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, 1995 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 OCTOBER 31, 1995 - ---------------------------------------- ------------------------------- Capital Stock, par value $1.25 per share 26,624,461
KENNAMETAL INC. FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1995 ------------------------------------ TABLE OF CONTENTS PART I. FINANCIAL INFORMATION - -------------------------------- Item 1. Financial Statements: Condensed Consolidated Balance Sheets (Unaudited) September 30, 1995 and June 30, 1995 Condensed Consolidated Statements of Income (Unaudited) Three months ended September 30, 1995 and 1994 Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended September 30, 1995 and 1994 Notes to Condensed Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 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) <TABLE> <CAPTION> September 30, June 30, 1995 1995 ------------- --------- <S> <C> <C> ASSETS Current Assets: Cash and equivalents $ 12,636 $ 10,827 Accounts receivable, less allowance for doubtful accounts of $12,067 and $12,106 167,143 175,405 Inventories 212,218 200,680 Deferred income taxes 22,262 22,362 -------- -------- Total current assets 414,259 409,274 -------- -------- Property, Plant and Equipment: Land and buildings 152,651 151,905 Machinery and equipment 372,274 365,275 Less accumulated depreciation (262,266) (256,838) -------- -------- Net property, plant and equipment 262,659 260,342 -------- -------- Other Assets: Investments in affiliated companies 7,001 6,873 Intangible assets, less accumulated amortization of $19,451 and $19,009 31,810 32,253 Deferred income taxes 51,273 56,629 Other 24,961 16,238 -------- -------- Total other assets 115,045 111,993 -------- -------- Total assets $791,963 $781,609 ======== ======== LIABILITIES Current Liabilities: Current maturities of term debt and capital leases $ 16,433 $ 17,475 Notes payable to banks 62,145 53,555 Accounts payable 57,479 60,211 Accrued vacation pay 18,116 18,424 Other 74,131 75,537 -------- -------- Total current liabilities 228,304 225,202 -------- -------- Term Debt and Capital Leases, Less Current Maturities 78,177 78,700 Deferred Income Taxes 21,154 20,998 Other Liabilities 50,967 51,615 -------- -------- Total liabilities 378,602 376,515 -------- -------- Minority Interest in Consolidated Subsidiaries 13,861 13,209 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 86,285 85,768 Retained earnings 307,490 297,838 Treasury shares, at cost; 2,745 and 2,793 shares held (36,435) (36,737) Cumulative translation adjustments 5,448 8,304 -------- -------- Total shareholders' equity 399,500 391,885 -------- -------- Total liabilities and shareholders' equity $791,963 $781,609 ======== ======== See accompanying notes to condensed consolidated financial statements. </TABLE>
KENNAMETAL INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - ------------------------------------------------------- (in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended ------------------ September 30, 1995 1994 -------- -------- <S> <C> <C> OPERATIONS: Net sales $254,903 $218,838 Cost of goods sold 148,461 128,051 -------- -------- Gross profit 106,442 90,787 Research and development expenses 4,964 4,419 Selling, marketing and distribution expenses 59,375 50,768 General and administrative expenses 15,692 12,877 Amortization of intangibles 384 773 -------- -------- Operating income 26,027 21,950 Interest expense 2,939 3,474 Other income (expense) (249) 92 -------- -------- Income before taxes 22,839 18,568 Provision for income taxes 9,200 7,900 -------- -------- Net income $ 13,639 $ 10,668 ======== ======== PER SHARE DATA: Earnings per share $ 0.51 $ 0.40 ======== ======== Dividends per share $ 0.15 $ 0.15 ======== ======== Weighted average shares outstanding 26,597 26,390 ======== ======== See accompanying notes to condensed consolidated financial statements. </TABLE>
KENNAMETAL INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - ----------------------------------------------------------- (in thousands) <TABLE> <CAPTION> Three Months Ended ------------------ September 30, 1995 1994 ------- ------- <S> <C> <C> OPERATING ACTIVITIES: Net income $13,639 $10,668 Adjustments for noncash items: Depreciation and amortization 9,767 9,935 Other 2,970 227 Changes in certain assets and liabilities net of effects from acquisitions: Accounts receivable 2,537 (4,627) Inventories (13,046) (10,463) Accounts payable and accrued liabilities (4,848) (12,063) Other 3,868 5,742 ------- ------- Net cash flow from (used for) operating activities 14,887 (581) ------- ------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (18,030) (7,713) Disposals of property, plant and equipment 1,008 1,040 Other (418) 555 ------- ------- Net cash flow used for investing activities (17,440) (6,118) ------- ------- FINANCING ACTIVITIES: Increase in short-term debt 8,498 24 Increase in term debt 1,041 2,288 Reduction in term debt (1,879) (1,831) Dividend reinvestment and employee stock plans 819 2,299 Cash dividends paid to shareholders (3,987) (3,953) ------- ------- Net cash flow from (used for) financing activities 4,492 (1,173) ------- ------- Effect of exchange rate changes on cash (130) 126 ------- ------- CASH AND EQUIVALENTS: Net increase (decrease) in cash and equivalents 1,809 (7,746) Cash and equivalents, beginning 10,827 17,190 ------- ------- Cash and equivalents, ending $12,636 $ 9,444 ======= ======= SUPPLEMENTAL DISCLOSURES: Interest paid $ 1,654 $ 2,294 Income taxes paid 4,995 1,627 See accompanying notes to condensed consolidated financial statements. </TABLE>
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 1995 Annual Report. The condensed consolidated balance sheet as of June 30, 1995 has been derived from the audited balance sheet included in the Company's 1995 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, 1995 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 September 30, 1995. Because inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year, the interim LIFO valuations are based on management's projections of expected year-end inventory levels and costs. Therefore, the interim financial results are subject to any final year-end LIFO inventory adjustments. 3. The major classes of inventory as of the balance sheet dates were as follows (in thousands): <TABLE> <CAPTION> September 30, June 30, 1995 1995 ------------- --------- <S> <C> <C> Finished goods $157,072 $147,231 Work in process and powder blends 67,934 65,231 Raw materials and supplies 26,603 24,629 -------- -------- Inventory at current cost 251,609 237,091 Less LIFO valuation (39,391) (36,411) -------- -------- Total inventories $212,218 $200,680 ======== ======== </TABLE> 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 ensure compliance with all 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. Prior to its acquisition by the Company, a non-U.S. subsidiary recorded sales of approximately $60 million in calendar 1993 under contracts with a certain customer to provide various equipment, know-how and training for a manufacturing facility. Upon the acquisition by the Company, the subsidiary decided to complete performance under the contracts with this customer but to not enter into any such contracts in the future. Pursuant to a United States embargo effective June 6, 1995, the subsidiary suspended performance under the contracts pending issuance by the U.S. government of definitive embargo regulations. Other than finalizing the transfer of know-how and training to commence production, performance was substantially completed prior to the suspension. The estimated costs to complete performance are not material and were accrued in the consolidated financial statements. The customer disputed the suspension and advised that it might file suit to require completion of performance as well as for compensation for alleged damages. However, the subsidiary reinstituted performance following the issuance of definitive embargo regulations in September of 1995. Management believes that the ultimate resolution of this matter will not have a material adverse impact on the financial position of the Company. 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, 1995 and September 30, 1995. The ratio of current assets to current liabilities was 1.8 as of September 30, 1995 and June 30, 1995. The debt to capital ratio (i.e., total debt divided by the sum of total debt and shareholders' equity) was 28 percent as of September 30, 1995 unchanged from June 30, 1995. Capital expenditures are estimated to be $60-70 million in fiscal year 1996. Expenditures are being made to modernize facilities, upgrade machinery and equipment, and acquire new information technology. 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 September 30, 1995, consolidated sales were $255 million, up 16 percent from $219 million in the same quarter last year. The increase in consolidated sales is attributable to an increase in sales volume of 11 percent, modest price increases, newly-consolidated international subsidiaries and favorable foreign currency translation effects. Excluding favorable foreign currency translation effects, international sales increased 20 percent and continued to show strong demand in all end markets. Net income for the September 1995 quarter was $13.6 million, or $0.51 per share, as compared with net income of $10.7 million, or $0.40 per share in the same quarter last year. Net income increased from higher sales of metalcutting tools in North America and Europe, and the continued growth of catalog sales. The following table presents the Company's sales by product class and geographic area (in thousands): <TABLE> <CAPTION> Quarter ended September 30, 1995 1994 % Change ---------- ---------- -------- <S> <C> <C> <C> Sales by Product Class: Metalworking $216,947 $183,581 18.2 Mining and construction 30,240 28,367 6.6 Metallurgical 7,716 6,890 12.0 -------- -------- Net sales $254,903 $218,838 16.5 ======== ======== Sales by Geographic Area: Within the U.S. $154,940 $140,569 10.2 Foreign and export 99,963 78,269 27.7 -------- -------- Net sales $254,903 $218,838 16.5 ======== ======== </TABLE> METALWORKING PRODUCTS During the September 1995 quarter, worldwide sales of metalworking products increased 18 percent from last year. In the United States, direct sales of metalcutting inserts and toolholding devices increased 5 percent. Total sales of industrial supply products increased 24 percent as a result of increased sales through mail order catalogs and full service supply programs. International sales of metalworking products increased 27 percent from the previous year primarily because of higher sales volume in Europe, the impact of favorable foreign currency translation effects, and newly-consolidated subsidiaries in Japan and China. Excluding the currency translation effect, international metalworking sales increased an estimated 19 percent. MINING AND CONSTRUCTION PRODUCTS During the September 1995 quarter, sales of mining and construction tools increased 7 percent from the previous year primarily because of additional domestic demand for mining and construction tools. International sales of highway construction and mining tools increased because of strong demand in Canada and Europe. METALLURGICAL PRODUCTS During the September 1995 quarter, sales of metallurgical products increased 12 percent from the previous year primarily because of strong international demand for carbide powders. GROSS PROFIT As a percentage of sales, gross profit for the September 1995 quarter was 41.8 percent as compared with 41.5 percent in the prior year. The gross profit margin benefited from higher production levels, modest price increases and favorable currency effects of international sales of products manufactured in the United States. These benefits were largely offset by higher raw material costs and reduced manufacturing efficiencies. OPERATING EXPENSES For the quarter ended September 30, 1995, operating expenses increased 18 percent primarily because of costs necessary to support the higher sales levels, increased spending on research and development, marketing programs, additional catalog branch openings and the implementation of new information systems. As a percentage of sales, operating expenses increased slightly to 31.4 percent as compared with 31.1 percent in the prior year. INCOME TAXES The effective tax rate for the September 1995 quarter was 40.3 percent compared with an effective tax rate of 42.5 percent in the prior year. The effective tax rate decreased primarily because of lower estimated non-U.S. taxes and additional benefits derived from the utilization of the foreign sales corporation. OUTLOOK In looking to the second quarter ending December 31, 1995, management expects consolidated sales to increase from the $230 million achieved in the same quarter last year. Sales of metalworking products in the United States should continue to benefit from full service supply programs and catalog sales as a result of additional branch openings. In addition, international sales are expected to increase as the European and Asia-Pacific economies continue to expand. Sales of mining and construction tools should continue to increase from additional international demand for highway construction and mining tools. 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, 1995, 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 At the Annual Meeting of Stockholders on October 30, 1995, the stockholders of the Company voted on the election of directors and independent auditors, and for the approval of a new Performance Bonus Stock Plan. 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. <TABLE> 1. With respect to the votes cast for directors whose terms expire in 1998. <CAPTION> For Withheld Broker Non-Vote ---------- ---------- --------------- <S> <C> <C> <C> A. Peter Held 22,374,882 79,286 0 Aloysius T. McLaughlin, Jr. 22,395,437 58,731 0 Larry Yost 22,156,926 297,242 0 2. With respect to the approval of the new Performance Bonus Stock Plan of 1995. <CAPTION> For Against Abstained Broker Non-Vote ---------- --------- --------- --------------- <S> <C> <C> <C> <C> Approval of Performance Bonus Stock Plan of 1995 21,365,723 975,467 112,978 2,352,956 3. With respect to the election of the firm of Arthur Andersen LLP, independent public accountants, to audit the financial statement of the Company and its subsidiary companies for the fiscal year ending June 30, 1996. <CAPTION> For Against Abstained Broker Non-Vote ---------- --------- --------- --------------- <S> <C> <C> <C> <C> Arthur Andersen LLP 22,377,216 31,329 45,623 0 </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K <TABLE> <CAPTION> Reference <S> <C> (a) Exhibits (10.1) Performance Bonus Stock Plan of 1995 Filed herewith (27) Financial Data Schedule Filed herewith (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1995. </TABLE> 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 13, 1995 By: /s/ RICHARD J. ORWIG ------------------------- Richard J. Orwig Vice President Chief Financial and Administrative Officer