THIS DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON MAY 18, 1998 PURSUANT TO
A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
Commission file number 1-5318
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0900168
State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
WORLD HEADQUARTERS
1600 TECHNOLOGY WAY
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650-0231
(Address of registrant's principal executive offices)
Registrant's telephone number, including area code: (724) 539-5000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT APRIL 30, 1998
- --------------------------------------- -----------------------------
Capital Stock, par value $1.25 per share 29,819,173
KENNAMETAL INC.
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
Item No.
- --------
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 1998 and June 30, 1997
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended March 31, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
5. Other Information
6. Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------
(in thousands) March 31, June 30,
1998 1997
---------- --------
ASSETS
Current Assets:
Cash and equivalents $ 18,831 $ 21,869
Accounts receivable, less allowance for
doubtful accounts of $13,653 and $7,325 341,655 200,515
Inventories 411,092 210,111
Other current assets 33,904 25,384
---------- --------
Total current assets 805,482 457,879
---------- --------
Property, Plant and Equipment:
Land and buildings 220,337 156,292
Machinery and equipment 659,170 473,850
Less accumulated depreciation (370,926) (329,756)
---------- --------
Net property, plant and equipment 508,581 300,386
---------- --------
Other Assets:
Investments in affiliated companies 11,080 11,736
Intangible assets, less accumulated
amortization of $33,294 and $23,960 742,533 49,915
Deferred income taxes 33,191 34,307
Other 21,520 15,086
---------- --------
Total other assets 808,324 111,044
---------- --------
Total assets $2,122,387 $869,309
========== ========
LIABILITIES
Current Liabilities:
Current maturities of term debt and capital leases $ 4,981 $ 13,853
Notes payable to banks 29,112 120,166
Accounts payable 92,559 60,322
Accrued payroll 24,018 3,294
Accrued vacation pay 22,796 18,176
Other 113,855 66,191
---------- --------
Total current liabilities 287,321 282,002
---------- --------
Term Debt and Capital Leases, Less Current Maturities 960,629 40,445
Deferred Income Taxes 34,670 21,055
Other Liabilities 73,884 57,060
---------- --------
Total liabilities 1,356,504 400,562
---------- --------
Minority Interest in Consolidated Subsidiaries 46,638 9,139
---------- --------
SHAREHOLDERS' EQUITY
Shareholders' Equity:
Preferred stock, 5,000 shares authorized; none issued - -
Capital stock, $1.25 par value; 70,000 shares
authorized; 32,820 and 29,370 shares issued 41,025 36,712
Additional paid-in capital 319,728 91,049
Retained earnings 440,545 406,083
Treasury shares, at cost; 3,013 and 3,263 shares held (59,409) (62,400)
Cumulative translation adjustments (22,644) (11,836)
---------- --------
Total shareholders' equity 719,245 459,608
---------- --------
Total liabilities and shareholders' equity $2,122,387 $869,309
========== ========
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ ---------------------
1998 1997 1998 1997
-------- -------- ---------- --------
OPERATIONS:
Net sales $496,585 $295,365 $1,177,425 $844,003
Cost of goods sold 296,316 168,799 694,431 489,381
-------- -------- ---------- --------
Gross profit 200,269 126,566 482,994 354,622
Research and development expenses 4,781 6,154 14,964 17,587
Selling, marketing and distribution
expenses 93,565 67,150 241,192 194,940
General and administrative expenses 31,513 17,351 80,049 51,356
Amortization of intangibles 5,822 735 9,587 2,029
-------- -------- ---------- --------
Operating Income 64,588 35,176 137,202 88,710
Interest expense 20,720 2,744 40,593 8,159
Other income (expense) (4,788) 11 (5,449) 1,246
-------- -------- ---------- --------
Income before income taxes
and minority interest 39,080 32,443 91,160 81,797
Provision for income taxes 16,600 12,200 38,700 31,400
Minority interest 1,739 315 4,597 699
-------- -------- ---------- --------
Net income $ 20,741 $ 19,928 $ 47,863 $ 49,698
======== ======== ========== ========
PER SHARE DATA:
Basic earnings per share $ 0.77 $ 0.75 $ 1.80 $ 1.86
======== ======== ========== ========
Diluted earnings per share $ 0.76 $ 0.74 $ 1.78 $ 1.85
======== ======== ========== ========
Dividends per share $ 0.17 $ 0.17 $ 0.51 $ 0.49
======== ======== ========== ========
Weighted average shares outstanding 27,011 26,691 26,528 26,719
======== ======== ========== ========
Diluted average shares outstanding 27,320 26,978 26,895 26,925
======== ======== ========== ========
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands)
Nine Months Ended
March 31,
------------------------
1998 1997
-------- -------
OPERATING ACTIVITIES:
Net income $ 47,863 $49,698
Adjustments for noncash items:
Depreciation and amortization 46,224 31,117
Other 6,394 6,911
Changes in certain assets and liabilities, net of
effects of acquisitions:
Accounts receivable (34,729) (653)
Inventories (14,769) 1,405
Accounts payable and accrued liabilities 13,116 (2,658)
Other (1,555) (16,669)
-------- -------
Net cash flow from operating activities 62,544 69,151
-------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (61,156) (57,024)
Disposals of property, plant and equipment 1,739 348
Acquisitions, net of cash (741,575) (17,665)
Other (3,421) 4,637
-------- -------
Net cash flow used for investing activities (804,413) (69,704)
-------- -------
FINANCING ACTIVITIES:
Increase (decrease) in short-term debt (89,343) 21,390
Increase in term debt 778,540 943
Reduction in term debt (200,804) (8,427)
Purchase of treasury stock - (2,631)
Net proceeds from issuance and sale of common stock 171,450 -
Net proceeds from issuance and sale of subsidiary stock 90,430 -
Dividend reinvestment and employee stock plans 9,936 4,762
Cash dividends paid to shareholders (13,401) (13,109)
Other (6,089) -
-------- -------
Net cash flow from financing activities 740,719 2,928
-------- -------
Effect of exchange rate changes on cash (1,888) (767)
-------- -------
CASH AND EQUIVALENTS:
Net increase (decrease) in cash and equivalents (3,038) 1,608
Cash and equivalents, beginning 21,869 17,090
-------- -------
Cash and equivalents, ending $ 18,831 $18,698
======== =======
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 44,137 $ 6,421
Income taxes paid 19,957 35,445
Purchase of treasury stock included in
current liabilities - 14,788
See accompanying notes to condensed consolidated financial
statements.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------------------
1. The condensed consolidated financial statements should be
read in conjunction with the Notes to Consolidated Financial
Statements included in the Company's 1997 Annual Report. The
condensed consolidated balance sheet as of June 30, 1997 has
been derived from the audited balance sheet included in the
Company's 1997 Annual Report. These interim statements are
unaudited; however, management believes that all adjustments
necessary for a fair presentation have been made and all
adjustments are normal, recurring adjustments. The results
for the three months and nine months ended March 31, 1998 are
not necessarily indicative of the results to be expected for
the full fiscal year.
2. Inventories are stated at lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for a
significant portion of domestic inventories and the first-in,
first-out (FIFO) method or average cost for other
inventories. The Company used the LIFO method of valuing its
inventories for approximately 51 percent of total inventories
at March 31, 1998. Because inventory valuations under the
LIFO method are based on an annual determination of
quantities and costs as of June 30 of each year, the interim
LIFO valuations are based on management's projections of
expected year-end inventory levels and costs. Therefore, the
interim financial results are subject to any final year-end
LIFO inventory adjustments.
3. The major classes of inventory as of the balance sheet dates
were as follows (in thousands):
March 31, June 30,
1998 1997
-------- --------
Finished goods $270,230 $183,961
Work in process and powder blends 123,885 50,351
Raw materials and supplies 58,238 16,494
-------- --------
Inventory at current cost 452,353 250,806
Less LIFO valuation (41,261) (40,695)
-------- --------
Total inventories $411,092 $210,111
======== ========
4. The Company has been involved in various environmental
cleanup and remediation activities at several of its
manufacturing facilities. In addition, the Company has been
named as a potentially responsible party at several Superfund
sites in the United States. However, it is management's
opinion, based on its evaluations and discussions with
outside counsel and independent consultants, that the
ultimate resolution of these environmental matters will not
have a material adverse effect on the results of operations,
financial position or cash flows of the Company.
The Company maintains a Corporate Environmental, Health and
Safety (EH&S) Department to facilitate compliance with
environmental regulations and to monitor and oversee
remediation activities. In addition, the Company has
established an EH&S administrator at each of its domestic
manufacturing facilities. The Company's financial management
team periodically meets with members of the Corporate EH&S
Department and the Corporate Legal Department to review and
evaluate the status of environmental projects and
contingencies. On a quarterly and annual basis, management
establishes or adjusts financial provisions and reserves for
environmental contingencies in accordance with Statement of
Financial Accounting Standards (SFAS) No. 5, "Accounting for
Contingencies."
5. On July 2, 1997, an initial public offering (IPO) of
approximately 4.9 million shares of common stock at a price
of $20.00 per share of JLK Direct Distribution Inc. (JLK), a
subsidiary of the Company, was consummated. JLK operates the
industrial supply operations consisting of the Company's
wholly owned J&L Industrial Supply (J&L) subsidiary and its
Full Service Supply programs. The net proceeds from the
offering were approximately $90 million and represented
approximately 20 percent of JLK's common stock. The
transaction has been accounted for as a capital transaction
in the Company's consolidated financial statements. The net
proceeds were used by JLK to repay $20 million of
indebtedness related to a dividend to the Company and
$20 million related to intercompany obligations to the
Company. The Company used these proceeds to repay short-term
debt. Additional net proceeds of $44 million have been used
to make acquisitions (see Note 6). The remaining net
proceeds are loaned to the Company under an intercompany
debt/investment and cash management agreement at a
fluctuating rate of interest equal to the Company's short-
term borrowing cost. The Company will maintain unused lines
of credit to enable it to repay any portion of the borrowed
funds as the amounts are due on demand by JLK.
The Company today owns approximately 80 percent of the
outstanding common stock of JLK and intends to retain a
majority of both the economic and voting interests of JLK.
6. During the quarter ended March 31, 1998, JLK acquired
Production Tools Sales, Inc. (PTS), Dalworth Tool & Supply
Inc.(Dalworth Tool) and ATS Industrial Supply (ATS). All
three companies are engaged in the distribution of
metalcutting tools and supplies and the companies had
combined annual sales of approximately $49 million.
The acquisitions were accounted for using the purchase method
of accounting. The consolidated financial statements include
the operating results from the respective dates of
acquisition. Pro forma results of operations have not been
presented because the effects of these acquisitions were not
significant.
Additionally, on May 1, 1998, JLK acquired Strong Tool Co.
(Strong), a distributor of metalcutting tools, industrial
supplies and maintenance, repair and operating supplies
headquartered in Cleveland, Ohio. Strong reported sales of
$64 million for the year ended December 31, 1997, and has a
major presence in the Midwest, primarily in Ohio and Indiana.
On October 10, 1997, Kennametal and Kennametal Acquisition
Corp. (Acquisition Corp.) entered into a Merger Agreement
with Greenfield Industries, Inc. (Greenfield) pursuant to
which Acquisition Corp. purchased at $38.00 per share on
November 17, 1997, approximately 16,179,976 (98% of the
outstanding) shares of Greenfield's common stock (Tender
Offer). Pursuant to the Merger Agreement, a merger of
Acquisition Corp. into Greenfield (Merger) occurred on
November 18, 1997, and Greenfield became a wholly owned
subsidiary of Kennametal on that date. The total purchase
price for the acquisition of Greenfield (including estimated
transaction costs and assumed Greenfield debt and convertible
redeemable preferred securities of approximately
$320 million) was approximately $1.0 billion.
Pro forma results of operations for the acquisition of
Greenfield, but excluding the effects of all other
acquisitions, are based on the historical financial
statements of the Company and Greenfield adjusted to give
effect to the acquisition of Greenfield. The pro forma
results of operations for the three and nine months ended
March 31, 1998 and 1997 assume that the acquisition of
Greenfield occurred as of the first day of the Company's 1997
fiscal year (July 1, 1996).
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 upon
completion of appraisals or other studies of the fair value
of Greenfield's assets and liabilities.
The preliminary allocation of the estimated purchase price to
assets acquired and liabilities assumed is as follows:
Working capital, other than cash $ 190,615
Property, plant and equipment 171,514
Other assets 1,685
Other liabilities ( 28,366)
Long-term debt (325,502)
Goodwill 645,850
---------
Net purchase price $ 655,796
=========
The pro forma financial information 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 date, as specified above, or to
project the Company's financial condition or results of
operations for any future period.
Three months ended Nine months ended
March 31, March 31,
------------------ --------------------
(in thousands) 1998 1997 1998 1997
------ ------- -------- --------
Net sales $496.6 $425.7 $1,412.2 $1,221.7
Net income $ 20.7 $ 14.4 $ 40.3 $ 32.0
Basic earnings per share $ 0.77 $ 0.54 $ 1.52 $ 1.20
Diluted earnings per share $ 0.76 $ 0.53 $ 1.50 $ 1.19
7. In connection with the acquisition of Greenfield, the
Company, on November 17, 1997, entered into a $1.4 billion
Credit Agreement (New Bank Credit Facility) with BankBoston,
N.A., Deutsche Bank AG, New York Branch and/or Cayman Islands
Branch, Mellon Bank N.A. and PNC Bank, National Association.
At March 31, 1998, the Company had outstanding borrowings of
$327.5 million under a term loan and approximately
$583.3 million in revolving credit loans under the New Bank
Credit Facility. Interest payable under the term loan and
revolving credit loans are currently based on LIBOR plus
1.375%. The proceeds from the loans were principally used to
pay for the shares of common stock of Greenfield purchased in
the Tender Offer and the Merger, to pay transaction costs, to
refinance certain indebtedness of Greenfield, and to
refinance certain indebtedness of the Company.
Subject to certain conditions, the New Bank Credit Facility
permits revolving credit loans of up to $900 million for
working capital requirements, capital expenditures, and
general corporate purposes. The New Bank Credit Facility was
initially secured by all of the stock of certain of
Kennametal's significant domestic subsidiaries, by guarantees
of certain such subsidiaries and by 65% of the stock of
Kennametal's significant foreign subsidiaries. On
December 24, 1997, the stock held as security was released.
The New Bank Credit Facility contains various restrictive and
affirmative covenants requiring the maintenance of certain
financial ratios. The term loans under the New Bank Credit
Facility are subject to mandatory amortization commencing on
November 30, 1998, and all loans mature on August 31, 2002.
8. On March 20, 1998, the Company sold 3.45 million shares of
common stock resulting in net proceeds of $171.5 million. The
proceeds were used to reduce a portion of the Company's long-
term debt incurred in connection with the acquisition of
Greenfield (See Note 7).
9. On January 23, 1998, the Company postponed its proposed
offerings of approximately $450 million of equity and equity-
related securities and $450 million of senior debt securities
due to a decline in its stock price. The proceeds of such
offerings would have been used to make prepayments of
outstanding borrowings under the New Bank Credit Facility.
In anticipation of the proposed senior debt securities
offering, the Company also entered into three one-month
interest rate hedges on an aggregate notional value of
$225 million under a treasury lock arrangement in order to
reduce its exposure to fluctuations in interest rates. The
interest rate hedges met the criteria required to use hedge
accounting.
As a result of the postponement of the planned offerings, the
Company terminated the interest rate hedges. This was due in
part to the uncertainty of when the Company would re-enter
the market in the future. As a result, the Company
recognized a loss of approximately $3.5 million in the
quarter ending March 31, 1998, to terminate the interest rate
hedges. The termination of the interest rate hedges has
eliminated any further earnings impact from these hedges due
to changes in interest rates. Additionally, the Company
wrote-off deferred financing costs of $1.1 million related to
the postponed offerings.
10. Basic earnings per share for fiscal 1998 was computed using
the weighted average number of shares outstanding during the
period, while diluted earnings per share was calculated to
reflect the potential dilution that occurs related to
issuance of common stock under stock option grants. The
difference between basic and diluted earnings per share
relates solely to the effect of common stock options.
For purposes of determining the number of dilutive shares
outstanding, weighted average shares outstanding for basic
earnings per share calculations were increased from the
dilutive effect of unexercised stock options, by 309,000 and
287,000 shares for the three months ended March 31, 1998 and
1997 and by 367,000 and 206,000 shares for the nine months
ended March 31, 1998 and 1997, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------------
RESULTS OF OPERATIONS
SALES AND EARNINGS
- ------------------
During the quarter ended March 31, 1998, consolidated sales were
$497 million, up 68 percent from $295 million in the same quarter
last year. Excluding acquisitions and unfavorable foreign
currency translation effects, sales increased 8 percent during
the quarter. The 8 percent increase in sales was primarily
attributable to continued higher sales of metalworking products
in North America and Europe and from higher sales of industrial
supplies sold through Kennametal's JLK Direct Distribution Inc.
(JLK) subsidiary.
Net income for the third quarter ended March 31, 1998, was
$20.7 million, or $0.76 per share on a diluted basis, as compared
with net income of $19.9 million, or $0.74 per share on a diluted
basis in the same quarter last year. The results were reduced by
approximately $5.4 million, or $0.20 per share, including one-
time costs of $0.10 per share as a result of the Greenfield
acquisition. Excluding the effects of the Greenfield
acquisition, earnings per share would have been $0.96 per share.
During the nine-month period ended March 31, 1998, consolidated
sales were $1.2 billion, up 40 percent from $844 million last
year. Net income was $47.9 million, or $1.78 per share on a
diluted basis, compared to $49.7 million, or $1.85 per share on a
diluted basis last year.
The following table presents the Company's sales and geographic
area information (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- -----------------------------
1998 1997 % Change 1998 1997 %
Change
-------- -------- -------- ---------- -------- --------
Metalworking:
North America $107,546 $ 95,992 12% $ 304,041 $277,835 9%
Europe 80,029 65,116 23 216,735 187,525 16
Asia Pacific 7,180 9,721 (26) 27,133 30,480 (11)
Industrial Supply 113,013 86,693 30 309,487 234,061 32
Mining and Construction 37,683 37,843 - 120,287 114,102 5
Greenfield Industries 151,134 - - 199,742 - -
-------- -------- --- ---------- -------- ---
Net sales $496,585 $295,365 68% $1,177,425 $844,003 40%
======== ======== === ========== ======== ===
By Geographic Area:
Within the
United States $335,434 $192,173 75% $ 784,015 $545,843 44%
International 161,151 103,192 56 393,410 298,160 32
-------- -------- --- ---------- -------- ---
Net sales $496,585 $295,365 68% $1,177,425 $844,003 40%
======== ======== === ========== ======== ===
METALWORKING MARKETS
- --------------------
Sales of traditional metalcutting products sold through all sales
channels in North America, including sales through the Industrial
Supply market, increased 14 percent during the quarter. This
increase was the fourth consecutive quarter of double-digit sales
and reflects deeper and broader market and customer penetration
as a result of Kennametal's channel strategy. This increase in
sales was broad based across most industries. Sales, as
reflected in the North America Metalworking market, increased
12 percent during the quarter.
Sales in the Europe Metalworking market on a local currency basis
increased 31 percent over the same quarter a year ago. Demand
for metalworking products continued to show strong gains in
nearly all industries in the European market with particular
strength coming from the automotive and machine tool builder
industries. Sales also benefited from recent acquisitions.
Excluding acquisitions and taking into account unfavorable
currency translation effects, sales in the Europe Metalworking
market increased 7 percent. Unfavorable currency translation
effects were 8 percent during the quarter.
The Asia Pacific Metalworking market, representing only 1 percent
of total sales, decreased 8 percent on a local currency basis
during the quarter. The results were affected by weak economic
conditions across most Asia Pacific countries. Including
unfavorable foreign currency translation effects, sales in this
market decreased 26 percent.
For the nine-month period, sales in the North America
Metalworking market increased 9 percent, sales in the Europe
Metalworking market increased 16 percent, and sales in the Asia
Pacific Metalworking market decreased 11 percent. Sales in the
Metalworking markets for the nine-month period benefited from the
same factors mentioned above.
INDUSTRIAL SUPPLY MARKET
- ------------------------
Sales in the Industrial Supply market rose 30 percent. Sales
increased primarily because of acquisitions, an expanded product
offering and from further penetration of existing customers
despite a significant reduction in sales due to the General
Electric Full Service Supply contract disengagement. Excluding
acquisitions, sales increased approximately 3 percent.
Additionally, during the quarter, JLK acquired three metalworking
distribution companies and on May 1, 1998, acquired another
metalworking distributor. The four companies had combined annual
sales of approximately $113 million. JLK also opened two new
locations during the quarter, one in the United States and one in
Germany.
For the nine-month period, sales in the Industrial Supply market
increased 32 percent and benefited from the same factors
mentioned above.
MINING AND CONSTRUCTION MARKET
- ------------------------------
Sales in the Mining and Construction market were flat from a year
ago. Sales of mining tools were affected by lower underground
coal production as a result of the unusually warm winter. Demand
for highway construction tools also was affected by wet weather
conditions.
For the nine-month period, sales of mining and construction tools
increased 5 percent and were affected by the factors mentioned
above.
GREENFIELD INDUSTRIES
- ---------------------
Sales of Greenfield Industries, Inc. for the quarter ended
March 31, 1998 increased 9 percent from the same period of a year
ago. Overall, sales increased as a result of strong economic
conditions in the United states.
GROSS PROFIT MARGIN
- -------------------
As a percentage of sales, gross profit margin for the March 1998
quarter was 40.3 percent as compared with 42.9 percent in the
prior year. Excluding the effects of the Greenfield acquisition,
the gross profit margin would have been 44.7 percent. The gross
profit margin improved significantly as a result of productivity
improvements and cost reductions related to the Focused Factory
initiative, from higher production levels and from a more
favorable sales mix. This increase was partially offset by
unfavorable foreign currency translation effects.
For the nine-month period, the gross profit margin was
41.0 percent, compared with 42.0 percent last year. The gross
profit margin declined slightly as a result of the acquisition of
Greenfield and a less favorable sales mix. This decline was
partially offset by productivity improvements related to the
Focused Factory initiative and improved manufacturing
efficiencies due to higher production volumes.
OPERATING EXPENSES
- ------------------
For the quarter ended March 31, 1998, operating expenses as a
percentage of sales were 26.2 percent compared to 30.7 percent
last year. Excluding the effects of the Greenfield acquisition,
operating expenses would have been 29.9 percent. Operating
expenses were again controlled despite higher costs related to
acquisitions, higher sales volumes and from the JLK showroom
expansion program. Benefits also are being realized as a result
of efficiencies from the world headquarters project.
Additionally, amortization of intangibles increased approximately
$5.1 million related primarily to the Greenfield acquisition.
For the nine-month period, operating expenses as a percentage of
sales were 28.6 percent compared to 31.3 percent last year.
Operating expenses, on an absolute dollars basis, increased
primarily because of the acquisition of Greenfield, higher costs
to support the JLK expansion program and higher costs associated
with other acquisitions.
INTEREST EXPENSE
- ----------------
Interest expense for the March 1998 quarter increased
$18.0 million as a result of increased borrowings, including
$0.3 million for the amortization of bank financing fees related
to the acquisition of Greenfield. Additionally, on March 20,
1998, Kennametal sold 3.45 million shares of common stock and
received net proceeds of approximately $171.5 million. The net
proceeds were used to repay debt related to the acquisition of
Greenfield. This transaction had a minimal impact on interest
expense during the quarter.
For the nine-month period, interest expense was $40.6 million
compared to $8.2 million last year. The increase in interest
expense was primarily related to the acquisition of Greenfield.
OTHER INCOME(EXPENSE)
- ---------------------
Other income (expense)increased $4.8 million during the quarter
as a result of the write-off of deferred financing costs related
to the postponed January 998 debt and equity offerings. These
costs, which totaled $4.6 million, included the termination of a
treasury lock hedge that amounted to $3.5 million and the write-
off of other related offering expenses of $1.1 million.
For the nine-month period, other income (expense) was
$(5.4) million compared to $1.2 million last year and was
affected by the factors mentioned above.
INCOME TAXES
- ------------
The effective tax rate for the March 1998 quarter was
42.5 percent compared to an effective tax rate of 37.6 percent in
the prior year. The increase in the effective tax rate is
directly attributable to higher nondeductible goodwill related to
the Greenfield acquisition.
For the nine-month period, the effective tax rate was
42.5 percent compared to 38.4 percent in the prior year. The
increase in the effective tax rate is attributable to higher
nondeductible goodwill related to the acquisition of Greenfield.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash flow from operations is the primary source of
financing for capital expenditures and internal growth. During
the nine months ended March 31, 1998, the Company generated
approximately $63 million in cash from operations. The increase
in cash provided by operations resulted from higher noncash
items, such as depreciation and amortization, offset in part by
higher incremental working capital requirements.
Net cash used in investing activities was $804 million. The
increase in net cash used in investing activities primarily
resulted from the acquisition of Greenfield Industries.
Additionally, increased investments were made in the Shanghai,
China manufacturing subsidiary.
Net cash flow from financing activities was $741 million. The
increase in net cash from financing activities was a result of
the sale of 3.45 million shares of common stock resulting in net
proceeds of $171.5 million that were used to repay debt and from
increased borrowings under the New Bank Credit Facility to
finance the acquisition of Greenfield. Net cash flow from
financing activities also increased because of proceeds received
from the issuance of common stock of the Company's JLK
subsidiary.
On October 10, 1997, Kennametal and Acquisition Corp. entered
into the Merger Agreement with Greenfield pursuant to which
Acquisition Corp. purchased at $38.00 per share on November 17,
1997, approximately 16,179,976 (98% of the outstanding) shares of
Greenfield's common stock. The Merger occurred on November 18,
1997, and Greenfield became a wholly owned subsidiary of
Kennametal on that date. The total purchase price for the
acquisition of Greenfield (including estimated transaction costs
and assumed Greenfield debt and convertible redeemable preferred
securities of approximately $320 million) was approximately
$1.0 billion.
In connection with the acquisition of Greenfield, the Company, on
November 17, 1997, entered into a $1.4 billion New Bank Credit
Facility with BankBoston, N.A., Deutsche Bank AG, New York Branch
and/or Cayman Islands Branch, Mellon Bank N.A. and PNC Bank,
National Association. At March 31, 1998, the Company had
outstanding borrowings of $327.5 million under a term loan and
approximately $583.3 million in revolving credit loans under the
New Bank Credit Facility. The proceeds from the loans were
principally used to pay for the shares of common stock of
Greenfield purchased in the Tender Offer and the Merger, to pay
transaction costs, to refinance certain indebtedness of
Greenfield, and to refinance certain indebtedness of the Company
(See Note 8 of the condensed consolidated financial statements).
Subject to certain conditions, the New Bank Credit Facility
permits revolving credit loans of up to $900 million for working
capital requirements, capital expenditures, and general corporate
purposes. The New Bank Credit Facility was initially secured by
all of the stock of certain of Kennametal's significant domestic
subsidiaries, by guarantees of certain such subsidiaries and by
65% of the stock of Kennametal's significant foreign
subsidiaries. On December 24, 1997, the stock held as security
was released. The New Bank Credit Facility contains various
restrictive covenants and affirmative covenants requiring the
maintenance of certain financial ratios. The term loans under
the New Bank Credit Facility are subject to mandatory
amortization commencing on November 30, 1998 and all term and
revolving credit loans mature on August 31, 2002.
On January 23, 1998, the Company postponed its proposed offerings
of approximately $450 million of equity and equity-related
securities and $450 million of senior debt securities due to a
decline in its stock price. The proceeds of such offerings would
have been used to make prepayments of outstanding borrowings
under the New Bank Credit Facility.
In anticipation of the proposed senior debt securities offering,
the Company also entered into three one-month interest rate
hedges on an aggregate notional value of $225 million under a
treasury lock arrangement in order to reduce its exposure to
fluctuations in interest rates. The interest rate hedges met the
criteria required to use hedge accounting.
As a result of the postponement of the planned offerings, the
Company terminated the interest rate hedges. This was due in
part to the uncertainty of when the Company would re-enter the
market in the future. As a result, the Company recognized a loss
of approximately $3.5 million in the quarter ending March 31,
1998, to terminate the interest rate hedges. The termination of
the interest rate hedges has eliminated any further earnings
impact from these hedges due to changes in interest rates.
Total assets were $2.1 billion at March 31, 1998, up from
$869 million at June 30, 1997. Net working capital was
$518 million, up from $176 million at June 30, 1997, and the
ratio of current assets to current liabilities was 2.8 as of
March 31, 1998 and 1.6 as of June 30, 1997. Also, the debt-to-
capital ratio (i.e., total debt divided by the sum of total debt,
minority interest, and shareholders' equity) was 56.5 percent as
of March 31, 1998, and 27.5 percent as of June 30, 1997.
YEAR 2000
- ---------
The Company is actively addressing the many areas affected by the
Year 2000 issues. The Company initiated a program beginning in
fiscal 1996 to prepare its computer systems and applications for
the Year 2000. A review has been performed of all key business,
operational and financial systems; and some of the Company's
computer software applications have already been replaced with
Year 2000 compliant software. For those software applications
that have not been addressed, the Company has developed a plan to
correct or mitigate potential issues.
The Company will continue to utilize both internal staff and
outside consultants to complete the necessary modifications and
anticipates that the associated costs to address these issues
will not have a material impact on the Company's results of
operations, financial position or cash flows. Implementation is
expected to be completed in fiscal 1999.
OUTLOOK
- -------
In looking to the fourth quarter ending June 30, 1998, management
expects Kennametal's consolidated sales to increase over the
fourth quarter of a year ago.
Sales in the North America Metalworking market and at Greenfield
should benefit from continuing strong market conditions in the
United States. Sales in the Europe Metalworking market also are
expected to benefit from steadily improving market conditions
throughout Europe, especially in Germany. Sales in the Asia
Pacific Metalworking market are expected to remain weak.
Sales in the Industrial Supply market should benefit from
acquisitions, the expansion of locations, increased mail order
sales as a result of the expanded product offering in the new J&L
Industrial Supply master catalog, offset in part by the
disengagement of the General Electric Full Service Supply
contract. Sales in the Mining and Construction market should
increase from additional domestic demand for highway construction
tools.
This Form 10-Q contains "forward-looking statements" as defined
in Section 21E of the Securities Exchange Act of 1934. Actual
results can materially differ from those in the forward-looking
statements to the extent that the anticipated economic conditions
in the United States, Asia Pacific and Europe are not sustained.
The Company undertakes no obligation to publicly release any
revisions to forward-looking statements to reflect events or
circumstances occurring after the date hereof.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
- -----------------------------------------------------------------
On April 8, 1998, the Board of Directors elected Timothy S. Lucas
to the Board. Mr. Lucas is chairman, president and chief
executive officer of MacroSonix Corporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------------------------
(a) Exhibits
(27) Financial Data Schedule for nine months ended
March 31, 1998, submitted to the Securities and Exchange
Commission in electronic format. Filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K dated January 20, 1998, was filed
during the
quarter ended March 31, 1998, and related to the
Company's
acquisition of Greenfield Industries, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
KENNAMETAL INC.
Date: May 15, 1998 By: /s/ RICHARD J. ORWIG
--------------------
Richard J. Orwig
Vice President
Chief Financial and
Administrative Officer
5
1,000
9-MOS
JUN-30-1998
JUL-01-1997
MAR-31-1998
18,831
0
355,308
13,653
411,092
805,482
879,507
370,926
2,122,387
287,321
0
0
0
41,025
678,220
2,122,387
1,177,425
1,177,425
694,431
694,431
24,551
1,660
40,593
91,160
38,700
47,863
0
0
0
47,863
1.80
1.78
