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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 SEPTEMBER 30, 1999
Commission file number 1-5318
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0900168
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
WORLD HEADQUARTERS
1600 TECHNOLOGY WAY
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650-0231
(Address of registrant's principal executive offices)
Registrant's telephone number, including area code: (724) 539-5000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title Of Each Class Outstanding at October 29, 1999
- - ---------------------------------------- -------------------------------
Capital Stock, par value $1.25 per share 30,178,552
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KENNAMETAL INC.
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Item No. Page
- - -------- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Statements of Income (Unaudited)
Three months ended September 30, 1999 and 1998........................ 1
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1999 and June 30, 1999.................................. 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended September 30, 1999 and 1998........................ 3
Notes to Condensed Consolidated Financial Statements
(Unaudited) ......................................................... 4
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 7
3. Quantitative and Qualitative Disclosures about Market Risk............ 11
PART II. OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders................... 12
6. Exhibits and Reports on Form 8-K...................................... 12
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- - --------------------------------------------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
OPERATIONS
Net sales $442,943 $480,922
Cost of goods sold 279,614 301,906
-------- --------
Gross profit 163,329 179,016
Operating expenses 122,487 138,919
Amortization of intangibles 7,003 6,405
-------- --------
Operating income 33,839 33,692
Interest expense 14,527 17,621
Other (income) expense, net (258) 416
-------- --------
Income before provision for income taxes and
minority interest 19,570 15,655
Provision for income taxes 8,709 6,700
Minority interest 948 1,561
-------- --------
Net income $ 9,913 $ 7,394
======== ========
PER SHARE DATA
Basic earnings per share $ 0.33 $ 0.25
======== ========
Diluted earnings per share $ 0.33 $ 0.25
======== ========
Dividends per share $ 0.17 $ 0.17
======== ========
Weighted average shares outstanding 30,099 29,857
======== ========
Diluted weighted average shares outstanding 30,165 29,940
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- - --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 20,748 $ 17,408
Marketable equity securities available-for-sale 11,772 13,436
Accounts receivable, less allowance for
doubtful accounts of $15,399 and $15,269 233,867 231,287
Inventories 431,324 434,462
Deferred income taxes 44,199 44,182
Other current assets 10,966 9,673
---------- ----------
Total current assets 752,876 750,448
---------- ----------
Property, plant and equipment:
Land and buildings 233,613 235,375
Machinery and equipment 764,039 756,917
Less accumulated depreciation (466,468) (452,492)
---------- ----------
Net property, plant and equipment 531,184 539,800
---------- ----------
Other assets:
Investments in affiliated companies 953 844
Intangible assets, less accumulated amortization
of $70,073 and $64,096 678,845 685,695
Deferred income taxes 33,748 33,996
Other 34,532 32,865
---------- ----------
Total other assets 748,078 753,400
---------- ----------
Total assets $2,032,138 $2,043,648
========== ==========
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases $ 90,442 $ 117,217
Notes payable to banks 21,195 26,222
Accounts payable 106,668 89,339
Accrued vacation pay 27,199 27,323
Accrued payroll 21,849 19,730
Other current liabilities 101,956 97,035
---------- ----------
Total current liabilities 369,309 376,866
---------- ----------
Long-term debt and capital leases, less current maturities 703,199 717,852
Deferred income taxes 53,100 53,108
Other liabilities 98,218 97,186
---------- ----------
Total liabilities 1,223,826 1,245,012
---------- ----------
Minority interest in consolidated subsidiaries 54,585 53,505
---------- ----------
SHAREOWNERS' EQUITY
Preferred stock, no par value; 5,000 shares authorized; none issued -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
32,903 shares issued 41,128 41,128
Additional paid-in capital 325,998 325,382
Retained earnings 482,389 477,593
Treasury shares, at cost; 2,775 and 2,836 shares held (56,430) (57,199)
Unearned compensation (2,953) (3,330)
Accumulated other comprehensive loss (36,405) (38,443)
---------- ----------
Total shareowners' equity 753,727 745,131
---------- ----------
Total liabilities and shareowners' equity $2,032,138 $2,043,648
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- - --------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,913 $ 7,394
Adjustments for noncash items:
Depreciation 19,061 17,312
Amortization 7,003 6,405
Other 80 1,623
Changes in certain assets and liabilities, net of effects of acquisitions
and divestiture:
Accounts receivable (1,041) 3,527
Inventories 4,871 (17,438)
Accounts payable and accrued liabilities 16,154 (11,587)
Other 5,762 (11,941)
-------- --------
Net cash flow from (used for) operating activities 61,803 (4,705)
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (10,779) (27,348)
Disposals of property, plant and equipment 5,049 1,712
Purchase of subsidiary stock -- (332)
Other (124) 328
-------- --------
Net cash flow used for investing activities (5,854) (25,640)
-------- --------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt (5,346) 1,100
Increase in long-term debt 25,000 36,807
Decrease in long-term debt (68,535) (945)
Dividend reinvestment and employee stock plans 1,386 1,366
Cash dividends paid to shareowners (5,117) (5,077)
-------- --------
Net cash flow from (used for) financing activities (52,612) 33,251
-------- --------
Effect of exchange rate changes on cash 3 (228)
-------- --------
CASH AND EQUIVALENTS
Net increase in cash and equivalents 3,340 2,678
Cash and equivalents, beginning 17,408 18,366
-------- --------
Cash and equivalents, ending $ 20,748 $ 21,044
======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 15,858 $ 20,814
Income taxes paid 2,914 6,909
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
KENNAMETAL INC.
- - --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements
included in the company's 1999 Annual Report. The condensed
consolidated balance sheet as of June 30, 1999 has been derived from
the audited balance sheet included in the company's 1999 Annual Report.
These interim statements are unaudited; however, management believes
that all adjustments necessary for a fair presentation have been made
and all adjustments are normal, recurring adjustments. The results for
the three months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the full fiscal year.
Certain amounts in the prior years' consolidated financial statements
have been reclassified to conform with the current year presentation.
2. Inventories are stated at lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for a significant portion of
domestic inventories and the first-in, first-out (FIFO) method or
average cost for other inventories. The company used the LIFO method of
valuing its inventories for approximately 50 percent of total
inventories at September 30, 1999. Because inventory valuations under
the LIFO method are based on an annual determination of quantities and
costs as of June 30 of each year, the interim LIFO valuations are based
on management's projections of expected year-end inventory levels and
costs. Therefore, the interim financial results are subject to any
final year-end LIFO inventory adjustments.
3. The major classes of inventory as of the balance sheet dates were as
follows (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
---- ----
<S> <C> <C>
Finished goods $320,099 $318,736
Work in process and powder blends 110,189 117,987
Raw materials and supplies 34,088 32,619
-------- --------
Inventory at current cost 464,376 469,342
Less LIFO valuation (33,052) (34,880)
-------- --------
Total inventories $431,324 $434,462
======== ========
</TABLE>
4. The company has been involved in various environmental cleanup and
remediation activities at several of its manufacturing facilities. In
addition, the company is currently named as a potentially responsible
party at two Superfund sites in the United States. However, it is
management's opinion, based on its evaluations and discussions with
outside counsel and independent consultants, that the ultimate
resolution of these environmental matters will not have a material
adverse effect on the results of operations, financial position or cash
flows of the company.
The company maintains a Corporate Environmental, Health and Safety
(EH&S) Department, as well as an EH&S Policy Committee, to ensure
compliance with environmental regulations and to monitor and oversee
remediation activities. In addition, the company has established an
EH&S administrator at each of its domestic manufacturing facilities.
The company's financial management team periodically meets with members
of the Corporate EH&S Department and the Corporate Legal Department to
review and evaluate the status of environmental projects and
contingencies. On a quarterly and annual basis, management establishes
or adjusts financial provisions and reserves for environmental
contingencies in accordance with Statement of Financial Accounting
Standards (SFAS) No. 5, "Accounting for Contingencies."
5. For purposes of determining the number of dilutive shares outstanding,
weighted average shares outstanding for basic earnings per share
calculations were increased due to the dilutive effect of unexercised
stock options by 66,272 and 83,129 for the three months ended September
30, 1999 and 1998, respectively.
4
<PAGE> 7
KENNAMETAL INC.
- - --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Comprehensive income for the three months ended September 30, 1999 and
1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 9,913 $ 7,394
Unrealized loss on marketable equity securities
available-for-sale, net of tax (1,998) --
Minimum pension liability adjustment (26) --
Foreign currency translation adjustments 4,062 (2,526)
------- -------
Comprehensive income $11,951 $ 4,868
======= =======
</TABLE>
The components of accumulated other comprehensive loss consist of the
following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
---- ----
<S> <C> <C>
Unrealized gain (loss) on marketable equity securities
available-for-sale, net of tax $ (838) $ 1,160
Minimum pension liability adjustment (1,291) (1,265)
Foreign currency translation adjustments (34,276) (38,338)
-------- --------
Total accumulated other comprehensive loss $(36,405) $(38,443)
======== ========
</TABLE>
7. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The company must adopt the standard by
the beginning of the first quarter of fiscal 2001. SFAS No. 133
establishes accounting and reporting standards requiring all derivative
instruments (including certain derivative instruments imbedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at their fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Accounting
for qualifying hedges allows a derivative's gains and losses to offset
related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. The
company is currently evaluating the effects of SFAS No. 133 and does
not believe that the adoption will have a material effect on the
financial statements or results of operations of the company.
8. In March 1999, the company's management began to implement
restructuring plans, including several programs to reduce costs,
improve operations and enhance customer satisfaction. The costs accrued
for these plans were based on management estimates using the latest
information available at the time that the accrual was established. The
costs charged against the accrual as of September 30, 1999 were as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, Cash September 30,
1999 Expenditures Adjustments 1999
------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Plant closure $ 2,200 $ (1,370) $ -- $ 830
Voluntary early retirement program 1,367 (213) -- 1,154
------------- -------------- ---------------- -------------
Total $ 3,567 $ (1,583) $ -- $ 1,984
============= ============== ================ =============
</TABLE>
Additional period costs of $1.4 million resulting from the relocation
of employees, hiring and training new employees and other costs
resulting from the temporary duplication of certain operations related
to the plant closure were included in cost of goods sold during the
September 1999 quarter. The remaining period costs related to these
items are estimated to be $1.3 million and will be incurred through the
remainder of fiscal 2000.
5
<PAGE> 8
KENNAMETAL INC.
- - --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. During the September 1999 quarter, the company entered into two
interest rate swaps that effectively convert a notional amount of $50.0
million from floating to fixed interest rates. This increases the total
notional amount of floating-to-fixed interest rate swaps to $100.0
million. These new agreements mature in July 2002.
At September 30, 1999, the company would have received $1.0 million to
settle all interest rate swap agreements, representing the excess of
fair value over carrying cost of these agreements. The effect of all
interest rate swaps on the company's composite interest rate on
long-term debt was not significant at September 30, 1999.
At September 30, 1999, the company had a notional amount of $23.0
million of outstanding foreign exchange forward contracts to sell
foreign currency. These contracts mature before December 31, 1999. The
net unrealized gain or loss on foreign currency contracts was not
significant at September 30, 1999.
10. The company reports three worldwide segments consisting of
Metalworking; Industrial Supply; and Engineered Products, Mining &
Construction and Other (EM&O). The company's external sales,
intersegment sales and operating income by segment for the three months
ended September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
External sales:
Metalworking $242,164 $260,837
Industrial supply 115,979 129,019
EM&O 84,800 91,066
-------- --------
Total external sales $442,943 $480,922
======== ========
Intersegment sales:
Metalworking $ 29,300 $ 18,546
Industrial supply 2,336 2,743
EM&O 11,228 9,335
-------- --------
Total intersegment sales $ 42,864 $ 30,624
======== ========
Total sales:
Metalworking $271,464 $279,383
Industrial supply 118,315 131,762
EM&O 96,028 100,401
-------- --------
Total sales $485,807 $511,546
======== ========
Operating income:
Metalworking $ 29,901 $ 35,407
Industrial supply 6,979 6,414
EM&O 10,668 12,280
Corporate (13,709) (20,409)
--------- --------
Total operating income $ 33,839 $ 33,692
======== ========
</TABLE>
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
OVERVIEW
Sales for the September 1999 quarter were $442.9 million, a decrease of 8
percent from $480.9 million in the year-ago quarter. Excluding the effects of a
divestiture, sales declined 7 percent. Unfavorable foreign currency translation
effects accounted for one percent of the sales decline. The remainder of the
sales decline was due to weak demand in North America and reduced demand in the
European metalworking market.
Net income for the quarter ended September 30, 1999 was $9.9 million, or $0.33
per share, as compared with net income of $7.4 million, or $0.25 per share, in
the same quarter last year. The improvement is attributable to strong cost
controls and operational improvements, which helped mitigate weak demand in the
company's served markets.
METALWORKING
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
External sales $242,164 $260,837
Intersegment sales 29,300 18,546
Operating income 29,901 35,407
</TABLE>
Sales in the Metalworking segment declined 7 percent during the September 1999
quarter, compared to the year-ago quarter. Sales in North America were down 5
percent compared to last year due to continued weak demand in the energy,
aerospace, agriculture and light and heavy engineering markets. This was
partially offset by strong sales in the automotive and truck markets, and to a
lesser extent, machine tool builder and electrical equipment markets.
Sales in the European Metalworking market decreased 16 percent over the same
quarter of a year ago. Unfavorable foreign currency translation effects
accounted for 4 percent of this decline. In Europe, sales were unfavorably
affected due to extended holiday shutdowns at customer plants, coupled with weak
export demand. Sales in the United Kingdom were down due to internal plant
consolidations and a weak market. Compared to the September 1998 quarter, sales
were lower in the automotive and light engineering markets due to less customer
demand.
Operating income declined to $29.9 million and was affected by lower sales
levels, period costs associated with plant closures and lower production levels,
partially offset by a reduction in operating expenses due to the cost
improvement program the company initiated in November 1998. Period costs of $1.4
million related to the Solon plant closing and rearrangement were included in
cost of goods sold for the September 1999 quarter. This is an increase of $0.7
million compared to the prior year.
INDUSTRIAL SUPPLY
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
External sales $115,979 $129,019
Intersegment sales 2,336 2,743
Operating income 6,979 6,414
</TABLE>
Sales in the Industrial Supply market declined 10 percent compared to last year.
Excluding the divestiture of the steel mill business of Strong Tool in March
1999, sales declined 7 percent. The sales decline was due to continued weak
conditions in the markets served by the catalog business, coupled with weak
demand at the previously acquired companies due to high exposure to the oil and
gas industries. Full Service Supply (FSS) sales were flat compared to the
September 1998 quarter as FSS growth was curtailed by the implementation of its
new business system and an increased number of plant shutdowns in the September
1999 quarter. Additionally, the new Year 2000 J&L Industrial
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- - --------------------------------------------------------------------------------
Supply master catalog was launched in September. The company provided FSS
programs to 163 customers covering 262 different facilities at September 30,
1999, compared to 123 customers covering 203 different facilities at September
30, 1998.
Despite the decline in sales, operating income increased 9 percent to $7.0
million in the September 1999 quarter. Operating expenses declined $4.8 million
from the same quarter a year ago primarily from continued benefits realized from
the cost reduction activities implemented in November 1998. This was partially
offset by a decline of $4.2 million in gross profit due to the decline in sales.
In the September 1999 quarter, the gross profit margin increased to 32.6
percent, compared to 32.5 percent in the year-ago quarter.
EM&O
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
External sales $84,800 $91,066
Intersegment sales 11,228 9,335
Operating income 10,668 12,280
</TABLE>
Sales in this segment declined $6.3 million, or 7 percent, from the September
1998 quarter due primarily to continued weakness in the oil and gas industry and
lower underground coal production. This was partially offset by continued strong
demand for construction tools in North America, coupled with a slight increase
in demand for electronic circuit board drills.
Operating income in the EM&O segment decreased 13 percent from a year ago due to
lower sales levels and lower production levels, partially offset by a reduction
in operating expenses due to maintaining the cost improvement program the
company initiated in November 1998.
GROSS PROFIT MARGIN
As a percentage of sales, the gross profit margin for the September 1999 quarter
was 36.9 percent as compared with 37.2 percent in the prior year. The gross
profit margin declined slightly due to lower production levels, a slightly
unfavorable sales mix and plant consolidation and rearrangement costs. This was
partially offset by the continued strong cost controls and reduced employment
levels.
OPERATING EXPENSES
Operating expenses for the September 1999 quarter were $122.5 million, a
reduction of 12 percent from $138.9 million in the same quarter last year.
Operating expenses decreased significantly due to the company's cost improvement
program. Operating expense as a percentage of sales was 27.7 percent, a
reduction of 120 basis points from the same quarter last year, despite the
decline in sales and the restoration of a portion of a salary reduction measure
implemented in November 1998. Overall employment declined 6 percent compared to
the September 1998 quarter.
INTEREST EXPENSE
Interest expense for the September 1999 quarter declined to $14.5 million due to
reduced debt levels and lower borrowing rates. Average U.S. borrowing rates of
6.4 percent were down 30 basis points from a year ago.
OTHER (INCOME) EXPENSE
Other income for the September 1999 quarter included a one-time gain of $1.4
million from sales of assets as part of the company's ongoing efforts to
generate cash from underutilized assets. This was partially offset by $1.1
million in fees incurred in connection with the company's accounts receivable
securitization program initiated in June 1999.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- - --------------------------------------------------------------------------------
INCOME TAXES
The effective tax rate for the September 1999 quarter was 44.5 percent compared
to an effective tax rate of 42.8 percent in the prior year. The increase in the
effective tax rate is attributable to the non-recurring utilization of tax
benefits from costs to repay senior debt in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The company's cash flow from operations is the primary source of financing for
capital expenditures and internal growth. During the quarter ended September 30,
1999, the Company generated $61.8 million in cash flow from operations. Compared
to the year-ago quarter, the increase in cash flow from operations resulted
primarily from improved working capital requirements and higher levels of net
income and non-cash items.
Net cash used for investing activities was $5.9 million. The decrease in net
cash used for investing activities was due to lower capital expenditures,
coupled with the proceeds from the sale of underutilized assets.
Net cash used for financing activities was $52.6 million. This compares to cash
flow from financing activities of $33.3 million in the September 1998 quarter.
The reduction in debt in the September 1999 quarter is attributable to the
increase in operating cash flows, as well as the company's focus on debt
repayment.
FINANCIAL CONDITION
Total assets were $2.0 billion at September 30, 1999, a one percent decline from
June 30, 1999. Net working capital was $383.6 million, down 15 percent from
$452.1 million from last year and up three percent from $373.6 million at June
30, 1999. The ratio of current assets to current liabilities remained at 2.0
compared to June 30, 1999. The total debt-to-total-capital ratio declined to
50.2 percent as of September 30, 1999 from 51.9 percent as of June 30, 1999.
YEAR 2000
Management believes that the company has substantially mitigated its exposure
relative to year 2000 issues for both information and non-information technology
systems. The company initiated a program beginning in 1996 to assess the
exposure to the year 2000 issue, and to prepare its computer systems, computer
applications and other systems for the year 2000. A management committee
actively monitors the status of the readiness program of each of the company's
business units. The company has currently completed the tasks identified to
remediate its mission critical systems and processes.
Year 2000 exposure related to information systems has been mitigated throughout
key metalworking and mining and construction operations through the
implementation of SAP R3 for most business processes.
The company has completed the process of modifying existing non-compliant
business systems in the former Greenfield industrial product and engineered
product operations to ensure these operations are supported by a year 2000
compliant information system. These modifications were completed and tested by
September 1999.
At JLK, HK Systems' Enterprise Information System was implemented, tested and
completed in August 1999 in the FSS business to address the year 2000 issue. The
company has modified the existing non-compliant systems in the catalog business
to ensure that J&L is supported by a year 2000 compliant information system.
Testing of these modifications was performed in September 1999.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- - --------------------------------------------------------------------------------
The company also has completed an assessment of the impact of this issue on its
non-information technology systems, including the company's personal computers,
embedded technology in manufacturing and processing equipment, and other
non-information technology items, and has determined that the mission critical
systems are year 2000 compliant. The company has identified a few
non-information systems, critical to the manufacturing operations, as non-year
2000 compliant and remediated these systems. The company has taken action to
remedy other non-compliant systems through replacement of or modification to the
existing systems. Such remedies were tested for year 2000 compliance in
September 1999.
Other systems that have been identified as not year 2000 compliant are not
considered "mission critical" systems to the overall manufacturing operations,
however, management expects to remedy these systems by November 1999.
Contingency plans include shifting production processes to year 2000 compliant
manufacturing operations. The company does not anticipate employing this
contingency plan.
The company estimates the total year 2000 expenditures to be approximately $53.0
to $55.0 million, approximately half of which are for computer hardware to
replace non-compliant computer systems and the other half to replace
non-compliant computer software, including software implementation and employee
training. These costs include both internal and external personnel costs related
to the assessment and remediation processes, as well as the cost of purchasing
certain hardware and software. There can be no guarantee that these estimates
will be achieved and actual results could differ from those planned.
The majority of these costs were incurred in 1997 and 1996. Total expenditures
expected to be incurred in fiscal 2000 are estimated to be $3.3 million to $4.3
million related to the year 2000 issues. Expenditures incurred to date in fiscal
2000 approximate $1.3 million. Cash flows from operations have provided, and
should continue to provide, funding for these expenditures.
Management believes the most significant impact of the year 2000 issue could be
an interrupted supply of goods and services from the company's vendors. The
company has an ongoing effort to gain assurances and certifications of
suppliers' readiness programs. To date, the results of this effort indicate that
the company's suppliers are well positioned to provide the company with
sufficient goods and services in the year 2000. To mitigate this risk, the
company is modestly increasing safety stock of critical materials and supplies.
The company will continue to expand its efforts to determine whether major
third-party businesses and public and private providers of infrastructure
services, such as utilities, communications services and transportation, also
will be prepared for the year 2000, and will attempt to address any failures on
their part to become year 2000 compliant. Contingency plans may include
purchasing raw materials and supplies from alternate certified vendors and a
further increase of safety stock of critical materials and supplies. The company
does not anticipate employing these contingency plans.
There can be no guarantee that the efforts of the company or of third parties,
whose systems the company relies upon, will completely mitigate a year 2000
problem that could have a material adverse affect on the company's operations or
financial results. While such problems could affect important operations of the
company and its subsidiaries, either directly or indirectly, in a significant
manner, the company cannot at present estimate either the likelihood or the
potential cost of such failures. However, the company will continue to
aggressively pursue all the year 2000 remediation activities discussed herein.
OUTLOOK
Seasonally, sales in the September and December quarters are usually flat.
Economic indicators in the United States and Germany that are leading indicators
for demand of the company's products are positive. In looking to the second
quarter ending December 31, 1999, management expects
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- - --------------------------------------------------------------------------------
Kennametal's consolidated sales to increase slightly over the September 1999
quarter. This outlook anticipates that the year 2000 issue will have neither a
positive or negative impact on the December 1999 quarter.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" as defined by Section 21E
of the Securities Exchange Act of 1934. Actual results may differ materially
from those expressed or implied in the forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
the extent that the economic conditions in the United States and Europe, and to
a lesser extent, Asia Pacific are not sustained, risks associated with
integrating businesses, demands on management resources, risks associated with
international markets such as currency exchange rates and competition, risks
associated with environmental remediation, the effect of third party or company
failures to achieve timely remediation of year 2000 issues, and the effect of
the conversion to the Euro on the company's operations. The company undertakes
no obligation to publicly release any revisions to forward-looking statements to
reflect events or circumstances occurring after the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- - --------------------------------------------------------------------------------
During the September 1999 quarter, the company entered into two interest rate
swaps that effectively convert a notional amount of $50.0 million from floating
to fixed interest rates. This increases the total notional amount of
floating-to-fixed interest rate swaps to $100.0 million. These new agreements
mature in July 2002.
At September 30, 1999, the company would have received $1.0 million to settle
all interest rate swap agreements, representing the excess of fair value over
carrying cost of these agreements. The effect of all interest rate swaps on the
company's composite interest rate on long-term debt was not significant at
September 30, 1999.
At September 30, 1999, the company had a notional amount of $23.0 million of
outstanding foreign exchange forward contracts to sell foreign currency. These
contracts mature before December 31, 1999. A hypothetical 10 percent change in
the applicable September 30, 1999 quarter-end forward rates would result in an
increase or decrease in pretax income of approximately $2.1 million related to
these positions.
There were no other material changes in the company's exposure to market risk
from June 30, 1999.
11
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - --------------------------------------------------------------------------------
At the Annual Meeting of Shareowners on October 25, 1999, the shareowners of the
company voted on the election of three directors, the approval of the Kennametal
Inc. Stock Option and Incentive Plan of 1999 and the election of independent
public accountants. The following is the number of shares voted in favor of and
against each matter and the number of shares having authority to vote on each
matter but withheld.
1. With respect to the votes cast for the election of three directors
whose terms expire in 2002:
<TABLE>
<CAPTION>
For Withheld Broker Non-Vote
------------------------------------------------------------------------
<S> <C> <C> <C>
Peter B. Bartlett 21,811,696 1,130,264 --
Robert L. McGeehan 21,734,355 1,207,605 --
Markos I. Tambakeras 22,703,285 238,675 --
</TABLE>
The following other directors' terms of office continued after the
meeting:
Richard C. Alberding, A. Peter Held, Timothy S. Lucas, Aloysius T.
McLaughlin, Jr., William R. Newlin, and Larry Yost.
2. With respect to the votes cast for the approval of the Kennametal Inc.
Stock Option and Incentive Plan of 1999:
<TABLE>
<CAPTION>
For Against Abstained
------------------------------------------------------------------
<S> <C> <C> <C>
Kennametal Inc. Stock Option
and Incentive Plan of 1999 15,324,739 4,098,795 98,504
</TABLE>
3. With respect to the election of the firm of Arthur Andersen LLP,
independent public accountants, to audit the financial statements of
the company and its subsidiary companies for the fiscal year ending
June 30, 2000:
<TABLE>
<CAPTION>
For Against Abstained
------------------------------------------------------------------
<S> <C> <C> <C>
Arthur Andersen LLP 22,822,714 59,410 59,836
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - --------------------------------------------------------------------------------
(a) Exhibits
(10) Material Contracts
10.1 Amendment to Credit Agreement with Mellon
Bank, N.A. and various creditors dated as of
October 1, 1999. Filed herewith.
(27) Financial Data Schedule for the three months ended
September 30, 1999, submitted to the Securities and
Exchange Commission in electronic format. Filed
herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENNAMETAL INC.
Date: November 10, 1999 By: /s/ FRANK P. SIMPKINS
--------------------------
Frank P. Simpkins
Corporate Controller and
Chief Accounting Officer
13
<PAGE> 1
EXHIBIT 10.1
AMENDMENT TO TRANSACTION DOCUMENTS
THIS AMENDMENT, dated as of October 1, 1999, by and among
KENNAMETAL INC., a Pennsylvania corporation (the "Borrower"), the Lenders
parties to the Credit Agreement referred to below, and MELLON BANK, N.A., as
Administrative Agent under such Credit Agreement.
RECITALS:
WHEREAS, the Borrower has entered into a Credit Agreement,
dated as of November 17, 1997, by and among the Borrower, the Lenders parties
thereto from time to time, and Mellon Bank, N.A., as Administrative Agent (as
amended by an Amendment to Transaction Documents, dated as of November 26, 1997,
an Amendment to Transaction Documents, dated as of December 19, 1997, an
Amendment to Transaction Documents, dated as of March 19, 1998, an Amendment to
Transaction Documents, dated as of December 15, 1998, and an Amendment to
Transaction Documents, dated as of March 31, 1999, the "Credit Agreement"); and
WHEREAS, the parties hereto desire to amend further the Credit
Agreement as set forth herein.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
SECTION 1. AMENDMENTS RELATING TO STANDARD NOTICE. In Section
1.01 of Annex A of the Credit Agreement, the definition of "Standard Notice" is
amended by deleting clause (a) and replacing it with the following:
(a) On the same Business Day in the case of selection of,
conversion to or renewal of the Base Rate Option or prepayment of any
Base Rate Portion; and
SECTION 2. AMENDMENTS RELATING TO EQUITY HYBRID SECURITIES.
(a) Section 2.07(b)(i) to the Credit Agreement is amended by
deleting the second sentence and replacing it with the following:
If a Reduction Event shall occur, an amount not less than the
corresponding Reduction Event Application Amount shall be applied (x)
first, to prepayment of the unpaid principal amount of outstanding Term
Loans, if any, and then (y) the balance, if any, shall be applied to
reduction of the aggregate Revolving Credit Committed Amounts;
provided, that the Borrower shall not be obligated to make any
application pursuant to the foregoing clause (y) in the event that
(A) the Investment Grade Rating Condition is satisfied on the
Reduction Event Date corresponding to such Reduction Event;
(B) such Reduction Event arises under Section 2.07(b)(iv)
(relating to equity issuance) or Section 2.07(b)(v) (relating to
issuance of Equity Hybrid Securities and settlement of Purchase
Contracts), the Equity Recapture Condition is satisfied on the
Reduction Event Date corresponding to such Reduction Event, and
such Reduction Event Date is on or before March 31, 2000; or
(C) such Reduction Event arises under Section 2.07(b)(vi)
(relating to Excess Cash Flow).
(b) Section 2.07(b)(v) of the Credit Agreement is deleted and
replaced with the following:
(v) ISSUANCE OF EQUITY HYBRID SECURITIES AND SETTLEMENT OF
PURCHASE CONTRACTS. "Reduction Event" shall include the following: (i)
issuance, sale or other disposition by the Borrower or any of its
Subsidiaries of any Equity Hybrid Securities, and (ii) settlement of,
or other receipt of proceeds by the Borrower or any of its Subsidiaries
in connection with, a Purchase Contract (whether such settlement or
receipt occurs by reason of cash payment by the holder of such Purchase
Contract, receipt of proceeds of remarketing or other disposition of
1
<PAGE> 2
Equity Hybrid Securities pledged to secure such Purchase Contracts,
receipt of proceeds of cash collateral for Purchase Contracts upon
maturity or liquidation thereof, or otherwise), excluding from clause
(ii) the following: (x) the portion of the aggregate proceeds received
(in cash or marketable securities, valued at their fair market value)
by the Borrower in settlement of Purchase Contracts, if any, equal to
the amount concurrently paid by the Borrower or its Subsidiaries to
redeem Equity Hybrid Securities in a redemption permitted under clause
(i)(y) of the definition of "Equity Hybrid Securities" and (y) Equity
Hybrid Securities acquired by the Borrower in satisfaction of the
obligation of the owners of such Equity Hybrid Securities under
Purchase Contracts. The "Reduction Event Application Amount"
corresponding to the foregoing Reduction Event shall be 100% of the Net
Proceeds thereof. The "Reduction Event Date" corresponding to the
foregoing Reduction Event shall be five Business Days after the
Borrower or its Subsidiaries receives Net Proceeds from such event.
(c) In Article VII of the Credit Agreement, the following new
Section 7.12 is added:
7.12. LIMITATION ON PAYMENTS ON CERTAIN OBLIGATIONS. The
Borrower shall not, and shall not permit any Subsidiary to, directly or
indirectly, pay, prepay, purchase, redeem, retire, defease or acquire,
or otherwise make any payment (on account of principal, interest,
premium or otherwise) of, any obligation under or evidenced by any
Equity Hybrid Security, except that the Borrower may
(a) make payments on and purchases of the Equity Hybrid
Securities as and when required to do so by the mandatory terms
of such Equity Hybrid Security, consistent with the definition
of that term in this Agreement, and
(b) purchase or redeem Equity Hybrid Securities from time
to time, provided that the aggregate principal or face amount of
all such purchases and redemptions of any class or series of
Equity Hybrid Securities shall not exceed 5% of the aggregate
principal or face amount of Equity Hybrid Securities of such
class or series originally issued.
(d) In Article VIII of the Credit Agreement, Section 8.01(f)
is amended as follows:
(i) In Section 8.01(f)(i), the word "and" at the end is
deleted and replaced with the following: "or (C) an event or condition shall
occur which gives any holder the right to put any Equity Hybrid Security to the
issuing trust or the Borrower (other than a put in accordance with clause (i) of
the definition of "Equity Hybrid Security"), and".
(ii) In Section 8.01(f)(ii), the word "and" before clause (C)
is deleted and the semicolon at the end of Section 8.01(f)(ii) is deleted and
replaced with the following: ", and (D) any Equity Hybrid Security (or set of
related Equity Hybrid Securities) having an aggregate principal or face amount
in excess of $10,000,000 (or the equivalent thereof in one or more foreign
currencies);"
(d) In Section 1.01 of Annex A of the Credit Agreement, the
definition of "Equity Hybrid Security" is deleted and replaced with the
following:
"Equity Hybrid Security" means (a) a beneficial interest
issued by a trust which constitutes a Subsidiary of the Borrower,
substantially all the assets of which trust are unsecured Indebtedness
of the Borrower or proceeds thereof, and all payments of which
Indebtedness are required to be, and are, distributed to the holders of
beneficial interests in such trust, or (b) a note, bond or debenture
issued by, and evidencing unsecured Indebtedness of, the Borrower, or
any combination of one or more of the Equity Hybrid Securities in
clauses (a) and (b); provided, however, that no Equity Hybrid Security
shall by its terms (or by the terms of any security into which it is
convertible or exchangeable) impose (either absolutely or upon the
happening of an event or the passage of time) any payment, prepayment,
redemption, repurchase, put or similar obligation on the Borrower or
any Subsidiary of the Borrower on or prior to the Revolving Credit
Maturity Date, except as follows:
(i) The holders of an Equity Hybrid Security may be
given the right to put, convert, exchange or exercise such
Equity Hybrid Security on or before the Revolving Credit
Maturity Date, provided that either (x) the consideration
payable by the Borrower or the issuing trust in connection
with such put, conversion, exchange or exercise is common
stock of the Borrower, or (y) the Borrower or the issuing
trust shall have received or shall concurrently receive
aggregate net proceeds (in cash or marketable securities,
valued at their fair market value) from Purchase Contracts
issued concurrently
2
<PAGE> 3
with the issuance of such Equity Hybrid Security at least
equal to the aggregate principal or face amount, as the case
may be, of such Equity Hybrid Security;
(ii) The holders of an Equity Hybrid Security may be
given the right to put such Equity Hybrid Security to the
issuing trust or the Borrower, or to accelerate the maturity
of such Equity Hybrid Security, upon (x) the occurrence of a
change of control or an event of default (as such terms may be
defined in the documentation relating to such Equity Hybrid
Security), so long as such change of control or event of
default also constitutes an Event of Default under Section
8.01 (other than solely under Section 8.01(f), except in the
case of an event of default arising solely from breach of a
purely ministerial requirement imposed by the terms of the
Equity Hybrid Security, including but not limited to such
matters as a requirement to maintain a New York payment office
for the Equity Hybrid Securities and customary representations
and warranties made at closing with respect to the Equity
Hybrid Security), or (y) a payment default with respect to
such Equity Hybrid Securities; and
(iii) obligations to make payments other than
payments that reduce the outstanding principal or face amount
of the Equity Hybrid Securities.
As used in this definition, "Purchase Contract" means a contract
between a holder of an Equity Hybrid Security (or a person who
purchased such Purchase Contract on the same date on which an Equity
Hybrid Security was issued, or the assignee or transferee of any such
person) and the Borrower whereby such holder (or such purchaser, or
such assignee or transferee, as the case may be) is obligated to
purchase, and the Borrower is obligated to sell, for an amount in cash
or marketable securities (valued at their fair market value) equal to
the principal or face amount of such Equity Hybrid Security, shares of
common stock of the Borrower.
(e) In Section 1.01 of Annex A of the Credit Agreement, the
definition of "Severed Equity Hybrid Security" is deleted, and the clause
defining the terms "Purchase Contract," "Purchase Contract Cash Collateral" and
"Purchase Contract Settlement Date" is revised to read as follows:
"Purchase Contract" has the meaning given that term in the
definition of "Equity Hybrid Securities.
(f) Section 1.01 of Annex A of the Credit Agreement is amended
by adding the following new definition in its appropriate place in alphabetical
order:
"Equity Recapture Condition": The Borrower shall be deemed to
satisfy the "Equity Recapture Condition" on a particular day if and
only if, on such day, the Borrower's senior unsecured long-term debt is
rated "BBB-" or higher by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. (or a comparable rating
from a generally recognized successor to such rating agency) or "Baa3"
or higher by Moody's Investors Service, Inc. (or a comparable rating
from a generally-recognized successor to such rating agency).
SECTION 3. EFFECTIVENESS AND EFFECT, ETC. This Amendment shall
become effective when Mellon Bank, N.A., as Administrative Agent, shall have
received counterparts hereof duly executed by the Borrower and the
Administrative Agent and consents hereto duly executed by the Required Lenders
(as defined in the Credit Agreement). The Credit Agreement, as amended by the
Amendment to Transaction Documents dated as of November 26, 1997, the Amendment
to Transaction Documents dated as of December 19, 1997, the Amendment to
Transaction Documents dated as of March 19, 1998, the Amendment to Transaction
Documents dated as of December 15, 1998, the Amendment to Transaction Documents,
dated as of March 31, 1999, and as further amended hereby, is and shall continue
to be in full force and effect and is hereby in all respects ratified and
confirmed. Except to the extent expressly set forth herein, the execution,
delivery and effectiveness of this Amendment shall not operate as a waiver of
any right, power or remedy under the Credit Agreement or constitute a waiver of
any provision of the Credit Agreement.
SECTION 4. MISCELLANEOUS. This Amendment may be executed in
any number of counterparts and by the different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same document. Section and other headings herein are for reference purposes only
and shall not affect the interpretation of this Amendment in any respect. This
Amendment shall be governed by and
3
<PAGE> 4
construed in accordance with the laws of the Commonwealth of Pennsylvania,
without regard to choice of law principles. This Amendment is a requested
amendment within the meaning of Section 10.06(a)(ii) of the Credit Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first written above.
KENNAMETAL INC.
By: /s/ James E. Morrison
------------------------------------
Name: James E. Morrison
Title: Vice President and Treasurer
MELLON BANK, N.A.,
individually and as Administrative Agent
By: /s/ Peter K. Lee
------------------------------------
Name: Peter K. Lee
Title: Vice President
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1999 Condensed Consolidated Financial Statements (unaudited) and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 20,748
<SECURITIES> 11,772
<RECEIVABLES> 249,266
<ALLOWANCES> 15,399
<INVENTORY> 431,324
<CURRENT-ASSETS> 752,876
<PP&E> 997,652
<DEPRECIATION> 466,468
<TOTAL-ASSETS> 2,032,138
<CURRENT-LIABILITIES> 369,309
<BONDS> 0
0
0
<COMMON> 41,128
<OTHER-SE> 712,599
<TOTAL-LIABILITY-AND-EQUITY> 2,032,138
<SALES> 442,943
<TOTAL-REVENUES> 442,943
<CGS> 279,614
<TOTAL-COSTS> 279,614
<OTHER-EXPENSES> 11,350
<LOSS-PROVISION> 970
<INTEREST-EXPENSE> 14,527
<INCOME-PRETAX> 19,570
<INCOME-TAX> 8,709
<INCOME-CONTINUING> 9,913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,913
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.33
</TABLE>
