1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (date of earliest event reported): November 17, 1997
KENNAMETAL INC.
(Exact name of registrant as specified in charter)
PENNSYLVANIA 1-5318 25-0900168
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
Route 981 South at Westmoreland County Airport
Latrobe, Pennsylvania 15650
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (412) 539-5000
2
EXPLANATORY NOTE
This Current Report on Form 8-K/A amends and restates in its entirety Item
7 of the Current Report on Form 8-K of Kennametal Inc. (the "Company") dated
November 17, 1997 and filed with the Securities and Exchange Commission on
November 20, 1997.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired.
The financial statements of the acquired business of Greenfield Industries,
Inc. ("Greenfield") for the periods required by Rule 3-05(b) of Regulation
S-X are attached hereto as Annex A.
(b) Pro Forma Financial Information.
The pro forma financial information of the Company required pursuant to
Article 11 of Regulation S-X is attached hereto as Annex B.
(c) Exhibits.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of October 10, 1997, among the
Company, Kennametal Acquisition Corp., and Greenfield (incorporated
herein by reference to Exhibit (a)(1) to the Company's Schedule 14D-1
dated October 17, 1997, as amended).
10.1 Credit Agreement, dated as of November 17, 1997, by and among the
Company, as Borrower, the Lender Parties named therein, and Mellon
Bank, N.A., as Administrative Agent (incorporated herein by reference
to Exhibit (b)(2) to the Company's Schedule 14D-1 dated October 17,
1997, as amended).
10.2 Guaranty and Suretyship Agreement, dated as of November 17, 1997, made
by the Subsidiary Guarantor named therein in favor of Mellon Bank,
N.A., as Collateral Agent, as supplemented by the Additional
Subsidiary Guarantor Supplement, dated as of November 18, 1997, made
by Greenfield (incorporated herein by reference to Exhibit (b)(3) to
the Company's Schedule 14D-1, as amended, and Exhibit 10.2 of
Greenfield's Current Report on Form 8-K dated November 17, 1997,
respectively).
10.3 Borrower Pledge Agreement, dated as of November 17, 1997, made by the
Company, as Grantor, in favor of Mellon Bank, N.A., as Collateral
Agent, as supplemented by the Additional Designated Collateral
Supplement, dated November 18, 1997, made by the Company (incorporated
herein by reference to Exhibit (b)(4) of the Company's Schedule 14D-1,
as amended, and Exhibit 10.5 of Greenfield's Current Report on Form
8-K dated November 17, 1997, respectively).
10.4 Subsidiary Pledge Agreement, dated as of November 18, 1997, made by
Greenfield, as Grantor, in favor of Mellon Bank, N.A., as Collateral
Agent (incorporated herein by reference to Exhibit 10.3 of
Greenfield's Current Report on Form 8-K dated November 17, 1997).
23.1 Consent of Price Waterhouse LLP*
99.1 Text of Press Release, dated November 17, 1997, by the Company
(incorporated herein by reference to Exhibit (a)(12) to the Company's
Schedule 14D-1 dated October 17, 1997, as amended).
- ---------------------------
* Filed herewith.
3
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 hereunto duly authorized.
Dated: December 31, 1997
KENNAMETAL INC.
By: /s/ RICHARD J. ORWIG
-------------------------
Name: Richard J. Orwig
Title: Vice President,
Chief Financial and Administrative Officer
4
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger, dated as of October 10, 1997, among the
Company, Kennametal Acquisition Corp., and Greenfield (incorporated
herein by reference to Exhibit (c)(1) to the Company's Schedule 14D-1
dated October 17, 1997, as amended).
10.1 Credit Agreement, dated as of November 17, 1997, by and among the
Company, as Borrower, the Lender Parties named therein, and Mellon
Bank, N.A., as Administrative Agent (incorporated herein by reference
to Exhibit (b)(2) to the Company's Schedule 14D-1 dated October 17,
1997, as amended).
10.2 Guaranty and Suretyship Agreement, dated as of November 17, 1997, made
by the Subsidiary Guarantor named therein in favor of Mellon Bank,
N.A., as Collateral Agent, as supplemented by the Additional
Subsidiary Guarantor Supplement, dated as of November 18, 1997, made
by Greenfield (incorporated herein by reference to Exhibit (b)(3) to
the Company's Schedule 14D-1, as amended, and Exhibit 10.2 of
Greenfield's Current Report on Form 8-K dated November 17, 1997,
respectively).
10.3 Borrower Pledge Agreement, dated as of November 17, 1997, made by the
Company, as Grantor, in favor of Mellon Bank, N.A., as Collateral
Agent, as supplemented by the Additional Designated Collateral
Supplement, dated November 18, 1997, made by the Company (incorporated
herein by reference to Exhibit (b)(4) of the Company's Schedule 14D-1,
as amended, and Exhibit 10.5 of Greenfield's Current Report on Form
8-K dated November 17, 1997, respectively).
10.4 Subsidiary Pledge Agreement, dated as of November 18, 1997, made by
Greenfield, as Grantor, in favor of Mellon Bank, N.A., as Collateral
Agent (incorporated herein by reference to Exhibit 10.3 of
Greenfield's Current Report on Form 8-K dated November 17, 1997).
23.1 Consent of Price Waterhouse LLP.
99.1 Text of Press Release, dated November 17, 1997, by Kennametal Inc.
(incorporated herein by reference to Exhibit (a)(12) to the Company's
Schedule 14D-1 dated October 17, 1997, as amended).
5
ANNEX A
6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Greenfield Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Greenfield Industries, Inc. and its subsidiaries at December 31,
1995 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
St. Louis, Missouri
January 30, 1997
7
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Net sales.................................... $271,787 $420,188 $510,094 $384,089 $419,480
Cost of sales................................ 180,974 288,158 357,203 266,835 295,167
-------- -------- -------- -------- --------
Gross profit................................. 90,813 132,030 152,891 117,254 124,313
Selling, general and administrative
expenses................................... 50,229 70,952 88,944 66,367 77,777
Restructuring costs.......................... 1,300 -- 4,000 4,000 --
-------- -------- -------- -------- --------
Operating income............................. 39,284 61,078 59,947 46,887 46,536
Interest expense............................. 3,169 8,223 11,049 8,729 9,699
Dividends at 6% per annum on
Company-obligated, mandatorily redeemable
convertible preferred securities of subsidiary
Greenfield Capital Trust holding solely
convertible subordinated debentures
of the Company............................. -- -- 4,734 3,009 5,175
-------- -------- -------- -------- --------
Income before provision for income taxes..... 36,115 52,855 44,164 35,149 31,662
Provision for income taxes................... 14,106 21,390 17,975 14,264 13,003
-------- -------- -------- -------- --------
Net income................................... $ 22,009 $ 31,465 $ 26,189 $ 20,885 $ 18,659
======== ======== ======== ======== ========
Earnings per common share:
Primary.................................... $ 1.35 $ 1.94 $ 1.60 $ 1.28 $ 1.14
Fully diluted(1)........................... $ -- $ -- $ 1.59 $ 1.25 $ 1.13
Weighted average common and common
equivalent shares outstanding:
Primary.................................... 16,250 16,252 16,328 16,313 16,404
Fully diluted(1)........................... -- -- 18,247 17,941 19,192
Dividends per common share................... $ 0.09 $ 0.13 $ 0.17 $ 0.12 $ 0.15
- ----------
(1) For the years ended December 31, 1994 and 1995, there was no dilutive
effect.
See accompanying Notes to Consolidated Financial Statements.
8
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ASSETS
Current assets:
Cash............................................ $ 5,258 $ 1,721 $ --
Accounts receivable, net........................ 63,618 83,199 98,100
Inventories, net................................ 109,769 152,659 182,524
Prepaid expenses and other...................... 4,069 8,034 5,875
-------- -------- --------
Total current assets......................... 182,714 245,613 286,499
Property, plant and equipment, net................ 109,022 144,300 169,179
Goodwill, net..................................... 98,795 169,958 180,187
Other assets, net................................. 7,932 2,773 2,302
-------- -------- --------
$398,463 $562,644 $638,167
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............... $ 633 $ 513 $ 6,632
Accounts payable................................ 24,586 22,392 31,026
Accrued liabilities............................. 33,688 35,411 41,561
-------- -------- --------
Total current liabilities.................... 58,907 58,316 79,219
Long-term debt.................................... 140,198 162,625 197,734
Deferred taxes.................................... 4,207 9,524 10,302
Other long-term liabilities....................... 15,891 16,451 18,891
-------- -------- --------
Total liabilities............................ 219,203 246,916 306,146
-------- -------- --------
Commitments and contingencies (Note 14)...........
Company-obligated, mandatorily redeemable
convertible preferred securities of
subsidiary Greenfield Capital Trust holding
solely convertible subordinated debentures
of the Company.................................. -- 115,000 115,000
-------- -------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 1,500,000 shares
authorized, no shares issued
and outstanding...............................
Common stock, $.01 par value, 100,000,000 shares
authorized, 16,260,377, 16,374,925
and 16,445,757 shares issued and
outstanding, respectively..................... 163 164 164
Additional paid-in capital and other............ 111,615 109,759 111,331
Retained earnings............................... 69,014 92,425 108,622
Cumulative translation adjustment............... (1,532) (1,620) (3,096)
-------- -------- --------
Total stockholders' equity................... 179,260 200,728 217,021
-------- -------- --------
$398,463 $562,644 $638,167
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
9
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ADDITIONAL CUMULATIVE
COMMON PAID-IN CAPITAL RETAINED TRANSLATION
STOCK AND OTHER EARNINGS ADJUSTMENT TOTAL
------ --------------- -------- ----------- --------
(IN THOUSANDS)
Balance, December 31, 1993....... $ 159 $ 107,338 $ 19,075 $ (862) $125,710
Net income....................... -- -- 22,009 -- 22,009
Exercise of stock options and tax
benefits relating thereto...... 1 1,288 -- -- 1,289
Dividends declared and paid...... -- -- (1,435) -- (1,435)
Partial repayment of stock
subscriptions receivable....... -- 128 -- -- 128
Cumulative translation adjustment -- -- -- 202 202
----- --------- -------- ------- --------
Balance, December 31, 1994....... 160 108,754 39,649 (660) 147,903
Net income....................... -- -- 31,465 -- 31,465
Exercise of stock options and tax
benefits relating thereto...... 3 3,520 -- -- 3,523
Dividends declared and paid...... -- -- (2,100) -- (2,100)
Additional minimum pension
liability...................... -- (783) -- -- (783)
Partial repayment of stock
subscriptions receivable....... -- 124 -- -- 124
Cumulative translation adjustment -- -- -- (872) (872)
----- --------- -------- ------- --------
Balance, December 31, 1995....... 163 111,615 69,014 (1,532) 179,260
Net income....................... -- -- 26,189 -- 26,189
Exercise of stock options and tax
benefits relating thereto...... 1 1,218 -- -- 1,219
Dividends declared and paid...... -- -- (2,778) -- (2,778)
Partial repayment of stock
subscriptions receivable and
other.......................... -- (115) -- -- (115)
Executive restricted stock awards -- 761 -- -- 761
Issuance costs of mandatorily
redeemable convertible
preferred securities............. -- (4,254) -- -- (4,254)
Additional minimum pension
liability........................ -- 534 -- -- 534
Cumulative translation adjustment -- -- -- (88) (88)
----- --------- -------- ------- --------
Balance, December 31, 1996....... 164 109,759 92,425 (1,620) 200,728
Net income (unaudited)........... -- -- 18,659 -- 18,659
Exercise of stock options and tax
benefits relating thereto
(unaudited).................... -- 753 -- -- 753
Dividends declared and paid
(unaudited).................... -- -- (2,462) -- (2,462)
Partial repayment of stock
subscriptions receivable
(unaudited).................... -- 133 -- -- 133
Executive restricted stock awards
(unaudited).................... -- 686 -- -- 686
Cumulative translation adjustment
(unaudited).................... -- -- -- (1,476) (1,476)
----- --------- -------- ------- --------
Balance, September 30, 1997
(unaudited).................... $ 164 $ 111,331 $108,622 $(3,096) $217,021
===== ========= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements.
10
GREENFIELD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1996 1997
-------- -------- --------- ---------- --------
(IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net income........................................ $ 22,009 $ 31,465 $ 26,189 $ 20,885 $ 18,659
Adjustments to reconcile net income to net cash
provided by (used in) operating activities,
excluding the effects of acquisitions:
Depreciation.................................... 9,305 11,319 14,259 10,967 13,423
Amortization.................................... 1,491 2,908 4,620 3,274 3,755
Deferred income taxes........................... 3,606 5,759 8,390 2,514 3,848
Tax benefits relating to stock options.......... 1,210 3,210 315 302 197
Other........................................... 664 (811) 1,356 (821) 1,625
Changes in operating assets and liabilities:
Accounts receivable, net...................... (3,859) (6,080) (7,126) (2,874) (7,683)
Inventories................................... (1,137) (21,452) (22,073) (17,242) (19,327)
Prepaid expenses and other.................... 3,251 (1,440) (2,639) (2,411) 2,479
Accounts payable.............................. 1,244 3,912 (9,513) (17,949) 306
Accrued liabilities........................... 2,641 (11,403) (11,620) (1,358) 1,282
-------- -------- --------- ---------- --------
Net cash provided by (used in) operating
activities................................ 40,425 17,387 2,158 (4,713) 18,564
-------- -------- --------- ---------- --------
Cash flows from investing activities:
Capital expenditures.............................. (13,141) (26,847) (29,185) (21,789) (26,189)
Proceeds from the sale of fixed assets............ 325 1,219 2,018 2,352 1,733
Purchase of businesses, net of cash acquired...... (73,639) (24,434) (111,183) (96,503) (33,725)
Investment in Rule................................ -- (5,611) -- -- --
-------- -------- --------- ---------- --------
Net cash used in investing activities....... (86,455) (55,673) (138,350) (115,940) (58,181)
-------- -------- --------- ---------- --------
Cash flows from financing activities:
Proceeds from borrowings.......................... 71,800 123,950 140,743 128,375 49,673
Payments on borrowings............................ (25,915) (82,148) (117,559) (116,660) (7,258)
Net proceeds from issuance of 6% Company-obligated,
mandatorily redeemable convertible preferred
securities of subsidiary Greenfield Capital
Trust holding solely convertible junior
subordinated debentures of the Company.......... -- -- 110,746 110,775 --
Dividends paid on common stock.................... (1,435) (2,100) (2,778) (1,959) (2,462)
Other............................................. (26) (299) 1,381 2,571 650
-------- -------- --------- ---------- --------
Net cash provided by financing activities... 44,424 39,403 132,533 123,102 40,603
-------- -------- --------- ---------- --------
Effect of exchange rate changes on cash............. (1,160) 145 122 (970) (2,707)
-------- -------- --------- ---------- --------
Net (decrease) increase in cash..................... (2,766) 1,262 (3,537) 1,479 (1,721)
-------- -------- --------- ---------- --------
Cash at beginning of period......................... 6,762 3,996 5,258 5,258 1,721
-------- -------- --------- ---------- --------
Cash at end of period............................... $ 3,996 $ 5,258 $ 1,721 $ 6,737 $ --
======== ======== ========= ========== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................ $ 2,643 $ 7,317 $ 10,937
Dividends on mandatorily redeemable convertible
preferred securities.......................... -- -- 4,734
Income taxes.................................... 7,699 16,797 18,601
Supplemental schedule of noncash investing and
financing activities:
Assets obtained under capital leases.............. 241 -- --
The Company purchased several companies as
detailed in Note 3 in 1994, 1995 and 1996.
In conjunction with the acquisitions, liabilities
were assumed as follows:
Fair value of assets acquired................. $ 56,284 $ 26,199 $ 59,370
Fair value assigned to goodwill............... 60,940 6,009 76,379
Cash paid..................................... (73,639) (24,434) (111,183)
-------- -------- ---------
Liabilities assumed........................... $ 43,585 $ 7,774 $ 24,566
======== ======== =========
See accompanying Notes to Consolidated Financial Statements.
11
GREENFIELD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BUSINESS
Greenfield Industries, Inc. (Greenfield or the Company) is a global
manufacturer of expendable products for material cutting, material removal and
wear applications used in various industries. The Company also manufactures a
limited number of products (primarily bilge pumps) for the marine industry. The
Company markets its products through six product groups which are as follows:
(1) industrial products, (2) engineered products, (3) energy and construction
products, (4) electronics products, (5) consumer products, and (6) marine
products. The majority of the Company's products are made from either high-speed
steel or tungsten carbide. The Company's largest concentration of business is in
North America but it sells its products throughout the world.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by the Company in the preparation of the consolidated
financial statements conform to generally accepted accounting principles, and
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual amounts could differ from these estimates.
The significant accounting policies followed by the Company are described
below.
REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized upon shipment
to the customer.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances are eliminated in consolidation.
INTERIM UNAUDITED FINANCIAL INFORMATION
The interim consolidated financial information at September 30, 1997 and
for the nine months ended September 30, 1996 and 1997 and related disclosures in
the notes herein (including Note 18) is unaudited. However, in the opinion of
management, such information has been prepared on the same basis as the audited
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results of operations for the periods presented. The interim results, however,
are not necessarily indicative of the results for any future period.
FOREIGN CURRENCY TRANSLATION
The accounts of the Company's foreign subsidiaries are maintained in their
respective local currencies. The accompanying consolidated financial statements
have been translated and adjusted to reflect U.S. dollars on the bases presented
below.
Assets and liabilities are translated into U.S. dollars at year-end
exchange rates. Income and expense items are translated at average rates of
exchange prevailing during the year. Adjustments resulting from the process of
translating the consolidated amounts into U.S. dollars are accumulated in a
separate translation adjustment account included in stockholders' equity. Common
stock and additional paid-in capital are translated at historical U.S. dollar
equivalents in effect at the date of acquisition. Foreign currency transaction
gains and losses are included in earnings currently. The Company recognized net
foreign currency transaction gains of $227, $540 and $599 for the years ended
December 31, 1994, 1995 and 1996, respectively.
12
CASH
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with an original maturity of three
months or less to be cash. Cash overdrafts, if any, on the Company's
disbursement accounts are included in the balances outstanding under the
Company's revolving credit facilities.
CONCENTRATION OF CREDIT RISK
The Company sells its products to distributors and end-users in the
industrial, energy and construction, electronics, engineered products, consumer
and marine markets. While most of the Company's business activity is with
customers located within North America, the Company also serves customers in
Europe and the Far East. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and historically such losses have been
within management's expectations. At December 31, 1996, the Company had no
significant concentrations of credit risk.
RELATIONSHIPS WITH SUPPLIERS
The Company purchases tungsten carbide materials from multiple suppliers,
for which alternative suppliers also exist and are adequate. Although the
Company purchases the majority of its domestic high-speed steel requirements
from a single supplier, the Company believes that the supply of steel and the
number of alternative suppliers are adequate. The Company considers its
relationships with its primary suppliers to be strong.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method, for substantially all domestic
inventories. For various tax and statutory reasons, inventories of the Company's
foreign subsidiaries are stated at first-in, first-out (FIFO) cost. The effects
on the consolidated financial position and results of operations from applying
the FIFO method (versus the LIFO method) to certain inventories are immaterial.
If the FIFO method (which approximates replacement cost) had been used in
determining cost for all inventories, inventories would have been approximately
$5,181 and $5,675 higher at December 31, 1995 and 1996, respectively.
Inventories include the cost of materials, direct labor and manufacturing
overhead. Obsolete or unsaleable inventories are reflected at their estimated
net realizable values.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost and is depreciated using
the straight-line method over the estimated useful lives of the assets which
range from 3 to 40 years. Properties held under capital leases are recorded at
the present value of the noncancelable lease payments over the term of the lease
and are amortized over the shorter of the lease term or the estimated useful
lives of the assets. Expenditures for repairs, maintenance and renewals are
charged to income as incurred. Expenditures which improve an asset or extend its
estimated useful life are capitalized. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is included in income.
GOODWILL
The excess of the purchase price over the fair value of net assets acquired
in business combinations is capitalized and amortized on a straight-line basis
over the estimated period benefited. The amortization period for all
acquisitions to date is 40 years. Amortization expense for the years ended
December 31, 1994, 1995 and 1996 was approximately $1,221, $2,636 and $4,279,
respectively. Accumulated amortization at December 31, 1995 and 1996 was
approximately $7,592 and $11,849, respectively. The carrying value of goodwill
is assessed for recoverability by management based on current and anticipated
conditions, including expected cash flows and operating results generated by the
underlying tangible assets. Management believes that there has been no
impairment at December 31, 1996.
OTHER ASSETS
Other assets are primarily comprised of debt issuance and trademark costs.
At December 31, 1995, other assets also included an
13
investment in Rule Industries, Inc. stock as further described in Note 3. Debt
issuance costs are being amortized on a straight-line basis over the life of the
related obligation and trademarks are being amortized on a straight-line basis
over 40 years. Amortization expense for the years ended December 31, 1994, 1995
and 1996 was approximately $270, $272 and $341, respectively. Accumulated
amortization at December 31, 1995 and 1996 was $3,471 and $3,568, respectively.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS
109, the deferred tax provision is determined using the liability method,
whereby deferred tax assets and liabilities are recognized based upon temporary
differences between the financial statement and income tax bases of assets and
liabilities using presently enacted tax rates.
EARNINGS PER SHARE
Fully diluted earnings per share primarily reflect the effects of
conversion of the Company's mandatorily redeemable convertible preferred
securities and elimination of the related dividends, net of applicable income
taxes (see Note 5). Primary earnings per share is computed by dividing net
income available to common stockholders by the weighted average number of common
and common equivalent shares outstanding during the period. Options under the
Company's employee and directors stock option plans are not included as common
stock equivalents for earnings per share purposes since they did not have a
material dilutive effect.
ENVIRONMENTAL LIABILITIES
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and that do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the costs can be
reasonably estimated.
EMPLOYEE STOCK-BASED COMPENSATION
The Company accounts for employee stock options and variable stock awards
in accordance with Accounting Principles Board No. 25, "Accounting for Stock
Issued to Employees" (APB 25). Under APB 25, the Company applies the intrinsic
value method of accounting. For employee stock options accounted for using the
intrinsic value method, no compensation expense is recognized because the
options are granted with an exercise price equal to the market value of the
stock on the date of grant. For variable stock awards accounted for using the
intrinsic value method, compensation cost is estimated and recorded each period
from the date of grant to the measurement date based on the market value of the
stock at the end of each period.
During 1996, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), became effective for the
Company. FAS 123 prescribes the recognition of compensation expense based on the
fair value of options or stock awards determined on the date of grant. However,
FAS 123 allows companies to continue to apply the valuation methods set forth in
APB 25. For companies that continue to apply the valuation methods set forth in
APB 25, FAS 123 mandates certain pro forma disclosures as if the fair value
method had been utilized. See Note 12 for additional discussion.
3. ACQUISITIONS
The following table summarizes certain information regarding the Company's
acquisitions during the past three years:
NET CASH
DATE BUSINESS PURCHASE PRICE
---- -------- --------------
October 1994 Threads, Inc. and Hendersonville Industrial
Tool Co., Inc. $ 5,272
November 1994 The Cleveland Twist Drill Company (CTD) $45,867
November 1994 Carbidie Corporation (Carbidie) $22,500
January 1995 American Mine Tool Division of Valenite, Inc. $14,676
(AMT)
June 1995 Van Keuren, Inc. $ 2,500
December 1995 Cleveland Europe Limited $ 7,258
January 1996 Rule Industries, Inc. (Rule) $84,046
June 1996 Boride Products, Inc. $ 8,768
July 1996 Arkansas Cutting Tools, a division of
Production Carbide & Steel Company $ 4,872
December 1996 Bassett Rotary Tool Company $13,497
March 1997 Hanita Metal Works, Ltd $33,725
14
During the past three years, the Company has made several acquisitions
which have significantly expanded its product lines. These acquisitions were
each accounted for using the purchase method of accounting and financed
primarily through bank borrowings, resulting in an increase in the Company's
outstanding debt. Results of operations of each acquired company have been
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price of each acquisition was allocated to the assets
acquired and liabilities assumed based on their estimated fair value at the date
of acquisition. The excess of purchase price over the estimated fair value of
net assets acquired was, in each instance, recorded as goodwill. Except for
Rule, CTD and Carbidie, the pro forma effects, individually and collectively, of
the acquisitions on the Company's consolidated results of operations and
financial position are not material.
The following table sets forth pro forma information for the Company as if
the acquisitions of Rule, CTD and Carbidie had taken place on January 1, 1994
and the acquisition of Rule had taken place on January 1, 1995, respectively.
This information is unaudited and does not purport to represent actual revenue,
net income and earnings per share had the acquisitions actually occurred on
January 1, 1994 and 1995, respectively. The pro forma effects of Rule, had the
acquisition taken place on January 1, 1996, are not material.
PRO FORMA INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
1994 1995
-------- --------
Net sales....................... $419,662 $484,600
Net income...................... $ 24,917 $ 31,479
Primary earnings per common $ 1.53 $ 1.94
share...........................
In connection with a definitive merger agreement between Rule and the
Company, on September 11, 1995 Greenfield exercised its option to acquire
630,000 shares of Rule common stock for approximately $5,611, including
acquisition costs. The cost of the Rule common stock is reflected as other
assets on the December 31, 1995 consolidated balance sheet. On January 12, 1996,
Greenfield acquired the remaining outstanding shares of Rule common stock as
discussed further below.
In connection with the Company's acquisition of Rule in January 1996, the
Company recorded a restructuring reserve of $2,600 in purchase accounting
primarily related to the closing of two Rule facilities (including the corporate
office) and the involuntary termination of a substantial number of Rule
employees. Of the $2,600 reserve, $1,240 related to employee severance costs,
$346 related to the closure of the two facilities, and $1,014 related to other
nonrecurring costs associated with terminating certain Rule operations. This
restructuring has resulted in a reduction in personnel and the elimination of
certain duplicate functions. The employee severance costs related to the
reduction of approximately 62 employees from the acquisition date. Of the total
$2,600 reserve, substantially all of the costs had been paid as of December 31,
1996.
The Company, as part of the acquisition of CTD, recorded a restructuring
and plant consolidation liability of $10,480 in purchase accounting relating to
the consolidation of certain facilities of CTD into existing facilities of the
Company. The $10,480 liability included $8,430 in costs associated with plant
closures, $2,000 in severance pay and $50 in other costs. Substantially all of
these costs had been paid as of December 31, 1996.
On March 27, 1997, the Company acquired the outstanding shares of Hanita
Metal Works, Ltd., an Israeli-based company, and its U.S. subsidiary Hanita
Cutting Tools, Inc. (collectively, Hanita) for approximately $20,800 (including
cash acquired) and assumed indebtedness of approximately $14,600. Hanita, with
its primary manufacturing, sales and distribution operations in Israel, is a
leading manufacturer of high-quality, high performance end mills and other
cutting tools for the metalworking industry. Hanita also sells and distributes
products around the world, including the United States. The acquisition was
accounted for using the purchase method of accounting and was financed through
the Company's existing unsecured credit facility. For the year ended December
31, 1996, Hanita had net sales of approximately $27,000. The pro forma effects
of the acquisition on the Company's results of operations are not material. The
results of operations of Hanita are included in the Company's consolidated
financial statements from the date of acquisition.
15
4. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
-------- -------- --------
(UNAUDITED)
SENIOR NOTES PAYABLE TO INSTITUTIONAL INVESTORS:
Principal payable in annual installments of $10,715
commencing October 15, 1999 with a final payment of
$10,710 on October 15, 2005; interest payable
semi-annually at 7.31%; unsecured..................... $ 75,000 $ 75,000 $ 75,000
INDUSTRIAL REVENUE BONDS:
Principal due March 1, 2015; interest payable monthly at
4.3% at December 31, 1996; secured by related property
and equipment (repaid May 1997)....................... 4,178 5,602 --
Principal due August 1, 2015; interest payable monthly
at 4.5% at December 31, 1996; secured by related
property and equipment................................ 3,287 3,751 4,737
Principal due April 3, 2009; interest payable monthly at
3.85% at September 30, 1997; secured by related
property and equipment................................ -- -- 1,222
NOTES PAYABLE TO BANKS:
Principal due in annual installments of approximately $37;
interest payable semi-annually at 6.0%; secured by the
mortgage on the property of Kemmer AG, an indirect,
wholly-owned subsidiary............................... 1,802 1,334 1,036
Principal due in varying installments through 2001; interest
at rates ranging from 5.6% to 8.85%; secured by
property and equipment................................ -- 14 14,224
Foreign currency denominated notes due in varying
installments through 2001; interest at rates ranging
from 2% to 16.5%; secured by property and equipment... -- -- 2,445
REVOLVING CREDIT FACILITIES:
Multi-currency facility; payable in full on December 9, 2001;
interest payable quarterly at LIBOR plus a specified
percentage, or at a base rate as set forth within the
loan agreement. The interest rate under each option is
determined by the Company's ratio of total indebtedness
to cash flow (6.3% to 8.3% at December 31,
1996); unsecured
Domestic........................................... -- 60,500 89,600
Foreign currency................................... -- 15,930 15,407
Domestic facility (replaced in December 1996)........... 34,400 -- --
Foreign currency denominated facility (replaced in
December 1996)........................................ 20,709 -- --
CAPITAL LEASE OBLIGATIONS................................. 1,455 1,007 695
-------- -------- --------
140,831 163,138 204,366
Less current portion of long-term debt and amounts due
on demand, including $590, $462 and $316 of capital
lease obligations at December 31, 1995, and 1996
and at September 30, 1997, respectively............... (633) (513) (6,632)
-------- -------- --------
$140,198 $162,625 $197,734
======== ======== ========
On April 3, 1997, the Company issued $7,000 City of Pine Bluff, Arkansas
Tax-Exempt Adjustable Mode Industrial Development Revenue Bonds (Greenfield
Industries, Inc. Project), Series 1997 (Arkansas Bonds) to pay for the planned
equipment purchases for its facility in Pine Bluff, Arkansas. The Arkansas Bonds
mature on April 3, 2009 and bear interest at 3.8% at September 30, 1997. The
proceeds from the Arkansas Bonds are held in trust until needed for the
equipment purchases. Approximately $1,222 has been received from the Arkansas
Bonds as of September 30, 1997.
During December 1996, the Company replaced its existing foreign and
domestic unsecured revolving credit facilities. The new agreement provides for a
$130,000 multi-currency unsecured revolving facility and a $50,000 U.S. dollar
acquisition facility. The multi-currency revolving facility provides for loans
of up to DM 30,000 and Sterling 15,000. The facility requires commitment fees of
0.20% or 0.25% per annum (as determined by the Company's ratio of total
indebtedness to cash flow) payable quarterly on any unused portion of the multi-
currency facility. As of December 31, 1996 and September 30, 1997, interest on
borrowings under the
16
multi-currency facility ranged from 6.3% to 8.3% per annum and from 4.0% to 8.2%
per annum, respectively. At December 31, 1996 and September 30, 1997, there was
$53,570 and $24,993, respectively, available under the multi-currency facility
and $50,000 available under the acquisition facility.
On October 23, 1995, the Company completed the private placement of $75,000
of senior unsecured notes (Notes) with various institutional investors. The
Notes, bearing interest payable quarterly at 7.31%, are due in 2005 with equal
payments beginning in 1999. The proceeds from the Notes were used to refinance
existing indebtedness and for general corporate purposes.
On August 16, 1995, the Company, through CTD, issued $7,200 in City of
Solon, Ohio Industrial Development Revenue Bonds (The Cleveland Twist Drill
Company Project) Series 1995 (Ohio Bonds) to pay for the construction of a new
manufacturing facility in Solon, Ohio. The Ohio Bonds mature on August 1, 2015
and bear interest at 4.5% at December 31, 1996. The proceeds from the Ohio Bonds
are held in trust until needed for the construction. Approximately $3,751 has
been received from the Ohio Bonds as of December 31, 1996.
On March 31, 1995, the Company, in conjunction with the South Carolina
Jobs-Economic Development Authority, issued $7,200 in Tax-Exempt Adjustable Mode
Economic Development Revenue Bonds (South Carolina Bonds) to pay for the
expansion of its facility in Clemson, South Carolina. The South Carolina Bonds
mature on March 1, 2015 and bear interest at 4.3% at December 31, 1996. The
proceeds from the South Carolina Bonds are held in trust until needed for the
expansion. Approximately $5,602 has been received from the South Carolina Bonds
as of December 31, 1996. The South Carolina Bonds were repaid in May 1997.
On March 15, 1995, the Company amended its existing $20,000 unsecured
foreign credit facility. The amended agreement provided for a DM 21 million
unsecured credit facility and a Sterling 4.5 million unsecured credit facility.
In connection with the acquisition of Cleveland Europe Limited, during December
1995, the Company amended the unsecured foreign credit facility, increasing the
Sterling Facility to Sterling 9.5 million. As discussed above, this foreign
revolving credit facility was replaced in December 1996.
During November 1994, the Company amended its existing unsecured credit
facility. The amended agreement provided for a $110,000 domestic revolving
facility and a $20,000 acquisition facility. The facility required commitment
fees of 0.25% or 0.375% per annum (as determined by the Company's ratio of total
indebtedness to cash flow) payable quarterly on any unused portion of the
domestic and foreign revolving credit facilities. As discussed above, the
domestic revolving facility and the acquisition facility were replaced in
December 1996.
The financing agreements contain provisions which limit additional
borrowings and capital expenditures, require maintenance of certain debt to
capital and debt to cash flow ratios and net worth levels. At December 31, 1995
and 1996, and at September 30, 1997, the Company was in compliance with such
provisions.
At December 31, 1996, the minimum principal payments of long-term debt,
excluding capital lease obligations, for the five subsequent fiscal years are as
follows:
INDUSTRIAL REVOLVING
NOTES REVENUE CREDIT
PAYABLE BONDS FACILITY TOTAL
-------- ---------- --------- ----------
1997.............. $ 51 $ -- $ -- $ 51
1998.............. 37 -- -- 37
1999.............. 10,752 -- -- 10,752
2000.............. 10,752 -- -- 10,752
2001.............. 10,752 -- 76,430 87,182
2002 and 44,004 9,353 -- 53,357
-------- ------ -------- ---------
thereafter........
$ 76,348 $9,353 $ 76,430 $ 162,131
======== ====== ======== =========
The book value of long-term debt at December 31, 1996 approximates fair
value.
5. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
On April 24, 1996, the Company completed a private placement to
institutional investors of $115,000 of 6% Convertible Preferred Securities
(liquidation preference of $50 per Convertible Preferred Security). The
placement was made through the Company's
17
wholly-owned subsidiary, Greenfield Capital Trust (Trust), a newly-formed
Delaware business trust. The securities represent undivided beneficial ownership
interests in the Trust. The sole asset of the Trust is the $118,557 aggregate
principal amount of the 6% Convertible Junior Subordinated Deferrable Interest
Debentures Due 2016 which were acquired with the proceeds from the private
placement of the Convertible Preferred Securities and the offering and sale of
Common Securities to the Company. The Company's obligations under the
Convertible Junior Subordinated Debentures, the Indenture pursuant to which they
were issued, the Amended and Restated Declaration of Trust of the Trust and the
Guarantee of Greenfield, taken together, constitute a full and unconditional
guarantee by Greenfield of amounts due on the Convertible Preferred Securities.
The Convertible Preferred Securities are convertible at the option of the
holders at any time into the common stock of Greenfield at an effective
conversion price of $41.25 per share and are redeemable at Greenfield's option
after April 15, 1999. The net proceeds of the offering of approximately $110,746
were used by Greenfield to retire indebtedness. A registration statement
relating to resales of such Convertible Preferred Securities was declared
effective by the Securities and Exchange Commission on September 26, 1996.
Upon consummation of the merger described in Note 18, the effective
conversion price of the Convertible Preferred Securities was adjusted to
approximately $36.05.
6. LEASE COMMITMENTS
The Company leases certain of its equipment under noncancelable lease
agreements. These agreements extend for a period of up to 42 months and contain
purchase or renewal options on a month-to-month basis. The leases are reflected
in the consolidated financial statements as capitalized leases in accordance
with the requirements of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases."
In addition, the Company has manufacturing facilities, office space and
certain equipment leased under noncancelable operating leases having remaining
terms of up to 14 years. Minimum lease payments under long-term capital and
operating leases at December 31, 1996 are as follows:
CAPITAL OPERATING
LEASES LEASES
------- ---------
1997................................................... $ 494 $ 4,989
1998................................................... 274 5,359
1999................................................... 141 2,638
2000................................................... 246 2,285
2001................................................... -- 1,881
2002 and thereafter.................................... -- 10,283
------- --------
Total minimum lease payments........................... 1,155 $ 27,435
========
Less amount representing interest...................... (148)
-------
Present value of net minimum lease payments, including
current portion of $462.............................. $ 1,007
=======
Rental expense incurred on the operating leases in 1994, 1995 and 1996
approximated $2,291, $2,840 and $6,070, respectively.
7. INCOME TAXES
Income (loss) before provision (benefit) for income taxes for the years
ended December 31 was taxed under the following jurisdictions:
1994 1995 1996
--------- -------- ------
Domestic. $ 36,594 $ 45,213 $ 34,694
Foreign.. (479) 7,642 9,470
-------- -------- --------
Total.... $ 36,115 $ 52,855 $ 44,164
======== ======== ========
The provision (benefit) for income taxes charged to operations was as
follows:
1994 1995 1996
-------- -------- --------
Current tax provision
(benefit):
U.S. federal............... $ 7,940 $10,383 $ 8,587
State and local............ 1,660 2,101 1,471
Foreign.................... 900 3,147 (473)
-------- ------- --------
Total current provision...... 10,500 15,631 9,585
======== ======= ========
Deferred tax provision
(benefit):
U.S. federal............... 4,504 4,637 3,820
State and local............ 602 785 695
Foreign.................... (1,500) 337 3,875
-------- ------- --------
Total deferred provision..... 3,606 5,759 8,390
-------- ------- --------
Total provision for income
taxes........................ $ 14,106 $21,390 $ 17,975
======== ======= ========
18
Deferred tax liabilities (assets) are comprised of the following at
December 31:
1995 1996
--------- ---------
Depreciation........................................ $ 14,226 $ 18,705
LIFO inventory...................................... 7,424 7,300
Foreign deferred tax liabilities, primarily related
to depreciation..................................... 2,334 3,437
Other............................................... 105 135
--------- ---------
Gross deferred tax liabilities...................... 24,089 29,577
--------- ---------
Property, plant and equipment basis differences..... (1,547) (2,253)
Restructuring costs................................. (2,517) (2,093)
Inventory reserves and costing capitalization....... (1,772) (4,174)
Retiree health...................................... (3,490) (3,578)
Pension............................................. (2,309) (2,301)
Workers' compensation reserves...................... (651) (726)
Environmental reserves.............................. (998) (1,053)
Other accruals...................................... (2,331) (3,266)
Foreign deferred tax assets, primarily loss
carryforwards and other reserves.................... (3,708) (936)
Other............................................... (866) (1,327)
--------- ---------
Gross deferred tax assets........................... (20,189) (21,707)
--------- ---------
Deferred tax assets valuation allowance............. 975 975
--------- ---------
Net deferred tax liability.......................... $ 4,875 $ 8,845
========= =========
The deferred tax asset valuation allowance at December 31, 1996 primarily
represents excess deductible temporary differences over taxable temporary
differences for foreign operations and potential nonrealization of certain other
deferred tax assets. The tax benefits, if any, from the future recognition of
certain deductible temporary differences present at the date of the acquisition
of CTD and Rule, but not recognized at that time, will be applied to reduce
goodwill.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as a result of the following differences:
1994 1995 1996
--------- --------- -------
Statutory U.S. rate................. $ 12,640 $ 18,499 $ 15,457
Increase (decrease) in rate
resulting from:
Foreign taxes, net................ (432) 809 172
State/local taxes, net............ 1,471 1,876 1,532
Nondeductible goodwill amortization 282 957 1,258
Other............................. 145 (751) (444)
-------- -------- --------
Effective tax rate................ $ 14,106 $ 21,390 $ 17,975
======== ======== ========
8. RESTRUCTURING COSTS
The results of operations for the year ended December 31, 1996 included
restructuring costs of $4,000 (approximately $2,400 net of related tax benefits,
or $0.15 per common share), on a primary basis. These costs were primarily
related to employee severance and certain other nonrecurring charges resulting
from the effects of the reorganization of the Company's business groups. The
restructuring costs included the costs associated with the combination or
elimination of certain functions or operations which were identified as
redundant. The $4,000 restructuring charge recorded in the third quarter
included $2,727 for employee-related costs consisting primarily of severance
costs, $585 for the noncash write-down of plant assets where operations have
been or will be terminated, and $688 for other nonrecurring severance costs for
personnel that have been terminated or will be terminated in future periods. The
employee severance costs relate to the reduction of approximately 42 employees
as of December 31, 1996 and future reductions of approximately 28 employees. Of
the total $4,000 charge, approximately $777 had been incurred through December
31, 1996. The remaining accrual primarily relates to employee severance costs
and costs associated with the closure of two facilities.
During 1994, the Company recorded restructuring costs of $1,300 relating to
the consolidation of the plant in Switzerland into a
19
plant in Germany. The $1,300 charge is comprised of $700 in costs associated
with plant closures and relocation of machinery and equipment, $500 in severance
costs related to approximately 35 administrative staff and plant personnel at
the closed Swiss facility and $100 in other costs. The Company substantially
completed the restructuring by the end of 1994.
The Company continues to evaluate its operations with an intent to
streamline operations, improve productivity and reduce costs and may implement
additional rationalization programs in the future.
9. RETIREMENT PLANS
The Company offers substantially all of its domestic employees a retirement
savings plan under Section 401(k) of the Internal Revenue Code. Employees may
elect to enter a written salary deferral agreement under which a maximum of 15%
of their salaries may be contributed to the plan, subject to aggregate limits
required under the Internal Revenue Code. The Company is required to make a
mandatory contribution of 2% of qualified employee earnings. In addition, the
Company will match a percentage of the employees' contribution up to a specified
maximum percentage of their salaries and may make a discretionary contribution
from profits upon resolution of its Board of Directors. For the years ended
December 31, 1994, 1995 and 1996, the Company made contributions to the defined
contribution plans of approximately $2,448, $3,406 and $3,923, respectively.
CTD, Carbidie and AMT had defined benefit pension plans covering
substantially all domestic employees with the exception of AMT non-union
employees when they were acquired by the Company. All of these plans were frozen
in 1995, and benefits were frozen at 1995 levels. In addition, Rule had a
defined benefit pension plan for certain employees for which the benefits had
been frozen prior to the Company's acquisition of Rule in January 1996. The
Company's funding policy with respect to such plans is to contribute annually
the minimum amount required under ERISA. Plan assets include marketable equity
securities, U.S. government securities, federal agency obligations, corporate
debt instruments, money market funds and other fixed income securities.
In connection with the CTD and Carbidie acquisitions in 1994, the Company
recorded an aggregate net liability of $6,051 in purchase accounting
representing the excess of the estimated projected benefit obligation (PBO) over
the fair value of plan assets. During 1996, the Company recorded a net liability
of $700 in purchase accounting for the excess of the PBO over the fair value of
the plan assets in connection with the Rule acquisition.
The following tables set forth the defined benefit pension plans' net
periodic pension costs for the years ended December 31, 1995 and 1996 and the
plans' net funded status, amounts recorded in the consolidated balance sheet,
and other summary information at December 31, 1995 and 1996:
FOR THE YEARS ENDED DECEMBER 31, 1995 1996
--------------------------------- -------- --------
NET PERIODIC PENSION COST:
Service cost..................... $ 502 $ 30
Interest cost.................... 2,334 2,297
Other............................ 583 (732)
Less: Actual return on plan
assets........................... (2,842) (1,560)
------- -------
Net periodic pension cost........ $ 577 $ 35
======= =======
DECEMBER 31, 1995 1996
- ------------------------------------------ ---------- -------
NET PENSION LIABILITY:
Vested accumulated benefit obligation..... $ 30,288 $ 32,226
========= =========
Nonvested accumulated benefit obligation.. $ 1,622 $ 751
========= =========
PBO....................................... $ 31,910 $ 33,228
Fair value of plan assets................. (27,361) (29,570)
Unrecognized prior service cost........... -- (30)
Unrecognized net loss..................... (519) (29)
Additional minimum pension liability...... 783 279
--------- ---------
Net pension liability..................... $ 4,813 $ 3,878
========= =========
Discount rate used to determine the PBO... 7.5% 8.0%
Assumed long-term rate of return on plan
assets.................................... 9.0% 9.0%
10. POSTRETIREMENT BENEFITS
Under Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," the Company is
required to recognize the cost of providing health care and other benefits to
retirees over the term of the
20
employees' service. Prior to the acquisitions of CTD and Carbidie, the Company
provided no postretirement benefits other than those related to the 401(k) plans
described in Note 9. CTD and a certain other subsidiary provides health care
insurance benefits to certain of its retired employees. All of these plans were
frozen in 1995, and benefits were frozen at 1995 levels. In connection with the
CTD acquisition in 1994, the Company recorded a liability of $11,939 in purchase
accounting representing the estimated discounted present value of the expected
future retiree benefits attributed to employees' service rendered in periods
prior to Greenfield's acquisition.
The following tables set forth the plans' net periodic postretirement
benefit cost for the years ended December 31, 1995 and 1996, the accumulated
postretirement benefit obligation (APBO) at December 31, 1995 and 1996 and other
summary information:
FOR THE YEARS ENDED DECEMBER 31, 1995 1996
------------------------------------------------- ------ -----
NET PERIODIC POSTRETIREMENT BENEFIT COST:
Service cost..................................... $ 55 $ --
Interest cost.................................... 873 765
------ -----
Net periodic postretirement benefit cost......... $ 928 $ 765
====== =====
DECEMBER 31, 1995 1996
- ---------------------------------------------------------- -------- --------
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION:
APBO (consisting solely of retirees and dependents)....... $ 11,692 $ 9,653
Unrecognized net gain (loss).............................. (3) 754
-------- --------
Net APBO.................................................. $ 11,689 $ 10,407
======== ========
Discount rate used in measuring the APBO.................. 7.5% 8.0%
Assumed health care cost trend rate used in measuring the
APBO.................................................... 8.5% 8.5%
The assumed health care cost trend rate used in measuring the APBO for 1995
and 1996 decreased gradually to 6% (until 2002 and thereafter). If the assumed
health care cost trend rates were increased by 1%, the APBO for 1995 and 1996
would have increased approximately $558 and $434, respectively.
There are no plan assets and the Company expects to continue to fund these
benefit costs on a pay-as-you-go basis. During 1995 and 1996, the Company made
payments of approximately $1,018 and $1,400, respectively, related to these
benefits.
11. 1993 EXECUTIVE STOCK OPTIONS
In 1993, the Company established the 1993-1 Executive Stock Option Plan
(1993-1 Plan) and granted to certain officers of Rogers Tool Works, Inc., a
wholly-owned subsidiary of the Company (RTW), non-qualified stock options to
purchase an aggregate of 438,258 shares of common stock at a price of $0.51 per
share, subject to adjustment, in exchange for the cancellation of RTW shares
held by these officers. In addition, the Company canceled the promissory notes
of each of these officers issued to finance the purchase of their RTW shares.
The exercise price with respect to the options granted was determined to
preserve the original purchase price per share of the RTW shares cancelled. The
options became exercisable as to 25% of the shares issuable thereunder on
January 26, 1994, and as to a cumulative 35%, 50% and 100% of the shares
issuable thereunder on each succeeding six-month anniversary thereof. As of
December 31, 1995 all of the options had been exercised. During the years ended
December 31, 1994 and 1995, 153,367 and 284,891 shares, respectively, were
issued in connection with the 1993-1 Plan.
In 1993, the Company also adopted the 1993-2 Executive Stock Option Plan
(1993-2 Plan) pursuant to which nonqualified stock options were granted to
certain existing shareholders prior to the initial public offering to acquire an
aggregate 453,350 shares of the Company's common stock, subject to adjustment,
by tendering existing common stock in payment thereof. The exercise price of all
options was the current market price on the date of exercise and all options
were exercised only by exchanging shares of previously owned common stock. The
grant and exercise of options under the 1993-2 Plan did not result in any
increase in the beneficial ownership of common stock by the plan participants
from the number of shares owned immediately after the initial public offering.
Under the terms of the 1993-2 Plan, the options were exercised immediately after
the initial public offering and the shares of common stock issued thereunder
became freely transferable by each participant as to 25% of the shares issuable
to such participants on January 31, 1994 and as to a cumulative 35%, 50% and
100% of the shares issuable to such participant on each succeeding six-month
anniversary thereof. The shares tendered in exercise of options granted under
the 1993-2 Plan were issued under promissory notes due in 1998 through 2002. The
notes are reflected in stock subscriptions receivable, included in additional
paid-in capital and other, in the accompanying consolidated financial
statements.
21
12. STOCK OPTION AND STOCK INCENTIVE PLANS
STOCK OPTION PLANS
The Company has three stock options plans: the Employee Stock Option Plan
(Employee Plan), the 1995 Directors Non-Qualified Stock Option Plan (Directors
Plan) and the 1993 Directors Non-Qualified Stock Option Plan (1993 Directors
Plan).
The Employee Plan provides for the granting of options to purchase up to
1,000,000 shares of common stock to the Company's executive officers and key
employees at prices equal to the fair market value of the stock on the date of
grant. The Employee Plan was amended effective May 6, 1997, to, among other
things, increase the number of options to purchase shares of common stock from
1,000,000 to 2,000,000. Options outstanding at December 31, 1996 entitle the
holders to purchase common stock at prices ranging between $16.00 and $37.00 per
share, subject to adjustment. Options shall become exercisable with respect to
one-fourth of the shares covered thereby on each anniversary of the date of
grant, commencing on the second anniversary of such date. The right to exercise
the options expires ten years from the date of grant, or earlier if an option
holder ceases to be employed by the Company.
The Directors Plan provides for the granting of options to purchase up to
125,000 shares of common stock to the Company's Directors who are not employees
of the Company at prices equal to the fair market value of the stock on the date
of grant. Options are granted to each eligible Director on the date such person
is first elected to the board of directors of the Company and on each subsequent
re-election date. The Directors Plan was approved in May 1996 by the
stockholders. Options outstanding at December 31, 1996 entitle the holders to
purchase common stock at a price of $37.00 per share, subject to adjustment.
Options granted upon re-election shall become exercisable in full on the first
anniversary of such date. All other options shall become exercisable with
respect to one-fourth of the shares covered thereby on each anniversary date of
the date of grant, commencing on the second anniversary of such date. The right
to exercise the options expires ten years from the date of grant, or earlier, if
an option holder ceases to be a Director of the Company.
The 1993 Directors Plan provides for the granting of options to purchase up
to 100,000 shares of common stock to the Company's Directors who are not
employees of the Company at prices equal to the fair market value of the stock
on the date of grant. Options are granted to each eligible Director on the date
such person is first elected to the board of directors of the Company. Options
outstanding at December 31, 1996 entitle the holders to purchase common stock at
prices ranging between $15.50 and $25.75 per share, subject to adjustment.
Options shall become exercisable with respect to one-fourth of the shares
covered thereby on each anniversary of the date of grant, commencing on the
second anniversary of such date. The right to exercise the options expires ten
years from the date of grant, or earlier if an option holder ceases to be a
Director of the Company. Subsequent to the May 1996 approval of the Directors
Plan, no further grants will be issued under the 1993 Directors Plan.
A summary of the status of the Company's stock option plans as of
December 31, 1994, 1995 and 1996, and changes during the years then ended are
presented below:
1994 1995 1996
--------------------- -------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
Outstanding at
beginning of year... 368,500 $ 15.98 578,500 $ 18.76 788,175 $ 21.95
Granted............... 217,500 $ 23.36 244,300 $ 29.07 255,400 $ 28.58
Exercised............. -- -- (10,375) $ 16.07 (55,000) $ 16.53
Forfeited............. (7,500) $ 16.18 (24,250) $ 19.93 (34,175) $ 27.21
--------- --------- ---------
Outstanding at end of
year................ 578,500 $ 18.76 788,175 $ 21.95 954,400 $ 23.85
========= ========= =========
Exercisable at end of
year................ -- -- 77,125 $ 15.98 158,875 $ 18.12
========= ========= =========
22
The following table summarizes information for options currently
outstanding and exercisable at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ---------- --------------- ----------- ----------- --------------- ----------
$14-21 308,000 7 $ 16.24 118,015 $ 16.13
$22-29 360,150 9 $ 25.23 40,860 $ 23.85
$30-37 286,250 9 $ 30.31 --
-------- --------
$14-37 954,400 8 $ 23.85 158,875 $ 18.12
======== ========
In connection with the resignation of a member of the Company's Board of
Directors, in 1994 the Company exchanged options for 10,000 shares of common
stock previously granted to the Director with a warrant to purchase 10,000
shares of common stock at an exercise price equal to the exercise price of the
options.
STOCK INCENTIVE PLANS
The Company has two stock incentive plans: the 1995 Equity Incentive Plan
(Incentive Plan) and the 1995 Restricted Stock Bonus Plan (Ownership Plan). Both
plans were approved in May 1996 by the stockholders of the Company.
The Incentive Plan provides for the granting of up to 273,000 shares of
common stock to certain senior executives of the Company in time-lapse
restricted stock, performance contingent restricted stock and performance
shares. Time-lapse restricted stock vests in one-third increments over a
three-year period commencing four years after the date of the award. Performance
contingent restricted stock is earned when the price for the Company's stock
reaches certain predetermined levels, and then vests over a three- or five-year
period. Performance shares are earned based on attainment of a predetermined
four-year cumulative earnings per share level. Attainment of between 50% and
200% of the predetermined objective will entitle the participants to receive
restricted performance shares of between 50% and 200% of the target award, which
then vest over a three-year period. No performance shares are earned if less
than 50% of the performance objective is obtained.
The Ownership Plan provides for the issuance of up to 250,000 shares of
common stock to certain employees, by allowing such employees to elect to defer
up to 50% of their annual cash bonus and receive, in lieu thereof, shares of the
Company's common stock. The Company will increase the employees' deferred bonus
by either 20% or 35% (depending on the employees' selection of 3 or 5 years,
respectively, for the restriction period).
Shares issued under these plans are restricted and are subject to
forfeiture upon termination of employment. During the period that the shares are
restricted, award holders have the right to vote and to receive dividends on
such shares.
A summary of stock earned and issued pursuant to the Incentive Plan and
Ownership Plan for the year ended December 31, 1996 follows:
MARKET VALUE
SHARES OF DATE EARNED VESTING PERIOD
------ -------------- --------------
Incentive Plan
Time-lapse Restricted Stock... 26,000 $ 30.50 Nov 1999-Nov 2001
Time-lapse Restricted Stock... 8,000 $ 31.625 July 2000-July 2002
Performance Contingent
Restricted Stock............ 7,700 $ 37.75 Nov 2000
-------
41,700
Ownership Plan.................. 17,848 $ 30.50 Feb 1997-Feb 2001
-------
Total restricted shares earned
and issued in 1996............ 59,548
=======
The Company awarded up to 273,000 shares of restricted stock to certain
senior executives under the Incentive Plan, subject to the attainment of certain
performance levels, as discussed above. The weighted average fair value of the
shares on the grant date was $30.73. The Company applies APB 25 and related
interpretations in accounting for stock awards under the Incentive and Ownership
Plans. Under APB 25, the Company recorded $1,500 of compensation expense during
1996 attributable to these awards, which is included in selling, general and
administrative expenses in the 1996 consolidated statement of operations.
Shares which have been issued but which remain restricted are recorded as
deferred compensation, a reduction to additional paid-in capital. The increase
in additional paid-in capital of $761 during 1996 represents the issuance of
executive stock awards and is net of this deferred compensation. As the shares
vest and become unrestricted, the deferred compensation will be recorded as
compensation expense and additional paid-in capital will increase.
23
PRO FORMA DISCLOSURES
The Company applies APB 25 and related interpretations in accounting for
its stock option plans. Accordingly, except for the Incentive and Ownership
Plans as described above, no compensation cost has been recognized for the stock
options because the options were granted with an exercise price equal to the
stock price on the date of grant. Had compensation costs for the Company's stock
option plans been determined based on the fair value of the options on the grant
dates consistent with the methodology prescribed by FAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. Due to the adoption of the methodology prescribed by FAS 123,
the pro forma results shown below only reflect the impact of options and stock
awards granted in 1995 and 1996. Because future options and stock awards may be
granted, the pro forma impact for 1995 and 1996 is not necessarily indicative of
the impact in future years.
1995 1996
------- -------
Net income As reported $31,465 $26,189
Pro forma $31,336 $25,614
Primary earnings per As reported $ 1.94 $ 1.60
share
Pro forma $ 1.90 $ 1.55
The fair value of the options granted (which is amortized over the option
vesting period in determining the pro forma impact), is estimated on the date of
grant using the Black-Scholes multiple option-pricing model with the following
weighted average assumptions:
1995 1996
----------- -----------
Expected life of options 5 years 5 years
Risk-free interest rates 5.69--7.76% 5.39--6.69%
Expected volatility of
stock................... 29% 32%
Expected dividend yield. 0.5% 0.5%
The weighted average fair value of options granted during the years ended
December 31, 1995 and 1996 was $10.34 and $10.84 per share, respectively.
13. RELATED PARTIES
Harbour Group Investments, L.P. (HGI, L.P.) was the Company's principal
stockholder prior to HGI, L.P.'s sale of substantially all of its shares in a
secondary stock offering in March 1994. Under terms of a corporate development
consulting and advisory services agreement, the Company incurred fees totaling
$1,109, $445 and $580 in 1994, 1995 and 1996, respectively, payable to an
affiliate of HGI, L.P. related to corporate development services provided in
identifying, negotiating and consummating certain acquisitions.
Under terms of a management consulting and advisory services agreement,
Harbour Group, Ltd. (HGL), an affiliate of HGI, L.P., charges the Company for
direct management and administrative services provided to the Company based on
HGL's approximate costs for such services. These charges totaled approximately
$250, $182 and $53 for the years ended December 31, 1994, 1995 and 1996,
respectively, and are reflected in selling, general and administrative expenses
in the accompanying consolidated financial statements.
At December 31, 1995 and 1996, a member of HGL management owned 80,000
shares of the Company's common stock partially financed with promissory notes
totaling $101 due in 1998 through 2003. The notes are reflected in stock
subscriptions receivable, included in additional paid-in capital and other, in
the accompanying consolidated financial statements.
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain claims and legal proceedings in which
monetary damages are sought. The Company is vigorously contesting these claims.
However, resolution of these claims is not expected to occur quickly and their
ultimate outcome presently cannot be predicted. It is the opinion of management
that any liability of the Company for claims or proceedings will not materially
affect its financial position.
In connection with the acquisition of CTD, the Company recorded a liability
of $2,600 in purchase accounting for certain estimated environmental clean-up
costs to be incurred relative to acquired CTD facilities. This estimated
potential liability, which is included in other accrued liabilities, has not
been reduced for any expected proceeds from other potentially responsible third
parties.
24
At December 31, 1996, the liability balance was approximately $2,200.
15. SEGMENT INFORMATION
Worldwide operations data, as required by Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise,"
are listed below. Profitability of the Company's foreign operations by
geographic area was determined based on ultimate sales to unaffiliated
customers. Income from operations was included in the geographic area of the
entity transacting the final sale. Intercompany sales have been eliminated in
consolidation.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
NET SALES TO INCOME
UNAFFILIATED FROM IDENTIFIABLE CAPITAL
CUSTOMERS OPERATIONS ASSETS EXPENDITURES
------------ ---------- ------------ ------------
1994
North America. $240,809 $ 38,223 $289,610 $ 12,345
Europe........ 30,978 1,061 30,325 1,037
-------- -------- -------- --------
$271,787 $ 39,284 $319,935 $ 13,382
======== ======== ======== ========
1995
North America. $377,314 $ 52,112 $352,532 $ 26,177
Europe........ 42,874 8,966 45,931 670
-------- -------- -------- --------
$420,188 $ 61,078 $398,463 $ 26,847
======== ======== ======== ========
1996
North America. $451,383 $ 50,463 $514,163 $ 27,175
Europe........ 58,711 9,484 48,481 2,010
-------- -------- -------- --------
$510,094 $ 59,947 $562,644 $ 29,185
======== ======== ======== ========
Export revenues included in the North American net sales to unaffiliated
customers were as follows:
FOR THE YEARS ENDED DECEMBER 31, 1994 1995 1996
- --------------------------------- -------- -------- ------
Geographic Areas:
Far East...................... $ 9,113 $19,837 $ 20,091
Canada/Latin America.......... 6,521 5,749 10,534
Europe........................ 3,572 7,601 15,340
Other......................... 36 665 1,343
-------- ------- --------
$ 19,242 $33,852 $ 47,308
======== ======= ========
16. SUPPLEMENTAL BALANCE SHEET INFORMATION
DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
----------- ---------- -------------
ACCOUNTS RECEIVABLE:
Trade receivables........................ $ 66,242 $ 86,962 $102,792
Allowance for doubtful accounts and
customer rebates....................... (2,624) (3,763) (4,692)
-------- -------- --------
$ 63,618 $ 83,199 $ 98,100
======== ======== ========
INVENTORIES:
Raw materials and component parts........ $ 28,248 $ 49,500 $ 68,988
Work in process.......................... 31,648 38,055 43,060
Finished goods........................... 49,873 65,104 70,476
-------- -------- --------
$109,769 $152,659 $182,524
======== ======== ========
PROPERTY, PLANT AND EQUIPMENT:
Machinery and equipment.................. $108,077 $143,664 $172,781
Buildings................................ 20,531 33,125 37,985
Land and land improvements............... 2,445 4,159 4,095
Property held under capital leases....... 4,579 4,496 4,496
-------- -------- --------
Total property, plant and equipment
at cost........................... 135,632 185,444 219,357
Less accumulated depreciation and
amortization, including $3,241 and
$3,715, respectively, related to property
held under capital leases.............. (46,833) (59,902) (71,931)
-------- -------- --------
88,799 125,542 147,426
Construction in progress................. 18,558 17,338 20,231
Property held for sale................... 1,665 1,420 1,522
-------- -------- --------
$109,022 $144,300 $169,179
======== ======== ========
ACCRUED LIABILITIES:
Employee compensation and benefits....... $ 18,676 $ 19,151 $ 22,566
Restructuring costs...................... 4,919 3,371 2,363
Interest................................. 1,544 1,656 3,395
Other.................................... 8,549 11,233 13,237
-------- -------- --------
$ 33,688 $ 35,411 $ 41,561
======== ======== ========
25
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1994, 1995 and 1996 appears below
(in thousands, except per share data):
NET SALES
--------------------------------------
1994 1995 1996
-------- -------- --------
First quarter...... $ 62,631 $106,419 $132,698
Second quarter..... 62,213 104,799 130,021
Third quarter...... 65,679 104,147 121,370
Fourth quarter..... 81,264 104,823 126,005
-------- -------- --------
$271,787 $420,188 $510,094
======== ======== ========
GROSS PROFIT
--------------------------------------
1994 1995 1996
-------- -------- --------
First quarter...... $ 20,802 $ 34,007 $ 40,570
Second quarter..... 21,451 31,469 41,685
Third quarter...... 22,051 32,683 34,999
Fourth quarter..... 26,509 33,871 35,637
-------- -------- --------
$ 90,813 $132,030 $152,891
======== ======== ========
NET INCOME
-----------------------------------
1994 1995 1996
------- ------- -------
First quarter...... $ 5,040 $ 7,055 $ 8,569
Second quarter..... 4,798 7,915 8,357
Third quarter...... 5,975 8,085 3,959
Fourth quarter..... 6,196 8,410 5,304
------- ------- -------
$22,009 $31,465 $26,189
======= ======= =======
PRIMARY EARNINGS PER SHARE
------------------------------
1994 1995 1996
------ ------ ------
First quarter...... $ .31 $ .43 $ .53
Second quarter..... .29 .49 .51
Third quarter...... .37 .50 .24
Fourth quarter..... .38 .52 .32
------ ------ ------
$ 1.35 $ 1.94 $ 1.60
====== ====== ======
18. SUBSEQUENT EVENTS (UNAUDITED)
On October 10, 1997, the Company entered into a definitive merger agreement
with Kennametal Inc. (Kennametal), whereby Kennametal Acquisition Corp. (a
wholly-owned subsidiary of Kennametal) commenced a tender offer on October 17,
1997 for all of the outstanding shares of the Company for $38 per share. The
tender offer expired on November 14, 1997 and approximately 98% of the Company's
shares were tendered. The merger was completed on November 18, 1997. Under the
terms of the merger agreement, all outstanding options to acquire shares of the
Company were cancelled in exchange for a payment equal to the difference between
$38 per share and the strike price.
In the fourth quarter of 1997, pursuant to a plan approved by the Company's
board of directors, the Company recorded a $11.5 million charge for nonrecurring
expenses primarily related to the restructuring of the Company's South
Deerfield, Massachusetts operations. These costs primarily included write-downs
of inventory and machinery and equipment to estimated net realizable values,
severance costs and other miscellaneous expenses relative to the Company's
decision to discontinue the manufacture and sale of certain low margin product
lines. The restructuring will result in a reduction in personnel, thereby
eliminating excessive costs and redundancies in future periods. The Company
expects to record additional nonrecurring expenses of approximately $2.0 million
in 1998 related to the rearrangement of the remaining operations at its South
Deerfield, Massachusetts facility.
26
ANNEX B
27
The following Pro Forma Condensed Consolidated Statements of Income and the
Pro Forma Condensed Consolidated Balance Sheet are based on the historical
financial statements of the Company and Greenfield. The Pro Forma Condensed
Consolidated Statements of Income for the year ended June 30, 1997, and for the
three months ended September 30, 1997, assume that the acquisition of Greenfield
occurred as of the first day of the Company's 1997 fiscal year (July 1, 1996).
Since Greenfield has a fiscal year-end of December 31, the historical
information included in the Pro Forma Condensed Consolidated Statement of Income
for the year ended June 30, 1997 has been derived from Greenfield's operating
results for the twelve months ended June 30, 1997. The Pro Forma Condensed
Consolidated Balance Sheet gives effect to the acquisition of Greenfield as if
it had occurred on September 30, 1997.
The pro forma financial information reflects the purchase method of
accounting for the acquisition of Greenfield, and accordingly is based on
estimated purchase accounting adjustments that are subject to further revision
depending upon completion of appraisals or other studies of the fair value of
Greenfield's assets and liabilities. Final purchase accounting adjustments will
differ from the pro forma adjustments presented herein and described in the
accompanying notes due to the results of operations of Greenfield from September
30, 1997 to the date of closing (November 18, 1997).
The pro forma financial information reflects certain assumptions described
above and in the Notes to Pro Forma Condensed Consolidated Statements of Income
and Pro Forma Condensed Consolidated Balance Sheet which follow. The pro forma
financial information, including notes thereto, should be read in conjunction
with the consolidated financial statements of the Company and of Greenfield, and
the related notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations. The pro forma financial information is
provided for informational purposes only and does not purport to present what
the Company's results of operations would actually have been if the acquisition
of Greenfield had occurred on the assumed dates, as specified above, or to
project the Company's financial condition or results of operations for any
future period.
28
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1997
ACQUISITION
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS AS ADJUSTED
---------- ---------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
INCOME STATEMENT DATA:
Net sales.................... $1,156,343 $527,019 $ -- $1,683,362
Cost of goods sold......... 668,415 373,133 2,000(a) 1,043,548
---------- -------- -------- ----------
Gross profit................. 487,928 153,886 (2,000) 639,814
Operating expenses......... 357,996 92,421 -- 450,417
Amortization of intangibles 2,907 4,946 10,557(b) 18,410
---------- -------- -------- ----------
Operating income............. 127,025 56,519 (12,557) 170,987
Interest expense........... 10,393 10,916 64,922(c) 86,231
Other income............... 1,531 -- -- 1,531
Dividends on
Greenfield-obligated
mandatorily redeemable
convertible preferred
securities of subsidiary
Greenfield Capital Trust
holding solely convertible
subordinated debentures
of Greenfield............ -- 6,900 (6,900)(d) --
----------- ----------- -------------- -----------
Income before income taxes
and minority interest...... 118,163 38,703 (70,579) 86,287
Provision for income taxes... 44,900 15,876 (26,261)(e) 34,515
Minority interest............ 1,231 -- -- 1,231
---------- -------- -------- ----------
Net income................... $ 72,032 $ 22,827 $(44,318) $ 50,541
========== ======== ======== ==========
PER SHARE DATA:
Net income................... $ 2.71 $ 1.90
========== ==========
Weighted average shares
outstanding................ 26,575 26,575
========== ==========
See accompanying Notes to Pro Forma Condensed Consolidated Statement of Income.
29
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1997
(a) Represents additional depreciation expense related to excess purchase price
assigned to property, plant and equipment.
(b) Represents amortization of excess purchase price allocated to goodwill over
40 years of approximately $15.5 million less the elimination of historical
Greenfield goodwill amortization of approximately $4.9 million.
(c) Reflects (i) an increase in interest expense of approximately $69.1 million
associated with borrowings under the New Bank Credit Facility, (ii) the
elimination of historical interest expense of approximately $17.3 million
as a result of repayment of outstanding indebtedness of Kennametal and
Greenfield and (iii) the amortization of deferred financing costs of
approximately $13.1 million.
(d) Reflects the elimination of historical dividends of approximately $6.9
million as a result of repayment of Greenfield-obligated, mandatorily
redeemable convertible preferred securities of subsidiary Greenfield
Capital Trust holding solely convertible subordinated debentures of
Greenfield.
(e) Represents an adjustment to the total provision for income taxes to
reflect a statutory tax rate of 40%.
30
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997
ACQUISITION
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
INCOME STATEMENT DATA:
Net sales.................... $ 310,792 $ 139,836 $ -- $ 450,628
Cost of goods sold......... 178,569 98,773 500(a) 277,842
--------- --------- -------- ---------
Gross profit................. 132,223 41,063 (500) 172,786
Operating expenses......... 98,518 25,769 -- 124,287
Amortization of intangibles 1,052 1,263 2,721(b) 5,036
--------- --------- -------- ---------
Operating income............. 32,653 14,031 (3,221) 43,463
Interest expense........... 1,180 3,670 12,955(c) 17,805
Other (expense)............ (440) -- -- (440)
Dividends on
Greenfield-obligated,
mandatorily redeemable
convertible preferred
securities of subsidiary
Greenfield Capital Trust
holding solely convertible
subordinated debentures
of Greenfield............ -- 1,725 (1,725)(d) --
---------- ----------- -------------------------
Income before income taxes
and minority interest........ 31,033 8,636 (14,451) 25,218
Provision for income taxes. 12,100 3,541 (5,554)(e) 10,087
Minority interest.......... 1,385 -- -- 1,385
--------- --------- -------- ---------
Net income................... $ 17,548 $ 5,095 $ (8,897) $ 13,746
========= ========= ======== =========
PER SHARE DATA:
Net income................... $ 0.67 $ 0.53
========= =========
Weighted average shares
outstanding................ 26,171 26,171
========= =========
See accompanying Notes to Pro Forma Condensed Consolidated Statement of Income.
31
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997
(a) Represents additional depreciation expense related to excess purchase price
assigned to property, plant and equipment.
(b) Represents amortization of excess purchase price allocated to goodwill over
40 years of approximately $3.9 million less the elimination of historical
Greenfield goodwill amortization of approximately $1.2 million.
(c) Reflects: (i) an increase in interest expense of approximately $17.3
million associated with borrowings under the New Bank Credit Facility; and
(ii) the elimination of historical interest expense of approximately $4.3
million as a result of repayment of outstanding indebtedness of Kennametal
and Greenfield.
(d) Reflects the elimination of historical dividends of approximately $1.7
million as a result of repayment of Greenfield-obligated, mandatorily
redeemable convertible preferred securities of subsidiary Greenfield
Capital Trust holding solely convertible subordinated debentures of
Greenfield.
(e) Represents an adjustment to the total provision for income taxes to reflect
a statutory tax rate of 40%.
32
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
ACQUISITION
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
KENNAMETAL GREENFIELD ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- -----------
(IN THOUSANDS)
(UNAUDITED)
ASSETS
Cash and equivalents.......... $ 45,409 $ -- $ -- $ 45,409
Accounts receivable, net of
allowance................... 202,144 98,100 -- 300,244
Inventories................... 214,068 182,524 5,700 (a) 396,292
-- -- (6,000)(b) --
Other current assets.......... 24,949 5,875 -- 30,824
--------- -------- ----------- ---------
Total current assets........ 486,570 286,499 (300) 772,769
Net property, plant and
equipment..................... 310,563 169,179 20,000 (a) 497,242
-- -- (2,500)(b) --
Intangible assets............. 57,691 180,187 439,952 (a) 677,830
Other assets.................. 64,765 2,302 13,100 (c) 80,167
--------- -------- ----------- ---------
Total assets................ $ 919,589 $638,167 $ 470,252 $2,028,008
========= ======== =========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Short-term debt............... $ 60,794 $ 6,632 $ (30,357)(d) $ 37,069
Accounts payable.............. 61,306 31,026 -- 92,332
Other current liabilities..... 106,035 41,561 3,000 (b) 150,596
--------- -------- ----------- ---------
Total current liabilities... 228,135 79,219 (27,357) 279,997
Term debt and capital leases,
less current maturities....... 40,464 197,734 (200,000)(d) 38,198
New Bank Credit Facility...... -- -- 1,023,950 (d) 1,023,950
Other liabilities............. 76,759 29,193 5,680 (a) 111,632
--------- -------- ------------ ---------
Total liabilities........... 345,358 306,146 802,273 1,453,777
Minority interest in
consolidated subsidiaries... 44,162 -- -- 44,162
Greenfield-obligated,
mandatorily redeemable
convertible preferred
securities of subsidiary
Greenfield Capital Trust
holding solely convertible
subordinated debentures of
Greenfield.................. -- 115,000 (115,000)(d) --
Shareholders' equity.......... 530,069 217,021 (217,021)(a) 530,069
--------- --------- ----------- ----------
Total liabilities and
shareholders' equity..... $ 919,589 $638,167 $ 470,252 $2,028,008
========= ======== =========== ==========
See accompanying Notes to Pro Forma Condensed Consolidated Balance Sheet.
33
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(a) The preliminary allocation of the estimated purchase price to assets
acquired and liabilities assumed as of September 30, 1997 is as follows:
Purchase price ......................... $ 624,960
Buy-out of stock options and warrants .. 16,333
Estimated acquisition costs ............ 24,200
---------
Total purchase price ......... $ 665,493
=========
Net book value of assets acquired ...... $ 217,021
Less: goodwill of Greenfield ........... (180,187)
Adjustments to fair value:
Inventories, eliminate LIFO
reserve....................... 5,700
Property, plant and equipment 20,000
Net deferred income tax
liabilities................... (5,680)
Impact of restructuring of
Greenfield.................... (11,500)
Goodwill...................... 620,139
---------
$ 665,493
=========
(b) Reflects the costs related to the restructuring of Greenfield's South
Deerfield, Massachusetts operations. In November 1997, Greenfield recorded
an $11.5 million charge for non-recurring expenses primarily related to the
restructuring of its South Deerfield operations. These costs primarily
included inventory and machinery and equipment reserves, severance costs
and other miscellaneous expenses relative to Greenfield's decision to
discontinue the manufacture and sale of certain low-margin product lines.
The restructuring will result in a reduction in personnel, thereby
eliminating excessive costs and redundancies in future periods. Greenfield
also expects to record additional non-recurring expenses of approximately
$2.0 million in 1998 related to the restructuring of its South Deerfield
operations. These amounts are not included in the restructuring charge.
The components of the restructuring charge are
recorded as follows:
Inventory write-down............................. $ 6,000
Property, plant and equipment write-down......... 2,500
Severance costs and other current liabilities.... 3,000
-------
Impact of restructuring of Greenfield............ $11,500
=======
(c) Represents payment of estimated deferred financing costs of approximately
$13.1 million to establish the New Bank Credit Facility.
(d) Reflects borrowings under the New Bank Credit Facility of approximately
$1,024.0 million to: (i) acquire Greenfield (approximately $665.5 million);
(ii) repay approximately $230.4 million of certain debt of Greenfield and
Kennametal; (iii) repay $115.0 million of outstanding indebtedness of
Greenfield-obligated, mandatorily redeemable convertible preferred
securities of subsidiary Greenfield Capital Trust holding solely
convertible subordinated debentures of Greenfield; and (iv) pay transaction
fees of approximately $13.1 million related to the New Bank Credit
Facility.
1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Form 8-K/A of Kennametal Inc. dated
November 17, 1997 of our report dated January 30, 1997, relating to the
consolidated financial statements of Greenfield Industries, Inc. as of December
31, 1996 and 1995 and for each of the three years in the period ended December
31, 1996, which appears in such Form 8-K/A.
PRICE WATERHOUSE LLP
St. Louis, Missouri
December 31, 1997
