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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 MARCH 31, 2001
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 May 1, 2001
- ---------------------------------------- --------------------------
Capital Stock, par value $1.25 per share 30,613,766
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KENNAMETAL INC.
FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
Item No. Page
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PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended March 31, 2001 and 2000...................................... 1
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 2001 and June 30, 2000......................................................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended March 31, 2001 and 2000................................................ 3
Notes to Condensed Consolidated Financial Statements (Unaudited)......................... 4
2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 10
3. Quantitative and Qualitative Disclosures about Market Risk............................... 17
PART II. OTHER INFORMATION
6. Exhibits and Reports on Form 8-K......................................................... 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
(in thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ -----------------------------
2001 2000 2001 2000
-------- -------- ---------- ----------
OPERATIONS
Net sales $464,650 $483,019 $1,355,876 $1,379,890
Cost of goods sold 284,416 294,567 840,051 859,242
-------- -------- ---------- ----------
Gross profit 180,234 188,452 515,825 520,648
Operating expense 123,807 125,830 374,054 375,019
Restructuring and asset impairment charge 2,286 13,323 4,633 17,304
Amortization of intangibles 6,063 6,517 18,533 20,117
-------- -------- ---------- ----------
Operating income 48,078 42,782 118,605 108,208
Interest expense 12,496 13,668 39,091 41,948
Other expense, net 579 1,269 3,236 1,521
-------- -------- ---------- ----------
Income before provision for income taxes
and minority interest 35,003 27,845 76,278 64,739
Provision for income taxes 13,824 12,067 30,128 28,485
Minority interest 785 1,681 2,291 3,733
-------- -------- ---------- ----------
Income before extraordinary loss and cumulative
effect of change in accounting principle 20,394 14,097 43,859 32,521
Extraordinary loss on early extinguishment of
debt, net of tax of $178 -- -- -- (267)
Cumulative effect of change in accounting
principle, net of tax of $399 -- -- (599) --
-------- -------- ---------- ----------
Net income $ 20,394 $ 14,097 $ 43,260 $ 32,254
======== ======== ========== ==========
PER SHARE DATA
Basic earnings per share before extraordinary loss and
cumulative effect of change in accounting principle $ 0.67 $ 0.46 $ 1.44 $ 1.08
Extraordinary loss per share -- -- -- (0.01)
Cumulative effect of change in accounting
principle per share -- -- (0.02) --
-------- -------- ---------- ----------
Basic earnings per share $ 0.67 $ 0.46 $ 1.42 $ 1.07
======== ======== ========== ==========
Diluted earnings per share before extraordinary loss and
cumulative effect of change in accounting principle $ 0.66 $ 0.46 $ 1.43 $ 1.07
Extraordinary loss per share -- -- -- (0.01)
Cumulative effect of change in accounting
principle per share -- -- (0.02) --
-------- -------- ---------- ----------
Diluted earnings per share $ 0.66 $ 0.46 $ 1.41 $ 1.06
======== ======== ========== ==========
Dividends per share $ 0.17 $ 0.17 $ 0.51 $ 0.51
======== ======== ========== ==========
Basic weighted average shares outstanding 30,483 30,320 30,523 30,201
======== ======== ========== ==========
Diluted weighted average shares outstanding 30,692 30,418 30,656 30,307
======== ======== ========== ==========
See accompanying notes to condensed consolidated financial statements.
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KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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(in thousands)
March 31, June 30,
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and equivalents $ 19,987 $ 22,323
Marketable equity securities available-for-sale 13,441 27,614
Accounts receivable, less allowance for
doubtful accounts of $8,415 and $12,214 214,332 231,917
Inventories 387,520 410,885
Deferred income taxes 52,610 42,911
Other current assets 18,458 13,065
---------- ----------
Total current assets 706,348 748,715
---------- ----------
Property, plant and equipment:
Land and buildings 229,763 230,448
Machinery and equipment 763,800 720,556
Less accumulated depreciation (519,548) (452,220)
---------- ----------
Net property, plant and equipment 474,015 498,784
---------- ----------
Other assets:
Investments in affiliated companies 3,914 2,571
Intangible assets, less accumulated amortization
of $104,774 and $88,458 637,633 661,172
Other 35,263 29,879
---------- ----------
Total other assets 676,810 693,622
---------- ----------
Total assets $1,857,173 $1,941,121
========== ==========
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases $ 3,557 $ 3,855
Notes payable to banks 5,229 57,701
Accounts payable 108,371 118,908
Accrued vacation pay 30,385 28,217
Accrued income taxes 29,890 30,226
Accrued payroll 23,944 20,605
Other current liabilities 90,159 91,800
---------- ----------
Total current liabilities 291,535 351,312
---------- ----------
Long-term debt and capital leases, less current maturities 646,144 637,686
Deferred income taxes 37,531 31,727
Other liabilities 84,312 85,036
---------- ----------
Total liabilities 1,059,522 1,105,761
---------- ----------
Minority interest in consolidated subsidiaries 10,708 55,106
---------- ----------
SHAREOWNERS' EQUITY
Preferred stock, no par value; 5,000 shares authorized; none issued -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
33,525 and 33,200 shares issued 41,918 41,500
Additional paid-in capital 347,695 335,314
Retained earnings 536,443 508,733
Treasury shares, at cost; 2,970 and 2,677 shares held (68,117) (55,236)
Unearned compensation (2,883) (2,814)
Accumulated other comprehensive loss (68,113) (47,243)
---------- ----------
Total shareowners' equity 786,943 780,254
---------- ----------
Total liabilities and shareowners' equity $1,857,173 $1,941,121
========== ==========
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)
Nine Months Ended
March 31,
--------------------------
2001 2000
-------- ---------
OPERATING ACTIVITIES
Net income $ 43,260 $ 32,254
Adjustments for noncash items:
Depreciation 54,907 56,333
Amortization 18,533 20,117
Restructuring and asset impairment charge 1,091 8,143
Cumulative effect of change in accounting principle, net of tax 599 --
Loss on early extinguishment of debt, net of tax -- 267
Other 5,076 5,133
Changes in certain assets and liabilities:
Accounts receivable 7,275 (23,161)
Proceeds from accounts receivable securitization 4,300 2,700
Inventories 13,553 9,808
Accounts payable and accrued liabilities (5,271) 55,847
Other (9,839) (2,186)
-------- ---------
Net cash flow from operating activities 133,484 165,255
-------- ---------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (40,121) (34,123)
Disposals of property, plant and equipment 3,558 6,788
Purchase of subsidiary stock (42,750) --
Other (170) 277
-------- ---------
Net cash flow used for investing activities (79,483) (27,058)
-------- ---------
FINANCING ACTIVITIES
Net decrease in notes payable (2,289) (11,191)
Net increase (decrease) in revolver and other lines of credit (34,905) 8,900
Term debt borrowings 1,120 378
Term debt repayments (1,033) (123,422)
Dividend reinvestment and employee benefit and stock plans 14,414 7,925
Cash dividends paid to shareowners (15,550) (15,398)
Purchase of treasury stock (16,494) --
Other (1,315) (1,017)
-------- ---------
Net cash flow used for financing activities (56,052) (133,825)
-------- ---------
Effect of exchange rate changes on cash and equivalents (285) (228)
-------- ---------
CASH AND EQUIVALENTS
Net increase (decrease) in cash and equivalents (2,336) 4,144
Cash and equivalents, beginning of year 22,323 17,408
-------- ---------
Cash and equivalents, end of period $ 19,987 $ 21,552
======== =========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 39,734 $ 40,757
Income taxes paid 25,847 14,417
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 Kennametal Inc. (the company) 2000 Annual Report. The condensed
consolidated balance sheet as of June 30, 2000 has been derived from the
audited balance sheet included in the company's 2000 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
and nine months ended March 31, 2001 and 2000 are not necessarily
indicative of the results to be expected for a full fiscal year. Unless
otherwise specified, any reference to a "year" is to a fiscal year ended
June 30. Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform with the current year
presentation.
2. On July 20, 2000, the company proposed to the Board of Directors of JLK
Direct Distribution Inc. (JLK), an 83-percent owned subsidiary of the
company, to acquire the outstanding shares of JLK it does not already own.
On September 11, 2000, the company and JLK announced that they entered into
a definitive merger agreement for the company to acquire all the
outstanding minority shares. Pursuant to the agreement, JLK agreed to
commence a cash tender offer for all of its shares of Class A Common Stock
at a price of $8.75 per share. The tender offer commenced on October 3,
2000 and expired on November 15, 2000 resulting in JLK reacquiring 4.3
million shares for $37.5 million. Following JLK's purchase of shares in the
tender offer, the company acquired the minority shares at the same price in
a merger. The company incurred transaction costs of $3.0 million, which
were included in the total cost of the transaction. JLK incurred costs of
$2.1 million associated with the transaction, which were expensed as
incurred. The transaction was unanimously approved by the JLK Board of
Directors, including its special committee comprised of independent
directors of the JLK Board.
In July 2000, the company, JLK and the JLK directors (including one former
director) were named as defendants in several putative class action
lawsuits. The lawsuits seek an injunction, rescission, damages, costs and
attorney fees in connection with the company's proposal to acquire the
outstanding stock of JLK not owned by the company.
On November 3, 2000, the parties to the lawsuits entered into a Memorandum
of Understanding (MOU) with respect to a proposed settlement of the
lawsuits. The proposed settlement would provide for complete releases of
the defendants, as well as among other persons their affiliates and
representatives, and would extinguish and enjoin all claims that have been,
could have been or could be asserted by or on behalf of any member of the
class against the defendants which in any manner relate to the allegations,
facts, or other matters raised in the lawsuits or which otherwise relate in
any manner to the agreement, the offer and the merger. The MOU also
provides, among other matters, for the payment by JLK of up to
approximately $0.3 million in attorneys' fees and expenses to plaintiffs'
counsel. No payment is to be made for liability or damages. The final
settlement of the lawsuits, including the amount of attorneys' fees and
expenses to be paid, is subject to court approval of a definitive
stipulation of settlement.
3. 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 U.S.
inventories and the first-in, first-out (FIFO) or average cost methods for
other inventories. The company used the LIFO method of valuing its
inventories for approximately 47 percent of total inventories at March 31,
2001. 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.
Inventories as of the balance sheet dates consisted of the following (in
thousands):
March 31, June 30,
2001 2000
--------- --------
Finished goods $290,151 $306,334
Work in process and powder blends 97,194 96,101
Raw materials and supplies 34,340 35,707
-------- --------
Inventory at current cost 421,685 438,142
Less LIFO valuation (34,165) (27,257)
-------- --------
Total inventories $387,520 $410,885
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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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 is currently named as a potentially responsible party
(PRP) at several Superfund sites in the United States. In December 1999,
the company recorded a remediation reserve of $3.0 million with respect to
its involvement in these matters, which was recorded as a component of
operating expense. This represents management's best estimate of its
undiscounted future obligation based on its evaluations and discussions
with outside counsel and independent consultants, and the current facts and
circumstances related to these matters. The company recorded this liability
because certain events occurred, including sufficient progress made by the
government and the PRPs in the identification of other PRPs and review of
potential remediation solutions, that clarified the level of involvement in
these matters by the company and its relationship to other PRPs. This led
the company to conclude that it was probable that a liability had been
incurred.
In addition to the amount currently reserved, the company may be subject to
loss contingencies related to these matters estimated to be up to an
additional $3.3 million. The company believes that such undiscounted
unreserved losses are reasonably possible but are not currently considered
to be probable of occurrence. The reserved and unreserved liabilities could
change substantially in the near term due to factors such as the nature and
extent of contamination, changes in remedial requirements, technological
changes, discovery of new information, the financial strength of other PRPs
and the identification of new PRPs.
The company maintains a Corporate Environmental, Health and Safety (EH&S)
Department, as well as an EH&S Policy Committee, to ensure compliance with
environmental regulations and to monitor and oversee remediation
activities. In addition, the company has established an EH&S administrator
at 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 basis,
management establishes or adjusts financial provisions and reserves for
environmental contingencies in accordance with Statement of Financial
Accounting Standard (SFAS) No. 5, "Accounting for Contingencies."
5. For purposes of determining the number of diluted weighted average shares
outstanding, weighted average shares outstanding for basic earnings per
share calculations were increased due to the dilutive effect of unexercised
stock options by 208,441 and 98,394 for the three months ended March 31,
2001 and 2000, respectively, and 132,674 and 105,231 for the nine months
ended March 31, 2001 and 2000, respectively.
Earnings per share amounts for each quarter are required to be computed
independently and, therefore, may not equal the amount computed for a
nine-month period.
6. Comprehensive income for the three and nine months ended March 31, 2001 and
2000 is as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
2001 2000 2001 2000
------- ------- -------- --------
Net income $20,394 $14,097 $ 43,260 $ 32,254
Cumulative effect of change in accounting
principle, net of tax -- -- 1,571 --
Unrealized loss on derivatives designated and
and qualified as cash flow hedges, net of tax (533) -- (2,673) --
Reclassification of unrealized gains or losses
on matured derivatives, net of tax (319) -- (832) --
Unrealized loss on marketable equity securities
available-for-sale, net of tax (920) (348) (6,791) (3,674)
Minimum pension liability adjustment, net of tax 43 53 44 100
Foreign currency translation adjustments (5,078) (7,519) (12,189) (10,425)
------- ------- -------- --------
Comprehensive income $13,587 $ 6,283 $ 22,390 $ 18,255
======= ======= ======== ========
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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The components of accumulated other comprehensive loss consist of the
following (in thousands):
March 31, June 30,
2001 2000
-------- --------
Unrealized gain on marketable equity securities
available-for-sale, net of tax $ 1,872 $ 8,663
Unrealized losses on derivatives designated and
qualified as cash flow hedges, net of tax (1,934) --
Minimum pension liability adjustment, net of tax (806) (850)
Foreign currency translation adjustments (67,245) (55,056)
-------- --------
Total accumulated other comprehensive loss $(68,113) $(47,243)
======== ========
7. On July 1, 2000, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was adopted resulting in the recording of current
assets of $1.6 million, long-term assets of $1.4 million, current
liabilities of $1.3 million, long-term liabilities of $0.7 million, a
decrease in accumulated other comprehensive loss of $1.6 million, net of
tax, and a loss from the cumulative effect from the change in accounting
principle of $0.6 million, net of tax.
Forward contracts, purchased options and range forward contracts,
designated as cash flow hedges, hedge anticipated cash flows from
cross-border intercompany sales of product and services. These contracts
mature at various times through August 2002. Gains and losses realized on
these contracts at maturity are recorded in accumulated other comprehensive
loss, net of tax, and are recognized as a component of other expense, net
when the underlying sales of product or services are recognized into
earnings. The company recognized expense of $0.6 million and $0.7 million,
as a component of other expense, net, for the three and nine months ended
March 31, 2001, respectively, related to hedge ineffectiveness.
Floating-to-fixed interest rate swap agreements, designated as cash flow
hedges, hedge the company's floating rate debt and mature at various times
through June 2003. The fair value of these contracts is recorded in the
balance sheet, with the offset to accumulated other comprehensive loss, net
of tax. Forward contracts hedging significant cross-border intercompany
loans are considered other derivatives and therefore, not eligible for
hedge accounting. These contracts are recorded at fair value in the balance
sheet, with the offset to other expense, net. Based upon foreign exchange
and interest rates at March 31, 2001, the company expects to recognize net
current assets of $0.5 million into earnings in the next 12 months related
to all derivative instruments.
In December 2000, the company entered into Euro-denominated forward
contracts to hedge the foreign exchange exposure in the company's net
investment in Euro-based subsidiaries. The company's objective for entering
into these contracts is to reduce its exposure to fluctuations in
accumulated other comprehensive loss due to exchange rate fluctuations.
These forward contracts had a notional amount of EUR 212.0 million and
matured in January 2001.
8. In the September 2000 quarter, the company's management began to implement
a business improvement plan in the J&L Industrial Supply (J&L) and Full
Service Supply (FSS) segments. In the J&L segment, for the three and nine
months ended March 31, 2001, the company recorded a restructuring and asset
impairment charge of $0.1 million and $1.7 million, respectively,
associated with the closure of ten underperforming satellite locations and
$1.3 million and $1.9 million, respectively, for severance for 54
individuals. This includes a $0.3 million noncash write-down of the book
value of certain property, plant and equipment, net of salvage value, that
management determined would no longer be utilized in ongoing operations. In
the FSS segment, for the three and nine months ended March 31, 2001, the
company recorded restructuring charges of $0.2 million and $0.3 million,
respectively, for severance for six individuals. The costs accrued for
these plans were based on management estimates using the latest information
available at the time that the accrual was established. The company also
recorded a charge of $0.4 million associated with the write-down of certain
product lines that were discontinued as part of a program to streamline and
optimize J&L's product offering. This charge was recorded as a component of
cost of goods sold. Through March 31, 2001, the costs charged against the
accrual for satellite closures and employee severance were $0.4 million and
$1.7 million, respectively. The company incurred period costs of $0.1
million related to these initiatives through the March 2001 quarter which
were included in operating expense as incurred.
In the March 2001 quarter, the company took actions to reduce its salaried
work force in response to the weakened U.S. manufacturing sector. As a
result, the company recorded a restructuring charge of $0.9 million related
to severance for 41 individuals. The costs charged against the accrual were
$0.3 million through March 31, 2001. The company continues to review its
business strategies and pursue other cost-reduction activities in all
business segments, some of which could result in future charges.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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In 2000, the company implemented plans to close, consolidate and downsize
several plants, warehouses and offices, and associated work force
reductions as part of its overall plan to increase asset utilization and
financial performance, and to reposition the company to become the premier
tooling solutions supplier. The costs charged against the restructuring
accrual for the 2000 programs as of March 31, 2001 were as follows (in
thousands):
June 30, Cash March 31,
2000 Expenditures Adjustments 2001
-------- ------------ ----------- ---------
Employee severance $2,533 $(2,129) $(52) $ 352
Facility rationalizations 3,518 (603) -- 2,915
------ ------- ---- ------
Total $6,051 $(2,732) $(52) $3,267
====== ======= ==== ======
Through March 31, 2001, the company incurred period costs of $0.2 million
related to these initiatives which were included in cost of goods sold as
incurred. The adjustment to the accrual for employee severance is due to a
reduction in actual amounts paid to certain individuals compared to what
was initially anticipated. This adjustment was recorded as a component of
restructuring and asset impairment charge.
In 1999, management implemented restructuring plans including several
programs to reduce costs, improve operations and enhance customer
satisfaction. Accruals for these 1999 programs were $0.6 million at March
31, 2001. Costs charged against the accrual for the voluntary early
retirement plan and the plant closure through March 31, 2001 were $0.3
million and $0.7 million, respectively. In the March 2001 quarter,
management recorded an adjustment of $0.2 million related primarily to the
recovery of accounts receivable associated with the write-down of an
investment in and net receivables from certain mining and construction
operations in emerging markets. This adjustment was due to higher
collections of outstanding accounts receivable than was initially
anticipated and was recorded as a component of restructuring and asset
impairment charge.
9. In September 2000, management reorganized the financial reporting of its
operations to focus on global business units consisting of Metalworking
Services & Solutions Group (MSSG), Advanced Materials Solutions Group
(AMSG) and JLK/Industrial Supply, and corporate functional shared services.
Subsequent to the acquisition of the outstanding shares of JLK, management
split the financial reporting of these operations into two units, J&L
Industrial Supply (J&L) and Full Service Supply (FSS). The results for all
periods presented have been restated to conform to the new reporting
structure. The company's external sales, intersegment sales and operating
income by segment for the three and nine months ended March 31, 2001 and
2000 are as follows (in thousands):
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- ---------------------------
2001 2000 2001 2000
-------- -------- ---------- ----------
External sales:
MSSG $257,747 $265,878 $ 748,628 $ 761,492
AMSG 91,095 85,814 261,487 253,550
J&L Industrial Supply 77,646 96,212 242,457 270,954
Full Service Supply 38,162 35,115 103,304 93,894
-------- -------- ---------- ----------
Total external sales $464,650 $483,019 $1,355,876 $1,379,890
======== ======== ========== ==========
Intersegment sales:
MSSG $ 31,241 $ 32,330 $ 80,481 $ 102,800
AMSG 7,352 5,925 21,024 18,153
J&L Industrial Supply 981 1,711 3,026 3,621
Full Service Supply 787 1,903 4,562 5,878
-------- -------- ---------- ----------
Total intersegment sales $ 40,361 $ 41,869 $ 109,093 $ 130,452
======== ======== ========== ==========
Total sales:
MSSG $288,988 $298,208 $ 829,109 $ 864,292
AMSG 98,447 91,739 282,511 271,703
J&L Industrial Supply 78,627 97,923 245,483 274,575
Full Service Supply 38,949 37,018 107,866 99,772
-------- -------- ---------- ----------
Total sales $505,011 $524,888 $1,464,969 $1,510,342
======== ======== ========== ==========
Operating income:
MSSG $ 37,369 $ 34,658 $ 96,305 $ 89,964
AMSG 12,184 8,001 32,106 26,565
J&L Industrial Supply 2,663 7,060 4,488 16,479
Full Service Supply 2,017 3,303 5,096 7,952
Corporate and eliminations (6,155) (10,240) (19,390) (32,752)
-------- -------- ---------- ----------
Total operating income $ 48,078 $ 42,782 $ 118,605 $ 108,208
======== ======== ========== ==========
J&L operating income for the three and nine months ended March 31, 2001 was
reduced by $1.4 million and $3.6 million, respectively, related to
restructuring and asset impairment charges, $0.4 million related to product
pruning initiatives, and $0.1 million and $2.1 million, respectively, of
costs primarily related to the tender offer to acquire the outstanding
shares of JLK. FSS operating income for the three and nine months ended
March 31, 2001 was reduced by $0.2 million and $0.3 million, respectively,
related to restructuring charges. MSSG operating income for the three and
nine months ended March 31, 2001 was reduced by $1.0 million related to
restructuring and asset impairment charges. AMSG operating income for the
three and nine months ended March 31, 2001 includes a $0.3 million credit
associated with the net reduction of restructuring and asset impairment
liabilities.
MSSG operating income for the three and nine months ended March 31, 2000
was reduced by $7.7 million and $11.2 million, respectively, related to
asset impairment charges, and costs associated with employee severance and
product and facility rationalizations. AMSG operating income for the three
and nine months ended March 31, 2000 was reduced by $4.4 million and $4.7
million, respectively, related to facility rationalization charges,
including costs to exit a related joint venture, asset impairment charges
and costs associated with employee severance. Corporate operating income
for the three and nine months ended March 31, 2000 was reduced by $1.2
million and $4.5 million, respectively, related to environmental
remediation costs and costs associated with employee severance. MSSG
operating income for the nine months ended March 31, 2000 includes a gain
of $4.7 million on the sale of inventory to the FSS segment. The
elimination of this gain from consolidated results is included in Corporate
and eliminations.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The company's assets by segment at March 31, 2001 and June 30, 2000 are as
follows (in thousands):
March 31, 2001 June 30, 2000
-------------- --------------
Assets:
MSSG $ 932,724 $ 978,188
AMSG 451,327 475,741
J&L Industrial Supply 191,064 218,247
Full Service Supply 70,743 69,435
Corporate 211,315 199,510
---------- ----------
Total assets $1,857,173 $1,941,121
========== ==========
10. In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a replacement of FASB
Statement No. 125" was issued. SFAS No. 140 revises criteria for accounting
for asset securitizations, other financial-asset transfers, and collateral
and introduces new disclosures, but otherwise carries forward most of SFAS
No. 125's provisions without amendment. SFAS No. 140 has an immediate
impact through new disclosure requirements and amendments of the collateral
provisions of SFAS No. 125. These changes must be applied for fiscal years
ending after December 15, 2000. The company is currently evaluating the
effects of SFAS No. 140 and is preparing a plan for implementation.
In September 2000, the Emerging Issues Task Force (EITF) finalized EITF
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs", to
address the diversity in the income statement classification of amounts
charged to customers for shipping and handling, as well as for costs
incurred related to shipping and handling. The Issue requires all amounts
billed to a customer in a sale transaction related to shipping and handling
be classified as revenue. The Issue further requires companies to adopt and
disclose a policy on the accounting for shipping and handling costs. Such
costs may not be netted against revenue, however, disclosure of the amount
and classification of these costs is required. This Issue becomes effective
for the June 2001 quarter and should not affect reported earnings, however,
it will result in the reclassification of amounts in previously reported
financial statements. The company is currently evaluating the effects of
this Issue and is preparing a plan for implementation.
11. On December 20, 2000, the company entered into a EUR 212.0 million
Euro-denominated revolving credit facility (Euro Credit Agreement) to hedge
the foreign exchange exposure in the company's net investment in Euro-based
subsidiaries and to diversify the company's interest rate exposure. Amounts
borrowed under the Euro Credit Agreement are required to be used to repay
indebtedness under the Bank Credit Agreement, and to the extent the Bank
Credit Agreement is repaid, for working capital and general corporate
purposes. At March 31, 2001, the Euro Credit Agreement bears interest at
EURIBOR plus 1.00%, includes a commitment fee of 0.275% of the unused
balance and matures in December 2003.
On January 8, 2001, the company borrowed EUR 212.0 million under this
facility to meet its obligation under the Euro-denominated forward
contracts. The proceeds from the Euro-denominated forward contracts of
$191.1 million were used to repay amounts borrowed under the Bank Credit
Agreement. Subsequently, the availability under the Bank Credit Agreement
was permanently reduced to $700.0 million, resulting in a write-down of a
portion of deferred financing fees of $0.3 million. This charge was
recorded as a component of interest expense.
The company has designated the foreign exchange exposure under the Euro
Credit Agreement as a hedge of the company's net investment in Euro-based
subsidiaries. The company's objective for this designation is to reduce its
exposure to fluctuations in accumulated other comprehensive loss due to
exchange rate fluctuations. Future changes in the value of borrowings under
the Euro Credit Agreement due to exchange rate fluctuations will be
recorded as a component of cumulative translation adjustment, net of tax.
12. In April 2001, the company sold ATS Industrial Supply, Inc., its industrial
supply distributor based in Salt Lake City, Utah, for $7 million. This
action resulted in a net book loss of approximately $3 million and is in
line with the company's strategy to refocus the J&L segment on its core
catalog business. Annualized sales of this business were approximately $17
million.
9
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
SALES
Sales for the March 2001 quarter were $464.7 million, a decline of four percent
from $483.0 million in the year-ago quarter. Sales were flat excluding
unfavorable foreign currency effects of two percent and fewer workdays in the
March 2001 quarter. Sales benefited from broad-based growth in Europe and
sustained growth in Asia, despite continued weakness in several key North
American end markets, particularly automotive.
Sales for the nine months ended March 31, 2001 were $1,355.9 million compared to
$1,379.9 million in the same period a year ago, a decline of two percent. Sales
increased three percent excluding unfavorable foreign currency effects of three
percent and fewer workdays in the nine months ended March 31, 2001. Sales were
affected by the factors mentioned above.
GROSS PROFIT MARGIN
The consolidated gross profit margin for the March 2001 quarter was 38.8 percent
and included a charge of $0.4 million associated with the write-down of certain
product lines that were discontinued as part of a program to streamline and
optimize J&L's product offering. Excluding this charge, the gross profit margin
was essentially flat compared with 39.0 percent in the prior year, despite
weaker sales. Gross margin benefited from efficiencies from lean manufacturing
techniques, coupled with the company's focus on increasing inventory turns and
maintaining pricing discipline, despite higher material costs and energy prices.
Consolidated gross profit margin was 38.0 percent for the nine months ended
March 31, 2001, compared with 37.7 percent in same period a year ago. Period
costs included in gross profit in 2001 and 2000 were $0.2 million related
primarily to the Kingswinford plant downsizing and $2.1 million related to the
Solon, Ohio plant closure, respectively. Excluding these costs, gross profit
margin was affected by the factors mentioned above.
OPERATING EXPENSE
Consolidated operating expense for the March 2001 quarter was $123.8 million,
including $0.1 million of costs related to the tender offer to acquire the
outstanding shares of JLK, compared to $125.8 million in the same period a year
ago. Operating expense declined 2 percent, but was flat on a constant currency
basis. The company was able to offset inflationary increases through
restructuring benefits and other productivity improvements. Despite the decline,
the company incurred incremental costs of approximately $0.6 million on
investments for strategic initiatives, new sales and marketing programs,
productivity programs and the company's e-commerce initiative.
For the nine months ended March 31, 2001, operating expense was $374.1 million,
including $2.1 million of costs related primarily to the JLK tender offer,
compared to $375.0 million for the same period a year ago, which includes a $3.0
million charge for environmental remediation costs. Operating expense increased
due to incremental investment in strategic initiatives of $4.6 million,
partially offset by restructuring benefits and continued cost reduction efforts.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGE
In the September 2000 quarter, the company's management began to implement a
business improvement plan in the J&L and FSS segments. Management anticipates
costs of $15 to $20 million associated with this plan. In the J&L segment, for
the three and nine months ended March 31, 2001, the company recorded a
restructuring and asset impairment charge of $0.1 million and $1.7 million,
respectively, associated with the closure of ten underperforming satellite
locations and $1.3 million and $1.9 million, respectively, for severance for 54
individuals. This includes a $0.3 million noncash write-down of the book value
of certain property, plant and equipment, net of salvage value, that management
determined would no longer be utilized in ongoing operations. In the FSS
segment, for the three and nine months ended March 31, 2001, the company
recorded restructuring charges of $0.2 million and $0.3 million, respectively,
for severance for six individuals. The costs accrued for these plans were based
on management estimates using the latest information available at the time that
the accrual was established. Through March 31, 2001, the costs charged against
the accrual for satellite closures and employee severance were $0.4 million and
$1.7 million, respectively. The company incurred period costs of $0.1 million
related to these initiatives through the March 2001 quarter which were included
in operating expense as
10
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
incurred. Annualized benefits of approximately $4.0 million are expected to be
realized beginning in the June 2001 quarter.
In the March 2001 quarter, the company took actions to reduce its salaried work
force in response to the weakened U.S. manufacturing sector. As a result, the
company recorded a restructuring charge of $0.9 million related to severance for
41 individuals. These actions are expected to result in ongoing annual benefits
of approximately $1.0 million. The costs charged against the accrual were $0.3
million through March 31, 2001. Furthermore, through the core-business resize
program, the company expects to eliminate an additional 150 to 200 worldwide,
salaried work force positions in 2001, which is expected to result in
incremental cost of $3 to $5 million and benefits of $9 to $14 million. The
company continues to review its business strategies and pursue other
cost-reduction activities in all business segments, some of which could result
in future charges.
In 2000, the company implemented plans to close, consolidate and downsize
several plants, warehouses and offices, and associated work force reductions as
part of its overall plan to increase asset utilization and financial
performance, and to reposition the company to become the premier tooling
solutions supplier. The costs charged against the restructuring accrual for the
2000 programs as of March 31, 2001 were as follows (in thousands):
June 30, Cash March 31,
2000 Expenditures Adjustments 2001
-------- ------------ ----------- ---------
Employee severance $2,533 $(2,129) $(52) $ 352
Facility rationalizations 3,518 (603) -- 2,915
------ ------- ---- ------
Total $6,051 $(2,732) $(52) $3,267
====== ======= ==== ======
Through March 31, 2001, the company incurred period costs of $0.2 million
related to these initiatives and were included in cost of goods sold as
incurred. The adjustment to the accrual for employee severance is due to a
reduction in actual amounts paid to certain individuals compared to what was
initially anticipated. This adjustment was recorded as a component of
restructuring and asset impairment charge.
In 1999, management implemented restructuring plans including several programs
to reduce costs, improve operations and enhance customer satisfaction. Accruals
for these 1999 programs were $0.6 million at March 31, 2001. Costs charged
against the accrual for the voluntary early retirement plan and the plant
closure through March 31, 2001 were $0.3 million and $0.7 million, respectively.
In the March 2001 quarter, management recorded an adjustment of $0.2 million
related primarily to the recovery of accounts receivable associated with the
write-down of an investment in and net receivables from certain mining and
construction operations in emerging markets. This adjustment was due to higher
collections of outstanding accounts receivable than was initially anticipated
and was recorded as a component of restructuring and asset impairment charge.
INTEREST EXPENSE
Interest expense for the March 2001 quarter declined to $12.5 million due
primarily to reduced borrowing levels. The March 2001 quarter included a $0.3
million charge related to the write-down of a portion of deferred financing fees
due to the reduction of the availability under the company's U.S. credit
facility. Excluding this charge, interest expense declined 11 percent. Average
U.S. borrowing rates of 6.87 percent were essentially flat compared to a year
ago.
Interest expense for the nine months ended March 31, 2001 was $39.1 million, a
decline of eight percent compared to 2000, excluding the $0.3 million charge.
The decline was due to reduced borrowing levels, partially offset by higher
borrowing rates as the average U.S. borrowing rate was 7.26 percent in 2001,
compared to 6.62 percent for 2000.
OTHER EXPENSE, NET
Other expense for the March 2001 and 2000 quarters included fees of $1.5 million
and $1.3 million, respectively, incurred in connection with the accounts
receivable securitization program. In 2001, this was partially offset by
interest income earned on foreign cash reserves. For the nine months ended March
31, 2001 and 2000, other expense included fees of $4.7 million and $3.7 million,
respectively, related to the accounts receivable securitization program. The
increase in these fees is due to higher levels of accounts receivable sold
through this program. In the nine months ended March 31, 2000, this was
partially offset by a net one-time gain of $1.4 million from the sale of
miscellaneous underutilized assets.
11
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
INCOME TAXES
The effective tax rate for the three and nine months ended March 31, 2001 was
39.5 percent compared to an effective tax rate of 43.3 percent and 44.0 percent,
respectively, for the comparable periods in the prior year. The decline in the
effective tax rate is attributable to successful tax planning initiatives in
Europe as well as the extension of the Foreign Sales Corporation tax benefit in
the United States.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
In November 1999, the company repaid its term loan under the Bank Credit
Agreement. This resulted in an acceleration of the write-off of deferred
financing fees of $0.4 million, which has been recorded as an extraordinary item
of $0.3 million, net of tax.
CHANGE IN ACCOUNTING PRINCIPLE
On July 1, 2000, Statement of Financial Accounting Standards (SFAS) No. 133 was
adopted, resulting in the recording of a loss from the cumulative effect from
the change in accounting principle of $0.6 million, net of tax, or $0.02 per
diluted share. The loss primarily relates to the write-down of previously paid
option premiums.
NET INCOME
Net income for the quarter ended March 31, 2001 was $20.4 million, or $0.66 per
diluted share, compared to net income of $14.1 million, or $0.46 per diluted
share, in the same quarter last year. Excluding special charges in both
quarters, net income was $22.3 million, or $0.73 per diluted share in the March
2001 quarter, an increase of three percent, compared to $21.6 million, or $0.71
per diluted share, in the same quarter last year. Despite significant weakness
in key North American markets and unfavorable foreign exchange effects, the
earnings improvement is attributable to continued cost control and cost
reduction activities, lower interest expense and a reduction in the company's
effective tax rate. Special charges in the March 2001 quarter of $3.2 million,
or $0.07 per diluted share, related primarily to the J&L and FSS business
improvement programs and the core business resize program. Special charges in
the March 2000 quarter of $13.3 million, or $0.25 per diluted share, related to
operational improvement programs in the core businesses.
Net income for the nine months ended March 31, 2001 was $43.3 million, or $1.41
per diluted share, compared to $32.3 million, or $1.06 per diluted share, in the
same period last year and was affected by the same factors mentioned above.
Special charges in 2001 were $7.5 million, or $0.16 per diluted share, related
primarily to the J&L and FSS business improvement programs, costs associated
with the tender offer to acquire the outstanding shares of JLK and the core
business resize program, and $0.02 per diluted share related to the adoption of
SFAS No. 133. Special charges in 2000 were $20.8 million, or $0.39 per share,
related primarily to business improvement programs in the core businesses and a
charge for environmental remediation.
METALWORKING SERVICES & SOLUTIONS GROUP
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
External sales $257,747 $265,878 $748,628 $761,492
Intersegment sales 31,241 32,330 80,481 102,800
Operating income 37,369 34,658 96,305 89,964
MSSG sales were flat compared to the March 2000 quarter, excluding unfavorable
foreign exchange effects of three percent due to the stronger U.S. dollar.
International markets experienced strong year-over-year growth, with particular
strength in Europe. However, in North America, sales were down eight percent
primarily due to a decline in demand in the automotive market, coupled with
significant weakness in the light engineering market. In Europe, sales increased
11 percent, in local currency, due to broad-based growth reflecting strength in
the machine tool and engineering markets. Demand in the European automotive end
market remained strong, though at a slightly diminished rate compared to the
prior quarter. Sales in Asia continued to grow, up nine percent in local
currency, compared to a year ago.
12
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Operating income was $37.4 million compared to $34.7 million last year. MSSG
operating income for the three months ended March 31, 2001 was reduced by $1.0
million related to restructuring and asset impairment charges. The March 2000
quarter results were reduced by $7.7 million related to asset impairment
charges, and costs associated with employee severance and product and facility
rationalizations. Additionally, the company incurred period costs of $0.1
million in the March 2000 quarter related to a facility closing, which were
included in cost of goods sold as incurred. Excluding these charges, operating
income declined $4.1 million due primarily to lower sales in the highly
profitable North American markets, offset in part by lean initiatives and
ongoing cost controls.
For the nine months ended March 31, 2001, sales increased two percent compared
to the prior year, excluding unfavorable foreign exchange effects of four
percent, due to the same factors mentioned above. Operating income increased to
$96.3 million and was affected by the same factors as mentioned above.
Additionally, the results for the nine months ended March 31, 2000 include a
gain of $4.7 million on the sale of $12.7 million of inventory to the FSS
segment. This purchase by FSS was necessary in order for FSS to have access to
Kennametal's branded inventory subsequent to the new business system
implementation. MSSG operating income for the nine months ended March 31, 2001
and 2000 was reduced by $1.0 million and $11.2 million, respectively, related to
restructuring and asset impairment charges. Additionally, the company incurred
period costs of $0.2 million and $2.1 million, respectively, related to facility
closings in the nine months ended March 31, 2001 and 2000 which were included in
cost of goods sold as incurred.
ADVANCED MATERIALS SOLUTIONS GROUP
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ------------------------
2001 2000 2001 2000
------- ------- -------- --------
External sales $91,095 $85,814 $261,487 $253,550
Intersegment sales 7,352 5,925 21,024 18,153
Operating income 12,184 8,001 32,106 26,565
AMSG sales increased eight percent, from the March 2000 quarter, excluding
unfavorable foreign exchange effects of two percent. Sales benefited from robust
growth in energy, mining and engineered products groups due to increased gas and
oil exploration and production, and higher demand for coal. This was partially
offset from a decline in electronics due to a sharp decline in demand from the
telecommunication industry.
Operating income increased to $12.2 million compared to $8.0 million a year ago
and benefited from margin improvement in the energy and mining businesses from
higher sales levels, partially offset by operating inefficiencies in the
electronics business due to weak sales. AMSG operating income for the three
months ended March 31, 2001 includes a $0.3 million credit associated with the
net reduction of restructuring and asset impairment liabilities. Operating
income for the three months ended March 31, 2000 was reduced by $4.4 million
related to facility rationalization charges, asset impairment charges and costs
associated with employee severance.
For the nine months ended March 31, 2001, AMSG sales increased six percent
excluding unfavorable foreign currency effects of three percent due to the
factors mentioned above. Operating income increased to $32.1 million due to the
factors mentioned above. Additionally, operating income for the nine months
ended March 31, 2000 was reduced by restructuring and asset impairment charges
of $4.7 million as mentioned above.
J&L INDUSTRIAL SUPPLY
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ------------------------
2001 2000 2001 2000
------- ------- -------- --------
External sales $77,646 $96,212 $242,457 $270,954
Intersegment sales 981 1,711 3,026 3,621
Operating income 2,663 7,060 4,488 16,479
J&L Industrial Supply sales declined 18 percent, excluding unfavorable foreign
exchange effects of one percent, compared to last year as sales continue to be
significantly affected by the automotive downturn and further weakening in the
broader U.S. industrial market.
13
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Operating income was $2.7 million and included a restructuring and asset
impairment charge of $1.4 million, special charges of $0.1 million related to
the tender offer to acquire the outstanding shares of JLK and $0.4 million
related to product pruning initiatives. Excluding these charges, operating
income of $4.6 million was primarily affected by lower sales levels, partially
offset by operational improvements from the business improvement program. As
part of a business improvement plan, J&L recorded a restructuring and asset
impairment charge associated with the closure of two underperforming satellite
locations and severance for 51 individuals.
For the nine months ended March 31, 2001, sales declined 10 percent excluding
unfavorable foreign exchange effects of one percent, due to the factors
mentioned above. Operating income of $4.5 million was reduced by $3.6 million
related to restructuring and asset impairment charges related to ten satellite
closures and severance for 54 individuals, $2.1 million of costs primarily
related to the tender offer to acquire the outstanding shares of JLK and the
product pruning charge. Excluding these costs, operating income was reduced due
to the factors mentioned above.
FULL SERVICE SUPPLY
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- -----------------------
2001 2000 2001 2000
------- ------- -------- -------
External sales $38,162 $35,115 $103,304 $93,894
Intersegment sales 787 1,903 4,562 5,878
Operating income 2,017 3,303 5,096 7,952
FSS sales increased nine percent compared to last year due to continued growth
in these programs. This growth was tempered by the downturn in the automotive
end market. Operating income was $2.0 million and included a restructuring
charge of $0.2 million related to severance for five individuals. Excluding
these charges, operating income of $2.2 million was primarily affected by a
higher portion of sales to the low-margin automotive market.
For the nine months ended March 31, 2001, sales increased 10 percent due to the
factors mentioned above. Operating income of $5.1 million was reduced by
restructuring charges of $0.3 million related to severance for six individuals.
Excluding these costs, operating income was reduced due to overall lower gross
margins due to a shift in end markets served and higher operating expense due to
higher shipping costs incurred to provide enhanced customer service.
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,
2001, the company generated $133.5 million in cash flow from operations, a
decline of $31.8 million compared to a year ago. The decline resulted primarily
from lower working capital improvements.
Net cash used for investing activities was $79.5 million, an increase of $52.4
million compared to the prior year. The increase is due primarily to the
purchase of all the outstanding shares of JLK for $40.5 million coupled with an
increase in capital spending of $6.0 million in the nine months ended March 31,
2001.
Net cash used for financing activities was $56.1 million, a decline of $77.8
million compared to the prior year. This decline is due to lower debt repayments
of $88.2 million coupled with higher company contributions of capital stock to
U.S. defined contribution pension plans of $6.5 million. This was partially
offset by treasury stock repurchases of $16.5 million. Lower debt repayments are
the result of the purchase of the JLK minority interest, lower cash flow from
operations and the repurchase of treasury stock.
The company generated free operating cash flow (FOCF) of $115.6 million and
$158.2 million for the nine months ended March 31, 2001 and 2000, respectively.
The decline in FOCF is primarily due to lower working capital improvements in
the nine months ended March 31, 2001.
14
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
In October 2000, the company continued its program to repurchase, from time to
time, up to a total of 1.6 million shares of its outstanding capital stock for
investment or other general corporate purposes. This repurchase program was
announced on January 31, 1997. During October 2000, the company purchased
600,000 shares of its capital stock at a total cost of $16.5 million, bringing
the total purchased under the authority of this program to approximately 1.4
million shares. The repurchases were financed principally by cash from
operations and short-term borrowings. Additionally, the Board of Directors
authorized the company to repurchase, from time to time, up to a total of 2.0
million additional shares of its outstanding capital stock. No repurchases have
been made under this new program. Repurchases may be made from time to time in
the open market, in negotiated or other permissible transactions.
On December 20, 2000, the company entered into a EUR 212.0 million
Euro-denominated revolving credit facility (Euro Credit Agreement) to hedge the
foreign exchange exposure in the company's net investment in Euro-based
subsidiaries and to diversify the company's interest rate exposure. Amounts
borrowed under the Euro Credit Agreement are required to be used to repay
indebtedness under the Bank Credit Agreement, and to the extent the Bank Credit
Agreement is repaid, for working capital and general corporate purposes. At
March 31, 2001, the Euro Credit Agreement bears interest at EURIBOR plus 1.00%,
includes a commitment fee of 0.275% of the unused balance and matures in
December 2003.
On January 8, 2001, the company borrowed EUR 212.0 million under this facility
to meet its obligation under the Euro-denominated forward contracts. The
proceeds from the Euro-denominated forward contracts of $191.1 million were used
to repay amounts borrowed under the Bank Credit Agreement. Subsequently, the
availability under the Bank Credit Agreement was permanently reduced to $700.0
million, resulting in a write-down of a portion of deferred financing fees of
$0.3 million. This charge was recorded as a component of interest expense.
FINANCIAL CONDITION
Total assets were $1,857.2 million at March 31, 2001, a four percent decline
from June 30, 2000. Net working capital was $414.8 million, up four percent from
$397.4 million at June 30, 2000. The ratio of current assets to current
liabilities at March 31, 2001 was 2.4 compared to 2.1 at June 30, 2000. Primary
working capital as a percentage of sales (PWC%) at March 31, 2001 was 27.9
percent, compared to 29.4 percent at June 30, 2000 and 30.0 percent at March 31,
2000. The improvements in net working capital, the current ratio and PWC% are
primarily due to company sponsored programs to reduce primary working capital.
Additionally, net working capital and the current ratio benefited from repayment
of $52.5 million of short-term notes payable to banks.
The total debt-to-total capital ratio was 45.1 percent at March 31, 2001, a
decline from 45.6 percent at June 30, 2000 and 47.6 percent at March 31, 2000.
The decline from June 30, 2000 is due to a modest debt reduction as a result of
the acquisition of the JLK minority shares and the share repurchase program,
partially offset by lower minority interest. The decline from March 31, 2000 is
due to the $82.1 million reduction in debt during this twelve-month period,
partially offset by lower minority interest.
ACQUISITION OF JLK MINORITY INTEREST
On July 20, 2000, the company proposed to the Board of Directors of JLK Direct
Distribution Inc. (JLK), an 83-percent owned subsidiary of the company, to
acquire the outstanding shares of JLK it does not already own. On September 11,
2000, the company and JLK announced that they entered into a definitive merger
agreement for the company to acquire all the outstanding minority shares.
Pursuant to the agreement, JLK agreed to commence a cash tender offer for all of
its shares of Class A Common Stock at a price of $8.75 per share. The tender
offer commenced on October 3, 2000 and expired on November 15, 2000 resulting in
JLK reacquiring 4.3 million shares for $37.5 million. Following JLK's purchase
of shares in the tender offer, the company acquired the minority shares at the
same price in a merger. The company incurred transaction costs of $3.0 million,
which were included in the total cost of the transaction. JLK incurred costs of
$2.1 million associated with the transaction, which were expensed as incurred.
The transaction was unanimously approved by the JLK Board of Directors,
including its special committee comprised of independent directors of the JLK
Board.
In July 2000, the company, JLK and the JLK directors (including one former
director) were named as defendants in several putative class action lawsuits.
The lawsuits seek an injunction, rescission, damages, costs and attorney fees in
connection with the company's proposal to acquire the outstanding stock of JLK
not owned by the company.
15
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
On November 3, 2000, the parties to the lawsuits entered into a Memorandum of
Understanding (MOU) with respect to a proposed settlement of the lawsuits. The
proposed settlement would provide for complete releases of the defendants, as
well as among other persons their affiliates and representatives, and would
extinguish and enjoin all claims that have been, could have been or could be
asserted by or on behalf of any member of the class against the defendants which
in any manner relate to the allegations, facts, or other matters raised in the
lawsuits or which otherwise relate in any manner to the agreement, the offer and
the merger. The MOU also provides, among other matters, for the payment by JLK
of up to approximately $0.3 million in attorneys' fees and expenses to
plaintiffs' counsel. No payment is to be made for liability or damages. The
final settlement of the lawsuits, including the amount of attorneys' fees and
expenses to be paid, is subject to court approval of a definitive stipulation of
settlement.
STRATEGIC ALTERNATIVES
In April 2001, the company sold ATS Industrial Supply, Inc., its industrial
supply distributor based in Salt Lake City, Utah, for $7 million. This action
resulted in a net book loss of approximately $3 million and is in line with the
company's strategy to refocus the J&L segment on its core catalog business.
Annualized sales of this business were approximately $17 million.
The company is considering strategic alternatives for a subsidiary, Strong Tool
Company, including the possible divestiture of this business or a portion
thereof. In 2000, this business represented approximately $70 million in sales.
The company is currently not a party to any written or oral agreement regarding
the divestiture of this or any other business.
NEW ACCOUNTING STANDARDS
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a replacement of FASB
Statement No. 125" was issued. SFAS No. 140 revises criteria for accounting for
asset securitizations, other financial-asset transfers, and collateral and
introduces new disclosures, but otherwise carries forward most of SFAS No. 125's
provisions without amendment. SFAS No. 140 has an immediate impact through new
disclosure requirements and amendments of the collateral provisions of SFAS No.
125. These changes must be applied for fiscal years ending after December 15,
2000. The company is currently evaluating the effects of SFAS No. 140 and is
preparing a plan for implementation.
In September 2000, the Emerging Issues Task Force (EITF) finalized EITF Issue
00-10, "Accounting for Shipping and Handling Fees and Costs", to address the
diversity in the income statement classification of amounts charged to customers
for shipping and handling, as well as for costs incurred related to shipping and
handling. The Issue requires all amounts billed to a customer in a sale
transaction related to shipping and handling be classified as revenue. The Issue
further requires companies to adopt and disclose a policy on the accounting for
shipping and handling costs. Such costs may not be netted against revenue,
however, disclosure of the amount and classification of these costs is required.
This Issue becomes effective for the June 2001 quarter and should not affect
reported earnings, however, it will result in the reclassification of amounts in
previously reported financial statements. The company is currently evaluating
the effects of this Issue and is preparing a plan for implementation.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" as defined by Section 21E
of the Securities Exchange Act of 1934, as amended. Actual results may differ
materially from those expressed or implied in the forward-looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to, the extent that the economic conditions in the United States and
Europe, and to a lesser extent, Asia Pacific are not sustained, risks associated
with integrating and divesting businesses, demands on management resources,
risks associated with international markets such as currency exchange rates,
competition, commodity prices and risks associated with the implementation of
restructuring actions and environmental remediation activities. The company
undertakes no obligation to publicly release any revisions to forward-looking
statements to reflect events or circumstances occurring after the date hereof.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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In December 2000, the company entered into Euro-denominated forward contracts to
hedge the foreign exchange exposure in the company's net investment in
Euro-based subsidiaries. The company's objective for entering into these
contracts is to reduce its exposure to fluctuations in accumulated other
comprehensive loss due to exchange rate fluctuations. These forward contracts
had a notional amount of EUR 212.0 million and matured in January 2001.
On December 20, 2000, the company entered into a EUR 212.0 million
Euro-denominated revolving credit facility (Euro Credit Agreement) to hedge the
foreign exchange exposure in the company's net investment in Euro-based
subsidiaries and to diversify the company's interest rate exposure. Amounts
borrowed under the Euro Credit Agreement are required to be used to repay
indebtedness under the Bank Credit Agreement, and to the extent the Bank Credit
Agreement is repaid, for working capital and general corporate purposes. At
March 31, 2001, the Euro Credit Agreement bears interest at EURIBOR plus 1.00%,
includes a commitment fee of 0.275% of the unused balance and matures in
December 2003.
On January 8, 2001, the company borrowed EUR 212.0 million under this facility
to meet its obligation under the Euro-denominated forward contracts. The
proceeds from the Euro-denominated forward contracts of $191.1 million were used
to repay amounts borrowed under the Bank Credit Agreement. Subsequently, the
availability under the Bank Credit Agreement was permanently reduced to $700.0
million, resulting in a write-down of a portion of deferred financing fees of
$0.3 million. This charge was recorded as a component of interest expense.
The company has designated the foreign exchange exposure under the Euro Credit
Agreement as a hedge of the company's net investment in Euro-based subsidiaries.
The company's objective for this designation is to reduce its exposure to
fluctuations in accumulated other comprehensive loss due to exchange rate
fluctuations. Future changes in the value of borrowings under the Euro Credit
Agreement due to exchange rate fluctuations will be recorded as a component of
cumulative translation adjustment, net of tax.
The company has recently experienced higher energy and raw material costs due to
external market forces. In 2001, the company has been able to offset the affect
of rising prices through cost reduction initiatives, price increases on products
sold to customers and existing long-term purchase contracts. The company
believes its competition also will experience this trend. The company will
continue to make supply arrangements that meet the future planned operating
requirements in a cost-effective manner, but cannot predict that future price
increases will not have a material affect on the financial results of the
company.
There were no additional material changes in the company's exposure to market
risk from June 30, 2000.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
KENNAMETAL INC.
Date: May 15, 2001 By: /s/ FRANK P. SIMPKINS
-----------------------------
Frank P. Simpkins
Corporate Controller and
Chief Accounting Officer
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