FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 28, 2004
KENNAMETAL INC.
Commission file number 1-5318
| 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
Table of Contents
| Item |
Description |
Page No. |
||
1. |
Changes in Control of Registrant | N/A | ||
2. |
Acquisitions or Disposition of Assets | N/A | ||
3. |
Bankruptcy or Receivership | N/A | ||
4. |
Changes in Registrant's Certifying Accountant | N/A | ||
5. |
Other Events and Regulation FD Disclosure | N/A | ||
6. |
Resignations of Registrant's Directors | N/A | ||
7. |
Financial Statements and Exhibits | N/A | ||
8. |
Change in Fiscal Year | N/A | ||
9. |
Regulation FD Disclosure | N/A | ||
10. |
Amendments to Registrant’s Code of Ethics, | N/A | ||
| or Waiver of a Provision of the Code of Ethics | ||||
11. |
Temporary Suspension of Trading under | N/A | ||
| Registrant’s Employee Benefit Plans | ||||
12. |
Results of Operations and Financial Condition | 2 |
1
Item 12. Results of Operations and Financial Condition
On April 28, 2004, Kennametal Inc. (“Kennametal” or “the Company”) issued a press release announcing financial results for its third quarter ended March 31, 2004.
The press release contains certain non-GAAP financial measures, including gross profit, operating expense, operating income, other (income)/expense, net income and diluted EPS in each case excluding special items. The special items include: restructuring charges, Widia integration costs, pension curtailment, gain on Toshiba Tungaloy investment, and a charge related to a note receivable. Kennametal management excludes these items in measuring and compensating internal performance to more easily compare the Company’s financial performance period to period. We believe investors should have available the same information that management uses to measure and compensate performance. Kennametal management believes that presentation of these non-GAAP financial measures provides useful information about the results of operations of the Company for the current, past and future periods.
In addition to the items above, the press release also contains free operating cash flow and debt-to-capital, as defined below:
Free Operating Cash Flow
Free operating cash flow is a non-GAAP financial measure and is defined as cash provided by operations (in accordance with GAAP) less capital expenditures plus proceeds from disposals of fixed assets. Free operating cash flow is considered to be an important indicator of Kennametal’s cash generating capability because it better represents cash generated from operations that can be used for strategic initiatives (such as acquisitions), dividends, debt repayment and other investing and financing activities.
Debt-to-Capital
Debt-to-equity in accordance with GAAP is defined as total debt divided by Shareowners’ equity and total debt. Debt-to-capital is defined by Kennametal as total current and long term debt divided by total Shareowner’s equity plus minority interest plus total debt. Management believes that these financial measures provide additional insight into the underlying capital structuring and performance of the Company.
A copy of the Company’s earnings announcement is reflected under Exhibit 99.1 attached hereto. Reconciliations of the above non-GAAP financial measures are included in the earnings announcement.
Additionally, during our quarterly teleconference we may use various other non-GAAP financial measures to describe the underlying operating results. Accordingly, we have compiled below certain reconciliations as required by Regulation G.
Primary Working Capital
Primary working capital is a non-GAAP presentation and is defined as accounts receivable, net plus inventories, net minus accounts payable. The most directly comparable GAAP measure is working capital, which is defined as current assets less current liabilities. We believe primary working capital better represents Kennametal’s performance in managing certain assets and liabilities controllable at the business unit level and is used as such for internal performance measurement.
2
EBIT
EBIT is an acronym for Earnings Before Interest and Taxes and is not a calculation in accordance with GAAP. The most directly comparable GAAP measure is net income. However, we believe that EBIT is widely used as a measure of operating performance and we believe EBIT to be an important indicator of the Company’s operational strength and performance. Nevertheless, the measure should not be considered in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining liquidity that is calculated in accordance with GAAP. Additionally, Kennametal will adjust EBIT for restructuring charges, interest income, and other items.
Adjusted Sales
Kennametal adjusted sales as reported under GAAP for specific items including acquisitions and foreign currency translation. Management believes that adjusting the sales as reported under GAAP provides additional insight into the underlying operations. Management uses this information in reviewing operating performance and in the determination of compensation.
Adjusted Gross Profit
Kennametal adjusted gross profit as recorded under GAAP for specific items including Widia integration and restructuring charges and pension curtailment. Management believes that the adjusted gross profit information is an important indicator of the Company’s underlying operating performance.
Operating Expense Reconciliation
Kennametal adjusted operating expense as reported under GAAP for Widia integration, restructuring charges, Widia operating expense, pension curtailment, note receivable, foreign exchange and decreased pension income. Management believes that the adjusted operating expense provides additional insight into the underlying operations. Management uses this information in reviewing operating performance and in the determination of compensation.
3
SUPPLEMENTAL INFORMATION AND RECONCILIATIONS
FINANCIAL HIGHLIGHTS
RECONCILIATION OF PRIMARY WORKING CAPITAL TO GAAP WORKING CAPITAL (Unaudited)
| March 31, |
||||||||
| 2004 |
2003 |
|||||||
Current assets |
$ | 790,063 | $ | 788,091 | ||||
Current liabilities |
342,899 | 344,865 | ||||||
Working capital in accordance with GAAP |
447,164 | 443,226 | ||||||
Excluded items: |
||||||||
Cash and cash equivalents |
(27,528 | ) | (17,250 | ) | ||||
Deferred income taxes |
(87,651 | ) | (81,651 | ) | ||||
Other current assets |
(38,803 | ) | (44,286 | ) | ||||
Total excluded current assets |
$ | (153,982 | ) | $ | (143,187 | ) | ||
Adjusted current asset |
636,081 | 644,904 | ||||||
Short-term debt, including notes payable |
(8,193 | ) | (15,068 | ) | ||||
Accrued liabilities |
(202,460 | ) | (208,816 | ) | ||||
Total excluded current liabilities |
$ | (210,653 | ) | $ | (223,884 | ) | ||
Adjusted current liabilities |
132,246 | 120,981 | ||||||
Primary working capital |
$ | 503,835 | $ | 523,923 | ||||
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FINANCIAL HIGHLIGHTS (Continued)
KENNAMETAL INC. EBIT RECONCILIATION (Unaudited)
| Quarter Ended | Nine Months Ended | |||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income, as reported |
$ | 24,070 | $ | 9,699 | $ | 43,727 | $ | 22,998 | ||||||||
As % of Sales |
4.6 | % | 2.1 | % | 3.1 | % | 1.8 | % | ||||||||
Add back: |
||||||||||||||||
Interest |
6,332 | 8,979 | 19,479 | 27,058 | ||||||||||||
Taxes |
11,579 | 4,474 | 21,345 | 10,622 | ||||||||||||
EBIT |
41,981 | 23,152 | 84,551 | 60,678 | ||||||||||||
Additional adjustments: |
||||||||||||||||
Minority interest |
533 | 739 | 1,632 | 1,786 | ||||||||||||
Restructuring and asset
impairment charges (1) |
— | 3,269 | 6,520 | 11,649 | ||||||||||||
Widia integration |
— | 1,929 | 1,559 | 4,004 | ||||||||||||
Pension Curtailment |
— | — | 1,299 | — | ||||||||||||
Gain on Toshiba Tungaloy Investment |
— | — | (4,397 | ) | — | |||||||||||
Note Receivable |
— | — | 2,000 | — | ||||||||||||
Interest income |
(376 | ) | (777 | ) | (1,251 | ) | (2,266 | ) | ||||||||
Securitization fees |
356 | 406 | 1,236 | 1,479 | ||||||||||||
Adjusted EBIT |
$ | 42,494 | $ | 28,718 | $ | 93,149 | $ | 77,330 | ||||||||
As % of Sales |
8.1 | % | 6.3 | % | 6.5 | % | 6.0 | % | ||||||||
| (1) | Includes charges in cost of goods sold and restructuring expense. |
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FINANCIAL HIGHLIGHTS (Continued)
MSSG SEGMENT (Unaudited):
| Quarter Ended | Nine Months Ended | |||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Sales, as reported |
$ | 317,506 | $ | 286,601 | $ | 872,128 | $ | 796,835 | ||||||||
Widia sales (1) |
— | — | (26,018 | ) | — | |||||||||||
Foreign currency exchange |
(22,569 | ) | — | (54,680 | ) | — | ||||||||||
Adjusted sales |
$ | 294,937 | $ | 286,601 | $ | 791,430 | $ | 796,835 | ||||||||
MSSG EBIT (Unaudited):
| Quarter Ended | Nine Months Ended | |||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
MSSG operating income, as reported |
$ | 36,751 | $ | 23,593 | $ | 82,937 | $ | 64,597 | ||||||||
As % of sales |
11.6 | % | 8.2 | % | 9.5 | % | 8.1 | % | ||||||||
Other income (expense) |
(26 | ) | (206 | ) | 1,940 | 546 | ||||||||||
EBIT |
36,725 | 23,387 | 84,877 | 65,143 | ||||||||||||
Adjustments: |
||||||||||||||||
MSSG restructuring (2) |
— | 1,077 | 5,023 | 5,926 | ||||||||||||
Widia integration |
— | 1,911 | 1,511 | 3,982 | ||||||||||||
EBIT, excluding special charges |
$ | 36,725 | $ | 26,375 | $ | 91,411 | $ | 75,051 | ||||||||
As % of sales |
11.6 | % | 9.2 | % | 10.5 | % | 9.4 | % | ||||||||
| (1) | Widia was acquired on August 30, 2002. Sales related to Widia for July and August have been removed from the 2003 results in order to reflect comparable Widia activity for both years. |
| (2) | Includes charges in cost of goods sold and restructuring expense. |
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FINANCIAL HIGHLIGHTS (Continued)
AMSG SEGMENT (Unaudited):
| Quarter Ended | Nine Months Ended | |||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Sales, as reported |
$ | 111,464 | $ | 89,849 | $ | 299,846 | $ | 256,563 | ||||||||
Widia sales(1) |
— | — | (5,476 | ) | — | |||||||||||
Foreign
currency exchange |
(4,613 | ) | — | (14,265 | ) | — | ||||||||||
Adjusted sales |
$ | 106,851 | $ | 89,849 | $ | 280,105 | $ | 256,563 | ||||||||
AMSG EBIT (Unaudited):
| Quarter Ended | Nine Months Ended | |||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
AMSG
operating income, as reported |
$ | 15,146 | $ | 9,320 | $ | 36,375 | $ | 27,044 | ||||||||
As % of sales |
13.6 | % | 10.4 | % | 12.1 | % | 10.5 | % | ||||||||
Other income (expense) |
55 | (96 | ) | 1,115 | (141 | ) | ||||||||||
EBIT |
15,201 | 9,224 | 37,490 | 26,903 | ||||||||||||
Adjustments: |
||||||||||||||||
AMSG
restructuring(2) |
— | 1,104 | 1,497 | 3,182 | ||||||||||||
Widia integration |
— | 18 | 48 | 22 | ||||||||||||
EBIT,
excluding special charges |
$ | 15,201 | $ | 10,346 | $ | 39,035 | $ | 30,107 | ||||||||
As % of sales |
13.6 | % | 11.5 | % | 13.0 | % | 11.7 | % | ||||||||
| (1) | Widia was acquired on August 30, 2002. Sales related to Widia for July and August have been removed from the 2003 results in order to reflect comparable Widia activity for both years. |
| (2) | Includes charges in cost of goods sold and restructuring expense. |
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FINANCIAL HIGHLIGHTS (Continued)
J&L SEGMENT (Unaudited):
| Quarter Ended | Nine Months Ended | |||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Sales, as reported |
$ | 60,074 | $ | 51,729 | $ | 158,554 | $ | 148,012 | ||||||||
Foreign currency exchange |
(806 | ) | — | (1,477 | ) | — | ||||||||||
Adjusted sales |
$ | 59,268 | $ | 51,729 | $ | 157,077 | $ | 148,012 | ||||||||
J&L EBIT (Unaudited):
| Quarter Ended | Nine Months Ended | |||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
J&L operating income, as reported |
$ | 6,419 | $ | 1,323 | $ | 13,410 | $ | 5,209 | ||||||||
As % of sales |
10.7 | % | 2.6 | % | 8.5 | % | 3.5 | % | ||||||||
Other (expense) |
(2 | ) | (6 | ) | 23 | (55 | ) | |||||||||
EBIT |
6,417 | 1,317 | 13,433 | 5,154 | ||||||||||||
Adjustments: |
||||||||||||||||
J&L restructuring |
— | 801 | — | 1,267 | ||||||||||||
EBIT, excluding special charges |
$ | 6,417 | $ | 2,118 | $ | 13,433 | $ | 6,421 | ||||||||
As % of sales |
10.7 | % | 4.1 | % | 8.5 | % | 4.3 | % | ||||||||
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FINANCIAL HIGHLIGHTS (Continued)
FSS SEGMENT (Unaudited):
| Quarter Ended | Nine Months Ended | |||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Sales, as reported |
$ | 35,186 | $ | 31,064 | $ | 99,055 | $ | 93,782 | ||||||||
Foreign currency exchange |
(112 | ) | — | (328 | ) | — | ||||||||||
Adjusted sales |
$ | 35,074 | $ | 31,064 | $ | 98,727 | $ | 93,782 | ||||||||
FSS EBIT (Unaudited):
| Quarter Ended | Nine Months Ended | |||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
FSS operating income / (loss), as reported |
$ | 376 | $ | 31 | $ | (64 | ) | $ | (320 | ) | ||||||
As % of sales |
1.1 | % | 0.1 | % | -0.1 | % | -0.3 | % | ||||||||
Other (expense) income |
0 | — | 2 | 58 | ||||||||||||
EBIT |
376 | 31 | (62 | ) | (262 | ) | ||||||||||
Adjustments: |
||||||||||||||||
FSS restructuring |
— | 9 | — | 38 | ||||||||||||
EBIT, excluding special charges |
$ | 376 | $ | 40 | $ | (62 | ) | $ | (224 | ) | ||||||
As % of sales |
1.1 | % | 0.1 | % | -0.1 | % | -0.2 | % | ||||||||
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RECONCILIATION TO GAAP – GROSS PROFIT (Unaudited)
| Quarter Ended | Quarter Ended | Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
| March 31, |
March 31, |
March 31, |
March 31, |
|||||||||||||||||||||||||||||
| As a % | As a % | As a % | As a % | |||||||||||||||||||||||||||||
| 2004 |
of Sales |
2003 |
of Sales |
2004 |
of Sales |
2003 |
of Sales |
|||||||||||||||||||||||||
Gross Profit |
$ | 175,854 | 33.5 | % | $ | 151,661 | 33.0 | % | $ | 467,593 | 32.7 | % | $ | 420,113 | 32.4 | % | ||||||||||||||||
Widia integration and restructuring charges |
— | 0.0 | % | 144 | 0.1 | % | 2,961 | 0.2 | % | 198 | 0.1 | % | ||||||||||||||||||||
Pension Curtailment |
— | 0.0 | % | — | 0.0 | % | 779 | 0.1 | % | — | 0.0 | % | ||||||||||||||||||||
Gross Profit, excluding special items |
$ | 175,854 | 33.5 | % | $ | 151,805 | 33.1 | % | $ | 471,333 | 33.0 | % | $ | 420,311 | 32.5 | % | ||||||||||||||||
OPERATING EXPENSE RECONCILIATION (Unaudited):
| Quarter ended | Quarter ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| March 31, 2004 |
March 31, 2003 |
March 31, 2004 |
March 31, 2003 |
|||||||||||||
Operating expense, as reported |
$ | 132,218 | $ | 122,592 | $ | 378,180 | $ | 343,104 | ||||||||
Integration costs |
— | (1,785 | ) | (1,448 | ) | (3,806 | ) | |||||||||
Pension Curtailment |
— | — | (520 | ) | — | |||||||||||
Note Receivable |
— | — | (1,817 | ) | — | |||||||||||
Operating expense, excluding special items |
132,218 | 120,807 | 374,395 | 339,298 | ||||||||||||
Less: |
||||||||||||||||
Widia operating expense (1) |
— | — | 8,441 | — | ||||||||||||
Unfavorable foreign exchange |
7,227 | — | 19,426 | — | ||||||||||||
Operating expense, excluding special items,
Widia expense and foreign exchange |
$ | 124,991 | $ | 120,807 | $ | 346,528 | $ | 339,298 | ||||||||
| (1) | Widia was acquired on August 30, 2002. Operating expenses related to Widia for July and August have been removed from the 2003 results in order to reflect comparable Widia activity for both years. |
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10
EXHIBIT INDEX
| Exhibit | Description | ||
99.1
|
Press Release dated April 28, 2004. Furnished herewith. |
11
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 hereunto duly authorized.
| KENNAMETAL INC. | ||||
| Registrant | ||||
Date: April 28, 2004
|
By: | /s/ Timothy A. Hibbard | ||
| Timothy A. Hibbard | ||||
| Corporate Controller and Chief | ||||
| Accounting Officer |
12
Exhibit 99.1 Fiscal 2004 3rd Quarter Earnings Announcement
|
FROM: | KENNAMETAL INC. P.O. Box 231 Latrobe, PA 15650 724-539-6141 |
||
Investor Relations |
||||
| Contact: Beth A. Riley | ||||
| Media Relations | ||||
| Contact: Joy Chandler | ||||
| DATE: | April 28, 2004 | |||
| FOR RELEASE: | Immediate |
KENNAMETAL CONTINUES STRONG GROWTH TREND IN THIRD QUARTER
| – | Sales up 14 percent over last year | |||
| – | Reported earnings per diluted share of $0.66, up 144 percent over last year | |||
| – | Strong cash flow | |||
LATROBE, Pa., April 28, 2004 - Kennametal Inc. (NYSE: KMT) today reported fiscal 2004 third-quarter earnings of $0.66 per diluted share compared with reported earnings of $0.27 per diluted share last year and exceeding previous guidance provided for the quarter. There were no special items to report in the fiscal 2004 third quarter, which was 74 percent above last year’s comparable earnings per diluted share of $0.38, excluding special items.
Earnings Per Share
Original Company Guidance (1/28/04) |
$0.50 to $0.60 | |
(Updated to $0.65 on 4/19/04) |
||
Analyst Estimate Range (4/16/04) |
$0.52 to $0.60 | |
Earnings Per Share |
$0.66 |
For the first nine months of fiscal 2004, reported earnings of $1.20 per diluted share compared with earnings of $0.65 per diluted share last year. Excluding special items in each period, diluted earnings of $1.34 per share were 40 percent above the prior year’s comparable earnings of $0.96 per share.
Kennametal Chairman, President and Chief Executive Officer, Markos I. Tambakeras, said, “We were pleased to deliver a quarter of strong earnings growth, as improving markets combined with the implementation of the Kennametal Value Business System (KVBS) by Kennametal employees allowed us to leverage the many improvements we have made to our business. Investments in product innovation, marketing
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13
initiatives, and acquisitions allowed us to outperform several of our end markets. This improvement was broad-based, and included Metalworking North America and Rest-of-World, Mining and Construction and Energy, and the J&L distribution business. In addition to the top-line growth, our earnings benefited from our streamlined cost structure.”
Highlights of the Fiscal 2004 Third Quarter
| • | Sales of $524 million were 14 percent above the prior year comparable quarter primarily on 6 percent organic sales growth, 2 percent from additional workdays, and 6 percent benefit from foreign currency exchange rates. | |||
| • | Reported net income was $24.1 million versus net income of $9.7 million in the same quarter last year. Reported net income grew 80 percent compared to net income excluding special items of $13.3 million last year, reflecting the benefits of increased volume, mix, and a leaner cost structure. | |||
| • | Net cash flow from operations was $54 million, versus $40 million for the prior year. Free operating cash flow totaled $41 million for the quarter, versus $26 million in last year’s comparable quarter due largely to the improved operating performance. | |||
| • | As of March 31, 2004, total debt was $494 million, down $31 million from June 2003, and $86 million below March 2003. | |||
| • | Debt to capital decreased to 37 percent, from 43 percent at the end of March in the prior year. | |||
| • | Concluded the acquisition of Conforma Clad Inc. | |||
Highlights of First Nine Months of Fiscal 2004
| • | Sales of $1.4 billion were 10 percent above the prior year comparable period on a 2 percent improvement from organic sales growth, 3 percent incremental sales from acquisitions, and a 5 percent improvement from foreign currency exchange rates. | |||
| • | Reported net income totaled $43.7 million versus $23.0 million in last year’s comparable period, a 90 percent increase. Excluding special items in both periods, net income improved 43% to $48.5 million in the current nine-month period. | |||
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Outlook
Tambakeras said, “Entering the final quarter of our year, we are optimistic that the momentum we built through the March quarter will continue, with strong sequential earnings growth in the June quarter. We anticipate that improvement in North American markets will increase, Europe will remain fairly stable and the developing markets will sustain recent high growth rates. Further, we expect that the Kennametal Value Business System (KVBS) will support additional outperformance.”
Sales for the fourth quarter of fiscal 2004 are expected to grow 10 to 12 percent year-over-year, including the impact of currency. Organic growth is anticipated to be 6 to 8 percent year-over-year. Reported diluted earnings per share are expected to be $0.70 to $0.80 per share, up 56 to 78 percent compared to the prior year.
Based on forecasted results for the fourth quarter, reported diluted earnings per share are expected to be $1.90 to $2.00 per share for fiscal 2004. This includes net special charges to date of approximately $0.14 per share. Excluding these charges, diluted earnings per share are forecasted to range from $2.05 to $2.15 per share. As previously stated, the earnings outlook for the full year includes approximately $0.12 per share of accretion from the Widia acquisition.
Kennametal anticipates net cash flow provided by operating activities of approximately $155 to $175 million in fiscal 2004. Purchases of property, plant and equipment, net of proceeds from disposals of property, plant and equipment are expected to be approximately $50 to $55 million. Adjusting net cash flow provided by operating activities for the above items, Kennametal expects to generate between $100 and $125 million of free operating cash flow for fiscal 2004.
Kennametal advises shareholders to note monthly order trends, for which the company makes a disclosure ten business days after the conclusion of each month. This information is available on the Investor Relations section of Kennametal’s corporate web site at www.kennametal.com.
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Dividend Declared
Kennametal also announced its Board of Directors declared a quarterly cash dividend of $0.17 cents per share, payable May 25, 2004, to shareowners of record as of the close of business May 10, 2004.
Third quarter results will be discussed in a live Internet broadcast at 10:00 a.m. today. Access the live or archived conference by visiting the Investor Relations section of Kennametal’s corporate web site at www.kennametal.com.
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This release contains “forward-looking’’ statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should,” “anticipate,” “estimate,” “approximate,” “expect,” “may,” “will,” “project,” “intend,” “plan,” “believe,” and other words of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements are likely to relate to, among other things, our goals, plans and projections regarding our financial position, results of operations, market position and product development, which are based on current expectations that involve inherent risks and uncertainties, including factors that could delay, divert or change any of them in the next several years. Although it is not possible to predict or identify all factors, they may include the following: global economic conditions; future terrorist attacks; epidemics; risks associated with integrating and divesting businesses and achieving the expected savings and synergies; demands on management resources; risks associated with international markets such as currency exchange rates, and social and political environments; competition; labor relations; commodity prices; demand for and market acceptance of new and existing products; and risks associated with the implementation of restructuring plans and environmental remediation matters. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.
Kennametal Inc. aspires to be the premier tooling solutions supplier in the world with operational excellence throughout the value chain and best-in-class manufacturing and technology. Kennametal strives to deliver superior shareowner value through top-tier financial performance. The company provides customers a broad range of technologically advanced tools, tooling systems and engineering services aimed at improving customers’ manufacturing competitiveness. With about 13,500 employees worldwide, the company’s annual sales approximate $1.9 billion, with nearly half coming from sales outside the United States. Kennametal is a five-time winner of the GM “Supplier of the Year” award and is represented in more than 60 countries. Kennametal operations in Europe are headquartered in Fürth, Germany. Kennametal Asia Pacific operations are headquartered in Singapore. For more information, visit the company’s web site at www.kennametal.com.
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FINANCIAL HIGHLIGHTS
Consolidated financial highlights for Kennametal Inc. (NYSE: KMT) for the quarter and nine months ended March 31, 2004 and 2003 are shown in the following tables (in thousands, except per share amounts).
Consolidated Statements of Income (Unaudited)
| Quarter Ended | Nine Months Ended | |||||||||||||||
| March 31, |
March 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Sales |
$ | 524,230 | $ | 459,243 | $ | 1,429,583 | $ | 1,295,192 | ||||||||
Cost of goods sold(A) |
348,376 | 307,582 | 961,990 | 875,079 | ||||||||||||
Gross profit |
175,854 | 151,661 | 467,593 | 420,113 | ||||||||||||
Operating expense(B) |
132,218 | 122,592 | 378,180 | 343,104 | ||||||||||||
Restructuring and asset impairment charges |
— | 3,269 | 3,670 | 11,649 | ||||||||||||
Amortization of intangibles |
614 | 1,196 | 1,570 | 3,310 | ||||||||||||
Operating income |
43,022 | 24,604 | 84,173 | 62,050 | ||||||||||||
Interest expense |
6,332 | 8,979 | 19,479 | 27,058 | ||||||||||||
Other (income) expense, net(C) |
508 | 713 | (2,010 | ) | (414 | ) | ||||||||||
Income before provision for income taxes
and minority interest |
36,182 | 14,912 | 66,704 | 35,406 | ||||||||||||
Provision for income taxes |
11,579 | 4,474 | 21,345 | 10,622 | ||||||||||||
Minority interest |
533 | 739 | 1,632 | 1,786 | ||||||||||||
Net income |
$ | 24,070 | $ | 9,699 | $ | 43,727 | $ | 22,998 | ||||||||
Basic earnings per share |
$ | 0.67 | $ | 0.28 | $ | 1.23 | $ | 0.65 | ||||||||
Diluted earnings per share |
$ | 0.66 | $ | 0.27 | $ | 1.20 | $ | 0.65 | ||||||||
Dividends per share |
$ | 0.17 | $ | 0.17 | $ | 0.51 | $ | 0.51 | ||||||||
Basic weighted average shares outstanding |
35,828 | 35,243 | 35,589 | 35,137 | ||||||||||||
Diluted weighted average shares outstanding |
36,662 | 35,480 | 36,307 | 35,412 | ||||||||||||
| (A) | For the nine months ended March 31, 2004, these amounts include charges of $0.1 million for integration activities related to the Widia acquisition, $2.9 million related to restructuring programs, and $0.8 million for a pension curtailment. For the quarter and nine months ended March 31, 2003, these amounts include charges of $0.1 million and $0.2 million, respectively, for integration activities related to the Widia acquisition. | |||
| (B) | For the nine months ended March 31, 2004, these amounts include charges of $1.8 million related to a note receivable from a divestiture of a business by Kennametal in 2002, $0.5 million related to a pension curtailment, and $1.4 million for integration activities related to the Widia acquisition. For the quarter and nine months ended March 31, 2003, these amounts include charges of $1.8 million and $3.8 million, respectively, for integration activities related to the Widia acquisition. | |||
| (C) | For the nine months ended March 31, 2004, these amounts include income of $4.4 million related to a gain on the sale of Toshiba Tungaloy investment and a charge of $0.2 million on a note receivable from a divestiture of a business by Kennametal in 2002. | |||
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FINANCIAL HIGHLIGHTS (Continued)
In addition to reported results under U.S. GAAP, the following financial highlight tables also include, where appropriate, a reconciliation of results excluding special items and free operating cash flow (which are non-GAAP measures), to the most directly comparable GAAP measures. Management believes that each of these non-GAAP financial measures is useful to investors to more easily compare the Company’s financial performance period to period.
RECONCILIATION TO GAAP - QUARTER ENDED MARCH 31, 2003 (Unaudited)
| Diluted | ||||||||||||||||||||
| Operating | Operating | Net | Earnings | |||||||||||||||||
| Gross Profit |
Expenses |
Income |
Income |
Per Share |
||||||||||||||||
2003 Reported Results |
$ | 151,661 | $ | 122,592 | $ | 24,604 | $ | 9,699 | $ | 0.27 | ||||||||||
MSSG Restructuring |
— | — | 1,077 | 754 | 0.02 | |||||||||||||||
AMSG Restructuring |
— | — | 1,104 | 773 | 0.02 | |||||||||||||||
Corporate Restructuring |
— | — | 278 | 195 | 0.01 | |||||||||||||||
J&L Restructuring |
— | — | 801 | 561 | 0.02 | |||||||||||||||
FSS Restructuring |
— | — | 9 | 6 | — | |||||||||||||||
Widia Integration Costs-MSSG |
144 | (1,767 | ) | 1,911 | 1,337 | 0.04 | ||||||||||||||
Widia Integration Costs-AMSG |
— | (18 | ) | 18 | 13 | — | ||||||||||||||
2003 Results Excluding Special Items |
$ | 151,805 | $ | 120,807 | $ | 29,802 | $ | 13,338 | $ | 0.38 | ||||||||||
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FINANCIAL HIGHLIGHTS (Continued)
RECONCILIATION TO GAAP - NINE MONTHS ENDED MARCH 31 (Unaudited)
| Other | Diluted | |||||||||||||||||||||||
| Operating | Operating | (Income) / | Net | Earnings | ||||||||||||||||||||
| Gross Profit |
Expenses |
Income |
Expense |
Income |
Per Share |
|||||||||||||||||||
2004 Reported Results |
$ | 467,593 | $ | 378,180 | $ | 84,173 | $ | (2,010 | ) | $ | 43,727 | $ | 1.20 | |||||||||||
MSSG Restructuring |
2,850 | — | 5,023 | — | 3,416 | 0.10 | ||||||||||||||||||
AMSG Restructuring |
— | — | 1,497 | — | 1,018 | 0.03 | ||||||||||||||||||
Widia Integration Costs - MSSG |
63 | (1,448 | ) | 1,511 | — | 1,027 | 0.03 | |||||||||||||||||
Widia Integration Costs - AMSG |
48 | — | 48 | — | 33 | — | ||||||||||||||||||
Pension Curtailment |
779 | (520 | ) | 1,299 | — | 883 | 0.02 | |||||||||||||||||
Gain on Toshiba Investment |
— | — | — | 4,397 | (2,990 | ) | (0.08 | ) | ||||||||||||||||
Note Receivable |
— | (1,817 | ) | 1,817 | (183 | ) | 1,360 | 0.04 | ||||||||||||||||
2004 Results Excluding Special Items |
$ | 471,333 | $ | 374,395 | $ | 95,368 | $ | 2,204 | $ | 48,474 | $ | 1.34 | ||||||||||||
2003 Reported Results |
$ | 420,113 | $ | 343,104 | $ | 62,050 | $ | (414 | ) | $ | 22,998 | $ | 0.65 | |||||||||||
MSSG Restructuring |
— | — | 5,926 | — | 4,148 | 0.12 | ||||||||||||||||||
AMSG Restructuring |
— | — | 3,182 | — | 2,227 | 0.06 | ||||||||||||||||||
Corporate Restructuring |
— | — | 1,236 | — | 865 | 0.02 | ||||||||||||||||||
J&L Restructuring |
— | — | 1,267 | — | 888 | 0.03 | ||||||||||||||||||
FSS Restructuring |
— | — | 38 | — | 26 | — | ||||||||||||||||||
Widia Integration Costs - MSSG |
198 | (3,784 | ) | 3,982 | — | 2,787 | 0.08 | |||||||||||||||||
Widia Integration Costs - AMSG |
— | (22 | ) | 22 | — | 16 | — | |||||||||||||||||
2003 Results Excluding Special Items |
$ | 420,311 | $ | 339,298 | $ | 77,703 | $ | (414 | ) | $ | 33,955 | $ | 0.96 | |||||||||||
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FINANCIAL HIGHLIGHTS (Continued)
SEGMENT DATA (Unaudited):
| Quarter Ended March 31, |
Nine Months Ended March 31, |
|||||||||||||||
| 2004 |
2003 * |
2004 |
2003 * |
|||||||||||||
Outside Sales: |
||||||||||||||||
Metalworking Solutions and Services Group |
$ | 317,506 | $ | 286,601 | $ | 872,128 | $ | 796,835 | ||||||||
Advanced Materials Solutions Group |
111,464 | 89,849 | 299,846 | 256,563 | ||||||||||||
J&L Industrial Supply |
60,074 | 51,729 | 158,554 | 148,012 | ||||||||||||
Full Service Supply |
35,186 | 31,064 | 99,055 | 93,782 | ||||||||||||
Total Outside Sales |
$ | 524,230 | $ | 459,243 | $ | 1,429,583 | $ | 1,295,192 | ||||||||
Sales By Geographic Region: |
||||||||||||||||
Within the United States |
$ | 268,359 | $ | 239,565 | $ | 737,176 | $ | 708,195 | ||||||||
International |
255,871 | 219,678 | 692,407 | 586,997 | ||||||||||||
Total Outside Sales |
$ | 524,230 | $ | 459,243 | $ | 1,429,583 | $ | 1,295,192 | ||||||||
Operating Income (Loss), as reported: |
||||||||||||||||
Metalworking Solutions and Services Group |
$ | 36,751 | $ | 23,593 | $ | 82,937 | $ | 64,597 | ||||||||
Advanced Materials Solutions Group |
15,146 | 9,320 | 36,375 | 27,044 | ||||||||||||
J&L Industrial Supply |
6,419 | 1,323 | 13,410 | 5,209 | ||||||||||||
Full Service Supply |
376 | 31 | (64 | ) | (320 | ) | ||||||||||
Corporate and Eliminations |
(15,670 | ) | (9,663 | ) | (48,485 | ) | (34,480 | ) | ||||||||
Total Operating Income |
$ | 43,022 | $ | 24,604 | $ | 84,173 | $ | 62,050 | ||||||||
Operating
Income (Loss), excluding special charges: |
||||||||||||||||
Metalworking Solutions and Services Group |
$ | 36,751 | $ | 26,581 | $ | 89,471 | $ | 74,505 | ||||||||
Advanced Materials Solutions Group |
15,146 | 10,442 | 37,920 | 30,248 | ||||||||||||
J&L Industrial Supply |
6,419 | 2,124 | 13,410 | 6,476 | ||||||||||||
Full Service Supply |
376 | 40 | (64 | ) | (282 | ) | ||||||||||
Corporate and Eliminations |
(15,670 | ) | (9,385 | ) | (45,369 | ) | (33,244 | ) | ||||||||
Total Operating Income |
$ | 43,022 | $ | 29,802 | $ | 95,368 | $ | 77,703 | ||||||||
| * | Prior year segment data has been restated for organizational changes. |
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FINANCIAL HIGHLIGHTS (Continued)
OPERATING INCOME / (LOSS) RECONCILIATION (Unaudited):
QUARTER ENDED MARCH 31,
| MSSG |
AMSG |
J&L |
FSS |
Corp & Elim |
Total |
|||||||||||||||||||
2003 Reported Operating Income (Loss) |
$ | 23,593 | $ | 9,320 | $ | 1,323 | $ | 31 | $ | (9,663 | ) | $ | 24,604 | |||||||||||
Restructuring |
1,077 | 1,104 | 801 | 9 | 278 | 3,269 | ||||||||||||||||||
Widia Integration Costs |
1,911 | 18 | — | — | — | 1,929 | ||||||||||||||||||
2003 Operating Income (Loss) Excluding Special Charges |
$ | 26,581 | $ | 10,442 | $ | 2,124 | $ | 40 | $ | (9,385 | ) | $ | 29,802 | |||||||||||
NINE MONTHS ENDED MARCH 31,
| MSSG |
AMSG |
J&L |
FSS |
Corp & Elim |
Total |
|||||||||||||||||||
2004 Reported Operating Income (Loss) |
$ | 82,937 | $ | 36,375 | $ | 13,410 | $ | (64 | ) | $ | (48,485 | ) | $ | 84,173 | ||||||||||
Restructuring |
5,023 | 1,497 | — | — | — | 6,520 | ||||||||||||||||||
Widia Integration Costs |
1,511 | 48 | — | — | — | 1,559 | ||||||||||||||||||
Pension Curtailment |
— | — | — | — | 1,299 | 1,299 | ||||||||||||||||||
Note Receivable |
— | — | — | — | 1,817 | 1,817 | ||||||||||||||||||
2004 Operating Income (Loss) Excluding Special Charges |
$ | 89,471 | $ | 37,920 | $ | 13,410 | $ | (64 | ) | $ | (45,369 | ) | $ | 95,368 | ||||||||||
2003 Reported Operating Income (Loss) |
$ | 64,597 | $ | 27,044 | $ | 5,209 | $ | (320 | ) | $ | (34,480 | ) | $ | 62,050 | ||||||||||
Restructuring |
5,926 | 3,182 | 1,267 | 38 | 1,236 | 11,649 | ||||||||||||||||||
Widia Integration Costs |
3,982 | 22 | — | — | — | 4,004 | ||||||||||||||||||
2003 Operating Income (Loss) Excluding Special Charges |
$ | 74,505 | $ | 30,248 | $ | 6,476 | $ | (282 | ) | $ | (33,244 | ) | $ | 77,703 | ||||||||||
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FINANCIAL HIGHLIGHTS (Continued)
RECONCILIATION TO FREE OPERATING CASH FLOW INFORMATION (Unaudited)
| Quarter Ended March 31, |
Nine Months Ended March 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income |
$ | 24,070 | $ | 9,699 | $ | 43,726 | $ | 22,998 | ||||||||
Other non-cash items |
4,238 | 2,593 | 15,457 | 8,082 | ||||||||||||
Depreciation and amortization |
16,913 | 21,839 | 48,753 | 61,819 | ||||||||||||
Change in inventory |
(1,969 | ) | 1,144 | 13,468 | 14,644 | |||||||||||
Change in accounts receivable |
(26,610 | ) | (30,063 | ) | (3,213 | ) | 848 | |||||||||
Change in accounts payable |
18,260 | 28,172 | 9,080 | 2,436 | ||||||||||||
Change in other assets and liabilities |
19,222 | 6,215 | (17,805 | ) | 3,359 | |||||||||||
Net cash flow provided by operating activities |
54,124 | 39,599 | 109,466 | 114,186 | ||||||||||||
Purchase of property, plant and equipment |
(14,207 | ) | (13,955 | ) | (36,060 | ) | (35,966 | ) | ||||||||
Proceeds from disposals of property, plant and equipment |
610 | 661 | 2,998 | 1,504 | ||||||||||||
Free operating cash flow |
$ | 40,527 | $ | 26,305 | $ | 76,404 | $ | 79,724 | ||||||||
CONDENSED BALANCE SHEETS (Unaudited)
| Quarter Ended |
||||||||||||||||||||
| 03/31/04 |
12/31/03 |
09/30/03 |
06/30/03 |
03/31/03 |
||||||||||||||||
ASSETS |
||||||||||||||||||||
Cash and equivalents |
$ | 27,528 | $ | 15,086 | $ | 14,720 | $ | 15,093 | $ | 17,250 | ||||||||||
Accounts receivable, net of allowance |
248,879 | 223,087 | 232,146 | 231,803 | 235,908 | |||||||||||||||
Inventories |
387,202 | 386,250 | 387,877 | 389,613 | 408,996 | |||||||||||||||
Deferred income taxes |
87,651 | 88,020 | 86,888 | 97,237 | 81,651 | |||||||||||||||
Other current assets |
38,803 | 39,460 | 47,003 | 48,606 | 44,286 | |||||||||||||||
Total current assets |
790,063 | 751,903 | 768,634 | 782,352 | 788,091 | |||||||||||||||
Property, plant and equipment, net |
481,793 | 487,530 | 489,242 | 489,828 | 476,208 | |||||||||||||||
Goodwill and Intangible assets, net |
554,614 | 500,890 | 484,662 | 473,173 | 491,987 | |||||||||||||||
Other assets |
59,641 | 72,802 | 67,108 | 68,534 | 107,159 | |||||||||||||||
Total |
$ | 1,886,111 | $ | 1,813,125 | $ | 1,809,646 | $ | 1,813,887 | $ | 1,863,445 | ||||||||||
LIABILITIES |
||||||||||||||||||||
Short-term debt, including notes payable |
$ | 8,193 | $ | 12,872 | $ | 11,375 | $ | 10,845 | $ | 15,068 | ||||||||||
Accounts payable |
132,246 | 112,563 | 107,653 | 118,509 | 120,981 | |||||||||||||||
Accrued liabilities |
202,460 | 183,835 | 197,578 | 206,993 | 208,816 | |||||||||||||||
Total current liabilities |
342,899 | 309,270 | 316,606 | 336,347 | 344,865 | |||||||||||||||
Long-term debt |
486,119 | 468,455 | 508,763 | 514,842 | 565,067 | |||||||||||||||
Deferred income taxes |
38,045 | 36,087 | 41,368 | 43,543 | 38,382 | |||||||||||||||
Other liabilities |
192,546 | 191,585 | 180,258 | 178,698 | 140,550 | |||||||||||||||
Total liabilities |
1,059,609 | 1,005,397 | 1,046,995 | 1,073,430 | 1,088,864 | |||||||||||||||
MINORITY INTEREST |
16,598 | 16,286 | 16,089 | 18,880 | 18,070 | |||||||||||||||
SHAREOWNERS’ EQUITY |
809,904 | 791,442 | 746,562 | 721,577 | 756,511 | |||||||||||||||
Total |
$ | 1,886,111 | $ | 1,813,125 | $ | 1,809,646 | $ | 1,813,887 | $ | 1,863,445 | ||||||||||
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FINANCIAL HIGHLIGHTS (Continued)
Debt to Capital Reconciliation (Unaudited)
| Quarter Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
Total Debt |
494,312 | 580,135 | ||||||
Total Shareowners’ Equity |
809,904 | 756,511 | ||||||
Debt to Equity, GAAP |
37.9 | % | 43.4 | % | ||||
Total Debt |
494,312 | 580,135 | ||||||
Minority Interest |
16,598 | 18,070 | ||||||
Total Shareowners’ Equity |
809,904 | 756,511 | ||||||
Total Capital |
1,320,814 | 1,354,716 | ||||||
Debt to Capital |
37.4 | % | 42.8 | % | ||||
RECONCILIATION OF FORECASTED GAAP EPS (Unaudited)
FY03 4Q
EPS - As Reported |
($ | 0.14 | ) | |
MSSG Restructuring |
0.06 | |||
AMSG Restructuring |
0.02 | |||
AMSG Electronics Impairment |
0.43 | |||
Widia
Integration - MSSG |
0.06 | |||
Widia
Integration - AMSG |
0.02 | |||
FY03 4Q
EPS - Excluding Special Items |
$ | 0.45 | ||
Forecasted Increase |
56% - 78 | % | ||
FY04 4Q
Forecasted EPS - Excluding Special Items |
$ | 0.70 - $0.80 | ||
RECONCILIATION OF FORECASTED GAAP CASH FLOW INFORMATION (Unaudited)
| Twelve Months Ended | ||||
| June 30, 2004 |
||||
Forecasted net cash flow provided by operating activity |
$ | 155,000 - $175,000 | ||
Forecasted purchases and disposals of property, plant and equipment |
50,000 - 55,000 | |||
Forecasted free operating cash flow |
$ | 100,000 - $125,000 | ||
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