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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 DECEMBER 31, 1997
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.)
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: (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 JANUARY 30, 1998
- ---------------------------------------- -------------------------------
Capital Stock, par value $1.25 per share 26,338,115
TABLE OF CONTENTS
Item No.
- --------
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
December 31, 1997 and June 30, 1997
Condensed Consolidated Statements of Income (Unaudited)
Three and six months ended December 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended December 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
4. Submission of Matters to a Vote of Shareholders
6. Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ---------------------------------------------------------------
(in thousands) December 31, June 30,
1997 1997
------------ --------
ASSETS
Current Assets:
Cash and equivalents $ 29,265 $ 21,869
Accounts receivable, less
allowance for doubtful accounts
of $13,016 and $7,325 303,496 200,515
Inventories 403,866 210,111
Other current assets 41,091 25,384
---------- --------
Total current assets 777,718 457,879
---------- --------
Property, Plant and Equipment:
Land and buildings 215,963 156,292
Machinery and equipment 632,791 473,850
Less accumulated depreciation (346,674) (329,756)
---------- --------
Net property, plant and equipment 502,080 300,386
---------- --------
Other Assets:
Investments in affiliated companies 11,191 11,736
Intangible assets, less accumulated
amortization of $27,677 and $23,960 708,382 49,915
Deferred income taxes 31,079 34,307
Other 30,766 15,086
---------- --------
Total other assets 781,418 111,044
---------- --------
Total assets $2,061,216 $869,309
========== ========
LIABILITIES
Current Liabilities:
Current maturities of term debt
and capital leases $ 4,561 $ 13,853
Notes payable to banks 26,788 120,166
Accounts payable 90,727 60,322
Accrued payroll 24,004 3,294
Accrued vacation pay 21,103 18,176
Other 92,924 66,191
---------- --------
Total current liabilities 260,107 282,002
---------- --------
Term Debt and Capital Leases,
Less Current Maturities 1,110,074 40,445
Deferred Income Taxes 35,516 21,055
Other Liabilities 73,749 57,060
---------- --------
Total liabilities 1,479,446 400,562
---------- --------
Minority Interest in
Consolidated Subsidiaries 45,989 9,139
---------- --------
SHAREHOLDERS' EQUITY
Shareholders' Equity:
Preferred stock, 5,000 shares
authorized; none issued - -
Capital stock, $1.25 par value;
70,000 shares authorized;
29,370 shares issued 36,712 36,712
Additional paid-in capital 151,623 91,049
Retained earnings 424,282 406,083
Treasury shares, at cost;
3,041 and 3,263 shares held (59,758) (62,400)
Cumulative translation adjustments (17,078) (11,836)
---------- --------
Total shareholders' equity 535,781 459,608
---------- --------
Total liabilities and shareholders'
equity $2,061,216 $869,309
---------- --------
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -----------------------------------------------------------------
(in thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
OPERATIONS:
Net sales $370,048 $273,435 $680,840 $548,638
Cost of goods sold 219,546 160,089 398,115 320,582
-------- -------- -------- --------
Gross profit 150,502 113,346 282,725 228,056
Research and
development
expenses 4,956 5,694 10,183 11,433
Selling, marketing
and distribution
expenses 79,056 64,771 147,627 127,790
General and
administrative
expenses 23,816 15,799 48,536 34,005
Amortization of
intangibles 2,713 748 3,765 1,294
-------- -------- -------- --------
Operating Income 39,961 26,334 72,614 53,534
Interest expense 18,693 2,773 19,873 5,415
Other income (expense) (221) 608 (661) 1,235
-------- -------- -------- --------
Income before income
taxes and minority
interest 21,047 24,169 52,080 49,354
Provision for
income taxes 10,000 9,400 22,100 19,200
Minority interest 1,473 202 2,858 384
-------- -------- -------- --------
Net income $ 9,574 $ 14,567 $ 27,122 $ 29,770
======== ======== ======== ========
PER SHARE DATA:
Basic earnings per
share $ 0.36 $ 0.54 $ 1.03 $ 1.11
======== ======== ======== ========
Diluted earnings
per share $ 0.36 $ 0.54 $ 1.02 $ 1.11
======== ======== ======== ========
Dividends per share $ 0.17 $ 0.17 $ 0.34 $ 0.32
======== ======== ======== ========
Weighted average
shares outstanding 26,273 26,758 26,223 26,743
======== ======== ======== ========
Diluted average
shares outstanding 26,669 26,923 26,565 26,904
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -----------------------------------------------------------------
(in thousands)
Six Months Ended
December 31,
-----------------------
1997 1996
-------- --------
OPERATING ACTIVITIES:
Net income $27,122 $29,770
Adjustments for noncash items:
Depreciation and amortization 25,060 20,275
Other 3,775 5,090
Changes in certain assets and liabilities,
net of effects of acquisitions:
Accounts receivable 218 21,665
Inventories (8,796) 902
Accounts payable and
accrued liabilities 17,501 (12,748)
Other (25,497) (14,175)
-------- --------
Net cash flow from operating
activities 39,383 50,779
-------- --------
INVESTING ACTIVITIES:
Purchases of property,
plant and equipment (29,307) (40,557)
Disposals of property,
plant and equipment 1,226 180
Acquisitions, net of cash (711,609) (17,665)
Other (7,609) 3,056
-------- --------
Net cash flow used for
investing activities (747,299) (54,986)
-------- --------
FINANCING ACTIVITIES:
Increase (decrease) in
short-term debt (92,750) 11,939
Increase in term debt 758,238 200
Reduction in term debt (31,458) (6,180)
Net proceeds from issuance and
sale of subsidiary stock 90,445 -
Dividend reinvestment and
employee stock plans 8,606 1,915
Cash dividends paid to shareholders (8,923) (8,556)
Other (7,384) -
-------- --------
Net cash flow from (used for)
financing activities 716,774 (682)
-------- --------
Effect of exchange rate changes
on cash (1,462) (163)
-------- --------
CASH AND EQUIVALENTS:
Net increase (decrease) in cash
and equivalents 7,396 (5,052)
Cash and equivalents, beginning 21,869 17,090
-------- --------
Cash and equivalents, ending $29,265 $12,038
======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid $16,030 $ 4,936
Income taxes paid 22,708 23,380
See accompanying notes to condensed consolidated financial statements.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
1. The condensed consolidated financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements included in
the Company's 1997 Annual Report. The condensed consolidated balance sheet as
of June 30, 1997 has been derived from the audited balance sheet included in
the Company's 1997 Annual Report. These interim statements are unaudited;
however, management believes that all adjustments necessary for a fair
presentation have been made and all adjustments are normal, recurring
adjustments. The results for the three months and six months ended December
31, 1997 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 56 percent of total inventories at December 31,
1997. Because inventory valuations under the LIFO method are based on an
annual determination of quantities and costs as of June 30 of each year, the
interim LIFO valuations are based on management's projections of expected
year-end inventory levels and costs. Therefore, the interim financial results
are subject to any final year-end LIFO inventory adjustments.
3. The major classes of inventory as of the balance sheet dates were as
follows (in thousands):
December 31, June 30,
1997 1997
---------- --------
Finished goods $262,173 $183,961
Work in process and
powder blends 123,662 50,351
Raw materials and supplies 57,691 16,494
-------- --------
Inventory at current cost 443,526 250,806
Less LIFO valuation (39,660) (40,695)
-------- --------
Total inventories $403,866 $210,111
-------- --------
4. The Company has been involved in various environmental cleanup and
remediation activities at several of its manufacturing facilities. In
addition, the Company has been named as a potentially responsible party at
several Superfund sites in the United States. However, it is management's
opinion, based on its evaluations and discussions with outside counsel and
independent consultants, that the ultimate resolution of these environmental
matters will not have a material adverse effect on the results of operations,
financial position or cash flows of the Company.
The Company maintains a Corporate Environmental, Health and Safety
(EH&S) Department to facilitate compliance with environmental regulations and
to monitor and oversee remediation activities. In addition, the Company has
established an EH&S administrator at each of its domestic manufacturing
facilities. The Company's financial management team periodically meets with
members of the Corporate EH&S Department and the Corporate Legal Department to
review and evaluate the status of environmental projects and contingencies.
On a quarterly and annual basis, management establishes or adjusts financial
provisions and reserves for environmental contingencies in accordance with
Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for
Contingencies."
5. The Financial Accounting Standards Board (FASB) recently issued SFAS No.
128, "Earnings Per Share" (SFAS No. 128) and SFAS No. 129, "Disclosure of
Information about Capital Structures" (SFAS No. 129). SFAS No. 128 was issued
in February 1997 and is effective for periods ending after December 15, 1997.
This statement requires all prior ending earnings per share (EPS) data to be
restated to conform to the provisions of the statement. This statement's
objective is to simplify the computations of EPS and to make the U.S. standard
for EPS computations more compatible with that of the International Accounting
Standards Committee. The Company adopted SFAS No. 128 in the second quarter
of fiscal 1998.
Basic earnings per share for fiscal 1998 was computed using the weighted
average number of shares outstanding during the period, while diluted earnings
per share was calculated to reflect the potential dilution that occurs related
to issuance of common stock under stock option grants. The difference between
basic and diluted earnings per share relates solely to the effect of common
stock options.
SFAS No. 129 was issued in February 1997 and is effective for periods
ending after December 15, 1997. This statement requires all companies to
provide specific disclosure regarding their capital structure. SFAS No. 129
specifies the disclosure for all companies, including descriptions of their
capital structure and the contractual rights of the holders of such
securities. The Company adopted SFAS No. 129 in the second quarter of fiscal
1998.
6. On July 2, 1997, an initial public offering (IPO) of approximately
4.9 million shares of common stock at a price of $20.00 per share of JLK
Direct Distribution Inc. (JLK), a subsidiary of the Company, was consummated.
JLK operates the industrial supply operations consisting of the Company's
wholly owned J&L Industrial Supply (J&L) subsidiary and its Full Service
Supply programs. The net proceeds from the offering were approximately
$90 million and represented approximately 20 percent of JLK's common stock.
The transaction has been accounted for as a capital transaction in the
Company's consolidated financial statements. The net proceeds were used by
JLK to repay $20 million of indebtedness related to a dividend to the Company
and $20 million related to intercompany obligations to the Company. The
Company used these proceeds to repay short-term debt. Additional net proceeds
of $14 million have been used to make acquisitions (see Note 7). The
remaining net proceeds are loaned to the Company under an intercompany
debt/investment and cash management agreement at a fluctuating rate of
interest equal to the Company's short-term borrowing costs. The Company will
maintain unused lines of credit to enable it to repay any portion of the
borrowed funds as the amounts are due on demand by JLK.
The Company today owns approximately 80 percent of the outstanding
common stock of JLK and intends to retain a majority of both the economic and
voting interests of JLK.
7. During the quarter ended December 31, 1997, the Company acquired Presto
Engineers Cutting Tools Ltd., a manufacturer of industrial high-speed steel
cutting tools, GRS Industrial Supply Company (GRS) and Car-Max Tool & Cutter
Sales, Inc. (Car-Max). GRS and Car-Max are engaged in the distribution of
metalcutting tools and industrial supplies. The combined companies had annual
sales approximating $45 million.
The acquisitions were accounted for using the purchase method of
accounting. The consolidated financial statements include the operating
results from the respective dates of acquisition. Pro forma results of
operations have not been presented because the effects of these acquisitions
were not significant.
Additionally, on January 5, 1998, JLK acquired Production Tools Sales,
Inc. (PTS), a metalworking distributor headquartered in Dallas, Texas. PTS
had annual sales of $23 million in its latest fiscal year.
On October 10, 1997, Kennametal and Kennametal Acquisition Corp.
(Acquisition Corp.) entered into a Merger Agreement with Greenfield
Industries, Inc. (Greenfield) pursuant to which Acquisition Corp. purchased at
$38.00 per share on November 17, 1997, approximately 16,179,976 (98% of the
outstanding) shares of Greenfield's common stock (Tender Offer). Pursuant to
the Merger Agreement, a merger of Acquisition Corp. into Greenfield (Merger)
occurred on November 18, 1997, and Greenfield became a wholly owned subsidiary
of Kennametal on that date. The total purchase price for the acquisition of
Greenfield (including estimated transaction costs and assumed Greenfield debt
and convertible redeemable preferred securities of approximately $320 million)
was approximately $1.0 billion.
Pro forma results of operations for the acquisition of Greenfield, but
excluding the effects of all other acquisitions, are based on the historical
financial statements of the Company and Greenfield adjusted to give effect to
the acquisition of Greenfield. The pro forma results of operations for the
three and six months ended December 31, 1997 and 1996 assume that the
acquisition of Greenfield occurred as of the first day of the Company's 1997
fiscal year (July 1, 1996).
The pro forma financial information reflects the purchase method of
accounting for the acquisition of Greenfield, and accordingly is based
on estimated purchase accounting adjustments that are subject to
further revision upon completion of appraisals or other studies of the
fair value of Greenfield's assets and liabilities.
The preliminary allocation of the estimated purchase price to assets
acquired and liabilities assumed is as follows:
Working capital, other than cash $ 205,712
Property plant and equipment 171,514
Other assets 1,685
Other liabilities ( 29,746)
Long-term debt (325,502)
Goodwill 632,133
---------
Net purchase price $ 655,796
=========
The pro forma financial information does not purport to present what the
Company's results of operations would actually have been if the acquisition of
Greenfield had occurred on the assumed date, as specified above, or to project
the Company's financial condition or results of operations for any future
period.
Three months ended Six months ended
December 31, December 31,
(in thousands) 1997 1996 1997 1996
------ ------ ------ ------
Net sales $465.0 $399.4 $915.6 $796.0
Net income $ 5.8 $ 9.2 $ 19.5 $ 17.6
Basic earnings
per share $ 0.22 $ 0.34 $ 0.75 $ 0.66
Diluted earnings
per share $ 0.22 $ 0.34 $ 0.74 $ 0.65
8. In connection with the acquisition of Greenfield, the Company, on
November 17, 1997, entered into a $1.4 billion Credit Agreement (New Bank
Credit Facility) with BankBoston, N.A., Deutsche Bank AG, New York Branch
and/or Cayman Islands Branch, Mellon Bank N.A. and PNC Bank, National
Association. As of December 31, 1997, the Company had borrowed $500 million
under a term loan and approximately $490 million in revolving credit loans
under the New Bank Credit Facility. Interest payable under the term loan and
revolving credit loans are currently based on LIBOR plus 1.375. The proceeds
from the loans were principally used to pay for the shares of common stock of
Greenfield purchased in the Tender Offer and the Merger, to pay transaction
costs, to refinance certain indebtedness of Greenfield, and to refinance
certain indebtedness of the Company.
Subject to certain conditions, the New Bank Credit Facility permits
revolving credit loans of up to $900 million for working capital requirements,
capital expenditures, and general corporate purposes. The New Bank Credit
Facility was initially secured by all of the stock of certain of Kennametal's
significant domestic subsidiaries, by guarantees of certain such subsidiaries
and by 65% of the stock of Kennametal's significant foreign subsidiaries. On
December 24, 1997, the stock held as security was released. The New Bank
Credit Facility contains various restrictive covenants and affirmative
covenants requiring the maintenance of certain financial ratios. The term
loans under the New Bank Credit Facility are subject to mandatory amortization
commencing on November 30, 1998, and all loans mature on August 31, 2002.
9. As a result of the Greenfield acquisition, the outstanding Greenfield
convertible preferred securities (Greenfield securities) have been classified
as long-term debt in the Company's consolidated balance sheet, as these
securities no longer are convertible into Greenfield common stock. The
holders of the Greenfield securities can convert these securities into the
right to receive cash, including a conversion premium, or they can continue to
remain outstanding until their due date of March 31, 2016. At December 31,
1997, approximately $89.5 million of these securities was included in long-
term debt. As of January 31, 1998, approximately $23.8 million remained
outstanding.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------
RESULTS OF OPERATIONS
SALES AND EARNINGS
- ------------------
During the quarter ended December 31, 1997, consolidated sales were
$370 million, up 35 percent from $273 million in the same quarter last year.
Excluding acquisitions and unfavorable foreign currency translation effects,
sales increased 13 percent during the quarter. The 13 percent increase in
sales was primarily attributable to continued higher sales of metalworking
products in North America and Europe and from higher sales of industrial
supplies sold through Kennametal's JLK Direct Distribution Inc. (JLK)
subsidiary.
Net income for the second quarter ended December 31, 1997, was $9.6 million,
or $0.36 per share, as compared with net income of $14.6 million, or $0.54 per
share in the same quarter last year. The results were reduced by
approximately $10.6 million, or $0.40 per share as a result of the net effects
of the Greenfield Industries, Inc. acquisition, which occurred on November 18,
1997. The $0.40 per share includes $0.18 per share for the amortization of
financing fees related to the Greenfield acquisition. Excluding the effects
of the Greenfield acquisition, earnings per share would have been $0.76 per
share.
During the six-month period ended December 31, 1997, consolidated sales were
$681 million, up 24 percent from $549 million last year. Net income was
$27.1 million, or $1.03 on a basic per share basis and $1.02 on a diluted
basis, compared to $29.8 million, or $1.11 per share on a basic and diluted
basis last year.
The following table presents the Company's sales and geographic area
information (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ --------------------------
1997 1996 % Change 1997 1996 % Change
-------- -------- ------ -------- -------- ------
Metalworking:
North America $ 99,228 $ 90,936 9% $196,495 $181,843 8%
Europe 76,250 61,715 24 136,706 122,409 12
Asia Pacific 9,832 10,359 (5) 19,953 20,759 (4)
Industrial Supply 97,423 74,090 31 196,474 147,368 33
Mining and
Construction 38,707 36,335 7 82,604 76,259 8
Greenfield
Industries 48,608 -- -- 48,608 -- --
-------- -------- ------ -------- -------- ----
Net sales $370,048 $273,435 35% $680,840 $548,638 24%
======== ======== === ======== ======== ===
By Geographic Area:
Within the
United States $239,214 $176,170 36% $449,177 $353,670 27%
International 130,834 97,265 35 231,663 194,968 19
-------- -------- ------ -------- -------- ----
Net sales $370,048 $273,435 35% $680,840 $548,638 24%
======== ======== === ======== ======== ===
METALWORKING MARKETS
- --------------------
Sales of traditional metalcutting products sold through all sales channels in
North America, including sales through the Industrial Supply market, increased
15 percent during the December 1997 quarter, and 11 percent from the September
1997 quarter. This increase is attributable to broad-based gains in
industrial production in most industries, and deeper and broader market and
customer penetration. Sales, as reflected in the North America Metalworking
market, increased 9 percent during the quarter.
Sales in the Europe Metalworking market on a local currency basis increased
34 percent over the same quarter a year ago. Demand for metalworking products
continued to show strong gains in nearly all industries in the European
market. Sales also increased due to two recent acquisitions. Sales in the
Europe Metalworking market, on a local currency basis excluding acquisitions,
increased 17 percent and sales increased 7 percent including unfavorable
currency effects.
The Asia Pacific Metalworking market, representing only 3 percent of total
sales, increased 6 percent on a local currency basis during the quarter. The
results were affected by weak economic conditions across most Asia Pacific
countries. Including unfavorable foreign currency translation effects, sales
in this market decreased 5 percent.
For the six-month period, sales in the North America Metalworking market
increased 8 percent, sales in the Europe Metalworking market increased
12 percent, and sales in the Asia Pacific Metalworking market decreased
4 percent.
INDUSTRIAL SUPPLY MARKET
- ------------------------
Sales in the Industrial Supply market rose 31 percent as a result of increased
sales through mail order and from acquisitions. Sales increased primarily
because of an expanded product offering, from acquisitions and from further
penetration of existing customers. Excluding acquisitions, sales increased
approximately 16 percent. Additionally, during the quarter, JLK acquired Car-
Max Tool & Cutter, Inc. and GRS Industrial Supply Company, and on January 5,
1998, it acquired Production Tools Sales, Inc. The three companies had
combined annual sales of approximately $47 million.
For the six-month period, sales in the Industrial Supply market increased
33 percent.
MINING AND CONSTRUCTION MARKET
- ------------------------------
During the December 1997 quarter, sales in the Mining and Construction market
increased 7 percent from last year as a result of increased domestic demand
for highway construction tools. Domestic sales of mining tools were flat.
International sales of mining and highway construction tools were flat during
the quarter.
For the six-month period, sales of mining and construction tools increased
8 percent.
GREENFIELD INDUSTRIES
- ---------------------
Sales of Greenfield Industries, Inc. from the period November 18, 1997 to the
end of the quarter rose 10 percent from the same period of a year ago.
GROSS PROFIT MARGIN
- -------------------
As a percentage of sales, gross profit margin for the December 1997 quarter
was 40.7 percent as compared with 41.5 percent in the prior year. Excluding
the effects of the Greenfield acquisition, the gross profit margin would have
been 42.7 percent. The gross profit margin increased primarily as a result of
productivity improvements related in part to the Focused Factory initiative,
from higher production levels and, to a lesser extent, from a more favorable
sales mix. This increase was partially offset by unfavorable foreign currency
translation effects.
For the six-month period, the gross profit margin was 41.5 percent, compared
with 41.6 percent last year. The gross profit margin declined slightly as a
result of the acquisition of Greenfield and a less favorable sales mix. This
decline was partially offset by productivity improvements related to the
Focused Factory initiative and improved manufacturing efficiencies due to
higher production volumes.
OPERATING EXPENSES
- ------------------
For the quarter ended December 31, 1997, operating expenses as a percentage of
sales were 29.1 percent compared to 31.5 percent last year. Operating
expenses were controlled despite higher costs related to acquisitions, higher
sales volumes and from the JLK showroom expansion program. Additionally,
amortization of intangibles increased approximately $2.0 million related
primarily to the Greenfield acquisition.
For the six-month period, operating expenses as a percentage of sales were
30.3 percent compared to 31.6 percent last year. Operating expenses, on an
absolute dollars basis, increased primarily because of the acquisition of
Greenfield, higher costs to support the JLK expansion program and higher costs
associated with other acquisitions.
INTEREST EXPENSE
- ----------------
Interest expense for the December 1997 quarter increased $15.9million as a
result of increased borrowings, including approximately $8.0 million for the
amortization of financing fees related to the acquisition of Greenfield.
For the six-month period, interest expense was $19.9 million compared to
$5.4 million last year.
INCOME TAXES
- ------------
The effective tax rate for the December 1997 quarter was 47.5 percent compared
to an effective tax rate of 38.9 percent in the prior year. The increase in
the effective tax rate aligns the year-to-date rate with an expected fiscal
1998 rate that is anticipated to be higher as a result of the Greenfield
acquisition.
For the six-month period, the effective tax rate was 42.4 percent compared to
38.9 percent in the prior year.
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 six months ended
December 31, 1997, the Company generated approximately $39 million in cash
from operations. The decrease in cash provided by operations resulted from
lower net income and higher incremental working capital requirements offset in
part by higher noncash items.
Net cash used in investing activities was $747 million. The increase in net
cash used in investing activities primarily resulted from the acquisition of
Greenfield Industries. Cash used in investing activities also increased due
to the acquisitions of Rubig G.m.b.H., Presto Engineers Cutting Tools Ltd.,
GRS Industrial Supply Company and Car-Max Tool & Cutter Sales, Inc.
Net cash flow from financing activities was $717 million. The increase in net
cash from financing activities was a result of increased borrowings under the
New Bank Credit Facility to finance the acquisition of Greenfield, the
assumption of Greenfield's debt, and dividends. Net cash flow from financing
activities also increased because of proceeds received from the issuance of
common stock of the Company's JLK subsidiary.
On October 10, 1997, Kennametal and Acquisition Corp. entered into the Merger
Agreement with Greenfield pursuant to which Acquisition Corp. purchased at
$38.00 per share on November 17, 1997, approximately 16,179,976 (98% of the
outstanding) shares of Greenfield's common stock. The Merger occurred on
November 18, 1997, and Greenfield became a wholly owned subsidiary of
Kennametal on that date. The total purchase price for the acquisition of
Greenfield (including estimated transaction costs and assumed Greenfield debt
and convertible redeemable preferred securities of approximately $320 million)
was approximately $1.0 billion.
In connection with the acquisition of Greenfield, the Company, on November 17,
1997, entered into a $1.4 billion New Bank Credit Facility with BankBoston,
N.A., Deutsche Bank AG, New York Branch and/or Cayman Islands Branch, Mellon
Bank N.A. and PNC Bank, National Association. As of December 31, 1997, the
Company had borrowed $500 million under a term loan and approximately
$490 million in revolving credit and swingline loans under the New Bank Credit
Facility. The proceeds from the loans were principally used to pay for the
shares of common stock of Greenfield purchased in the Tender Offer and the
Merger, to pay transaction costs, to refinance certain indebtedness of
Greenfield, and to refinance certain indebtedness of the Company.
Subject to certain conditions, the New Bank Credit Facility permits revolving
credit loans of up to $900 million for working capital requirements, capital
expenditures, and general corporate purposes. The New Bank Credit Facility
was initially secured by all of the stock of certain of Kennametal's
significant domestic subsidiaries, by guarantees of certain such subsidiaries
and by 65% of the stock of Kennametal's significant foreign subsidiaries. On
December 24, 1997, the stock held as security was released. The New Bank
Credit Facility contains various restrictive covenants and affirmative
covenants requiring the maintenance of certain financial ratios. The term
loans under the New Bank Credit Facility are subject to mandatory amortization
commencing on November 30, 1998 and all term and revolving credit loans mature
on August 31, 2002.
On January 23, 1998, the Company decided to postpone its proposed offerings of
approximately $450 million of equity and equity-related securities and
$450 million of senior debt securities due to a decline in its stock price.
The proceeds of such offerings would have been used to make prepayments of
outstanding borrowings under the New Bank Credit Facility. The Company
intends to proceed with appropriate offerings when stock market conditions are
favorable.
In anticipation of the proposed senior debt securities offering, the Company
also entered into three one-month interest rate hedges on an aggregate
notional value of $225 million under a treasury lock arrangement in order to
reduce its exposure to fluctuations in interest rates. The interest rate
hedges met the criteria required to use hedge accounting.
As a result of the postponement of the planned offerings, the Company decided
to terminate the interest rate hedges. This was due in part to the
uncertainty of when the Company would re-enter the market in the future. As a
result, the Company will recognize a loss of approximately $3.5 million in its
third quarter ending March 31, 1998, to terminate the interest rate hedges.
The termination of the interest rate hedges has eliminated any further
earnings impact from these hedges due to changes in interest rates.
Total assets were $2.1 billion at December 31, 1997, up from $869 million at
June 30, 1997. Net working capital was $518 million, up from $176 million at
June 30, 1997, and the ratio of current assets to current liabilities was 3.0
as of December 31, 1997 and 1.6 as of June 30, 1997. Also, the debt to
capital ratio (i.e., total debt divided by the sum of total debt and
shareholders' equity) was 66.2 percent as of December 31, 1997, and
27.5 percent as of June 30, 1997.
The most significant event that affected the Company's financial condition
during the quarter was the acquisition of Greenfield Industries.
OUTLOOK
- -------
In looking to the third quarter ending March 31, 1998, management expects
Kennametal's consolidated sales to increase over the third quarter of a year
ago.
Sales in the North America Metalworking market should benefit from continuing
strong market conditions in the United States. Sales in the Europe
Metalworking market are also expected to benefit from steadily improving
market conditions throughout Europe, especially in Germany. Sales in the Asia
Pacific Metalworking market are expected to remain weak.
Sales in the Industrial Supply market should benefit from expansion of
locations, increased mail order sales as a result of the expanded product
offering in the new J&L Industrial Supply master catalog, and from
acquisitions offset in part by the loss of the General Electric Full Service
Supply contract. Sales in the Mining and Construction market should increase
from additional domestic demand. Sales by Greenfield are expected to benefit
as a result of the factors mentioned previously.
This Form 10-Q contains "forward-looking statements" as defined in Section 21E
of the Securities Exchange Act of 1934. Actual results can materially differ
from those in the forward-looking statements to the extent that the
anticipated economic conditions in the United States, Asia Pacific and Europe
are not sustained. The Company undertakes no obligation to publicly release
any revisions to forward-looking statements to reflect events or circumstances
occurring after the date hereof.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The information set forth in Part II, Item 4 of the Company's September 30,
1997 Form 10-Q is incorporated by reference herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
(10) Material Contracts
10.1 Letter agreement dated May 5, 1997 between Greenfield
Industries, Inc. and Paul W. Jones (incorporated herein
by reference to Exhibit 10.2 of the Form 10-Q of
Greenfield Industries, Inc. ("Greenfield") for the
quarterly period ended June 30, 1997).
10.2 Credit Agreement, dated as of November 17, 1997, by and
among the Company, as Borrower, the Lender Parties named
therein, and Mellon Bank, N.A., as Administrative Agent
(incorporated herein by reference to Exhibit (b)(2) to
the Company's Schedule 14D-1 dated October 17, 1997, as
amended).
10.3 Guaranty and Suretyship Agreement, dated as of
November 17, 1997, made by the Subsidiary Guarantor
named therein in favor of Mellon Bank, N.A., as
Collateral Agent, as supplemented by the Additional
Subsidiary Guarantor Supplement, dated as of
November 18, 1997, made by Greenfield (incorporated
herein by reference to Exhibit (b)(3) to the Company's
Schedule 14D-1, as amended, and Exhibit 10.2 of
Greenfield's Current Report on Form 8-K dated
November 17, 1997).
(27) Financial Data Schedule for six months ended December 31,
1997, submitted to the Securities and Exchange Commission in
electronic format. Filed Herewith.
(99) Additional Exhibits.
Press Release dated January 23, 1998. Filed Herewith.
(b) Reports on Form 8-K
A report on Form 8-K dated November 20, 1997, Amendment No. 1 dated
December 31, 1997, and Amendment No. 2 dated January 20, 1998, were
filed during and subsequent to the quarter ended December 31, 1997,
and related to the Company's acquisition of Greenfield Industries,
Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENNAMETAL INC.
Date: February 13, 1998 By: /s/ RICHARD J. ORWIG
---------------------
Richard J. Orwig
Vice President
Chief Financial and
Administrative Officer
EXHIBIT 99
January 23, 1998
Immediate Release
KENNAMETAL POSTPONES PUBLIC OFFERINGS
DUE TO UNFAVORABLE STOCK PRICE
-------------------------------------
LATROBE, Pa., January 23, 1998. Kennametal Inc. (NYSE:KMT) announced today
that it has decided to postpone its previously announced public offerings of
4,300,000 shares of common stock and 4,500,000 FELINE PRIDES, along with a
related $450 million subsequent senior debt offering. Kennametal said it made
this decision because of the recent decline in its stock price due to
unfavorable stock market conditions. Net proceeds from the equity offerings
would have been used to retire debt incurred in connection with its recent
acquisition of Greenfield Industries, Inc.
President and Chief Executive Officer Robert L. McGeehan remarked that
Kennametal's current five-year credit facility provided the flexibility to
postpone the offerings because it makes available more than adequate long-term
capital to pursue Kennametal's business plans, including the integration of
the Greenfield acquisition. He added that although Kennametal desires to
restructure its balance sheet with additional equity to return to its targeted
debt-to-capital ratio, the Company decided, considering the best interests of
its shareholders, not to proceed with the offerings in the current market
environment, as the stock price is not reflective of the Company's inherent
value. Kennametal intends to proceed with an appropriate offering when stock
market conditions are more favorable.
This release contains "forward-looking statements" as defined by Section 21E
of the Securities Exchange Act of 1934. Actual results can differ from those
herein to the extent that economic conditions in the United States, Asia
Pacific and Europe are not sustained.
-END-
5
CONFIDENTIAL KENNAMETAL INC.
- -EdgarK1-23-98.doc-Travel Dept.
February 13, 1998 11:03 AM