<PAGE> 1
================================================================================
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, 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 May 3, 1999
- ---------------------------------------- --------------------------
Capital Stock, par value $1.25 per share 29,947,801
================================================================================
<PAGE> 2
KENNAMETAL INC.
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
- -------- ----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 1999 and June 30, 1998....................................................................... 1
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended March 31, 1999 and 1998.................................................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended March 31, 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.............................................................................. 9
PART II. OTHER INFORMATION
5. Other Information...................................................................................... 17
6. Exhibits and Reports on Form 8-K....................................................................... 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) March 31, June 30,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 15,896 $ 18,366
Marketable equity securities available-for-sale 11,567 --
Accounts receivable, less allowance for doubtful accounts of
$15,041 and $11,974 341,954 332,677
Inventories 454,278 436,472
Deferred income taxes 35,781 31,316
----------- -----------
Total current assets 859,476 818,831
----------- -----------
Property, plant and equipment:
Land and buildings 236,357 222,426
Machinery and equipment 759,471 690,143
Less accumulated depreciation (446,855) (386,642)
----------- -----------
Net property, plant and equipment 548,973 525,927
----------- -----------
Other assets:
Investments in affiliated companies 1,990 13,740
Intangible assets, less accumulated
amortization of $57,479 and $39,408 686,121 706,619
Deferred income taxes 34,319 39,426
Other 43,063 34,450
----------- -----------
Total other assets 765,493 794,235
----------- -----------
Total assets $ 2,173,942 $ 2,138,993
=========== ===========
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases $ 121,123 $ 78,632
Notes payable to banks 35,996 48,103
Accounts payable 106,154 115,373
Accrued payroll 23,044 30,600
Accrued vacation pay 28,921 21,523
Other current liabilities 97,729 82,838
----------- -----------
Total current liabilities 412,967 377,069
----------- -----------
Long-term debt and capital leases, less current maturities 824,349 840,932
Deferred income taxes 45,406 45,253
Other liabilities 96,759 98,073
----------- -----------
Total liabilities 1,379,481 1,361,327
----------- -----------
Minority interest in consolidated subsidiaries 53,145 42,206
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, 5,000 shares authorized; none issued -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
32,820 shares issued 41,025 41,025
Additional paid-in capital 321,932 320,645
Retained earnings 467,178 458,805
Treasury shares, at cost; 2,872 and 2,991 shares held (57,649) (59,131)
Accumulated other comprehensive loss (31,170) (25,884)
----------- -----------
Total shareholders' equity 741,316 735,460
----------- -----------
Total liabilities and shareholders' equity $ 2,173,942 $ 2,138,993
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATIONS
Net sales $ 479,051 $ 496,585 $ 1,444,291 $ 1,177,425
Cost of goods sold 305,654 296,316 910,816 694,431
----------- ----------- ------------ ------------
Gross profit 173,397 200,269 533,475 482,994
Research and development expenses 4,174 4,781 14,984 14,964
Selling, marketing and distribution expenses 100,913 93,565 301,209 241,192
General and administrative expenses 22,294 31,513 80,647 80,049
Restructuring and asset impairment charges 13,937 -- 13,937 --
Amortization of intangibles 6,485 5,822 19,151 9,587
----------- ----------- ------------ ------------
Operating income 25,594 64,588 103,547 137,202
Interest expense 17,992 20,720 53,248 40,593
Other expense 668 4,788 861 5,449
----------- ----------- ------------ ------------
Income before income taxes and minority interest 6,934 39,080 49,438 91,160
Provision for income taxes 2,900 16,600 21,000 38,700
Minority interest 1,854 1,739 4,828 4,597
----------- ----------- ------------ ------------
Net income $ 2,180 $ 20,741 $ 23,610 $ 47,863
=========== =========== ============ ============
PER SHARE DATA
Basic earnings per share $ 0.07 $ 0.77 $ 0.79 $ 1.80
=========== =========== ============ ============
Diluted earnings per share $ 0.07 $ 0.76 $ 0.79 $ 1.78
=========== =========== ============ ============
Dividends per share $ 0.17 $ 0.17 $ 0.51 $ 0.51
=========== =========== ============ ============
Weighted average shares outstanding 29,912 27,011 29,882 26,528
=========== =========== ============ ============
Diluted weighted average shares outstanding 29,923 27,320 29,921 26,895
=========== =========== ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Nine Months Ended
March 31,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 23,610 $ 47,863
Adjustments for noncash items:
Depreciation and amortization 71,897 46,224
Restructuring and asset impairment charges and other charges 17,119 --
Other 6,308 6,394
Changes in certain assets and liabilities, net of effects of acquisitions:
Accounts receivable 910 (34,729)
Inventories (23,002) (14,769)
Accounts payable and accrued liabilities (81) 13,116
Other (6,816) (1,544)
----------- -----------
Net cash flow from operating activities 89,945 62,555
----------- -----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (83,226) (61,156)
Disposals of property, plant and equipment 8,947 1,739
Purchase of marketable equity securities (12,162) --
Acquisitions, net of cash and other (4,593) (744,996)
----------- -----------
Net cash used for investing activities (91,034) (804,413)
----------- -----------
FINANCING ACTIVITIES
Decrease in short-term debt (13,637) (89,343)
Increase in long-term debt 131,330 778,540
Decrease in long-term debt (104,860) (200,804)
Net proceeds from issuance and sale of common stock -- 171,439
Net proceeds from issuance and sale of subsidiary stock -- 90,430
Dividend reinvestment and employee stock plans 2,769 9,936
Cash dividends paid to shareholders (15,237) (13,401)
Other (1,014) (6,089)
----------- -----------
Net cash flow (used for) from financing activities (649) 740,708
----------- -----------
Effect of exchange rate changes on cash (732) (1,888)
----------- -----------
CASH AND EQUIVALENTS
Net decrease in cash and equivalents (2,470) (3,038)
Cash and equivalents, beginning 18,366 21,869
----------- -----------
Cash and equivalents, ending $ 15,896 $ 18,831
=========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 51,425 $ 44,137
Income taxes paid 18,808 19,957
</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 1998 Annual Report. The condensed consolidated balance sheet
as of June 30, 1998 has been derived from the audited balance sheet
included in the company's 1998 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 and nine months
ended March 31, 1999 are not necessarily indicative of the results to be
expected for the full fiscal year. Certain amounts in the prior years'
condensed 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 March 31,
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>
March 31, June 30,
1999 1998
---- ----
<S> <C> <C>
Finished goods $ 325,742 $ 302,374
Work in process and powder blends 129,580 117,428
Raw materials and supplies 36,556 53,449
----------- -----------
Inventory at current cost 491,878 473,251
Less LIFO valuation (37,600) (36,779)
----------- -----------
Total inventories $ 454,278 $ 436,472
=========== ===========
</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 five Superfund sites in the United States. However, it is management's
opinion, based on its evaluations and discussions with outside counsel and
independent consultants, that the ultimate resolution of these
environmental matters will not have a material adverse effect on the
results of operations, financial position or cash flows of the company.
The company maintains a Corporate Environmental, Health and Safety (EH&S)
Department to facilitate compliance with environmental regulations and to
monitor and oversee remediation activities. In addition, the company has
established an EH&S administrator at each of its domestic manufacturing
facilities. The company's financial management team periodically meets with
members of the Corporate EH&S Department and the Corporate Legal Department
to review and evaluate the status of environmental projects and
contingencies. On a quarterly and annual basis, management establishes or
adjusts financial provisions and reserves for environmental contingencies
in accordance with Statement of Financial Accounting Standards (SFAS) No.
5, "Accounting for Contingencies."
5. For purposes of determining the average 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 11,723 and 308,935 for the three months ended March 31,
1999 and 1998, respectively, and 38,637 and 366,916 for the nine months
ended March 31, 1999 and 1998, respectively.
4
<PAGE> 7
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires the presentation of
comprehensive income in a company's financial statement disclosures.
Comprehensive income represents all changes in the equity of a company
during the reporting period, including net income, as well as charges and
credits directly to retained earnings, which are excluded from net income.
The company's components of comprehensive income (loss) consist of the
following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 2,180 $ 20,741 $ 23,610 $ 47,863
Unrealized loss on marketable equity
securities available-for-sale, net of tax (66) -- (66) --
Foreign currency translation adjustments (5,619) (5,566) (5,220) (10,808)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (3,505) $ 15,175 $ 18,324 $ 37,055
=========== =========== =========== ===========
</TABLE>
The components of accumulated other comprehensive loss consist of the
following (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
---- ----
<S> <C> <C>
Foreign currency translation adjustments $ (31,104) $ (25,884)
Unrealized loss on marketable equity
securities available-for-sale, net of tax (66) --
----------- -----------
Total accumulated other comprehensive loss $ (31,170) $ (25,884)
=========== ===========
</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 year 2000. SFAS No. 133
establishes accounting and reporting standards requiring all derivative
instruments (including certain derivative instruments imbedded in other
contracts) to 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 allow 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. On July 2, 1997, an initial public offering (IPO) of approximately 4.9
million shares of common stock of JLK Direct Distribution Inc. (JLK), a
subsidiary of the company, was consummated at a price of $20.00 per share.
JLK's operations consist of the company's wholly owned subsidiary J&L
Industrial Supply (J&L) and its Full Service Supply programs. The net
proceeds from the offering were approximately $90.4 million and represented
approximately 20 percent of JLK's common stock. The transaction has been
accounted for as a capital transaction in the consolidated financial
statements. The net proceeds were used by JLK to repay $20.0 million of
indebtedness related to a dividend to the company and $20.0 million related
to intercompany obligations to the company incurred in 1997. The company
used these proceeds to repay short-term debt. Pending other uses, the
remaining net proceeds were loaned to the company, under an intercompany
debt/investment and cash management agreement at a fluctuating rate of
interest equal to the company's short-term borrowing costs. The remaining
net proceeds of $50.4 million were used to make acquisitions in 1998. The
company currently owns approximately 83 percent of the outstanding common
stock of JLK due to treasury stock purchases made by JLK since the IPO.
5
<PAGE> 8
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
9. On November 17, 1997, the company completed the acquisition of Greenfield
Industries, Inc. (Greenfield) for approximately $1.0 billion, including
$324.4 million in assumed Greenfield debt and convertible redeemable
preferred securities and transaction costs.
The Greenfield acquisition was recorded using the purchase method of
accounting and, accordingly, the results of operations of Greenfield have
been included in the company's results from the date of acquisition. The
purchase price was allocated to assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. The excess
of purchase price over the fair value of the net assets acquired has been
recorded as goodwill and is being amortized over forty years.
Additionally, the company made several other acquisitions in 1998 to expand
its product offering and distribution channels. These acquisitions were
accounted for using the purchase method of accounting and their results
have been included in the company's results from the respective dates of
acquisition. Except for Greenfield, the pro forma effects, individually and
collectively, of the acquisitions in the company's consolidated financial
statements would not have a material impact on the reported results.
The allocation of the purchase price to assets acquired and liabilities
assumed of Greenfield is as follows (in thousands):
<TABLE>
<S> <C>
Working capital, other than cash $ 171,710
Property, plant and equipment 167,798
Other assets 9,246
Other liabilities (28,510)
Long-term debt (318,146)
Goodwill 654,117
------------
Net purchase price $ 656,215
============
</TABLE>
Pro forma results of operations for the acquisition of Greenfield, but
excluding the effects of all other acquisitions, are based on the
historical financial statements of the company and Greenfield adjusted to
give effect to the acquisition of Greenfield. The pro forma results of
operations assume that the acquisition of Greenfield occurred as of the
first day of the company's 1998 fiscal year (July 1, 1997).
<TABLE>
<CAPTION>
Nine Months Ended
(in thousands, except per share data) March 31, 1998
--------------
<S> <C>
Net sales $ 1,412,227
Net income 40,289
Basic earnings per share 1.52
Diluted earnings per share 1.50
</TABLE>
The pro forma financial information does not purport to present what the
company's results of operations would actually have been if the acquisition
of Greenfield had occurred on the assumed date, as specified above, or to
project the company's financial condition or results of operations for any
future period.
On June 26, 1998, the company sold the Marine Products division of
Greenfield, which operated as Rule Industries, Inc. (Rule). The company
acquired Rule as part of its acquisition of Greenfield and, for strategic
reasons, chose to divest itself of this part of the business. Annual sales
of the Marine Products division were approximately $25.0 million. Cash
proceeds of $62.1 million were used to reduce a portion of the company's
long-term debt incurred in connection with the acquisition of Greenfield
(see Note 10).
6
<PAGE> 9
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. In connection with the acquisition of Greenfield, the company entered into
a $1.4 billion Bank Credit Agreement (Agreement). Subject to certain
conditions, the Agreement permitted term loans of up to $500.0 million and
revolving credit loans of up to $900.0 million for working capital, capital
expenditures and general corporate purposes. Interest payable under the
term loan and revolving credit loans are currently based on LIBOR plus
1.125%. The Agreement also includes a commitment fee on the revolving
credit loans of 0.25% of the unused balance.
The Agreement also contains various restrictive and affirmative covenants
requiring the maintenance of certain financial ratios. The term loan is
subject to mandatory amortization, which commenced on November 30, 1998 and
matures on August 31, 2002. The revolving credit loan also matures on
August 31, 2002. During fiscal 1998, the term loan was permanently reduced
with the net proceeds received in connection with the issuance of company
stock and from the sale of certain assets (see Notes 9 and 11).
11. On March 20, 1998, the company sold 3.45 million shares of common stock
resulting in net proceeds of $171.4 million. The proceeds were used to
reduce a portion of the company's long-term debt incurred in connection
with the acquisition of Greenfield (see Note 10).
12. On January 18, 1999, the company entered into a business cooperation
agreement with Toshiba Tungaloy Co., Ltd. (TT) to enhance the global
business prospects for metalcutting tools of both companies. The agreement
includes various joint activities in areas such as product development,
research and development, private labeling, cross-licensing, and sales and
marketing. As part of the agreement, the company purchased approximately
4.9% of the outstanding shares of TT in a private transaction from TT's
largest shareholder, Toshiba Corporation, for approximately $15.9 million,
including the costs of the transaction. In order to enter into this
agreement, the company purchased the shares at a predetermined price. In
accordance with accounting rules, the company realized a one-time charge of
approximately $3.8 million in the March 1999 quarter due to the difference
between the cost ($15.9 million) and the fair market value of the
securities on the date the securities were purchased ($12.1 million). Due
to the provisions of this agreement, the company was not able to record
this difference as an asset. This charge has been recorded as a component
of selling, marketing and distribution expenses.
The investment is accounted for as an available-for-sale security under
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The unrealized gain or loss on this investment is recorded as
a component of accumulated other comprehensive loss, net of tax. The gross
unrealized loss on this investment for the three and nine months ended
March 31, 1999 is $0.1 million.
13. In March 1999, the company's management completed 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 components of the charges are as
follows (in thousands):
<TABLE>
<CAPTION>
Asset
Write-Downs & Initial
Total Other Non-Cash Restructuring
Charge Adjustments Liability
------ ----------- ---------
<S> <C> <C> <C>
Product rationalization $ 6,900 $ 6,900 $ --
Plant closure 4,200 2,000 2,200
Impairment of international operations 5,800 5,800 --
Voluntary early retirement program 3,937 2,419 1,518
------------- ------------- --------------
Total $ 20,837 $ 17,119 $ 3,718
============= ============= ==============
</TABLE>
7
<PAGE> 10
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The product rationalization charge represents a write-down of certain
product lines that are being discontinued as part of a program to
streamline and optimize the company's global metalworking product offering.
This charge is net of salvage value and has been recorded as a component of
cost of goods sold. Estimated salvage values were based on estimates of
proceeds to be realized through the sale of this inventory outside the
normal course of business.
The program will result in a reduction in the number of products offered
from 58,000 to 38,000 and is an extension of the company's initiative to
reduce the number of its North American warehouses. By streamlining the
product offering, the company anticipates it will improve customer service
and inventory turnover, allow for more efficient operations, thereby
reducing costs and improving capacity utilization, and eliminate redundancy
in its product offering. Sales of these products represent less than 5
percent of global metalworking sales. The company is proactively converting
customers from these older, less competitive products to newer products.
The company also initiated plans to close a drill manufacturing plant
in Solon, Ohio. The manufacturing of products made at this plant will
be relocated to other existing plants in the United States. The
closure will eliminate excess capacity at other plant locations and
unnecessary overhead at this plant. The company will decommission the
existing plant and sell the property in the near future. The charge
consists of employee termination benefits for 155 hourly and salaried
employees, which is substantially all employees at this plant, and the
write-down of assets included in property, plant and equipment, net of
salvage value.
The costs resulting from the relocation of employees, hiring and training
new employees and other costs resulting from the temporary duplication of
certain operations have not been included in this charge and will be
included in operating expenses as incurred. The costs related to these
items are estimated to be approximately $2.7 million and will be incurred
through fiscal 2000.
An asset impairment charge was recorded to write-down, to fair market
value, an investment in and net receivables from certain international
operations in emerging markets as a result of changing market
conditions in the regions these operations serve. In the March 1999
quarter, the company completed a study to evaluate the majority of
these operations, the markets for these products, and the current
economic situation in these regions, and to provide recommendations
for solving operational concerns. As a result of this study and
continued economic deterioration in these regions, the company
determined that the carrying amount of its investment in and net
receivables from these operations would not be recoverable.
A voluntary early retirement benefit program was offered to and accepted by
34 domestic employees. In exchange for their retirement, the company will
provide those employees pension and health benefits that would have been
earned by the employees through their normal retirement date. As a result
of providing these additional pension benefits, approximately $2.4 million
of the total cost was funded through the company's overfunded pension plan.
There are no tax benefits associated with this cost as the company may only
deduct actual cash payments made to the pension plan.
The charges for the plant closure, the write-down of the investment in and
net receivables from certain international operations, and the voluntary
early retirement benefit program are recorded as the restructuring and
asset impairment charges.
The costs charged against the restructuring cost accrual as of March 31,
1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Beginning Cash Ending
Accrual Expenditures Adjustments Accrual
------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Plant closure $ 2,200 $ -- $ -- $ 2,200
Voluntary early retirement program 1,518 -- -- 1,518
------------- -------------- ---------------- -------------
Total $ 3,718 $ -- $ -- $ 3,718
============= ============== ================ =============
</TABLE>
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
SALES AND EARNINGS
During the quarter ended March 31, 1999, consolidated sales were $479.1 million,
a decline of 4 percent from $496.6 million in the same quarter last year.
Excluding acquisitions, sales were 10 percent lower due to reduced industrial
demand of the company's metalworking products in North America.
Net income for the quarter ended March 31, 1999, was $2.2 million, or $0.07 per
share, as compared with net income of $20.7 million, or $0.76 per share in the
same quarter last year. The results for the quarter ended March 31, 1999 were
reduced by approximately $24.6 million, or $0.51 per share, including $20.8
million, or $0.44 per share, related to special charges for operational
improvement programs, and $3.8 million, or $0.07 per share, related to a
one-time charge incurred in the acquisition of 4.9 percent of Toshiba Tungaloy
stock.
Excluding these charges for the March 1999 quarter, net income was primarily
affected by lower sales in traditional Kennametal markets and a less favorable
sales mix. This was partially offset by significant cost control and
cost-reduction actions.
During the nine-month period ended March 31, 1999, consolidated sales were
$1,444.3 million, up 23 percent from $1,177.4 million last year. Net income was
$23.6 million or $0.79 per share, compared to $47.9 million or $1.78 per share
last year.
The following table presents the Company's sales (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------ --------------------------------------
1999 1998 % Change 1999 1998 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Sales(1):
Metalworking:
North America $ 91,335 $ 109,076 (16)% $ 276,236 $ 309,732 (11)%
Europe 74,989 69,590 8 220,452 190,411 16
Asia Pacific 10,171 8,711 17 29,048 32,235 (10)
Industrial Products 81,109 95,167 (15) 258,026 128,128 101
JLK/Industrial Supply 134,172 107,332 25 393,454 291,249 35
Engineered Products & Other 43,240 61,630 (30) 133,577 98,351 36
Mining and Construction 44,035 45,079 (2) 133,498 127,319 5
---------- ----------- ------ ------------ ------------ ------
Net sales $ 479,051 $ 496,585 (4)% $ 1,444,291 $ 1,177,425 23%
========== =========== ====== ============ ============ ======
By Geographic Area:
Within the United States $ 318,392 $ 335,434 (4)% $ 970,593 $ 784,611 24%
International 160,659 161,151 -- 473,698 392,814 21
---------- ----------- ------ ----------- ----------- ------
Net sales $ 479,051 $ 496,585 (4)% $ 1,444,291 $ 1,177,425 23%
========== =========== ====== ============ ============ ======
</TABLE>
(1) Certain amounts in prior period sales have been reclassified to conform
to the current year presentation.
METALWORKING
During the March 1999 quarter, sales in the North America Metalworking market
decreased 16 percent from the previous year due to reduced demand by customers
in most markets, except for the automotive market. The metalworking market
continues to be adversely affected by reduced demand in the oil field services,
agriculture and construction equipment, light engineering and several other
sectors. Sales of Kennametal traditional metalcutting products sold through all
sales channels in North America decreased 12 percent during the quarter.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Sales in the Europe Metalworking market grew 8 percent over the same quarter of
a year ago due to acquisitions, favorable foreign currency translation effects
and improved demand in the automotive and aerospace markets. Sales to most other
sectors were down. Favorable foreign currency translation effects were 4 percent
during the quarter. The acquisition-related sales were a result of the company's
July 1, 1998 purchase of an increased ownership of affiliated companies in
Italy.
In the Asia Pacific Metalworking market, sales rose 12 percent on a local
currency basis during the quarter. Sales were positively affected by increased
global demand in the automotive market. Favorable foreign currency translation
effects were 5 percent of the increase in sales in this market.
For the nine-month period ended March 31, 1999, sales in the North America
Metalworking market decreased 11 percent and sales in the Europe Metalworking
market increased 16 percent due to the factors mentioned above. Sales in the
Asia Pacific Metalworking market decreased 10 percent due to weak economic
conditions across most Asia Pacific countries.
INDUSTRIAL PRODUCTS
Sales of Industrial Products declined 15 percent due to reduced industrial
demand in North America, partially offset by increased demand of industrial
products sold in consumer markets as a result of new sales programs.
For the nine-month period ended March 31, 1999, sales of Industrial Products
increased due to the inclusion of five additional months of sales related to the
acquisition of Greenfield. On a comparable basis, demand for Greenfield
Industrial Products declined 11 percent from a year ago due to the factors
mentioned above.
JLK/INDUSTRIAL SUPPLY
Sales at JLK rose 25 percent primarily because of acquisitions. Excluding the
effects of acquisitions, sales at JLK declined 4 percent primarily due to
continued weakness in the oil field services and other markets. This was
partially offset by higher sales from the addition of new Full Service Supply
programs. Full Service Supply was awarded new contracts covering 10 plant sites
in the United States during this quarter.
For the nine-month period ended March 31, 1999, sales in the Industrial Supply
market increased 35 percent due to the factors mentioned above.
ENGINEERED PRODUCTS & OTHER
Sales in the Engineered Products & Other markets declined 30 percent during the
quarter due to continued weak market conditions in the oil field services
industry and in electronic circuit board manufacturing. Sales were also affected
by the divestiture of the marine products business. Excluding this divestiture,
sales of Engineered Products & Other declined 22 percent.
For the nine-month period ended March 31, 1999, sales of Engineered Products &
Other increased due to the inclusion of five additional months of sales related
to the acquisition of Greenfield, partially offset by the divestiture of the
marine products business in June 1998. On a comparable basis, demand for
Engineered Products & Other declined 19 percent from a year ago due to the
factors mentioned above.
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
MINING AND CONSTRUCTION
During the March 1999 quarter, sales in the Mining and Construction market
declined 2 percent from a year ago as a result of weaker demand for mining tools
and metallurgical powders used in the oil field services industry. This was
partially offset by increased sales of construction tools due to a strong start
to the construction season.
For the nine-month period ended March 31, 1999, sales in the Mining and
Construction market increased 5 percent due to the Greenfield acquisition,
partially offset by the factors mentioned above.
GROSS PROFIT MARGIN
The gross profit margin for the March 1999 quarter was 36.2 percent as compared
with 40.3 percent in the prior year. The gross margin in the current year was
affected by a $6.9 million charge related to the implementation of a new program
to streamline and optimize the global metalworking product offering. Excluding
this charge, the gross margin would have been 37.6 percent. The gross profit
margin was affected by an unfavorable sales mix, lower production levels and
costs associated with plant consolidations and rearrangements.
For the nine-month period ended March 31, 1999, the gross profit margin was 36.9
percent, compared with 41.0 percent last year due to lower-margin sales from
acquired companies and the factors mentioned above.
OPERATING EXPENSES
For the March 1999 quarter, operating expenses as a percentage of sales were
26.6 percent compared to 26.2 percent last year. Operating expenses for the
current quarter include a charge of $3.8 million that the company recorded on
its purchase of 4.9 percent of Toshiba Tungaloy stock due to the difference
between the cost and the fair market value of the securities on the date the
securities were purchased. Excluding the effect of this charge, the operating
expense ratio would have been 25.8 percent. Operating expenses decreased
significantly due to the company's on-going efforts to control costs.
For the nine-month period ended March 31, 1999, the operating expenses as a
percentage of sales were 27.5 percent, compared with 28.6 percent last year. On
an absolute dollar basis, the increase in operating expenses is attributable to
acquisitions, the JLK expansion program, including costs to relocate JLK's
office and warehouse in the United Kingdom, the charge recorded on the purchase
of Toshiba Tungaloy stock, facility rationalizations and other programs. These
increases were partially offset by cost-reduction actions implemented in
November 1998 and continued cost control. Additionally, amortization of
intangibles increased approximately $9.6 million related primarily to the
acquisition of Greenfield and other companies.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In March 1999, the company's management completed 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 components of the charges are as follows (in thousands):
<TABLE>
<CAPTION>
Asset
Write-Downs & Initial
Total Other Non-Cash Restructuring
Charge Adjustments Liability
------ ----------- ---------
<S> <C> <C> <C>
Product rationalization $ 6,900 $ 6,900 $ --
Plant closure 4,200 2,000 2,200
Impairment of international operations 5,800 5,800 --
Voluntary early retirement program 3,937 2,419 1,518
------------- ------------- --------------
Total $ 20,837 $ 17,119 $ 3,718
============= ============= ==============
</TABLE>
The product rationalization charge represents a write-down of certain product
lines that are being discontinued as part of a program to streamline and
optimize the company's global metalworking product offering. This charge is net
of salvage value and has been recorded as a component of cost of goods sold.
Estimated salvage values were based on estimates of proceeds to be realized
through the sale of this inventory outside the normal course of business.
The program will result in a reduction in the number of products offered from
58,000 to 38,000 and is an extension of the company's initiative to reduce the
number of its North American warehouses. By streamlining the product offering,
the company anticipates it will improve customer service and inventory turnover,
allow for more efficient operations, thereby reducing costs and improving
capacity utilization, and eliminate redundancy in its product offering. Sales of
these products represent less than 5 percent of global metalworking sales. The
company is proactively converting customers from these older, less competitive
products to newer products.
The company also initiated plans to close a drill manufacturing plant in
Solon, Ohio. The manufacturing of products made at this plant will be
relocated to other existing plants in the United States. The closure will
eliminate excess capacity at other plant locations and unnecessary overhead
at this plant. The company will decommission the existing plant and sell
the property in the near future. The charge consists of employee
termination benefits for 155 hourly and salaried employees, which is
substantially all employees at this plant, and the write-down of assets
included in property, plant and equipment, net of salvage value.
The costs resulting from the relocation of employees, hiring and training new
employees and other costs resulting from the temporary duplication of certain
operations have not been included in this charge and will be included in
operating expenses as incurred. The costs related to these items are estimated
to be approximately $2.7 million and will be incurred through fiscal 2000.
An asset impairment charge was recorded to write-down, to fair market
value, an investment in and net receivables from certain international
operations in emerging markets as a result of changing market conditions in
the regions these operations serve. In the March 1999 quarter, the company
completed a study to evaluate the majority of these operations, the markets
for these products, and the current economic situation in these regions,
and to provide recommendations for solving operational concerns. As a
result of this study and continued economic deterioration in these regions,
the company determined that the carrying amount of its investment in and
net receivables from these operations would not be recoverable.
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
A voluntary early retirement benefit program was offered to and accepted by 34
domestic employees. In exchange for their retirement, the company will provide
those employees pension and health benefits that would have been earned by the
employees through their normal retirement date. As a result of providing these
additional pension benefits, approximately $2.4 million of the total cost was
funded through the company's overfunded pension plan. There are no tax benefits
associated with this cost as the company may only deduct actual cash payments
made to the pension plan.
The charges for the plant closure, the write-down of the investment in and net
receivables from certain international operations, and the voluntary early
retirement benefit program are recorded as the restructuring and asset
impairment charges.
The costs charged against the restructuring cost accrual as of March 31, 1999
were as follows (in thousands):
<TABLE>
<CAPTION>
Beginning Cash Ending
Accrual Expenditures Adjustments Accrual
------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Plant closure $ 2,200 $ -- $ -- $ 2,200
Voluntary early retirement program 1,518 -- -- 1,518
------------- -------------- ---------------- -------------
Total $ 3,718 $ -- $ -- $ 3,718
============= ============== ================ =============
</TABLE>
INTEREST EXPENSE
Interest expense in the March 1999 quarter declined to $18.0 million as a result
of lower borrowing rates coupled with lower average borrowings during the
quarter. For the nine-month period ended March 31, 1999, interest expense was
$53.2 million, compared with $40.6 million last year due to higher average
borrowings in fiscal 1999.
OTHER EXPENSE
Other expense for the three and nine months ended March 31, 1998 included the
write-off of deferred financing costs related to the cancelled January 1998 debt
and equity offerings. These costs, which totaled $4.6 million, included the
termination of a treasury lock hedge that amounted to $3.5 million and the
write-off of other related offering expenses of $1.1 million.
INCOME TAXES
The effective tax rate for the March 1999 quarter was 41.8 percent compared to
an effective tax rate of 42.5 percent in the third quarter of a year ago. For
the nine-month periods ended March 31, 1999 and 1998, the effective tax rate was
42.5 percent.
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 nine months ended March 31,
1999, the Company generated $89.9 million in cash from operations. The increase
in cash provided by operations compared to the same period a year ago resulted
primarily from higher noncash items and lower working capital requirements,
offset in part by lower net income.
Net cash used for investing activities was $91.0 million. Compared to the prior
year, the decrease in net cash used for investing activities was due to reduced
acquisition activity offset by increased expenditures to upgrade machinery and
equipment and to acquire additional client-server information systems. The
company also purchased approximately 4.9% of the outstanding shares of Toshiba
Tungaloy in fiscal 1999.
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Net cash used for financing activities was $0.6 million. The decrease in net
cash from financing activities was a result of lower borrowings compared to
fiscal 1998, which included the financing of the Greenfield acquisition. The
company also received net proceeds from the issuance and sale of its common
stock and from the sale of the common stock of the company's JLK subsidiary in
fiscal 1998.
On January 18, 1999, the company entered into a business cooperation agreement
with Toshiba Tungaloy Co., Ltd. (TT) to enhance the global business prospects
for metalcutting tools of both companies. The agreement includes various joint
activities in areas such as product development, research and development,
private labeling, cross-licensing, and sales and marketing. As part of the
agreement and as is customary in Japan as a sign of good faith, the company
purchased approximately 4.9% of the outstanding shares of TT in a private
transaction from TT's largest shareholder, Toshiba Corporation, for
approximately $15.9 million, including the costs of the transaction. In order to
enter into this agreement, the company purchased the shares at a predetermined
price. In accordance with accounting rules, the company realized a one-time
charge of approximately $3.8 million in the March 1999 quarter due to the
difference between the cost ($15.9 million) and the fair market value of the
securities on the date the securities were purchased ($12.1 million). Due to the
provisions of this agreement, the company was not able to record this difference
as an asset. This charge has been recorded as a component of selling, marketing
and distribution expenses. This transaction was financed through the borrowing
of Japanese yen under a new credit line.
The intentions of the companies are to make the business cooperation agreement
successful and to develop a strong working relationship that will benefit both
companies in the future. The company will periodically evaluate the progress
made under this agreement and its current ownership position in TT to ensure
both are aligned with the company's operational and financial goals.
FINANCIAL CONDITION
Total assets were $2.2 billion at March 31, 1999, up 1.6 percent from $2.1
billion at June 30, 1998. Net working capital was $446.5 million, an increase of
1.1 percent from $441.8 million at June 30, 1998. The ratio of current assets to
current liabilities was 2.1 as of March 31, 1999 and 2.2 as of June 30, 1998.
The total debt-to-total-capital ratio was 55.3 percent as of March 31, 1999 and
55.4 percent as of June 30, 1998.
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 more than 85 percent of the
tasks identified to remediate the year 2000 exposure, with the majority of the
remaining tasks targeted for June 1999 completion. The information systems being
utilized by the company that were not year 2000 compliant were either replaced
with a compliant system, or are in the process of being modified to become
compliant.
Year 2000 exposure related to information systems has been substantially
mitigated throughout key metalworking and mining and construction operations
through the implementation of SAP R3 for most business processes. In efforts to
manage other business processes on year 2000 compliant information systems, the
company is implementing Manugistics to manage inventory and replenishment and
the Human Resources module of SAP. These systems are to be fully implemented by
June 30, 1999.
The company is in the process of modifying existing non-compliant business
systems in the industrial product and engineered product operations to ensure
these operations are supported by a year 2000 compliant information system.
These modifications are expected to be completed and tested by June 1999.
Management intends to implement SAP R3 in these operations in the future.
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
At JLK, HK Systems' Enterprise Information System currently is being implemented
in two phases and will address the year 2000 issue. The initial phase of this
implementation is expected to be tested and completed by June 1999. The second
phase is expected to be implemented in late 1999 and completed thereafter. Due
to the timing of the completion of the second phase, the company currently is
modifying the existing non-compliant systems to ensure the remainder of these
operations are supported by a year 2000 compliant information system. These
modifications are expected to be completed by August 1999. Management has
determined that sufficient internal resources are available and adequate time
exists to implement these procedures.
The company also has substantially 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 tooling, and other non-information technology items, and has
determined that the majority of these 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 is currently replacing
these systems with year 2000 compliant systems. The company is currently taking
action to remedy these other non-compliant systems through replacement of or
modification to the existing systems. Such remedies will be tested for year 2000
compliance prior to June 30, 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 June 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 $45.0
to $50.0 million, 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.
Expenditures to rectify non-compliant personal computers and various
non-information technology items are estimated to be an additional $5.0 million.
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.
Cash flows from operations have provided, and should continue to provide,
funding for these expenditures. The majority of these costs were incurred in
1997 and 1996. Total expenditures expected to be incurred in fiscal 1999 and
fiscal 2000 are estimated to be approximately $12.0 and $5.0 million,
respectively, related to the year 2000 issues. Expenditures incurred in fiscal
1999 to date approximate $10.2 million, over half of which relate to computer
hardware and software licenses.
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 should be able 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 ensure that 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 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 this
contingency plan.
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,
15
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency, the Euro. The company conducts business in member countries.
The transition period for the introduction of the Euro will be between January
1, 1999 and June 30, 2002. The company has been addressing the issues involved
with the introduction of the Euro. Where considered necessary, the company's
current business systems support this new currency, and therefore, the company
has the ability to perform transactions denominated in the Euro. Other than the
costs associated with the new systems as part of the year 2000 remediation,
there were no additional costs incurred by the company as a result of this
conversion.
Currently, the company has different price structures for goods being sold in
the member countries due to, among other things, historical differences in
volatility in the currencies of those individual countries. Price structure
harmonization has occurred over the past several years and is expected to
continue as these member countries become a unified common market. This
harmonization has not significantly affected the past financial results of the
company nor is it expected to have a significant impact in the future on the
company's financial results.
Further, the company's competitors will have to address the Euro conversion as
those companies currently have manufacturing facilities and distribution
networks in member countries. Management believes the conversion to the Euro
will not significantly impact any existing material contracts, nor should it
have any adverse tax or accounting consequences. Accordingly, conversion to the
Euro is not expected to have a material effect on the company's operations or
financial results.
OUTLOOK
In looking ahead to the remainder of fiscal 1999, management expects the
short-term outlook for demand for the company's products to be unchanged, though
the company will remain focused on controlling costs and improving the balance
sheet. As a whole, the company's end markets in North America appear to have
stabilized. The company remains cautious about the European economy for the
remainder of fiscal 1999. The company's results will continue to benefit from
the cost-reduction actions and additional cost reduction programs announced this
quarter.
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, 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.
16
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
- --------------------------------------------------------------------------------
Effective July 1, 1999, the company's Board of Directors has elected Markos I.
Tambakeras president and chief executive officer to succeed Robert L. McGeehan
who will retire June 30, 1999. Tambakeras has been president of the Industrial
Control Business of Honeywell Inc. since 1997.
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 March 31,
1999. Filed herewith.
(27) Financial Data Schedule for nine months ended March 31,
1999, submitted to the Securities and Exchange Commission in
electronic format. Filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K was filed on March 23, 1999 regarding the
announcement that Kennametal President and CEO Robert L.
McGeehan will retire from the company effective July 1, 1999.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENNAMETAL INC.
Date: May 13, 1999 By: /s/ FRANK P. SIMPKINS
----------------------------
Frank P. Simpkins
Corporate Controller and
Chief Accounting Officer
18
<PAGE> 1
EXHIBIT 10.1
AMENDMENT TO TRANSACTION DOCUMENTS
This Amendment, dated as of March 31, 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:
A. 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 and an Amendment to
Transaction Documents, dated as of December 15, 1998, the "Credit Agreement");
and
B. 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 PROPOSED RECEIVABLES
SECURITIZATION PROGRAM.
(a) Section 2.07(b)(ii) is hereby deleted in its entirety and replaced with the
following:
(ii) ASSET SALES. "Reduction Event" shall include the
following (each, a "Reduction Event Asset Sale"): any sale, lease or
other disposition (including without limitation (x) any such
transaction effected by way of merger or consolidation, and (y) any
sale-leaseback transaction whether or not involving a capitalized
lease) by the Borrower or any of its Subsidiaries of any property
(including without limitation any capital stock or other equity
interest held by the Borrower or such Subsidiary), but excluding (A)
any disposition to the Borrower or to a Subsidiary of the Borrower, (B)
any sale, transfer or other disposition in the ordinary course of
business of inventory or of obsolete equipment or equipment which has
been replaced by upgraded equipment (it being understood that
dispositions of equipment which has become redundant as a result of the
Acquisition or any other acquisition of a business shall not be deemed
to be in the ordinary course), (C) any sale, lease or other disposition
(or series of related sales, leases or other dispositions), other than
an Asset Securitization Transfer, the Net Proceeds of which do not
exceed $5,000,000, (D) any leases of tangible personal property entered
into in the ordinary course of business, (E) any sale, transfer or
other disposition of temporary cash investments in the ordinary course
of business, (F) any sale, transfer or other disposition of any
property (other than an Asset Securitization Transfer) if the Borrower
notifies the Administrative Agent promptly after the receipt of the Net
Proceeds thereof that such proceeds will be used by the Borrower and
its Subsidiaries to purchase similar properties within twelve months
after the date of such notice, but only to the extent such proceeds are
actually so used, (G) any sale, transfer or other disposition of any
Margin Stock for fair value on or before the Merger Date (provided,
that if the proceeds thereof are not applied to the Loan Obligations,
they will be held as cash or cash equivalent investments), (H) any
disposition in a Reduction Event described in Section 2.07(b)(iii), (I)
any leases or subleases of unoccupied space, (J) any factoring of trade
receivables originated by a Foreign Subsidiary; provided, that the
aggregate amount of all transactions described in this clause (J) from
and after the date hereof shall not exceed $25,000,000 (or the
equivalent in any currency at any time), and (K) any Asset
Securitization Transfer representing the reinvestment of cash
collections from accounts or notes receivable or interests therein
which have been previously the subject of an Asset Securitization
Transfer, but only to the extent of such reinvestment of cash
collections. 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.
(b) Section 6.13(a) of the Credit Agreement is hereby amended by adding before
clause (x) the following new clause (w): "(w) a Subsidiary which is an Asset
Securitization SPE,".
(c) Section 7.03 of the Credit Agreement is hereby amended by deleting the word
"and" at the end of Section 7.03(k), redesignating Section 7.03(l) as Section
7.03(m), and adding a new Section 7.03(l) as follows:
(l) Liens (contingent or otherwise) customarily granted in
connection with an Asset Securitization Program; and
(d) Section 7.09 is amended by deleting the word "and" following clause (f)
thereof, replacing the period at the end of clause (g) with a semicolon, and
adding the following new clause (h):
1
<PAGE> 2
(h) with respect the foregoing clause (x), restrictions
relating to accounts or notes receivable or interests therein or any
related collateral which are the subject of an Asset Securitization
Program, and with respect to the foregoing clause (y), restrictions
imposed on a Subsidiary of the Borrower serving as an Asset
Securitization SPE.
(e) Annex A to the Credit Agreement, Section 1.01, is amended by adding the
following new definitions in their appropriate places in alphabetical order:
"Asset Securitization Program" means a program of Asset
Securitization Transfers each of which, at the time of such Asset
Securitization Transfer, is either (i) to the Borrower or a
consolidated Subsidiary of the Borrower or (ii) qualifies as a sale
under GAAP for purposes of the consolidated financial statements of the
Borrower.
"Asset Securitization SPE" means a limited-purpose Subsidiary
of the Borrower which serves as a special purpose entity to which the
Borrower or any Subsidiary of the Borrower from time to time makes
Asset Securitization Transfers in connection with an Asset
Securitization Program.
"Asset Securitization Transfer" means a sale, transfer or
other disposition of accounts or notes receivable, or of interests
therein, pursuant to an Asset Securitization Program.
(f) In Annex A to the Credit Agreement, Section 1.01, the definition of "Net
Proceeds" is amended by deleting the phrase "(b) if such Reduction Event is a
Reduction Event Asset Sale," and replacing it with the phrase "(b) if such
Reduction Event is a Reduction Event Asset Sale (other than an Asset
Securitization Transfer),".
SECTION 2. 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, 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 3. 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 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.
[This Space Intentionally Left Blank.]
2
<PAGE> 3
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
3
<PAGE> 4
LENDER CONSENT AND ACKNOWLEDGMENT
The undersigned, a "Lender" under that certain Credit
Agreement, dated as of November 17, 1997, by and among Kennametal Inc., a
Pennsylvania corporation (the "Borrower"), the Lenders parties thereto from time
to time, and Mellon Bank, N.A., as Administrative Agent (as amended, the "Credit
Agreement"), hereby (a) acknowledges receipt of a counterpart of the Amendment
to Transaction Documents, dated as of March 31, 1999, by and among the Borrower,
the Lenders parties to the Credit Agreement and Mellon Bank, N.A., as
Administrative Agent, and (b) pursuant to Section 10.03 of the Credit Agreement,
consents and agrees to such Amendment to Transaction Documents and directs the
Administrative Agent to enter into it.
_________________________________________, as
Lender
By_______________________________________
Name:
Title:
Date:______________________
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 15,896
<SECURITIES> 11,567
<RECEIVABLES> 356,995
<ALLOWANCES> 15,041
<INVENTORY> 454,278
<CURRENT-ASSETS> 859,476
<PP&E> 995,828
<DEPRECIATION> 446,855
<TOTAL-ASSETS> 2,173,942
<CURRENT-LIABILITIES> 412,967
<BONDS> 0
0
0
<COMMON> 41,025
<OTHER-SE> 700,291
<TOTAL-LIABILITY-AND-EQUITY> 2,173,942
<SALES> 1,444,291
<TOTAL-REVENUES> 1,444,291
<CGS> 910,816
<TOTAL-COSTS> 910,816
<OTHER-EXPENSES> 34,135
<LOSS-PROVISION> 6,936
<INTEREST-EXPENSE> 53,248
<INCOME-PRETAX> 49,438
<INCOME-TAX> 21,000
<INCOME-CONTINUING> 23,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,610
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.79
</TABLE>
