<PAGE> 1
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following discussion should be read in connection with the consolidated
financial statements of Kennametal Inc. (the company or Kennametal) and the
related footnotes. Unless otherwise specified, any reference to a "year" is to a
fiscal year ended June 30.
OVERVIEW
Sales for 2000 were $1,853.7 million, flat compared to sales of $1,902.9 million
in 1999, excluding unfavorable foreign exchange effects and the effects of a
divestiture of two and one percent, respectively. Market conditions were soft in
many of the company's served markets in the first half of 2000. Market
conditions began to improve in the second half of the year, led by North
America, followed by Europe, while Asia Pacific showed steady growth throughout
the year. Net income for 2000 was $51.7 million, or $1.70 per share, compared to
$39.1 million, or $1.31 per share, in 1999. Excluding special charges in both
years, earnings per share were $2.13 in 2000 compared to $1.82 in 1999. The
increase in earnings in 2000 is attributable to improved operational
effectiveness, lean techniques and continued cost discipline.
Special charges in 2000 were $22.9 million, or $0.43 per share, and were
primarily related to operational improvement programs. In 1999, special charges
were $24.6 million, or $0.51 per share, related to operational improvement
programs, including a one-time charge incurred in the acquisition of 4.9 percent
of Toshiba Tungaloy.
Sales of $1,902.9 million in 1999 increased 13 percent compared to sales of
$1,678.4 million in 1998. The increase in sales was primarily attributable to
the inclusion of five additional months of sales related to the acquisition of
Greenfield Industries, Inc. (Greenfield) that occurred on November 17, 1997.
Excluding acquisitions, sales declined seven percent in 1999 due to lower sales
of metalworking products and industrial supplies in North America due to weak
market conditions.
Net income for 1999 was $39.1 million, or $1.31 per share, compared to $71.2
million, or $2.58 per share, in 1998. Excluding special charges in both years,
earnings per share were $1.82 in 1999 compared to $3.23 in 1998. The decline in
earnings for 1999 was primarily due to lower sales levels and higher interest
and amortization expense related to acquisitions. Cost-reduction and significant
cost-control measures, coupled with stronger demand in the European metalworking
market, partially offset this decline.
The Greenfield acquisition reduced 1998 earnings by approximately $17.5 million,
or $0.65 per share, including one-time costs of $0.28 per share. The results for
1999 and a portion of 1998 include an additional 3.45 million shares of common
stock issued on March 20, 1998.
BUSINESS SEGMENT REVIEW
In November 1999, management reorganized the financial reporting of its
operations to focus on global business units consisting of Metalworking,
Engineered Products, Mining & Construction and JLK/Industrial Supply, and
corporate functional shared services. The results for all periods presented have
been restated to conform to the new reporting structure. The presentation of
segment information reflects the manner in which management organizes segments
for making operating decisions and assessing performance.
METALWORKING
In the metalworking segment, the company provides consumable metalcutting tools
and tooling systems to manufacturing companies in a wide range of industries
throughout the world. Metalcutting operations include turning, boring,
threading, grooving, milling and drilling. The company's tooling systems consist
of a steel toolholder and an indexable cutting tool such as an insert or drill
made from cemented tungsten carbides, high-speed steel or other hard materials.
(in thousands) 2000 1999 1998
======================================================================
External sales $1,020,914 $1,038,205 $939,290
Intersegment sales 134,398 108,994 76,376
Operating income 128,283 116,306 138,799
----------------------------------------------------------------------
External sales in the Metalworking segment in 2000 increased one percent
compared to a year ago, excluding unfavorable foreign currency effects of three
percent. Sales in North America were up two percent in local currency compared
to last year due predominately to strong demand in the automotive and truck
markets and, to a lesser extent, increased demand in the oil field services and
machine tool end markets, especially in the second half of 2000. Sales in the
European metalworking market declined two percent compared to 1999, excluding
unfavorable foreign currency translation effects of nine percent. The decline in
sales was due to weakness in most served markets, however, sales in automotive
and machine tool builder markets were stronger in the second half of 2000. Sales
in the Asia Pacific region continued to grow and were up 18 percent, in local
currency, compared to the prior year.
Operating income in 2000 of $128.3 million was reduced by restructuring and
asset impairment charges of $11.0 million and period costs of $2.4 million.
Excluding special charges and period costs in each period, operating income
increased $10.1 million, or eight percent, compared to 1999 due to strong cost
controls and improved manufacturing performance due to lean techniques, despite
lower production levels. Restructuring and asset impairment charges in 2000
resulted from employee severance packages for 135 people, the downsizing of the
Kingswinford, United Kingdom plant, closure of a German warehouse facility
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MANAGEMENT'S DISCUSSION AND ANALYSIS cont.
and several offices in Asia Pacific and South America, and asset impairment
charges. Operating income for 1999 included restructuring costs associated with
the Solon, Ohio high-speed steel drill plant closure and product rationalization
charges of $11.1 million, and a $3.8 million charge recorded on the purchase of
Toshiba Tungaloy stock. Period costs associated with the Solon plant closing
were $2.1 million and $0.4 million in 2000 and 1999, respectively.
In 1999, sales of metalworking products declined seven percent compared to 1998
excluding the impact of the Greenfield acquisition of 19 percent and unfavorable
foreign exchange of one percent. Sales in North America were down 11 percent
excluding acquisitions due to weak industrial demand by customers across a
variety of industries in North America, except for the automotive market. Demand
for metalworking products continued to show strong gains in the European market,
primarily Germany, with particular strength coming from export-oriented
businesses such as the automotive and truck industries, and to a lesser extent,
aerospace and machine tool builder industries. European metalworking sales
declined one percent in 1999, excluding acquisitions and favorable foreign
currency translation effects of 13 percent and one percent, respectively. Sales
in the Asia Pacific region increased one percent, excluding unfavorable foreign
exchange effects of four percent.
Operating income in 1999 declined to $116.3 million and was affected by
restructuring and product rationalization charges of $11.1 million, a $3.8
million charge recorded on the purchase of Toshiba Tungaloy stock, and period
costs of $0.4 million. Excluding these charges, operating income declined five
percent due to lower sales levels and higher goodwill amortization. This was
partially offset as operating expenses were contained through cost-reduction and
significant cost-control measures implemented in November 1998. These
cost-reduction measures involved selected work force reductions, facility
consolidations and closings and other measures. Additionally, amortization of
intangibles increased due to a full year of amortization related to the
acquisition of Greenfield and other companies in the prior year.
In 1999, the company incurred a $6.9 million charge related to the
implementation of a new program to streamline and optimize the global
metalworking product offering and a $4.2 million charge related to the closure
of the Solon plant.
ENGINEERED PRODUCTS
This segment's principal business is the production and sale of cemented
tungsten carbide products used in engineered applications including circuit
board drills and compacts. These products have technical commonality to the
company's core metalworking products.
(in thousands) 2000 1999 1998
==================================================================
External sales $176,469 $173,171 $155,496
Intersegment sales 19,978 23,752 15,300
Operating income 23,711 24,473 29,090
------------------------------------------------------------------
Compared to 1999, external sales in the Engineered Products market in 2000
increased five percent, excluding unfavorable foreign exchange effects of three
percent, due primarily to strong demand for electronic circuit board drills.
Sales to the oil field services end market were soft in the first half of 2000,
but showed renewed demand in the second half.
Operating income in 2000 of $23.7 million increased five percent, excluding
restructuring charges and period costs, due primarily to higher sales levels,
lower manufacturing variances, continued cost controls and lean manufacturing
techniques. Restructuring charges of $1.4 million were incurred in 2000 related
to the rationalization of the Janesville, Wisc. circuit board drill plant,
employee severance, and asset impairment charges. Period costs of $0.5 million
were incurred related to the plant closure.
Sales in 1999 increased 11 percent from 1998 due to the inclusion of five
additional months of sales related to the Greenfield acquisition. Included in
the 1998 results were the sales of the Marine Products division of Greenfield,
which, for strategic reasons, was divested by the company in June 1998. Annual
sales of the Marine Products division were approximately $25 million. Excluding
the acquisition-related effects, sales declined 20 percent. The sales decline
was due to weak demand for engineered products and compacts used in the oil
field services industry due to reduced exploration activity.
Operating income declined to $24.5 million in 1999 due to lower sales levels, an
unfavorable sales mix, lower production levels, plant rearrangement costs and
the Marine divestiture. This was partially offset by cost-reduction actions
implemented in November 1998 and continued cost controls.
MINING & CONSTRUCTION
This segment represents the sales of cemented tungsten carbide products used in
mining and highway construction and other similar applications. These products
also have technical commonality to the company's core metalworking products. The
company also sells metallurgical powders to manufacturers of cemented tungsten
carbide products.
(in thousands) 2000 1999 1998
==================================================================
External sales $165,899 $173,028 $168,837
Intersegment sales 7,041 5,635 6,851
Operating income 17,483 14,203 21,408
------------------------------------------------------------------
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External sales in 2000 declined three percent compared to 1999, excluding one
percent unfavorable foreign exchange effects. Depressed demand for mining tools
in North America, construction tools in Europe and metallurgical powders as a
result of weakness in the underground coal and oil and gas exploration end
markets resulted in overall sales declines of three, two and one percent,
respectively. This was partially offset by strong demand for construction tools
in North America, which increased sales by two percent compared to 1999.
Operating income for 2000 increased to $20.9 million from $20.0 million due to
continued strong cost controls, despite the decline in sales, excluding
restructuring charges in each year. Restructuring charges of $3.4 million were
incurred in 2000 associated with the closure of a manufacturing operation in
China and the exit of the related joint venture. In 1999, restructuring costs of
$5.8 million were recorded related to the write-down of an investment in, and
net receivables from, other international operations in emerging markets as a
result of changing market conditions in the regions these operations serve.
In 1999, sales increased four percent excluding two percent unfavorable foreign
exchange effects. This increase includes incremental sales of seven percent due
to five additional months of sales related to the Greenfield acquisition in
1998. Sales benefited from increased domestic demand for highway construction
tools due to a higher level of highway construction in North America in 1999,
particularly in the second half of the year. However, this was offset by weaker
demand for metallurgical powders used in the oil field services industry and
mining tools due to reduced underground coal production.
Operating income for 1999, excluding restructuring costs of $5.8 million,
declined to $20.0 million due to an unfavorable sales mix and lower production
levels. This was partially offset by cost-reduction actions implemented in
November 1998 and continued cost controls.
JLK/INDUSTRIAL SUPPLY
This segment represents the sales of industrial supply products through
Kennametal's 83-percent owned subsidiary, JLK Direct Distribution Inc. (JLK).
Sales of metalworking consumable products are derived through a direct-marketing
program, including mail-order catalogs and showrooms, a direct field sales
force, and integrated supply or Full Service Supply (FSS) programs.
(in thousands) 2000 1999 1998
==================================================================
External sales $490,381 $518,512 $414,765
Intersegment sales 8,912 13,130 10,583
Operating income 28,174 34,532 41,308
------------------------------------------------------------------
Sales declined three percent in 2000, excluding the effects of the March 1999
divestiture of the Strong Tool Company steel mill business unit. JLK added new
FSS programs which contributed overall sales growth of two percent. However,
this growth was offset by continued weakness in the catalog business end markets
and in acquired distributors end markets, predominately oil field services. At
June 30, 2000, the company operated 30 showrooms,including seven distribution
centers, and 12 other locations, and provided FSS programs to 188 customers
covering 283 different facilities.
Operating income in 2000 declined to $28.2 million due to lower sales, partially
offset by continued operating cost controls. Lower sales levels affected
operating income by $10.4 million, which was partially offset by a decline in
operating expense of $4.6 million due primarily to the implementation of several
cost-reduction initiatives since March 1999. Operating expense for 2000 included
special charges of $0.6 million for employee separation costs and $0.2 million
of costs related to the evaluation of strategic alternatives.
In 1999, sales in this segment increased 25 percent primarily due to
acquisitions. Excluding the effects of acquisitions, sales of industrial supply
products declined three percent. Sales benefited from the addition of new FSS
programs, growth in Europe and an increased product offering, offset by weak
industrial demand across North America and the General Electric (GE) FSS
contract disengagement. The company decided not to accede to certain price
concessions requested by GE during renegotiations of the FSS program with GE in
1997. Sales to these GE manufacturing sites were $22.9 million in 1998. In 2000
and 1999, JLK did not have any sales to GE for those manufacturing sites that
were discontinued. At June 30, 1999, the company operated 31 showrooms,
including eight distribution centers and 13 other locations acquired in 1998
through acquisitions, and provided FSS programs to 150 customers covering 231
different facilities.
Operating income in 1999 of $34.5 million declined from 1998 due to lower gross
profit margins and an increase in operating expense levels. The gross profit
margin was affected by lower-margin sales from prior year acquisitions, growth
in the FSS business and softer-than-expected economic conditions that resulted
in weaker demand in the higher-margin mail-order business. Cost-reduction
actions implemented in November 1998 contained operating expenses. However, the
increase in operating expense was attributable to increased costs from
acquisitions, including higher levels of amortization expense, relocation of the
office and warehouse in the United Kingdom, and higher direct-mail costs.
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONT.
COSTS AND EXPENSES
GROSS PROFIT MARGIN
In 2000, the gross profit margin was 38.1 percent compared to 37.0 percent in
1999. The increase in gross margin is predominately due to improved
manufacturing variances across most business units as a result of lean
manufacturing techniques and strong cost controls, despite lower production
levels. The gross margin in 1999 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 1999 gross margin
would have been 37.4 percent.
In 1999, the gross profit margin declined from 40.7 percent in 1998 due to lower
production levels, lower-margin sales from acquired companies, an unfavorable
sales mix, and period costs associated with plant consolidations and
rearrangements.
OPERATING EXPENSE
Operating expense as a percentage of sales declined to 27.1 percent in 2000,
down from 27.2 percent in 1999 despite the decline in sales. The improvement is
due to management's resolve to control costs through ongoing cost and
productivity improvement programs. Operating expense for 2000 includes a $3.0
million charge for environmental remediation costs and $0.8 million for costs
incurred and expensed for the evaluation of strategic alternatives related to
JLK. Operating expense for 1999 includes a charge of $3.8 million recorded on
the 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.
In 1999, operating expense as a percentage of sales declined to 27.2 percent
from 28.2 percent in 1998. Excluding the effects of the Toshiba Tungaloy charge,
operating expense as a percentage of sales would have been 27.0 percent in 1999.
Operating expense was controlled through cost-reduction actions implemented in
November 1998 that involved salaried work force reductions, salary reductions,
closure of several JLK-acquired locations and other measures. However,
operating expense increased due to acquisitions, the JLK expansion program, the
charge recorded on the purchase of Toshiba Tungaloy stock, facility
rationalizations and other programs. Additionally, amortization of intangibles
increased $10.1 million due to a full year of amortization related to the
acquisition of Greenfield and other companies.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In November 1999, the company announced plans to close, consolidate or downsize
several plants, warehouses and offices, and associated work force reductions as
part of its overall plan to increase asset utilization and financial
performance, and to reposition the company to become the premier tooling
solutions supplier. These actions are expected to have a favorable impact on
future performance. Management implemented these programs throughout 2000. The
costs accrued for the implemented programs were based upon management estimates
using the latest information available at the time that the accrual was
established. The components of the charges are as follows:
Incremental Initial
Total Asset Pension Restructuring
(in thousands) Charge Write-Downs Obligation Liability
==============================================================================
Asset impairment
charges $ 4,808 $(4,808) $ -- $ --
Employee
severance 7,396 -- (787) 6,609
Product
rationalization 100 (100) -- --
Facility
rationalizations 6,322 (1,470) (205) 4,647
------------------------------------------------------------------------------
Total $18,626 $(6,378) $(992) $11,256
==============================================================================
In conjunction with the company's ongoing review of underperforming businesses,
certain assets are reviewed for impairment pursuant to the provisions of
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." An
asset impairment charge of $1.7 million was recorded, related to a metalworking
manufacturing operation in Shanghai, China. This operation became fully
operational in 1998 and to date, has not generated the performance that was
expected at the time the company entered into this market. Management performed
an in-depth review of the operations, capacity utilization and the local
management team, and engaged a consultant to perform an independent review of
the same. These reviews enabled management to determine that the market served
by this operation is not expected to develop to the extent originally
anticipated, but that the operations were in good working order and utilized
modern technology, and that the management team in place was competent.
Management also determined that this facility had excess capacity given the
level of market demand.
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Accordingly, management updated its operating forecast to reflect the current
market demand. In comparing the undiscounted projected cash flows of the updated
forecast to the net book value of the assets of this operation, management
determined that the full value of these assets would not be recoverable.
Accordingly, a charge was recorded to adjust the carrying value of the
long-lived assets of this operation to fair value. The estimated fair value of
these assets was based on various methodologies, including a discounted value of
estimated future cash flows.
The product rationalization charge of $0.1 million represents the write-down of
certain discontinued product lines manufactured in these operations. The company
manufactured these products specifically for the market served by these
operations and management has determined that these products are no longer
salable. This charge has been recorded as a component of cost of goods sold.
The company recorded an asset impairment charge of $2.8 million related to the
write-down of equipment in its North American metalworking operations and $0.3
million in its engineered products operations. In connection with the
repositioning of the company, management completed an assessment of the assets
currently being used in these operations and determined that these assets were
not going to be further utilized in conducting these operations. This amount
represents the write-down of the book value of the assets, net of salvage value.
The charge for facility rationalizations relates to employee severance for 153
employees and other exit costs associated with the closure or downsizing of a
metalworking manufacturing operation in Kingswinford, United Kingdom, a circuit
board drill plant in Janesville, Wisc., a German warehouse facility, and several
offices in the Asia Pacific region and South America. Included in this charge is
incremental pension obligation of $0.2 million due to a plan curtailment. This
amount is included in the pension obligation and is presented as a component of
other liabilities. The charge also includes $3.4 million for employee severance
for 41 employees and other exit costs associated with the closure of a mining
and construction manufacturing operation in China and the exit of the related
joint venture.
The company accrued $7.4 million related to severance packages provided to 171
hourly and salaried employees terminated in connection with a global work force
reduction. Included in this charge is incremental pension obligation of $0.8
million, incurred by the company as a result of the severance packages provided.
This amount is included in the pension obligation and is presented as a
component of other liabilities.
The costs related to the asset impairment charges, employee severance and
facility rationalizations of $18.5 million are recorded as restructuring and
asset impairment charges. The costs charged against the restructuring accrual as
of June 30, 2000 were as follows:
Beginning Cash June 30,
(in thousands) Accrual Expenditures Adjustments 2000
============================================================================
Employee
severance $ 6,609 $(4,076) $-- $2,533
Facility
rationalizations 4,647 (1,129) -- 3,518
----------------------------------------------------------------------------
Total $11,256 $(5,205) $-- $6,051
============================================================================
In 2000, the company incurred period costs of $0.8 million related to these
initiatives, and costs of $1.7 million associated with the implementation of
lean manufacturing techniques, both of which were included in cost of goods sold
as incurred. Benefits realized in 2000 approximated this level of cost. By the
second half of 2001, the company expects to realize annual benefits of
approximately $15 to $17 million associated with these initiatives. Additional
period costs are estimated to be $2 to $3 million and are expected to be
incurred in 2001. The company continues to review its business strategies and
pursue other cost-reduction activities, some of which could result in future
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:
Asset Write-
Downs & Other Initial
Total Non-Cash Restructuring
(in thousands) Charge Adjustments Liability
==========================================================================
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
==========================================================================
The product rationalization charge represents a write-down of certain product
lines that were 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 was 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS CONT.
The program resulted in a reduction in the number of products offered from an
estimated 58,000 to 38,000 and was an extension of the company's initiative to
reduce the number of its North American warehouses. By streamlining the product
offering, the company has improved customer service and inventory turnover,
allowed for more efficient operations, thereby reducing costs and improving
capacity utilization, and eliminated redundancy in its product offering. Sales
of these products represent less than five percent of global metalworking sales.
The company proactively converted customers from these older 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 was relocated to other
existing plants in the United States. The closure eliminated excess capacity at
other plant locations. The company decommissioned the existing plant and expects
to 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 incurred in 2000 and 1999 were $2.1 million and $0.4 million,
respectively, and were included in cost of goods sold as incurred. The company
does not anticipate incurring additional period costs associated with this
action.
An asset impairment charge was recorded to write-down, to fair market value, an
investment in and net receivables from certain mining and construction
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 of these operations, the markets for these products,
and the current economic situation in these regions, 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, $2.4 million of the total cost was funded through
the company's 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 restructuring and asset impairment
charges. The costs charged against the restructuring accrual as of June 30, 2000
and 1999 were as follows:
Beginning Cash June 30,
(in thousands) Accrual Expenditures Adjustments 1999
========================================================================
Plant closure $2,200 $ -- $-- $2,200
Voluntary early
retirement
program 1,518 (151) -- 1,367
------------------------------------------------------------------------
Total $3,718 $(151) $-- $3,567
========================================================================
June 30, Cash June 30,
(in thousands) 1999 Expenditures Adjustments 2000
------------------------------------------------------------------------
Plant closure $2,200 $(2,046) $595 $ 749
Voluntary early
retirement
program 1,367 (602) -- 765
------------------------------------------------------------------------
Total $3,567 $(2,648) $595 $1,514
========================================================================
The adjustment to the accrual for the plant closure is due to the company
receiving more value for property upon disposition than initially anticipated.
This adjustment was not included in the determination of net income for 2000.
INTEREST EXPENSE
In 2000, interest expense declined to $55.1 million due to reduced debt levels,
partially offset by higher borrowing rates. Average borrowing rates under the
company's revolving credit line with commercial banks (Bank Credit Agreement) of
6.72 percent were 34 basis points higher compared to a year ago due to the
rising interest rate environment, partially offset by improved pricing due to
improved financial condition.
In 1999, interest expense increased $9.1 million as a result of higher average
borrowings, partially offset by lower borrowing rates. Interest expense in 1998
included one-time costs of $7.2 million for the amortization of deferred bank
financing fees related to the acquisition of Greenfield.
OTHER EXPENSE, NET
Other expense for 2000 included fees of $5.2 million incurred in connection with
the accounts receivable securitization program initiated in June 1999. This was
partially offset by gains of $1.4 million from the sale of miscellaneous
underutilized assets.
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<PAGE> 7
Other expense for 1998 included the write-off of deferred financing costs
related to a cancelled public offering of debt and equity securities that the
company originally intended to offer in connection with the acquisition of
Greenfield. Related to the debt offering, the company entered into an agreement
to hedge its exposure to fluctuations in interest rates. When the company
subsequently postponed the proposed offerings, the interest rate hedges were
terminated resulting in a loss of $3.5 million. The company also wrote-off
other offering-related expenses of $1.1 million resulting in a combined total of
$4.6 million or $0.10 per share.
INCOME TAXES
The 2000 effective tax rate was 43.5 percent compared to a tax rate of 42.0
percent in 1999, and 41.3 percent in 1998. The increase in the effective tax
rate for both years is directly attributable to higher nondeductible goodwill
related to the Greenfield acquisition, partially offset in 1999 by tax benefits
from costs to repay senior debt.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
In November 1999, the company repaid its term loan under the Bank Credit
Agreement. This resulted in an acceleration of the amortization of deferred
financing fees of $0.4 million, which has been recorded as an extraordinary loss
of $0.3 million, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
Kennametal's cash flow from operations is the primary source of financing for
capital expenditures and internal growth. Additionally, in the United States,
the company maintains a revolving credit line under the Bank Credit Agreement
totaling $900.0 million, of which $247.5 million was available for use at June
30, 2000. The company and its subsidiaries generally obtain local financing
through credit lines with commercial banks. The company believes that cash flow
from operations and the availability under its revolving credit lines will be
sufficient to meet its cash requirements over the next 12 months.
During 2000, the company generated $221.2 million in cash flow from operations,
a decrease of $5.3 million from 1999. Working capital improved $57.5 million and
net income increased by $12.6 million in 2000, however 1999 benefited from
additional proceeds from the securitization of accounts receivable of $75.5
million. The working capital improvement reflects management's initiatives to
reduce working capital and consistently generate strong cash flow.
Net cash used for investing activities was $43.1 million in 2000. Compared to
the prior year, net cash used for investing activities declined by $58.9 million
due to a reduction in capital expenditures of $44.3 million and the purchase of
the shares of Toshiba Tungaloy for $12.2 million in 1999.
The reduction in capital expenditures reflects management's more stringent
capital expenditure approval process. Management believes the level of capital
spending in 2000 was sufficient to improve productivity and make necessary
capital improvements to remain competitive.
Net cash used for financing activities was $173.3 million in 2000, an increase
of $49.0 million compared to 1999, due principally to the reduction in debt of
$163.0 million in 2000, compared to $106.3 million in 1999. The reduction in
debt is attributable to strong cash flow generation through continued focus on
reducing working capital, controlled capital expenditures and improved earnings.
Effective October 1, 1999, company contributions to U.S. defined contribution
pension plans are made primarily in the company's common stock, resulting in the
issuance of 268,964 shares during 2000.
During 1999, the company generated $226.6 million in cash from operations. Cash
provided by operations increased from 1998 due to the proceeds from the
securitization of accounts receivable of $82.0 million and a reduction of
working capital requirements of $52.4 million.
Net cash used for investing activities was $102.0 million in 1999. Compared to
the prior year, the decrease in net cash used for investing activities was due
to a net reduction of $689.7 million of cash outflows from acquisitions and
divestiture activity, a reduction of $13.9 million in subsidiary stock
repurchases, and $9.8 million of reduced capital expenditures. This was offset
by the purchase of the Toshiba Tungaloy shares in 1999.
Net cash flow used for financing activities was $124.4 million in 1999, which
compares to cash from financing activities of $710.1 million in 1998. The change
is due to the repayment of debt of $106.3 million in 1999, compared to
borrowings of $461.4 million and proceeds from the issuance and sale of common
and subsidiary stock of $261.8 million in 1998. The borrowings and proceeds from
stock issuances were primarily used to finance the Greenfield acquisition.
Through a new management incentive program, management is reinforcing the focus
on cash flow and working capital improvement. Management believes free operating
cash flow (FOCF) is an appropriate measure of the company's cash flow. The
company generated FOCF of $183.8 million and $120.6 million, and used FOCF of
$204.9 million in 2000, 1999 and 1998, respectively. The improvements in FOCF
for all periods are primarily due to improved working capital and lower capital
expenditures. Higher levels of net income contributed to the increase in FOCF in
2000, while lower levels of net income in 1999, compared to 1998, partially
offset some of the improvements.
19
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS CONT.
FOCF is defined as funds from operations minus capital expenditures, plus the
change in working capital (excluding changes in cash, marketable securities and
short-term debt). Funds from operations is defined as net income from continuing
operations plus depreciation, amortization, deferred income taxes and other
non-cash items. Cash flows from operating activities, as defined by accounting
principles generally accepted in the United States (GAAP), is used to measure
cash flow generation. While FOCF is not a GAAP alternative measure of cash flow
and may not be comparable to other similarly titled measures of other companies,
the company's management believes FOCF is a meaningful measure of the company's
cash flow.
On January 18, 1999, the company entered into a business cooperation agreement
with Toshiba Tungaloy Co., Ltd. (TT), a leading Japanese manufacturer of
consumable, cemented tungsten carbide metalcutting products, to enhance the
global business prospects for metalcutting tools of both companies. The
agreement includes various joint activities in areas such as product research
and development, private labeling, cross-licensing, and sales and marketing. The
company purchased approximately 4.9 percent of the outstanding shares of TT for
$15.9 million, including the costs of the transaction. 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. See Note 5
to the consolidated financial statements for additional information.
On June 18, 1999, the company entered into an agreement with a financial
institution whereby the company securitizes, on a continuous basis, an undivided
interest in a specific pool of the company's domestic trade accounts receivable.
The company is permitted to securitize up to $100.0 million of accounts
receivable under this agreement. The financial institution charges the company
fees based on the level of accounts receivable securitized under this agreement
and the commercial paper market rates plus the financial institution's cost to
administer the program. The costs incurred by the company under this program,
$5.2 million and $0.2 million in 2000 and 1999, respectively, are accounted for
as a component of other expense, net. At June 30, 2000 and 1999, the company
securitized accounts receivable of $88.5 million and $82.0 million,
respectively, under this program. In 1999, the proceeds from the securitization
were used to permanently reduce a portion of the company's long-term debt.
On December 16, 1999, the company determined that certain performance
measurements in the accounts receivable securitization program agreement were
not met due to an increase in the aging of the accounts receivable of one of the
participating subsidiaries as a result of a system implementation at that
subsidiary. The program sponsor waived this condition and the agreement was
amended to temporarily revise the performance measurements until May 2000, at
which time these performance measurements reverted to the original terms of the
agreement. The company is in compliance with the provisions of this agreement at
June 30, 2000. See Note 6 to the consolidated financial statements for
additional information.
During 1998, the company generated $101.5 million in cash from operations, a
$1.7 million increase from 1997 due to higher working capital requirements of
$47.8 million related to increased sales offset by $50.2 million of higher
noncash items, such as depreciation and amortization. Net cash used in investing
activities was $813.1 million, a significant increase compared to 1997 due to
the acquisition of Greenfield and other companies. Capital expenditures of
$104.8 million, an increase of $31.0 million compared to 1997, were made to
upgrade machinery and equipment, to acquire additional client-server information
systems and to complete the construction of the new world headquarters in
Latrobe, Pa. and a manufacturing facility in China. Additionally, the company
repurchased subsidiary stock of $14.2 million in 1998.
Net cash flow from financing activities was $710.1 million in 1998. The increase
of $713.4 million resulted from $424.1 million of increased borrowings under the
Bank Credit Agreement that was used primarily to fund the acquisition of
Greenfield and the $261.8 million of proceeds from the issuance of stock.
On July 2, 1997, an initial public offering (IPO) of 4.9 million shares of
common stock of JLK was consummated at a price of $20.00 per share. The net
proceeds from the offering were $90.4 million and represented approximately 20
percent of JLK's common stock. 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. JLK used the remaining net
proceeds of $50.4 million to make acquisitions in 1998. The company's ownership
in JLK increased to approximately 83 percent due to treasury stock purchases
made by JLK since the IPO.
20
<PAGE> 9
On November 17, 1997, the company completed the acquisition of all the
outstanding stock of Greenfield. The total purchase price for the acquisition of
Greenfield was $1.0 billion, including $324.4 million in assumed Greenfield debt
and convertible redeemable preferred securities and transaction costs. In
connection with the acquisition of Greenfield, the company entered into a $1.4
billion Bank Credit Agreement and borrowed the appropriate funds to pay for the
Greenfield acquisition, including the refinancing of certain indebtedness of
Greenfield and the company. Additionally, 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 business. Annual sales of
the Marine Products division were approximately $25 million. Proceeds received
from the sale were used to reduce a portion of the company's long-term debt.
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.
On June 8, 1998, JLK initiated a stock repurchase program to repurchase, from
time-to-time, up to a total of 20 percent, or approximately 1.0 million shares,
of its outstanding Class A Common Stock. In 1999 and 1998, JLK repurchased
15,000 and 628,700 shares, respectively, of its Class A Common Stock at a total
cost of $0.3 million and $14.2 million, respectively. The repurchases were made
in the open market or in negotiated or other permissible transactions. These
repurchases were financed principally by cash from operations and short-term
borrowings. There were no repurchases in 2000.
Capital expenditures for 2001 are estimated to be $60 to $70 million and will be
used primarily to support new products and to upgrade machinery and equipment.
FINANCIAL CONDITION
At June 30, 2000, the company's total assets were $1,982.9 million, a decline of
three percent from June 30, 1999. Net working capital was $397.4 million, an
increase of six percent from $373.6 million for the previous year due primarily
to the repayment of short-term debt. The ratio of current assets to current
liabilities was 2.1 in 2000, compared with 2.0 in 1999. Accounts receivable
remained flat at $231.9 million, while inventories declined $23.6 million to
$410.9 million at June 30, 2000. Inventory turnover was 2.7 in 2000 and 2.6 in
1999. The reduction in inventory is due to management's efforts to reduce
overall inventory levels to generate cash flow.
Total debt (including capital lease obligations) decreased 19 percent to $699.2
million in 2000, as a result of strong FOCF generated in 2000. The ratio of
total debt-to-total capital was 45.6 percent in 2000, compared with 51.9 percent
in 1999. Cash from operations and the company's debt capacity are expected to
continue to be sufficient to fund capital expenditures, debt service
obligations, dividend payments and operating requirements. In the future, the
company may consider refinancing a portion of its variable-rate long-term debt
to further reduce the exposure to fluctuating interest rates.
One of the features of the new management incentive program is the focus on the
more efficient use of working capital to generate sales. Management believes the
ratio of primary working capital as a percentage of sales (PWC%) is appropriate
for measuring the company's efficiency in utilizing working capital to generate
sales. The company's PWC% was 29.4 percent and 34.9 percent at June 30, 2000 and
1999, respectively. The improvement in PWC% is due to lower primary working
capital, partially offset by lower sales levels.
Primary working capital (PWC) is defined as inventory plus accounts receivable,
less accounts payable. PWC% is calculated by averaging beginning of the year and
quarter-end balances for PWC, divided by sales for the most recent 12-month
period. While PWC% is not a GAAP alternative measure of asset utilization
efficiency and may not be comparable to other similarly titled measures of other
companies, the company's management believes PWC% is a meaningful measure of the
company's efficiency in utilizing working capital to generate sales.
STRATEGIC ALTERNATIVES
In the December 1999 quarter, the company engaged an investment bank to explore
strategic alternatives regarding JLK, including a possible divestiture. At that
time, management believed a divestiture might enhance growth prospects for both
the company and JLK by allowing each company to focus on its core competencies.
The company completed a thorough and disciplined process of evaluating strategic
alternatives and on May 2, 2000, decided to terminate consideration of a
possible divestiture at that time, although management continues to believe
there may be better owners for JLK. The company incurred and expensed $0.8
million in costs associated with this evaluation in 2000.
21
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS CONT.
On July 20, 2000, the company proposed to the JLK Board of Directors to acquire
the outstanding shares of JLK it does not already own. As of September 1, 2000,
no agreement to acquire these minority shares has been reached with JLK, and the
company may or may not acquire these minority shares. In the event the company
were to acquire this minority interest of approximately 4.3 million shares, it
is not expected to have a material effect on the company's financial condition.
The proposal is not conditioned on financing. The company reserved the right to
amend or withdraw this proposal at any time at its sole discretion.
In July 2000, the company, JLK and the JLK directors (including one former
director) were named as defendants in several putative class action lawsuits.
The lawsuits seek an injunction, rescission, damages, costs and attorney fees in
connection with the company's proposal to acquire the outstanding stock of JLK
not owned by the company. The company believes the actions lack merit and will
defend them vigorously. The amount of any ultimate exposure cannot be determined
with certainty at this time. Management believes that any losses derived from
the final outcome of these actions and proceedings will not be material in the
aggregate to the company's financial condition.
ENVIRONMENTAL MATTERS
The company has been involved in various environmental cleanup and remediation
activities at several of its manufacturing facilities. In addition, the company
is currently named as a potentially responsible party (PRP) at several Superfund
sites in the United States. In the December 1999 quarter, the company recorded a
remediation reserve of $3.0 million with respect to its involvement in these
matters, which is recorded as a component of operating expense. This represents
management's best estimate of its undiscounted future obligation based on its
evaluations and discussions with outside counsel and independent consultants,
and the current facts and circumstances related to these matters. The company
recorded this liability in the December quarter because certain events occurred,
including sufficient progress made by the government and the PRPs in the
identification of other PRPs and review of potential remediation solutions, that
clarified the level of involvement in these matters by the company and its
relationship to other PRPs. This led the company to conclude that it was
probable that a liability had been incurred.
In addition to the amount currently reserved, the company may be subject to loss
contingencies related to these matters estimated to be up to an additional $3.3
million. The company believes that such undiscounted unreserved losses are
reasonably possible but are not currently considered to be probable of
occurrence. The reserved and unreserved liabilities could change substantially
in the near term due to factors such as the nature and extent of contamination,
changes in remedial requirements, technological changes, discovery of new
information, the financial strength of other PRPs and the identification of new
PRPs.
The company maintains a Corporate Environmental, Health and Safety (EH&S)
Department, as well as an EH&S Policy Committee, to ensure compliance with
environmental regulations and to monitor and oversee remediation activities. In
addition, the company has established an EH&S administrator at its domestic
manufacturing facilities. The company's financial management team periodically
meets with members of the Corporate EH&S Department and the Corporate Legal
Department to review and evaluate the status of environmental projects and
contingencies. On a quarterly basis, management establishes or adjusts financial
provisions and reserves for environmental contingencies in accordance with SFAS
No. 5, "Accounting for Contingencies."
MARKET RISK
The company is exposed to certain market risks arising from transactions that
are entered into in the normal course of business. The company seeks to minimize
these risks through its normal operating and financing activities and, when
considered appropriate, through the use of derivative financial instruments. The
company does not enter into derivative transactions for speculative purposes and
therefore holds no derivative instruments for trading purposes. The company's
objective in managing these exposures is to reduce both earnings and cash flow
volatility to allow management to focus its attention on its core business
operations. The company hedges its foreign currency and interest rate exposures
in a manner that dampens the effect of changes in foreign currency and interest
rates on consolidated net income. See Notes 2 and 15 to the consolidated
financial statements for additional information.
A portion of the company's operations consists of investments in foreign
subsidiaries. The company's exposure to market risk for changes in foreign
currency exchange rates arises from intercompany loans utilized to finance
foreign subsidiaries, trade receivables and payables, and firm commitments
arising from international transactions. The company manages its foreign
currency transaction risk to reduce the volatility of cash flows caused by
currency fluctuations through internal natural offsets, to the fullest extent
possible, and foreign exchange contracts. These contracts are designated as
hedges of transactions, which will settle in future periods, that otherwise
would expose the company to foreign currency risk.
22
<PAGE> 11
In April 2000, the company implemented a foreign exchange hedging program to
protect a portion of the company's currency exposure from unfavorable exchange
rate movements. This exposure arises from anticipated cash collections from
foreign subsidiaries on transactions between domestic and foreign subsidiaries
during 2001. This program utilizes purchased options, range forwards and forward
contracts. The cost of this program was $1.9 million, of which, $0.3 million was
amortized to other expense, net based on the life of the contracts,until SFAS
133,"Accounting for Derivative Instruments and Hedging Activities," is adopted
on July 1, 2000; thereafter, the contracts will be accounted for and reported
under this new Statement. At June 30, 2000, the unamortized cost of the options
of $1.6 million and unrealized gains on the forward contracts of $0.4 million
are recorded in other current assets and approximate the fair value of the
contracts then outstanding. The notional amounts of the contracts translated
into U.S. dollars at June 30, 2000 rates is $121.7 million. At June 30, 2000, a
hypothetical 10 percent strengthening of the U.S. dollar would result in an
increase in pretax income of $7.8 million, while a 10 percent weakening of the
U.S. dollar would result in a decrease in pretax income of $3.2 million related
to these positions.
In February 2000, the company completed a short-term foreign exchange hedging
program to protect a portion of the company's currency exposure from unfavorable
exchange rate movements. The exposure arose from anticipated cash collections
from foreign subsidiaries on sales between domestic and foreign subsidiaries
through June 30, 2000. This program involved the purchase of a series of options
that gave the company the right to sell foreign currency at specific rates
contained in the contracts. The cost of this program, $0.6 million, was
amortized to other expense, net over the life of the options.
In addition, the company may enter into forward contracts to hedge transaction
exposures or significant cross-border intercompany loans by either purchasing or
selling specified amounts of foreign currency at a specified date. At June 30,
2000, the company had several outstanding forward contracts to sell foreign
currency. The notional amounts of these forward contracts translated into U.S.
dollars at June 30, 2000 rates is $26.7 million. A hypothetical 10 percent
change in the applicable 2000 year-end exchange rates would result in an
increase or decrease in pretax income of $0.8 million related to these
positions.
The company's exposure to market risk for changes in interest rates relates
primarily to the company's long-term debt obligations. The company seeks to
manage its interest rate risk in order to balance its exposure between fixed and
floating rates while attempting to minimize its borrowing costs. To achieve
these objectives, the company primarily uses interest rate swap agreements to
manage net exposure to interest rate changes related to its borrowings. At June
30, 2000, the company had interest rate swap agreements outstanding that
effectively convert a notional amount of $300.0 million of debt from floating to
fixed interest rates. These agreements mature at various times between June 2001
and June 2003.
At June 30, 2000 and 1999, the company had $699.2 million and $861.3 million of
debt outstanding at effective interest rates of 7.11 percent and 6.11 percent,
respectively, after the impact of interest rate swaps is taken into account. A
hypothetical change of 10 percent in the company's effective interest rate from
year-end 2000 levels would increase or decrease interest expense by
approximately $3.0 million.
The company is exposed to counterparty credit risk for non-performance and, in
the unlikely event of nonperformance, to market risk for changes in interest and
currency rates. The company manages exposure to counterparty credit risk through
credit standards, diversification of counterparties and procedures to monitor
concentrations of credit risk. The company does not anticipate nonperformance by
any of the counterparties.
The company's investment in Toshiba Tungaloy is classified as an
available-for-sale security and, therefore, is carried at its quoted market
value, adjusted for changes in currency exchange rates. At June 30, 2000, the
carrying and fair value of this investment was $27.6 million. A 10 percent
change in the quoted market value of TT common stock at June 30, 2000 would
result in a $2.8 million increase or decrease in fair value.
YEAR 2000
Management believes that the company substantially mitigated its exposure
relative to year 2000 issues for both information and non-information technology
systems. The company's non-compliant systems were either replaced or modified to
become year 2000 compliant prior to December 31, 1999. The transition into the
year 2000 resulted in no significant impact to the financial position or
operations of the company. To date, the company's suppliers continue to provide
the company with sufficient goods and services in the year 2000.
Expenditures incurred in 2000 and 1999 approximate $3.5 million and $13.5
million, respectively. Cash flows from operations provided funding for these
expenditures. The company does not anticipate incurring additional expenditures
related to year 2000 issues.
23
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS CONT.
EFFECTS OF INFLATION
Despite modest inflation in recent years, rising costs continue to affect the
company's operations throughout the world. The company strives to minimize the
effects of inflation through cost containment, productivity improvements and
price increases under highly competitive conditions.
NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133 was issued, which 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. SFAS No. 133 was adopted on July 1, 2000
resulting in the recording of current assets of $1.6 million, long-term assets
of $1.4 million, current liabilities of $1.3 million, long-term liabilities of
$0.7 million, a decrease in other comprehensive loss of $1.6 million, net of
tax, and a loss from the cumulative effect from the change in accounting
principle of $0.6 million, net of tax. Forward contracts hedging significant
cross-border intercompany loans are considered other derivatives and therefore,
not eligible for hedge accounting. The remainder of the derivative contracts are
accounted for as cash flow hedges. The company expects to recognize net current
assets of $0.5 million into earnings in the next 12 months.
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), to provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101 explains the SEC staff's general framework for revenue
recognition, however, it does not change existing accounting pronouncements on
revenue recognition, but rather clarifies the SEC's position on preexisting
rules. SAB No. 101 did not require the company to change existing revenue
recognition policies and, therefore, had no impact on the company's financial
condition at June 30, 2000.
FORWARD-LOOKING STATEMENTS
This annual report 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, competition, and risks
associated with the implementation of restructuring actions and environmental
remediation. The company undertakes no obligation to publicly release any
revisions to forward-looking statements to reflect events or circumstances
occurring after the date hereof.
24
<PAGE> 13
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30 2000 1999 1998
====================================================================================================================
(in thousands, except per share data)
<S> <C> <C> <C>
OPERATIONS
Net sales $1,853,663 $1,902,916 $1,678,388
Cost of goods sold 1,147,287 1,198,651 994,481
--------------------------------------------------------------------------------------------------------------------
Gross profit 706,376 704,265 683,907
Research and development expense 19,246 18,797 20,397
Selling, marketing and distribution expense 364,971 394,204 339,772
General and administrative expense 118,184 104,043 112,519
Restructuring and asset impairment charges 18,526 13,937 --
Amortization of intangibles 26,452 25,788 15,648
--------------------------------------------------------------------------------------------------------------------
Operating income 158,997 147,496 195,571
Interest expense 55,079 68,594 59,536
Other expense, net 3,507 492 5,459
--------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and minority interest 100,411 78,410 130,576
Provision for income taxes 43,700 32,900 53,900
Minority interest 4,734 6,394 5,479
--------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 51,977 39,116 71,197
Extraordinary loss on early extinguishment of debt,
net of tax of $178 (267) -- --
--------------------------------------------------------------------------------------------------------------------
Net income $ 51,710 $ 39,116 $ 71,197
====================================================================================================================
PER SHARE DATA
Basic earnings per share before extraordinary loss $ 1.72 $ 1.31 $ 2.61
Extraordinary loss per share (0.01) -- --
--------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.71 $ 1.31 $ 2.61
====================================================================================================================
Diluted earnings per share before extraordinary loss $ 1.71 $ 1.31 $ 2.58
Extraordinary loss per share (0.01) -- --
--------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.70 $ 1.31 $ 2.58
====================================================================================================================
Dividends per share $ 0.68 $ 0.68 $ 0.68
====================================================================================================================
Basic weighted average shares outstanding 30,263 29,917 27,263
====================================================================================================================
Diluted weighted average shares outstanding 30,364 29,960 27,567
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE> 14
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30 2000 1999
========================================================================================================================
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 22,323 $ 17,408
Marketable equity securities available-for-sale 27,614 13,436
Accounts receivable, less allowance for doubtful accounts of $12,214 and $15,269 231,917 231,287
Inventories 410,885 434,462
Deferred income taxes 52,754 44,182
Other current assets 13,065 9,673
------------------------------------------------------------------------------------------------------------------------
Total current assets 758,558 750,448
------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment:
Land and buildings 230,448 235,375
Machinery and equipment 720,556 756,917
Less accumulated depreciation (452,220) (452,492)
------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 498,784 539,800
------------------------------------------------------------------------------------------------------------------------
Other assets:
Investments in affiliated companies 2,571 844
Intangible assets, less accumulated amortization of $88,458 and $64,096 661,172 685,695
Deferred income taxes 23,228 33,996
Other 38,629 32,865
------------------------------------------------------------------------------------------------------------------------
Total other assets 725,600 753,400
------------------------------------------------------------------------------------------------------------------------
Total assets $1,982,942 $2,043,648
========================================================================================================================
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases $ 3,855 $ 117,217
Notes payable to banks 57,701 26,222
Accounts payable 118,908 89,339
Accrued income taxes 30,226 9,487
Accrued vacation pay 28,217 27,323
Accrued payroll 20,605 19,730
Other current liabilities 101,643 87,548
------------------------------------------------------------------------------------------------------------------------
Total current liabilities 361,155 376,866
------------------------------------------------------------------------------------------------------------------------
Long-term debt and capital leases, less current maturities 637,686 717,852
Deferred income taxes 54,955 53,108
Other liabilities 93,786 97,186
------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,147,582 1,245,012
------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 55,106 53,505
------------------------------------------------------------------------------------------------------------------------
SHAREOWNERS' EQUITY
Preferred stock, no par value; 5,000 shares authorized; none issued -- --
Common stock, $1.25 par value; 70,000 shares authorized;
33,200 and 32,903 shares issued 41,500 41,128
Additional paid-in capital 335,314 325,382
Retained earnings 508,733 477,593
Treasury stock, at cost; 2,677 and 2,836 shares held (55,236) (57,199)
Unearned compensation (2,814) (3,330)
Accumulated other comprehensive loss (47,243) (38,443)
------------------------------------------------------------------------------------------------------------------------
Total shareowners' equity 780,254 745,131
------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareowners' equity $1,982,942 $2,043,648
========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30 2000 1999 1998
================================================================================================================
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 51,710 $ 39,116 $ 71,197
Adjustments for noncash items:
Depreciation 75,194 70,203 51,663
Amortization 26,452 25,788 15,648
Restructuring and asset impairment charges 6,378 17,119 --
Loss on early extinguishment of debt, net of tax 267 -- --
Other 11,472 6,583 29,705
Changes in certain assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts receivable (17,257) 25,973 (17,006)
Proceeds from accounts receivable securitization 6,500 82,000 --
Inventories 14,331 (3,867) (37,231)
Accounts payable and accrued liabilities 44,968 (32,701) (8,791)
Other 1,192 (3,662) (3,661)
----------------------------------------------------------------------------------------------------------------
Net cash flow from operating activities 221,207 226,552 101,524
----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (50,663) (94,993) (104,774)
Disposals of property, plant and equipment 8,109 9,555 5,132
Purchase of marketable equity securities -- (12,162) --
Acquisitions, net of cash -- (5,164) (755,338)
Divestitures, net of cash -- 1,617 62,052
Purchase of subsidiary stock -- (332) (14,197)
Other (531) (503) (5,992)
----------------------------------------------------------------------------------------------------------------
Net cash flow used for investing activities (43,085) (101,982) (813,117)
----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in notes payable (18,491) (23,328) (1,968)
Net increase (decrease) in revolver and other lines of credit (15,100) 61,800 237,794
Term debt borrowings 378 25,285 269,487
Term debt repayments (129,810) (170,040) (43,905)
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 benefit and stock plans 11,276 3,299 10,764
Cash dividends paid to shareowners (20,570) (20,328) (18,475)
Other (1,018) (1,045) (5,511)
----------------------------------------------------------------------------------------------------------------
Net cash flow from (used for) financing activities (173,335) (124,357) 710,055
----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 128 (1,171) (1,965)
----------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS
Net increase (decrease) in cash and equivalents 4,915 (958) (3,503)
Cash and equivalents, beginning of year 17,408 18,366 21,869
----------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 22,323 $ 17,408 $ 18,366
================================================================================================================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 55,000 $ 67,065 $ 61,692
Income taxes paid 17,092 21,738 47,052
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE> 16
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
Year ended June 30 2000 1999 1998
==============================================================================================================
(in thousands)
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ 41,128 $ 41,025 $ 36,712
Issuance of common stock under employee benefit and stock plans 372 103 --
Issuance of common stock -- -- 4,313
--------------------------------------------------------------------------------------------------------------
Balance at end of year 41,500 41,128 41,025
--------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 325,382 320,645 91,049
Dividend reinvestment 1,250 340 819
Issuance of common stock under employee benefit and stock plans 8,682 4,397 6,676
Issuance of common stock -- -- 167,126
Issuance of subsidiary stock -- -- 54,975
--------------------------------------------------------------------------------------------------------------
Balance at end of year 335,314 325,382 320,645
--------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 477,593 458,805 406,083
Net income 51,710 39,116 71,197
Cash dividends (20,570) (20,328) (18,475)
--------------------------------------------------------------------------------------------------------------
Balance at end of year 508,733 477,593 458,805
--------------------------------------------------------------------------------------------------------------
TREASURY STOCK
Balance at beginning of year (57,199) (59,131) (62,400)
Dividend reinvestment 1,236 392 292
Issuance of common stock under employee benefit and stock plans 727 1,540 2,977
--------------------------------------------------------------------------------------------------------------
Balance at end of year (55,236) (57,199) (59,131)
--------------------------------------------------------------------------------------------------------------
UNEARNED COMPENSATION
Balance at beginning of year (3,330) -- --
Issuance of common stock under employee benefit and stock plans (1,094) (3,473) --
Amortization of unearned compensation 1,610 143 --
--------------------------------------------------------------------------------------------------------------
Balance at end of year (2,814) (3,330) --
--------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year (38,443) (25,884) (11,836)
Unrealized gain on marketable equity securities
available-for-sale, net of tax 7,503 1,160 --
Minimum pension liability adjustment, net of tax 415 (1,265) --
Foreign currency translation adjustments (16,718) (12,454) (14,048)
--------------------------------------------------------------------------------------------------------------
Other comprehensive loss (8,800) (12,559) (14,048)
--------------------------------------------------------------------------------------------------------------
Balance at end of year (47,243) (38,443) (25,884)
--------------------------------------------------------------------------------------------------------------
Total shareowners' equity, June 30 $780,254 $745,131 $735,460
==============================================================================================================
COMPREHENSIVE INCOME
Net income $ 51,710 $ 39,116 $ 71,197
Other comprehensive loss (8,800) (12,559) (14,048)
--------------------------------------------------------------------------------------------------------------
Comprehensive income $ 42,910 $ 26,557 $ 57,149
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
NATURE OF OPERATIONS
Kennametal Inc. (the company or Kennametal) is a global leader engaged in the
manufacture, purchase and distribution of a broad range of tools, tooling
systems, and solutions to the metalworking, mining, oil and energy industries,
and wear-resistant parts for a wide range of industries. Unless otherwise
specified, any reference to a "year" is to a fiscal year ended June 30.
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented below to assist in
evaluating the company's consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
Temporary cash investments having original maturities of three months or less
are considered cash equivalents. Cash equivalents consist principally of
investments in money market funds and certificates of deposit.
MARKETABLE EQUITY SECURITIES AVAILABLE-FOR-SALE
The company's investment in marketable equity securities is accounted for as an
available-for-sale security under Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This investment is reported at fair value, as determined through
quoted market sources. The unrealized gain on this investment is recorded as a
component of accumulated other comprehensive loss, net of tax.
ACCOUNTS RECEIVABLE
Accounts receivable included $2.4 million and $5.3 million of receivables from
affiliates at June 30, 2000 and 1999, respectively.
INVENTORIES
Inventories are carried at the lower of cost or market. The company uses the
last-in, first-out (LIFO) method for determining the cost of a significant
portion of its U.S. inventories. The cost of the remainder of inventories is
determined under the first-in, first-out (FIFO) or average cost methods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Major improvements are
capitalized, while maintenance and repairs are expensed as incurred. Retirements
and disposals are removed from cost and accumulated depreciation accounts,
with the gain or loss reflected in income. Interest is capitalized during the
construction of major facilities. Capitalized interest is included in the cost
of the constructed asset and is amortized over its estimated useful life.
Depreciation for financial reporting purposes is computed using the
straight-line method over the estimated useful lives of the assets ranging from
three to 40 years. Leased property and equipment under capital leases are
amortized using the straight-line method over the terms of the related leases.
INTANGIBLE ASSETS
Intangible assets, which include the excess of cost over net assets of acquired
companies, are amortized using the straight-line method over periods ranging
from two to 40 years. The company assesses the recoverability of goodwill by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired entities. The carrying value of goodwill would be adjusted to the
present value of the future operating cash flows if the asset cannot be
recovered over its remaining life. The net book value of goodwill amounted to
$647.9 million and $671.4 million at June 30, 2000 and 1999, respectively.
DEFERRED FINANCING FEES
Fees incurred in connection with new borrowings are capitalized and amortized to
interest expense over the life of the related obligation.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of shares
outstanding during the period, while diluted earnings per share is calculated to
reflect the potential dilution that occurs related to issuance of common stock
under stock option grants. The difference between basic and diluted earnings per
share relates solely to the effect of common stock options.
For purposes of determining the number of dilutive shares outstanding, weighted
average shares outstanding for basic earnings per share calculations were
increased for the dilutive effect of unexercised stock options by 100,653;
43,453; and 303,539 shares in 2000, 1999 and 1998, respectively.
30
<PAGE> 18
ISSUANCE OF SUBSIDIARY STOCK
The company accounts for sales of subsidiary stock as capital transactions in
the consolidated financial statements.
REVENUE RECOGNITION
The company recognizes revenue from product sales upon shipment to the customer.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
Deferred income taxes are recognized based on the future income tax effects
(using enacted tax laws and rates) of differences in the carrying amounts of
assets and liabilities for financial reporting and tax purposes. A valuation
allowance is recognized if it is "more likely than not" that some or all of a
deferred tax asset will not be realized.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of international operations are translated into U.S.
dollars using year-end exchange rates, while revenues and expenses are
translated at average exchange rates throughout the year. The resulting net
translation adjustments are recorded as a component of accumulated other
comprehensive loss.
DERIVATIVE FINANCIAL INSTRUMENTS
From time to time, the company uses derivative financial instruments to hedge a
portion of the exposures to fluctuations in foreign currency exchange rates and
interest rates. The company accounts for derivative instruments as a hedge of
the related asset, liability, firm commitment or anticipated transaction when
designated as a hedge of such items. The company does not enter into derivative
transactions for speculative purposes and therefore holds no derivative
instruments for trading purposes. Premiums paid on option contracts are
amortized over the lives of the contracts. Unrealized gains and losses from
option and range forward contracts that hedge foreign currency exposures of
anticipated transactions are deferred and recognized in the same period as the
hedged transaction. Unrealized gains and losses on forward contracts used to
hedge foreign currency exposures of underlying receivables and payables and
anticipated transactions are not deferred and are recognized in other expense,
net. Changes in the amount to be received or paid under interest rate swap
agreements used to manage net exposure to interest rate changes related to
borrowings are recognized in interest expense.
NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued, which 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. SFAS No. 133 was adopted on July 1, 2000 resulting in the recording
of current assets of $1.6 million, long-term assets of $1.4 million, current
liabilities of $1.3 million, long-term liabilities of $0.7 million, a decrease
in other comprehensive loss of $1.6 million, net of tax, and a loss from the
cumulative effect from the change in accounting principle of $0.6 million, net
of tax. Forward contracts hedging significant cross-border intercompany loans
are considered other derivatives and therefore, not eligible for hedge
accounting. The remainder of the derivative contracts are accounted for as cash
flow hedges. The company expects to recognize net current assets of $0.5 million
into earnings in the next 12 months.
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), to provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB No. 101 explains the SEC staff's general framework for revenue
recognition, however, it does not change existing accounting pronouncements on
revenue recognition, but rather clarifies the SEC's position on pre-existing
rules. SAB No. 101 did not require the company to change existing revenue
recognition policies and, therefore, had no impact on the company's financial
condition at June 30, 2000.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform with the current-year presentation.
NOTE 3
ACQUISITIONS AND DIVESTITURES
In the December 1999 quarter, the company engaged an investment bank to explore
strategic alternatives regarding its 83 percent-owned subsidiary, JLK Direct
Distribution Inc. (JLK), including a possible divestiture. At that time,
management believed a divestiture might enhance growth prospects for both the
company and JLK by allowing each company to focus on its core competencies. The
company completed a thorough and disciplined process of evaluating strategic
alternatives and on May 2, 2000, decided to terminate consideration of a
possible divestiture at that time,
31
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT.
although management continues to believe there may be better owners for JLK. The
company incurred and expensed $0.8 million in costs associated with this
evaluation in 2000.
On July 20, 2000, the company proposed to the JLK Board of Directors to acquire
the outstanding shares of JLK it does not already own. As of September 1, 2000,
no agreement to acquire these minority shares has been reached with JLK, and the
company may or may not acquire these minority shares. In the event the company
were to acquire this minority interest of approximately 4.3 million shares, it
is not expected to have a material effect on the company's financial condition.
The proposal is not conditioned on financing. The company reserved the right to
amend or withdraw this proposal at any time at its sole discretion.
In July 2000, the company, JLK and the JLK directors (including one former
director) were named as defendants in several putative class action lawsuits.
The lawsuits seek an injunction, rescission, damages, costs and attorney fees in
connection with the company's proposal to acquire the outstanding stock of JLK
not owned by the company. The company believes the actions lack merit and will
defend them vigorously. The amount of any ultimate exposure cannot be determined
with certainty at this time. Management believes that any losses derived from
the final outcome of these actions and proceedings will not be material in the
aggregate to the company's financial condition.
On November 17, 1997, the company completed the acquisition of Greenfield
Industries, Inc. (Greenfield) for $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 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 40 years.
Additionally, the company also made several other acquisitions in 1999 and 1998,
primarily through JLK, 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 did not materially impact the reported results.
The allocation of the purchase price to assets acquired and liabilities assumed
of Greenfield is as follows:
(in thousands)
=================================================
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
=================================================
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 1998 (July 1, 1997):
(in thousands, except per share data)
===============================================
Net sales $1,913,190
Net income 63,623
Basic earnings per share 2.33
Diluted earnings per share 2.31
-----------------------------------------------
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 business. Annual sales of the Marine Products division
were approximately $25 million. Proceeds received from the sale were used to
reduce a portion of the company's long-term debt. No gain on sale was recorded
as the difference between the cash proceeds and the net book value of Rule's
assets was recorded as a reduction of previously recorded goodwill associated
with the acquisition of Greenfield.
NOTE 4
STOCK ISSUANCES
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.
On July 2, 1997, an initial public offering (IPO) of 4.9 million shares of
common stock of JLK was consummated at a price of $20.00 per share. JLK operates
the industrial supply
32
<PAGE> 20
operations consisting of the company's wholly owned J&L Industrial Supply (J&L)
subsidiary and its Full Service Supply programs. The net proceeds from the
offering were $90.4 million and represented the sale of approximately 20 percent
of JLK's common stock. 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. JLK used the remaining net proceeds of
$50.4 million to make acquisitions in 1998. The company's ownership in JLK
increased to approximately 83 percent due to treasury stock purchases made by
JLK since the IPO.
NOTE 5
MARKETABLE EQUITY SECURITIES AVAILABLE-FOR-SALE
On January 18, 1999, the company entered into a business cooperation agreement
with Toshiba Tungaloy Co., Ltd. (TT), a leading Japanese manufacturer of
consumable metalcutting products, to enhance the global business prospects for
metalcutting tools of both companies. The agreement includes various joint
activities in areas such as product research and development, private labeling,
cross-licensing, and sales and marketing. As part of the agreement, the company
purchased approximately 4.9 percent 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 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
expense. The gross unrealized gain on this investment is $14.2 million and $1.9
million at June 30, 2000 and 1999, respectively.
NOTE 6
ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
On June 18, 1999, the company entered into an agreement with a financial
institution whereby the company securitizes, on a continuous basis, an undivided
interest in a specific pool of the company's domestic trade accounts receivable.
Pursuant to this agreement, the company and several of its domestic
subsidiaries, sell their domestic accounts receivable to Kennametal Receivables
Corporation, a wholly-owned, bankruptcy-remote subsidiary (KRC). KRC was formed
to purchase these accounts receivable and sell participating interests in such
accounts receivable to the financial institution which, in turn, purchases and
receives ownership and security interests in those assets. As collections reduce
the amount of accounts receivable included in the pool, the company and the
participating domestic subsidiaries sell new accounts receivable to KRC which,
in turn, securitizes these new accounts receivable with the financial
institution.
The company is permitted to securitize up to $100.0 million of accounts
receivable under this agreement. The financial institution charges the company
fees based on the level of accounts receivable securitized under this agreement
and the commercial paper market rates plus the financial institution's cost to
administer the program. The costs incurred by the company under this program,
$5.2 million and $0.2 million in 2000 and 1999, respectively, are accounted for
as a component of other expense, net. At June 30,2000 and 1999, the company
securitized accounts receivable of $88.5 million and $82.0 million,
respectively, under this program. In 1999, the proceeds from the securitization
were used to permanently reduce a portion of the company's long-term debt (see
Note 9).
On December 16, 1999, the company determined that certain performance
measurements in the accounts receivable securitization program agreement were
not met due to an increase in the aging of the accounts receivable of one of the
participating subsidiaries as a result of a system implementation at that
subsidiary. The program sponsor waived this condition and the agreement was
amended to temporarily revise the performance measurements until May 2000, at
which time these performance measurements reverted to the original terms of the
agreement. The company is in compliance with the provisions of this agreement at
June 30, 2000.
NOTE 7
INVENTORIES
Inventories consisted of the following:
(in thousands) 2000 1999
====================================================================
Finished goods $306,334 $318,736
Work in process and powder blends 96,101 117,987
Raw materials and supplies 35,707 32,619
--------------------------------------------------------------------
Inventories at current cost 438,142 469,342
Less LIFO valuation (27,257) (34,880)
--------------------------------------------------------------------
Total inventories $410,885 $434,462
====================================================================
The company used the LIFO method of valuing its inventories for approximately 45
and 49 percent of total inventories at June 30, 2000 and 1999, respectively. The
company uses the LIFO method in order to more closely match current costs with
current revenues, thereby reducing the effects of inflation on earnings.
33
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT.
In 1999, the company recognized a $6.9 million charge which 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 (see Note 14).
NOTE 8
OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
(in thousands) 2000 1999
==============================================================
Accrued benefits $ 17,607 $12,881
Deferred income taxes 9,843 1,802
Accrued employee programs 8,180 10,041
Payroll, state and local taxes 8,255 7,552
Accrued interest expense 5,123 6,422
Other accrued expenses 52,635 48,850
--------------------------------------------------------------
Total other current liabilities $101,643 $87,548
==============================================================
NOTE 9
LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital lease obligations consisted of the following:
(in thousands) 2000 1999
======================================================================
Bank Credit Agreement:
Revolving credit loans, 7.030%
to 7.530% in 2000 and 6.125%
to 6.476% in 1999, due in 2003 $606,000 $ 671,100
Term loan, 6.179% in 1999,
repaid in full in 2000 -- 109,250
Borrowings outside the U.S.,
varying from 1.00% to 14.50% in
2000 and 1.62% to 9.20% in 1999,
due in installments through 2013 18,798 33,131
Lease of office facilities with
terms expiring through 2008 at
4.45% to 4.73% 7,815 9,654
Other 8,928 11,934
----------------------------------------------------------------------
Total debt and capital leases 641,541 835,069
----------------------------------------------------------------------
Less current maturities:
Long-term debt (2,918) (116,036)
Capital leases (937) (1,181)
----------------------------------------------------------------------
Total current maturities (3,855) (117,217)
----------------------------------------------------------------------
Long-term debt and capital leases $637,686 $ 717,852
======================================================================
In 1998, 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.
At June 30, 2000, interest payable under revolving credit loans is based on
LIBOR plus 0.75%. The Agreement also includes a commitment fee on the revolving
credit loans of 0.20% of the unused balance.
The Agreement also contains various restrictive and affirmative covenants
requiring the maintenance of certain financial ratios. The term loan was subject
to mandatory amortization, and was repaid in November 1999. This resulted in an
acceleration of the write-off of deferred financing fees of $0.4 million, which
was recorded as an extraordinary loss of $0.3 million, net of tax. The revolving
credit loans mature on August 31, 2002.
In 1999, the term loan was permanently reduced with the net proceeds received
from the accounts receivable securitization program (see Note 6). In 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 3 and 4).
Future principal maturities of long-term debt are $2.9 million, $16.3 million,
$606.3 million, $0.2 million and $0.2 million, respectively, in 2001 through
2005.
Future minimum lease payments under capital leases for the next five years and
in total are as follows:
(in thousands)
========================================================
Year ending June 30:
2001 $ 1,277
2002 1,116
2003 1,051
2004 957
2005 957
After 2005 3,918
--------------------------------------------------------
Total future minimum lease payments 9,276
Less amount representing interest (1,461)
--------------------------------------------------------
Present value of minimum lease payments $ 7,815
========================================================
Future minimum lease payments under operating leases for the next five years and
thereafter are as follows:
(in thousands)
========================================================
Year ending June 30:
2001 $14,727
2002 10,911
2003 7,911
2004 5,701
2005 4,160
After 2005 15,572
--------------------------------------------------------
34
<PAGE> 22
NOTE 10
NOTES PAYABLE AND LINES OF CREDIT
Notes payable to banks of $57.7 million and $26.2 million at June 30, 2000 and
1999, respectively, represent short-term borrowings under U.S. and international
credit lines with commercial banks. These credit lines, translated into U.S.
dollars at June 30, 2000 rates, totaled $188.5 million at June 30, 2000, of
which $130.8 million was unused. The weighted average interest rate for
short-term borrowings was 7.3 percent and 6.1 percent at June 30, 2000 and 1999,
respectively.
NOTE 11
INCOME TAXES
Income before income taxes and the provision for income taxes consisted of the
following:
(in thousands) 2000 1999 1998
=============================================================================
Income before provision
for income taxes:
United States $ 59,679 $36,858 $ 93,775
International 40,732 41,552 36,801
-----------------------------------------------------------------------------
Total income before
provision for
income taxes $100,411 $78,410 $130,576
=============================================================================
Current income taxes:
Federal $ 16,053 $18,300 $ 17,200
State 1,729 3,300 5,700
International 19,861 11,900 10,100
-----------------------------------------------------------------------------
Total 37,643 33,500 33,000
Deferred income taxes 6,057 (600) 20,900
-----------------------------------------------------------------------------
Provision for income taxes $ 43,700 $32,900 $ 53,900
=============================================================================
Effective tax rate 43.5% 42.0% 41.3%
=============================================================================
The reconciliation of income taxes computed using the statutory U.S. income tax
rate and the provision for income taxes was as follows:
(in thousands) 2000 1999 1998
============================================================================
Income taxes at
U.S. statutory rate $35,144 $27,444 $45,702
State income taxes,
net of federal tax benefits 528 2,397 3,684
Nondeductible goodwill 5,605 5,630 3,944
Combined tax effects of
international income (123) 203 2,944
International losses with
no related tax benefits 2,527 1,915 1,562
Tax benefits from costs to
repay senior debt -- (3,607) --
Other 19 (1,082) (3,936)
----------------------------------------------------------------------------
Provision for income taxes $43,700 $32,900 $53,900
============================================================================
Deferred tax assets and liabilities consisted of the following:
(in thousands) 2000 1999
===================================================================
Deferred tax assets (liabilities):
Other postretirement benefits $ 20,658 $ 19,817
Inventory valuation and reserves 19,956 18,515
Accrued employee benefits 14,323 12,945
Net operating loss carryforwards 10,694 10,176
Other accruals 8,865 14,111
Marketable equity securities (4,500) (742)
Pension benefits (9,709) (6,898)
Accumulated depreciation (44,995) (39,799)
-------------------------------------------------------------------
Total 15,292 28,125
Less valuation allowance (4,108) (4,857)
-------------------------------------------------------------------
Net deferred tax assets $ 11,184 $ 23,268
===================================================================
Deferred income taxes have not been provided on cumulative
undistributed earnings of international subsidiaries and affiliates. At June 30,
2000, unremitted earnings of non-U.S. subsidiaries were determined to be
permanently reinvested. It is not practical to estimate the income tax benefit
that might be incurred if earnings were remitted to the United States.
Included in deferred tax assets at June 30, 2000, are unrealized tax benefits
totaling $10.7 million related to net operating loss carryforwards. The
realization of these tax benefits is contingent on future taxable income in
certain international operations. Of this amount, $6.3 million relates to net
operating loss carryforwards in the United Kingdom and Germany, which can be
carried forward indefinitely. The remaining unrealized tax benefits relate to
net operating loss carryforwards in certain other international operations. The
company established a valuation allowance of $4.1 million to offset the deferred
tax benefits that may not be realized in the foreseeable future.
NOTE 12
PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The company sponsors several retirement plans that cover substantially all
employees.
Pension benefits under defined benefit pension plans are based on years of
service and, for certain plans, on average compensation immediately preceding
retirement. Pension costs are determined in accordance with SFAS No. 87,
"Employers' Accounting for Pensions." The company funds pension costs in
accordance with the funding requirements of the Employee Retirement Income
Security Act of 1974, as amended, for U.S. plans and in accordance with local
regulations or customs for non-U.S. plans. In 2000, the company made a qualified
transfer of pension assets of $2.2 million from a U.S. pension plan to pay for
medical benefit claims and administrative expenses incurred by the company for
postretirement health care benefits.
35
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT.
The company presently provides varying levels of post-retirement health care and
life insurance benefits to most U.S. employees. Postretirement health care
benefits are available to employees and their spouses retiring on or after age
55 with ten or more years of service after age 40.
Beginning with retirements on or after January 1, 1998, Kennametal's portion of
the costs of postretirement health care benefits will be capped at 1996 levels.
The funded status of these plans and amounts recognized in the consolidated
balance sheets were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
-------------------------------- -----------------------------
(in thousands) 2000 1999 2000 1999
================================================================================================================================
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year $ 357,102 $ 312,394 $ 37,922 $ 40,627
Service cost 13,414 12,126 1,168 1,196
Interest cost 25,187 18,268 2,536 2,633
Participant contributions 857 864 -- --
Plan amendments -- -- -- 2,153
Actuarial (gains) losses (21,754) 12,406 (2,219) (5,329)
Benefits paid (17,818) (16,965) (3,343) (3,358)
Effect of acquired businesses -- 16,651 -- --
Special termination benefits -- 2,731 -- --
Effect of curtailment and other 937 -- -- --
Foreign currency translation adjustments (3,611) (1,373) -- --
--------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 354,314 $ 357,102 $ 36,064 $ 37,922
================================================================================================================================
Change in plan assets:
Fair value of plan assets, beginning of year $ 460,957 $ 422,180 $ -- $ --
Actual return on plan assets 29,242 39,458 -- --
Company contributions 1,709 1,763 -- --
Participant contributions 857 864 -- --
Pension asset transfer (2,250) -- -- --
Benefits paid (17,818) (16,965) -- --
Effect of acquired businesses -- 14,114 -- --
Other 1,266 -- -- --
Foreign currency translation adjustments (1,755) (457) -- --
--------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, end of year $ 472,208 $ 460,957 $ -- $ --
================================================================================================================================
Funded status of plans $ 117,894 $ 103,855 $(36,064) $(37,922)
Unrecognized transition obligation (3,109) (4,826) -- --
Unrecognized prior service cost 4,654 5,168 1,890 2,296
Unrecognized actuarial gains (117,220) (106,919) (10,242) (8,488)
Minimum pension liability (4,206) (1,265) -- --
--------------------------------------------------------------------------------------------------------------------------------
Net accrued obligation $ (1,987) $ (3,987) $(44,416) $(44,114)
================================================================================================================================
Amounts recognized in the balance sheet consist of:
Prepaid benefit $ 27,096 $ 12,241 $ -- $ --
Accrued benefit obligation (29,083) (16,228) (44,416) (44,114)
--------------------------------------------------------------------------------------------------------------------------------
Net accrued obligation $ (1,987) $ (3,987) $(44,416) $(44,114)
================================================================================================================================
</TABLE>
Prepaid pension benefits are included in other long-term assets. Accrued pension
benefit obligations are included in other long-term liabilities. Accrued
postretirement benefit obligations of $41.1 million and $40.8 million at June
30, 2000 and 1999, respectively are included in other long-term liabilities.
Included in the above information are international pension plans with
accumulated benefit obligations exceeding the fair value of plan assets as
follows:
(in thousands) 2000 1999
==========================================================
Projected benefit obligation $52,860 $55,069
Accumulated benefit obligation 51,960 53,364
Fair value of plan assets 31,136 33,581
==========================================================
36
<PAGE> 24
The components of net pension benefit and other postretirement cost include the
following:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
-------------------------------------- --------------------------------
(in thousands) 2000 1999 1998 2000 1999 1998
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 13,414 $ 12,126 $ 11,810 $1,168 $1,196 $1,080
Interest cost 25,187 18,268 19,646 2,536 2,633 2,646
Expected return on plan assets (39,388) (30,505) (49,151) -- -- --
Amortization of transition obligation (2,030) (2,140) (2,150) -- -- --
Amortization of prior service cost 514 551 551 406 406 47
Recognition of actuarial (gains) losses (1,662) (2,709) 18,593 (465) (286) (107)
--------------------------------------------------------------------------------------------------------------------------
Net (benefit) cost $ (3,965) $ (4,409) $ (701) $3,645 $3,949 $3,666
==========================================================================================================================
</TABLE>
The significant actuarial assumptions used to determine the present value of the
net pension and other postretirement benefit obligations were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
------------------------------------ -----------------------------------
2000 1999 1998 2000 1999 1998
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Discount rate:
U.S. plans 8.0% 7.5% 7.0% 8.0% 7.5% 7.0%
International plans 5.5-7.0% 5.5-6.5% 6.0-7.0% -- -- --
Rate of future salary increases:
U.S. plans 4.5% 4.5% 4.5% -- -- --
International plans 3.5-4.3% 3.0-4.3% 4.0-4.5% -- -- --
Rate of return on plan assets:
U.S. plans 10.0% 9.5% 9.0% -- -- --
International plans 6.5-8.0% 6.5-7.0% 7.0-8.0% -- -- --
=====================================================================================================================
</TABLE>
The annual assumed rate of increase in the per capita cost of covered benefits
(the health care cost trend rate) for health care plans was 7.5% in 2000 and was
assumed to decrease gradually to 5.5% in 2002 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. A change of one percentage point
in the assumed health care cost trend rates would have the following effects on
the total service and interest cost components of other postretirement cost and
the other postretirement benefit obligation at June 30, 2000:
(in thousands) 1% Increase 1% Decrease
===============================================================
Effect on total of service and
interest cost components $ 140 $ (130)
Effect on other postretirement
benefit obligation 1,470 (1,350)
---------------------------------------------------------------
U.S. defined benefit pension plan assets consist principally of common stocks,
corporate bonds and U.S. government securities. International defined benefit
pension plan assets consist principally of common stocks, corporate bonds and
government securities.
The company also sponsors several defined contribution pension plans. Pension
costs for defined contribution plans were $9.8 million, $9.5 million and $9.0
million in 2000, 1999 and 1998, respectively. Effective October 1, 1999, company
contributions to U.S. defined contribution pension plans are made primarily in
the company's common stock, resulting in the issuance of 268,964 shares during
2000.
The company provides for postemployment benefits pursuant to SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The company accrues the
cost of separation and other benefits provided to former or inactive employees
after employment but before retirement. Postemployment benefit costs were not
significant in 2000, 1999 and 1998.
37
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT.
NOTE 13
ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss consist of the following:
(in thousands) 2000 1999
============================================================================
Unrealized gain on marketable equity
securities available-for-sale, net of tax $ 8,663 $ 1,160
Minimum pension liability adjustment (850) (1,265)
Foreign currency translation adjustments (55,056) (38,338)
----------------------------------------------------------------------------
Total accumulated other
comprehensive loss $(47,243) $(38,443)
============================================================================
NOTE 14
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In November 1999, the company announced plans to close, consolidate or downsize
several plants, warehouses and offices, and associated work force reductions as
part of its overall plan to increase asset utilization and financial
performance, and to reposition the company to become the premier tooling
solutions supplier. Management implemented these programs throughout 2000. The
costs accrued for the implemented programs were based upon management estimates
using the latest information available at the time that the accrual was
established. The components of the charges are as follows:
Incremental Initial
Total Asset Pension Restructuring
(in thousands) Charge Write-Downs Obligation Liability
==============================================================================
Asset impairment
charges $ 4,808 $(4,808) $ -- $ --
Employee
severance 7,396 -- (787) 6,609
Product
rationalization 100 (100) -- --
Facility
rationalizations 6,322 (1,470) (205) 4,647
------------------------------------------------------------------------------
Total $18,626 $(6,378) $(992) $11,256
==============================================================================
In conjunction with the company's ongoing review of underperforming businesses,
certain assets are reviewed for impairment pursuant to the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." An asset impairment charge of $1.7 million was
recorded, related to a metalworking manufacturing operation in Shanghai, China.
This operation became fully operational in 1998 and to date, has not generated
the performance that was expected at the time the company entered into this
market. Management performed an in-depth review of the operations, capacity
utilization and the local management team, and engaged a consultant to perform
an independent review of the same. These reviews enabled management to determine
that the market served by this operation is not expected to develop to the
extent originally anticipated, but that the operations were in good working
order and utilized modern technology, and that the management team in place was
competent. Management also determined that this facility had excess capacity
given the level of market demand.
Accordingly, management updated its operating forecast to reflect the current
market demand. In comparing the undiscounted projected cash flows of the updated
forecast to the net book value of the assets of this operation, management
determined that the full value of these assets would not be recoverable.
Accordingly, a charge was recorded to adjust the carrying value of the
long-lived assets of this operation to fair value. The estimated fair value of
these assets was based on various methodologies, including a discounted value of
estimated future cash flows.
The product rationalization charge of $0.1 million represents the write-down of
certain discontinued product lines manufactured in these operations. The company
manufactured these products specifically for the market served by these
operations and management has determined that these products are no longer
salable. This charge has been recorded as a component of cost of goods sold.
The company recorded an asset impairment charge of $2.8 million related to the
write-down of equipment in its North American metalworking operations and $0.3
million in its engineered products operations. In connection with the
repositioning of the company, management completed an assessment of the assets
currently being used in these operations and determined that these assets were
not going to be further utilized in conducting these operations. This amount
represents the write-down of the book value of the assets, net of salvage value.
The charge for facility rationalizations relates to employee severance for 153
employees and other exit costs associated with the closure or downsizing of a
metalworking manufacturing operation in Kingswinford, United Kingdom, a circuit
board drill plant in Janesville, Wisc., a German warehouse facility, and several
offices in the Asia Pacific region and South America. Included in this charge is
incremental pension obligation of $0.2 million due to a plan curtailment. This
amount is included in the pension obligation and is presented as a component of
other liabilities. The charge also includes $3.4 million for employee severance
for 41 employees and other exit costs associated with the closure of a mining
and construction manufacturing operation in China and the exit of the related
joint venture.
The company accrued $7.4 million related to severance packages provided to 171
hourly and salaried employees terminated in connection with a global work force
reduction. Included in this charge is incremental pension obligation of $0.8
million, incurred by the company as a result of the severance packages provided.
This amount is included in the pension obligation and is presented as a
component of other liabilities.
38
<PAGE> 26
The costs related to the asset impairment charges, employee severance and
facility rationalizations of $18.5 million have been recorded as a component of
restructuring and asset impairment charges. The costs charged against the
restructuring accrual as of June 30,2000 were as follows:
Beginning Cash June 30,
(in thousands) Accrual Expenditures Adjustments 2000
===========================================================================
Employee
severance $ 6,609 $(4,076) $-- $2,533
Facility
rationalizations 4,647 (1,129) -- 3,518
---------------------------------------------------------------------------
Total $11,256 $(5,205) $-- $6,051
===========================================================================
In 2000, the company incurred period costs of $0.8 million related to these
initiatives, and costs of $1.7 million associated with the implementation of
lean manufacturing techniques, both of which were included in cost of goods sold
as incurred. The company continues to review its business strategies and pursue
other cost-reduction activities, some of which could result in future 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:
Asset Write-
Downs & Other Initial
Total Non-Cash Restructuring
(in thousands) Charge Adjustments Liability
========================================================================
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
========================================================================
The product rationalization charge represents a write-down of certain product
lines that were 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 was 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 resulted in a reduction in the number of products offered from an
estimated 58,000 to 38,000 and was an extension of the company's initiative to
reduce the number of its North American warehouses. By streamlining the product
offering, the company has improved customer service and inventory turnover,
allowed for more efficient operations, thereby reducing costs and improving
capacity utilization, and eliminated redundancy in its product offering. Sales
of these products represent less than five percent of global metalworking sales.
The company proactively converted customers from these older 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 was relocated to other
existing plants in the United States. The closure eliminated excess capacity at
other plant locations. The company decommissioned the existing plant and expects
to 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 incurred in 2000 and 1999 were $2.1 million and $0.4 million,
respectively, and were included in cost of goods sold as incurred. The company
does not anticipate incurring additional period costs associated with this
action.
An asset impairment charge was recorded to write-down, to fair market value, an
investment in and net receivables from certain mining and construction
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 of these operations, the markets for these products,
and the current economic situation in these regions, 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, $2.4 million of the total cost was funded through
the company's 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.
39
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT.
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 accrual as of
June 30, 2000 and 1999 were as follows:
Beginning Cash June 30,
(in thousands) Accrual Expenditures Adjustments 1999
============================================================================
Plant closure $2,200 $ -- $-- $2,200
Voluntary early
retirement
program 1,518 (151) -- 1,367
----------------------------------------------------------------------------
Total $3,718 $(151) $-- $3,567
============================================================================
June 30, Cash June 30,
(in thousands) 1999 Expenditures Adjustments 2000
============================================================================
Plant closure $2,200 $(2,046) $595 $ 749
Voluntary early
retirement
program 1,367 (602) -- 765
----------------------------------------------------------------------------
Total $3,567 $(2,648) $595 $1,514
============================================================================
The adjustment to the accrual for the plant closure is due to the company
receiving more value upon disposition than initially anticipated. This
adjustment was not included in the determination of net income for 2000. No
restructuring or asset impairment charges were recorded in 1998.
NOTE 15
FINANCIAL INSTRUMENTS
The carrying values and fair values of the company's financial instruments at
June 30 are as follows:
2000 1999
---------------------- ----------------------
Carrying Fair Carrying Fair
(in thousands) Value Value Value Value
===========================================================================
Cash and
equivalents $ 22,323 $ 22,323 $ 17,408 $ 17,408
Marketable equity
securities 27,614 27,614 13,436 13,436
Current maturities
of long-term debt 2,918 2,918 116,036 116,036
Notes payable
to banks 57,701 57,701 26,222 26,222
Long-term debt 630,808 630,808 709,379 710,105
===========================================================================
The methods used to estimate the fair value of the company's financial
instruments are as follows:
CASH AND EQUIVALENTS, CURRENT MATURITIES OF LONG-TERM DEBT AND NOTES PAYABLE TO
BANKS
The carrying amounts approximate their fair value because of the short
maturity of the instruments.
MARKETABLE EQUITY SECURITIES
The fair value is estimated based on the quoted market price of this security,
as adjusted for the currency exchange rate at June 30.
LONG-TERM DEBT
Fair value was determined using discounted cash flow analysis and the company's
incremental borrowing rates for similar types of arrangements.
The notional amounts of the company's derivative financial instruments,
translated into U.S. dollars at June 30, 2000 and 1999 rates, are as follows:
2000 1999
Notional Notional
(in thousands) Amounts Amounts
============================================================
Foreign currency contracts:
Forward contracts $ 55,137 $12,645
Purchased options 66,283 --
Range forward contracts 27,024 --
Interest rate swap agreements 300,000 50,000
============================================================
Methods used to estimate the fair value of the company's derivative financial
instruments are as follows:
FOREIGN CURRENCY CONTRACTS
The company enters into foreign currency contracts to hedge its significant firm
and anticipated purchase and sale commitments denominated in foreign currencies,
as well as significant cross-border intercompany loans. The company utilizes
written options to offset purchased options in range forward contracts. These
contracts mature at various times before August 2001. The unamortized cost of
the option premiums of $1.6 million at June 30, 2000 and the unrealized gains on
the forward contracts of $0.4 million and $0.1 million at June 30, 2000 and
1999, respectively, approximate the fair value of the contracts then
outstanding. Fair value was estimated based on quoted market prices of
comparable instruments.
40
<PAGE> 28
INTEREST RATE SWAP AGREEMENTS
At June 30, 2000, the company has interest rate swap agreements outstanding that
effectively convert a notional amount of $300.0 million of debt from floating to
fixed interest rates. These agreements mature at various times between June 2001
and June 2003. The company would have received $1.8 million to settle its
interest rate swap agreements, representing the excess of fair value over
carrying cost of these agreements. Fair value was estimated based on the
mark-to-market value of the contracts which closely approximates the amount that
the company would receive or pay to terminate the agreements at year end.
The net payments or receipts under interest rate swap agreements are recorded as
a part of interest expense and are not significant. The effect of interest rate
swaps on the company's composite interest rate on long-term debt was not
significant at June 30, 2000.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the company to concentrations of
credit risk consist primarily of temporary cash investments and trade
receivables. By policy, the company makes temporary cash investments with high
credit quality financial institutions. With respect to trade receivables,
concentrations of credit risk are significantly reduced because the company
serves numerous customers in many industries and geographic areas.
The company is exposed to counterparty credit risk for non-performance and, in
the unlikely event of nonperformance, to market risk for changes in interest and
currency rates. The company manages exposure to counterparty credit risk through
credit standards, diversification of counterparties and procedures to monitor
concentrations of credit risk. The company does not anticipate nonperformance by
any of the counterparties. As of June 30, 2000 and 1999, the company had no
significant concentrations of credit risk.
NOTE 16
STOCK OPTIONS AND AWARDS
Stock options generally are granted to eligible employees at fair market value
at the date of grant. Options are exercisable under specified conditions for up
to ten years from the date of grant. The company has four plans under which
options may be granted: the 1992 plan, the 1996 plan and two 1999 plans. No
options may be granted under the 1992 plan after October 2002, no options may be
granted under the 1996 plan after October 2006 and no options may be granted
under the 1999 plans after April and October 2009. No charges to income have
resulted from grants under the 1992 and 1996 plans.
Under provisions of the plans, participants may deliver Kennametal stock in
payment of the option price and receive credit for the fair market value of the
shares on the date of delivery. Shares delivered in 2000, 1999 and 1998 were not
significant. Under the plans, shares may be awarded to eligible employees
without payment. The respective plans specify that such shares are awarded in
the name of the employee, who has all the rights of a shareowner, subject to
certain restrictions or forfeitures. Awards in 2000, 1999 and 1998 were not
significant.
The company measures compensation expense in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, at the time options are granted, no compensation expense was
recognized in the accompanying consolidated financial statements. If
compensation expense had been determined based on the estimated fair value of
options granted in 2000, 1999 and 1998, consistent with the methodology in SFAS
No. 123, "Accounting for Stock Based Compensation," the effect on the company's
2000, 1999 and 1998 net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
(in thousands, except per share data) 2000 1999 1998
============================================================================
Net income:
As reported $51,710 $39,116 $71,197
Pro forma 50,287 37,489 65,671
Basic earnings per share:
As reported $ 1.71 $ 1.31 $ 2.61
Pro forma 1.66 1.25 2.41
Diluted earnings per share:
As reported $ 1.70 $ 1.31 $ 2.58
Pro forma 1.66 1.25 2.38
============================================================================
The fair values of the options granted were estimated on the date of their grant
using the Black-Scholes option-pricing model based on the following weighted
average assumptions:
2000 1999 1998
=========================================================================
Risk-free interest rate 6.64% 5.10% 6.12%
Expected life (years) 5 5 5
Expected volatility 31.1% 24.4% 23.8%
Expected dividend yield 2.5% 2.6% 1.6%
=========================================================================
41
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT.
Stock option activity for 2000, 1999 and 1998 is set forth below:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------- --------------------------- ---------------------------
Weighted Average Weighted Average Weighted Average
(number of options) Options Exercise Price Options Exercise Price Options Exercise Price
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 2,635,256 $33.84 1,620,206 $38.40 1,169,367 $30.85
Granted 317,600 27.01 1,127,750 26.78 727,900 49.82
Exercised (20,808) 19.81 (52,950) 23.72 (224,061) 33.05
Lapsed and forfeited (75,750) 38.86 (59,750) 39.47 (53,000) 50.76
------------------------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 2,856,298 $33.05 2,635,256 $33.84 1,620,206 $38.40
====================================================================================================================================
Options exercisable, end of year 2,025,723 $35.30 1,808,308 $36.54 1,592,854 $38.64
------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $ 8.30 $ 6.02 $13.90
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock options outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------- -----------------------------------
Weighted Average
Range of Remaining Contractual Weighted Average Weighted Average
Exercise Prices Options Life (years) Exercise Price Options Exercise Price
================================================================================================================================
<S> <C> <C> <C> <C> <C>
$16.94-$21.75 359,698 6.83 $20.87 216,994 $20.87
22.97- 24.75 406,362 7.23 24.16 393,062 24.20
26.00- 26.41 350,100 9.34 26.23 50,000 26.00
26.53- 31.06 287,200 7.44 29.66 204,700 30.49
31.69 385,000 8.08 31.69 128,362 31.69
31.84- 38.00 438,538 5.66 36.62 405,205 36.66
48.56 469,400 7.08 48.56 469,400 48.56
49.25- 53.97 160,000 7.49 51.96 158,000 51.98
--------------------------------------------------------------------------------------------------------------------------------
2,856,298 7.32 $33.05 2,025,723 $35.30
================================================================================================================================
</TABLE>
In addition to stock option grants, the 1999 plans permit the award of
restricted stock to directors, officers and key employees of the company. During
2000 and 1999, restricted stock awards of 34,800 and 113,000 shares,
respectively, were granted to certain officers and employees of the company.
These awards vest over periods of two to three years from the grant date, and
accordingly, a portion of the total compensation expense associated with these
awards of $1.1 million and $3.1 million for 2000 and 1999, respectively, is
considered unearned compensation. In 1999, additional unearned compensation of
$0.4 million was recognized related to the difference in the stock price between
the date of an option grant and the date the employee commenced employment. This
option award vests over a three-year period from the grant date. Unearned
compensation is amortized to expense over the vesting period. Compensation
expense related to these awards was $1.6 million and $0.1 million in 2000 and
1999, respectively.
NOTE 17
ENVIRONMENTAL MATTERS
The company has been involved in various environmental cleanup and remediation
activities at several of its manufacturing facilities. In addition, the company
is currently named as a potentially responsible party (PRP) at several Superfund
sites in the United States. In the December 1999 quarter, the company recorded a
remediation reserve of $3.0 million with respect to its involvement in these
matters, which is recorded as a component of operating expense. This represents
management's best estimate of its undiscounted future obligation based on its
evaluations and discussions with outside counsel and independent consultants,
and the current facts and circumstances related to these matters. The company
recorded this liability in the December quarter because certain events occurred,
including sufficient progress made by the government and the PRPs in the
identification of other PRPs and review of potential remediation solutions, that
clarified the level of involvement in these matters by the company and its
relationship to other PRPs. This led the company to conclude that it was
probable that a liability had been incurred.
42
<PAGE> 30
In addition to the amount currently reserved, the company may be subject to loss
contingencies related to these matters estimated to be up to an additional $3.3
million. The company believes that such undiscounted unreserved losses are
reasonably possible but are not currently considered to be probable of
occurrence. The reserved and unreserved liabilities could change substantially
in the near term due to factors such as the nature and extent of contamination,
changes in remedial requirements, technological changes, discovery of new
information, the financial strength of other PRPs and the identification of new
PRPs.
The company maintains a Corporate Environmental, Health and Safety (EH&S)
Department, as well as an EH&S Policy Committee, to ensure compliance with
environmental regulations and to monitor and oversee remediation activities. In
addition, the company has established an EH&S administrator at its domestic
manufacturing facilities. The company's financial management team periodically
meets with members of the Corporate EH&S Department and the Corporate Legal
Department to review and evaluate the status of environmental projects and
contingencies. On a quarterly basis, management establishes or adjusts financial
provisions and reserves for environmental contingencies in accordance with SFAS
No. 5, "Accounting for Contingencies."
NOTE 18
SHAREHOLDER RIGHTS PLAN
Pursuant to the company's Shareholder Rights Plan, one-half of a right is
associated with each share of common stock. Each right entitles a shareowner to
buy 1/100th of a share of a new series of preferred stock at a price of $105
(subject to adjustment).
The rights will be exercisable only if a person or group of persons acquires or
intends to make a tender offer for 20 percent or more of the company's common
stock. If any person acquires 20 percent of the common stock, each right will
entitle the shareowner to receive that number of shares of common stock having a
market value of two times the exercise price. If the company is acquired in a
merger or other business combination, each right will entitle the shareowner to
purchase at the exercise price that number of shares of the acquiring company
having a market value of two times the exercise price. The rights will expire on
November 2,2000 and are subject to redemption by the company at $0.01 per right.
On July 24, 2000, the company's Board of Directors adopted a new shareowner
rights plan to replace its existing plan, which has been in effect since 1990.
The new plan will become effective upon the expiration of the existing plan on
November 2, 2000 and provides for the distribution to shareowners of one stock
purchase right for each share of common stock held as of September 5, 2000. The
principal modification effected by the new plan is the establishment of a new
exercise price of $120.
NOTE 19
SEGMENT DATA
In November 1999, management reorganized the financial reporting of its
operations to focus on global business units consisting of Metalworking,
Engineered Products, Mining & Construction and JLK/Industrial Supply, and
corporate functional shared services. The results for all periods presented have
been restated to conform to the new reporting structure. Segment selection was
based upon internal organizational structure, the way in which management
organizes segments for making operating decisions and assessing performance, the
availability of separate financial results, and materiality considerations.
Intersegment sales are accounted for at arm's-length prices, reflecting
prevailing market conditions within the various geographic areas. Such sales and
associated costs are eliminated in the consolidated financial statements.
Sales to a single customer did not aggregate 10 percent or more of total sales
in 2000, 1999 or 1998. Export sales from U.S. operations to unaffiliated
customers were $75.8 million, $69.9 million and $64.7 million in 2000, 1999 and
1998, respectively.
METALWORKING
In the metalworking segment, the company provides consumable metalcutting tools
and tooling systems to manufacturing companies in a wide range of industries
throughout the world. Metalcutting operations include turning, boring,
threading, grooving, milling and drilling. The company's tooling systems consist
of a steel toolholder and an indexable cutting tool such as an insert or drill
made from cemented tungsten carbides, high-speed steel and other hard materials.
ENGINEERED PRODUCTS
This segment's principal business is the production and sale of cemented
tungsten carbide products used in engineered applications, including circuit
board drills and compacts. These products have technical commonality to the
company's core metalworking products.
MINING & CONSTRUCTION
This segment represents the sales of cemented tungsten carbide products used in
mining and highway construction and other similar applications. These products
also have technical commonality to the company's core metalworking products. The
company also sells metallurgical powders to manufacturers of cemented tungsten
carbide products.
JLK/INDUSTRIAL SUPPLY
This segment represents the sales of industrial supply products through JLK.
Sales of metalworking consumable products are derived through a direct-marketing
program, including mail-order catalogs and showrooms, a direct field sales
force, and integrated supply or Full Service Supply (FSS) programs.
43
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT.
Segment detail is summarized as follows:
(in thousands) 2000 1999 1998
============================================================================
External sales:
Metalworking $1,020,914 $1,038,205 $ 939,290
Engineered Products 176,469 173,171 155,496
Mining & Construction 165,899 173,028 168,837
JLK/Industrial Supply 490,381 518,512 414,765
----------------------------------------------------------------------------
Total external sales $1,853,663 $1,902,916 $1,678,388
============================================================================
Intersegment sales:
Metalworking $ 134,398 $ 108,994 $ 76,376
Engineered Products 19,978 23,752 15,300
Mining & Construction 7,041 5,635 6,851
JLK/Industrial Supply 8,912 13,130 10,583
----------------------------------------------------------------------------
Total intersegment sales $ 170,329 $ 151,511 $ 109,110
============================================================================
Total sales:
Metalworking $1,155,312 $1,147,199 $1,015,666
Engineered Products 196,447 196,923 170,796
Mining & Construction 172,940 178,663 175,688
JLK/Industrial Supply 499,293 531,642 425,348
----------------------------------------------------------------------------
Total sales $2,023,992 $2,054,427 $1,787,498
============================================================================
Operating income:
Metalworking $ 128,283 $ 116,306 $ 138,799
Engineered Products 23,711 24,473 29,090
Mining & Construction 17,483 14,203 21,408
JLK/Industrial Supply 28,174 34,532 41,308
Corporate (38,654) (42,018) (35,034)
----------------------------------------------------------------------------
Total operating income 158,997 147,496 195,571
----------------------------------------------------------------------------
Interest expense 55,079 68,594 59,536
Other expense, net 3,507 492 5,459
----------------------------------------------------------------------------
Income before income taxes
and minority interest $ 100,411 $ 78,410 $ 130,576
============================================================================
Depreciation and
amortization:
Metalworking $ 64,727 $ 63,822 $ 46,807
Engineered Products 16,361 14,278 8,785
Mining & Construction 5,531 5,208 3,792
JLK/Industrial Supply 9,386 8,749 5,185
Corporate 5,641 3,934 2,742
----------------------------------------------------------------------------
Total depreciation
and amortization $ 101,646 $ 95,991 $ 67,311
============================================================================
Equity income (loss):
Metalworking $ 615 $ 650 $ 812
Engineered Products 23 17 43
Mining & Construction (41) (794) (1,103)
JLK/Industrial Supply -- -- --
Corporate -- -- --
----------------------------------------------------------------------------
Total equity income (loss) $ 597 $ (127) $ (248)
============================================================================
(in thousands) 2000 1999 1998
============================================================================
Total assets:
Metalworking $ 978,188 $1,039,854 $1,171,697
Engineered Products 343,139 363,739 374,081
Mining & Construction 132,602 146,295 137,242
JLK/Industrial Supply 290,277 274,989 275,586
Corporate 238,736 218,771 180,387
----------------------------------------------------------------------------
Total assets $1,982,942 $2,043,648 $2,138,993
============================================================================
Capital expenditures:
Metalworking $ 35,125 $ 63,722 $ 65,026
Engineered Products 5,161 12,120 6,343
Mining & Construction 2,074 3,996 6,346
JLK/Industrial Supply 7,699 9,681 12,286
Corporate 604 5,474 14,773
----------------------------------------------------------------------------
Total capital expenditures $ 50,663 $ 94,993 $ 104,774
============================================================================
Investment in affiliated
companies:
Metalworking $ 3,006 $ 2,821 $ 11,218
Engineered Products 435 340 416
Mining & Construction (870) (2,317) 2,106
JLK/Industrial Supply -- -- --
Corporate -- -- --
----------------------------------------------------------------------------
Total investments in
affiliated companies $ 2,571 $ 844 $ 13,740
============================================================================
Metalworking operating income for 2000 was reduced by $11.0 million related to
asset impairment charges and costs associated with facility and product
rationalizations, and employee severance (see Note 14). Engineered Products
operating income for 2000 was reduced by $1.4 million related to costs
associated with a facility rationalization, employee severance, and asset
impairment charges (see Note 14). Mining & Construction operating income for
2000 was reduced by $3.4 million related to asset impairment charges and costs
associated with a facility rationalization, including costs to exit the related
joint venture, and employee severance (see Note 14). JLK/Industrial Supply
operating income for 2000 was reduced by $0.6 million related to employee
severance costs (see Note 14) and $0.2 million related to the evaluation of
strategic alternatives (see Note 3). Corporate operating income for 2000 was
reduced by $3.0 million related to environmental remediation costs (see Note
17), $2.2 million related to employee severance costs (see Note 14), and $0.6
million related to the evaluation of strategic alternatives (see Note 3).
44
<PAGE> 32
Metalworking operating income for 1999 was reduced by $11.1 million related to
the product rationalization program and to close a drill manufacturing plant in
Solon, Ohio (see Note 14) and a $3.8 million one-time charge incurred in the
acquisition of 4.9 percent of Toshiba Tungaloy (see Note 5). Mining &
Construction operating income for 1999 was reduced by $5.8 million related to a
write-down of an investment in and net receivables from certain international
operations in emerging markets (see Note 14). Corporate operating income for
1999 was reduced by $3.9 million related to a voluntary early retirement benefit
program (see Note 14).
Geographic information for sales, based on country of origin, and assets is as
follows:
(in thousands) 2000 1999 1998
==========================================================================
External sales:
United States $1,307,472 $1,346,195 $1,190,021
Germany 195,868 208,490 199,002
United Kingdom 95,457 106,676 99,129
Canada 60,756 52,877 52,195
Other 194,110 188,678 138,041
--------------------------------------------------------------------------
Total external sales $1,853,663 $1,902,916 $1,678,388
==========================================================================
Total assets:
United States $1,522,911 $1,593,747 $1,654,026
Germany 157,126 163,750 192,186
United Kingdom 93,465 85,363 104,597
Canada 28,203 29,854 30,710
Other 181,237 170,934 157,474
--------------------------------------------------------------------------
Total assets $1,982,942 $2,043,648 $2,138,993
==========================================================================
NOTE 20
OTHER EXPENSE, NET
Other expense, net for 2000 included fees of $5.2 million incurred in connection
with the accounts receivable securitization program initiated in June 1999. This
was partially offset by gains of $1.4 million from the sale of miscellaneous
underutilized assets.
Other expense, net for 1998 included the write-off of deferred financing costs
related to the cancelled public offering of debt and equity securities that the
company originally intended to offer in connection with the acquisition of
Greenfield. Related to the debt offering, the company also entered into an
agreement to hedge its exposure to fluctuations in interest rates. When the
company subsequently postponed the proposed offerings, the interest rate hedges
were terminated resulting in a loss of $3.5 million. The company also wrote-off
other offering-related expenses of $1.1 million resulting in a combined total of
$4.6 million.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
SELECTED QUARTERLY FINANCIAL DATA
Quarter Ended
--------------------------------------------------------------------------------
(in thousands,
except per share) Sep. 30 Dec. 31 Mar. 31 Jun. 30
================================================================================
2000:
Net sales $442,943 $453,928 $483,019 $473,773
Gross profit 163,329 168,867 188,452 185,728
Net income 9,913 8,244 14,097 19,456
Basic earnings
per share 0.33 0.27 0.46 0.64
Diluted earnings
per share 0.33 0.27 0.46 0.64
--------------------------------------------------------------------------------
1999:
Net sales $480,922 $484,318 $479,051 $458,625
Gross profit 179,016 181,062 173,397 170,790
Net income 7,394 14,036 2,180 15,506
Basic earnings
per share 0.25 0.47 0.07 0.52
Diluted earnings
per share 0.25 0.47 0.07 0.52
================================================================================
Earnings per share amounts for each quarter are required to be computed
independently and, therefore, may not equal the amount computed for the year.
In the December 1999 quarter, the company recorded pretax charges of $7.5
million ($0.14 per share), including $4.1 million ($0.07 per share) related to
restructuring and asset impairment charges, $3.0 million ($0.06 per share)
related to environmental remediation, and $0.4 million ($0.01 per share) related
to an extraordinary loss related to the early extinguishment of debt. In the
March 2000 quarter, the company recorded pretax charges of $13.3 million ($0.25
per share) related to restructuring and asset impairment charges. In the June
2000 quarter, the company recorded pretax charges of $1.3 million ($0.02 per
share) related to restructuring and asset impairment charges and $0.8 million
($0.02 per share) related to the evaluation of strategic alternatives.
In the March 1999 quarter, the company recorded pretax charges of $24.6 million
($0.51 per share), including $20.8 million ($0.44 per share) related to special
charges for operational improvement programs and $3.8 million ($0.07 per share)
related to a one-time charge incurred in the acquisition of 4.9 percent of
Toshiba Tungaloy.
45
<PAGE> 33
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) CONT.
STOCK PRICE RANGES AND DIVIDENDS PAID
The company's common stock is traded on the New York Stock Exchange (symbol
KMT). The number of shareowners of record as of August 24, 2000, was 2,920.
Stock price ranges and dividends declared and paid were as follows:
Quarter Ended
------------------------------------------------------------
Sep. 30 Dec. 31 Mar. 31 Jun. 30
============================================================
2000:
High $30 $33 7/8 $33 13/16 $30 1/2
Low 23 23 1/2 22 5/8 19 1/8
Dividends 0.17 0.17 0.17 0.17
------------------------------------------------------------
1999:
High $43 13/16 $25 5/8 $26 $31 5/16
Low 25 3/8 15 5/8 16 3/8 16 5/8
Dividends 0.17 0.17 0.17 0.17
============================================================
REPORT OF MANAGEMENT
TO THE SHAREOWNERS OF KENNAMETAL INC.
The management of Kennametal Inc. is responsible for the integrity of all
information contained in this report. The financial statements and related
information were prepared by management in accordance with accounting principles
generally accepted in the United States and, as such, contain amounts that are
based on management's best judgment and estimates.
Management maintains a system of policies, procedures and controls designed to
provide reasonable, but not absolute, assurance that the financial data and
records are reliable in all material respects and that assets are safeguarded
from improper or unauthorized use. The company maintains an active internal
audit department that monitors compliance with this system.
The Board of Directors, acting through its Audit Committee, is ultimately
responsible for determining that management fulfills its responsibilities in the
preparation of the financial statements. The Audit Committee meets periodically
with management, the internal auditors and the independent public accountants to
discuss auditing and financial reporting matters. The internal auditors and
independent public accountants have full access to the Audit Committee without
the presence of management.
Kennametal has always placed the utmost importance on conducting its business
activities in accordance with the spirit and letter of the law and the highest
ethical standards. This philosophy is embodied in a code of business ethics and
conduct that is distributed to all employees.
/s/ MARKOS I. TAMBAKERAS
------------------------------------------
Markos I. Tambakeras
President and Chief Executive Officer
Shareowner
/s/ JAMES R. BREISINGER
------------------------------------------
James R. Breisinger
Vice President and Chief Financial Officer
Shareowner
July 24, 2000
46
<PAGE> 34
REPORT OF AUDIT COMMITTEE
TO THE SHAREOWNERS OF KENNAMETAL INC.
The Audit Committee of the Board of Directors, composed of three independent
directors, met four times during 2000.
The Audit Committee monitors the company's financial reporting process for
accuracy, completeness and timeliness. In fulfilling its responsibility, the
committee recommended to the Board of Directors the reappointment of Arthur
Andersen LLP as the company's independent public accountants. The Audit
Committee reviewed with management, the internal auditors and the independent
public accountants the overall scope and specific plans for their respective
audits. The committee evaluated with management Kennametal's annual and
quarterly reporting process and the adequacy of the company's internal controls.
The committee met with the internal auditors and independent public accountants,
with and without management present, to review the results of their
examinations, their evaluations of the company's internal controls and the
overall quality of Kennametal's financial reporting.
The Audit Committee participates in a self-assessment program whereby the
composition, activities and interactions of the committee are periodically
evaluated by the committee. The purpose of the program is to provide guidance
with regard to the continual fulfillment of the committee's responsibilities.
/s/ LARRY YOST
------------------------------------------
Larry Yost
Chairman, Audit Committee
Shareowner
July 24, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREOWNERS OF KENNAMETAL INC.
We have audited the accompanying consolidated balance sheets of Kennametal Inc.
(a Pennsylvania corporation) and subsidiaries as of June 30, 2000 and 1999, and
the related consolidated statements of income, shareowners' equity and cash
flows for each of the three years in the period ended June 30, 2000. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kennametal Inc. and
subsidiaries as of June 30, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
------------------------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 24, 2000
(except with respect to the matter
discussed in Note 3, as to which the
date is September 1, 2000)
47
<PAGE> 35
ELEVEN-YEAR FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) Notes 2000 1999 1998 1997
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $1,853,663 $1,902,916 $1,678,388 $1,156,343
Cost of goods sold 1,147,287 1,198,651 994,481 668,415
Research and development expense 19,246 18,797 20,397 24,105
Selling, marketing and distribution expense 364,971 394,204 339,772 263,980
General and administrative expense 118,184 104,043 112,519 69,911
Interest expense 55,079 68,594 59,536 10,393
Unusual or nonrecurring items (1) 22,412 24,617 4,595 --
Income taxes 43,700 32,900 53,900 44,900
Accounting changes, net of tax (2) -- -- -- --
Net income (loss) (3) 51,710 39,116 71,197 72,032
-----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Net working capital $ 397,403 $ 373,582 $ 447,992 $ 175,877
Inventories 410,885 434,462 436,472 210,111
Property, plant and equipment, net 498,784 539,800 525,927 300,386
Total assets 1,982,942 2,043,648 2,138,993 869,309
Long-term debt, including capital leases 637,686 717,852 840,932 40,445
Total debt, including capital leases 699,242 861,291 967,667 174,464
Total shareowners' equity (4) 780,254 745,131 735,460 459,608
-----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings (loss) (3) $ 1.71 $ 1.31 $ 2.61 $ 2.71
Diluted earnings (loss) 1.70 1.31 2.58 2.69
Dividends 0.68 0.68 0.68 0.66
Book value (at June 30) 25.56 24.78 24.66 17.61
Market price (at June 30) 21.44 31.00 41.75 43.00
-----------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Capital expenditures $ 50,663 $ 94,993 $ 104,774 $ 73,779
Number of employees (at June 30) 13,200 13,640 14,380 7,550
Average sales per employee $ 139 $ 136 $ 152 $ 159
Weighted average shares outstanding (000) (4) 30,263 29,917 27,263 26,575
Diluted weighted average shares outstanding (000) (4) 30,364 29,960 27,567 26,786
-----------------------------------------------------------------------------------------------------------------------------------
KEY RATIOS
Sales growth (2.6)% 13.4% 45.1% 7.1%
Gross profit margin 38.1 37.0 40.7 42.2
Operating profit margin (5) 9.8 9.0 11.7 11.0
Return on sales (3) 2.8 2.1 4.2 6.2
Return on average shareowners' equity (3) 6.9 5.3 12.2 15.8
Total debt to total capital 45.6 51.9 55.4 27.1
Inventory turnover 2.7x 2.6x 3.1x 3.2x
===================================================================================================================================
</TABLE>
n.m.--Not meaningful
NOTES
1. Unusual or nonrecurring items reflect cost associated with environmental
remediation, strategic alternatives, and restructuring costs and asset
impairment charges related to operational improvement programs initiated in
2000, cost associated with the acquisitions of shares of Toshiba Tungaloy
and restructuring costs and asset impairment charges related to operational
improvement programs initiated in 1999, deferred financing costs related to
a postponed public offering intended to have been offered in connection
with the acquisition of Greenfield in 1998, restructuring costs for the
relocation of the North America Metalworking Headquarters from Raleigh,
N.C. to Latrobe, Pa., and to close a manufacturing facility in 1996,
restructuring and integration costs associated with the acquisition of
Hertel AG in 1994, settlement and partial reversal of accrued patent
litigation costs in 1993 and accrued patent litigation costs in 1991.
2. Accounting changes in 1994 reflect changes in the methods of accounting for
postretirement health care and life insurance benefits (SFAS No. 106) and
income taxes (SFAS No. 109).
48
<PAGE> 36
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990
=======================================================================================================
<S> <C> <C> <C> <C> <C> <C>
$1,079,963 $983,873 $802,513 $598,496 $594,533 $617,833 $589,023
625,473 560,867 472,533 352,773 362,967 358,529 342,434
20,585 18,744 15,201 14,714 13,656 14,750 13,325
242,375 219,271 189,487 144,850 137,494 136,319 123,286
65,417 55,853 58,612 41,348 45,842 49,219 42,648
11,296 12,793 13,811 9,549 10,083 11,832 10,538
2,666 -- 24,749 (1,738) -- 6,350 --
43,900 45,000 15,500 14,000 8,100 17,300 23,000
-- -- 15,003 -- -- -- --
69,732 68,294 (4,088) 20,094 12,872 21,086 32,113
-------------------------------------------------------------------------------------------------------
$ 217,651 $184,072 $130,777 $120,877 $108,104 $ 88,431 $108,954
204,934 200,680 158,179 115,230 118,248 119,767 114,593
267,107 260,342 243,098 192,305 200,502 193,830 175,523
799,491 781,609 697,532 448,263 472,167 476,194 451,379
56,059 78,700 90,178 87,891 95,271 73,113 81,314
131,151 149,730 147,295 110,628 127,954 130,710 116,212
438,949 391,885 322,836 255,141 251,511 243,535 231,598
-------------------------------------------------------------------------------------------------------
$ 2.62 $ 2.58 $ (0.17) $ 0.93 $ 0.60 $ 1.00 $ 1.54
2.60 2.56 (0.17) 0.92 0.60 0.99 1.52
0.60 0.60 0.58 0.58 0.58 0.58 0.58
16.44 14.75 12.25 11.64 11.64 11.42 11.02
34.00 34.50 24.63 16.75 17.13 17.81 17.25
-------------------------------------------------------------------------------------------------------
$ 57,556 $ 43,371 $ 27,313 $ 23,099 $ 36,555 $ 55,323 $ 35,998
7,260 7,030 6,600 4,850 4,980 5,360 5,580
$ 152 $ 146 $ 125 $ 122 $ 116 $ 113 $ 107
26,635 26,486 24,304 21,712 21,452 21,094 20,872
26,825 26,640 24,449 21,753 21,551 21,237 21,065
-------------------------------------------------------------------------------------------------------
9.8% 22.6% 34.1% 0.7% (3.8)% 4.9% 24.7%
42.1 43.0 41.1 41.1 38.9 42.0 41.9
11.5 12.9 7.8 6.9 5.2 8.9 10.9
6.5 6.9 n.m. 3.4 2.2 3.4 5.5
17.0 19.3 n.m. 8.1 5.2 8.7 14.9
22.5 27.0 30.6 30.2 33.7 34.9 33.4
3.0x 3.1x 3.1x 3.1x 3.0x 3.0x 3.1x
=======================================================================================================
</TABLE>
3. Excluding unusual or nonrecurring items in 2000 and an extraordinary loss
of $0.3 million, net of tax, net income was $64,689; diluted earnings per
share were $2.13; return on sales was 3.5 percent; and return on average
shareowners' equity was 8.6 percent. Excluding unusual or nonrecurring
items in 1999, net income was $54,299; diluted earnings per share were
$1.82; return on sales was 2.9 percent; and return on average shareowners'
equity was 7.3 percent. Excluding unusual or nonrecurring items in 1998 and
the effects of the Greenfield acquisition, net income was $88,697; diluted
earnings per share were $3.23; return on sales was 5.3 percent; and return
on average shareowners' equity was 15.2 percent. Excluding unusual or
nonrecurring items in 1996, net income was $71,369; diluted earnings per
share were $2.66; return on sales was 6.6 percent; and return on average
shareowners' equity was 17.4 percent.
4. In 1998, the company issued 3.45 million shares of capital stock for net
proceeds of $171.4 million.
5. Excludes unusual or nonrecurring items.
49
