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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 October 30, 1998
- ---------------------------------------- -------------------------------
Capital Stock, par value $1.25 per share 29,872,449
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KENNAMETAL INC.
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Item No. Page
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PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1998 and June 30, 1998................................................................... 1
Condensed Consolidated Statements of Income (Unaudited)
Three months ended September 30, 1998 and 1997......................................................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended September 30, 1998 and 1997......................................................... 3
Notes to Condensed Consolidated Financial Statements
(Unaudited) .......................................................................................... 4
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................................. 8
PART II. OTHER INFORMATION
4. Submission of Matters to a Vote of Security Holders.................................................... 12
6. Exhibits and Reports on Form 8-K....................................................................... 12
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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(in thousands)
September 30, June 30,
1998 1998
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ASSETS
Current assets:
Cash and equivalents $ 21,044 $ 18,366
Accounts receivable, less allowance for
doubtful accounts of $13,565 and $11,974 342,128 332,677
Inventories 458,836 436,472
Deferred income taxes 31,954 31,316
----------- -----------
Total current assets 853,962 818,831
----------- -----------
Property, plant and equipment:
Land and buildings 228,583 222,426
Machinery and equipment 729,502 690,143
Less accumulated depreciation (417,893) (386,642)
----------- -----------
Net property, plant and equipment 540,192 525,927
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Other assets:
Investments in affiliated companies 4,856 13,740
Intangible assets, less accumulated
amortization of $44,839 and $39,408 698,981 706,619
Deferred income taxes 39,193 39,426
Other 40,547 34,450
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Total other assets 783,577 794,235
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Total assets $ 2,177,731 $ 2,138,993
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LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases $ 109,094 $ 78,632
Notes payable to banks 49,286 48,103
Accounts payable 100,794 115,373
Accrued payroll 26,197 30,600
Accrued vacation pay 25,337 21,523
Other current liabilities 91,159 82,838
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Total current liabilities 401,867 377,069
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Long-term debt and capital leases, less current maturities 846,472 840,932
Deferred income taxes 44,651 45,253
Other liabilities 95,763 98,073
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Total liabilities 1,388,753 1,361,327
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Minority interest in consolidated subsidiaries 52,361 42,206
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SHAREHOLDERS' EQUITY
Preferred stock, 5,000 shares authorized; none issued -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
32,820 shares issued 41,025 41,025
Additional paid-in capital 321,466 320,645
Retained earnings 461,122 458,805
Treasury shares, at cost; 2,947 and 2,991 shares held (58,586) (59,131)
Accumulated other comprehensive income (28,410) (25,884)
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Total shareholders' equity 736,617 735,460
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Total liabilities and shareholders' equity $ 2,177,731 $ 2,138,993
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See accompanying notes to condensed consolidated financial statements.
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KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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(in thousands, except per share data)
Three Months Ended
September 30,
---------------------------------
1998 1997
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OPERATIONS
Net sales $ 480,922 $ 310,792
Cost of goods sold 301,906 178,569
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Gross profit 179,016 132,223
Research and development expenses 5,571 5,227
Selling, marketing and distribution expenses 102,484 68,571
General and administrative expenses 30,864 24,720
Amortization of intangibles 6,405 1,052
----------- -----------
Operating income 33,692 32,653
Interest expense 17,621 1,180
Other expense 416 440
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Income before income taxes and minority interest 15,655 31,033
Provision for income taxes 6,700 12,100
Minority interest 1,561 1,385
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Net income $ 7,394 $ 17,548
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PER SHARE DATA
Basic earnings per share $ 0.25 $ 0.67
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Diluted earnings per share $ 0.25 $ 0.66
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Dividends per share $ 0.17 $ 0.17
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Weighted average shares outstanding 29,857 26,171
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Diluted weighted average shares outstanding 29,940 26,526
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See accompanying notes to condensed consolidated financial statements.
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KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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(in thousands)
Three Months Ended
September 30,
--------------------------------
1998 1997
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OPERATING ACTIVITIES
Net income $ 7,394 $ 17,548
Adjustments for noncash items:
Depreciation and amortization 23,717 10,326
Other 1,623 1,091
Changes in certain assets and liabilities, net of effects of acquisitions:
Accounts receivable 3,527 (4,077)
Inventories (17,438) (2,319)
Accounts payable and accrued liabilities (11,587) 8,935
Other (11,941) 9,150
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Net cash flow from operating activities (4,705) 40,654
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INVESTING ACTIVITIES
Purchases of property, plant and equipment (27,348) (16,695)
Disposals of property, plant and equipment 1,712 193
Acquisitions, net of cash -- (17,031)
Purchase of subsidiary stock (332) --
Other 328 1,116
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Net cash flow from investing activities (25,640) (32,417)
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FINANCING ACTIVITIES
Change in short-term debt 1,100 (72,733)
Increase in long-term debt 36,807 --
Reduction in long-term debt (945) (939)
Net proceeds from issuance and sale of subsidiary stock -- 90,430
Dividend reinvestment and employee stock plans 1,366 4,062
Cash dividends paid to shareholders (5,077) (4,457)
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Net cash flow from financing activities 33,251 16,363
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Effect of exchange rate changes on cash (228) (1,060)
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CASH AND EQUIVALENTS
Net increase in cash and equivalents 2,678 23,540
Cash and equivalents, beginning 18,366 21,869
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Cash and equivalents, ending $ 21,044 $ 45,409
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SUPPLEMENTAL DISCLOSURES
Interest paid $ 20,814 $ 520
Income taxes paid 6,909 2,257
See accompanying notes to condensed consolidated financial statements.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. The condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements included in
the company's 1998 Annual Report. The condensed consolidated balance sheet
as of June 30, 1998 has been derived from the audited balance sheet
included in the company's 1998 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 ended September 30,
1998 are not necessarily indicative of the results to be expected for the
full fiscal year. Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform with the current
year presentation.
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 50 percent of total inventories at September
30, 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):
September 30, June 30,
1998 1998
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Finished goods $ 321,282 $ 302,374
Work in process and powder blends 118,256 117,428
Raw materials and supplies 56,821 53,449
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Inventory at current cost 496,359 473,251
Less LIFO valuation (37,523) (36,779)
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Total inventories $ 458,836 $ 436,472
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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
one Superfund site 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. For purposes of determining the average number of dilutive shares
outstanding, weighted average shares outstanding for basic earnings per
share calculations were increased due to the dilutive effect of unexercised
stock options by 83,129 and 355,149 for the three months ended September
30, 1998 and 1997, respectively.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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6. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires the presentation of
comprehensive income in a company's financial statement disclosures.
Comprehensive income represents all changes in the equity of a company
during the reporting period, including net income, as well as charges and
credits directly to retained earnings which are excluded from net income.
The components of comprehensive income consist of the following (in
thousands):
Three Months Ended
September 30,
---------------------------------
1998 1997
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Net income $ 7,394 $ 17,548
Foreign currency translation adjustments (2,526) (1,318)
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Comprehensive income $ 4,868 $ 16,230
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Accumulated other comprehensive income consists solely of cumulative
foreign currency translation adjustments.
7. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The company must adopt the standard by the
beginning of the first quarter of fiscal year 2000. SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments imbedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Accounting for qualifying
hedges allow a derivative's gains and losses to offset related results on
the hedged item in the income statement, and requires that a company must
formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The company is currently evaluating the
effects of SFAS No. 133 and does not believe that the adoption will have a
material effect on the financial statements or results of operation of the
company.
8. On July 2, 1997, an initial public offering (IPO) of approximately 4.9
million shares of common stock of JLK Direct Distribution Inc. (JLK), a
subsidiary of the company, was consummated at a price of $20.00 per share.
JLK's operations consist of the company's wholly owned subsidiary J&L
Industrial Supply (J&L) and its Full Service Supply programs. The net
proceeds from the offering were approximately $90.4 million and represented
approximately 20 percent of JLK's common stock. The transaction has been
accounted for as a capital transaction in the consolidated financial
statements. The net proceeds were used by JLK to repay $20.0 million of
indebtedness related to a dividend to the company and $20.0 million related
to intercompany obligations to the company incurred in 1997. The company
used these proceeds to repay short-term debt. Pending other uses, the
remaining net proceeds were 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 costs. The remaining
net proceeds of $50.4 million were used to make acquisitions in 1998.
9. On November 17, 1997, the company completed the acquisition of Greenfield
Industries, Inc. (Greenfield) for approximately $1.0 billion, including
$324.4 million in assumed Greenfield debt and convertible redeemable
preferred securities and transaction costs.
The Greenfield acquisition was recorded using the purchase method of
accounting and, accordingly, the results of operations of Greenfield have
been included in the company's results from the date of acquisition. The
purchase price was allocated to assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. The excess
of purchase price over the fair value of the net assets acquired has been
recorded as goodwill and is being amortized over forty years.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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Additionally, the company made several other acquisitions in 1998 to expand
its product offering and distribution channels. These acquisitions were
accounted for using the purchase method of accounting and their results
have been included in the company's results from the respective dates of
acquisition. Except for Greenfield, the pro forma effects, individually and
collectively, of the acquisitions in the company's consolidated financial
statements would not materially impact the reported results.
The allocation of the purchase price to assets acquired and liabilities
assumed of Greenfield is as follows (in thousands):
Working capital, other than cash $171,710
Property, plant and equipment 167,798
Other assets 9,246
Other liabilities (28,510)
Long-term debt (318,146)
Goodwill 654,117
--------
Net purchase price $656,215
========
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 assume that the acquisition of Greenfield occurred as of the
first day of the company's 1998 fiscal year (July 1, 1997).
Three Months Ended
(in thousands, except per share data) September 30, 1997
------------------
Net sales $450,628
Net income 13,746
Basic earnings per share 0.53
Diluted earnings per share 0.52
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.
On June 26, 1998, the company sold the Marine Products division of
Greenfield which operated as Rule Industries, Inc. (Rule). The company
acquired Rule as part of its acquisition of Greenfield and, for strategic
reasons, chose to divest itself of this part of the business. Annual sales
of the Marine Products division were approximately $25.0 million. Cash
proceeds of $62.1 million were used to reduce a portion of the company's
long-term debt incurred in connection with the acquisition of Greenfield
(see Note 10).
10. In connection with the acquisition of Greenfield, the company entered into
a new $1.4 billion Bank Credit Agreement (Agreement). Subject to certain
conditions, the Agreement permits term loans of up to $500.0 million and
revolving credit loans of up to $900.0 million for working capital, capital
expenditures and general corporate purposes. Interest payable under the
term loan and revolving credit loans are currently based on LIBOR plus
0.875%. The Agreement also includes a commitment fee on the revolving
credit loans of 0.25% of the unused balance.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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The Agreement also contains various restrictive and affirmative covenants
requiring the maintenance of certain financial ratios. The term loan under
the Agreement is subject to mandatory amortization commencing on November
30, 1998, and matures on August 31, 2002. The revolving credit loan also
matures on August 31, 2002. During fiscal 1998, the term loan was
permanently reduced with the net proceeds received in connection with the
issuance of company stock and from the sale of certain assets (see Notes 9
and 11).
11. On March 20, 1998, the company sold 3.45 million shares of common stock
resulting in net proceeds of $171.4 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 10).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
SALES AND EARNINGS
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During the quarter ended September 30, 1998, consolidated sales were $480.9
million, up 55 percent from $310.8 million in the same quarter last year. The
increase in sales was primarily attributable to the Greenfield acquisition,
which accounted for $126.4 million of sales in the quarter ended September 30,
1998. Sales rose 56 percent excluding unfavorable foreign currency translation
effects. These results were adversely affected by lower sales of metalworking
products in North America and industrial supplies sold by J&L Industrial Supply
(J&L), excluding acquisitions, and by Full Service Supply programs, both
operating within Kennametal's JLK Direct Distribution Inc. (JLK) subsidiary.
Sales also were affected by softer market conditions, the General Motors strike,
and the previously disclosed disengagement from the General Electric Full
Service Supply program (GE Contract). These factors were partially offset by
stronger demand in the European metalworking market.
Net income for the quarter ended September 30, 1998, was $7.4 million, or $0.25
per diluted share, as compared with net income of $17.5 million, or $0.66 per
diluted share in the same quarter last year. The decline in earnings was the
result of lower sales in traditional Kennametal markets, lower earnings at JLK
and higher interest and amortization expense related to acquisitions.
The following table presents the Company's sales by geographic area (in
thousands):
Three Months Ended
September 30,
-------------------------------------------------
1998 1997 % Change
---- ---- --------
Sales(1):
Metalworking:
North America $ 93,629 $101,901 (8)%
Europe 75,119 60,456 24
Asia Pacific 9,309 11,753 (21)
Industrial Supply 128,991 92,785 39
Mining and Construction 47,441 43,897 8
Greenfield Industries 126,433 -- --
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Net sales $480,922 $310,792 55 %
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By Geographic Area:
Within the United States $332,888 $209,963 59 %
International 148,034 100,829 47
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Net sales $480,922 $310,792 55 %
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(1) Certain amounts in prior year sales have been reclassified to conform
to the current year presentation.
METALWORKING MARKETS
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During the September 1998 quarter, sales in the North America Metalworking
market decreased 8 percent from the previous year. Demand for Kennametal
metalworking products was mixed across most end markets and was particularly
weaker in the automotive industry, due in part to the General Motors strike.
Reduced production in the agriculture equipment and oil services markets further
contributed to lower demand in the North American Metalworking market. Sales of
Kennametal traditional metalcutting products sold through all sales channels in
North America, including sales through the Industrial Supply market, decreased 3
percent during the quarter.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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Sales in the Europe Metalworking market increased 24 percent over the same
quarter of a year ago. Demand for metalworking products continued to show gains
in nearly all key industries in the European market with sustained strength
coming especially from the automotive and truck industries. Additionally, the
heavy engineering market, which includes power generation, engines, pumps and
valves, and aerospace market exhibit continued demand for metalworking products.
Acquisition-related sales accounted for 14 percent of the sales gain. Favorable
foreign currency translation effects were 1 percent during the quarter. European
sales were favorably affected by $5.8 million as a result of the company's
purchase of an increased ownership of affiliated companies in Italy. The
operating results of these affiliates now are consolidated into the company's
results, effective July 1, 1998.
In the Asia Pacific Metalworking market, sales declined 3 percent on a local
currency basis during the quarter. Sales continued to be affected by weak
economic conditions across most Asia Pacific countries. Including unfavorable
foreign currency translation effects, sales in the Asia Pacific Metalworking
market decreased 21 percent.
INDUSTRIAL SUPPLY MARKET
- ------------------------
Sales in the Industrial Supply market rose 39 percent primarily because of
acquisitions, which accounted for approximately $41.7 million of the sales gain.
Excluding the acquisitions, sales decreased approximately 6 percent primarily
due to lower sales to the automotive industry as a result of the General Motors
strike, and a $14.7 million reduction in sales from the GE Contract
disengagement. Excluding the effects of acquisitions and the GE Contract
disengagement, sales increased 11 percent. Additionally, a new showroom was
opened in Boston, Mass., the new 1999 J&L Industrial Supply master catalog was
launched in late September, and 30 new Full Service Supply programs were added
compared to the same quarter a year ago.
MINING AND CONSTRUCTION MARKET
- ------------------------------
During the September 1998 quarter, sales in the Mining and Construction market
increased 8 percent from a year ago and benefited from the Greenfield
acquisition. Excluding Greenfield, sales declined 13 percent as a result of
lower sales of metallurgical powders used in the oil field services industry.
GREENFIELD INDUSTRIES
- ---------------------
Sales of Greenfield Industries products for the quarter ended September 30, 1998
decreased 2 percent compared to the same period a year ago, excluding the
effects of the sale of the Marine division in June 1998. Sales of consumer
products increased due to new programs initiated late in fiscal 1998, while
sales of industrial products remained relatively unchanged. Additionally, sales
to markets served by Greenfield Industries were adversely affected by weaker
market conditions in the oil services industry and in electronic circuit board
manufacturing.
GROSS PROFIT MARGIN
- -------------------
As a percentage of sales, the gross profit margin for the September 1998 quarter
was 37.2 percent as compared with 42.5 percent in the prior year. The gross
profit margin was affected by lower-margin sales from acquired companies, an
unfavorable sales mix and unfavorable foreign currency effects. Excluding the
effects of Greenfield, the gross margin would have been 40.7 percent.
OPERATING EXPENSES
- ------------------
Operating expenses as a percentage of sales were 28.9 percent compared to 31.7
percent last year. The prior-year results include additional expenses of $5.2
million for the completion of the company's world headquarters project.
Excluding the effects of Greenfield, the operating expense ratio for the first
quarter of fiscal 1999 would have been 32.6 percent. This increase in operating
expenses is attributed to the inclusion of operating expenses of acquired
companies, the JLK expansion program,
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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including costs to relocate JLK's office and warehouse in the United Kingdom,
and other programs. Additionally, amortization of intangibles increased
approximately $5.4 million related primarily to the acquisition of Greenfield
and other companies.
INTEREST EXPENSE
- ----------------
Interest expense for the September 1998 quarter increased $16.4 million,
including approximately $0.3 million for the amortization of bank financing fees
related to the acquisition of Greenfield and other companies, compared to $1.2
million in the same quarter of a year ago. Interest expense increased as a
result of increased borrowings due to the Greenfield acquisition in November
1997.
INCOME TAXES
- ------------
The effective tax rate for the September 1998 quarter was 42.8 percent compared
to an effective tax rate of 39.0 percent in the prior year. The increase in the
effective tax rate is attributable to higher, nondeductible goodwill related to
the acquisitions.
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 quarter ended September 30,
1998, the Company used $4.7 million in cash from operations. The decrease in
cash provided by operations resulted primarily from lower net income and
increased working capital requirements.
Net cash used for investing activities was $25.6 million. The decrease in net
cash used in investing activities consisted of higher capital expenditures to
acquire additional client-server information systems and to upgrade machinery
and equipment, offset by a reduction in the level of acquisition activity in the
first quarter of fiscal 1999.
Net cash from financing activities was $33.3 million. The increase in net cash
from financing activities was a result of additional borrowings under the
company's existing revolving credit line to fund working capital needs, offset
by cash dividends paid during the quarter.
FINANCIAL CONDITION
- -------------------
Total assets were $2.2 billion at September 30, 1998, up 2 percent from $2.1
billion at June 30, 1998. Net working capital was $452.1 million, up 75 percent
from $258.4 million from last year and 2 percent from $441.8 million at June 30,
1998. The ratio of current assets to current liabilities was 2.1 as of September
30, 1998 and 2.2 as of June 30, 1998. The total debt-to-total-capital ratio was
56.0 percent as of September 30, 1998, and 55.4 percent as of June 30, 1998.
YEAR 2000
- ---------
Management believes that the company has substantially mitigated its exposure
relative to year 2000 issues for both information and non-information technology
systems. The company initiated a program beginning in 1996 to prepare its
computer systems, computer applications and other systems for the year 2000. A
management committee actively monitors the status of the readiness program of
each of the company's business units. The company estimates the total year 2000
expenditures to be approximately $45.0 million, half of which are for computer
hardware, to replace non-compliant computer systems, and the other half to
replace non-compliant computer software, including software implementation and
employee training. The majority of these costs were incurred in 1997 and 1996.
Expenditures to rectify non-compliant personal computers and various
non-information technology items are estimated to be an additional $5.0 million.
Total expenditures expected to be incurred in fiscal 1999 are estimated to be
approximately $12.0 million related to the year 2000 issues. These costs include
both internal and external personnel costs related to the assessment process, as
well as
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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the cost of purchasing certain hardware and software. There can be no guarantee
that these estimates will be achieved and actual results could differ from those
planned. The company has currently completed more than 75 percent of the tasks
identified to remediate the year 2000 exposure, with the remaining tasks to be
completed by June 1999.
Management believes the most significant impact of the year 2000 issue could be
an interrupted supply of goods and services from the company's vendors. The
company has an ongoing effort to gain assurances and certifications of
suppliers' readiness programs. Contingency plans include the search for
alternate certified vendors and the increase of safety stock of critical
materials and supplies.
At September 30, 1998, management currently believes the company continues to
make progress toward achieving a timely completion of the tasks identified to
remediate the year 2000 exposure.
OUTLOOK
- -------
In looking to the second quarter ending December 31, 1998, management expects
Kennametal's consolidated sales to increase over the second quarter of a year
ago due to the acquisition of Greenfield and other companies.
In the North America Metalworking market, sales levels in the second quarter
should remain flat due to an overall softening market. Sales in the Europe
Metalworking market are expected to remain strong, however, year-to-year gains
likely will be less robust than they were in the first quarter. Sales in the
Asia Pacific Metalworking market are expected to remain weak.
Sales in the Industrial Supply market should continue to benefit from recent
acquisitions, from a refocusing of management's attention on the core business,
from the new, expanded J&L master catalog and from new Full Service Supply
programs. Sales in Mining and Construction also are expected to remain impacted
by the decline in the oil field services market.
This Form 10-Q contains "forward-looking statements" as defined by Section 21E
of the Securities Exchange Act of 1934. Actual results can differ materially
from those in the forward-looking statements to the extent that the economic
conditions in the United States, Europe and, to a lesser extent, Asia Pacific,
and the effect of third party or company failures to achieve timely remediation
of year 2000 issues, change from the company's expectations. The company
undertakes no obligation to publicly release any revisions to forward-looking
statements to reflect events or circumstances occurring after the date hereof.
11
14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
At the Annual Meeting of Stockholders on October 26, 1998, the stockholders of
the company voted on the election of directors and independent public
accountants. The following is the number of shares voted in favor of and against
each matter, and the number of shares having authority to vote on each matter
but withheld.
1. With respect to the votes cast for directors whose terms expire in
2001:
For Withheld Broker Non-Vote
-----------------------------------------
A. Peter Held 25,953,911 144,837 --
Aloysius T. McLaughlin, Jr. 25,950,957 147,791 --
Larry Yost 25,955,548 143,200 --
The following other directors' terms of office continued after the
meeting:
Richard C. Alberding, Peter B. Bartlett, Warren H. Hollinshead, Timothy
S. Lucas, Robert L. McGeehan and William R. Newlin.
2. With respect to the election of the firm of Arthur Andersen LLP,
independent public accountants, to audit the financial statements of
the company and its subsidiary companies for the fiscal year ending
June 30, 1999:
For Against Abstained Broker Non-Vote
------------------------------------------------------
Arthur Andersen LLP 26,002,023 45,767 50,957 --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
(27) Financial Data Schedule for three months ended September
30, 1998 and 1997, submitted to the Securities and Exchange
Commission in electronic format. Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
12
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENNAMETAL INC.
Date: November 12, 1998 By: /s/ FRANK P. SIMPKINS
---------------------------
Frank P. Simpkins
Corporate Controller and
Chief Accounting Officer
13
5
1,000
3-MOS 3-MOS
JUN-30-1999 JUN-30-1998
JUL-01-1998 JUL-01-1997
SEP-30-1998 SEP-30-1997
21,044 45,409
0 0
355,693 209,514
13,565 7,370
458,836 214,068
853,962 486,570
958,085 654,940
417,893 344,377
2,177,731 919,589
401,867 228,135
0 0
0 0
0 0
41,025 36,712
695,592 493,357
2,177,731 919,589
480,922 310,792
480,922 310,792
301,906 178,569
301,906 178,569
11,976 6,279
500 304
17,621 1,180
15,655 31,033
6,700 12,100
7,394 17,548
0 0
0 0
0 0
7,394 17,548
0.25 0.67
0.25 0.66
