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 DECEMBER 31, 1996 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.) ROUTE 981 AT WESTMORELAND COUNTY AIRPORT P.O. BOX 231 LATROBE, PENNSYLVANIA 15650 (Address of registrant's principal executive offices) Registrant's telephone number, including area code: (412) 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 JANUARY 31, 1997 - ---------------------------------------- ------------------------------- Capital Stock, par value $1.25 per share 26,807,999
KENNAMETAL INC. FORM 10-Q FOR QUARTER ENDED DECEMBER 31, 1996 TABLE OF CONTENTS Item No. - -------- PART I. FINANCIAL INFORMATION 1. Financial Statements: Condensed Consolidated Balance Sheets (Unaudited) December 31, 1996 and June 30, 1996 Condensed Consolidated Statements of Income (Unaudited) Three months and six months ended December 31, 1996 and 1995 Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended December 31, 1996 and 1995 Notes to Condensed Consolidated Financial Statements (Unaudited) 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION 1. Legal Proceedings 4. Submission of Matters to a Vote of Security Holders 6. Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KENNAMETAL INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - ------------------------------------------------- (in thousands) December 31, June 30, 1996 1996 -------- -------- ASSETS Current Assets: Cash and equivalents $ 12,038 $ 17,090 Accounts receivable, less allowance for doubtful accounts of $8,136 and $9,296 171,961 189,820 Inventories 209,640 204,934 Deferred income taxes 24,580 24,620 -------- -------- Total current assets 418,219 436,464 -------- -------- Property, Plant and Equipment: Land and buildings 160,856 156,064 Machinery and equipment 453,984 415,443 Less accumulated depreciation (323,057) (304,400) -------- -------- Net property, plant and equipment 291,783 267,107 -------- -------- Other Assets: Investments in affiliated companies 11,840 8,742 Intangible assets, less accumulated amortization of $22,099 and $20,795 43,116 33,756 Deferred income taxes 39,163 41,757 Other 14,236 11,665 -------- -------- Total other assets 108,355 95,920 -------- -------- Total assets $818,357 $799,491 ======== ======== LIABILITIES Current Liabilities: Current maturities of term debt and capital leases $ 13,040 $ 17,543 Notes payable to banks 69,566 57,549 Accounts payable 51,249 64,663 Accrued vacation pay 19,044 19,228 Other 61,222 59,830 -------- -------- Total current liabilities 214,121 218,813 -------- -------- Term Debt and Capital Leases, Less Current Maturities 54,570 56,059 Deferred Income Taxes 20,522 20,611 Other Liabilities 55,600 52,559 -------- -------- Total liabilities 344,813 348,042 -------- -------- Minority Interest in Consolidated Subsidiaries 11,070 12,500 -------- -------- SHAREHOLDERS' EQUITY Shareholders' Equity: Preferred stock, 5,000 shares authorized; none issued - - Capital stock, $1.25 par value; 70,000 shares authorized; 29,370 shares issued 36,712 36,712 Additional paid-in capital 88,495 87,417 Retained earnings 372,808 351,594 Treasury shares, at cost; 2,600 and 2,667 shares held (34,897) (35,734) Cumulative translation adjustments ( 644) (1,040) -------- -------- Total shareholders' equity 462,474 438,949 -------- -------- Total liabilities and shareholders' equity $818,357 $799,491 ======== ======== See accompanying notes to condensed consolidated financial statements.
<TABLE> <CAPTION> KENNAMETAL INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - ------------------------------------------------------- (in thousands, except per share data) Three Months Ended Six Months Ended December 31, December 31, ------------------- ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- <S> <C> <C> <C> <C> OPERATIONS: Net sales $273,435 $259,174 $548,638 $514,077 Cost of goods sold 160,089 151,370 320,582 299,831 -------- -------- -------- -------- Gross profit 113,346 107,804 228,056 214,246 Research and development expenses 5,694 4,977 11,433 9,941 Selling, marketing and distribution expenses 64,771 60,632 127,790 120,007 General and administrative expenses 15,799 15,982 34,005 31,674 Amortization of intangibles 748 398 1,294 782 -------- -------- -------- -------- Operating Income 26,334 25,815 53,534 51,842 Interest expense 2,773 3,173 5,415 6,112 Other income 406 934 851 685 -------- -------- -------- -------- Income before taxes 23,967 23,576 48,970 46,415 Provision for income taxes 9,400 9,700 19,200 18,900 -------- -------- -------- -------- Net income $ 14,567 $ 13,876 $ 29,770 $ 27,515 ======== ======== ======== ======== PER SHARE DATA: Earnings per share $ 0.54 $ 0.52 $ 1.11 $ 1.03 ======== ======== ======== ======== Dividends per share $ 0.17 $ 0.15 $ 0.32 $ 0.30 ======== ======== ======== ======== Weighted average shares outstanding 26,758 26,629 26,743 26,612 ======== ======== ======== ======== See accompanying notes to condensed consolidated financial statements. </TABLE>
KENNAMETAL INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - ----------------------------------------------------------- (in thousands) Six Months Ended December 31, ---------------------- 1996 1995 -------- -------- OPERATING ACTIVITIES: Net income $29,770 $27,515 Adjustments for noncash items: Depreciation and amortization 20,275 19,940 Other 5,090 8,045 Changes in certain assets and liabilities, net of effects of acquisitions: Accounts receivable 21,665 10,109 Inventories 902 (13,658) Accounts payable and accrued liabilities (12,748) (16,152) Other (14,175) (7,796) ------- ------- Net cash flow from operating activities 50,779 28,003 ------- ------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (40,557) (27,440) Disposals of property, plant and equipment 180 2,607 Acquisitions, net of cash (17,665) (1,441) Other 3,056 (1,693) ------- ------- Net cash flow used for investing activities (54,986) (27,967) ------- ------- FINANCING ACTIVITIES: Increase in short-term debt 11,939 16,306 Increase in term debt 200 2,191 Reduction in term debt (6,180) (5,047) Dividend reinvestment and employee stock plans 1,915 1,174 Cash dividends paid to shareholders (8,556) (7,981) ------- ------- Net cash flow from (used for) financing activities (682) 6,643 ------- ------- Effect of exchange rate changes on cash (163) (203) ------- ------- CASH AND EQUIVALENTS: Net increase (decrease) in cash and equivalents (5,052) 6,476 Cash and equivalents, beginning 17,090 10,827 ------- ------- Cash and equivalents, ending $12,038 $17,303 ======= ======= SUPPLEMENTAL DISCLOSURES: Interest paid $ 4,936 $ 6,236 Income taxes paid 23,380 20,209 See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ----------------------------------------------------------------------------- 1. The condensed consolidated financial statements should be read in conjunction With the Notes to Consolidated Financial Statements included in the Company's 1996 Annual Report. The condensed consolidated balance sheet as of June 30, 1996 has been derived from the audited balance sheet included in the Company's 1996 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 six months ended December 31, 1996 are not necessarily indicative of the results to be expected for the full fiscal year. 2. Inventories are stated at lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for a significant portion of domestic inventories and the first-in, first-out (FIFO) method or average cost for other inventories. The Company used the LIFO method of valuing its inventories for approximately 55 percent of total inventories at December 31, 1996. Because inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year, the interim LIFO valuations are based on management's projections of expected year-end inventory levels and costs. Therefore, the interim financial results are subject to any final year-end LIFO inventory adjustments. 3. The major classes of inventory as of the balance sheet dates were as follows (in thousands): December 31, June 30, 1996 1996 ------------ --------- Finished goods $175,509 $169,108 Work in process and powder blends 53,784 59,326 Raw materials and supplies 20,557 16,514 -------- -------- Inventory at current cost 249,850 244,948 Less LIFO valuation (40,210) (40,014) -------- -------- Total inventories $209,640 $204,934 ======== ======== 4. The Company has been involved in various environmental cleanup and remediation activities at several of its manufacturing facilities. In addition, the Company has been named as a potentially responsible party at four Superfund sites in the United States. However, it is management's opinion, based on its evaluations and discussions with outside counsel and independent consultants, that the ultimate resolution of these environmental matters will not have a material adverse effect on the results of operations, financial position or cash flows of the Company. The Company maintains a Corporate Environmental, Health and Safety (EH&S) Department to facilitate compliance with environmental regulations and to monitor and oversee remediation activities. In addition, the Company has established an EH&S administrator at each of its domestic manufacturing facilities. The Company's financial management team periodically meets with members of the Corporate EH&S Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly and annual basis, management establishes or adjusts financial provisions and reserves for environmental contingencies in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies." 5. Effective July 1, 1996, the company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption of SFAS No. 121 did not have an impact on the financial statements, as the statement is consistent with existing company policy. 6. During the year, the company acquired three companies with annual sales totaling approximately $22 million for a total consideration of approximately $19 million. The acquisitions were accounted for using the purchase method of accounting. The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not significant. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ----------------------------------------------------------------------------- FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES There were no material changes in financial position, liquidity or capital resources between June 30, 1996 and December 31, 1996. The ratio of current assets to current liabilities was 2.0 as of December 31, 1996 and June 30, 1996. The debt to capital ratio (i.e., total debt divided by the sum of total debt and shareholders' equity) was 23 percent as of December 31, 1996 and June 30, 1996. On January 31, 1997, the company announced the adoption of a program to repurchase from time to time up to a total of 1.6 million shares of its outstanding capital stock. The repurchases may be made in the open market or in negotiated or other permissible transactions. Capital expenditures are estimated to be $70-80 million in fiscal year 1997. Expenditures are being made to construct a new corporate headquarters and a manufacturing facility in China, to acquire additional client-server information systems and to upgrade machinery and equipment. Capital expenditures are being financed with cash from operations and borrowings under existing revolving credit agreements with banks. RESULTS OF OPERATIONS SALES AND EARNINGS - ------------------ During the quarter ended December 31, 1996, consolidated sales were $273 million, up 6 percent from $259 million in the same quarter last year. Net income was $14.6 million, or $0.54 per share, as compared with net income of $13.9 million, or $0.52 per share in the same quarter last year. During the six-month period ended December 31, 1996, consolidated sales were $549 million, up 7 percent from $514 million last year. Net income was $29.8 million, or $1.11 per share, compared to $27.5 million, or $1.03 per share last year. For the quarter ended December 31, 1996, sales increased in all markets with the exception of the Europe Metalworking market. The Industrial Supply market accounted for the largest gain as a result of the continued growth of new showrooms and mail order sales through J&L Industrial Supply and from new Full Service Supply programs. Earnings benefited from higher sales of traditional metalcutting products and productivity improvements associated with the focused factory initiative. These benefits were offset in part by slightly lower production levels. The following table presents the Company's sales by market and geographic area (in thousands): Three Months Ended Six Months Ended December 31, December 31, -------------------------- -------------------------- 1996 1995 % Change 1996 1995 % Change -------- -------- -------- -------- -------- -------- By Market: Metalworking: North America $ 90,936 $ 89,516 2% $181,843 $177,076 3% Europe 61,715 67,748 (9) 122,409 133,131 (8) Asia-Pacific 10,359 8,577 21 20,759 16,571 25 Industrial Supply 74,090 59,426 25 147,368 115,677 27 Mining and Construction 36,335 33,907 7 76,259 71,622 6 -------- -------- --- -------- -------- --- Net sales $273,435 $259,174 6% $548,638 $514,077 7% ======== ======== === ======== ======== === By Geographic Area: Within the United States $176,170 $157,420 12% $353,670 $312,360 13% International 97,265 101,754 (4) 194,968 201,717 (3) -------- -------- --- -------- -------- --- Net sales $273,435 $259,174 6% $548,638 $514,077 7% ======== ======== === ======== ======== === METALWORKING MARKETS - -------------------- During the December 1996 quarter, sales of traditional metalcutting products sold through all sales channels in North America, including sales through the Industrial Supply market, increased 6 percent due to improved economic conditions in the United States and due to continued emphasis on milling and drilling products. Sales, as reflected in the North America Metalworking market, increased 2 percent during the quarter. Sales in the Europe Metalworking market decreased 9 percent. Demand for metalworking products continued to be slow due to weak economic conditions in Europe, principally in Germany. Sales grew at a faster pace in the United Kingdom and France. Excluding the impact of unfavorable foreign currency translation effects, sales in the Europe Metalworking market decreased 4 percent. In the Asia-Pacific Metalworking market, sales rose 12 percent, excluding the consolidation of a majority-owned subsidiary in China, as a result of increased demand, although sales were impacted by soft economic conditions in the ASEAN region and Korea. Excluding unfavorable foreign currency translation effects, sales in the Asia-Pacific Metalworking market increased 16 percent. For the six-month period, sales in the North America Metalworking market increased 3 percent because of slightly improved economic conditions in the United States and due to continued emphasis on milling and drilling products. In the Europe Metalworking market, sales decreased 8 percent because of weak economic conditions in Europe, primarily Germany and the impact of unfavorable foreign currency translation effects. In the Asia-Pacific Metalworking market, sales increased 25 percent because of increased demand and the impact of a newly-consolidated subsidiary in China. INDUSTRIAL SUPPLY MARKET - ------------------------ During the December 1996 quarter, sales in the Industrial Supply market increased 25 percent as a result of increased sales through mail order and Full Service Supply programs. The Industrial Supply market now represents 27 percent of total sales. Sales increased because of new and existing Full Service Supply programs with large customers, innovative marketing programs and the continuing successful implementation of the geographic expansion strategy at J&L Industrial Supply. During the second quarter, J&L opened three locations in the United States and now operates 22 locations in the United States and one location in the United Kingdom. For the six-month period, sales in the Industrial Supply market increased 27 percent due to innovative marketing programs and the geographic expansion program at J&L, and due to new and existing Full Service Supply programs with large customers. MINING AND CONSTRUCTION MARKET - ------------------------------ During the December 1996 quarter, sales in the Mining and Construction market increased 7 percent from the previous year as a result of a recent acquisition and from increased domestic demand for mining tools. Excluding the effects of the acquisition, international sales of highway construction tools were flat as a result of weak economic conditions, primarily in Europe. For the six-month period, sales of mining and construction tools increased 6 percent from the prior year primarily because of a recent acquisition and increased sales of domestic mining tools. GROSS PROFIT MARGIN - ------------------- As a percentage of sales, gross profit margin for the December 1996 quarter was 41.5 percent compared to 41.6 percent last year. The gross profit margin declined slightly as a result of a less favorable sales mix and lower production volumes. This decrease was partially offset by productivity improvements related to the Focused Factory initiative. For the six-month period, the gross profit margin was 41.6 percent, compared with 41.7 percent last year. The gross profit margin declined slightly as a result of a less favorable sales mix and reduced manufacturing efficiencies due to lower production volumes. This decline was partially offset by productivity improvements related to the Focused Factory initiative. OPERATING EXPENSES - ------------------ For the quarter ended December 31, 1996, operating expenses as a percentage of sales were 31.5 percent, unchanged from the prior year. Operating expenses increased 6 percent primarily because of higher research and development costs, costs necessary to support new Full Service Supply programs, marketing and branch expansion at J&L Industrial Supply and higher costs associated with acquisitions. For the six-month period, operating expenses as a percentage of sales were 31.6 percent compared to 31.4 percent last year. Operating expenses increased primarily because of higher research and development costs, higher costs to support new Full Service Supply programs, marketing and branch program expansion at J&L Industrial Supply and higher costs associated with acquisitions. INCOME TAXES - ------------ The effective tax rate for the December 1996 quarter was 39 percent compared to an effective tax rate of 41 percent in the prior year. The reduction in the effective tax rate resulted from certain tax benefits derived from international operations. For the six-month period, the effective tax rate was also 39 percent compared to 41 percent in the prior year. The decrease in the effective tax rate for the six-month period is the result of additional tax benefits derived from international operations. OUTLOOK - ------- In looking to the third quarter ending March 31, 1997, management expects consolidated sales to increase over the third quarter of fiscal 1996. Sales to the Metalworking markets should benefit from stable economic conditions in the United States. Sales in the Europe Metalworking market are expected to remain weak. Sales demand in the Asia-Pacific Metalworking market is expected to be strong. Sales in the Industrial Supply market should benefit from the expansion of locations, catalog sales and new Full Service Supply programs. Sales in the Mining and Construction market should increase from additional domestic demand. This Form 10-Q, including the prior two paragraphs, contains "forward-looking statements" as defined in Section 21E of the Securities Exchange Act of 1934. Actual results can differ from those in the forward-looking statements to the extent that the anticipated economic conditions in the United States, Europe and Asia-Pacific are not sustained. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - ----------------------------------------------------------------------------- The information set forth in Note 4 to the condensed consolidated financial statements, contained in Part I, Item 1 of this Form 10-Q, is incorporated by reference herein and supplements the information previously reported in Part I, Item 3 of the Company's Form 10-K for the year ended June 30, 1996, which is also incorporated by reference herein. It is management's opinion, based on its evaluation and discussions with outside counsel, that the Company has viable defenses to these cases and that, in any event, the ultimate resolutions of these matters will not have a materially adverse effect on the results of operations, financial position or cash flows of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------------------------- The information set forth in Part II, Item 4 of the Company's September 30, 1996 Form 10-Q is incorporated by reference herein. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------------------------------------------- (a) Exhibits (10) Material Contracts 10.8 Kennametal Inc. Stock Option and Incentive Plan of 1992, as amended Filed herewith (27) Financial Data Schedule for the six months ended December 31, 1996, submitted to the Securities and Exchange Commission in electronic format Filed herewith (99) Additional Exhibits Press Release Dated January 31, 1997 Filed herewith (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1996. 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: February 13, 1997 By: /s/ RICHARD J. ORWIG -------------------- Richard J. Orwig Vice President Chief Financial and Administrative Officer