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 DECEMBER 31, 1993
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 Number)
ROUTE 981 AT WESTMORELAND COUNTY AIRPORT
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650
(Address of registrant's principal executive offices)
Registrant's telephone number, including area code: (412) 539-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT JANUARY 31, 1994
------------------- -------------------------------
Capital Stock, par value $1.25 per share 13,100,327
KENNAMETAL INC.
FORM 10-Q
FOR QUARTER ENDED DECEMBER 31, 1993
------------------------------------
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
- ---------------------------------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
December 31, 1993 and June 30, 1993
Condensed Consolidated Statements of Income (Unaudited)
Three months and six months ended December 31, 1993 and 1992
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended December 31, 1993 and 1992
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
- -----------------------------
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------
(Dollars in thousands)
December 31, June 30,
1993 1993
------------- ----------
ASSETS
- ------
Current Assets:
Cash and equivalents $ 15,946 $ 4,149
Accounts receivable, less allowance for
doubtful accounts of $9,005 and $2,062 116,986 89,496
Inventories 157,075 115,230
Other current assets 12,245 -
----------- -----------
Total current assets 302,252 208,875
----------- -----------
Property, plant and equipment 475,886 402,428
Less: accumulated depreciation (218,811) (210,123)
----------- -----------
Net property, plant and equipment 257,075 192,305
----------- -----------
Other Assets:
Investments in affiliated companies 5,033 4,819
Intangible assets, less accumulated
amortization of $14,416 and $12,368 58,654 29,766
Other 27,127 12,498
----------- -----------
Total other assets 90,814 47,083
Total assets $ 650,141 $ 448,263
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of term debt
and capital leases $ 10,547 $ 2,184
Notes payable to banks 40,409 20,553
Accounts payable 39,447 32,492
Accrued vacation pay 14,177 12,233
Other 77,617 20,536
----------- -----------
Total current liabilities 182,197 87,998
----------- -----------
Term Debt and Capital Leases
Less Current Maturities 94,165 87,891
Deferred Income Taxes 18,644 10,744
Other Liabilities 53,482 6,489
----------- -----------
Total liabilities 348,488 193,122
----------- -----------
Minority Interest 4,645 -
Shareholders' Equity:
Capital stock, $1.25 par value;
30,000,000 shares authorized;
14,684,829 shares issued 18,356 15,891
Preferred stock, 5,000,000 shares authorized
and none issued - -
Additional paid-in capital 100,373 28,135
Retained earnings 228,176 263,531
Treasury shares, at cost (1,652,559 and
1,754,744 shares) (42,793) (44,974)
Cumulative translation adjustments (7,104) (7,442)
----------- -----------
Total shareholders' equity 297,008 255,141
----------- -----------
Total liabilities and shareholders' equity $ 650,141 $ 448,263
=========== ===========
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
------------------ ----------------
December 31, December 31,
1993 1992 1993 1992
---------- ---------- ---------- ----------
NET SALES $195,167 $140,697 $370,832 $289,527
COSTS AND EXPENSES:
Cost of goods sold 118,254 86,123 223,901 175,977
Research and development 3,958 3,824 7,590 7,557
Marketing 47,384 35,348 90,214 71,456
General and administrative 15,615 10,568 29,672 21,535
Interest expense 3,603 2,407 7,687 4,818
Amortization of intangibles 1,011 829 1,959 1,657
Restructuring charge - - 24,749 -
Patent Settlement - (1,738) - (1,738)
---------- ---------- --------- ---------
Total costs and expenses 189,825 137,361 385,772 281,262
---------- ---------- --------- ---------
OTHER INCOME 580 142 957 238
INCOME (LOSS) BEFORE TAXES ON INCOME,
MINORITY INTEREST AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGES 5,922 3,478 (13,983) 8,503
PROVISION FOR INCOME TAXES 2,000 1,400 500 3,400
MINORITY INTEREST IN LOSSES OF
HERTEL AG 166 - 515 -
---------- ---------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGES 4,088 2,078 (13,968) 5,103
CUMULATIVE EFFECT OF ACCOUNTING CHANGES,
NET OF INCOME TAXES:
POSTRETIREMENT BENEFITS - - (20,060) -
INCOME TAXES - - 5,057 -
---------- ----------- --------- ---------
NET INCOME (LOSS) $ 4,088 $ 2,078 $(28,971) $ 5,103
========== ========== ========= =========
PER SHARE DATA:
Earnings (loss) before cumulative
effect of accounting changes $ 0.35 $ 0.19 $ (1.29) $ 0.47
Cumulative effect of accounting changes:
Postretirement benefits - - (1.83) -
Income taxes - - 0.46 -
---------- ---------- --------- ---------
Earnings (loss) per share $ 0.35 $ 0.19 $ (2.66) $ 0.47
========== ========== ========= =========
Dividends per share $ 0.29 $ 0.29 $ 0.58 $ 0.58
========== ========== ========= =========
Average shares outstanding
(in thousands) 11,533 10,834 11,292 10,824
========== ========== ========= =========
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------
(Dollars in thousands)
Six Months Ended
----------------
December 31,
1993 1992
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(28,971) $ 5,103
Adjustments for non-cash items 37,803 15,841
Changes in certain assets and liabilities 4,445 (9,522)
--------- ---------
Net cash flow from operating activities 13,277 11,422
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (13,350) (13,491)
Purchase of Hertel AG, net of cash (19,226) -
Other 3,165 (1,915)
--------- ---------
Net cash flow used for investing activities (29,411) (15,406)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt 3,132 7,432
Increase (decrease) in term debt (664) 1,000
Reduction in term debt (45,736) (4,093)
Net proceeds from issuance of common stock 73,692 -
Dividend reinvestment and employee stock plans 3,192 1,118
Cash dividends paid to shareholders (6,385) (6,274)
Other - 750
--------- ---------
Net cash flow from (used for) financing activities 27,231 (67)
--------- ---------
Effect of exchange rate changes on cash 700 (150)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 11,797 (4,201)
Cash and equivalents, beginning 4,149 9,007
--------- ---------
Cash and equivalents, ending $ 15,946 $ 4,806
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 6,591 $ 5,186
Income taxes paid $ 3,587 $ 11,745
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
1. The condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements
included in the company's 1993 Annual Report. The condensed
consolidated balance sheet as of June 30, 1993 has been derived from
the audited balance sheet included in the company's 1993 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 six months ended December 31, 1993 are not necessarily
indicative of the results to be expected for the full fiscal year.
2. Inventories are stated at lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for a significant portion
of domestic inventories and the first-in, first-out (FIFO) method or
average cost for other inventories. The company used the LIFO method
of valuing its inventories for approximately 60 percent of total
inventories at December 31, 1993. Because inventory valuations under
the LIFO method are based on an annual determination of quantities and
costs as of June 30 of each year, the interim LIFO valuations are
based on management's projections of expected year-end inventory
levels and costs. Therefore, the interim financial results are
subject to any final year-end LIFO inventory adjustments.
3. The major classes of inventory as of the balance sheet dates were as
follows (dollars in thousands):
December 31, June 30,
1993 1993
------------- ---------
Finished goods $108,776 $ 97,365
Work in process and powder blends 52,746 38,177
Raw materials and supplies 21,520 8,803
---------- ----------
Inventory at current cost 183,042 144,345
Less LIFO valuation (25,967) (29,115)
---------- ----------
Total inventories $157,075 $115,230
========== ==========
4. In the ordinary course of business, there have been various legal
proceedings brought against the company, including certain product
liability cases. Since 1984, the company, along with varying numbers
of other parties, has been named as a codefendant in numerous
complaints which allege that former or existing employees of
competitors and customers suffered personal injury as a result of
exposure to certain metallurgical substances or other materials during
their employment. The involvement of many of the defendants,
including the company, is based on assertions that these defendants
sold metallurgical materials or other products to the plaintiffs'
former or existing employers. Unspecified damages are sought jointly
and severally from all defendants, with certain of the complaints
seeking both compensatory and punitive damages and others seeking
compensatory damages only. The company is vigorously defending these
cases and, to date, a significant number of these cases have been
either dismissed or settled for a nominal amount. All such dismissed
or settled cases have been resolved without a finding of liability of
the company. It is management's opinion, based on its evaluation and
discussions with outside counsel, that the company has viable defenses
to the remaining complaints and that, in any event, this litigation
will not have a material adverse effect on the results of operations
or financial position of the company.
The company has been involved in various environmental clean-up and
remediation activities at several of its manufacturing facilities. In
addition, the company has been named as a potentially responsible
party at four Superfund sites in the United States. However, it is
management's opinion, based on its evaluations and discussions with
outside counsel and independent consultants, that the ultimate
resolution of these environmental matters will not have a material
adverse effect on the results of operations or financial position of
the company.
The company maintains a Corporate Environmental, Health and Safety
(EH&S) Department to effect compliance with all environmental
regulations and to monitor and oversee remediation activities. In
addition, the company has established an EH&S administrator at each of
its domestic manufacturing facilities. The company's financial
management team periodically meets with members of the Corporate EH&S
Department and the Corporate Legal Department to review and evaluate
the status of environmental projects and contingencies. On a
quarterly and annual basis, management establishes or adjusts
financial provisions and reserves for environmental contingencies in
accordance with Statement of Financial Accounting Standards (SFAS)
No. 5, "Accounting for Contingencies."
5. On August 4, 1993, the company completed the acquisition of an 81
percent interest in Hertel AG (Hertel) for $43 million in cash and $55
million of assumed debt. Hertel is a manufacturer of cemented carbide
tools and tooling systems based in Furth, Germany.
The Hertel acquisition was recorded under the purchase method of
accounting and, accordingly, the results of operations of Hertel for
the period beginning as of August 4, 1993 forward are included in the
accompanying financial statements. The purchase price has been
allocated to assets acquired and liabilities assumed based on fair
market values at the date of acquisition. The excess of the purchase
price over the fair market value of the net assets acquired has been
recorded as goodwill and is being amortized over forty years. The
fair values of assets acquired and liabilities assumed are summarized
below (in thousands):
Current assets $117,500
Property, plant and equipment 73,700
Intangible assets (goodwill) 30,900
Other noncurrent assets 10,700
Current liabilities 102,400
Long-term liabilities 83,200
As presented above, current liabilities includes a reserve of
approximately $34.1 million (pretax) for the restructuring of Hertel.
The restructuring costs primarily include amounts for severance, phase-
out, relocation and provisions for the disposal of surplus inventory
and machinery and equipment. It is expected that the restructuring,
which began on August 4, 1993, will be substantially completed during
fiscal year 1995.
The effect of the purchase on the company's operations, assuming the
transaction had occurred on July 1, 1992, would be as follows:
PRO FORMA (UNAUDITED)
- ---------------------------------------------
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
------------------ ----------------
December 31, December 31,
1993 1992 1993 1992
-------- --------- --------- --------
Net sales $195,167 $178,895 $383,514 $353,191
======== ========= ========= ========
Income (loss) before cumulative
effect of accounting changes $ 4,088 $ (1,357) $(15,741) $ 256
======== ========= ========= ========
Net income (loss) $ 4,088 $ (1,357) $(30,744) $ 256
======== ========= ========= ========
Per share data:
Earnings (loss) before cumulative
effect of accounting changes $ 0.35 $ (0.12) $ (1.39) $ 0.03
Cumulative effect of accounting changes:
Postretirement benefits - - (1.78) -
Income taxes - - 0.45 -
-------- --------- --------- --------
Earnings (loss) per share $ 0.35 $ (0.12) $ (2.72) $ 0.03
======== ========= ========= ========
The pro forma financial information presented above does not purport
to present what the company's results of operations would actually
have been if the acquisition of Hertel had occurred on July 1, 1992,
or to project the company's results of operations for any future
period.
6. In connection with the acquisition of Hertel, the company announced on
September 3, 1993 that it intends to close its manufacturing facility
in Neunkirchen, Germany. During the September 1993 quarter, the
company recognized a special charge of approximately $20.4 million
after taxes in connection with the Neunkirchen closure and other
integration related actions.
7. Effective July 1, 1993, the company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The
change did not significantly affect earnings before cumulative effect
of changes in methods of accounting in the three and six month periods
ended December 31, 1993.
The company provides varying levels of postretirement health care and
life insurance benefits to most U.S. employees who retire from active
service after having attained age 55 and 10 years of service. This
plan remains in effect for all current retirees and employees that
will retire prior to January 1, 1997. However, for those employees
retiring on or after January 1, 1997, the following plan amendments
will be effective. The retirees' health care payments will be capped
at 1996 levels. To qualify for medical benefits at normal retirement
(age 65 or later), employees must have a minimum of 5 years of service
after age 40. Medical benefits will be available for only those
retirements that begin on or after the normal retirement age of 65.
The following table presents the components of the company's liability
for future retiree health care and life insurance benefits as of
July 1, 1993.
(Dollars in thousands)
July 1,
1993
-------------
Accumulated postretirement benefit obligation:
Retirees $(15,100)
Fully eligible active participants (7,600)
Other active participants (11,300)
---------
Total $(34,000)
Assets at fair value -
---------
Accrued postretirement benefit cost $(34,000)
=========
As of December 31, 1993, the company's accrued postretirement benefit
liability was $34.9 million.
The components of retiree health care cost for the three and six month
periods ended December 31, 1993 were as follows:
(Dollars in thousands)
Three Months Six Months
Ended December 31, Ended December 31,
1993 1993
------------------ ------------------
Service cost $ 300 $ 600
Interest cost 700 1,400
------ ------
Total cost $1,000 $2,000
====== ======
The discount rate used in calculating the accumulated postretirement
benefit obligation is 8.5 percent. For fiscal year 1994, the assumed
rates of increase in health care costs used to calculate the
accumulated postretirement benefit obligation are 15.0 percent for
retirees under age 65 and 10.0 percent for persons age 65 and older.
These rates are assumed to decrease to varying degrees annually to 6.0
percent for years 2002 and thereafter. A one percent increase in the
trend rate would increase both the accumulated postretirement benefit
obligation at July 1, 1993 and the total cost of the plan for the
second quarter of fiscal year 1994 by approximately eight percent.
The accumulated postretirement benefit obligation is unfunded.
8. Effective July 1, 1993, the company adopted SFAS No. 109, "Accounting
for Income Taxes". The company previously accounted for income taxes
pursuant to the provisions of APB No. 11. The new standard requires
the use of the liability method to recognize deferred income tax
assets and liabilities using expected future tax rates. As a result
of implementing the change in accounting principle, a net deferred tax
liability of $5.6 million was recognized relating to net operating
loss carryforwards and other tax attributes existing as of July 1,
1993. In addition, the income tax effect of the new method of
accounting related to the company's adoption of SFAS No. 106 as of
July 1, 1993 was the recognition of additional deferred tax assets of
$13.9 million. The combined effect of these items resulted in the
recognition of an $8.3 million net deferred tax asset and a net income
tax benefit of $5.1 million. The components of the company's deferred
income tax assets and liabilities arising under SFAS No. 109 were as
follows:
(Dollars in thousands)
As of
July 1, 1993
---------------------
Deferred tax assets:
Net operating loss carryforwards $ 1,086
Deductible temporary differences:
Inventories 6,375
Property, plant and equipment 1,902
Vacation pay 3,287
Pensions and other long-term liabilities 2,288
Postretirement benefits other than pensions 13,940
Other deductible temporary differences 2,424
Valuation allowance (1,086)
--------
30,216
Deferred tax liabilities:
Accumulated depreciation (21,953)
--------
Net deferred tax asset $ 8,263
========
As of July 1, 1993, the company had available foreign net operating
loss carryforwards of approximately $3.2 million expiring in 1996
through 2001.
As a component of its cumulative adjustment from implementing
SFAS No. 109, the company recognized a charge of $1.1 million to
establish a valuation reserve related to certain tax attributes
comprising its net deferred tax asset. As of July 1, 1993, deferred
tax liabilities associated with existing taxable temporary differences
exceeded deferred tax assets from future deductible temporary
differences, excluding those attributable to SFAS No. 106, by
approximately $5.7 million. The recognition by the company as of
July 1, 1993 of the entire transition obligation related to adopting
the provisions of SFAS No. 106 resulted in the recognition of a $13.9
million deferred tax asset. Future operating costs under SFAS No. 106
are expected to exceed deductible amounts for income tax purposes for
many years. In addition, under current Federal tax regulations,
should the company incur tax losses in future periods, such losses may
be carried forward to offset taxable income for a period of up to 15
years. Based upon the length of the period during which the SFAS No.
106-generated deferred tax asset can be utilized, the company believes
that it is more likely than not that future taxable income will be
sufficient to fully offset these future deductions and a valuation
allowance for this deferred tax asset is not necessary. The length of
time associated with the carryforward period available to utilize
existing net operating losses is more definite. The company has
adopted a conservative approach with respect to these attributes and
provided a valuation allowance as of July 1, 1993 equal to 100% of the
value of its net operating loss carryforwards.
9. In July 1993, in connection with the acquisition of Hertel, the
company entered into a new $130 million credit agreement. The credit
agreement provided a $40 million bridge loan facility and $90 million
of revolving credit lines. The new revolving credit lines replaced
previous facilities totaling $80 million. These revolving credit
lines, of which $3.6 million were utilized at December 31, 1993,
allows borrowings through July 1996 and requires a facility fee of .15
percent per annum on the total revolving credit commitment. In
addition, there is a commitment fee of .10 percent per annum on
unborrowed amounts under one-half of the revolving credit lines.
The new credit agreement requires compliance with certain financial
covenants related to, among others, tangible net worth, fixed charge
coverage and debt leverage. The company has remained in compliance
with these covenants since the inception of this agreement.
The company also arranged DM113.5 million ($69 million) of credit
lines for Hertel which are guaranteed by the company. These
facilities, of which DM36.9 million ($21.4 million) were utilized at
December 31, 1993, allow borrowings through August 1996 and require
either a facility fee of .25 percent to .375 percent per annum on the
total facility or a commitment fee of .25 percent per annum on
unborrowed amounts.
10. On December 23, 1993, the company completed the sale of 1,715,000
shares of common stock to underwriters, at a price of $37.605 per
share, who resold these shares to the public at a price of $39.375 per
share. The net proceeds to the company were $64,018,500. In
addition, the underwriters exercised the over-allotment option for an
additional 257,250 shares of common stock at the same price per share
resulting in additional proceeds of $9,673,900. The total proceeds to
the company were $73,692,400.
The company used $38,700,000 of the proceeds from the offering to
repay the bridge loan, which has expired, and $34,992,400 to reduce
borrowings under the revolving credit lines.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
On August 4, 1993, the company completed the previously announced
acquisition of an 81 percent interest in Hertel. In connection with the
acquisition, the company obtained a new $130 million credit agreement dated
as of July 29, 1993 (the "credit agreement"). The credit agreement
provided a $40 million bridge loan facility dedicated to purchasing Hertel
shares ($38.7 million of which was borrowed) and $90 million of revolving
credit lines in two equal tranches. The bridge loan was repaid and
therefore expired. Any Tranche A loans mature on July 27, 1994 while any
Tranche B loans mature on July 27, 1996.
On December 23, 1993, the company completed the sale of 1,972,250 shares of
common stock resulting in net proceeds of $73,692,400. The company used
$38,700,000 of the proceeds from the offering to repay the bridge loan and
$34,992,400 to reduce borrowings under the revolving credit lines.
In the first quarter of 1993, the company recorded cumulative effect
charges aggregating $15 million after taxes for the adoption of
SFAS No. 106 and SFAS No. 109. While these charges did not involve the use
of cash, they had a significant effect on various components of the
company's consolidated financial position at December 31, 1993.
The ratio of current assets to current liabilities decreased from 2.4 at
June 30, 1993 to 1.7 at December 31, 1993. The debt to capital ratio
(i.e., total debt divided by the sum of total debt, minority interest and
shareholders' equity) increased to 32.5 percent as of December 31, 1993, as
compared with 30.2 percent as of June 30, 1993. The increase is due to
borrowings assumed to finance the acquisition of Hertel, the cumulative
effect charges related to SFAS No. 106 and SFAS No. 109 and the
restructuring charge relating to the closure of the company's Neunkirchen
manufacturing facility and other actions related to the integration of the
operations of Hertel with those of the company.
Capital expenditures are estimated to be $30-35 million in fiscal year
1994. Expenditures are being made to upgrade machinery and equipment and
to modernize facilities. Capital expenditures are being financed with cash
from operations and borrowings under existing revolving credit agreements.
RESULTS OF OPERATIONS
SALES AND EARNINGS
During the quarter ended December 31, 1993, consolidated sales were $195
million, up 38 percent from $141 million in the same quarter last year.
The increase in sales during the quarter resulted primarily from the
acquisition of an 81 percent interest in Hertel. Excluding Hertel, sales
were up nine percent from the prior year.
Net income for the quarter was $4.1 million, or $0.35 per share, as
compared with $2.1 million, or $0.19 per share last year. The prior year
results included a nonrecurring gain of $1.0 million, or $0.10 per share.
During the six month period ended December 31, 1993, consolidated sales
were $371 million, up 28 percent from $290 million last year. The increase
in sales during the six month period resulted primarily from the
acquisition of an 81 percent interest in Hertel. Excluding Hertel, sales
were up five percent from the prior year.
For the six month period, the company recorded a net loss of $29.0 million,
or $2.66 per share, as compared with net income of $5.1 million, or $0.47
per share, in the same period last year. The net loss for the six months
ended December 31, 1993, includes the unfavorable cumulative noncash effect
of adopting SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ($20.1 million net of income tax effect), and
the favorable cumulative noncash effect of adopting SFAS No. 109,
"Accounting for Income Taxes" ($5.1 million). In addition, the results
include a restructuring charge ($20.4 million after taxes) and the impact
of additional operating costs resulting from the adoption of SFAS No. 106
($0.6 million).
The Hertel acquisition decreased net income and increased the net loss for
the three and six month periods ended December 31, 1993, respectively, by
approximately $1.3 million and $3.1 million, respectively. Excluding the
cumulative effect of accounting changes, the restructuring charge and the
acquisition impacts, the company had net income of $5.4 million and $9.5
million for the three and six month periods ended December 31, 1993,
respectively, as compared with $2.1 million and $5.1 million last year.
The following table presents the company's sales by product class and
geographic area (dollars in thousands):
Quarter Ended December 31, Six Months
Ended December 31,
1993 1992 % Change 1993 1992 % Change
---------- ---------- -------- --------- --------- --------
Sales by Product Class:
Metalworking $166,121 $112,391 48 $311,112 $229,258 36
Mining and construction 23,294 23,436 (1) 48,572 50,104 (3)
Metallurgical 5,752 4,870 18 11,148 10,165 10
-------- -------- -------- --------
Net sales $195,167 $140,697 39 $370,832 $289,527 28
======== ======== ======== ========
Sales by Geographic Area:
Within the U.S. $123,088 $103,303 19 $242,335 $209,148 16
Foreign and export 72,079 37,394 93 128,497 80,379 60
-------- -------- -------- --------
Net sales $195,167 $140,697 39 $370,832 $289,527 28
======== ======== ======== ========
METALWORKING PRODUCTS
During the December 1993 quarter, excluding the effects of the acquisition
of Hertel, worldwide sales of metalworking products increased 11 percent
from those of the prior year.
In the United States, sales of metalcutting inserts and toolholding devices
increased 14 percent from the previous year. Total sales of industrial
supply products increased 19 percent as a result of increased sales through
full service supply programs and mail order catalogs.
International sales of metalworking products, excluding the effects of the
acquisition of Hertel, decreased five percent from the previous year
primarily because of unfavorable foreign currency translation effects and
lower sales volume in Europe. Excluding currency translation effects,
international sales were flat with those of last year.
For the six month period, excluding the effects of the acquisition of
Hertel, worldwide sales of metalworking products increased seven percent
from the prior year primarily because of increased sales of metalworking
products in the United States. Excluding foreign currency translation
effects, international sales of metalworking products decreased three
percent from last year.
MINING AND CONSTRUCTION PRODUCTS
During the December 1993 quarter, sales of mining and construction tools,
excluding the effects of the acquisition of Hertel, decreased one percent
from the previous year as a result of unfavorable foreign currency
translation effects and weak domestic and international demand for mining
tools.
For the six month period, sales of mining and construction tools, excluding
the effects of the acquisition of Hertel, decreased three percent from the
prior year primarily because of unfavorable foreign currency translation
effects and weak international demand for mining tools.
METALLURGICAL PRODUCTS
During the December 1993 quarter, sales of metallurgical products increased
18 percent from the pervious year due to increased demand for hardfacing
products.
For the six month period, sales of metallurgical products rose 10 percent
because of strong demand for hardfacing products.
GROSS PROFIT MARGIN
As a percentage of sales, the gross profit margin for the December 1993
quarter was 39.4 percent. The gross profit margin was unfavorably affected
by the inclusion of Hertel's financial results. Excluding the effects of
the acquisition, the gross margin was 40.1 percent, as compared with 38.8
percent in the same period last year.
For the six month period, the gross profit margin was 39.6 percent, up from
39.2 percent last year. The gross profit margin was unfavorably affected
by the inclusion of Hertel's financial results. Excluding the effects of
the acquisition, the gross profit was 40.1 percent.
OPERATING EXPENSES
For the quarter ended December 31, 1993, research and development, selling
and marketing, and general and administrative expenses increased
35 percent. Excluding the effects of the Hertel acquisition, operating
expenses increased four percent.
As a percentage of sales, operating expenses were 34.3 percent for the
quarter ended December 31, 1993, as compared with 35.4 percent for the same
period last year.
For the six month period, as a percentage of sales, operating expenses were
34.4 percent, as compared with 34.7 percent in the same period last year.
INTEREST EXPENSE
Interest expense was $3.6 million and $7.7 million for the quarter and six
months ended December 31, 1993, respectively, as compared with $2.4 million
and $4.8 million, respectively, for the same periods last year. The
increase in both periods was primarily due to the debt incurred and assumed
in connection with the Hertel acquisition. As of December 31, 1993,
approximately 36 percent of the company's total debt was subject to
variable interest rates.
INCOME TAXES
For the quarter ended December 31, 1993, the effective tax rate was 33.8
percent, as compared with 40.3 percent in the same period last year.
Excluding the effects of the accounting changes and the restructuring
charge, the effective tax rate for the six month period ended December 31,
1993 was 44.9 percent, as compared with 40.0 percent in the same period
last year.
OUTLOOK
In looking to the third quarter ending March 31, 1994, management expects
sales of metalworking products in the United States to continue to improve.
However, international sales are expected to remain weak in Europe as the
German economy continues to display weakness. In addition, with respect to
Germany, we expect the financial performance of Hertel to continue to
improve as more of the restructuring and integration related activities are
completed.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in footnote 4 to the condensed consolidated
financial statements, contained in Part I, Item 1 of this Form 10-Q, is
incorporated by reference herein and supplements the information previously
reported in Part I, Item 3(a) of the company's Form 10-K for the year ended
June 30, 1993, which is also incorporated by reference herein.
On August 13, 1993 Kennametal was served with a Notice of Violation dated
August 9, 1993, issued by the United States Environmental Protection Agency
("EPA"). The EPA alleges violations concerning visible emissions from the
company's Fallon, Nevada facility. The EPA on October 6, 1993 issued an
interim compliance order with respect to this matter. Although Kennametal
anticipates that the EPA may impose a penalty in excess of $100,000 with
respect to these violations, it is management's opinion, based on its
evaluation and discussions with outside counsel, that the ultimate
resolution of this matter will not have a material adverse effect on the
results of operations or financial position of the company.
At the annual meeting of shareholders of Hertel held on December 6, 1993,
two minority shareholders of Hertel (Dr. Bernard Appel and Christa Gotz),
one of whom purported to own or control 2,500 shares and the other of whom
purported to own 5 shares, filed protests with respect to the resolution
adopted by the Hertel shareholders which authorized and approved Hertel
entering into the Domination Contract with Kennametal which permits
Kennametal to direct Hertel's operations. Under German law, Kennametal is
required to offer to minority shareholders to purchase their shares for a
reasonable compensation and to guarantee dividends during the term of the
Domination Contract (ending June 30, 1996 subject to annual renewals) and
to pay to Hertel any net cumulative losses it sustains during the term and
has liability to Hertel creditors as if Hertel merged with Kennametal. The
filing of a protest is a prerequisite to a shareholder's filing a formal
complaint which must be filed within an applicable time period. Mrs. Gotz
filed a formal complaint within the applicable time period in the District
Court at Nurnberg, Bavaria, Germany that seeks to declare null and void the
resolution by arguing that it should not have been considered at the annual
meeting because the requisite prior notice period for presenting a
resolution to approve a domination contract (30 days) had not expired, even
though Hertel had published notice of the proposed Domination Contract more
than 30 days prior to the date of the annual meeting, due to Hertel's
having also subsequently published a clarification of certain terms of the
Domination Contract relating to German taxes within 30 days prior to the
date of the annual meeting. Since Kennametal holds sufficient shares of
Hertel to approve a domination contract, Kennametal could cure any
defective notice by having the Domination Contract presented again to
Hertel's shareholders for approval at a subsequent annual or special
meeting of Hertel's shareholders. The complaint also asserts that the tax
treatment specified in the clarification is improper under German law which
renders the resolution void. Apart from the complaint challenging the
validity of the resolution approving and authorizing the Domination
Contract, minority shareholders are contesting the reasonableness of the
purchase price for minority shares and the minimum dividend on minority
shares offered by Kennametal in connection with the Domination Contract.
It is management's opinion that Hertel has viable defenses to all of the
challenges raised to the validity of the adoption of the resolution
approving and authorizing the Domination Contract and to the contest of the
reasonableness of the minority share purchase price and minimum dividend
and, in any event, that the ultimate outcome of this matter will not have a
material adverse effect on the results of operations or financial position
of the company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
A report on Form 8-K dated August 19, 1993, Amendment No. 1 dated
October 15, 1993, Amendment No. 2 dated November 19, 1993 and
Amendment No. 3 dated December 13, 1993 were filed during the
quarter ended December 31, 1993, covering Items 2 and 7 thereof,
and related to the company's acquisition of Hertel AG.
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: February 11, 1994 By: /s/RICHARD J. ORWIG
--------------------------------
Richard J. Orwig
Vice President & Chief Financial
and Administrative Officer
