Back to GetFilings.com
===============================================================================
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, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
capital stock, as of the latest practicable date:
Title Of Each Class Outstanding at October 31, 2003
- ---------------------------------------------------- ----------------------------------------------
Capital Stock, par value $1.25 per share 36,050,414
===============================================================================
KENNAMETAL INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Statements of Income (Unaudited)
Three months ended September 30, 2003 and 2002........................................................................... 1
Condensed Consolidated Balance Sheets
September 30, 2003 (Unaudited) and June 30, 2003......................................................................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended September 30, 2003 and 2002........................................................................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited)......................................................... 4
2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 14
3. Quantitative and Qualitative Disclosures about Market Risk............................................................... 21
4. Controls and Procedures.................................................................................................. 21
PART II. OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders...................................................................... 22
5. Other Information........................................................................................................ 22
6. Exhibits and Reports on Form 8-K......................................................................................... 23
Signatures............................................................................................................... 24
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands, except per share data)
Three Months Ended
September 30,
---------------------------------------
2003 2002
---- ----
OPERATIONS
Sales $ 444,575 $ 404,218
Cost of goods sold 300,468 273,249
------------- -------------
Gross profit 144,107 130,969
Operating expense 121,239 104,835
Restructuring 550 (181)
Amortization of intangibles 470 814
------------- -------------
Operating income 21,848 25,501
Interest expense 6,600 8,485
Other expense, net 1,337 594
------------- -------------
Income before provision for income taxes and minority interest 13,911 16,422
Provision for income taxes 4,452 5,255
Minority interest 695 338
------------- -------------
Net income $ 8,764 $ 10,829
============ =============
PER SHARE DATA
Basic earnings per share $ 0.25 $ 0.31
============ =============
Diluted earnings per share $ 0.24 $ 0.31
============ ============
Dividends per share $ 0.17 $ 0.17
============ ============
Basic weighted average shares outstanding 35,336 35,045
============= =============
Diluted weighted average shares outstanding 35,989 35,344
============= =============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
-1-
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(in thousands) September 30, June 30,
2003 2003
---- ----
ASSETS (Unaudited)
Current assets:
Cash and equivalents $ 14,720 $ 15,093
Marketable equity securities available-for-sale 13,979 11,365
Accounts receivable, less allowance for
doubtful accounts of $19,853 and $23,405 232,146 235,648
Inventories 387,877 392,255
Deferred income taxes 86,888 97,237
Other current assets 33,024 30,754
--------------- ---------------
Total current assets 768,634 782,352
--------------- ---------------
Property, plant and equipment:
Land and buildings 255,860 261,345
Machinery and equipment 981,838 965,374
Less accumulated depreciation (748,456) (733,346)
--------------- ---------------
Net property, plant and equipment 489,242 493,373
--------------- ---------------
Other assets:
Investments in affiliated companies 17,256 16,788
Goodwill 444,488 434,431
Intangible assets, less accumulated amortization
of $13,733 and $15,037 40,174 39,501
Deferred income taxes 27,372 17,122
Other 22,480 30,320
--------------- ---------------
Total other assets 551,770 538,162
--------------- ---------------
Total assets $ 1,809,646 $ 1,813,887
=============== ===============
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases $ 2,846 $ 2,907
Notes payable to banks 8,529 7,938
Accounts payable 107,653 119,853
Accrued income taxes 12,058 22,511
Accrued vacation pay 31,018 31,459
Accrued payroll 34,698 32,592
Accrued restructuring 26,966 24,868
Other current liabilities 92,838 94,219
--------------- ---------------
Total current liabilities 316,606 336,347
--------------- ---------------
Long-term debt and capital leases, less current maturities 508,763 514,842
Deferred income taxes 41,368 43,543
Postretirement benefits 44,205 44,030
Accrued pension benefits 114,343 111,690
Other liabilities 21,710 22,978
--------------- ---------------
Total liabilities 1,046,995 1,073,430
--------------- ---------------
Minority interest in consolidated subsidiaries 16,089 18,880
--------------- ---------------
Commitments and contingencies
SHAREOWNERS' EQUITY
Preferred stock, no par value; 5,000 shares authorized; none issued -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
37,718 and 37,649 shares issued 47,147 47,061
Additional paid-in capital 512,969 507,343
Retained earnings 303,939 301,263
Treasury shares, at cost; 1,749 and 2,176 shares held (56,786) (67,268)
Unearned compensation (11,273) (9,109)
Accumulated other comprehensive loss (49,434) (57,713)
---------------- ---------------
Total shareowners' equity 746,562 721,577
--------------- ---------------
Total liabilities and shareowners' equity $ 1,809,646 $ 1,813,887
=============== ===============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
-2-
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands) Three Months Ended
September 30,
-----------------------------------------
2003 2002
---- ----
OPERATING ACTIVITIES
Net income $ 8,764 $ 10,829
Adjustments for non-cash items:
Depreciation 14,881 18,252
Amortization 470 814
Stock-based compensation expense 3,088 1,900
Restructuring -- (181)
Other 3,385 286
Changes in certain assets and liabilities (excluding acquisition):
Accounts receivable 9,052 6,721
Change in accounts receivable securitization (3,998) (783)
Inventories 3,728 10,121
Accounts payable and accrued liabilities (18,593) (14,974)
Other (8,592) 5,329
-------------- --------------
Net cash flow provided by operating activities 12,185 38,314
-------------- --------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (10,594) (10,475)
Disposals of property, plant and equipment 534 605
Acquisition of business assets, net of cash acquired -- (183,770)
Purchase of subsidiary stock (5,014) (221)
Other 134 (308)
-------------- --------------
Net cash flow used for investing activities (14,940) (194,169)
-------------- --------------
FINANCING ACTIVITIES
Net increase (decrease) in notes payable 618 (11,228)
Net (decrease) in revolver and other lines of credit (571) (9,355)
Term debt borrowings 693 874
Borrowings for Widia acquisition, net -- 185,307
Term debt repayments (3,510) (1,336)
Dividend reinvestment and employee benefit and stock plans 10,910 1,826
Cash dividends paid to shareowners (6,088) (5,957)
-------------- --------------
Net cash flow provided by financing activities 2,052 160,131
-------------- --------------
Effect of exchange rate changes on cash and equivalents 330 (361)
-------------- --------------
CASH AND EQUIVALENTS
Net (decrease) increase in cash and equivalents (373) 3,915
Cash and equivalents, beginning of year 15,093 10,385
-------------- --------------
Cash and equivalents, end of period $ 14,720 $ 14,300
============= ==============
SUPPLEMENTAL DISCLOSURES
Interest paid $ 2,107 $ 3,592
Income taxes paid (refunded) 13,697 (5,850)
Contribution of stock to employee defined contribution benefit plans 1,941 470
Changes in fair value of interest rate swaps (7,075) 19,390
The accompanying notes are an integral part of
these condensed consolidated financial statements.
-3-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION
Kennametal Inc. was incorporated in Pennsylvania in 1943 and maintains its
world headquarters in Latrobe, Pennsylvania. Kennametal Inc. and its
subsidiaries (collectively, "Kennametal" or the "Company") is a leading
global manufacturer, marketer and distributor of a broad range of cutting
tools, tooling systems, supplies and technical services, as well as
wear-resistant parts. We believe that our reputation for manufacturing
excellence and technological expertise and innovation in our principal
products has helped us achieve a leading market presence in our primary
markets. We believe we are the second largest global provider of
metalcutting tools and tooling systems. End users of our products include
metalworking manufacturers and suppliers in the aerospace, automotive,
machine tool and farm machinery industries, as well as manufacturers and
suppliers in the highway construction, coal mining, quarrying and oil and
gas exploration industries. We operate four global business units
consisting of Metalworking Solutions & Services Group (MSSG), Advanced
Materials Solutions Group (AMSG), J&L Industrial Supply (J&L) and Full
Service Supply (FSS), and corporate functional shared services.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements, which include our
accounts and those of our majority-owned subsidiaries, should be read in
conjunction with the 2003 Annual Report on Form 10-K. The condensed
consolidated balance sheet as of June 30, 2003 was derived from the
audited balance sheet included in our 2003 Annual Report on Form 10-K.
These interim statements are unaudited; however, we believe that all
adjustments necessary for a fair statement of the results of the interim
periods were made and all adjustments are normal, recurring adjustments.
The results for the three months ended September 30, 2003 and 2002 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. For example, a reference to 2004 is to the fiscal year
ended June 30, 2004. When used in this Form 10-Q, unless the context
requires otherwise, the terms "we," "our" and "us" refer to Kennametal
Inc. and its subsidiaries.
Certain amounts have been reclassified to conform to current year
presentation.
3. STOCK-BASED COMPENSATION
Stock options generally are granted to eligible employees with a stock
price equal to fair market value at the date of grant. Options are
exercisable under specific conditions for up to 10 years from the date of
grant. As permitted under the Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") we
have elected to measure compensation expense related to stock options in
accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations which uses the
intrinsic value method. In addition to stock option grants, the Amended
and Restated Kennametal Inc. Stock and Incentive Plan of 2002 permits the
award of restricted stock to directors, officers and key employees.
Expense associated with restricted stock grants is amortized over the
vesting period. The expense for these awards is the same under the fair
value method or intrinsic value method, and therefore is not included in
the table below. If compensation expense was determined based on the
estimated fair value of options granted in 2003 and 2002, consistent with
the methodology in SFAS No. 123 and Statement of Financial Accounting
Standard No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure ("SFAS No. 148") , our 2003 and 2002 net income and earnings
per share for the quarter would be reduced to the pro forma amounts
indicated below:
-4-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Quarter Ended
September 30,
----------------------------------------
2003 2002
---- ----
Net income, as reported $ 8,764 $ 10,829
Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects (1,428) (1,363)
Add: Total stock-based employee compensation expense determined under
the intrinsic value based method for all awards, net of related tax
effects -- 158
------------- -------------
Total stock-based compensation $ (1,428) $ (1,205)
Pro forma net income $ 7,336 $ 9,624
Basic earnings per share:
As reported $ 0.25 $ 0.31
Pro forma 0.21 0.27
Diluted earnings per share:
As reported $ 0.24 $ 0.31
Pro forma 0.20 0.27
4. ACQUISITIONS
On August 30, 2002, we purchased the Widia Group (Widia) in Europe and
India from Milacron Inc. for EUR188 million ($185.3 million) subject to a
purchase price adjustment. On February 12, 2003, Milacron Inc. and
Kennametal signed a settlement agreement with respect to the calculation
of the post-closing purchase price adjustment for the Widia acquisition
pursuant to which Milacron paid Kennametal EUR 18.8 million ($20.1
million) in cash. The net cash purchase price of $167.1 million includes
the actual purchase price of $185.3 million less the settlement of $20.1
million plus $6.2 million of direct acquisition costs ($1.1 million paid
in 2002 and $5.1 million paid in 2003) less $4.3 million of acquired cash.
We financed the acquisition with funds borrowed under the 2002 Credit
Agreement. The acquisition of Widia improves our global competitiveness,
strengthens our European position and represents a strong platform for
increased penetration in Asia. Widia's operating results have been
included in our consolidated results since August 30, 2002. The fair
market value of the Widia tangible and intangible assets were determined
by an independent appraiser.
In accordance with SFAS No. 141, "Business Combinations," we accounted for
the acquisition using the purchase method of accounting. As a result of
the acquisition we have recorded approximately $59.7 million of goodwill
and $27.2 million of other intangibles. Of the $27.2 million of
identifiable intangible assets approximately $6.4 million has a definite
life and therefore will be amortized over its remaining useful life. In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
goodwill will not be amortized but will instead be subject to an annual
impairment test.
In conjunction with the Widia acquisition, we reviewed the estimated lives
currently being used for existing Kennametal assets, and have determined
that the current useful lives should be extended to more appropriately
match the life of the asset. Starting July 1, 2003, we have changed our
accounting policy regarding machinery and equipment and have extended our
useful lives from a maximum life of 10 years to 15 years.
-5-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The unaudited pro forma consolidated financial data presented below gives
effect to the Widia acquisition as if it had occurred as of the beginning
of each period presented. The pro forma adjustments are based upon
available information and certain assumptions that we believe are
reasonable, including additional interest expense that resulted from the
transaction, net of any applicable income tax effects. The unaudited pro
forma consolidated financial data is not necessarily indicative of the
operating results that would have occurred had the acquisition been
consummated on the date indicated, nor are they indicative of future
operating results. The unaudited pro forma consolidated financial data
should be read in conjunction with the historical consolidated financial
statements and accompanying notes.
Three Months Ended
Pro Forma Consolidated Financial Data September 30,
------------------------------------- ----------------------------------------
2003 2002
---- ----
Net sales $ 444,575 $ 439,612
Net income 8,764 6,188
Basic earnings per share 0.25 0.18
Diluted earnings per share 0.24 0.18
Additionally, during the current quarter, we acquired 11.5 percent of the
outstanding minority interest of our subsidiary in India for a total
consideration of $5.0 million, bringing our ownership interest to 88.2
percent. This transaction resulted in $1.3 million of goodwill.
5. INVENTORIES
Inventories are stated at the lower of cost or market. We use the last-in,
first-out (LIFO) method for determining the cost of a significant portion
of our U.S. inventories. The cost for the remainder of our inventories is
determined under the first-in, first-out (FIFO) or average cost methods.
We used the LIFO method of valuing inventories for approximately 40
percent of total inventories at both September 30, 2003 and June 30, 2003.
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 our projections of expected year-end
inventory levels and costs. Therefore, the interim financial results are
subject to any final year-end LIFO inventory adjustments.
Inventories as of the balance sheet dates consisted of the following (in
thousands):
September 30, June 30,
2003 2003
---- ----
Finished goods $ 267,364 $ 273,803
Work in process and powder blends 106,745 109,295
Raw materials and supplies 40,248 36,514
-------------- --------------
Inventory at current cost 414,357 419,612
Less: LIFO valuation (26,480) (27,357)
-------------- --------------
Total inventories $ 387,877 $ 392,255
============= ==============
-6-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. ENVIRONMENTAL MATTERS
We are involved in various environmental cleanup and remediation
activities at several of our manufacturing facilities. In addition, we are
currently named as a potentially responsible party (PRP) at the Li
Tungsten Superfund site in Glen Cove, New York. In December 1999, we
recorded a remediation reserve of $3.0 million with respect to our
involvement in these matters, which was recorded as a component of
operating expense. This represents our best estimate of the undiscounted
future obligation based on our evaluations and discussions with outside
counsel and independent consultants, and the current facts and
circumstances related to these matters. We recorded this liability because
certain events occurred, including the identification of other PRPs, an
assessment of potential remediation solutions and direction from the
government for the remedial action plan that clarified our level of
involvement in these matters and our relationship to other PRPs. This led
us to conclude that it was probable a liability had been incurred. At
September 30, 2003, we have an accrual of $2.8 million remaining relative
to this environmental issue. No cash payments have been made against this
reserve during the quarter.
In addition to the amount currently reserved, we may be subject to loss
contingencies related to these matters estimated to be up to an additional
$3.0 million. We believe that such undiscounted unreserved losses are
reasonably possible but are not currently considered to be probable of
occurrence. The reserved and unreserved liabilities for all environmental
concerns 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, the identification of new PRPs and the
involvement of and direction taken by government agencies on these
matters.
Additionally, we also maintain reserves for other potential environmental
issues associated with our domestic operations and a location operated by
our German subsidiary. At September 30, 2003, the total of these accruals
was $1.0 million and represents anticipated costs associated with the
remediation of these issues. Cash payments of $0.3 million have been made
against this reserve during the quarter.
As a result of the Widia acquisition, we have established a separate
environmental reserve of $6.2 million. This reserve will be used for
environmental clean-up and remediation activities at several Widia
manufacturing locations. This liability represents our best estimate of
the future obligation based on our evaluations and discussions with
independent consultants and the current facts and circumstances related to
these matters. This liability has been recorded as part of the Widia
acquisition and has not been reflected in our operating results. No cash
payments have been made against this reserve during the quarter.
We maintain 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, we have established an EH&S administrator at all
our global manufacturing facilities. Our 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, we
establish or adjust financial provisions and reserves for environmental
contingencies in accordance with Statement of Financial Accounting
Standard (SFAS) No. 5, "Accounting for Contingencies."
-7-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of
shares outstanding during the period, while diluted earnings per share is
calculated to reflect the potential dilution that occurs related to
issuance of capital stock under stock option grants and restricted stock
awards. The difference between basic and diluted earnings per share
relates solely to the effect of capital stock options and restricted stock
awards.
For purposes of determining the number of diluted shares outstanding,
weighted average shares outstanding for basic earnings per share
calculations were increased due solely to the dilutive effect of
unexercised stock options and restricted stock awards by 652,271 and
298,741 for the three months ended September 30, 2003 and 2002,
respectively. Unexercised stock options to purchase our capital stock of
1.4 million and 1.7 million shares at September 30, 2003 and 2002,
respectively, are not included in the computation of diluted earnings per
share because the option exercise price was greater than the average
market price.
8. COMPREHENSIVE INCOME
Comprehensive income for the three months ended September 30, 2003 and
2002 is as follows (in thousands):
Three Months Ended
September 30,
-----------------------------------------
2003 2002
---- ----
Net income $ 8,764 $ 10,829
Unrealized gain (loss) on marketable equity securities
available-for-sale, net of tax 1,035 (589)
Unrealized gain on derivatives designated
and qualified as cash flow hedges, net of tax 24 1,442
Reclassification of unrealized loss
on matured derivatives, net of tax 2,022 78
Minimum pension liability adjustment, net of tax (181) 10
Foreign currency translation adjustments 5,379 (2,508)
------------- -------------
Comprehensive income $ 17,043 $ 9,262
============= =============
-8-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill attributable to each segment at September
30, 2003 and June 30, 2003 is as follows (in thousands):
September 30,
June 30, 2003 Acquisition Transfer Translation 2003
------------- ----------- -------- ----------- -------------
MSSG $222,309 $ 8,959 $ (11,344) $ 776 $ 220,700
AMSG 167,766 -- 11,344 322 179,432
J&L 39,649 -- -- -- 39,649
FSS 4,707 -- -- -- 4,707
------------ ------------ ----------- ------------- -------------
Total $434,431 $ 8,959 $ -- $ 1,098 $ 444,488
------------ ------------ ----------- ------------- -------------
During the quarter ended September 30, 2003, we realigned certain
operations to provide for enhanced marketing benefits. As a result we have
transferred a portion of the goodwill, that resulted from the acquisition,
from MSSG to AMSG. The increase in goodwill is associated with final
purchase price accounting adjustments related to the acquisition of Widia
and the purchase of minority interest shares in India.
The components of our other intangible assets and useful lives are as
follows (in thousands):
September 30, 2003 June 30, 2003
------------------ -------------
Estimated Gross Carrying Accumulated Gross Carrying Accumulated
Useful Life Amount Amortization Amount Amortization
----------- ------ ------------ ------ ------------
Contract based 4-15 years $ 9,858 $ (8,225) $ 11,218 $ (10,230)
Technology based and other 4-15 years 11,148 (5,508) 10,799 (4,807)
Trademarks Indefinite 24,479 -- 24,139 --
Intangible pension asset and other n/a 8,422 -- 8,382 --
----------- ----------- ----------- -----------
Total $ 53,907 $ (13,733) $ 54,538 $ (15,037)
----------- ----------- ----------- ----------
During the current quarter we removed $2.4 million of fully amortized
intangible assets.
-9-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
2003 FACILITY CONSOLIDATION PROGRAM In June 2003, we approved a facility
consolidation program. This program is expected to have restructuring
charges of approximately $2.5 million. The plan includes the closure of
two regional operating centers and the Framingham manufacturing facility
and a workforce reduction. All actions pertain to the MSSG segment. All
costs associated with the restructuring program are expected to be
incurred and paid by December 31, 2003, except certain lease costs which
extend to 2005.
Accrual at Cash Accrual at
(in thousands) June 30, 2003 Expense Expenditures September 30, 2003
------------- ------- ------------ ------------------
Employee severance $1,188 $ 77 $ (287) $ 978
Facility rationalization 144 -- -- 144
------- ---------- ---------- ------------
Total $1,332 $ 77 $ (287) $ 1,122
====== ========== ========== ============
2003 WORKFORCE RESTRUCTURING PROGRAM In October 2002, we announced a
global salaried workforce reduction of approximately five percent. The
reduction as announced was expected to cost between $9 million and $10
million. The expected cost was revised to $8.0 million and the plan has
been completed as of September 30, 2003. The program resulted in $2.8
million of charges for the MSSG segment, $2.6 million for AMSG, $1.3
million for J&L, $0.1 million for FSS and $1.2 million for Corporate. The
components of the restructuring accrual are as follows:
Accrual at Cash Accrual at
(in thousands) June 30, 2003 Expense Expenditures September 30, 2003
------------- ------- ------------ ------------------
Employee severance $ 1,835 $ -- $ (831) $ 1,004
The restructuring accrual at September 30, 2003 represents expected future
cash payments for these obligations over the next three months.
WIDIA INTEGRATION In addition to the 2003 Workforce Restructuring Program,
we have implemented two Widia acquisition-related integration programs
(Kennametal Integration Restructuring Program and the Widia Integration
Plan) which together are expected to result in a global headcount
reduction of approximately 760 positions. Our original estimates were
between 650 and 700 positions and has been increased due to additional
headcount reductions in Europe and India. We have substantially completed
the integration plan in Europe and we have closed six sales offices, three
manufacturing facilities and closed or consolidated four warehouses. As of
September 30, 2003, we have terminated 385 employees in Europe. We have
also implemented a restructuring program in India. Phase one of the India
program involved the termination of 225 employees and has been completed.
Phase two will be implemented in the quarter ended December 31, 2003 and
will involve the termination of approximately 150 employees. We expect the
completion of all integration activities by December 31, 2003.
-10-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
KENNAMETAL INTEGRATION RESTRUCTURING PROGRAM This program will include
employee severance costs associated with existing Kennametal facilities.
The components of the restructuring accrual at September 30, 2003 for this
program are as follows:
Accrual Cash Accrual at
(in thousands) at June 30, 2003 Expense Expenditures September 30, 2003
---------------- ------- ------------ ------------------
Employee severance $ 3,640 $ 473 $ (1,026) $ 3,087
WIDIA INTEGRATION PLAN In connection with the acquisition, we have
established a Widia integration plan to develop centers of excellence in
functional areas and enable long-term growth and competitive advantages.
Costs that are incurred under this plan will be accounted for under EITF
95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination." As a result, these costs have been recorded as part of the
Widia purchase price allocation.
Accrual at Adjustment Cash Accrual at
June 30, 2003 to Goodwill Expenditures Translation September 30, 2003
------------- ----------- ------------ ----------- ------------------
Facility rationalizations $ 1,357 $ 4,138 $ (2,060) $ 90 $ 3,525
Employee severance 14,934 1,547 (238) 986 17,229
Terminated contracts 463 -- (493) 30 --
------------- ------------- ------------ ------------- -------------
Total $ 16,754 $ 5,685 $ (2,791) $ 1,106 $ 20,754
============= ============= =========== ============= =============
PRIOR PROGRAMS During 2003, we effectively completed and paid the
majority of costs associated with the acquired Widia Restructuring
Program, 2002 AMSG and MSSG Restructuring Programs and the 2002 and 2001
J&L and FSS Business Improvement Programs. Remaining cash expenditures
for all of these programs is $0.9 million and relates primarily to final
lease payments. We expect all remaining cash payments to be completed by
June 30, 2004.
-11-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
12. SEGMENT DATA
We operate four global business units consisting of Metalworking Solutions
& Services Group (MSSG), Advanced Materials Solutions Group (AMSG), J&L
Industrial Supply (J&L) and Full Service Supply (FSS), and corporate
functional shared services. We do not allocate corporate costs, domestic
pension expense, interest expense, other expense, income taxes, or
minority interest to the operating segment results presented below. During
the quarter ended September 30, 2003, we realigned certain business
operations to provide for enhanced marketing benefits. This realignment
has resulted in a change in segment reporting. The most significant change
is the realignment of our Wear Parts business from the MSSG segment to the
AMSG segment. The prior year information has been reclassified to reflect
this change. Our external sales, intersegment sales and operating income
by segment for the three months ended September 30, 2003 and 2002 are as
follows (in thousands):
Three Months Ended
September 30,
--------------------------------------
2003 2002
---- ----
External sales:
MSSG $ 271,129 $ 240,821
AMSG 93,631 83,409
J&L 48,139 48,207
FSS 31,676 31,781
------------ -------------
Total external sales $ 444,575 $ 404,218
============ ============
Intersegment sales:
MSSG $ 30,015 $ 26,568
AMSG 7,172 6,890
J&L 323 563
FSS 600 771
------------ -------------
Total intersegment sales $ 38,110 $ 34,792
============ ============
Total sales:
MSSG $ 301,144 $ 267,389
AMSG 100,803 90,299
J&L 48,462 48,770
FSS 32,276 32,552
------------ -------------
Total sales $ 482,685 $ 439,010
============ ============
Operating income (loss):
MSSG $ 23,502 $ 23,610
AMSG 11,822 11,385
J&L 2,685 2,164
FSS (281) (19)
Corporate and eliminations (15,880) (11,639)
------------ -------------
Total operating income $ 21,848 $ 25,501
============ ============
-12-
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
13. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective October 9, 2003, the Financial Accounting Standards Board (FASB)
elected to defer the effective date to December 31, 2003, for applying the
provisions of FASB Interpretation No. 46 for interests held by public
entities in variable interest entities created before February 1, 2003.
This standard is not expected to have a material impact on our
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity." This
standard requires that certain financial instruments embodying an
obligation to transfer assets or to issue equity securities be classified
as liabilities. It is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is generally effective July 1,
2003. This standard has no impact on our consolidated financial
statements.
In January 2003, the EITF released Issue No. 00-21 ("EITF 00-21"),
"Revenue Arrangements with Multiple Deliverables," which addresses certain
aspects of the accounting by a vendor for arrangement under which it will
perform multiple revenue-generating activities. Specifically, EITF 00-21
addresses whether an arrangement contains more than one unit of accounting
and the measurement and allocation to the separate units of accounting in
the arrangement. EITF 00-21 is effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. This standard has no
material impact on our consolidated financial statements.
14. SUBSEQUENT EVENT
On November 13, 2003, Kennametal announced a plan amendment for selected
participants in the Retirement Income Plan ("the Plan") effective January
1, 2004. The Plan currently covers the majority of the Company's U.S.
workforce. Effective, January 1, 2004, no new employees will become
eligible to participate in the Plan. Benefits under the Plan will continue
to accrue after December 31, 2003 only for certain employees
("Grandfathered Participants"). Benefits for all other Participants will
be frozen effective December 31, 2003. All eligible employees hired on or
after January 1, 2004 and all non-Grandfathered Participants in the Plan
will be eligible to participate in a new defined contribution benefit
which will provide for a fixed contribution equal to 3% of the employee's
compensation and will allow for a variable contribution up to an
additional 3% depending on the Company's performance. This Plan amendment
will result in a curtailment under FAS 88 "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." We expect this amendment to result in a pre-tax
charge in the quarter ending December 31, 2003 of approximately $1.1
million. Additionally, we expect pre-tax pension expense savings of
approximately $3.0 to $4.0 million in 2004.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
This Form 10-Q contains "forward-looking" statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. You can identify these
forward-looking statements by the fact they use words such as "should,"
"anticipate," "estimate," "approximate," "expect," "may," "will," "project,"
"intend," "plan," "believe" and other words of similar meaning and expression in
connection with any discussion of future operating or financial performance. One
can also identify forward-looking statements by the fact that they do not relate
strictly to historical or current facts. These statements are likely to relate
to, among other things, our goals, plans and projections regarding our financial
position, results of operations, cash flows, market position and product
development, which are based on current expectations that involve inherent risks
and uncertainities, including factors that could delay, divert or change any of
them in the next several years. Although it is not possible to predict or
identify all factors, they may include the following: global economic
conditions; future terrorist attacks; epidemics; risks associated with
integrating and divesting businesses and achieving the expected savings and
synergies; demands on management resources; risks associated with international
markets such as currency exchange rates, and social and political environments;
competition; labor relations; commodity prices; demand for and market acceptance
of new and existing products, and risks associated with the implementation of
restructuring plans and environmental remediation matters. We can give no
assurance that any goal or plan set forth in forward-looking statements can be
achieved and readers are cautioned not to place undue reliance on such
statements, which speak only as of the date made. We undertake no obligation to
release publicly any revisions to forward-looking statements as a result of
future events or developments.
SALES
- -----
Sales for the quarter ended September 30, 2003 were $444.6 million, an increase
of $40.4 million or 10.0 percent from $404.2 million in the prior year. The
increase in sales is attributed to the positive benefit of $14.2 million of
favorable foreign currency effects and $31.5 million from the Widia acquisition,
offset in part, by persistent weakness in our European markets.
GROSS PROFIT MARGIN
- -------------------
Gross profit margin for the quarter ended September 30, 2003 remained flat at
32.4 percent. The gross margin benefited from the favorable foreign currency
translation effects which were $7.7 million or 1.7 percent of sales.
Additionally, as previously announced, we have reviewed and changed the
estimated lives that were used for existing Kennametal machinery and equipment.
Starting July 1, 2003, we extended the useful lives of these assets from a
maximum life of 10 years to 15 years. This change has resulted in a benefit to
gross margin during the current quarter of $4.3 million or 0.9 percent of sales.
These benefits were offset by pension expense which reduced gross margin by $2.1
million or 0.5 percent of sales and pricing pressures in the J&L, FSS and
Electronics businesses and unfavorable effects of lower production levels.
Additionally, the current quarter reflects additional depreciation expense of
approximately $1.0 million or 0.2 percent of sales resulting from the step-up in
basis of the Widia assets based on a third party appraisal completed in June
2003. Finally, we also experienced a year-over-year increase in integration
costs and restructuring activities of $3.0 million or 0.7 percent of sales.
Gross profit for the quarter ended September 30, 2003 was $144.1 million an
increase of $13.1 million from the prior year. The increase of $13.1 million is
related to higher sales volume from the Widia acquisition.
OPERATING EXPENSE
- -----------------
Operating expense for the quarter ended September 30, 2003 was $121.2 million,
an increase of $16.4 million or 15.6 percent, compared to $104.8 million of a
year ago. The increase in operating expenses is associated with the Widia
acquisition of $8.4 million, $5.0 million of unfavorable foreign currency
effects, an increase in pension expense of $1.5 million and an increase in costs
of $1.0 million associated with the company match on 401(k) contributions.
Additionally, the current quarter has an increase in integration costs of $0.7
million from the same quarter last year.
PENSION AMENDMENT
- -----------------
As discussed in the notes to Condensed Consolidated Financial Statements (Note
14) we have amended the Retirement Income Plan effective January 1, 2004. We
expect this amendment to result in a total charge in the quarter ending December
31, 2003 of approximately $1.1 million. We also expect this amendment to result
in pre-tax pension expense savings of approximately $3.0 to $4.0 million in
2004. This savings will impact both gross margin and operating expenses. The
anticipated benefit to gross margin is expected to be $1.8 million to $2.4
million in 2004. The anticipated benefit to operating expense is expected to be
$1.2 million to $1.6 million in 2004.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESTRUCTURING AND ASSET IMPAIRMENT CHARGE
2003 FACILITY CONSOLIDATION PROGRAM In June 2003, we approved a facility
consolidation program. This program is expected to have restructuring charges of
approximately $2.5 million and is anticipated to generate in excess of $1.5
million in cash savings annually. The plan includes the closure of two regional
operating centers and the Framingham manufacturing facility and a workforce
reduction. All actions pertain to the MSSG segment. All costs associated with
the restructuring program are expected to be incurred and paid by December 31,
2003, except certain lease costs which extend to 2005.
Accrual at Cash Accrual at
(in thousands) June 30, 2003 Expense Expenditures September 30, 2003
------------- ------- ------------ ------------------
Employee severance $1,188 $ 77 $ (287) $ 978
Facility rationalization 144 -- -- 144
------- ---------- ----------- -------------
Total $1,332 $ 77 $ (287) $ 1,122
====== ========== =========== =============
2003 WORKFORCE RESTRUCTURING PROGRAM In October 2002, we announced a global
salaried workforce reduction of approximately five percent. The reduction as
announced was expected to cost between $9 million and $10 million. The expected
cost was revised to $8.0 million and the plan has been completed as of September
30, 2003. The plan is expected to generate in excess of $15 million in annual
cash savings. The program resulted in $2.8 million of charges for the MSSG
segment, $2.6 million for AMSG, $1.3 million for J&L, $0.1 million for FSS and
$1.2 million for Corporate. The components of the restructuring accrual are as
follows:
Accrual at Cash Accrual at
(in thousands) June 30, 2002 Expense Expenditures September 30, 2003
------------- ------- ------------ ------------------
Employee severance $ 1,835 $ -- $ (831) $ 1,004
The restructuring accrual at September 30, 2003 represents expected future cash
payments for these obligations over the next three months.
WIDIA INTEGRATION In addition to the 2003 Workforce Restructuring Program, we
have implemented two Widia acquisition-related integration programs (Kennametal
Integration Restructuring Program and the Widia Integration Plan) which together
are expected to result in a global headcount reduction of approximately 760
positions. Our original estimates were between 650 and 700 positions and has
been increased due to additional headcount reductions in Europe and India. The
integration plan is expected to result in annual cost savings of $30 million
annually. We have substantially completed the integration plan in Europe and we
have closed six sales offices, three manufacturing facilities and closed or
consolidated four warehouses. As of September 30, 2003, we have terminated 385
employees in Europe. We also implemented a restructuring program in India. Phase
one of the India program involved the termination of 225 employees and has been
completed. Phase two will be implemented in the December 2003 quarter and will
involve the termination of approximately 150 employees. We expect the completion
of all integration activities by December 31, 2003.
KENNAMETAL INTEGRATION RESTRUCTURING PROGRAM This program will include employee
severance costs associated with existing Kennametal facilities.
The components of the restructuring accrual at September 30, 2003 for this
program are as follows:
Accrual Cash Accrual at
(in thousands) at June 30, 2003 Expense Expenditures September 30, 2003
---------------- ------- ------------ ------------------
Employee severance $ 3,640 $ 473 $ (1,026) $ 3,087
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
WIDIA INTEGRATION PLAN In connection with the acquisition, we have established a
Widia integration plan to develop centers of excellence in functional areas and
enable long-term growth and competitive advantages. Costs that are incurred
under this plan will be accounted for under EITF 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination." As a result,
these costs have been recorded as part of the Widia purchase price allocation.
Accrual at Adjustment Cash Accrual at
June 30, 2003 to Goodwill Expenditures Translation September 30, 2003
------------- ----------- ------------ ----------- ------------------
Facility rationalizations $ 1,357 $ 4,138 $ (2,060) $ 90 $ 3,525
Employee severance 14,934 1,547 (238) 986 17,229
Terminated contracts 463 -- (493) 30 --
------------- ------------- ------------ ------------ -------------
Total $ 16,754 $ 5,685 $ (2,791) $ 1,106 $ 20,754
============= ============= ============ ============ =============
PRIOR PROGRAMS During 2003, we effectively completed and paid the majority of
costs associated with the acquired Widia Restructuring Program, 2002 AMSG and
MSSG Restructuring Programs and the 2002 and 2001 J&L and FSS Business
Improvement Programs. Remaining cash expenditures for all of these programs is
$0.9 million and relates primarily to final lease payments. We expect all
remaining cash payments to be completed by June 30, 2004. We continue to believe
these programs have generated in excess of $16.0 million in annual cost savings
for Kennametal.
INTEREST EXPENSE
- ----------------
Interest expense for the quarter ended September 30, 2003 declined 22.2 percent
to $6.6 million from $8.5 million a year ago. The decrease in interest expense
is due to total debt, including capital leases and notes payable, decreasing
from $616.6 million at September 30, 2002 to $520.1 million at September 30,
2003. Additionally, the average borrowing rate decreased from 5.57 percent in
2002 to 4.26 percent in 2003. The decrease in the average borrowing rate is due
to the decrease in market interest rates and an increase in the percentage of
our debt that is subject to floating rates of interest. As of September 30,
2002, 65.7 percent of our debt was subject to variable rates of interest
compared to 69.1 percent of our debt at September 30, 2003.
OTHER EXPENSE, NET
- ------------------
Other expense increased $0.7 million from $0.6 million in 2002 to $1.3 million
in 2003. Other expense for the three months ended September 30, 2003 and 2002
included fees of $0.4 million and $0.5 million, respectively, incurred in
connection with the accounts receivable securitization program. The decline in
these fees is due to lower interest rates in the commercial paper market. The
other significant component is the increase in foreign exchange losses which
increased $0.9 million from $0.8 million in 2002 to $1.7 million in 2003.
INCOME TAXES
- ------------
The effective tax rate was 32.0 percent for both the September 2003 quarter and
for the year-ago quarter. Our effective tax rate differs from the statutory rate
primarily due to international tax planning initiatives.
NET INCOME
- ----------
Net income for the quarter ended September 30, 2003 was $8.8 million, or $0.24
per diluted share, compared to a $10.8 million, or $0.31 per diluted share, in
the same quarter last year. The decline in earnings is primarily attributable to
an increase in operating expenses which increased $16.4 million or from 26.0
percent of sales to 27.3 percent of sales and integration and restructuring
activities which increased $3.0 million.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
METALWORKING SOLUTIONS & SERVICES GROUP
- ---------------------------------------
Three Months Ended
September 30,
----------------------------------------
2003 2002
---- ----
External sales $ 271,129 $ 240,821
Intersegment sales 30,015 26,568
Operating income 23,502 23,610
MSSG sales increased 12.6 percent or $30.3 million compared to the quarter ended
September 30, 2002. The increase in sales is attributed to the positive benefits
of $11.1 million of favorable foreign currency effects and $26.0 million from
the Widia acquisition. The prior year includes one month of Widia operating
results, whereas the current year includes three months of operating results. In
Metalworking North America, sales were flat compared to the prior year.
Metalworking Europe increased $25.4 million, or 30.6 percent, due to the Widia
acquisition and favorable foreign currency effects offset by overall weakness in
Europe and specifically the automotive sector. Additionally, the Industrial
Products Group had a decline in sales of $4.4 million or 8.8 percent, due to
weakness in the high speed steel market. This was offset by Asia Pacific which
increased sales by $2.7 million or 18 percent. The increase in sales is
attributed to strength in the automotive sector specific to this region. South
America also delivered revenue growth of $1.6 million or 54.5 percent, due to
favorable economic conditions and market share growth.
Operating income of $23.5 million was down slightly compared to $23.6 million
last year. This was due primarily to an increase in restructuring and
integration costs of $4.2 million, increase in foreign pension costs and
reinstatement of the 401(k) match. This was offset in part by lower depreciation
expense resulting from the extension of useful lives, favorable foreign currency
effects, Kennametal Lean Enterprise initiatives, integration benefits and
on-going cost controls.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
ADVANCED MATERIALS SOLUTIONS GROUP
- ----------------------------------
Three Months Ended
September 30,
----------------------------------------
2003 2002
---- ----
External sales $ 93,631 $ 83,409
Intersegment sales 7,172 6,890
Operating income 11,822 11,385
AMSG sales increased 12.3 percent or $10.2 million from the quarter ended
September 30, 2002. The increase in sales is attributed to the positive benefits
of $2.8 million related to favorable foreign currency effects and $5.5 million
from the Widia acquisition. The Energy Products Group experienced strong growth
of $2.6 million or 17 percent year-over-year due to increased activity in oil
and gas exploration. Mining and construction had a $4.3 million or 8.8 percent
increase in revenue due to the Widia acquisition, favorable foreign currency
effects and to a modest recovery in mining and growth in construction.
Additionally, the Engineered Products Group had an increase in sales of $2.6
million or 12.3 percent due to the Widia acquisition and favorable foreign
currency effects.
Operating income was $11.8 million compared to $11.4 million last year due to an
increase in sales, reduced depreciation expense, favorable foreign currency
effects and the benefits derived from the previously-implemented restructuring
efforts offset by increased foreign pension costs and reinstatement of the
401(k) match.
J&L INDUSTRIAL SUPPLY
- ---------------------
Three Months Ended
September 30,
----------------------------------------
2003 2002
---- ----
External sales $ 48,139 $ 48,207
Intersegment sales 323 563
Operating income 2,685 2,164
J&L sales declined slightly compared to the quarter ended September 30, 2002.
The decline in sales is primarily attributable to flat volume and due to pricing
pressures. Operating income was $2.7 million in the September 2003 quarter,
compared to $2.2 million in the prior year. The increase in operating income is
a result of cost containment and benefits from prior restructuring programs.
FULL SERVICE SUPPLY
- -------------------
Three Months Ended
September 30,
----------------------------------------
2003 2002
---- ----
External sales $ 31,676 $ 31,781
Intersegment sales 600 771
Operating income (loss) (281) (19)
FSS sales and operating loss both decreased slightly compared to the quarter
ended September 30, 2002. The decline in sales is primarily associated with
pricing pressures. During the end of 2003 and into 2004, we have obtained new
customers that we expect will significantly help FSS operating performance
during 2004.
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
CORPORATE AND ELIMINATIONS
- --------------------------
Three Months Ended
September 30,
----------------------------------------
2003 2002
---- ----
Operating loss $ (15,880) $ (11,639)
Corporate and eliminations represents corporate management and administrative
costs, domestic pension costs and eliminations of operating results between
segments. The increase in operating loss is attributed to an increase in
domestic pension expense of $2.9 million and increase in shared service costs of
$1.3 million.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our cash flow from operations is the primary source of financing for capital
expenditures and internal growth. During the quarter ended September 30, 2003,
we generated $12.2 million in cash flow from operations, a decrease of $26.1
million compared to the year-ago quarter. The decrease in operating cash flow is
due to increased income tax payments of $19.6 million. Additionally,
restructuring payments also increased to $5.2 million in 2003 from $2.4 million
in 2002.
We expect to spend approximately $30 million for restructuring during the
remainder of the current fiscal year. This includes $3 to $4 million of
additional charges in the quarter ending December 31, 2003 related to the
Kennametal Integration Restructuring program.
Net cash used for investing activities was $14.9 million, a decrease of $179.2
million compared to the year-ago quarter. The change is almost entirely due to
the net cost paid for Widia of $183.8 million. Capital expenditures remained
flat quarter-over-quarter at approximately $10.6 million. We have projected our
capital expenditures for 2004 to be $60 to $70 million and will be primarily
used to support new strategic initiatives, new products and to upgrade machinery
and equipment. We believe this level of capital spending is sufficient to
maintain competitiveness and improve productivity.
Net cash provided from financing activities was $2.1 million, a decrease of
$158.1 million compared to the same period last year. This decrease is due to
the incremental borrowings required to finance the Widia acquisition of $185.3
million, partially offset by decreases in notes payable and lines of credit in
2002.
As of September 30, 2003, we were in compliance with all debt covenants.
On July 3, 2003, the Company entered into a new three-year securitization
program ("2003 Securitization Program") which permitted us to securitize up to
$100.0 million of accounts receivable. The 2003 Securitization Program was
amended on September 19, 2003, permitting the Company to securitize up to $125
million of accounts receivable. The 2003 Securitization Program provides for
co-purchase arrangement with Falcon Asset Securitization Corporation and Victory
Receivables Corporation, whereby the two financial institutions participate in
the purchase of the Company's accounts receivable.
Total debt, including notes payable and capital leases decreased from $616.6
million at September 30, 2002 to $520.1 million at September 30, 2003. The
significant decrease in total debt is related to operating cash flow being used
to reduce debt.
-19-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
- -------------------
Total assets were $1,809.6 million at September 30, 2003, compared to $1,813.9
million at June 30, 2003. Working capital was $452.0 million, up slightly from
$446.0 million at June 30, 2003. The working capital increase was primarily due
to a decrease in Accounts Payable and Accrued Income Taxes offset by increases
in Accrued Restructuring and Accrued Payroll.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
Effective October 9, 2003, the Financial Accounting Standards Board (FASB)
elected to defer the effective date to December 31, 2003, for applying the
provisions of FASB Interpretation No. 46 for interests held by public entities
in variable interest entities created before February 1, 2003. This standard is
not expected to have a material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity." This standard requires
that certain financial instruments embodying an obligation to transfer assets or
to issue equity securities be classified as liabilities. It is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is generally effective July 1, 2003. This standard has no impact on our
consolidated financial statements.
In January 2003, the EITF released Issue No. 00-21 ("EITF 00-21"), "Revenue
Arrangements with Multiple Deliverables," which addresses certain aspects of the
accounting by a vendor for arrangement under which it will perform multiple
revenue-generating activities. Specifically, EITF 00-21 addresses whether an
arrangement contains more than one unit of accounting and the measurement and
allocation to the separate units of accounting in the arrangement. EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. This standard has no material impact on our consolidated
financial statements.
-20-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
We have experienced certain changes in our exposure to market risk from June 30,
2003.
During the quarter, we recognized a non-cash decrease of $7.1 million in our
long-term debt associated with our fixed-to-floating interest rate swap
agreements. In accordance with the accounting mandated by SFAS No. 133, the
recent increase that has occurred in the variable interest rate market has
necessitated this mark-to-market adjustment.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
As of the end of the period covered by this quarterly report on Form 10-Q, the
Company's management evaluated, with the participation of the company's Chief
Executive Officer and Chief Financial Officer, the effectiveness of the
company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)). The Company's disclosure controls were designed to
provide a reasonable assurance that information required to be disclosed in
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote. However, the controls have been
designed to provide reasonable assurance of achieving the controls' stated
goals. Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective at the reasonable assurance level. There were no
changes in the Company's internal control over financial reporting that occurred
during the Company's most recent fiscal quarter that have materially affected or
are reasonably likely to materially affect the Company's internal control over
financial reporting.
-21-
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
At the Annual Meeting of Shareowners on October 28, 2003, our shareowners voted
on the election of three directors and the ratification of the selection of the
independent public auditors. Of the 31,526,206 shares present by proxy, the
following is the number of shares voted in favor of, abstained or 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 re-election of three directors
whose terms expire in 2006:
For Withheld Broker Non-Vote
----------------------------------------------------------------------------------
Ronald M. DeFeo 28,433,780 3,092,426 --
William R. Newlin 29,732,910 1,793,296 --
Lawrence W. Stranghoener 30,733,611 792,595 --
The following other directors' terms of office continued after the
meeting: Peter B. Bartlett, A. Peter Held, Kathleen J. Hempel,
Aloysius T. McLaughlin, Jr., Markos I. Tambakeras and Larry D. Yost.
3. With respect to the ratification of the selection of the firm of
PricewaterhouseCoopers LLP as the Company's independent auditors for
the fiscal year ending June 30, 2004:
For Against Abstained
-------------------------------------------------------------------------------
PricewaterhouseCoopers LLP 30,689,055 813,400 23,751
ITEM 5. OTHER INFORMATION
- --------------------------------------------------------------------------------
On October 27, 2003, the Audit Committee approved new or recurring engagements
of PricewaterhouseCoopers LLP for non-audit services and tax compliance and
planning.
-22-
>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Documents filed as part of this Form 10-Q
(31) Certifications
--------------
(31.1) Certification executed by Markos I. Tambakeras,
Chief Executive Officer of Kennametal Inc.
(31.2) Certification executed by F. Nicholas
Grasberger III, Chief Financial Officer of
Kennametal Inc.
(32) Section 1350 Certifications
---------------------------
(32.1) Certification Pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by
Markos I. Tambakeras, Chief Executive Officer
of Kennametal Inc., and F. Nicholas Grasberger
III, Chief Financial Officer of Kennametal Inc.
(b) Reports on Form 8-K
The following were furnished and not deemed to be filed during
the quarter ended September 30, 2003:
Form 8-K dated July 30, 2003, reported under Item 12.
Results of Operations and Financial Condition regarding
the fourth quarter and fiscal year ended June 30, 2003
financial results.
Form 8-K/A dated July 30, 2003, reported under Item 12.
Results of Operations and Financial Condition regarding
the fourth quarter and fiscal year ended June 30, 2003
financial results.
The following was furnished and not deemed to be filed
subsequent to the quarter ended September 30, 2003:
Form 8-K dated October 29, 2003, reported under Item 12,
Results of Operations and Financial Condition regarding
the September 30, 2003 financial results.
-23-
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, 2003 By: /s/ TIMOTHY A. HIBBARD
----------------------------
Timothy A. Hibbard
Corporate Controller and
Chief Accounting Officer
-24-