UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
Commission file number 1-5318
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
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Pennsylvania
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25-0900168
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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World Headquarters
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1600 Technology Way
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P.O. Box 231
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Latrobe, Pennsylvania
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15650-0231
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(Address of principal executive offices)
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(Zip Code)
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Website:
www.kennametal.com
Registrants 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
ý
NO
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
ý
NO
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated
filer
ý
Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Accelerated filer
o
Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange
Act). YES
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NO
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Indicate the number of shares outstanding of each of the issuers classes of capital stock, as of
the latest practicable date.
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Title of Each Class
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Outstanding at January 31, 2011
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Capital Stock, par value $1.25 per share
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82,151,690
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KENNAMETAL INC.
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2010
TABLE OF CONTENTS
FORWARD-LOOKING INFORMATION
This Form 10-Q 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. Forward-looking
statements are statements that do not relate strictly to historical or current facts. You can
identify 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 or events. Forward-looking statements in this Form 10-Q may concern, among
other things, Kennametals expectations regarding our strategy, goals, plans and projections
regarding our financial position, liquidity and capital resources, results of operations, market
position, and product development, all of which are based on current estimates that involve
inherent risks and uncertainties. Among the factors that could cause the actual results to differ
materially from those indicated in the forward-looking statements are risks and uncertainties
related to: prolonged economic recession; restructuring and related actions (including associated
costs and anticipated benefits); availability and cost of the raw materials we use to manufacture
our products; our foreign operations and international markets, such as currency exchange rates,
different regulatory environments, trade barriers, exchange controls, and social and political
instability; changes in the regulatory environment in which we operate, including environmental,
health and safety regulations; our ability to protect and defend our intellectual property;
competition; our ability to retain our management and employees; demands on management resources;
successful completion of information systems upgrades, including our enterprise system software;
potential claims relating to our products; integrating acquisitions and achieving the expected
savings and synergies; business divestitures; global or regional catastrophic events; energy costs;
commodity prices; labor relations; demand for and market acceptance of new and existing products;
implementation of environmental remediation matters; and implementation of a new segment structure.
Should one or more of these risks or uncertainties materialize, or should the assumptions
underlying the forward-looking statements prove incorrect, actual outcomes could vary materially
from those indicated. These and other risks are more fully described in the Risk Factors Section
of our Annual Report on Form 10-K and in our other periodic filings with the Securities and
Exchange Commission. We undertake no obligation to release publicly any revisions to
forward-looking statements as a result of future events or developments.
3
PART I FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL STATEMENTS
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KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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Three Months Ended
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Six Months Ended
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December 31,
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December 31,
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(in thousands, except per share amounts)
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2010
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2009
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2010
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2009
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Sales
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$
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565,768
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$
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442,865
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$
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1,094,926
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$
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852,260
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Cost of goods sold
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365,743
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302,777
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706,161
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594,371
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Gross profit
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200,025
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140,088
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388,765
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257,889
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Operating expense
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132,105
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117,902
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257,125
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234,064
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Restructuring charges (Note 7)
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3,391
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3,348
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6,651
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11,178
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Amortization of intangibles
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2,912
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3,367
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5,860
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6,707
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Operating income
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61,617
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15,471
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119,129
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5,940
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Interest expense
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5,564
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5,954
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11,527
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12,325
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Other (income) expense, net
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(253
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(1,866
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1,658
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(4,818
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Income (loss) from continuing operations
before
income taxes
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56,306
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11,383
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105,944
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(1,567
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Provision (benefit) for income taxes
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12,016
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5,090
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25,698
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(39
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Income (loss) from continuing operations
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44,290
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6,293
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80,246
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(1,528
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Loss from discontinued operations (Note 8)
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-
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(56
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-
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(1,423
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Net income (loss)
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44,290
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6,237
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80,246
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(2,951
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Less: Net
income attributable to noncontrolling
interests
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821
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270
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1,856
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899
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Net income (loss) attributable to Kennametal
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$
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43,469
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$
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5,967
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$
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78,390
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$
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(3,850
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)
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Amounts attributable to Kennametal Shareowners:
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Income (loss) from continuing operations
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$
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43,469
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$
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6,023
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$
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78,390
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$
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(2,427
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)
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Loss from discontinued operations
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-
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(56
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-
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(1,423
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Net income (loss)
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$
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43,469
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$
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5,967
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$
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78,390
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$
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(3,850
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PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREOWNERS
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Basic earnings (loss) per share:
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Continuing operations
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$
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0.53
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$
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0.07
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$
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0.95
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$
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(0.03
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Discontinued operations
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-
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-
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-
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(0.02
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$
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0.53
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$
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0.07
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$
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0.95
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$
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(0.05
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Diluted earnings (loss) per share:
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Continuing operations
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$
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0.52
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$
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0.07
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$
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0.94
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$
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(0.03
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)
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Discontinued operations
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-
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-
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-
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(0.02
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$
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0.52
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$
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0.07
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$
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0.94
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$
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(0.05
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)
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Dividends per share
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$
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0.12
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$
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0.12
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$
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0.24
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$
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0.24
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Basic weighted average shares outstanding
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82,186
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81,149
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82,146
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80,461
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Diluted weighted average shares outstanding
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83,337
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81,855
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83,012
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80,461
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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December 31,
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June 30,
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(in thousands, except per share data)
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2010
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2010
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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147,157
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$
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118,129
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Accounts receivable, less allowance for doubtful accounts of
$23,664 and $24,789
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340,531
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326,699
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Inventories (Note 11)
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425,957
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364,268
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Deferred income taxes
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63,863
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62,083
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Other current assets
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47,625
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44,752
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Total current assets
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1,025,133
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915,931
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Property, plant and equipment:
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Land and buildings
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359,943
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341,748
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Machinery and equipment
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1,328,627
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1,281,872
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Less accumulated depreciation
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(1,022,791
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)
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(959,085
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)
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Property, plant and equipment, net
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665,779
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664,535
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Other assets:
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Investments in affiliated companies
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1,826
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2,251
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Goodwill (Note 18)
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500,790
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489,443
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Other intangible assets, less accumulated amortization of $71,213
and $63,343
(Note 18)
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153,917
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155,306
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Deferred income taxes
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11,815
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11,827
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Other
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35,733
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28,530
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Total other assets
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704,081
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687,357
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Total assets
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$
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2,394,993
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$
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2,267,823
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LIABILITIES
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Current liabilities:
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Current maturities of long-term debt and capital leases (Note 12)
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$
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900
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$
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3,539
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Notes payable to banks
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3,336
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19,454
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Accounts payable
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116,849
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|
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125,360
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Accrued income taxes
|
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13,265
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17,857
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Accrued expenses
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81,134
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73,989
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Other current liabilities (Note 7)
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154,435
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152,806
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Total current liabilities
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369,919
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|
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393,005
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Long-term debt and capital leases, less current maturities (Note 12)
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312,143
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|
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|
314,675
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Deferred income taxes
|
|
|
64,933
|
|
|
|
63,266
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|
Accrued pension and postretirement benefits
|
|
|
139,679
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|
|
|
129,701
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Accrued income taxes
|
|
|
5,648
|
|
|
|
5,193
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Other liabilities
|
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26,244
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|
|
|
28,540
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Total liabilities
|
|
|
918,566
|
|
|
|
934,380
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|
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Commitments and contingencies
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EQUITY (Note 16)
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Kennametal Shareowners Equity:
|
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Preferred stock, no par value; 5,000 shares authorized; none issued
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-
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-
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Capital
stock, $1.25 par value; 120,000 shares authorized;
82,003 and 81,903 shares issued
|
|
|
102,503
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|
|
|
102,379
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Additional paid-in capital
|
|
|
503,663
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|
|
|
492,454
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Retained earnings
|
|
|
851,909
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|
|
|
793,448
|
|
Accumulated other comprehensive loss
|
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(2,607
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)
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|
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(72,781
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)
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Total Kennametal Shareowners Equity
|
|
|
1,455,468
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|
|
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1,315,500
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Noncontrolling interests
|
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20,959
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|
|
|
17,943
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|
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Total equity
|
|
|
1,476,427
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|
|
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1,333,443
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Total liabilities and equity
|
|
$
|
2,394,993
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|
|
$
|
2,267,823
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|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Six months ended December 31 (in thousands)
|
|
2010
|
|
|
2009
(1)
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
80,246
|
|
|
$
|
(2,951
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)
|
Adjustments for non-cash items:
|
|
|
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|
|
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|
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Depreciation
|
|
|
39,883
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|
|
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40,770
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Amortization
|
|
|
5,860
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|
|
|
6,707
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Stock-based compensation expense
|
|
|
12,591
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|
|
8,551
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|
Restructuring charges
|
|
|
1,622
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|
|
|
62
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|
Loss on divestitures
|
|
|
-
|
|
|
|
527
|
|
Deferred income tax provision
|
|
|
505
|
|
|
|
(877
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)
|
Other
|
|
|
771
|
|
|
|
(147
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)
|
Changes in certain assets and liabilities, excluding effects of acquisitions
and divestitures:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,600
|
|
|
|
11,985
|
|
Inventories
|
|
|
(45,089
|
)
|
|
|
8,446
|
|
Accounts payable and accrued liabilities
|
|
|
(21,163
|
)
|
|
|
(20,572
|
)
|
Accrued income taxes
|
|
|
(3,993
|
)
|
|
|
(6,300
|
)
|
Other
|
|
|
(5,432
|
)
|
|
|
7,230
|
|
|
Net cash flow provided by operating activities
|
|
|
67,401
|
|
|
|
53,431
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(21,150
|
)
|
|
|
(19,266
|
)
|
Disposals of property, plant and equipment
|
|
|
7,451
|
|
|
|
1,659
|
|
Proceeds from divestitures (Note 8)
|
|
|
-
|
|
|
|
27,788
|
|
Other
|
|
|
1,138
|
|
|
|
343
|
|
|
Net cash flow (used for) provided by investing activities
|
|
|
(12,561
|
)
|
|
|
10,524
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net decrease in notes payable
|
|
|
(16,139
|
)
|
|
|
(11,248
|
)
|
Net decrease in short-term revolving and other lines of credit
|
|
|
-
|
|
|
|
(18,400
|
)
|
Term debt borrowings
|
|
|
255,055
|
|
|
|
254,779
|
|
Term debt repayments
|
|
|
(256,564
|
)
|
|
|
(370,261
|
)
|
Purchase of capital stock
|
|
|
(10,275
|
)
|
|
|
(146
|
)
|
Net proceeds from equity offering
|
|
|
-
|
|
|
|
120,696
|
|
Dividend reinvestment and the effect of employee benefit and stock plans
|
|
|
10,186
|
|
|
|
3,789
|
|
Cash dividends paid to shareowners
|
|
|
(19,929
|
)
|
|
|
(19,572
|
)
|
Other
|
|
|
(1,489
|
)
|
|
|
(2,481
|
)
|
|
Net cash flow used for financing activities
|
|
|
(39,155
|
)
|
|
|
(42,844
|
)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
13,343
|
|
|
|
4,901
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
29,028
|
|
|
|
26,012
|
|
Cash and cash equivalents, beginning of period
|
|
|
118,129
|
|
|
|
69,823
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
147,157
|
|
|
$
|
95,835
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
(1) Amounts presented include cash flows from discontinued operations.
6
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Kennametal Inc. was incorporated in Pennsylvania in 1943. Kennametal Inc. and its subsidiaries
(collectively, Kennametal or the Company) are a leading global manufacturer and supplier of
tooling, engineered components and advanced materials consumed in production processes. We
believe that our reputation for manufacturing excellence, as well as our technological expertise
and innovation in our principle products, has helped us to achieve a leading market presence in
our primary markets. End users of our products include metalworking manufacturers and suppliers
across a diverse array of industries including the aerospace, defense, transportation, machine
tool, light machinery and heavy machinery industries, as well as manufacturers, producers and
suppliers in a number of other industries including coal mining, highway construction, quarrying,
oil and gas exploration and production industries. Our end users products and services include
everything from airframes to coal, engines to oil wells and turbochargers to construction. We
operate two global business units consisting of Industrial and Infrastructure.
|
|
|
The condensed consolidated financial statements, which include our accounts and those of our
majority-owned subsidiaries, should be read in conjunction with our 2010 Annual Report on Form
10-K. The condensed consolidated balance sheet as of June 30, 2010 was derived from the audited
balance sheet included in our 2010 Annual Report on Form 10-K. These interim statements are
unaudited; however, we believe that all adjustments necessary for a fair statement of the results
of the interim periods were made and all adjustments are normal, recurring adjustments. The
results for the six months ended December 31, 2010 and 2009 are not necessarily indicative of the
results to be expected for a full fiscal year. Unless otherwise specified, any reference to a
year is to a fiscal year ended June 30. For example, a reference to 2011 is to the fiscal year
ending June 30, 2011. When used in this Form 10-Q, unless the context requires otherwise, the
terms we, our and us refer to Kennametal Inc. and its consolidated subsidiaries.
|
3.
|
|
NEW ACCOUNTING STANDARDS
|
|
|
Issued
|
|
|
|
In December 2010, the FASB issued additional guidance on intangible impairment testing for
reporting units with zero or negative carrying amounts. This guidance is effective for fiscal
years and interim periods beginning after
December 15, 2010. Kennametal adopted this guidance on January 1, 2011 and such adoption did not
have a material impact on our condensed consolidated financial statements.
|
|
|
|
In December 2010, the FASB issued additional guidance on disclosures related to business
combinations for a public entity that presents comparative financial statements. This guidance
also expanded the supplemental pro forma business combination disclosures. This guidance is
effective prospectively for business combinations for which the acquisition date is on or after
the annual reporting period beginning December 15, 2010. Kennametal adopted this guidance on
January 1, 2011 and such adoption did not have a material impact to our condensed consolidated
financial statements.
|
|
|
|
Adopted
|
|
|
|
As of July 1, 2010, Kennametal adopted new guidance on consolidations for enterprises involved
with variable interest entities. The guidance modifies how a company determines when an entity
that is insufficiently capitalized or is not controlled through voting (or similar) rights should
be consolidated and clarifies that the determination of whether a company is required to
consolidate a variable interest entity is based on, among other things, an entitys purpose and
design and a companys ability to direct the activities of the entity that most significantly
impact the entitys economic performance. This guidance requires an ongoing reassessment of
whether a company is the primary beneficiary of a variable interest entity and also requires
additional disclosures about a companys involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. The adoption of this guidance did
not have a material impact on our condensed consolidated financial statements.
|
|
|
|
As of July 1, 2010, Kennametal adopted new guidance on accounting for transfers of financial
assets. This guidance requires additional disclosure regarding transfers of financial assets,
including securitization transactions, and where companies have continuing exposure to the risks
related to transferred financial assets. The adoption of this guidance did not have a material
impact on our condensed consolidated financial statements.
|
|
|
|
As of July 1, 2010, Kennametal adopted new guidance on revenue recognition for
multiple-deliverable revenue arrangements. The guidance allows companies to allocate arrangement
consideration in multiple deliverable arrangements in a manner that better reflects the
transactions economics and may result in earlier revenue recognition. In
addition, the residual method of allocating arrangement consideration is no longer permitted. The
adoption of this guidance did not have a material impact on our condensed consolidated financial
statements.
|
7
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4.
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURES
|
|
|
|
|
|
|
|
|
|
Six months ended December 31 (in thousands)
|
|
2010
|
|
|
2009
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
12,653
|
|
|
$
|
14,012
|
|
Income taxes
|
|
|
30,362
|
|
|
|
8,016
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash information:
|
|
|
|
|
|
|
|
|
Contribution of capital stock to employees defined contribution benefit plans
|
|
|
948
|
|
|
|
2,683
|
|
|
5.
|
|
FAIR VALUE MEASUREMENTS
|
|
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The
fair value hierarchy consists of three levels to prioritize the inputs used in valuations, as
defined below:
|
|
|
|
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date
for identical, unrestricted assets or liabilities.
|
|
|
|
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly, including quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices that are observable for the asset
or liability (e.g., interest rates); and inputs that are derived principally from or
corroborated by observable market data by correlation or other means.
|
|
|
|
Level 3: Inputs that are unobservable.
|
|
|
|
As of December 31, 2010, the fair values of the Companys financial assets and financial
liabilities measured at fair value on a recurring basis are categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
(1)
|
|
$
|
-
|
|
|
$
|
4,016
|
|
|
$
|
-
|
|
|
$
|
4,016
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
4,016
|
|
|
$
|
-
|
|
|
$
|
4,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
(1)
|
|
$
|
-
|
|
|
$
|
1,435
|
|
|
$
|
-
|
|
|
$
|
1,435
|
|
|
Total liabilities at fair value
|
|
$
|
-
|
|
|
$
|
1,435
|
|
|
$
|
-
|
|
|
$
|
1,435
|
|
|
As of June 30, 2010, the fair value of the Companys financial assets and financial
liabilities measured at fair value on a recurring basis are categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
(1)
|
|
$
|
-
|
|
|
$
|
43
|
|
|
$
|
-
|
|
|
$
|
43
|
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
43
|
|
|
$
|
-
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
(1)
|
|
$
|
-
|
|
|
$
|
3,453
|
|
|
$
|
-
|
|
|
$
|
3,453
|
|
|
Total liabilities at fair value
|
|
$
|
-
|
|
|
$
|
3,453
|
|
|
$
|
-
|
|
|
$
|
3,453
|
|
|
|
|
|
(1)
|
|
Foreign currency derivative and interest rate swap contracts are valued based
on observable market spot and forward rates and are classified within
Level 2 of the fair value hierarchy.
|
8
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.
|
|
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
|
|
|
As part of our financial risk management program, we use certain derivative financial
instruments. We do not enter into derivative transactions for speculative purposes and therefore
hold no derivative instruments for trading purposes. We use derivative financial instruments to provide predictability to the effects of changes in
foreign exchange rates on our consolidated results and to achieve our targeted mix of fixed and
floating interest rates on outstanding debt. We account for derivative instruments as a hedge of
the related asset, liability, firm commitment or anticipated transaction when the derivative is
specifically designated as a hedge of such items. Our objective in managing foreign exchange
exposures with derivative instruments is to reduce volatility in cash flow, allowing us to focus
more of our attention on business operations. With respect to interest rate management, these
derivative instruments allow us to achieve our targeted
fixed-to-floating interest rate mix as a separate decision from funding arrangements in the bank
and public debt markets. We measure hedge effectiveness by assessing the changes in the fair
value or expected future cash flows of the hedged item. The ineffective portions are recorded in
other (income) expense, net.
|
|
|
|
The fair value of derivatives designated in the condensed consolidated balance sheet are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
(in thousands)
|
|
2010
|
|
|
2010
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Other current assets - range forward contracts
|
|
$
|
363
|
|
|
$
|
34
|
|
Other current liabilities - range forward contracts
|
|
|
(394
|
)
|
|
|
(2
|
)
|
Other assets - forward starting interest rate swap contracts
|
|
|
2,597
|
|
|
|
-
|
|
Other liabilities - forward starting interest rate swap contracts
|
|
|
(919
|
)
|
|
|
(2,348
|
)
|
|
Total derivatives designated as hedging instruments
|
|
|
1,647
|
|
|
|
(2,316
|
)
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Other current assets - currency forward contracts
|
|
|
1,056
|
|
|
|
9
|
|
Other current liabilities - currency forward contracts
|
|
|
(122
|
)
|
|
|
(1,103
|
)
|
|
Total derivatives not designated as hedging instruments
|
|
|
934
|
|
|
|
(1,094
|
)
|
|
Total derivatives
|
|
$
|
2,581
|
|
|
$
|
(3,410
|
)
|
|
Certain currency forward contracts hedging significant cross-border intercompany loans are
considered as other derivatives and therefore do not qualify for hedge accounting. These
contracts are recorded at fair value in the balance sheet, with the offset to other (income)
expense, net. (Gains) losses related to derivatives not designated as hedging instruments have
been recognized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Other expense (income), net - currency forward contracts
|
|
$
|
865
|
|
|
$
|
9,742
|
|
|
$
|
(1,782
|
)
|
|
$
|
6,997
|
|
|
FAIR VALUE HEDGES
Fixed-to-floating interest rate swap contracts, designated as fair value hedges, are entered
into from time to time to hedge our exposure to fair value fluctuations on a portion of our
fixed rate debt. These interest rate swap contracts convert a portion of our fixed rate debt to
floating rate debt. These contracts require periodic settlement and the difference between
amounts to be received and paid under the interest rate swap contracts is recognized in interest
expense. We had no such contracts outstanding at December 31, 2010 and June 30, 2010,
respectively.
In February 2009, we terminated interest rate swap contracts to convert $200.0 million of our
fixed rate debt to floating rate debt. These contracts were originally set to mature in June
2012. Upon termination, we received a cash payment of $13.2 million. This gain is being
amortized as a component of interest expense over the remaining term of the related debt using
the effective interest rate method. During the three and six months ended December 31, 2010,
$1.4 million and $2.9 million respectively, were recognized as reductions in interest expense.
During the three and six months ended December 31, 2009, $1.4 million and $2.8 million
respectively, were recognized as reductions in interest expense.
9
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW HEDGES
Currency forward contracts and range forward contracts (a transaction where both a put option is
purchased and a call option is sold), designated as cash flow hedges, hedge anticipated cash
flows from cross-border intercompany sales of products and services. Gains and losses realized
on these contracts at maturity are recorded in accumulated other comprehensive loss, net of tax,
and are recognized as a component of other (income) expense, net when the underlying sale of
products or services are recognized into earnings. The notional amount of the contracts
translated into U.S. dollars at December 31, 2010 and 2009, was $64.1 million and $29.2 million,
respectively. The time value component of the fair value of range forwards is excluded from the
assessment of hedge effectiveness. Assuming the market rates remain constant with the rates at
December 31, 2010, we expect to recognize a loss of $0.2 million in the next 12 months on
outstanding derivatives.
We enter into floating-to-fixed interest rate swap contracts, designated as cash flow hedges,
from time to time to hedge our exposure to interest rate changes on a portion of our floating
rate debt. These interest rate swap contracts convert a portion of our floating rate debt to
fixed rate debt. We record the fair value of these contracts as an asset or a liability, as
applicable, in the balance sheet, with the offset to accumulated other comprehensive loss, net
of tax. At December 31, 2010 we had forward starting interest rate swap contracts outstanding for
forecasted transactions that effectively converted a cumulative notional amount of $125 million
from floating to fixed interest rates. As of
December 31, 2010 we recorded a net asset of $1.7 million on these contracts which was recorded
as an offset in other comprehensive income, net of tax. Over the next 12 months, assuming the
market rates remain constant with the rates at December 31, 2010, we do not expect to recognize
into earnings any significant gains or losses on outstanding derivatives. We had no such
contracts outstanding at December 31, 2009.
(Gains) losses related to cash flow hedges have been recognized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses recognized in other comprehensive
loss
- range forward contracts
|
|
$
|
(326
|
)
|
|
$
|
(75
|
)
|
|
$
|
169
|
|
|
$
|
69
|
|
|
Losses (gains) reclassified from accumulated
other
comprehensive loss into other (income)
expense,
net - range forward contracts
|
|
$
|
115
|
|
|
$
|
(102
|
)
|
|
$
|
140
|
|
|
$
|
(1,510
|
)
|
|
No portion of the gains or losses recognized in earnings was due to ineffectiveness and no
amounts were excluded from our effectiveness testing for the six months ended December 31, 2010
and 2009, respectively.
|
|
We continued to implement restructuring plans to reduce costs and improve operating
efficiencies. These actions taken during the six months ended December 31, 2010 related
primarily to the rationalization of certain manufacturing facilities. Restructuring and related
charges recorded during the six months ended December 31, 2010 amounted to $9.4 million, including $7.1 million of restructuring charges of which $0.5 million were related
to inventory disposals and recorded in cost of goods sold. Restructuring-related charges of $1.5
million and $0.8 million were recorded in cost of goods sold and operating expense, respectively
during the six months ended December 31, 2010.
|
|
|
|
Restructuring and related charges recorded during the six months ended December 31, 2009
amounted to $12.7 million, including $11.2 million of restructuring charges.
Restructuring-related charges of $1.0 million and $0.5 million were recorded in cost of goods
sold and operating expense, respectively, during the same period.
|
|
|
|
The combined total pre-tax charges are expected to be approximately $160 million to $165
million, which is expected to be approximately 70% Industrial and 30% Infrastructure. We expect
the majority of these pre-tax charges to be severance charges. Total restructuring and related
charges since inception of $138 million have been recorded through December 31, 2010:
approximately $97 million in
Industrial and approximately $41 million in Infrastructure. The remaining restructuring charges
are expected to be completed within the next three to six months and are anticipated to be mostly cash
expenditures.
|
10
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The restructuring accrual is recorded in other current liabilities in our condensed consolidated
balance sheet and the amount attributable to each segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Cash
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2010
|
|
|
Expense
|
|
|
Write-down
|
|
|
Expenditures
|
|
|
Translation
|
|
|
December 31, 2010
|
|
|
Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
18,327
|
|
|
$
|
2,175
|
|
|
$
|
-
|
|
|
$
|
(7,569
|
)
|
|
$
|
1,112
|
|
|
$
|
14,045
|
|
Facilities
|
|
|
508
|
|
|
|
1,048
|
|
|
|
(1,048
|
)
|
|
|
(378
|
)
|
|
|
-
|
|
|
|
130
|
|
Other
|
|
|
403
|
|
|
|
1,377
|
|
|
|
-
|
|
|
|
(1,367
|
)
|
|
|
37
|
|
|
|
450
|
|
|
Total Industrial
|
|
|
19,238
|
|
|
|
4,600
|
|
|
|
(1,048
|
)
|
|
|
(9,314
|
)
|
|
|
1,149
|
|
|
|
14,625
|
|
|
Infrastructure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
7,637
|
|
|
|
1,192
|
|
|
|
-
|
|
|
|
(4,147
|
)
|
|
|
609
|
|
|
|
5,291
|
|
Facilities
|
|
|
211
|
|
|
|
574
|
|
|
|
(574
|
)
|
|
|
(207
|
)
|
|
|
-
|
|
|
|
4
|
|
Other
|
|
|
168
|
|
|
|
755
|
|
|
|
-
|
|
|
|
(749
|
)
|
|
|
20
|
|
|
|
194
|
|
|
Total Infrastructure
|
|
|
8,016
|
|
|
|
2,521
|
|
|
|
(574
|
)
|
|
|
(5,103
|
)
|
|
|
629
|
|
|
|
5,489
|
|
|
Total
|
|
$
|
27,254
|
|
|
$
|
7,121
|
|
|
$
|
(1,622
|
)
|
|
$
|
(14,417
|
)
|
|
$
|
1,778
|
|
|
$
|
20,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Cash
|
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2009
|
|
|
Expense
|
|
|
Write-down
|
|
|
Expenditures
|
|
|
Translation
|
|
|
June 30, 2010
|
|
|
Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
18,378
|
|
|
$
|
29,082
|
|
|
$
|
-
|
|
|
$
|
(28,086
|
)
|
|
$
|
(1,047
|
)
|
|
$
|
18,327
|
|
Facilities
|
|
|
477
|
|
|
|
790
|
|
|
|
(604
|
)
|
|
|
(142
|
)
|
|
|
(13
|
)
|
|
|
508
|
|
Other
|
|
|
176
|
|
|
|
1,393
|
|
|
|
-
|
|
|
|
(1,241
|
)
|
|
|
75
|
|
|
|
403
|
|
|
Total Industrial
|
|
|
19,031
|
|
|
|
31,265
|
|
|
|
(604
|
)
|
|
|
(29,469
|
)
|
|
|
(985
|
)
|
|
|
19,238
|
|
|
Infrastructure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
7,659
|
|
|
|
12,119
|
|
|
|
-
|
|
|
|
(11,704
|
)
|
|
|
(437
|
)
|
|
|
7,637
|
|
Facilities
|
|
|
199
|
|
|
|
329
|
|
|
|
(251
|
)
|
|
|
(59
|
)
|
|
|
(7
|
)
|
|
|
211
|
|
Other
|
|
|
73
|
|
|
|
580
|
|
|
|
-
|
|
|
|
(517
|
)
|
|
|
32
|
|
|
|
168
|
|
|
Total Infrastructure
|
|
|
7,931
|
|
|
|
13,028
|
|
|
|
(251
|
)
|
|
|
(12,280
|
)
|
|
|
(412
|
)
|
|
|
8,016
|
|
|
Total
|
|
$
|
26,962
|
|
|
$
|
44,293
|
|
|
$
|
(855
|
)
|
|
$
|
(41,749
|
)
|
|
$
|
(1,397
|
)
|
|
$
|
27,254
|
|
|
See Note 19 for further discussion regarding the Companys segments.
8.
|
|
DISCONTINUED OPERATIONS
|
|
|
On June 30, 2009, we completed the sale of our high speed steel drills and related product
lines. This divestiture was accounted for as discontinued operations. Cash proceeds received
from this divestiture amounted to $28.5 million of which $27.0 million was received during the
six months ended December 31, 2009. We did not incur any pre-tax charges related to this
divestiture during the three and six months ended December 31, 2010. We incurred pre-tax charges
related to the divestiture of $0.1 million and $2.3 million during the three and six months
ended December 31, 2009, respectively. We do not expect to incur any additional pre-tax charges
related to this divestiture.
|
|
|
|
The following represents the results of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(in thousands)
|
|
December 31, 2009
|
|
|
December 31, 2009
|
|
|
Sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
|
$
|
(59
|
)
|
|
$
|
(2,269
|
)
|
Income tax benefit
|
|
|
3
|
|
|
|
846
|
|
|
Loss from discontinued operations
|
|
$
|
(56
|
)
|
|
$
|
(1,423
|
)
|
|
11
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9.
|
|
STOCK-BASED COMPENSATION
|
|
|
On October 26, 2010, the Companys shareowners
approved the Kennametal Inc., Stock and Incentive
Plan of 2010
(the 2010 Plan). The 2010 Plan authorizes the issuance of up to 3,500,000 shares of the
Companys common stock plus the remaining shares from the 2002 Plan. Shares can be issued in
the form of incentive stock options, non-statutory stock options, stock appreciation rights,
performance share awards, performance unit awards, restricted stock awards, restricted unit
awards and share awards.
|
|
|
|
Stock Options
|
|
|
|
The assumptions used in our Black-Scholes valuation related to grants made during the six months
ended December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Risk-free interest rate
|
|
|
1.4
|
%
|
|
|
2.3
|
%
|
Expected life (years)
(1)
|
|
|
4.5
|
|
|
4.5
|
Expected volatility
(2)
|
|
|
47.0
|
%
|
|
|
43.9
|
%
|
Expected dividend yield
|
|
|
2.0
|
%
|
|
|
1.8
|
%
|
|
|
|
|
(1)
|
|
Expected life is derived from historical experience.
|
|
(2)
|
|
Expected volatility is based on the historical volatility of our stock.
|
Changes in our stock options for the six months ended December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic value
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Life (years)
|
|
|
(in thousands)
|
|
|
Options outstanding, June 30, 2010
|
|
|
3,582,075
|
|
|
$
|
25.59
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
545,987
|
|
|
|
27.01
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(353,954
|
)
|
|
|
21.01
|
|
|
|
|
|
|
|
|
|
Lapsed and forfeited
|
|
|
(37,114
|
)
|
|
|
27.59
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2010
|
|
|
3,736,994
|
|
|
$
|
26.22
|
|
|
|
6.2
|
|
|
$
|
49,478
|
|
|
Options vested and expected to vest,
December 31, 2010
|
|
|
3,643,179
|
|
|
$
|
26.24
|
|
|
|
6.2
|
|
|
$
|
48,157
|
|
|
Options exercisable, December 31, 2010
|
|
|
2,223,253
|
|
|
$
|
26.41
|
|
|
|
4.9
|
|
|
$
|
29,023
|
|
|
During the six months ended December 31, 2010 and 2009, compensation expense related to stock
options was
$3.5 million and $3.0 million, respectively. As of December 31, 2010, the total unrecognized
compensation cost related to options outstanding was $6.5 million and is expected to be
recognized over a weighted average period of 2.6 years.
Weighted average fair value of options granted during the six months ended December 31, 2010 and
2009 was
$9.22 and $7.28, respectively. Fair value of options vested during the six months ended December
31, 2010 and 2009 was $4.2 million and $4.0 million, respectively.
Tax benefits, relating to excess stock-based compensation deductions, are presented in the
statement of cash flow as financing cash inflows. Tax benefits resulting from stock-based
compensation deductions exceeded amounts reported for financial reporting purposes by $1.3
million for the six months ended December 31, 2010. Amounts reported for financial reporting
purposes exceeded the tax benefit by $0.3 million for the six months ended December 31, 2009.
The amount of cash received from the exercise of capital stock options during the six months
ended December 31, 2010 and 2009 was $7.0 million and $2.1 million, respectively. The related
tax benefit for the six months ended
December 31, 2010 and 2009 was $1.7 million and $0.2 million, respectively. The total intrinsic
value of options exercised during the six months ended December 31, 2010 and 2009 was $4.8
million and $0.7 million, respectively.
Under the provisions of the 2010 Plan participants may deliver stock, owned by the holder for at
least six months, in payment of the option price and receive credit for the fair market value of
the shares on the date of delivery. The fair market value of shares delivered during the six
months ended December 31, 2010 was $0.4 million. There were no such shares delivered during the
six months ended December 31, 2009.
12
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Restricted Stock Awards
Changes in our restricted stock awards for the six months ended December 31, 2010 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Unvested restricted stock awards, June 30, 2010
|
|
|
198,701
|
|
|
$
|
32.71
|
|
Vested
|
|
|
(84,783
|
)
|
|
|
31.78
|
|
Forfeited
|
|
|
(753
|
)
|
|
|
31.26
|
|
|
Unvested restricted stock awards, December 31, 2010
|
|
|
113,165
|
|
|
$
|
33.41
|
|
|
During the six months ended December 31, 2010 and 2009, compensation expense related to
restricted stock awards was $1.2 million and $1.5 million, respectively. As of December 31,
2010, the total unrecognized compensation cost related to unvested restricted stock awards was
$1.7 million and is expected to be recognized over a weighted average period of 1.3 years.
Restricted Stock Units Time Vesting and Performance Vesting
Performance vesting restricted stock units (performance units) were granted to certain
individuals. These performance units are earned pro rata each year if certain performance goals
are met over a 3-year period, and are also subject to a service condition that requires the
individual to be employed by the Company at the payment date after the 3-year performance
period.
Changes in our time vesting and performance vesting restricted stock units for the six months
ended December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
|
|
|
|
|
|
|
|
|
|
|
Performance
|
|
|
Vesting
|
|
|
|
|
|
|
Time Vesting
|
|
|
|
Vesting
|
|
|
Weighted
|
|
|
Time Vesting
|
|
|
Weighted
|
|
|
|
Stock
|
|
|
Average Fair
|
|
|
Stock
|
|
|
Average Fair
|
|
|
|
Units
|
|
|
Value
|
|
|
Units
|
|
|
Value
|
|
|
Unvested
performance vesting and time
vesting restricted stock units,
June 30, 2010
|
|
|
-
|
|
|
$
|
-
|
|
|
|
546,713
|
|
|
$
|
24.29
|
|
Granted
|
|
|
134,807
|
|
|
|
26.89
|
|
|
|
525,250
|
|
|
|
26.93
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
|
|
(48,066
|
)
|
|
|
21.56
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,760
|
)
|
|
|
26.14
|
|
|
Unvested
performance vesting and time
vesting restricted stock units,
December 31, 2010
|
|
|
134,807
|
|
|
$
|
26.89
|
|
|
|
1,017,137
|
|
|
$
|
25.78
|
|
|
During the six months ended December 31, 2010 and 2009, compensation expense related to time
vesting and performance vesting restricted stock units was $6.6 million and $1.1 million,
respectively. As of December 31, 2010, the total unrecognized compensation cost related to
unvested time vesting and performance vesting restricted stock units was $18.5 million and is
expected to be recognized over a weighted average period of 2.8 years.
Restricted Stock Units STEP
As of December 31, 2010, participating executives had been granted awards under the Kennametal
Inc. 2008 Strategic Transformational Equity Program, under the 2002 Plan (STEP), equal to that
number of restricted stock units having a value of $30.3 million. A further amount of $7.0
million remains available under the STEP for additional awards that could be made to other
executives; however, the Company has decided that it will not make any further awards under the
STEP. No new grants under the STEP were made in the six months ended December 31, 2010 and it is
assumed that none of these units will vest. There are no voting rights or dividends associated
with restricted stock units under the STEP.
13
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
Under the STEP, there are two interim measurement dates, September 30, 2009 and 2010, and a
final measurement date, September 30, 2011, at which performance is assessed. Participants may
earn up to a cumulative 35 percent of the maximum restricted stock units awarded if certain
threshold levels of performance are achieved through the two interim measurement dates. The
threshold level of performance for September 30, 2010 and 2009 were not achieved and no
restricted stock units were earned under the STEP. Generally, the payment of any restricted
stock units under the STEP is also conditioned upon the participants being employed by the
Company on the date of distribution and the satisfaction of all other provisions of the STEP. As
of December 31, 2010, no restricted stock units have been earned or paid under the STEP.
|
|
|
|
The unvested EPS performance-based STEP restricted stock units as of December 31, 2010 were
502,371 and the weighted average fair value was $35.54.
|
|
|
|
The unvested TSR performance-based STEP restricted stock units as of December 31, 2010 were
270,501 and the weighted average fair value was $8.35.
|
|
|
|
During the six months ended December 31, 2010 and 2009, compensation expense related to STEP
restricted stock units was $0.3 million in both years. As of December 31, 2010, the total
unrecognized compensation cost related to unvested STEP restricted stock units was $0.4 million
and is expected to be recognized over a weighted average period of
0.8 years.
|
|
|
We sponsor several defined benefit pension plans. Additionally, we provide varying levels of
postretirement health care and life insurance benefits to some U.S. employees.
|
|
|
|
The table below summarizes the components of net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Service cost
|
|
$
|
1,909
|
|
|
$
|
1,997
|
|
|
$
|
3,822
|
|
|
$
|
3,995
|
|
Interest cost
|
|
|
10,208
|
|
|
|
10,675
|
|
|
|
20,458
|
|
|
|
21,350
|
|
Expected return on plan assets
|
|
|
(12,027
|
)
|
|
|
(11,591
|
)
|
|
|
(24,073
|
)
|
|
|
(23,164
|
)
|
Amortization of transition obligation
|
|
|
12
|
|
|
|
14
|
|
|
|
26
|
|
|
|
29
|
|
Amortization of prior service credit
|
|
|
(70
|
)
|
|
|
(70
|
)
|
|
|
(141
|
)
|
|
|
(140
|
)
|
Special termination benefits
|
|
|
-
|
|
|
|
507
|
|
|
|
-
|
|
|
|
1,967
|
|
Settlement loss
|
|
|
270
|
|
|
|
-
|
|
|
|
533
|
|
|
|
-
|
|
Recognition of actuarial losses
|
|
|
3,064
|
|
|
|
1,128
|
|
|
|
6,132
|
|
|
|
2,251
|
|
|
Net periodic pension cost
|
|
$
|
3,366
|
|
|
$
|
2,660
|
|
|
$
|
6,757
|
|
|
$
|
6,288
|
|
|
The table below summarizes the components of the net periodic other postretirement benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Service cost
|
|
$
|
19
|
|
|
$
|
25
|
|
|
$
|
38
|
|
|
$
|
50
|
|
Interest cost
|
|
|
259
|
|
|
|
316
|
|
|
|
518
|
|
|
|
633
|
|
Amortization of prior service cost
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
4
|
|
Recognition of actuarial gains
|
|
|
(47
|
)
|
|
|
(92
|
)
|
|
|
(94
|
)
|
|
|
(184
|
)
|
|
Net periodic other postretirement benefit cost
|
|
$
|
231
|
|
|
$
|
251
|
|
|
$
|
462
|
|
|
$
|
503
|
|
|
14
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
We used the last-in, first-out (LIFO) method of valuing inventories for approximately 49 percent
and 51 percent of total inventories at December 31, 2010 and June 30, 2010, respectively.
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 our
projections of expected year-end inventory levels and costs. Therefore, the interim financial
results are subject to any final year-end LIFO inventory adjustments.
|
|
|
|
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
(in thousands)
|
|
2010
|
|
|
2010
|
|
|
Finished goods
|
|
$
|
261,854
|
|
|
$
|
227,096
|
|
Work in process and powder blends
|
|
|
145,440
|
|
|
|
134,732
|
|
Raw materials and supplies
|
|
|
87,953
|
|
|
|
62,673
|
|
|
Inventories at current cost
|
|
|
495,247
|
|
|
|
424,501
|
|
Less: LIFO valuation
|
|
|
(69,290
|
)
|
|
|
(60,233
|
)
|
|
Total inventories
|
|
$
|
425,957
|
|
|
$
|
364,268
|
|
|
12.
|
|
LONG-TERM DEBT AND CAPITAL LEASES
|
|
|
|
Long-term debt and capital lease obligations consist primarily of Senior Unsecured Notes issued
in June 2002 having an aggregate face amount of $300.0 million, maturing in June 2012, as well
as borrowings under a five-year, multi-currency, revolving credit facility (2010 Credit
Agreement) which permits revolving credit loans of up to $500.0 million for working capital,
capital expenditures and general corporate purposes. The 2010 Credit Agreement allows for
borrowings in U.S. dollars, euro, Canadian dollars, pound sterling and Japanese yen. Interest
payable under the 2010 Credit Agreement is based upon the type of borrowing under the facility
and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal
Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us.
|
|
|
|
The 2010 Credit Agreement requires us to comply with various restrictive and affirmative
covenants, including two financial covenants: a maximum leverage ratio and a minimum
consolidated interest coverage ratio (as those terms are defined in the agreement). We were in
compliance with these financial covenants as of December 31, 2010. We had no borrowings
outstanding under the 2010 Credit Agreement as of December 31, 2010 and June 30, 2010.
|
|
|
|
Borrowings under the 2010 Credit Agreement are guaranteed by our significant domestic
subsidiaries.
|
|
|
|
Fixed rate debt had a fair market value of $322.8 million and $325.5 million at December 31,
2010 and June 30, 2010, respectively. The fair value is determined based on the quoted market
price of this debt as of December 31, 2010 and June 30, 2010, respectively.
|
13.
|
|
ENVIRONMENTAL MATTERS
|
|
|
|
The operation of our business has exposed us to certain liabilities and compliance costs related
to environmental matters. We are involved in various environmental cleanup and remediation
activities at certain of our locations.
|
|
|
|
Superfund Sites
We are involved as a Potentially Responsible Party (PRP) at various sites
designated by the U.S. Environmental Protection Agency (USEPA) as Superfund sites. For certain
of these sites, we have evaluated the claims and potential liabilities and have determined that
neither are material, individually or in the aggregate. For certain other sites, proceedings are
in the very early stages and have not yet progressed to a point where it is possible to estimate
the ultimate cost of remediation, the timing and extent of remedial action that may be required
by governmental authorities or the amount of our liability alone or in relation to that of any
other PRPs.
|
|
|
|
Other Environmental
We establish and maintain reserves for other potential environmental costs
which amounted to $6.1 million as of December 31, 2010. This accrual represents anticipated
costs associated with the remediation of these issues.
We recorded approximately $1.3 million related to an environmental liability in our
international operations and unfavorable foreign currency translation adjustments of $0.4
million for the six months ended December 31, 2010. In addition, we paid a civil penalty of $0.2
million during the six months ended December 31, 2010 related to our Chestnut Ridge, Pennsylvania
facility closure.
|
15
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reserves we have established for environmental liabilities represent our best current
estimate of the costs of addressing all identified environmental situations, based on our review
of currently available evidence, and taking into consideration our prior experience in
remediation and that of other companies, as well as public information released by the USEPA,
other governmental agencies, and by the PRP groups in which we are participating. Although the
reserves currently appear to be sufficient to cover these environmental liabilities, there are
uncertainties associated with environmental liabilities, and we can give no assurance that our
estimate of any environmental liability will not increase or decrease in the future. The
reserved and unreserved exposures for all environmental concerns could change substantially due
to factors such as the nature and extent of contamination, changes in remedial requirements,
technological changes, discovery of new information, the financial strength of other PRPs, the
identification of new PRPs and the involvement of and direction taken by the government on these
matters.
We maintain a Corporate Environmental, Health and Safety (EHS) Department, as well as an EHS
Steering Committee, to monitor compliance with environmental regulations and to oversee
remediation activities. In addition, we have designated EHS coordinators who are responsible for
each of our global manufacturing facilities. Our financial management team periodically meets
with members of the Corporate EHS Department and the Corporate Legal Department to review and
evaluate the status of environmental projects and contingencies. On a quarterly basis, we review
financial provisions and reserves for environmental contingencies and adjust these reserves when
appropriate.
14.
|
|
INCOME TAXES
|
|
|
|
The effective income tax rate for the three months ended
December 31, 2010 and 2009 was 21.3 percent
compared to 44.7 percent, respectively. The current year rate reflects the favorable impact of
stronger operating results under our pan-European business strategy and the extension of the
credit for increasing research activities included in the Tax Relief Act of 2010 enacted in the
quarter. The prior year rate was unfavorably impacted by restructuring and related charges in
lower tax jurisdictions and from the effects of having a relatively
low pre-tax base.
|
|
|
|
The effective income tax rate for the six months ended December 31, 2010 and 2009 was 24.3
percent (provision on income) compared to 2.5 percent (benefit on a loss), respectively. The
current year rate reflects the favorable impact of stronger operating results under our
pan-European business strategy. The prior year rate was unfavorably impacted by restructuring
and related charges in lower tax jurisdictions and from the effects of having a relatively low
pre-tax base.
|
15.
|
|
EARNINGS PER SHARE
|
|
|
|
Basic earnings per share is computed using the weighted average number of shares outstanding
during the period, while diluted earnings per share is calculated to reflect the potential
dilution that may occur related to the issuance of capital stock through grants of capital stock
options, restricted stock awards and restricted stock units. The difference between basic and
diluted earnings per share relates solely to the effect of capital stock options, restricted
stock awards and restricted stock units.
|
|
|
|
For purposes of determining the number of diluted shares outstanding, weighted average shares
outstanding for basic earnings per share calculations were increased due solely to the dilutive
effect of unexercised capital stock options, unvested restricted stock awards and unvested
restricted stock units by 1.1 million shares and 0.7 million shares for the three months ended
December 31, 2010 and 2009, respectively. For the six months ended December 31, 2010, the effect
of these items was 0.9 million shares. For the six months ended December 31, 2009, the effect
was anti-dilutive and therefore has been excluded from diluted shares outstanding as well as
from the diluted earnings per share calculation. Unexercised capital stock options, restricted
stock units and restricted stock awards of 0.6 million shares and 2.9 million shares for the
three months ended December 31, 2010 and 2009, respectively, and 0.7 million shares and 3.0
million shares for the six months ended December 31, 2010 and 2009, respectively, were not
included in the computation of diluted earnings per share because the inclusion would have been
anti-dilutive.
|
16
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16.
|
|
EQUITY
|
|
|
|
A summary of the changes in the carrying amounts of total equity, Kennametal shareowners equity
and equity attributable to noncontrolling interests as of December 31, 2010 and 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kennametal Shareowners Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
other
|
|
|
Non-
|
|
|
|
|
|
|
Capital
|
|
|
paid-in
|
|
|
Retained
|
|
|
comprehensive
|
|
|
controlling
|
|
|
|
|
(in thousands)
|
|
stock
|
|
|
capital
|
|
|
earnings
|
|
|
(loss) income
|
|
|
interests
|
|
|
Total equity
|
|
|
Balance as of June 30, 2010
|
|
$
|
102,379
|
|
|
$
|
492,454
|
|
|
$
|
793,448
|
|
|
$
|
(72,781
|
)
|
|
$
|
17,943
|
|
|
$
|
1,333,443
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
78,390
|
|
|
|
-
|
|
|
|
1,856
|
|
|
|
80,246
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,174
|
|
|
|
1,292
|
|
|
|
71,466
|
|
Dividend reinvestment
|
|
|
7
|
|
|
|
152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
159
|
|
Capital stock issued under
employee benefit and stock
plans
|
|
|
496
|
|
|
|
20,953
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,449
|
|
Purchase of capital stock
|
|
|
(379
|
)
|
|
|
(9,896
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,275
|
)
|
Cash dividends paid
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,929
|
)
|
|
|
-
|
|
|
|
(132
|
)
|
|
|
(20,061
|
)
|
|
Total equity, December 31, 2010
|
|
$
|
102,503
|
|
|
$
|
503,663
|
|
|
$
|
851,909
|
|
|
$
|
(2,607
|
)
|
|
$
|
20,959
|
|
|
$
|
1,476,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kennametal Shareowners Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
other
|
|
|
Non-
|
|
|
|
|
|
|
Capital
|
|
|
paid-in
|
|
|
Retained
|
|
|
comprehensive
|
|
|
controlling
|
|
|
|
|
(in thousands)
|
|
stock
|
|
|
capital
|
|
|
earnings
|
|
|
income
|
|
|
interests
|
|
|
Total equity
|
|
|
Balance as of June 30, 2009
|
|
$
|
91,540
|
|
|
$
|
357,839
|
|
|
$
|
786,345
|
|
|
$
|
11,719
|
|
|
$
|
20,012
|
|
|
$
|
1,267,455
|
|
Net (loss) income
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,850
|
)
|
|
|
-
|
|
|
|
899
|
|
|
|
(2,951
|
)
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,551
|
|
|
|
530
|
|
|
|
24,081
|
|
Dividend reinvestment
|
|
|
8
|
|
|
|
138
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
146
|
|
Capital
stock issued under
employee benefit and stock
plans
|
|
|
261
|
|
|
|
10,451
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,712
|
|
Purchase of capital stock
|
|
|
(8
|
)
|
|
|
(138
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(146
|
)
|
Equity offering
|
|
|
10,063
|
|
|
|
110,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,696
|
|
Cash dividends paid
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,572
|
)
|
|
|
-
|
|
|
|
(176
|
)
|
|
|
(19,748
|
)
|
|
Total equity, December 31, 2009
|
|
$
|
101,864
|
|
|
$
|
478,923
|
|
|
$
|
762,923
|
|
|
$
|
35,270
|
|
|
$
|
21,265
|
|
|
$
|
1,400,245
|
|
|
The amounts of comprehensive income attributable to Kennametal shareowners and noncontrolling
interests are disclosed in Note 17.
17
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
Comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net income (loss)
|
|
$
|
44,290
|
|
|
$
|
6,237
|
|
|
$
|
80,246
|
|
|
$
|
(2,951
|
)
|
Unrealized gain (loss) on derivatives designated and qualified as
cash flow hedges, net of income tax
|
|
|
177
|
|
|
|
(6
|
)
|
|
|
223
|
|
|
|
(1,045
|
)
|
Reclassification of unrealized loss on expired derivatives
designated and qualified as cash flow hedges, net of income tax
|
|
|
5,780
|
|
|
|
57
|
|
|
|
2,187
|
|
|
|
20
|
|
Unrecognized net pension and other postretirement benefit gains
(losses), net of income tax
|
|
|
564
|
|
|
|
(316
|
)
|
|
|
(1,622
|
)
|
|
|
554
|
|
Reclassification of net pension and other postretirement benefit
losses,
net of income tax
|
|
|
1,859
|
|
|
|
598
|
|
|
|
3,720
|
|
|
|
1,191
|
|
Foreign currency translation adjustments, net of income tax
|
|
|
(7,293
|
)
|
|
|
(1,948
|
)
|
|
|
66,958
|
|
|
|
23,361
|
|
|
Total comprehensive income
|
|
|
45,377
|
|
|
|
4,622
|
|
|
|
151,712
|
|
|
|
21,130
|
|
Comprehensive income attributable to noncontrolling interests
|
|
|
604
|
|
|
|
384
|
|
|
|
3,148
|
|
|
|
1,429
|
|
|
Comprehensive income attributable to Kennametal Shareowners
|
|
$
|
44,773
|
|
|
$
|
4,238
|
|
|
$
|
148,564
|
|
|
$
|
19,701
|
|
|
18.
|
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
|
|
Goodwill represents the excess of cost over the fair value of the net assets of acquired
companies. Goodwill and other intangible assets with indefinite lives are tested at least
annually for impairment. We perform our annual impairment tests during the June quarter in
connection with our annual planning process unless there are impairment indicators that warrant
a test prior to that. In conjunction with the implementation of our new operating structure on
July 1, 2010, we tested goodwill for impairment and determined that there was no impairment at
that time. We have noted no impairment indicators warranting additional testing. See Note 19
for further discussion regarding the Companys segments.
|
|
|
A summary of the carrying amount of goodwill attributable to each segment as well as the changes
in such are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Industrial
|
|
|
Infrastructure
|
|
|
Total
|
|
|
Goodwill
|
|
$
|
393,974
|
|
|
$
|
246,311
|
|
|
$
|
640,285
|
|
Accumulated impairment losses
|
|
|
(150,842
|
)
|
|
|
-
|
|
|
|
(150,842
|
)
|
|
Balance as of June 30, 2010
|
|
$
|
243,132
|
|
|
$
|
246,311
|
|
|
$
|
489,443
|
|
|
Adjustments
|
|
$
|
121
|
|
|
$
|
-
|
|
|
$
|
121
|
|
Translation
|
|
|
9,065
|
|
|
|
2,161
|
|
|
|
11,226
|
|
|
Change in goodwill
|
|
|
9,186
|
|
|
|
2,161
|
|
|
|
11,347
|
|
|
Goodwill
|
|
|
403,160
|
|
|
|
248,472
|
|
|
|
651,632
|
|
Accumulated impairment losses
|
|
|
(150,842
|
)
|
|
|
-
|
|
|
|
(150,842
|
)
|
|
Balance as of December 31,
2010
|
|
$
|
252,318
|
|
|
$
|
248,472
|
|
|
$
|
500,790
|
|
|
18
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
The components of our intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
December 31, 2010
|
|
|
June 30, 2010
|
|
|
|
Useful Life
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
(in thousands)
|
|
(in years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Contract-based
|
|
|
4 to 15
|
|
|
$
|
6,252
|
|
|
$
|
(5,241
|
)
|
|
$
|
6,357
|
|
|
$
|
(5,218
|
)
|
Technology-based and other
|
|
|
4 to 15
|
|
|
|
38,693
|
|
|
|
(23,231
|
)
|
|
|
37,136
|
|
|
|
(20,422
|
)
|
Customer-related
|
|
|
10 to 20
|
|
|
|
111,293
|
|
|
|
(33,688
|
)
|
|
|
108,470
|
|
|
|
(29,255
|
)
|
Unpatented technology
|
|
|
30
|
|
|
|
19,378
|
|
|
|
(4,609
|
)
|
|
|
19,216
|
|
|
|
(4,572
|
)
|
Trademarks
|
|
|
5 to 20
|
|
|
|
10,853
|
|
|
|
(4,444
|
)
|
|
|
10,647
|
|
|
|
(3,876
|
)
|
Trademarks
|
|
Indefinite
|
|
|
|
38,661
|
|
|
|
-
|
|
|
|
36,823
|
|
|
|
-
|
|
|
Total
|
|
|
|
|
|
$
|
225,130
|
|
|
$
|
(71,213
|
)
|
|
$
|
218,649
|
|
|
$
|
(63,343
|
)
|
|
|
|
During the six months ended December 31, 2010, we recorded amortization expense of $5.9 million
related to our intangible assets and favorable foreign currency translation adjustments of $4.5
million.
|
|
|
In order to take additional advantage of growth opportunities as well as to provide a better
platform for continually improving the efficiency and effectiveness of operations, we
implemented a new operating structure at the beginning of fiscal 2011.
|
|
|
The new structure provides for an enhanced market sector approach coupled with a more
customer-centric focus for the sales organization and other key market-facing functions such as
customer service, marketing, product management, engineering and product development. The new
structure also involves the formation of a single, global integrated supply chain and logistics
organization that unleashes additional opportunities to achieve higher customer satisfaction and
realize lower costs to serve. Furthermore, the new structure provides for more uniform
management of administrative functions on a global basis to further improve the consistency,
effectiveness and efficiency of the services provided by these functions.
|
|
|
A key attribute of the new structure is the establishment of two new operating segments by
market sector which replace the previous two operating segments that were based on a product
focus. The two new reportable operating segments are named Industrial and Infrastructure. The
Industrial business is focused on customers within the transportation, aerospace, defense and
general engineering market sectors, as well as the machine tool industry. The Infrastructure
business is focused on customers within the energy and earthworks industries. The formation of
the two new reportable operating segments is consistent with the new management approach and
internal financial reporting established under the new structure.
|
|
|
Under the new structure, more corporate expenses will be allocated to the new segments than were
allocated to the previous segments. Corporate expenses related to executive retirement plans,
the Companys Board of Directors and strategic initiatives, as well as certain other costs will
continue to be reported as Corporate.
|
|
|
Kennametal delivers productivity to customers seeking peak performance in demanding environments
by providing innovative custom and standard wear-resistant solutions, enabled through our
advanced materials sciences, application knowledge and commitment to a sustainable environment.
Our product offering includes a wide array of standard and custom solution products in
metalworking, such as metal cutting tools and tooling systems, and advanced materials, such as
cemented tungsten carbide products, to address customer demands. These products are offered
through a variety of channels via an enterprise approach to customers in both of our operating
segments.
|
|
|
The Industrial segment serves customers that operate in industrial end markets such as
aerospace, defense, transportation and general engineering. The customers in these end markets
manufacture engines, airframes, automobiles, trucks, ships and various industrial goods. The
technology needs and level of customization vary by customer and industry served. We deliver
value to our Industrial segment customers through our application expertise and diverse product
offering.
|
|
|
The Infrastructure segment serves customers that operate in the earthworks and energy end
markets. These customers support primary industries such as oil and gas, power generation,
underground mining, surface and hard rock mining, highway construction and road maintenance.
Generally, our Infrastructure segment customers are served through a customer intimacy model
that allows us to offer full system solutions by gaining an in depth understanding of our
customers engineering needs. Our product offering promotes value by bringing enhanced
performance and productivity to our customers processes and systems.
|
19
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
Our external sales and operating income by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
(1)
|
|
|
2010
|
|
|
2009
(1)
|
|
|
External sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
369,139
|
|
|
$
|
277,784
|
|
|
$
|
699,797
|
|
|
$
|
526,137
|
|
Infrastructure
|
|
|
196,629
|
|
|
|
165,081
|
|
|
|
395,129
|
|
|
|
326,123
|
|
|
Total external sales
|
|
$
|
565,768
|
|
|
$
|
442,865
|
|
|
$
|
1,094,926
|
|
|
$
|
852,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
42,157
|
|
|
$
|
5,903
|
|
|
$
|
78,265
|
|
|
$
|
(11,948
|
)
|
Infrastructure
|
|
|
21,566
|
|
|
|
18,250
|
|
|
|
48,069
|
|
|
|
29,898
|
|
Corporate
|
|
|
(2,106
|
)
|
|
|
(8,682
|
)
|
|
|
(7,205
|
)
|
|
|
(12,010
|
)
|
|
Total operating income
|
|
$
|
61,617
|
|
|
$
|
15,471
|
|
|
$
|
119,129
|
|
|
$
|
5,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
5,564
|
|
|
$
|
5,954
|
|
|
$
|
11,527
|
|
|
$
|
12,325
|
|
Other (income) expense, net
|
|
|
(253
|
)
|
|
|
(1,866
|
)
|
|
|
1,658
|
|
|
|
(4,818
|
)
|
|
Income
(loss) from continuing operations
before income taxes
|
|
$
|
56,306
|
|
|
$
|
11,383
|
|
|
$
|
105,944
|
|
|
$
|
(1,567
|
)
|
|
|
|
Our total assets by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
(in thousands)
|
|
2010
|
|
|
2010
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
1,363,416
|
|
|
$
|
1,310,635
|
|
Infrastructure
|
|
|
706,890
|
|
|
|
682,169
|
|
Corporate
|
|
|
324,687
|
|
|
|
275,019
|
|
|
Total assets
|
|
$
|
2,394,993
|
|
|
$
|
2,267,823
|
|
|
|
(1)
|
Amounts for the three and six months ended December 31, 2009 and for the
period as of June 30, 2010 have been restated to
reflect the change in reportable operating segments.
|
20
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
|
OVERVIEW
Kennametal Inc. is a leading global manufacturer and supplier of tooling, engineered components and
advanced materials consumed in production processes. We believe that our reputation for
manufacturing excellence, as well as our technological expertise and innovation in our principal
products, has helped us to achieve a leading market presence in our primary markets. We believe we
are one of the largest global providers of consumable metalcutting tools and tooling supplies. End
users of our products include metalworking manufacturers and suppliers across a diverse array of
industries including the aerospace, defense, transportation, machine tool, light machinery and
heavy machinery industries, as well as manufacturers, producers and suppliers in a number of other
industries including coal mining, highway construction, quarrying, and oil and gas exploration and
production industries. Our end users products include items ranging from airframes to coal mining,
engines to oil wells and turbochargers to construction.
We experienced growth for the December quarter across most of our major served end markets. Our
sales for the quarter ended December 31, 2010 grew 28 percent compared to sales for the December
quarter one year ago. Operating margin for the quarter increased by $46.1 million on sales that
were $122.9 million higher, resulting in 38 percent year-over-year operating leverage. During the
quarter, we experienced certain raw material cost increases. We believe these costs will
ultimately be recovered as we continue to implement pricing increases.
Our restructuring programs remain on track to deliver the anticipated annual ongoing pre-tax
savings of $160 million to $165 million once all programs are fully implemented. These programs
delivered $41 million of benefits in the quarter ended December 31, 2010.
For the quarter ended December 31, 2010, we recorded net income attributable to Kennametal of $43.5
million or $0.52 per diluted share compared to $6.0 million or $0.07 per diluted share for the
three months ended December 31, 2009. The drivers of our improved performance were higher sales,
favorable capacity utilization and mix, and incremental restructuring benefits of $8 million.
These benefits were partially offset by higher employment costs of $13.2 million, the
restoration of temporary cost reductions of $8.7 million and higher input costs.
We generated cash flow from operating activities of $67.4 million during the six months ended
December 31, 2010, driven by our operating performance.
In addition, we invested further in technology and innovation to continue delivering a high level
of new products to our customers. Research and development expenses totaled $17.9 million for the
three months ended December 31, 2010.
The following narrative provides further discussion and analysis of our results of operations,
liquidity and capital resources, as well as other pertinent matters.
RESULTS OF CONTINUING OPERATIONS
SALES
Sales for the three months ended December 31, 2010 were $565.8 million, an increase of $122.9
million, or 27.7 percent, from $442.9 million in the prior year quarter. Sales increased
organically by 31 percent, partially offset by a 2 percent unfavorable impact from foreign currency
effects and an unfavorable impact from fewer business days. The improvement in sales was driven by
continued expansion in industrial activity in most of our served end markets and all major
geographies.
Sales for the six months ended December 31, 2010 were $1,094.9 million, an increase of $242.6
million, or 28.5 percent, from $852.3 million in the prior year quarter. Sales increased
organically by 33 percent, partially offset by a 3 percent unfavorable impact from foreign currency
effects and an unfavorable impact from fewer business days. The improvement in sales was driven by
continued expansion in industrial activity in all of our major served end markets and all major
geographies, led by growth in general engineering and transportation with sales of 48 percent and
37 percent, respectively.
GROSS PROFIT
Gross profit for the three months ended December 31, 2010 was $200.0 million, an increase of $59.9
million from
$140.1 million in the prior year quarter. This increase was due to higher organic sales volume,
favorable product mix, restructuring and other cost reduction benefits and improved absorption of
manufacturing costs due to higher production levels. The impact of these items was partially offset
by higher raw material costs, the restoration of salaries and other employment costs that had been
temporarily reduced and unfavorable foreign currency effects of $3.9 million. The gross profit
margin for the three months ended December 31, 2010 was
35.4 percent, as compared to 31.6 percent
generated in the prior year quarter.
21
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
|
Gross profit for the six months ended December 31, 2010 was $388.8 million, an increase of $130.9
million from
$257.9 million in the prior year quarter. This increase was due to higher organic sales volume,
favorable product mix, restructuring and other cost reduction benefits and improved absorption of
manufacturing costs due to higher production levels. The impact of these items was partially offset
by higher raw material costs, unfavorable foreign currency effects of $9.9 million and the
restoration of salaries and other employment costs that had been temporarily reduced. The prior
year was also favorably impacted by one-time benefits from certain labor negotiations in Europe.
The gross profit margin for the six months ended December 31,
2010 was 35.5 percent, as compared to
30.3 percent generated in the prior year period.
OPERATING EXPENSE
Operating expense for the three months ended December 31, 2010 increased $14.2 million or 12.0
percent to $132.1 million compared to $117.9 million in the prior year quarter. The increase is
primarily attributable to an increase in employment costs of $12.1 million due to the restoration
of employment costs that had been temporarily reduced in the prior year and higher incentive
compensation and employee merit increases. These increases were partially offset by favorable
foreign currency effects of $2.4 million.
Operating expense for the six months ended December 31, 2010 increased $23.0 million or 9.8 percent
to $257.1 million compared to $234.1 million in the prior year quarter. The increase is primarily
attributable to an increase in employment costs of $20.9 million due to the restoration of
employment costs that had been temporarily reduced in the prior year, higher incentive compensation
and employee merit increases. These increases were partially offset by favorable foreign currency
effects of $5.9 million.
RESTRUCTURING CHARGES
We continued to implement restructuring plans to reduce costs and improve operating efficiencies.
The actions taken in the December quarter related primarily to the continued rationalization of
certain manufacturing facilities. Restructuring and related charges recorded during the three
months ended December 31, 2010 amounted to $5.1 million, including $3.8 million of restructuring
charges, of which $0.5 million were related to inventory disposals and recorded in cost of goods
sold. Restructuring related charges of $0.5 million and $0.8 million were recorded in cost of goods
sold and operating expense, respectively, during the three months ended December 31, 2010. We
realized pre-tax benefits from these restructuring programs of approximately $41 million for the
three months ended December 31, 2010.
Restructuring and related charges recorded during the six months ended December 31, 2010 amounted
to $9.4 million, including $7.1 million of restructuring charges of which $0.5 million were related
to inventory disposals and recorded in cost of goods sold. Restructuring related charges of $1.5
million and $0.8 million were recorded in cost of goods sold and operating expense, respectively,
during the six months ended December 31, 2010. We realized pre-tax benefits from these
restructuring programs of approximately $80 million for the six months ended December 31, 2010.
Restructuring and related charges recorded in the three months ended December 31, 2009 amounted to
$4.1 million, including $3.3 million of restructuring charges. Restructuring related charges of
$0.6 million and $0.2 million were recorded in cost of goods sold and operating expense,
respectively, during the three months ended December 31, 2009. We realized incremental pre-tax
benefits from these restructuring programs of approximately $30 million for the three months ended
December 31, 2009.
Restructuring and related charges recorded in the six months ended December 31, 2009 amounted to
$12.7 million, including $11.2 million of restructuring charges. Restructuring related charges of
$1.0 million and $0.5 million were recorded in cost of goods sold and operating expense,
respectively, during the six months ended December 31, 2009. We
realized incremental pre-tax
benefits from these restructuring programs of approximately $60 million for the six months ended
December 31, 2009. See Note 7 to our condensed consolidated financial statements set forth in Part
I Item 1 of this Form 10-Q.
The Companys restructuring programs are on track to deliver the anticipated annual ongoing pre-tax
savings of
$160 million to $165 million once all programs are fully implemented. The combined total pre-tax
charges are expected to be approximately $160 million to $165 million. Total restructuring and
related charges recorded from inception to
December 31, 2010 were $138 million. The remaining restructuring charges are expected to be
completed within the next
three to six months and are anticipated to be mostly cash expenditures.
22
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
|
INTEREST EXPENSE
Interest expense for the three months ended December 31, 2010 of $5.6 million decreased $0.4
million, or 6.7 percent, from $6.0 million in the prior year quarter. Interest expense for the six
months ended December 31, 2010 of $11.5 million decreased $0.8 million, or 6.5 percent, from $12.3
million in the prior year quarter.
OTHER (INCOME) EXPENSE, NET
Other income, net for the three months ended December 31, 2010 was $0.3 million, compared to other
income, net of
$1.9 million for the three months ended December 31, 2009. The decrease was primarily driven by
unfavorable foreign currency transaction results of $1.5 million.
Other expense, net for the six months ended December 31, 2010 was $1.7 million, compared to other
income, net of
$4.8 million for the six months ended December 31, 2009. The decrease of $6.5 million was primarily
driven by unfavorable foreign currency transaction results of $5.2 million.
INCOME TAXES
The effective income tax rate for the three months ended December 31, 2010 and 2009 was 21.3 percent
compared to 44.7 percent, respectively. The current year rate reflects the favorable impact of
stronger operating results under our pan-European business strategy and the extension of the credit
for increasing research activities included in the Tax Relief Act of 2010 enacted in the quarter.
The prior year rate was unfavorably impacted by restructuring and related charges in lower tax
jurisdictions and from the effects of having a relatively low pre-tax base.
The effective income tax rate for the six months ended December 31, 2010 and 2009 was 24.3 percent
(provision on income) compared to 2.5 percent (benefit on a loss), respectively. The current year
rate reflects the favorable impact of stronger operating results under our pan-European business
strategy. The prior year rate was unfavorably impacted by restructuring and related charges in
lower tax jurisdictions and from the effects of having a relatively
low pre-tax base.
During 2011, we expect to generate a nominal amount of taxable income in jurisdictions where we
have a valuation allowance recorded against our net deferred tax assets. The corresponding impact
on the fiscal 2011 effective tax rate is expected to be immaterial. We believe the sustainability
of future income in these jurisdictions remains uncertain. Accordingly, we have not adjusted the
valuation allowance. We will again assess the sustainability of future income in these
jurisdictions in conjunction with our annual planning process during our fiscal fourth quarter. If
based on that assessment, we determine that it is more likely than not we will be able to realize
the net deferred tax assets in these jurisdictions, we will adjust the valuation allowance. Such
an adjustment would likely result in a material reduction to tax expense in the period the
adjustment occurs.
BUSINESS SEGMENT REVIEW
Our operations are organized into two reportable operating segments consisting of Industrial and
Infrastructure, and Corporate. The presentation of segment information reflects the manner in which
we organize segments for making operating decisions and assessing performance. Corporate is
comprised of costs related to executive retirement plans and strategic initiatives, as well as
certain other costs.
Amounts for the three and six months ended December 31, 2010 have been restated to reflect the
change in reportable operating segments.
INDUSTRIAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
External sales
|
|
$
|
369,139
|
|
|
$
|
277,784
|
|
|
$
|
699,797
|
|
|
$
|
526,137
|
|
Operating income (loss)
|
|
|
42,157
|
|
|
|
5,903
|
|
|
|
78,265
|
|
|
|
(11,948
|
)
|
|
For the three months ended December 31, 2010, Industrial segment external sales increased by
32.9 percent, driven by organic sales growth of 37 percent, partially offset by unfavorable foreign
currency effects of 2 percent and an unfavorable impact due to fewer business days. On an organic
basis, sales increased in most served market sectors led by strong growth in general engineering
and transportation sales of 49 percent and 36 percent, respectively. On a regional basis, sales
increased by approximately 48 percent in Asia, 34 percent in Europe and 31 percent in the Americas.
23
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
|
For the three months ended December 31, 2010, Industrial segment operating income increased $36.3
million. The primary drivers of the increase in operating income were higher sales volumes,
improved absorption of manufacturing costs due to higher production levels, better product mix and
incremental restructuring benefits. These benefits were partially offset by higher employment
costs, the restoration of temporary cost reductions and higher input costs.
For the six months ended December 31, 2010, Industrial segment external sales increased by 33.0
percent, driven by organic sales growth of 38 percent, partially offset by unfavorable foreign
currency effects of 3 percent and an unfavorable impact due to fewer business days. On an organic
basis, sales increased in all served market sectors led by growth in general engineering and
transportation. On a regional basis, sales increased by approximately 49 percent in Asia, 35
percent in the Americas and 32 percent in Europe.
For the six months ended December 31, 2010, Industrial segment operating income increased $90.2
million. The primary drivers of the increase in operating income were higher sales volumes,
improved absorption of manufacturing costs due to higher production levels, better product mix and
incremental restructuring benefits. These benefits were partially offset by the higher employment
costs, the restoration of temporary cost reductions and higher input costs.
INFRASTRUCTURE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
External sales
|
|
$
|
196,629
|
|
|
$
|
165,081
|
|
|
$
|
395,129
|
|
|
$
|
326,123
|
|
Operating income
|
|
|
21,566
|
|
|
|
18,250
|
|
|
|
48,069
|
|
|
|
29,898
|
|
|
For the three months ended December 31, 2010, Infrastructure segment external sales increased
by 19.1 percent, all driven by organic sales growth. The organic increase was driven by higher
sales in the energy and earthworks markets of 22 percent and 17 percent, respectively. On a
regional basis, sales increased by approximately 24 percent in Asia, 21 percent in the Americas and
12 percent in Europe.
For the three months ended December 31, 2010, Infrastructure segment operating income increased
$3.3 million to
$21.6 million. Operating income improved primarily due to higher sales, increased absorption of
manufacturing costs due to higher production levels and incremental restructuring benefits,
partially offset by higher employment costs, higher input costs and the restoration of temporary
cost reductions.
For the six months ended December 31, 2010, Infrastructure segment external sales increased by 21.2
percent, driven by
22 percent organic sales growth, slightly offset by unfavorable currency effects. The organic
increase was driven by higher sales in the energy and earthworks markets of 33 percent and 16
percent, respectively. On a regional basis, sales increased by approximately 33 percent in Asia, 22
percent in the Americas and 14 percent in Europe.
For the six months ended December 31, 2010, Infrastructure segment operating income increased
$18.2 million to $48.1 million. Operating income improved primarily due to higher sales, increased absorption of
manufacturing costs due to higher production levels and incremental restructuring benefits,
partially offset by higher employment costs, higher input costs and the restoration of temporary
cost reductions.
CORPORATE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Corporate unallocated expense
|
|
$
|
(2,106
|
)
|
|
$
|
(8,682
|
)
|
|
$
|
(7,205
|
)
|
|
$
|
(12,010
|
)
|
|
For the three months ended December 31, 2010, unallocated expenses decreased $6.6 million to
$2.1 million. During the current year quarter, a greater percent of corporate expenses were
allocated to the segments than in the prior year quarter.
For the six months ended December 31, 2010, unallocated expenses decreased $4.8 million to $7.2
million. During the current year period, a greater percent of corporate expenses were allocated to
the segments than in the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is our primary source of funding for capital expenditures and internal
growth.
24
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
|
To augment cash from operations and as an additional source of funds, we maintain a syndicated,
five-year, multi-currency, revolving credit facility (2010 Credit Agreement) that extends to June
2015. The 2010 Credit Agreement permits revolving credit loans of up to $500.0 million for working
capital, capital expenditures and general corporate purposes. The 2010 Credit Agreement allows for
borrowings in U.S. dollars, euro, Canadian dollars, pound sterling and Japanese yen. Interest
payable under the 2010 Credit Agreement is based upon the type of borrowing under the facility and
may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds
effective rate plus an applicable margin, or (3) fixed as negotiated by us.
The 2010 Credit Agreement requires us to comply with various restrictive and affirmative covenants,
including two financial covenants: a maximum leverage ratio and a minimum consolidated interest
coverage ratio (as those terms are defined in the agreement). We were in compliance with these
financial covenants as of December 31, 2010. We had no borrowings outstanding under the 2010 Credit
Agreement as of December 31, 2010. Borrowings under the 2010 Credit Agreement are guaranteed by our
significant domestic subsidiaries.
At December 31, 2010, cash and cash equivalents was $147.2 million, total debt was $316.4 million
and total Kennametal shareowners equity was $1,455.5 million. Our current senior credit ratings
are at investment grade levels. We believe that our current financial position, liquidity and
credit ratings provide access to the capital markets. We closely monitor our liquidity position and
the condition of the capital markets as well as the counterparty risk of our credit providers.
There have been no material changes in our contractual obligations and commitments since June 30,
2010.
Cash Flow Provided by Operating Activities
During the six months ended December 31, 2010, cash flow provided by operating activities was $67.4
million, compared to $53.4 million for the prior year period. Cash flow provided by operating
activities for the current year period consisted of net income and non-cash items amounting to an
inflow of $141.5 million, partially offset by changes in certain assets and liabilities netting to
$74.1 million. Contributing to the changes in certain assets and liabilities was an increase in
inventory of $45.1 million driven by an increase in production to meet higher demand and a decrease
in accounts payable and accrued liabilities of $21.2 million.
During the six months ended December 31, 2009, cash flow provided by operating activities consisted
of net loss and non-cash items amounting to an inflow of $52.6 million partially offset by changes
in certain assets and liabilities netting to $0.8 million. Contributing to the changes in certain
assets and liabilities were a decrease in accounts receivable of $12.0 million, a decrease in
inventories of $8.4 million and an increase in other of $7.2 million, mostly offset by a decrease
in accounts payable and accrued liabilities of $20.6 million and a decrease in foreign and domestic
income taxes of $6.3 million.
Cash Flow (Used for) Provided by Investing Activities
Cash flow used for investing activities was $12.6 million for the six months ended December 31,
2010, compared to cash flow provided by investing activities of $10.5 million in the prior year
period. During the six months ended December 31, 2010, cash flow used for investing activities
included capital expenditures, net of $13.7 million, which consisted primarily of an Enterprise
Resource Planning (ERP) system and equipment upgrades.
Cash flow provided by investing activities was $10.5 million for the six months ended December 31,
2009. Cash flow provided by investing activities included $27.0 million in remaining cash proceeds
from the sale of our high speed steel drills business and related product lines and $0.8 million in
cash proceeds from the sale of our gage business, partially offset by capital expenditures, net of
$17.6 million, which consisted primarily of equipment upgrades.
Cash Flow Used for Financing Activities
Cash flow used for financing activities was $39.2 million for the six months ended December 31,
2010 compared to
$42.8 million in the prior year period. During the six months ended December 31, 2010, cash flow
used for financing activities included $19.9 million of cash dividends paid to shareowners, $17.6
million net decrease in borrowings and
$10.3 million used for the repurchase of capital stock, partially offset by $10.2 million of
dividend reinvestment and the effect of employee benefit and stock plans.
Cash flow used for financing activities was $42.8 million for the six months ended December 31,
2009. Cash flow used for financing activities included $145.1 million net decrease in borrowings
and $19.6 million of cash dividends paid to shareowners, partially offset by $120.7 million in net
proceeds from issuance of capital stock and $3.8 million of dividend reinvestment and the effect of
employee benefit and stock plans.
25
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
|
FINANCIAL CONDITION
At December 31, 2010, total assets increased $127.2 million to $2,395.0 million from $2,267.8
million at June 30, 2010. Total liabilities decreased $15.8 million to $918.6 million at December
31, 2010 from $934.4 million at June 30, 2010.
Working capital was $655.2 million at December 31, 2010, an increase of $132.3 million from $522.9
million at June 30, 2010. The increase in working capital was driven primarily by an increase in inventories
of $61.7 million driven by an increase in production to meet higher demand, an increase in cash and
cash equivalents of $29.0 million, a decrease in current maturities of long-term debt and capital
leases, including notes payable of $18.8 million, an increase in accounts receivable of $13.8
million due to the increase in sales and a decrease in accounts payable of $8.5 million, partially
offset by an increase in accrued expenses of $7.1 million. Foreign currency effects accounted for
$17.1 million, $16.2 million, $8.5 million, $3.8 million and $3.5 million of the change in inventory, accounts receivable, cash
and cash equivalents, accounts payable, accrued expenses, respectively.
Property, plant and equipment, net increased $1.2 million from $664.5 million at June 30, 2010 to
$665.8 million at December 31, 2010, primarily due to capital additions of $21.2 million and
favorable foreign currency impact of $21.1 million, partially offset by depreciation expense of
$39.9 million.
At December 31, 2010, other assets were $704.1 million, an increase of $16.7 million from $687.4
million at June 30, 2010. The drivers for the increase were an increase in goodwill of $11.3
million and an increase in other assets of $7.2 million, partially offset by a decrease in other
intangible assets of $1.4 million. The change in goodwill and other intangible assets was driven by
foreign currency translation effects of $15.7 million, offset by amortization expense of $5.9
million. The increase in other assets was primarily driven by an increase in pension assets of $5.5
million and an increase in fair value of forward starting interest rate swap contracts of $2.6
million.
Long-term debt and capital leases decreased $2.6 million to $312.1 million at December 31, 2010 from
$314.7 million at June 30, 2010.
Kennametal shareowners equity was $1,455.5 million at December 31, 2010, an increase of $140.0
million from $1,315.5 million at June 30, 2010. The increase was primarily due to net income attributable to
Kennametal of $78.4 million, foreign currency translation adjustments of $65.7 million and capital
stock issued under employee benefit and stock plans of $21.4 million, partially offset by cash
dividends paid to shareowners of $19.9 million and repurchase of capital stock of $10.3 million.
ENVIRONMENTAL MATTERS
The operation of our business has exposed us to certain liabilities and compliance costs related to
environmental matters. We are involved in various environmental cleanup and remediation activities
at certain of our locations. With respect to the environmental proceedings listed below, if any one
or more of them were decided against Kennametal, we believe that it would not have a material
effect on our consolidated financial position. However, it is not possible to predict the ultimate
outcome of any of these proceedings or whether such ultimate outcome may have a material effect on
our consolidated financial position. We report these proceedings to comply with Securities and
Exchange Commission regulations, which require us to disclose proceedings arising under federal,
state or local provisions regulating the discharge of materials into the environment or protecting
the environment if we reasonably believe that such proceedings will result in monetary sanctions of
$0.1 million or more.
Superfund Sites
We are involved as a Potentially Responsible Party (PRP) at various sites
designated by the U.S. Environmental Protection Agency (USEPA) as Superfund sites. For certain of
these sites, we have evaluated the claims and potential liabilities and have determined that
neither are material, individually or in the aggregate. For certain other sites, proceedings are in
the very early stages and have not yet progressed to a point where it is possible to estimate the
ultimate cost of remediation, the timing and extent of remedial action that may be required by
governmental authorities or the amount of our liability alone or in relation to that of any other
PRPs.
Other Environmental
We establish and maintain reserves for other potential environmental costs
which amounted to $6.1 million as of December 31, 2010. This accrual represents anticipated costs
associated with the remediation of these issues. We recorded approximately $1.3 million related to
an environmental liability in our international operations and unfavorable foreign currency
translation adjustments of $0.4 million for the six months ended December 31, 2010. In addition, we
paid a civil penalty of $0.2 million during the six months ended December 31, 2010 related to our
Chestnut Ridge, Pennsylvania facility closure discussed below.
26
|
|
|
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
|
In the course of preparing our Chestnut Ridge, Pennsylvania facility for closure, we discovered two
outfalls for storm water that were not covered by the permits issued to the site by the
Pennsylvania Department of Environmental Protection (PA DEP). We promptly plugged the outfalls and
voluntarily reported the matter to the PA DEP. In June 2010, we received a draft Consent Order &
Agreement from the PA DEP relating to the storm water outfalls and to a minor coolant spill in the
facility. After negotiations, on November 17, 2010 the parties signed a final Consent Order &
Agreement to resolve all matters, under which Kennametal agreed to conduct additional site
investigations and submit reports to the PA DEP, and pay a civil penalty of $0.2 million.
The reserves we have established for environmental liabilities represent our best current estimate
of the costs of addressing all identified environmental situations, based on our review of
currently available evidence, and taking into consideration our prior experience in remediation and
that of other companies, as well as public information released by the USEPA, other governmental
agencies, and by the PRP groups in which we are participating. Although the reserves currently
appear to be sufficient to cover these environmental liabilities, there are uncertainties
associated with environmental liabilities, and we can give no assurance that our estimate of any
environmental liability will not increase or decrease in the future. The reserved and unreserved
exposures for all environmental concerns could change substantially due to factors such as the
nature and extent of contamination, changes in remedial requirements, technological changes,
discovery of new information, the financial strength of other PRPs, the identification of new PRPs
and the involvement of and direction taken by the government on these matters.
We maintain a Corporate EHS Department, as well as an EHS Steering Committee, to monitor compliance
with environmental regulations and to oversee remediation activities. In addition, we have
designated EHS coordinators who are responsible for each of our global manufacturing facilities.
Our financial management team periodically meets with members of the Corporate EHS Department and
the Corporate Legal Department to review and evaluate the status of environmental projects and
contingencies. On a quarterly basis, we review financial provisions and reserves for environmental
contingencies and adjust these reserves when appropriate.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
There have been no changes to our critical accounting policies since June 30, 2010.
NEW ACCOUNTING STANDARDS
See Note 3 to our condensed consolidated financial statements set forth in Part I Item 1 of this
Form 10-Q for a description of new accounting standards.
|
|
|
ITEM 3.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
There have been no material changes to our market risk exposure since June 30, 2010.
|
|
|
ITEM 4.
|
|
CONTROLS AND PROCEDURES
|
As of the end of the period covered by this quarterly report on Form 10-Q, the Companys management
evaluated, with the participation of the Companys Chief Executive Officer and Chief Financial
Officer, the effectiveness of the Companys disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)). The Companys disclosure controls were designed to
provide a reasonable assurance that information required to be disclosed in reports that we file or
submit under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote. However, the controls have been designed to provide
reasonable assurance of achieving the controls stated goals. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures were effective as of December 31, 2010.
There were no changes in the Companys internal control over financial reporting that occurred
during the Companys most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The disclosures set forth in Part I, Item 2. Managements Discussion and Analysis under the
heading Environmental Matters are incorporated in to this Item.
|
|
|
ITEM 2.
|
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
Shares that May Yet
|
|
|
|
Total Number of
|
|
|
|
|
|
|
Purchased as Part of
|
|
|
Be Purchased Under
|
|
|
|
Shares
|
|
|
Average Price
|
|
|
Publicly Announced
|
|
|
the Plans or
|
|
Period
|
|
Purchased
(1)
|
|
|
Paid per Share
|
|
|
Plans or Programs
|
|
|
Programs
(2)
|
|
|
October 1 through October 31, 2010
|
|
|
3,132
|
|
|
$
|
34.14
|
|
|
|
-
|
|
|
|
8,000,000
|
|
November 1 through November 30, 2010
|
|
|
275,153
|
|
|
|
34.05
|
|
|
|
269,500
|
|
|
|
7,730,500
|
|
December 1 through December 31, 2010
|
|
|
38,390
|
|
|
|
34.17
|
|
|
|
28,300
|
|
|
|
7,702,200
|
|
|
Total
|
|
|
316,675
|
|
|
$
|
34.07
|
|
|
|
297,800
|
|
|
|
7,702,200
|
|
|
|
|
|
(1)
|
|
During the current period, 2,371 shares were purchased on the open market on behalf of Kennametal to fund the
Companys dividend reinvestment program. Also, during the current period, employees delivered 3,943 shares of
restricted stock to Kennametal, upon vesting, to satisfy tax-withholding requirements and 12,561shares of
Kennametal stock as payment for the exercise price of stock options.
|
|
(2)
|
|
On October 26, 2010, the Company publicly announced a repurchase programs of up to 8 million shares of its
outstanding common stock.
|
28
|
|
|
|
|
(10)
|
|
Material Contracts
|
|
|
(10.1)*
|
|
Kennametal Inc. Stock and Incentive Plan of 2010
|
|
Appendix A to the
2010 Proxy
Statement filed
September 13, 2010
is incorporated
herein by
reference.
|
(10.2)*
|
|
Form of Performance Unit Award under Kennametal Inc.
Stock and Incentive Plan of 2010
|
|
Filed herewith.
|
(10.3)*
|
|
Form of Restricted Unit Award under Kennametal Inc.
Stock and Incentive Plan of 2010 (Employees)
|
|
Filed herewith.
|
(10.4)*
|
|
Form of Restricted Unit Award under Kennametal Inc.
Stock and Incentive Plan of 2010 (Non-Employee
Directors)
|
|
Filed herewith.
|
(10.5)*
|
|
Form of Nonstatutory Stock Option Award under
Kennametal Inc. Stock and Incentive Plan of 2010
(Employees)
|
|
Filed herewith.
|
(10.6)*
|
|
Form of Nonstatutory Stock Option Award under
Kennametal Inc. Stock and Incentive Plan of 2010
(Non-Employee Directors)
|
|
Filed herewith.
|
|
|
|
|
|
(31)
|
|
Rule 13a-14(a)/15d-14(a) Certifications
|
|
|
(31.1)
|
|
Certification executed by Carlos M. Cardoso,
Chairman, President and Chief Executive Officer of
Kennametal Inc.
|
|
Filed herewith.
|
(31.2)
|
|
Certification executed by Frank P. Simpkins, Vice
President and Chief Financial Officer of Kennametal
Inc.
|
|
Filed herewith.
|
|
|
|
|
|
(32)
|
|
Section 1350 Certifications
|
|
|
(32.1)
|
|
Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, executed by Carlos M. Cardoso, Chairman,
President and Chief Executive Officer of Kennametal
Inc., and Frank P. Simpkins, Vice President and Chief
Financial Officer of Kennametal Inc.
|
|
Filed herewith.
|
|
|
|
|
|
(101)
|
|
XBRL
|
|
|
(101.INS)**
|
|
XBRL Instance Document
|
|
Filed herewith.
|
(101.SCH)**
|
|
XBRL Taxonomy Extension Schema Document
|
|
Filed herewith.
|
(101.CAL)**
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
Filed herewith.
|
(101.LAB)**
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
Filed herewith.
|
(101.PRE)**
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
Filed herewith.
|
|
|
|
*
|
|
Denotes management contract or compensatory plan or arrangement.
|
|
**
|
|
The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall
not be deemed filed or part of a registration statement or prospects for purposes of
Section 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to
the liabilities of these sections.
|
29
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 8, 2011
|
By:
|
/s/ Martha A. Bailey
|
|
|
|
Martha A. Bailey
|
|
|
|
Vice President Finance and Corporate Controller
|
|
30