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 MARCH 31, 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 APRIL 30, 1995
- ---------------------------------------- -------------------------------
Capital Stock, par value $1.25 per share 26,546,835
KENNAMETAL INC.
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1995
------------------------------------
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
- --------------------------------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 1995 and June 30, 1994
Condensed Consolidated Statements of Income (Unaudited)
Three months and nine months ended March 31, 1995 and 1994
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended March 31, 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 6. Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------
(Dollars in thousands)
March 31, June 30,
1995 1994
------------- ---------
ASSETS
- ------
Current Assets:
Cash and equivalents $ 16,360 $ 17,190
Accounts receivable, less allowance for
doubtful accounts of $12,398 and $9,328 178,312 143,691
Inventories 192,510 158,179
Deferred income taxes 12,561 13,744
--------- ---------
Total current assets 399,743 332,804
--------- ---------
Property, Plant and Equipment 497,456 467,652
Less: accumulated depreciation (245,114) (224,554)
--------- ---------
Net property, plant and equipment 252,342 243,098
--------- ---------
Other Assets:
Investments in affiliated companies 6,684 6,393
Intangible assets, less accumulated
amortization of $18,563 and $16,540 31,794 32,141
Deferred income taxes 68,950 65,606
Other 20,258 17,490
--------- ---------
Total other assets 127,686 121,630
--------- ---------
Total assets $ 779,771 $ 697,532
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of term debt
and capital leases $ 4,521 $ 4,364
Notes payable to banks 70,843 52,753
Accounts payable 54,307 52,148
Accrued vacation pay 17,332 15,569
Other 72,564 77,193
--------- ---------
Total current liabilities 219,567 202,027
--------- ---------
Term Debt and Capital Leases,
Less Current Maturities 93,737 90,178
Postretirement Benefits Other Than Pensions 34,342 33,752
Deferred Income Taxes 20,723 19,279
Other Liabilities 22,743 18,048
--------- ---------
Total liabilities 391,112 363,284
--------- ---------
Minority Interest 12,250 11,412
Shareholders' Equity:
Capital stock, $1.25 par value;
70,000,000 shares authorized;
29,369,658 shares issued 36,712 36,712
Preferred stock, 5,000,000 shares
authorized; none issued - -
Additional paid-in capital 85,417 83,839
Retained earnings 278,219 245,428
Treasury shares, at cost (2,824,459 and
3,015,466 shares) (36,915) (39,247)
Pension liability adjustment (536) (536)
Cumulative translation adjustments 13,512 (3,360)
--------- ---------
Total shareholders' equity 376,409 322,836
--------- ---------
Total liabilities and shareholders' equity $ 779,771 $ 697,532
========= =========
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
------------------ ------------------
March 31, March 31,
1995 1994 1995 1994
-------- -------- -------- --------
NET SALES $268,064 $211,809 $717,237 $582,641
COSTS AND EXPENSES:
Cost of goods sold 148,839 123,380 412,604 347,281
Research and development 4,695 3,080 13,477 10,670
Marketing 56,743 49,183 159,847 139,397
General and administrative 14,954 14,249 41,396 43,921
Interest expense 3,136 3,099 9,602 10,786
Amortization of intangibles 363 1,012 1,891 2,971
Restructuring charge - - - 24,749
-------- -------- -------- --------
Total costs and expenses 228,730 194,003 638,817 579,775
-------- -------- -------- --------
OTHER INCOME (EXPENSE) (784) 784 (829) 2,259
-------- -------- -------- --------
INCOME BEFORE TAXES ON INCOME AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES 38,550 18,590 77,591 5,125
PROVISION FOR INCOME TAXES 16,400 7,500 32,900 7,997
-------- ------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGES 22,150 11,090 44,691 (2,872)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES,
NET OF INCOME TAXES:
Postretirement benefits - - - (20,060)
Income taxes - - - 5,057
-------- -------- -------- --------
NET INCOME (LOSS) $ 22,150 $ 11,090 $ 44,691 $(17,875)
======== ======== ======== ========
AVERAGE SHARES OUTSTANDING
(in thousands) 26,524 26,222 26,463 23,692
======== ======== ======== ========
PER SHARE DATA:
Earnings (loss) before cumulative
effect of accounting changes $ 0.84 $ 0.43 $ 1.69 $ (0.12)
Cumulative effect of accounting changes:
Postretirement benefits - - - (0.84)
Income taxes - - - 0.21
-------- -------- -------- --------
Earnings (loss) per share $ 0.84 $ 0.43 $ 1.69 $ (0.75)
======== ======== ======== ========
Dividends per share $ 0.15 $ 0.145 $ 0.45 $ 0.435
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
(Dollars in thousands)
Nine Months Ended
------------------
March 31,
1995 1994
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ 44,691 $(17,875)
Adjustments for non-cash items 38,274 48,877
Changes in certain assets and liabilities (60,371) (12,640)
-------- --------
Net cash flow from operating activities 22,594 18,362
-------- --------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (27,323) (21,111)
Purchase of Hertel AG, net of cash - (19,226)
Other (385) 4,949
-------- --------
Net cash flow used for investing activities (27,708) (35,388)
-------- --------
FINANCING ACTIVITIES:
Increase in short-term debt 11,093 11,636
Increase in term debt 5,206 3,938
Reduction in term debt (4,791) (62,144)
Net proceeds from issuance of common stock - 73,692
Dividend reinvestment and employee stock plans 3,910 8,126
Cash dividends paid to shareholders (11,901) (10,196)
Other - 210
-------- --------
Net cash flow from financing activities 3,517 25,262
-------- --------
Effect of exchange rate changes on cash 767 1,044
-------- --------
CASH AND EQUIVALENTS:
Net increase (decrease) in cash and equivalents (830) 9,280
Cash and equivalents, beginning 17,190 4,149
-------- --------
Cash and equivalents, ending $ 16,360 $ 13,429
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 8,285 $ 8,440
Income taxes paid $ 18,707 $ 7,752
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
1. The condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements included
in the company's 1994 Annual Report. The condensed consolidated balance
sheet as of June 30, 1994 has been derived from the audited balance
sheet included in the company's 1994 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
nine months ended March 31, 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 60 percent of total
inventories at March 31, 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 (dollars in thousands):
March 31, June 30,
1995 1994
------------- ---------
Finished goods $135,594 $112,202
Work in process and powder blends 67,896 54,831
Raw materials and supplies 28,085 20,571
-------- --------
Inventory at current cost 231,575 187,604
Less LIFO valuation (39,065) (29,425)
-------- --------
Total inventories $192,510 $158,179
======== ========
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 or financial position of the
company.
The company maintains a Corporate Environmental, Health and Safety
(EH&S) Department to effect 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. On August 4, 1993, the company completed the acquisition of an 81
percent interest in Hertel AG (Hertel) for $43 million in cash and $55
million of assumed debt. Hertel is a manufacturer of cemented carbide
tools and tooling systems based in Furth, Germany.
The Hertel acquisition was recorded under the purchase method of
accounting and, accordingly, the results of operations of Hertel for the
period beginning as of August 4, 1993, forward are included in the
accompanying condensed consolidated financial statements. The purchase
price has been allocated to assets acquired and liabilities assumed
based on fair market value at the date of acquisition. The excess of
the purchase price over the fair market value of the net assets acquired
has been recorded as goodwill and is being amortized over twenty years.
The fair values (as adjusted) of assets acquired and liabilities assumed
are summarized below (in thousands):
Current assets $114,800
Property, plant and equipment 70,200
Intangible assets (goodwill) 5,800
Deferred tax asset 40,600
Other noncurrent assets 12,400
Current liabilities 104,700
Long-term liabilities 89,400
As presented above, current liabilities includes a reserve of
approximately $36.0 million (pretax) for the restructuring of Hertel.
The restructuring costs primarily include amounts for severance, phase-
out and relocation. The cumulative charges to the restructuring reserve
total $27.3 million, leaving a balance of $10.9 million at March 31,
1995. It is expected that the restructuring, which began in fiscal
1994, will be substantially completed during fiscal year 1995.
Since January 1, 1994, the company has purchased an additional
37,000 shares of Hertel at a purchase price of DM128 per share.
The company's ownership interest in Hertel as of March 31, 1995 was
85 percent.
In connection with the acquisition of Hertel, the company recognized a
special charge in the September 1993 quarter of approximately $20.4
million after taxes in connection with the closure of its manufacturing
facility in Neunkirchen, Germany, and other integration related actions.
The cumulative charges to the related reserve total $20.0 million, a
significant portion of which were cash charges, leaving a balance of
$4.4 million at March 31, 1995. It is expected that spending
related to this charge will be substantially completed during fiscal
year 1995.
The effect of the purchase on the company's operations, assuming the
transaction had occurred on July 1, 1992, would be as follows:
Pro Forma (Unaudited)
(Dollars in Thousands, Except Per Share Data)
---------------------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, March 31,
1995 1994 1995 1994
-------- -------- -------- -----------
(Actual) (Actual) (Actual) (Pro Forma)
Net sales $268,064 $211,809 $717,237 $595,323
======== ======== ======== ========
Income (loss) before cumulative
effect of accounting changes $ 22,150 $ 11,090 $ 44,691 $ (4,651)
======== ======== ======== ========
Net income (loss) $ 22,150 $ 11,090 $ 44,691 $(19,654)
======== ======== ======== ========
Per share data:
Earnings (loss) before cumulative
effect of accounting changes $ 0.84 $ 0.43 $ 1.69 $ (0.20)
Cumulative effect of accounting changes:
Postretirement benefits - - - (0.84)
Income taxes - - - 0.21
-------- -------- -------- --------
Earnings (loss) per share $ 0.84 $ 0.43 $ 1.69 $ (0.83)
======== ======== ======== ========
The pro forma financial information presented above does not purport to
present what the company's results of operations would actually have
been if the acquisition of Hertel had occurred on July 1, 1992, or to
project the company's results of operations for any future period.
6. Effective July 1, 1993, the company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
The company provides varying levels of postretirement health care and
life insurance benefits to most U.S. employees who retire from active
service after having attained age 55 and 10 years of service. This plan
remains in effect for all current retirees and employees who will retire
prior to January 1, 1997. However, for those employees retiring on or
after January 1, 1997, the following plan amendments will be effective.
The company's retiree health care payments will be capped at 1996
levels. To qualify for medical benefits at normal retirement (age 65 or
later), employees must have a minimum of 5 years of service after age
40. Medical benefits will be available for only those retirements that
begin on or after the normal retirement age of 65.
The following table presents the components of the company's liability
for future retiree health care and life insurance benefits as of June
30, 1994 and July 1, 1993.
(Dollars in thousands)
June 30, July 1,
1994 1993
--------- --------
Accumulated postretirement benefit obligations:
Retirees $(14,800) $(15,100)
Fully eligible active participants (8,000) (7,600)
Other active participants (13,000) (11,300)
-------- --------
Total obligation $(35,800) $(34,000)
Assets at fair value - -
-------- --------
Accrued postretirement benefit cost $(35,800) $(34,000)
======== ========
As of March 31, 1995, the company's accrued postretirement benefit
liability was $36.9 million.
The components of retiree health care cost for the three and nine month
periods ended March 31, 1995 were as follows:
(Dollars in thousands)
Three months Nine months
Ended March 31 Ended March 31,
1995 1995
----------------- ------------------
Service cost $ 300 $ 900
Interest cost 725 2,175
------ ------
Total cost $1,025 $3,075
====== ======
The discount rate used in calculating the accumulated postretirement
benefit obligations was 8.5 percent. In determining the accumulated
postretirement benefit obligations at July 1, 1993 and June 30, 1994,
the assumed rates of increase in health care were 15 percent for
retirees under age 65 and 10 percent for persons age 65 and older.
These rates are assumed to decrease to varying degrees annually to
6 percent for years 2002 and thereafter. A 1 percent increase in the
trend rate would increase both the accumulated postretirement benefit
obligation at June 30, 1994 and the total cost of the plan for the
third quarter of fiscal year 1995 by approximately 8 percent. The
accumulated postretirement benefit obligation is unfunded.
Effective July 1, 1994, the company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." Under the new standard, the
company must recognize the obligation to provide benefits to former or
inactive employees after employment, but before retirement. The
implementation of the new standard did not have a material impact on the
results of operations or financial position of the company.
7. Effective July 1, 1993, the company adopted SFAS No. 109, "Accounting
for Income Taxes." The company previously accounted for income taxes
pursuant to the provisions of APB No. 11. The new standard requires the
use of the liability method to recognize deferred income tax assets and
liabilities using enacted tax rates. As a result of implementing the
change in accounting principle, a net deferred tax liability of $5.6
million was recognized relating to net operating loss carryforwards and
other tax attributes existing as of July 1, 1993. In addition, the
income tax effect of the new method of accounting related to the
company's adoption of SFAS No. 106 as of July 1, 1993 was the
recognition of additional deferred tax assets of $13.9 million. The
combined effect of these items resulted in the recognition of an $8.3
million net deferred tax asset and a net income tax benefit of $5.1
million.
As a component of its cumulative adjustment from implementing SFAS No.
109, the company recognized a charge of $1.1 million to establish a
valuation reserve related to certain tax attributes comprising its net
deferred tax asset. As of July 1, 1993, deferred tax liabilities
associated with existing taxable temporary differences exceeded deferred
tax assets from future deductible temporary differences, excluding those
attributable to SFAS No. 106, by approximately $5.7 million. The
recognition by the company as of July 1, 1993, of the entire transition
obligation related to adopting the provisions of SFAS No. 106 resulted
in the recognition of a $13.9 million deferred tax asset. Future
operating costs under SFAS No. 106 are expected to exceed deductible
amounts for income tax purposes for many years. In addition, under
current federal tax regulations, should the company incur tax losses in
future periods, such losses may be carried forward to offset taxable
income for a period of up to 15 years. Based upon the length of the
period during which the SFAS No. 106-generated deferred tax asset can be
utilized, the company believes that it is more likely than not that
future taxable income will be sufficient to offset fully these future
deductions and a valuation allowance for this deferred tax asset is not
necessary.
At June 30, 1994, the company had unused tax benefits of $50.8 million
related to non-U.S. net operating loss (NOL) carryforwards for income
tax purposes, of which $46.7 million can be carried forward indefinitely
with the balance expiring at various dates through 2001. A significant
portion ($46.7 million) of the unused tax benefits relate to the Federal
Republic of Germany.
The company believes that it is more likely than not that $45.1 million
of NOL carryforwards will be utilized in future periods. The recorded
tax benefits are expected to be realized by achieving future profitable
operations in Germany. The German NOL carryforwards can be carried
forward indefinitely.
8. On January 3, 1995, the company acquired Adaptive Technologies
Corporation (ATC) for approximately $2.8 million. ATC is a
manufacturer of steel toolholding devices based in Michigan. The ATC
acquisition will be accounted for under the purchase method and,
accordingly, the results of operations of ATC for the period beginning
as of January 4, 1995, forward will be included in the company's
consolidated financial statements.
On February 1, 1995, the company acquired Grupo Tecnico de Herramientas
S.A. de C.V. (GTH) for approximately $1 million. GTH is a distributor
of metalcutting tools and supplies based in Mexico. The GTH acquisition
will be accounted for under the purchase method and, accordingly, the
results of operations of GTH for the period beginning as of February 2,
1995, forward will be included in the company's consolidated financial
statements.
9. On May 8, 1995, management initiated a plan to integrate Hertel Cutting
Technologies Inc. into the Metalworking Systems Division of Kennametal
Inc. The integration is expected to result in operational efficiencies
and cost savings. Management does not expect that the implementation of
the plan will have a significant effect on the results of operations or
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, 1994 and March 31, 1995. The ratio of current
assets to current liabilities was 1.8 as of March 31, 1995 as compared with
1.6 as of June 30, 1994. The debt to capital ratio (i.e., total debt divided
by the sum of total debt and shareholders' equity) was 31 percent as of March
31, 1995 unchanged from June 30, 1994.
In the September 1993 quarter, the company recorded cumulative effect charges
aggregating $15 million after taxes for the adoption of SFAS No. 106 and SFAS
No. 109. While these charges did not involve the use of cash, they had a
significant effect on various components of the company's consolidated
financial position at June 30, 1994.
Capital expenditures are estimated to be $40-45 million in fiscal year 1995.
Expenditures are being made to modernize facilities and upgrade machinery and
equipment. Capital expenditures are being financed with cash from operations
and borrowings under existing revolving credit agreements with banks.
RESULTS OF OPERATIONS
SALES AND EARNINGS
During the quarter ended March 31, 1995, consolidated sales were $268 million,
up 27 percent from $212 million in the same quarter last year.
Net income for the March 1995 quarter was $22.2 million, or $0.84 per share,
as compared with $11.1 million, or $0.43 per share last year.
During the nine month period ended March 31, 1995, consolidated sales were
$717 million, up 23 percent from $583 million last year. The prior year sales
include only eight months of Kennametal Hertel AG (Hertel) revenues. Hertel
is a German toolmaker acquired by Kennametal in August 1993.
For the nine month period, net income was $44.7 million, or $1.69 per share,
as compared with a net loss of $17.9 million, or $0.75 per share in the same
period last year. The net loss reported in the prior year includes the
unfavorable cumulative noncash effect of adopting Statement of Financial
Accounting Standards (SFAS) No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ($20.1 million net of income tax effect) and the
favorable cumulative noncash effect of adopting SFAS No. 109 "Accounting for
Income Taxes" ($5.1 million). In addition to the cumulative effect of changes
in accounting principles, prior year results included a restructuring charge
of $20.4 million after taxes.
The following table presents the company's sales by product class and
geographic area (dollars in thousands):
Three Months Ended March 31, Nine Months Ended March 31,
------------------------------- -----------------------------
1995 1994 % Change 1995 1994 % Change
--------- -------- -------- -------- --------- --------
Sales by Product Class:
Metalworking $235,134 $180,412 30.3 $616,352 $491,524 25.4
Mining and construction 25,006 25,293 (1.1) 78,780 73,865 6.7
Metallurgical 7,924 6,104 29.8 22,105 17,252 28.1
-------- -------- -------- --------
Net sales $268,064 $211,809 26.6 $717,237 $582,641 23.1
======== ======== ======== ========
Sales by Geographic Area:
Within the U.S. $164,605 $134,777 22.1 $446,504 $377,112 18.4
Foreign and export 103,459 77,032 34.3 270,733 205,529 31.7
-------- -------- -------- --------
Net sales $268,064 $211,809 26.6 $717,237 $582,641 23.1
======== ======== ======== ========
METALWORKING PRODUCTS
During the March 1995 quarter, worldwide sales of metalworking products
increased 30 percent from those of the prior year.
In the United States, sales of metalcutting inserts and toolholding devices
increased 21 percent. Total sales of industrial supply products increased 31
percent as a result of increased sales through mail order catalogs and full
service supply programs.
International sales of metalworking products increased 42 percent from the
previous year primarily because of higher sales volume in Europe and Canada
and favorable foreign currency translation effects. Excluding currency
translation effects, international metalworking sales increased an estimated
26 percent.
For the nine month period, worldwide sales of metalworking products increased
25 percent from the prior year because of increased sales of metalworking
products in the United States and Europe, the impact of the acquisition of
Hertel and favorable foreign currency translation effects. Excluding foreign
currency translation effects, international sales of metalworking products
increased 26 percent from last year. The prior year sales include only eight
months of Hertel revenues.
MINING AND CONSTRUCTION PRODUCTS
During the March 1995 quarter, sales of mining and construction tools
decreased one percent from the previous year because of weak international
demand for highway construction and mining tools. Domestic demand for highway
construction and mining tools remains fairly strong, with sales increasing
seven percent when compared to the prior year.
For the nine month period, sales of mining and construction tools increased
seven percent from the prior year primarily because of strong domestic demand
for highway construction and mining tools.
METALLURGICAL PRODUCTS
During the March 1995 quarter, sales of metallurgical products increased 30
percent from the previous year primarily because of strong international
demand for carbide powders.
For the nine month period, sales of metallurgical products rose 28 percent
primarily because of strong international demand for carbide powders.
GROSS PROFIT MARGIN
As a percentage of sales, the gross profit margin for the March 1995 quarter
was 44.5 percent as compared with 41.7 percent in the prior year. The gross
profit margin benefited from a favorable sales mix and increased manufacturing
efficiencies. However, these benefits were partially offset by higher raw
material costs.
For the nine month period, the gross profit margin was 42.5 percent, up from
40.4 percent last year. The gross profit margin was favorably affected by
sales mix and increased manufacturing efficiencies. However, these benefits
were partially offset by higher raw material costs.
OPERATING EXPENSES
For the quarter ended March 31, 1995, research and development, marketing and
general and administrative expenses increased 15 percent as a result of higher
sales volume and unfavorable foreign currency translation effects.
As a percentage of sales, operating expenses were 28.5 percent for the quarter
ended March 31, 1995, as compared with 31.4 percent for the same period last
year. The operating expense ratio decreased as a result of the containment of
general and administrative expenses combined with the increase in consolidated
sales.
For the nine month period, as a percentage of sales, operating expenses were
29.9 percent, as compared with 33.3 percent in the same period last year. The
operating expense ratio decreased as a result of the decrease in general and
administrative expenses combined with the increase in consolidated sales.
INTEREST EXPENSE
Interest expense was $3.1 million and $9.6 million for the quarter and nine
months ended March 31, 1995, respectively, as compared with $3.1 million and
$10.8 million, respectively, for the same periods last year. The decrease in
the nine month period was primarily due to the lower amount of debt
outstanding during the periods. As of March 31, 1995 approximately 43 percent
of the company's total debt was subject to variable interest rates.
INCOME TAXES
For the quarter ended March 31, 1995, the effective tax rate was 42.5 percent
as compared with 40.3 percent in the same period last year.
For the nine month period ended March 31, 1995, the effective tax rate was
42.4 percent. Excluding the effects of the accounting changes and the
restructuring charge, the effective tax rate for the comparable prior year
period was 41.6 percent.
OUTLOOK
In looking to the fourth quarter ending June 30, 1995, management expects
consolidated sales to increase from the $220 million achieved in the same
quarter last year. Sales of metalworking products in the United States should
continue to benefit from favorable economic conditions and catalog sales.
International sales are expected to continue to grow as the German economy
expands. Sales of mining and construction tools should grow as a result of
increased domestic demand for highway construction tools.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in footnote 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(c) of the company's Form 10-K for the year
ended June 30, 1994, 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, this litigation will not have a materially adverse effect on the
results of operations or financial position of the company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule for the nine months ended
March 31, 1995, submitted to the Securities
and Exchange Commission in electronic format.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1995.
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: May 12, 1995 By: /s/ RICHARD J. ORWIG
---------------------
Richard J. Orwig
Vice President
Chief Financial and Administrative Officer
5
1,000
9-MOS
JUN-30-1995
JUL-01-1994
MAR-31-1995
16,360
0
190,710
12,398
192,510
399,743
497,456
245,114
779,771
219,567
0
36,712
0
0
339,697
779,771
717,237
717,237
412,604
638,817
829
0
9,602
77,591
32,900
44,691
0
0
0
44,691
1.69
1.69
