b) Reports on Form 8-K
The following were filed during the quarter ended March 31, 2003.
Form 8-K dated March 28, 2003, reported under Item 9. Regulation
FD Disclosure regarding the press release announcing revised
sales and earnings outlook for the company's fiscal 2003 third
and fourth quarters.
Form 8-K for the event dated January 28, 2003, reporting under
Item 5. Other events and Regulations FD Disclosure regarding the
election of Larry Stranghoener to the Board of Directors.
Form 8-K dated January 29, 2003, reported under Item 9.
Regulation FD Disclosure regarding the press release announcing
second quarter fiscal 2003 financial results.
The following were filed subsequent to the quarter ended March 31,
2003.
Form 8-K dated April 30, 2003, reported under Item 9. Regulation
FD Disclosure regarding the press release announcing third
quarter 2003 financial results.
-26-
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 14, 2003 By: /s/ TIMOTHY A. HIBBARD
-----------------------------------
Timothy A. Hibbard
Corporate Controller and
Chief Accounting Officer
-27-
CERTIFICATIONS
I, Markos I. Tambakeras, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kennametal Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ MARKOS I. TAMBAKERAS
-------------------------------
Markos I. Tambakeras
Chairman, President and
Chief Executive Officer
-28-
I, F. Nicholas Grasberger III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kennametal Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ F. NICHOLAS GRASBERGER III
-----------------------------------
F. Nicholas Grasberger III
Vice President and Chief Financial Officer
-29-