KENNAMETAL INC - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003

Commission file number 1-5318

KENNAMETAL INC.

(Exact name of registrant as specified in its charter)


Pennsylvania (State or other jurisdiction of incorporation)		25-0900168 (I.R.S. Employer 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 January 31, 2004

Capital Stock, par value $1.25 per share		36,256,806

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
	SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

KENNAMETAL INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2003

TABLE OF CONTENTS


Item No.				Page

		PART I. FINANCIAL INFORMATION
1.	Financial Statements:
	Condensed Consolidated Statements of Income (Unaudited) Three and six months ended December 31, 2003 and 2002				1
	Condensed Consolidated Balance Sheets December 31, 2003 (Unaudited) and June 30, 2003				2
	Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended December 31, 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				23
4.	Controls and Procedures				23
			PART II. OTHER INFORMATION
5.	Other Information				24
6.	Exhibits and Reports on Form 8-K				25
	Signatures				26

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						Six Months Ended
	December 31,						December 31,

	2003			2002			2003			2002

OPERATIONS
Sales	$	460,778		$	431,731		$	905,353		$	835,949
Cost of goods sold		313,146			294,248			613,614			567,497

Gross profit		147,632			137,483			291,739			268,452
Operating expense		124,723			115,677			245,962			220,512
Restructuring		3,120			8,561			3,670			8,380
Amortization of intangibles		486			1,300			956			2,114

Operating income		19,303			11,945			41,151			37,446
Interest expense		6,547			9,594			13,147			18,079
Other (income), net		(3,855	)		(1,721	)		(2,518	)		(1,127	)

Income before provision for income taxes and minority interest		16,611			4,072			30,522			20,494
Provision for income taxes		5,315			893			9,767			6,148
Minority interest		404			709			1,099			1,047

Net income	$	10,892		$	2,470		$	19,656		$	13,299

PER SHARE DATA
Basic earnings per share	$	0.31		$	0.07		$	0.55		$	0.38

Diluted earnings per share	$	0.30		$	0.07		$	0.54		$	0.38

Dividends per share	$	0.17		$	0.17		$	0.34		$	0.34

Basic weighted average shares outstanding		35,604			35,126			35,470			35,086

Diluted weighted average shares outstanding		36,260			35,414			36,124			35,379

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


		December 31,			June 30,
		2003			2003

		(Unaudited)
ASSETS
Current assets:
	Cash and equivalents	$	15,086		$	15,093
	Marketable equity securities available-for-sale		—			11,365
	Accounts receivable, less allowance for doubtful accounts of $21,911 and $23,405		223,087			231,803
	Inventories		386,250			389,613
	Deferred income taxes		88,020			97,237
	Assets held for sale		6,199			7,720
	Other current assets		33,261			29,521

Total current assets			751,903			782,352

Property, plant and equipment:
	Land and buildings		261,623			258,985
	Machinery and equipment		1,012,956			964,171
	Less accumulated depreciation		(787,049	)		(733,328	)

Net property, plant and equipment			487,530			489,828

Other assets:
	Investments in affiliated companies		15,717			13,780
	Goodwill		454,117			430,664
	Intangible assets, less accumulated amortization of $14,494 and $15,037		46,773			42,509
	Deferred income taxes		27,223			17,122
	Assets held for sale		7,322			7,312
	Other		22,540			30,320

Total other assets			573,692			541,707

Total assets		$	1,813,125		$	1,813,887

LIABILITIES
Current liabilities:
	Current maturities of long-term debt and capital leases	$	2,946		$	2,907
	Notes payable to banks		9,926			7,938
	Accounts payable		112,563			118,509
	Accrued income taxes		4,923			22,511
	Accrued vacation pay		32,759			31,272
	Accrued payroll		29,294			32,592
	Accrued restructuring		22,550			24,868
	Liabilities of operations held for sale		1,430			1,531
	Other current liabilities		92,879			94,219

Total current liabilities			309,270			336,347

Long-term debt and capital leases, less current maturities			468,455			514,842
Deferred income taxes			36,087			43,543
Postretirement benefits			44,513			44,030
Accrued pension benefits			125,608			111,503
Other liabilities			21,464			23,165

Total liabilities			1,005,397			1,073,430

Minority interest in consolidated subsidiaries			16,286			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; 37,784 and 37,649 shares issued			47,230			47,061
Additional paid-in capital			515,333			507,343
Retained earnings			308,458			301,263
Treasury shares, at cost; 1,632 and 2,176 shares held			(52,513	)		(67,268	)
Unearned compensation			(10,905	)		(9,109	)
Accumulated other comprehensive loss			(16,161	)		(57,713	)

Total shareowners’ equity			791,442			721,577

Total liabilities and shareowners’ equity		$	1,813,125		$	1,813,887

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


		Six Months Ended
		December 31,

		2003			2002

OPERATING ACTIVITIES
Net income		$	19,656		$	13,299
Adjustments for non-cash items:
	Depreciation		30,884			37,866
	Amortization		956			2,114
	Stock-based compensation expense		6,341			3,365
	Restructuring		—			(181	)
	Other		4,878			2,305
Changes in certain assets and liabilities (excluding acquisition):
	Accounts receivable		21,291			26,811
	Change in accounts receivable securitization		2,106			4,100
	Inventories		15,437			13,500
	Accounts payable and accrued liabilities		(31,466	)		(33,680	)
	Other		(14,741	)		5,088

Net cash flow provided by operating activities			55,342			74,587

INVESTING ACTIVITIES
Purchases of property, plant and equipment			(21,853	)		(22,011	)
Disposals of property, plant and equipment			2,388			843
Acquisition of business assets, net of cash acquired			—			(184,936	)
Purchase of subsidiary stock			(5,024	)		(6,426	)
Proceeds from the sale of marketable equity securities			17,429			—
Other			1,058			865

Net cash flow used for investing activities			(6,002	)		(211,665	)

FINANCING ACTIVITIES
Net increase (decrease) in notes payable			1,573			(10,318	)
Net (decrease) in revolver and other lines of credit			(52,820	)		(21,700	)
Term debt borrowings			1,546			1,500
Borrowings for Widia acquisition, net			—			185,307
Term debt repayments			(5,021	)		(3,053	)
Dividend reinvestment and employee benefit and stock plans			14,638			3,354
Cash dividends paid to shareowners			(12,461	)		(12,489	)
Other			(1,261	)		(514	)

Net cash flow (used for) provided by financing activities			(53,806	)		142,087

Effect of exchange rate changes on cash and equivalents			4,459			2,761

CASH AND EQUIVALENTS
Net (decrease) increase in cash and equivalents			(7	)		7,770
Cash and equivalents, beginning of year			15,093			10,385

Cash and equivalents, end of period		$	15,086		$	18,155

SUPPLEMENTAL DISCLOSURES
Interest paid		$	12,422		$	16,499
Income taxes paid (refunded)			20,631			(1,831	)
Contribution of stock to employee defined contribution benefit plans			3,913			997
Changes in fair value of interest rate swaps			(5,771	)		18,822

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 six months ended December 31, 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 the restricted stock grants 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 and six months would be reduced to the pro forma amounts indicated below:

- 4 -

KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


	Three Months Ended						Six Months Ended
	December 31,						December 31,

	2003			2002			2003			2002

Net income, as reported	$	10,892		$	2,470		$	19,656		$	13,299
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(1,371	)		(1,629	)		(2,799	)		(2,992	)
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	$	(1,371	)	$	(1,629	)	$	(2,799	)	$	(2,834	)
Pro forma net income	$	9,521		$	841		$	16,857		$	10,465
Basic earnings per share:

Table of Contents

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Table of Contents

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 six months ended December 31, 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 the restricted stock grants 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 and six months would be reduced to the pro forma amounts indicated below: