<PAGE> 1
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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission file number 1-5318
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0900168
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
WORLD HEADQUARTERS
1600 TECHNOLOGY WAY
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650-0231
(Address of registrant's principal executive offices)
Registrant's telephone number, including area code: (724) 539-5000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title Of Each Class Outstanding at October 30, 2000
---------------------------------------- --------------------------------
Capital Stock, par value $1.25 per share 30,277,530
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<PAGE> 2
KENNAMETAL INC.
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
------- ----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Statements of Income (Unaudited)
Three months ended September 30, 2000 and 1999..................................................... 1
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 2000 and June 30, 2000............................................................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended September 30, 2000 and 1999..................................................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited)................................... 4
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................................... 9
3. Quantitative and Qualitative Disclosures about Market Risk......................................... 14
PART II. OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders................................................ 15
6. Exhibits and Reports on Form 8-K................................................................... 15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
-------------------------------------------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATIONS
Net sales $ 450,705 $ 442,943
Cost of goods sold 282,052 279,614
----------- -----------
Gross profit 168,653 163,329
Operating expense 128,424 122,487
Restructuring and asset impairment charge 1,535 --
Amortization of intangibles 6,323 7,003
----------- -----------
Operating income 32,371 33,839
Interest expense 13,195 14,527
Other expense (income), net 1,457 (258)
----------- -----------
Income before provision for income taxes and minority interest 17,719 19,570
Provision for income taxes 7,176 8,709
Minority interest 602 948
----------- -----------
Income before cumulative effect of change in accounting principle 9,941 9,913
Cumulative effect of change in accounting principle,
net of tax of $399 (599) --
----------- -----------
Net income $ 9,342 $ 9,913
=========== ===========
PER SHARE DATA
Basic earnings per share before cumulative effect
of change in accounting principle $ 0.32 $ 0.33
Cumulative effect of change in accounting principle per share (0.02) --
----------- ----------
Basic earnings per share $ 0.30 $ 0.33
=========== ===========
Diluted earnings per share before cumulative effect
of change in accounting principle $ 0.32 $ 0.33
Cumulative effect of change in accounting principle per share (0.02) --
----------- -----------
Diluted earnings per share $ 0.30 $ 0.33
=========== ===========
Dividends per share $ 0.17 $ 0.17
=========== ===========
Basic weighted average shares outstanding 30,703 30,099
=========== ===========
Diluted weighted average shares outstanding 30,742 30,165
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
-------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 31,560 $ 22,323
Marketable equity securities available-for-sale 24,290 27,614
Accounts receivable, less allowance for
doubtful accounts of $8,740 and $12,214 218,863 231,917
Inventories 392,741 410,885
Deferred income taxes 43,760 42,911
Other current assets 17,707 13,065
------------- -------------
Total current assets 728,921 748,715
------------- -------------
Property, plant and equipment:
Land and buildings 232,774 230,448
Machinery and equipment 720,748 720,556
Less accumulated depreciation (467,391) (452,220)
------------- -------------
Net property, plant and equipment 486,131 498,784
------------- -------------
Other assets:
Investments in affiliated companies 3,351 2,571
Intangible assets, less accumulated amortization
of $93,336 and $88,458 653,018 661,172
Other 29,458 29,879
------------- -------------
Total other assets 685,827 693,622
------------- -------------
Total assets $ 1,900,879 $ 1,941,121
============= =============
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases $ 3,188 $ 3,855
Notes payable to banks 56,248 57,701
Accounts payable 111,873 118,908
Accrued vacation pay 27,842 28,217
Accrued income taxes 25,950 30,226
Accrued payroll 22,777 20,605
Other current liabilities 89,787 91,800
------------- -------------
Total current liabilities 337,665 351,312
------------- -------------
Long-term debt and capital leases, less current maturities 613,157 637,686
Deferred income taxes 31,907 31,727
Other liabilities 85,059 85,036
------------- -------------
Total liabilities 1,067,788 1,105,761
------------- -------------
Minority interest in consolidated subsidiaries 52,892 55,106
------------- -------------
SHAREOWNERS' EQUITY
Preferred stock, no par value; 5,000 shares authorized; none issued -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
33,319 and 33,200 shares issued 41,648 41,500
Additional paid-in capital 340,135 335,314
Retained earnings 512,853 508,733
Treasury shares, at cost; 2,501 and 2,677 shares held (53,046) (55,236)
Unearned compensation (3,661) (2,814)
Accumulated other comprehensive loss (57,730) (47,243)
------------- -------------
Total shareowners' equity 780,199 780,254
------------- -------------
Total liabilities and shareowners' equity $ 1,900,879 $ 1,941,121
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------------------------------------
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,342 $ 9,913
Adjustments for noncash items:
Depreciation 18,243 19,061
Amortization 6,323 7,003
Restructuring and asset impairment charge 235 --
Cumulative effect of change in accounting principle, net of tax 599 --
Other 2,155 80
Changes in certain assets and liabilities:
Accounts receivable 7,444 (1,041)
Proceeds from accounts receivable securitization 1,500 --
Inventories 10,801 4,871
Accounts payable and accrued liabilities (4,765) 16,154
Other (3,543) 5,762
------------ ------------
Net cash flow from operating activities 48,334 61,803
------------ ------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (11,471) (10,779)
Disposals of property, plant and equipment 84 5,049
Purchase of subsidiary stock (1,947) --
Other (165) (124)
------------ ------------
Net cash flow used for investing activities (13,499) (5,854)
------------ ------------
FINANCING ACTIVITIES
Net decrease in notes payable (1,333) (5,346)
Net decrease in revolver and other lines of credit (23,900) (13,000)
Term debt borrowings 350 --
Term debt repayments (718) (30,535)
Dividend reinvestment and employee benefit and stock plans 5,736 1,386
Cash dividends paid to shareowners (5,222) (5,117)
------------ ------------
Net cash flow used for financing activities (25,087) (52,612)
------------ ------------
Effect of exchange rate changes on cash and equivalents (511) 3
------------ ------------
CASH AND EQUIVALENTS
Net increase in cash and equivalents 9,237 3,340
Cash and equivalents, beginning of year 22,323 17,408
------------ ------------
Cash and equivalents, end of period $ 31,560 $ 20,748
============ ============
SUPPLEMENTAL DISCLOSURES
Interest paid $ 13,087 $ 15,858
Income taxes paid 7,770 2,914
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. The condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements included in
the company's 2000 Annual Report. The condensed consolidated balance sheet
as of June 30, 2000 has been derived from the audited balance sheet
included in the company's 2000 Annual Report. These interim statements are
unaudited; however, management believes that all adjustments necessary for
a fair presentation have been made and all adjustments are normal,
recurring adjustments. The results for the three months ended September 30,
2000 and 1999 are not necessarily indicative of the results to be expected
for a full fiscal year. Unless otherwise specified, any reference to a
"year" is to a fiscal year ended June 30. Certain amounts in the prior
years' consolidated financial statements have been reclassified to conform
with the current year presentation.
2. On July 20, 2000, the company proposed to the Board of Directors of JLK
Direct Distribution Inc., an 83-percent owned subsidiary of the company, to
acquire the outstanding shares of JLK it does not already own. On September
11, 2000, the company and JLK announced that they entered into a definitive
merger agreement for the company to acquire these minority shares. Pursuant
to the agreement, JLK agreed to commence a cash tender offer for all of its
shares of Class A Common Stock at a price of $8.75 per share. The tender
offer commenced on October 3, 2000 and will expire on November 15, 2000.
Following JLK's purchase of shares in the tender offer, the company will
acquire the remainder of the minority shares at the same price in a merger.
The aggregate value to acquire the minority interest of approximately 4.3
million shares would be approximately $37 million. The transaction has been
unanimously approved by the JLK Board of Directors, including its special
committee comprised of independent directors of the JLK Board. The
transaction is not conditioned on financing, but is subject to conditions
set forth in the merger agreement.
In July 2000, the company, JLK and the JLK directors (including one former
director) were named as defendants in several putative class action
lawsuits. The lawsuits seek an injunction, rescission, damages, costs and
attorney fees in connection with the company's proposal to acquire the
outstanding stock of JLK not owned by the company.
On November 3, 2000, the parties to the lawsuits entered into a Memorandum
of Understanding (MOU) with respect to a proposed settlement of the
lawsuits. The proposed settlement would provide for complete releases of
the defendants, as well as among other persons their affiliates and
representatives, and would extinguish and enjoin all claims that have been,
could have been or could be asserted by or on behalf of any member of the
class against the defendants which in any manner relate to the allegations,
facts, or other matters raised in the lawsuits or which otherwise relate in
any manner to the agreement, the offer and the merger. The MOU also
provides, among other matters, for the payment by JLK of up to
approximately $0.3 million in attorneys' fees and expenses to plaintiffs'
counsel. No payment is to be made for liability or damages. The final
settlement of the lawsuits, including the amount of attorneys' fees and
expenses to be paid, is subject to the execution of a definitive
stipulation of settlement, to consummation of the merger, and to court
approval.
3. Inventories are stated at lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method for a significant portion of U.S.
inventories and the first-in, first-out (FIFO) or average cost methods for
other inventories. The company used the LIFO method of valuing its
inventories for approximately 47 percent of total inventories at September
30, 2000. Because inventory valuations under the LIFO method are based on
an annual determination of quantities and costs as of June 30 of each year,
the interim LIFO valuations are based on management's projections of
expected year-end inventory levels and costs. Therefore, the interim
financial results are subject to any final year-end LIFO inventory
adjustments.
4
<PAGE> 7
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
Inventories as of the balance sheet dates consisted of the following (in
thousands):
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
---- ----
<S> <C> <C>
Finished goods $ 290,678 $ 306,334
Work in process and powder blends 95,499 96,101
Raw materials and supplies 34,849 35,707
------------ ------------
Inventory at current cost 421,026 438,142
Less LIFO valuation (28,285) (27,257)
------------ ------------
Total inventories $ 392,741 $ 410,885
============ ============
</TABLE>
4. The company has been involved in various environmental cleanup and
remediation activities at several of its manufacturing facilities. In
addition, the company is currently named as a potentially responsible party
(PRP) at several Superfund sites in the United States. In 2000, the company
recorded a remediation reserve of $3.0 million with respect to its
involvement in these matters, which was recorded as a component of
operating expense. This represents management's best estimate of its
undiscounted future obligation based on its evaluations and discussions
with outside counsel and independent consultants, and the current facts and
circumstances related to these matters. The company recorded this liability
because certain events occurred, including sufficient progress made by the
government and the PRPs in the identification of other PRPs and review of
potential remediation solutions, that clarified the level of involvement in
these matters by the company and its relationship to other PRPs. This led
the company to conclude that it was probable that a liability had been
incurred.
In addition to the amount currently reserved, the company may be subject to
loss contingencies related to these matters estimated to be up to an
additional $3.3 million. The company believes that such undiscounted
unreserved losses are reasonably possible but are not currently considered
to be probable of occurrence. The reserved and unreserved liabilities could
change substantially in the near term due to factors such as the nature and
extent of contamination, changes in remedial requirements, technological
changes, discovery of new information, the financial strength of other PRPs
and the identification of new PRPs.
The company maintains a Corporate Environmental, Health and Safety (EH&S)
Department, as well as an EH&S Policy Committee, to ensure compliance with
environmental regulations and to monitor and oversee remediation
activities. In addition, the company has established an EH&S administrator
at its domestic manufacturing facilities. The company's financial
management team periodically meets with members of the Corporate EH&S
Department and the Corporate Legal Department to review and evaluate the
status of environmental projects and contingencies. On a quarterly basis,
management establishes or adjusts financial provisions and reserves for
environmental contingencies in accordance with Statement of Financial
Accounting Standard (SFAS) No. 5, "Accounting for Contingencies."
5. For purposes of determining the number of dilutive shares outstanding,
weighted average shares outstanding for basic earnings per share
calculations were increased due to the dilutive effect of unexercised stock
options by 39,253 and 66,272 for the three months ended September 30, 2000
and 1999, respectively.
5
<PAGE> 8
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
6. Comprehensive income (loss) for the three months ended September 30, 2000
and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------
2000 1999
---- ----
<S> <C> <C>
Net income $ 9,342 $ 9,913
Cumulative effect of change in accounting
principle, net of tax 1,571 --
Unrealized loss on derivatives designated and
and qualified as cash flow hedges, net of tax (302) --
Reclassification of unrealized gains or losses
on matured derivatives, net of tax (58) --
Unrealized loss on marketable equity securities
available-for-sale, net of tax (1,618) (1,998)
Minimum pension liability adjustment, net of tax 47 (26)
Foreign currency translation adjustments (10,127) 4,062
------------- ------------
Comprehensive income (loss) $ (1,145) $ 11,951
============ ============
</TABLE>
The components of accumulated other comprehensive loss consist of the
following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
---- ----
<S> <C> <C>
Unrealized gain on marketable equity securities
available-for-sale, net of tax $ 7,045 $ 8,663
Unrealized gains on derivatives designated and
qualified as cash flow hedges, net of tax 1,211 --
Minimum pension liability adjustment, net of tax (803) (850)
Foreign currency translation adjustments (65,183) (55,056)
----------- -----------
Total accumulated other comprehensive loss $ (57,730) $ (47,243)
=========== ===========
</TABLE>
7. On July 1, 2000, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was adopted resulting in the recording of current
assets of $1.6 million, long-term assets of $1.4 million, current
liabilities of $1.3 million, long-term liabilities of $0.7 million, a
decrease in accumulated other comprehensive loss of $1.6 million, net of
tax, and a loss from the cumulative effect from the change in accounting
principle of $0.6 million, net of tax.
Forward contracts, purchased options and range forward contracts,
designated as cash flow hedges, hedge anticipated cash flows from
cross-border intercompany sales of product and services through the
remainder of 2001. Gains and losses realized on these contracts at maturity
are recorded in accumulated other comprehensive loss, net of tax, and are
recognized as a component of other expense (income), net when the
underlying sales of product or services are recognized into earnings. The
company recognized expense of $0.1 million, as a component of other expense
(income), net, during the September 2000 quarter related to hedge
ineffectiveness. Floating-to-fixed interest rate swap agreements,
designated as cash flow hedges, hedge the company's floating rate debt and
mature at various times through June 2003. The fair value of these
contracts is recorded in the balance sheet, with the offset to accumulated
other comprehensive loss, net of tax. Forward contracts hedging significant
cross-border intercompany loans are considered other derivatives and
therefore, not eligible for hedge accounting. These contracts are recorded
at fair value in the balance sheet, with the offset to other expense
(income), net. Based upon foreign exchange and interest rates at September
30, 2000, the company expects to recognize net current assets of $2.9
million into earnings in the next 12 months related to all derivative
instruments.
6
<PAGE> 9
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
8. In the September 2000 quarter, the company's management began to implement
a business improvement plan in the JLK/Industrial Supply segment. As a
result, the company recorded a restructuring and asset impairment charge of
$1.6 million associated with the closure of five underperforming satellite
locations and severance for certain individuals. This includes a $0.2
million noncash writedown of the book value of certain property, plant and
equipment, net of salvage value, that management determined would no longer
be utilized in ongoing operations. The costs accrued for these plans were
based on management estimates using the latest information available at the
time that the accrual was established. The costs charged against the
accrual in the September 2000 quarter were not significant. The company
continues to review its business strategies and pursue other cost-reduction
activities, some of which could result in future charges.
In 2000, the company announced plans to close, consolidate or downsize
several plants, warehouses and offices, and associated work force
reductions as part of its overall plan to increase asset utilization and
financial performance, and to reposition the company to become the premier
tooling solutions supplier. The costs charged against the restructuring
accrual for the 2000 programs as of September 30, 2000 were as follows
(in thousands):
<TABLE>
<CAPTION>
June 30, Cash September 30,
2000 Expenditures Adjustments 2000
---- ------------ ----------- ----
<S> <C> <C> <C> <C>
Employee severance $ 2,533 $ (858) $ (52) $ 1,623
Facility rationalizations 3,518 (210) -- 3,308
----------- ---------- ---------- -----------
Total $ 6,051 $ (1,068) $ (52) $ 4,931
=========== ========== ========== ===========
</TABLE>
In the September 2000 quarter, the company incurred period costs of $0.1
million related to these initiatives which were included in cost of goods
sold as incurred. The adjustment to the accrual for employee severance is
due to a reduction in actual amounts paid to certain individuals compared
to what was initially anticipated. This adjustment was recorded as a
component of restructuring and asset impairment charge.
In 1999, management implemented restructuring plans including several
programs to reduce costs, improve operations and enhance customer
satisfaction. Accruals for these 1999 programs were $1.4 million at
September 30, 2000. Costs charged against the accrual for the voluntary
early retirement plan in the September 2000 quarter were $0.1 million.
There were no costs charged against the accrual for the plant closure.
9. In September 2000, management reorganized the financial reporting of its
operations to focus on global business units consisting of Metalworking
Services & Solutions Group (MSSG), Advanced Materials Solutions Group
(AMSG) and JLK/Industrial Supply, and corporate functional shared services.
The results for all periods presented have been restated to conform to the
new reporting structure. The company's external sales, intersegment sales
and operating income by segment for the three months ended September 30,
2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
2000 1999
---- ----
<S> <C> <C>
External sales:
MSSG $ 246,816 $ 242,164
AMSG 86,779 84,800
JLK/Industrial Supply 117,110 115,979
----------- -----------
Total external sales $ 450,705 $ 442,943
=========== ===========
Intersegment sales:
MSSG $ 23,966 $ 41,903
AMSG 7,174 6,604
JLK/Industrial Supply 3,341 2,336
----------- -----------
Total intersegment sales $ 34,481 $ 50,843
=========== ===========
</TABLE>
7
<PAGE> 10
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
2000 1999
---- ----
<S> <C> <C>
Total sales:
MSSG $ 270,782 $ 284,067
AMSG 93,953 91,404
JLK/Industrial Supply 120,451 118,315
----------- -----------
Total sales $ 485,186 $ 493,786
=========== ===========
Operating income:
MSSG $ 27,922 $ 29,257
AMSG 11,187 10,623
JLK/Industrial Supply 552 6,979
Corporate and eliminations (7,290) (13,020)
----------- -----------
Total operating income $ 32,371 $ 33,839
=========== ===========
</TABLE>
JLK/Industrial Supply operating income for the three months ended September
30, 2000 was reduced by $1.6 million related to restructuring and asset
impairment charges, and $1.7 million of costs primarily related to the
tender offer to acquire the outstanding shares of JLK. MSSG operating
income for the three months ended September 30, 1999 includes a gain of
$4.7 million on the sale of inventory to the JLK/Industrial Supply
segment. The elimination of this gain from consolidated results is included
in Corporate and eliminations.
The company's assets by business area at September 30, 2000 and June 30,
2000 are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
------------------ ---------------
<S> <C> <C>
Assets:
MSSG $ 957,610 $ 978,188
AMSG 465,635 475,741
JLK/Industrial Supply 283,632 287,682
Corporate 194,002 199,510
--------------- ---------------
Total assets $ 1,900,879 $ 1,941,121
=============== ===============
</TABLE>
10. In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a replacement of FASB
Statement No. 125" was issued. SFAS No. 140 revises criteria for accounting
for asset securitizations, other financial-asset transfers, and collateral
and introduces new disclosures, but otherwise carries forward most of SFAS
No. 125's provisions without amendment. SFAS No. 140 has an immediate
impact through new disclosure requirements and amendments of the collateral
provisions of SFAS No. 125. These changes must be applied for fiscal years
ending after December 15, 2000. The company is currently evaluating the
effects of SFAS No. 140 and is preparing a plan for implementation.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------------------------------------------------------------
RESULTS OF OPERATIONS
OVERVIEW
Sales for the September 2000 quarter were $450.7 million, an increase of two
percent from $442.9 million in the year-ago quarter. Sales increased six percent
excluding unfavorable foreign currency effects of two percent and fewer workdays
in the September 2000 quarter. Sales performance generally was favorable across
the company's businesses, with particular strength from international markets.
Soft end markets in the North American construction business negatively affected
this growth by one percent.
Net income for the quarter ended September 30, 2000 was $9.3 million, or $0.30
per share, compared to net income of $9.9 million, or $0.33 per share, in the
same quarter last year. Excluding special charges in the September 2000 quarter,
net income was $11.5 million, or $0.38 per share. The earnings improvement is
attributable to higher sales levels and margins, lower interest costs and a
decline in the company's effective tax rate, partially offset by higher
operating expense. Special charges in the September 2000 quarter of $3.2 million
or $0.06 per share, related to the JLK business improvement plan and costs
associated with the tender offer to acquire the outstanding shares of JLK,
coupled with a charge of $0.6 million, net of tax, or $0.02 per share, related
to the adoption of Statement of Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
BUSINESS SEGMENT REVIEW
In September 2000, management reorganized the financial reporting of its
operations to focus on global business units consisting of Metalworking Services
& Solutions Group (MSSG), Advanced Materials Solutions Group (AMSG) and
JLK/Industrial Supply, and corporate functional shared services. The results for
all periods presented have been restated to conform to the new reporting
structure.
METALWORKING SERVICES & SOLUTIONS GROUP
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
External sales $ 246,816 $ 242,164
Intersegment sales 23,966 41,903
Operating income 27,922 29,257
</TABLE>
MSSG sales increased five percent compared to the September 1999 quarter,
excluding unfavorable foreign exchange effects of three percent due to the
stronger U.S. dollar. Most major markets experienced year-over-year growth, with
particular strength in North America and Europe. In North America, sales were up
four percent, while Europe was up eight percent, in local currency, due
primarily to strength in the machine tool builders and energy markets. The
automotive end market began to slow both in North America and Europe, with
particular weakness in the heavy-duty truck market. Sales in Asia continued to
grow, up seven percent compared to a year ago.
Operating income was $27.9 million compared to $29.3 million last year. The
September 1999 results include a gain of $4.7 million on the sale of $12.7
million of inventory to the JLK/Industrial Supply segment. This purchase by JLK
was necessary in order for JLK to have access to Kennametal's branded inventory
subsequent to the new business system implementation. Excluding this gain and
incremental period costs of $1.3 million, operating income increased eight
percent or $2.1 million, as a result of lean techniques that improved
manufacturing performance. The company incurred period costs of $0.1 million
related to the Kingswinford plant downsizing in the September 2000 quarter,
compared to $1.4 million related to the Solon plant closing in the September
1999 quarter, both of which were included in cost of goods sold as incurred.
Operating expense was flat compared to the September 1999 quarter.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
-------------------------------------------------------------------------------
ADVANCED MATERIALS SOLUTIONS GROUP
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
External sales $ 86,779 $ 84,800
Intersegment sales 7,174 6,604
Operating income 11,187 10,623
</TABLE>
AMSG sales increased five percent, from the September 1999 quarter, excluding
unfavorable foreign exchange effects of three percent. Continued strength in
electronics, driven by strong demand for computer circuit boards and cellular
phones, and higher demand for products used for oil and gas exploration,
contributed 10 percent to the growth in sales, on a local currency basis. This
was partially offset by soft demand for construction tools in North America as
highway funds are being spent on infrastructure programs and new roads.
Operating income increased $0.6 million from a year ago due to higher sales
levels, partially offset by weakness in the high-margin construction tool
business. Operating expense was flat compared to last year.
JLK/INDUSTRIAL SUPPLY
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
2000 1999
---- ----
<S> <C> <C>
External sales $ 117,110 $ 115,979
Intersegment sales 3,341 2,336
Operating income 552 6,979
</TABLE>
JLK sales increased one percent compared to last year as higher sales through
Full Service Supply (FSS) programs contributed three percent to sales growth,
partially offset by a decline in sales through acquired distributors of two
percent. The increase in FSS sales is due to the continued penetration in
existing accounts coupled with curtailed growth in the September 1999 quarter as
a result of the implementation of its new business system. Sales at the acquired
distributors declined due to reduced demand in the end markets served. The
company provided FSS programs to 182 customers covering 260 different facilities
at September 30, 2000, compared to 163 customers covering 262 different
facilities at September 30, 1999.
Operating income was $0.6 million and included a restructuring and asset
impairment charge of $1.6 million and special charges of $1.7 million primarily
related to the tender offer to acquire the outstanding shares of JLK. Excluding
these charges, operating income was $3.9 million and was primarily affected by
lower margins in all businesses due to a shift in end markets served, coupled
with higher operating expense due to higher shipping costs incurred to provide
enhanced customer service. As part of a business improvement plan, JLK recorded
a restructuring and asset impairment charge associated with the closure of five
underperforming satellite locations and severance for certain individuals.
GROSS PROFIT MARGIN
The consolidated gross profit margin for the September 2000 quarter was 37.4
percent, a 50 basis point improvement compared with 36.9 percent in the prior
year. This increase is the result of implementing lean manufacturing techniques
that has resulted in ongoing reductions in manufacturing variances and a $1.3
million reduction in period costs incurred associated with restructuring
programs.
OPERATING EXPENSE
Consolidated operating expense for the September 2000 quarter was $128.4
million, including $1.7 million of costs primarily related to the tender offer
to acquire the outstanding shares of JLK. Excluding these costs, operating
expense increased three percent due to investments in strategic initiatives,
including increased research
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
-------------------------------------------------------------------------------
and development, productivity programs and the company's e-commerce initiative.
Excluding these costs, operating expense increased one percent.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGE
In the September 2000 quarter, the company's management began to implement a
business improvement plan in the JLK/Industrial Supply segment. As a result, the
company recorded a restructuring and asset impairment charge of $1.6 million
associated with the closure of five underperforming satellite locations and
severance for certain individuals. This includes a $0.2 million non-cash
writedown of the book value of certain property, plant and equipment, net of
salvage value, that management determined would no longer by utilized in ongoing
operations. The costs accrued for these plans were based on management estimates
using the latest information available at the time that the accrual was
established. The costs charged against the accrual in the September 2000 quarter
were not significant. Annualized benefits of $0.9 million are expected to be
realized beginning in the March 2001 quarter. The company continues to review
its business strategies and pursue other cost-reduction activities, some of
which could result in future charges.
In 2000, the company announced plans to close, consolidate or downsize several
plants, warehouses and offices, and associated work force reductions as part of
its overall plan to increase asset utilization and financial performance, and to
reposition the company to become the premier tooling solutions supplier. The
costs charged against the restructuring accrual for the 2000 programs as of
September 30, 2000 were as follows (in thousands):
<TABLE>
<CAPTION>
June 30, Cash September 30,
2000 Expenditures Adjustments 2000
---- ------------ ----------- ----
<S> <C> <C> <C> <C>
Employee severance $ 2,533 $ (858) $ (52) $ 1,623
Facility rationalizations 3,518 (210) -- 3,308
------------- ----------- ---------- ----------
Total $ 6,051 $ (1,068) $ (52) $ 4,931
============= =========== ========== ==========
</TABLE>
In the September 2000 quarter, the company incurred period costs of $0.1 million
related to these initiatives which were included in cost of goods sold as
incurred. The adjustment to the accrual for employee severance is due to a
reduction in actual amounts paid to certain individuals compared to what was
initially anticipated. This adjustment was recorded as a component of
restructuring and asset impairment charge.
In 1999, management implemented restructuring plans including several programs
to reduce costs, improve operations and enhance customer satisfaction. Accruals
for these 1999 programs were $1.4 million at September 30, 2000. Costs charged
against the accrual for the voluntary early retirement plan in the September
2000 quarter were $0.1 million. There were no costs charged against the accrual
for the plant closure.
INTEREST EXPENSE
Interest expense for the September 2000 quarter declined to $13.2 million due to
reduced debt levels, partially offset by higher borrowing rates. Average U.S.
borrowing rates of 7.4 percent were up 100 basis points from a year ago due to
Federal Reserve rate increases.
OTHER EXPENSE (INCOME), NET
Other expense for the September 2000 quarter included fees of $1.6 million
incurred in connection with the accounts receivable securitization program.
Other income for the September 1999 quarter included a net one-time gain of $1.4
million from the sale of miscellaneous underutilized assets. This was partially
offset by $1.1 million in fees incurred in connection with the accounts
receivable securitization program.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
-------------------------------------------------------------------------------
INCOME TAXES
The effective tax rate for the September 2000 quarter was 40.5 percent compared
to an effective tax rate of 44.5 percent in the prior year. The decline in the
effective tax rate is attributable to successful tax planning initiatives in
Europe, which more than offset the repeal of the Foreign Sales Corporation tax
laws in the United States.
CHANGE IN ACCOUNTING PRINCIPLE
On July 1, 2000, SFAS No. 133 was adopted, resulting in the recording of a loss
from the cumulative effect from the change in accounting principle of $0.6
million, net of tax, or $0.02 per share. The loss primarily relates to the
write-down of previously paid option premiums.
LIQUIDITY AND CAPITAL RESOURCES
The company's cash flow from operations is the primary source of financing for
capital expenditures and internal growth. During the quarter ended September 30,
2000, the company generated $48.3 million in cash flow from operations, a
decline of $13.5 million compared to a year ago. The decline resulted primarily
from lower working capital improvements of $15.8 million, partially offset by
increased proceeds from the securitization of accounts receivable of $1.5
million and a $1.4 million increase in non-cash items.
Net cash used for investing activities was $13.5 million, an increase of $7.6
million compared to the prior year. The increase is due to a $5.0 million
reduction in proceeds from the disposal of underutilized assets, that occurred
in the September 1999 quarter, coupled with the purchase of minority interests
in two consolidated subsidiaries for $1.9 million in the September 2000 quarter.
Net cash used for financing activities was $25.1 million, a decline of $27.5
million compared to the prior year. This decline is due to lower debt reductions
of $23.3 million due to lower cash flow from operations coupled with higher
proceeds of $4.4 million from company contributions of capital stock to U.S.
defined contribution pension plans.
The company generated free operating cash flow (FOCF) of $42.9 million and $50.4
million for the quarters ended September 30, 2000 and 1999, respectively. The
decline in FOCF is due to lower working capital improvements in the September
2000 quarter.
In October 2000, the company continued its program to repurchase, from time to
time, up to a total of 1.6 million shares of its outstanding capital stock for
investment or other general corporate purposes. This repurchase program was
announced on January 31, 1997. During October 2000, the company purchased
600,000 shares of its capital stock at a total cost of $16.5 million, bringing
the total purchased under the authority of this program to approximately 1.4
million shares. The repurchases were financed principally by cash from
operations and short-term borrowings. Additionally, the Board of Directors
authorized the company to repurchase, from time to time, up to a total of 2.0
million additional shares of its outstanding capital stock. No repurchases have
been made under this new program. Repurchases may be made from time to time in
the open market, in negotiated or other permissible transactions.
FINANCIAL CONDITION
Total assets were $1,900.9 million at September 30, 2000, a two percent decline
from June 30, 2000. Net working capital was $391.3 million, down two percent
from $397.4 million at June 30, 2000. The ratio of current assets to current
liabilities at September 30, 2000 was 2.2 compared to 2.1 at June 30, 2000.
Primary working capital as a percentage of sales (PWC%) at September 30, 2000
was 28.5 percent, compared to 29.4 percent at June 30, 2000 and 32.0 percent at
September 30, 1999. The improvements in net working capital, the current ratio
and PWC% are primarily due to company sponsored programs to reduce primary
working capital. The total
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
-------------------------------------------------------------------------------
debt-to-total capital ratio declined to 44.7 percent at September 30, 2000 from
45.6 percent at June 30, 2000 and 50.2 percent at September 30, 1999 due to the
FOCF generated by the company.
ACQUISITION OF JLK MINORITY INTEREST
On July 2000, the company proposed to the Board of Directors of JLK Direct
Distribution Inc., an 83-percent owned subsidiary to acquire the outstanding
shares of JLK it does not already own. On September 11, 2000, the company and
JLK announced that they entered into a definitive merger agreement for the
company to acquire these minority shares. Pursuant to the agreement, JLK agreed
to commence a cash tender offer for all of its shares of Common A Common Stock
at a price of $8.75 per share. The tender offer commenced on October 3, 2000 and
will expire on November 15, 2000. Following JLK's purchase of shares in the
tender offer, the company will acquire the remainder of the minority shares at
the same price in a merger. The aggregate value to acquire the minority interest
of approximately 4.3 million shares would be approximately $37 million. The
transaction has been unanimously approved by the JLK Board of Directors,
including its special committee comprised of independent directors of the JLK
Board. The transaction is not conditioned on financing, but is subject to
conditions set forth in the merger agreement.
In July 2000, the company, JLK and the JLK directors (including one former
director) were named as defendants in several putative class action lawsuits.
The lawsuits seek an injunction, rescission, damages, costs and attorney fees in
connection with the company's proposal to acquire the outstanding stock of JLK
not owned by the company.
On November 3, 2000, the parties to the lawsuits entered into a Memorandum of
Understanding (MOU) with respect to a proposed settlement of the lawsuits. The
proposed settlement would provide for complete releases of the defendants as
well as among other persons their affiliates and representatives, and would
extinguish and enjoin all claims that have been, could have been or could be
asserted by or on behalf of any member of the class against the defendants which
in any manner relate to the allegations, facts, or other matters raised in the
lawsuits or which otherwise relate in any manner to the agreement, the offer and
the merger. The MOU also provides, among other matters, for the payment by JLK
of up to approximately $0.3 million in attorneys' fees and expenses to
plaintiffs' counsel. No payment is to be made for liability or damages. The
final settlement of the lawsuits, including the amount of attorneys' fees and
expenses to be paid, is subject to the execution of a definitive stipulation of
settlement, to consummation of the merger, and to court approval.
STRATEGIC ALTERNATIVES
The company is considering strategic alternatives for two subsidiaries. Strong
Tool Company and Abrasive & Tools Specialties Company, including the possible
divestiture of these businesses or a portion thereof. In 2000, these businesses
represented approximately $90 million in sales. The company is currently not a
party to any written or oral agreement regarding the divestiture of these
businesses.
NEW ACCOUNTING STANDARD
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities -- a replacement of FASB
Statement No. 125" was issued. SFAS No. 140 revises criteria for accounting for
asset securitizations, other financial-asset transfers, and collateral and
introduces new disclosures, but otherwise carries forward most of SFAS No.
125's provisions without amendment. SFAS No. 140 has an immediate impact
through new disclosure requirements and amendments of the collateral provisions
of SFAS No. 125. These changes must be applied for fiscal years ending after
December 15, 2000. The company is currently evaluating the effects of SFAS No.
140 and is preparing a plan for implementation.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" as defined by Section 21E
of the Securities Exchange Act of 1934. Actual results may differ materially
from those expressed or implied in the forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
the extent that the economic conditions in the United States and Europe, and to
a lesser extent, Asia Pacific are not sustained, risks associated with
integrating businesses, demands on management resources, risks associated with
international markets such as currency exchange rates, competition, and risks
associated with the implementation of restructuring actions and environmental
remediation activities. The company undertakes no obligation to publicly release
any revisions to forward-looking statements to reflect events or circumstances
occurring after the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------------------
There were no material changes in the company's exposure to market risk from
June 30, 2000.
13
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------------------------------------------------------------------------------
At the Annual Meeting of Shareowners on October 24, 2000, the shareowners of the
company voted on the election of four directors, the approval of the Kennametal
Inc. 2000 Employee Stock Purchase Plan and the election of independent public
accountants. The following is the number of shares voted in favor of and against
each matter and the number of shares having authority to vote on each matter but
withheld.
1. With respect to the votes cast for the election of three directors
whose terms expire in 2003:
<TABLE>
<CAPTION>
For Withheld Broker Non-Vote
------------------------------------------------------------
<S> <C> <C> <C>
Richard C. Alberding 22,940,427 3,388,891 --
William R. Newlin 22,790,941 3,538,377 --
Timothy S. Lucas 22,960,528 3,368,790 --
</TABLE>
With respect to the votes cast for the election of one director whose
term expires in 2002:
<TABLE>
<CAPTION>
For Withheld
----------------------------------
<S> <C> <C>
Kathleen J. Hempel 25,966,644 362,674
</TABLE>
The following other directors' terms of office continued after the
meeting:
Peter B. Bartlett, A. Peter Held, Aloysius T. McLaughlin, Jr.,
Markos I. Tambakeras and Larry Yost.
2. With respect to the votes cast for the approval of the Kennametal Inc.
2000 Employee Stock Purchase Plan:
<TABLE>
<CAPTION>
For Against Abstained
------------------------------------------------------
<S> <C> <C> <C>
Kennametal Inc. 2000 Employee
Stock Purchase Plan 21,080,090 5,155,098 94,130
</TABLE>
3. With respect to the election of the firm of Arthur Andersen LLP,
independent public accountants, to audit the financial statements of
the company and its subsidiary companies for the fiscal year ending
June 30, 2001:
<TABLE>
<CAPTION>
For Against Abstained
------------------------------------------------------
<S> <C> <C> <C>
Arthur Andersen LLP 26,200,817 71,029 57,472
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------------
(a) Exhibits
(4) Instruments Defining the Rights of Security Holders,
Including Indentures
4.1 Rights Agreement, effective as of November 2,
2000, is incorporated herein by reference to
Exhibit 1 of the company's October 10, 2000 Form 8-A.
(27) Financial Data Schedules
27.1 For the three months ended September 30, 2000,
submitted to the Securities and Exchange Commission in
electronic format. Filed herewith.
27.2 For the year ended June 30, 2000, as restated,
submitted to the Securities and Exchange Commission in
electronic format. Filed herewith.
27.3 For the nine months ended March 31, 2000, as restated,
submitted to the Securities and Exchange Commission in
electronic format. Filed herewith.
27.4 For the six months ended December 31, 1999, as
restated, submitted to the Securities and Exchange
Commission in electronic format. Filed herewith.
27.5 For the three months ended September 30, 1999, as
restated, submitted to the Securities and Exchange
Commission in electronic format. Filed herewith.
27.6 For the year ended June 30, 1999, as restated,
submitted to the Securities and Exchange Commission in
electronic format. Filed herewith.
27.7 For the nine months ended March 31, 1999, as restated,
submitted to the Securities and Exchange Commission in
electronic format. Filed herewith.
27.8 For the six months ended December 31, 1998, as
restated, submitted to the Securities and Exchange
Commission in electronic format. Filed herewith.
27.9 For the three months ended September 30, 1998, as
restated, submitted to the Securities and Exchange
Commission in electronic format. Filed herewith.
27.10 For the year ended June 30, 1998, as restated,
submitted to the Securities and Exchange Commission in
electronic format. Filed herewith.
14
<PAGE> 17
(b) Reports on Form 8-K
A report on Form 8-K was filed on July 21, 2000 regarding the
announcement of a proposal by Kennametal Inc. to acquire the
outstanding shares of JLK Direct Distribution Inc., an 83 percent-
owned subsidiary of Kennametal Inc., that it does not already own
for $6.70 per share in cash.
A report on Form 8-K was filed on July 25, 2000 regarding the
announcements that the Board of Directors adopted a new
shareowner rights plan to replace its existing plan which has
been in effect since 1990, that Robert L. McGeehan resigned as
a member of the Board of Directors effective July 24, 2000,
and that Kennametal and all the directors of JLK Direct
Distribution Inc., an 83 percent-owned subsidiary of Kennametal Inc.,
were named in civil action No. GD00-12565, filed in the Court of
Common Pleas in Allegheny County, Pennsylvania.
A report on Form 8-K was filed on September 11, 2000 regarding
the announcement that Kennametal Inc. and JLK Direct Distribution
Inc., an 83 percent-owned subsidiary of Kennametal Inc., have
entered into a definitive merger agreement for Kennametal to
acquire the outstanding shares of JLK that Kennametal does not
already own.
A report on Form 8-K was filed on September 12, 2000 regarding
the announcement that JLK Direct Distribution Inc., an 83
percent-owned subsidiary of Kennametal Inc., expects to
recognize special charges of $15 - $20 million associated with
its business improvement plan.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENNAMETAL INC.
Date: November 14, 2000 By: /s/ FRANK P. SIMPKINS
-----------------------------
Frank P. Simpkins
Corporate Controller and
Chief Accounting Officer
16
