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, 2015SEPTEMBER 30, 2016
Commission file number 1-5318
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
|
| | |
Pennsylvania | | 25-0900168 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
600 Grant Street Suite 5100 Pittsburgh, Pennsylvania | | 15219-2706 |
(Address of principal executive offices) | | (Zip Code) |
Website: www.kennametal.com
Registrant’s telephone number, including area code: (412) 248-8000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate 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 [X] NO [ ]
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer [X] | | Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer’s classes of capital stock, as of the latest practicable date.
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| | |
Title of Each Class | | Outstanding at January 29,October 31, 2016 |
Capital Stock, par value $1.25 per share | | 79,672,22979,933,935 |
KENNAMETAL INC.
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2015SEPTEMBER 30, 2016
TABLE OF CONTENTS
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FORWARD-LOOKING INFORMATION
This Quarterly Report on 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. We have also included forward looking statements in this Quarterly Report on Form 10-Q concerning, among other things, our strategy, goals, plans and projections regarding our financial position, liquidity and capital resources, results of operations, market position and product development. These statements are based on current estimates that involve inherent risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: economic recession; our ability to achieve all anticipated benefits of restructuring initiatives; 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; potential for future goodwill and other intangible asset impairment charges; our ability to protect and defend our intellectual property; continuity and security of information technology infrastructure; competition; our ability to retain our management and employees; demands on management resources; availability and cost of the raw materials we use to manufacture our products; product liability claims; integrating acquisitions and achieving the expected savings and synergies; global or regional catastrophic events; demand for and market acceptance of our products; business divestitures; energy costs; commodity prices; labor relations; and implementation of environmental remediation matters. We provide additional information about many of the specific risks we face in the “Risk Factors” Section of our Annual Report on Form 10-K. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
(in thousands, except per share amounts) | 2015 | | 2014 | | 2015 | | 2014 |
Sales | $ | 524,021 |
| | $ | 675,631 |
| | $ | 1,079,376 |
| | $ | 1,370,572 |
|
Cost of goods sold | 383,215 |
| | 476,173 |
| | 787,345 |
| | 953,015 |
|
Gross profit | 140,806 |
| | 199,458 |
| | 292,031 |
| | 417,557 |
|
Operating expense | 123,580 |
| | 137,459 |
| | 252,824 |
| | 285,947 |
|
Restructuring and asset impairment charges (Notes 8 and 18) | 112,237 |
| | 388,839 |
| | 121,357 |
| | 390,402 |
|
Loss on divestiture (Note 5) | 133,307 |
| | — |
| | 133,307 |
| | — |
|
Amortization of intangibles | 5,638 |
| | 6,931 |
| | 11,886 |
| | 13,959 |
|
Operating loss | (233,956 | ) | | (333,771 | ) | | (227,343 | ) | | (272,751 | ) |
Interest expense | 6,803 |
| | 7,960 |
| | 13,782 |
| | 16,170 |
|
Other (income) expense, net | (732 | ) | | 2,223 |
| | 353 |
| | 409 |
|
Loss before income taxes | (240,027 | ) | | (343,954 | ) | | (241,478 | ) | | (289,330 | ) |
(Benefit) provision for income taxes | (71,216 | ) | | 43,751 |
| | (66,964 | ) | | 58,248 |
|
Net loss | (168,811 | ) | | (387,705 | ) | | (174,514 | ) | | (347,578 | ) |
Less: Net income attributable to noncontrolling interests | 416 |
| | 597 |
| | 939 |
| | 1,236 |
|
Net loss attributable to Kennametal | $ | (169,227 | ) | | $ | (388,302 | ) | | $ | (175,453 | ) | | $ | (348,814 | ) |
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS | | | | |
Basic loss per share | $ | (2.12 | ) | | $ | (4.89 | ) | | $ | (2.20 | ) | | $ | (4.40 | ) |
Diluted loss per share | $ | (2.12 | ) | | $ | (4.89 | ) | | $ | (2.20 | ) | | $ | (4.40 | ) |
Dividends per share | $ | 0.20 |
| | $ | 0.18 |
| | $ | 0.40 |
| | $ | 0.36 |
|
Basic weighted average shares outstanding | 79,840 |
| | 79,343 |
| | 79,784 |
| | 79,229 |
|
Diluted weighted average shares outstanding | 79,840 |
| | 79,343 |
| | 79,784 |
| | 79,229 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements. |
| | | | | | | |
| Three Months Ended September 30, |
(in thousands, except per share amounts) | 2016 | | 2015 |
Sales | $ | 477,140 |
| | $ | 555,354 |
|
Cost of goods sold | 333,610 |
| | 404,130 |
|
Gross profit | 143,530 |
| | 151,224 |
|
Operating expense | 119,865 |
| | 129,243 |
|
Restructuring charges (Note 7) | 28,605 |
| | 9,120 |
|
Amortization of intangibles | 4,271 |
| | 6,247 |
|
Operating (loss) income | (9,211 | ) | | 6,614 |
|
Interest expense | 6,993 |
| | 6,979 |
|
Other expense, net | 118 |
| | 1,087 |
|
Loss before income taxes | (16,322 | ) | | (1,452 | ) |
Provision for income taxes | 4,879 |
| | 4,252 |
|
Net loss | (21,201 | ) | | (5,704 | ) |
Less: Net income attributable to noncontrolling interests | 455 |
| | 522 |
|
Net loss attributable to Kennametal | $ | (21,656 | ) | | $ | (6,226 | ) |
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS |
Basic loss per share | $ | (0.27 | ) | | $ | (0.08 | ) |
Diluted loss per share | $ | (0.27 | ) | | $ | (0.08 | ) |
Dividends per share | $ | 0.20 |
| | $ | 0.20 |
|
Basic weighted average shares outstanding | 80,054 |
| | 79,728 |
|
Diluted weighted average shares outstanding | 80,054 |
| | 79,728 |
|
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | Three Months Ended December 31, | | Six Months Ended December 31, | Three Months Ended September 30, |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
Net loss | $ | (168,811 | ) | | $ | (387,705 | ) | | $ | (174,514 | ) | | $ | (347,578 | ) | $ | (21,201 | ) | | $ | (5,704 | ) |
Other comprehensive loss, net of tax | | | | | | | | | | |
Unrealized gain on derivatives designated and qualified as cash flow hedges | 277 |
| | 1,206 |
| | 802 |
| | 2,713 |
| |
Reclassification of unrealized (gain) loss on expired derivatives designated and qualified as cash flow hedges | (418 | ) | | (35 | ) | | (2,184 | ) | | 329 |
| |
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges | | (126 | ) | | 525 |
|
Reclassification of unrealized loss (gain) on expired derivatives designated and qualified as cash flow hedges | | 387 |
| | (1,766 | ) |
Unrecognized net pension and other postretirement benefit gain | 1,450 |
| | 1,924 |
| | 2,449 |
| | 5,565 |
| 630 |
| | 999 |
|
Reclassification of net pension and other postretirement benefit loss | 1,203 |
| | 735 |
| | 2,422 |
| | 1,489 |
| 1,834 |
| | 1,219 |
|
Foreign currency translation adjustments | (23,639 | ) | | (30,209 | ) | | (42,488 | ) | | (81,722 | ) | 1,164 |
| | (18,849 | ) |
Reclassification of foreign currency translation adjustment loss realized upon sale | 17,028 |
| | — |
| | 17,028 |
| | — |
| |
Total other comprehensive loss, net of tax | (4,099 | ) | | (26,379 | ) | | (21,971 | ) | | (71,626 | ) | |
Total other comprehensive income (loss), net of tax | | 3,889 |
| | (17,872 | ) |
Total comprehensive loss | (172,910 | ) | | (414,084 | ) | | (196,485 | ) | | (419,204 | ) | (17,312 | ) | | (23,576 | ) |
Less: comprehensive loss attributable to noncontrolling interests | (111 | ) | | (184 | ) | | (128 | ) | | (1,037 | ) | |
Less: comprehensive income (loss) attributable to noncontrolling interests | | 870 |
| | (17 | ) |
Comprehensive loss attributable to Kennametal Shareholders
| $ | (172,799 | ) | | $ | (413,900 | ) | | $ | (196,357 | ) | | $ | (418,167 | ) | $ | (18,182 | ) | | $ | (23,559 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | (in thousands, except per share data) | December 31, 2015 | | June 30, 2015 | September 30, 2016 | | June 30, 2016 |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 138,978 |
| | $ | 105,494 |
| $ | 119,411 |
| | $ | 161,579 |
|
Accounts receivable, less allowance for doubtful accounts of $11,406 and $13,560, respectively | 333,402 |
| | 445,373 |
| |
Inventories (Note 11) | 477,499 |
| | 575,531 |
| |
Deferred income taxes | 55,722 |
| | 72,449 |
| |
Accounts receivable, less allowance for doubtful accounts of $12,743 and $12,724, respectively | | 348,470 |
| | 370,916 |
|
Inventories (Note 10) | | 459,296 |
| | 458,830 |
|
Deferred income taxes (Note 3) | | — |
| | 26,713 |
|
Other current assets | 57,391 |
| | 59,699 |
| 64,660 |
| | 57,303 |
|
Total current assets | 1,062,992 |
| | 1,258,546 |
| 991,837 |
| | 1,075,341 |
|
Property, plant and equipment: | | | | | | |
Land and buildings | 350,046 |
| | 401,207 |
| 356,765 |
| | 353,789 |
|
Machinery and equipment | 1,509,418 |
| | 1,573,597 |
| 1,533,220 |
| | 1,511,462 |
|
Less accumulated depreciation | (1,139,935 | ) | | (1,158,979 | ) | (1,154,537 | ) | | (1,134,611 | ) |
Property, plant and equipment, net | 719,529 |
| | 815,825 |
| 735,448 |
| | 730,640 |
|
Other assets: | | | | | | |
Investments in affiliated companies | 2 |
| | 361 |
| 2 |
| | 2 |
|
Goodwill (Note 18) | 297,975 |
| | 417,389 |
| |
Other intangible assets, less accumulated amortization of $104,964 and $153,370, respectively (Note 18) | 216,027 |
| | 286,669 |
| |
Deferred income taxes | 72,927 |
| | 24,091 |
| |
Goodwill (Note 17) | | 298,718 |
| | 298,487 |
|
Other intangible assets, less accumulated amortization of $117,186 and $114,093, respectively (Note 17) | | 202,871 |
| | 207,208 |
|
Deferred income taxes (Note 3) | | 35,862 |
| | 14,459 |
|
Other | 70,800 |
| | 46,648 |
| 42,695 |
| | 36,646 |
|
Total other assets | 657,731 |
| | 775,158 |
| 580,148 |
| | 556,802 |
|
Total assets | $ | 2,440,252 |
| | $ | 2,849,529 |
| $ | 2,307,433 |
| | $ | 2,362,783 |
|
LIABILITIES | | | | | | |
Current liabilities: | | | | | | |
Current maturities of long-term debt and capital leases | $ | 5,444 |
| | $ | 8,129 |
| $ | 374 |
| | $ | 732 |
|
Notes payable to banks | 498 |
| | 7,573 |
| 1,007 |
| | 1,163 |
|
Accounts payable | 151,597 |
| | 187,381 |
| 176,004 |
| | 182,039 |
|
Accrued income taxes | 29,572 |
| | 25,237 |
| 17,504 |
| | 16,602 |
|
Accrued expenses | 53,748 |
| | 75,746 |
| 61,237 |
| | 74,470 |
|
Other current liabilities | 154,124 |
| | 178,678 |
| 146,448 |
| | 152,269 |
|
Total current liabilities | 394,983 |
| | 482,744 |
| 402,574 |
| | 427,275 |
|
Long-term debt and capital leases, less current maturities (Note 12) | 700,711 |
| | 735,885 |
| |
Long-term debt and capital leases, less current maturities (Notes 3 and 11) | | 694,027 |
| | 693,548 |
|
Deferred income taxes | 15,310 |
| | 59,744 |
| 13,280 |
| | 17,126 |
|
Accrued pension and postretirement benefits | 147,766 |
| | 163,029 |
| 200,998 |
| | 201,473 |
|
Accrued income taxes | 2,274 |
| | 3,002 |
| 2,342 |
| | 3,100 |
|
Other liabilities | 24,931 |
| | 29,690 |
| 24,804 |
| | 24,460 |
|
Total liabilities | 1,285,975 |
| | 1,474,094 |
| 1,338,025 |
| | 1,366,982 |
|
Commitments and contingencies |
| |
| |
EQUITY (Note 16) | | | | |
EQUITY (Note 15) | | | | |
Kennametal Shareholders’ Equity: | | | | | | |
Preferred stock, no par value; 5,000 shares authorized; none issued | — |
| | — |
| — |
| | — |
|
Capital stock, $1.25 par value; 120,000 shares authorized; 79,670 and 79,375 shares issued, respectively | 99,588 |
| | 99,219 |
| |
Capital stock, $1.25 par value; 120,000 shares authorized; 79,927 and 79,694 shares issued, respectively | | 99,908 |
| | 99,618 |
|
Additional paid-in capital | 426,703 |
| | 419,829 |
| 443,226 |
| | 436,617 |
|
Retained earnings | 862,984 |
| | 1,070,282 |
| 742,961 |
| | 780,597 |
|
Accumulated other comprehensive loss | (264,427 | ) | | (243,523 | ) | (349,035 | ) | | (352,509 | ) |
Total Kennametal Shareholders’ Equity | 1,124,848 |
| | 1,345,807 |
| 937,060 |
| | 964,323 |
|
Noncontrolling interests | 29,429 |
| | 29,628 |
| 32,348 |
| | 31,478 |
|
Total equity | 1,154,277 |
| | 1,375,435 |
| 969,408 |
| | 995,801 |
|
Total liabilities and equity | $ | 2,440,252 |
| | $ | 2,849,529 |
| $ | 2,307,433 |
| | $ | 2,362,783 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) | | | Six Months Ended December 31, | Three Months Ended September 30, |
(in thousands) | 2015 | | 2014 | 2016 | | 2015 |
OPERATING ACTIVITIES | | | | | | |
Net loss | $ | (174,514 | ) | | $ | (347,578 | ) | $ | (21,201 | ) | | $ | (5,704 | ) |
Adjustments for non-cash items: | | | | | | |
Depreciation | 50,429 |
| | 53,341 |
| 23,167 |
| | 25,312 |
|
Amortization | 11,886 |
| | 13,959 |
| 4,271 |
| | 6,247 |
|
Stock-based compensation expense | 10,811 |
| | 13,475 |
| 9,088 |
| | 7,016 |
|
Restructuring and asset impairment charges (Notes 8 and 18) | 111,327 |
| | 383,489 |
| |
Restructuring charges (Note 7) | | (77 | ) | | 3,049 |
|
Deferred income tax provision | (78,742 | ) | | (13,824 | ) | 456 |
| | 14,381 |
|
Loss on divestiture (Note 5) | 133,307 |
| | — |
| |
Other | (345 | ) | | 8,938 |
| (1,312 | ) | | 7,141 |
|
Changes in certain assets and liabilities: | | | | | | |
Accounts receivable | 69,832 |
| | 54,928 |
| 23,111 |
| | 35,481 |
|
Inventories | 46,565 |
| | 4,727 |
| 838 |
| | 20,288 |
|
Accounts payable and accrued liabilities | (44,142 | ) | | (74,969 | ) | (3,836 | ) | | (27,813 | ) |
Accrued income taxes | (12,390 | ) | | 45,596 |
| (521 | ) | | (28,597 | ) |
Accrued pension and postretirement benefits | (18,176 | ) | | (7,089 | ) | (5,644 | ) | | (11,416 | ) |
Other | (1,304 | ) | | 329 |
| (6,480 | ) | | (6,678 | ) |
Net cash flow provided by operating activities | 104,544 |
| | 135,322 |
| 21,860 |
| | 38,707 |
|
INVESTING ACTIVITIES | | | | | | |
Purchases of property, plant and equipment | (61,175 | ) | | (54,672 | ) | (42,264 | ) | | (37,217 | ) |
Disposals of property, plant and equipment | 4,402 |
| | 978 |
| 1,138 |
| | 1,933 |
|
Proceeds from divestiture (Note 5) | 61,100 |
| | — |
| |
Other | 814 |
| | (126 | ) | 159 |
| | (72 | ) |
Net cash flow provided by (used for) investing activities | 5,141 |
| | (53,820 | ) | |
Net cash flow used for investing activities | | (40,967 | ) | | (35,356 | ) |
FINANCING ACTIVITIES | | | | | | |
Net (decrease) increase in notes payable | (6,990 | ) | | 15,241 |
| (128 | ) | | 386 |
|
Net increase in short-term revolving and other lines of credit | — |
| | 8,500 |
| — |
| | 9,600 |
|
Term debt borrowings | 26,173 |
| | 50,727 |
| — |
| | 16,618 |
|
Term debt repayments | (63,726 | ) | | (154,547 | ) | (244 | ) | | (27,337 | ) |
Purchase of capital stock | (167 | ) | | (168 | ) | (63 | ) | | (80 | ) |
Dividend reinvestment and the effect of employee benefit and stock plans | 1,473 |
| | 7,891 |
| (433 | ) | | 401 |
|
Cash dividends paid to Shareholders | (31,845 | ) | | (28,451 | ) | (15,980 | ) | | (15,915 | ) |
Other | (290 | ) | | (4,786 | ) | (6,576 | ) | | 4,075 |
|
Net cash flow used for financing activities | (75,372 | ) | | (105,593 | ) | (23,424 | ) | | (12,252 | ) |
Effect of exchange rate changes on cash and cash equivalents | (829 | ) | | (7,571 | ) | 363 |
| | 606 |
|
CASH AND CASH EQUIVALENTS | | | | | | |
Net increase (decrease) in cash and cash equivalents | 33,484 |
| | (31,662 | ) | |
Net decrease in cash and cash equivalents | | (42,168 | ) | | (8,295 | ) |
Cash and cash equivalents, beginning of period | 105,494 |
| | 177,929 |
| 161,579 |
| | 105,494 |
|
Cash and cash equivalents, end of period | $ | 138,978 |
| | $ | 146,267 |
| $ | 119,411 |
| | $ | 97,199 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.ORGANIZATION
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 we deliver in our products and services, helps us to achieve a leading position in our primary markets. End users of our products include metalworking and machinery manufacturers and suppliers across a diverse array of industries, including the aerospace, defense, transportation, machine tool, light machinery and heavy machinery, as well as producers and suppliers in a number of equipment-intensive industries such as coal mining, road construction and quarrying, as well as oil and gas exploration, refining, production and supply. Our end users' applications range from airframes to mining operations, engines to oil wells and turbochargers to processing.
In order to take advantage of the growth opportunities of our WIDIA brand, we implemented a new operating structure.
A key attribute of the new structure is the establishment of the WIDIA operating segment. In order to better leverage the opportunities that lie in this business, in addition to being more agile and competitive in the marketplace, we are placing higher levels of focus, determination and leadership in the business. The Industrial and WIDIA segments in 2017 were formed from the 2016 Industrial segment. We operate twonow have three global business segments consisting ofreportable operating segments: Industrial, WIDIA, and Infrastructure.
2.BASIS OF PRESENTATION
The condensed consolidated financial statements, which include our accounts and those of our majority-owned subsidiaries, should be read in conjunction with our 20152016 Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, 20152016 was derived from the audited balance sheet included in our 20152016 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 sixthree months ended December 31,September 30, 2016 and 2015 and 2014 are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a “year”���year” is to a fiscal year ended June 30. For example, a reference to 20162017 is to the fiscal year ending June 30, 2016.2017. When used in this Form 10-Q, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
3.NEW ACCOUNTING STANDARDS
Adopted
In April 2014,November 2015, the Financial Accounting Standards Board (FASB) issued new guidance on reporting discontinued operations and disclosures of disposals of components of an entity. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Additionally, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This guidance was effective for Kennametal beginning July 1, 2015. The transaction outlined in Note 5 was evaluated under this guidance.
Issued
In November 2015, the FASB issued new guidance on balance sheet classification of deferred taxes. The amendments in this Updateguidance require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position, as opposedin comparison to the currentprevious practice of separating deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. We adopted this guidance July 1, 2016 on a prospective basis. Therefore, prior period balance sheets were not retrospectively adjusted. Current deferred tax assets of $26.7 million and current deferred tax liabilities of $0.6 million are reported in the June 30, 2016 balance sheet.
In April 2015, the FASB issued guidance on the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. This standard isguidance was effective for Kennametal beginning July 1, 2017. We2016 and was retrospectively applied to all periods presented. Debt issuance costs of $5.7 million and $6.0 million are reported as direct reductions of the carrying amounts of debt liabilities in the processbalance sheet as of assessingSeptember 30, and June 30, 2016, respectively.
In April 2015, the impact theFASB issued guidance on accounting for fees paid in a cloud computing arrangement. The amendments in this update provide guidance to customers about treatment of costs as either capitalized and amortized as an intangible asset or expensed as incurred as a service contract. The amendments provide clarification that costs in arrangements that include software license should be capitalized and amortized, and costs in arrangements that do not include a software license should be expensed as incurred. This standard was effective for Kennametal beginning July 1, 2016 and was applied prospectively. The adoption of this ASU willguidance did not have a material impact on our condensed consolidated financial statements.position, results of operations and cash flows.
| |
4. | SUPPLEMENTAL CASH FLOW DISCLOSURES |
|
| | | | | | | |
| Six Months Ended December 31, |
(in thousands) | 2015 | | 2014 |
Cash paid during the period for: | | | |
Interest | $ | 13,076 |
| | $ | 16,334 |
|
Income taxes | 25,735 |
| | 24,894 |
|
Supplemental disclosure of non-cash information: | | | |
Changes in accounts payable related to purchases of property, plant and equipment | 16,400 |
| | 6,470 |
|
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Issued
In August 2016, the FASB issued guidance on classification of certain cash receipts and cash payments in the statement of cash flow. The guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This guidance is effective for Kennametal beginning July 1, 2018. We are in the process of assessing the impact the adoption of this guidance will have on our condensed consolidated financial statements.
| |
5.4. | DIVESTITURESUPPLEMENTAL CASH FLOW DISCLOSURES |
During the three months ended December 31, 2015, Kennametal completed its transaction to sell all of the outstanding capital stock of: Kennametal Extrude Hone LLC and its wholly owned subsidiaries, Kennametal Stellite S.r.l. (Bellusco, Italy), Kennametal Stellite S.p.A. (Milan, Italy), Kennametal Stellite GmbH (Koblenz, Germany); and all of the assets of the businesses of: Tricon (manufacturing operations in Birmingham, Alabama; Chicago, Illinois; and Elko, Nevada), Landis (manufacturing operation in Waynesboro, Pennsylvania); and all of the assets located at the Biel, Switzerland manufacturing facility ("non-core businesses") to Madison Industries for an aggregate price of $61.1 million cash, net of cash sold and working capital settlements. A portion of the transaction proceeds were used to pay down revolver debt with the remaining balance being held as cash on hand. |
| | | | | | | |
| Three Months Ended September 30, |
(in thousands) | 2016 | | 2015 |
Cash paid during the period for: | | | |
Interest | $ | 6,935 |
| | $ | 6,832 |
|
Income taxes | 4,943 |
| | 19,838 |
|
Supplemental disclosure of non-cash information: | | | |
Changes in accounts payable related to purchases of property, plant and equipment | 15,404 |
| | 16,400 |
|
The net book value of these non-core businesses immediately prior to the transaction was $182.5 million, which includes the impact of cumulative translation adjustments. We recognized a pre-tax loss on the sale of $133.3 million during the three months ended December 31, 2015 which included the impact of working capital adjustments and deal costs. Charges of $126.0 million and $7.3 million were recorded in the Infrastructure and Industrial segments, respectively. The pre-tax income attributable to the non-core businesses was assessed and determined to be immaterial for disclosure for the periods presented.
6.5.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, 2015,September 30, 2016, the fair values of the Company’s 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 |
| Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
|
Assets: | | | | | | | | | | | | | | |
Derivatives (1) | $ | — |
| | $ | 799 |
| | $ | — |
| | $ | 799 |
| $ | — |
| | $ | 394 |
| | $ | — |
| | $ | 394 |
|
Total assets at fair value | $ | — |
| | $ | 799 |
| | $ | — |
| | $ | 799 |
| $ | — |
| | $ | 394 |
| | $ | — |
| | $ | 394 |
|
| | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | |
Derivatives (1) | $ | — |
| | $ | 75 |
| | $ | — |
| | $ | 75 |
| $ | — |
| | $ | 518 |
| | $ | — |
| | $ | 518 |
|
Contingent consideration | — |
| | — |
| | 8,600 |
| | 8,600 |
| |
Total liabilities at fair value | $ | — |
| | $ | 75 |
| | $ | 8,600 |
| | $ | 8,675 |
| $ | — |
| | $ | 518 |
| | $ | — |
| | $ | 518 |
|
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2015,2016, the fair value of the Company’s 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 |
| Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
|
Assets: | | | | | | | | | | | | | | |
Derivatives (1) | $ | — |
| | $ | 2,678 |
| | $ | — |
| | $ | 2,678 |
| $ | — |
| | $ | 334 |
| | $ | — |
| | $ | 334 |
|
Total assets at fair value | $ | — |
| | $ | 2,678 |
| | $ | — |
| | $ | 2,678 |
| $ | — |
| | $ | 334 |
| | $ | — |
| | $ | 334 |
|
| | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | |
Derivatives (1) | $ | — |
| | $ | 44 |
| | $ | — |
| | $ | 44 |
| $ | — |
| | $ | 763 |
| | $ | — |
| | $ | 763 |
|
Contingent consideration | — |
| | — |
| | 10,000 |
| | 10,000 |
| — |
| | — |
| | 6,600 |
| | 6,600 |
|
Total liabilities at fair value | $ | — |
| | $ | 44 |
| | $ | 10,000 |
| | $ | 10,044 |
| $ | — |
| | $ | 763 |
| | $ | 6,600 |
| | $ | 7,363 |
|
(1) Currency derivatives are valued based on observable market spot and forward rates and are classified within Level 2 of the fair value hierarchy.
There have been no changes in classification and transfers between levels in the fair value hierarchy in the current period. The fair value of contingent consideration payable that was classified as Level 3 relatesat June 30, 2016 related to our probability assessments of expected future milestone targets, primarily associated with product delivery, related to a previous acquisition. During the the three months ended September 30, 2016, the Company paid the remaining $6.6 million in conjunction with achieved milestone targets. The contingent consideration is to be paid over the next 12 months and iswas recorded in other current liabilities in our condensed consolidated balance sheet. The Company reassessed this contingent consideration and determined that an adjustment of $1.4 million to reduce the fair value of the remaining contingent consideration was necessary during the six months ended December 31, 2015 due to a return of inventory to the seller during the period.sheet at June 30, 2016. No other changes in the expected outcome have occurred during the sixthree months ended December 31, 2015.September 30, 2016.
| |
7.6. | 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 account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated and qualifies as a hedge of such items. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow. 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 and not designated as hedging instruments in the condensed consolidated balance sheet are as follows:
| | (in thousands) | December 31, 2015 | | June 30, 2015 | September 30, 2016 | | June 30, 2016 |
Derivatives designated as hedging instruments | | | | | | |
Other current assets - range forward contracts | $ | 762 |
| | $ | 2,626 |
| $ | 239 |
| | $ | 323 |
|
Other current liabilities - range forward contracts | | (5 | ) | | — |
|
Other assets - range forward contracts | 21 |
| | — |
| 35 |
| | — |
|
Total derivatives designated as hedging instruments | 783 |
| | 2,626 |
| 269 |
| | 323 |
|
Derivatives not designated as hedging instruments | | | | | | |
Other current assets - currency forward contracts | 16 |
| | 52 |
| 120 |
| | 11 |
|
Other current liabilities - currency forward contracts | (75 | ) | | (44 | ) | (513 | ) | | (763 | ) |
Total derivatives not designated as hedging instruments | (59 | ) | | 8 |
| (393 | ) | | (752 | ) |
Total derivatives | $ | 724 |
| | $ | 2,634 |
| $ | (124 | ) | | $ | (429 | ) |
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain currency forward contracts that hedge 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 condensed consolidated balance sheet, with the offset to other (income) expense, net. Gains related to derivatives not designated as hedging instruments have been recognized as follows:
|
| | | | | | | |
| Three Months Ended September 30, |
(in thousands) | 2016 | | 2015 |
Other expense, net - currency forward contracts | $ | (318 | ) | | $ | (17 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 |
Other (income) expense, net - currency forward contracts | $ | 25 |
| | $ | (2,273 | ) | | $ | 8 |
| | $ | (7,169 | ) |
CASH FLOW HEDGES
Range forward contracts (a transaction where both a put option is purchased and a call option is sold) are designated as cash flow hedges and 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 and are recognized as a component of other expense, (income), net when the underlying sale of products or services is recognized into earnings. The notional amount of the contracts translated into U.S. dollars at December 31, 2015September 30, 2016 and June 30, 2015,2016, was $61.0$71.5 million and $53.8$53.3 million,, respectively. The time value component of the fair value of range forward contracts is excluded from the assessment of hedge effectiveness. Assuming the market rates remain constant with the rates at December 31, 2015,September 30, 2016, we expect to recognize into earnings in the next 12 months $0.4 millionan immaterial amount of income on outstanding derivatives.
The following represents gains and losses related to cash flow hedges:
| | | Three Months Ended December 31, | | Six Months Ended December 31, | Three Months Ended September 30, |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
(Losses) gains recognized in other comprehensive loss, net | $ | (239 | ) | | $ | 1,205 |
| | $ | 277 |
| | $ | 2,712 |
| $ | (125 | ) | | $ | 516 |
|
Losses (gains) reclassified from accumulated other comprehensive loss into other (income) expense, net | $ | 1,122 |
| | $ | 152 |
| | $ | (336 | ) | | $ | 502 |
| |
Losses (gains) reclassified from accumulated other comprehensive loss into other expense, net | | $ | 386 |
| | $ | (1,458 | ) |
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 sixthree months ended December 31, 2015September 30, 2016 and 2014.2015.
| |
8.7. | RESTRUCTURING AND RELATED CHARGES |
Phase 1
We are implementing restructuring actions in conjunction with our Phase 1 restructuring program to achieve synergies across Kennametal as a result of the TMB acquisition by consolidating operations among both organizations, reducing administrative overhead and leveraging the supply chain. These restructuring actions are expected to be completed by the end of fiscal 2016 and are anticipated to be mostly cash expenditures.
The total pre-tax charges for Phase 1 programs are expected to be in the range of $55 million to $60 million, which is expected to be approximately 50 percent Industrial and 50 percent Infrastructure. Total restructuring and related charges since inception of $57.9 million have been recorded for these Phase 1 programs through December 31, 2015: $30.5 million in Industrial, $25.0 million in Infrastructure and $2.4 million in Corporate.
Phase 2
We are implementing restructuring actions in conjunction with Phase 2 to streamline the Company's cost structure. These initiatives are expected to enhanceimprove the alignment of our cost structure with the current operating environment through headcount reductions; rationalization and consolidation of certain manufacturing facilities; enhancement of operational efficiencies through the rationalization of certain manufacturing facilities as well asan enterprise-wide cost reduction program; and other employment and cost reduction programs. These restructuring actions are expected to be completed by December 2018of fiscal 2019 and are anticipated to be mostly cash expenditures.
The total pre-tax charges for Phase 2these programs are expected to be in the range of $90$155 million to $100$175 million, which is expected to be approximately 8560 percent Industrial, 5 percent WIDIA, 30 percent Infrastructure and 155 percent Infrastructure.Corporate. Total restructuring and related charges since inception of $38.1$102.8 million have been recorded for these Phase 2 programs through December 31, 2015: $22.3September 30, 2016: $54.3 million in Industrial, $10.6$33.0 million in Infrastructure, $8.6 million in WIDIA and $5.2$6.9 million in Corporate.
We have recorded restructuring and related charges of $31.7 million and $15.1 million for the three months ended September 30, 2016 and 2015, respectively. Of these amounts, restructuring charges totaled $28.6 million and $9.1 million, respectively. During the three months ended September 30, 2016, an immaterial amount of restructuring charges was related to inventory disposals and were recorded in cost of goods sold. Restructuring-related charges of $2.0 million and $1.6 million were recorded in cost of goods sold and $1.1 million and $4.4 million in operating expense for the three months ended September 30, 2016 and 2015, respectively.
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:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | June 30, 2016 | | Expense | | Asset Write-Down | | Translation | | Cash Expenditures | | September 30, 2016 |
Industrial | | | | | | | | | | | |
Severance | $ | 8,180 |
| | $ | 16,994 |
| | $ | — |
| | $ | 36 |
| | $ | (10,904 | ) | | $ | 14,306 |
|
Facilities | — |
| | 105 |
| | (105 | ) | | — |
| | — |
| | — |
|
Other | 809 |
| | (78 | ) | | — |
| | (3 | ) | | (355 | ) | | 373 |
|
Total Industrial | $ | 8,989 |
| | $ | 17,021 |
| | $ | (105 | ) | | $ | 33 |
| | $ | (11,259 | ) | | $ | 14,679 |
|
| | | | | | | | | | | |
WIDIA | | | | | | | | | | | |
Severance | $ | 909 |
| | $ | 2,880 |
| | $ | — |
| | $ | 6 |
| | $ | (1,848 | ) | | $ | 1,947 |
|
Facilities | — |
| | 9 |
| | (9 | ) | | — |
| | — |
| | — |
|
Other | 90 |
| | (13 | ) | | — |
| | — |
| | (60 | ) | | 17 |
|
Total WIDIA | 999 |
| | 2,876 |
| | (9 | ) | | 6 |
| | (1,908 | ) | | 1,964 |
|
| | | | | | | | | | | |
Infrastructure | | | | | | | | | | | |
Severance | $ | 5,301 |
| | $ | 8,929 |
| | $ | — |
| | $ | 19 |
| | $ | (5,729 | ) | | $ | 8,520 |
|
Facilities | 33 |
| | (191 | ) | | 191 |
| | — |
| | — |
| | 33 |
|
Other | 381 |
| | (41 | ) | | — |
| | (1 | ) | | (187 | ) | | 152 |
|
Total Infrastructure | $ | 5,715 |
| | $ | 8,697 |
| | $ | 191 |
| | $ | 18 |
| | $ | (5,916 | ) | | $ | 8,705 |
|
Total | $ | 15,703 |
| | $ | 28,594 |
| | $ | 77 |
| | $ | 57 |
| | $ | (19,083 | ) | | $ | 25,348 |
|
| |
8. | STOCK-BASED COMPENSATION |
Stock Options
There were no grants made during the three months ended September 30, 2016.
The assumptions used in our Black-Scholes valuation related to grants made during the three months ended September 30, 2015 were as follows: |
| | | |
Risk-free interest rate | | 1.4 | % |
Expected life (years) (2) | | 4.5 |
|
Expected volatility (3) | | 31.0 | % |
Expected dividend yield | | 2.0 | % |
(2) Expected life is derived from historical experience. (3) Expected volatility is based on the implied historical volatility of our stock.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Phase 3
We are implementing restructuring actions in conjunction with Phase 3. These initiatives are expected to enhance operational efficiencies through an enterprise-wide cost reduction program as well as the consolidation of certain manufacturing facilities. These restructuring actions are expected to be completed by March 2017 and are anticipated to be mostly cash expenditures.
The total pre-tax charges for Phase 3 programs are expected to be in the range of $40 million to $45 million, which is expected to be approximately 50 percent Industrial and 50 percent Infrastructure. Total restructuring and related charges since inception of $5.2 million have been recorded for these Phase 3 programs through December 31, 2015: $2.0 million in Industrial, $1.6 million in Infrastructure and $1.6 million in Corporate.
Combined
We have recorded restructuring and related charges of $8.9 million and $12.9 million for the three months ended December 31, 2015 and 2014, respectively. Of these amounts, restructuring charges totaled $3.5 million and $6.7 million, of which benefits of $0.3 million and $0.1 million were related to inventory and were recorded in cost of goods sold, respectively. Restructuring-related charges of $2.0 million and $2.8 million were recorded in cost of goods sold and $3.4 million and $3.4 million in operating expense for the three months ended December 31, 2015 and 2014, respectively.
We have recorded restructuring and related charges of $24.0 million and $20.4 million for the six months ended December 31, 2015 and 2014, respectively. Of these amounts, restructuring charges totaled $12.6 million and $8.6 million, of which a benefit of $0.3 million and expense of $0.2 million were related to inventory and were recorded in cost of goods sold, respectively. Restructuring-related charges of $3.6 million and $6.3 million were recorded in cost of goods sold and $7.8 million and $5.5 million in operating expense for the six months ended December 31, 2015 and 2014, respectively.
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:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | June 30, 2015 | | Expense | | Asset Write-Down | | Translation | | Cash Expenditures | | December 31, 2015 |
Industrial | | | | | | | | | | | |
Severance | $ | 13,456 |
| | $ | 7,383 |
| | $ | — |
| | $ | (282 | ) | | $ | (12,242 | ) | | $ | 8,315 |
|
Facilities | — |
| | 1,002 |
| | (998 | ) | | — |
| | (4 | ) | | — |
|
Other | 28 |
| | 48 |
| | — |
| | (1 | ) | | (49 | ) | | 26 |
|
Total Industrial | $ | 13,484 |
| | $ | 8,433 |
| | $ | (998 | ) | | $ | (283 | ) | | $ | (12,295 | ) | | $ | 8,341 |
|
| | | | | | | | | | | |
Infrastructure | | | | | | | | | | | |
Severance | $ | 7,173 |
| | $ | 2,082 |
| | $ | — |
| | $ | (80 | ) | | $ | (3,453 | ) | | $ | 5,722 |
|
Facilities | 131 |
| | 2,109 |
| | (1,963 | ) | | — |
| | (244 | ) | | 33 |
|
Other | — |
| | 13 |
| | — |
| | — |
| | (7 | ) | | 6 |
|
Total Infrastructure | $ | 7,304 |
| | $ | 4,204 |
| | $ | (1,963 | ) | | $ | (80 | ) | | $ | (3,704 | ) | | $ | 5,761 |
|
Total | $ | 20,788 |
| | $ | 12,637 |
| | $ | (2,961 | ) | | $ | (363 | ) | | $ | (15,999 | ) | | $ | 14,102 |
|
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | June 30, 2014 | | Expense | | Asset Write-Down | | Other (2) | | Translation | | Cash Expenditures | | December 31, 2014 |
Industrial | | | | | | | | | | | | | |
Severance | $ | 5,815 |
| | $ | 3,361 |
| | $ | — |
| | $ | — |
| | $ | (282 | ) | | $ | (4,291 | ) | | $ | 4,603 |
|
Facilities | 444 |
| | 489 |
| | (489 | ) | | — |
| | (22 | ) | | (389 | ) | | 33 |
|
Other | 67 |
| | 21 |
| | — |
| | — |
| | (2 | ) | | (86 | ) | | — |
|
Total Industrial | $ | 6,326 |
| | $ | 3,871 |
| | $ | (489 | ) | | $ | — |
| | $ | (306 | ) | | $ | (4,766 | ) | | $ | 4,636 |
|
| | | | | | | | | | | | | |
Infrastructure | | | | | | | | | | | | | |
Severance | $ | 2,458 |
| | $ | 4,177 |
| | $ | — |
| | $ | (459 | ) | | $ | (312 | ) | | $ | (4,747 | ) | | $ | 1,117 |
|
Facilities | 190 |
| | 542 |
| | (541 | ) | | — |
| | (25 | ) | | (166 | ) | | — |
|
Other | 28 |
| | 23 |
| | — |
| | — |
| | (3 | ) | | (48 | ) | | — |
|
Total Infrastructure | $ | 2,676 |
| | $ | 4,742 |
| | $ | (541 | ) | | $ | (459 | ) | | $ | (340 | ) | | $ | (4,961 | ) | | $ | 1,117 |
|
Total | $ | 9,002 |
| | $ | 8,613 |
| | $ | (1,030 | ) | | $ | (459 | ) | | $ | (646 | ) | | $ | (9,727 | ) | | $ | 5,753 |
|
(2) Special termination benefit charge for one of our U.S.-based benefit pension plans resulting from a plant closure - see Note 10.
| |
9. | STOCK-BASED COMPENSATION |
Stock Options
The assumptions used in our Black-Scholes valuation related to grants made during the six months ended December 31, 2015 and 2014 were as follows:
|
| | | | | |
| 2015 | | 2014 |
Risk-free interest rate | 1.4 | % | | 1.5 | % |
Expected life (years) (3) | 4.5 |
| | 4.5 |
|
Expected volatility (4) | 31.0 | % | | 32.5 | % |
Expected dividend yield | 2.0 | % | | 1.6 | % |
(3) Expected life is derived from historical experience.
(4) Expected volatility is based on the implied historical volatility of our stock.
Changes in our stock options for the sixthree months ended December 31, 2015September 30, 2016 were as follows:
|
| | | | | | | | | | | | |
| Options |
| | Weighted Average Exercise Price |
| | Weighted Average Remaining Life (years) | | Aggregate Intrinsic value (in thousands) |
|
Options outstanding, June 30, 2015 | 2,094,037 |
| | $ | 36.08 |
| | | | |
Granted | 742,687 |
| | 30.04 |
| | | | |
Exercised | (38,569 | ) | | 25.02 |
| | | | |
Lapsed and forfeited | (168,666 | ) | | 36.79 |
| | | | |
Options outstanding, December 31, 2015 | 2,629,489 |
| | $ | 34.49 |
| | 5.5 | | $ | — |
|
Options vested and expected to vest, December 31, 2015 | 2,537,759 |
| | $ | 34.59 |
| | 5.3 | | $ | — |
|
Options exercisable, December 31, 2015 | 1,661,984 |
| | $ | 35.35 |
| | 3.2 | | $ | — |
|
|
| | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Weighted Average Remaining Life (years) | | Aggregate Intrinsic value (in thousands) |
Options outstanding, June 30, 2016 | 2,547,809 |
| | $ | 33.72 |
| | | | |
Granted | — |
| | — |
| | | | |
Exercised | (8,359 | ) | | 22.83 |
| | | | |
Lapsed or forfeited | (90,230 | ) | | 28.36 |
| | | | |
Options outstanding, September 30, 2016 | 2,449,220 |
| | $ | 33.95 |
| | 4.6 | | $ | 3,431 |
|
Options vested and expected to vest, September 30, 2016 | 2,413,580 |
| | $ | 34.02 |
| | 4.6 | | $ | 3,348 |
|
Options exercisable, September 30, 2016 | 1,826,158 |
| | $ | 35.84 |
| | 3.2 | | $ | 1,245 |
|
During the sixthree months ended December 31,September 30, 2016 and 2015, and 2014, compensation expense related to stock options was $1.90.5 million and $2.81.3 million, respectively. As of December 31, 2015,September 30, 2016, the total unrecognized compensation cost related to options outstanding was $4.42.0 million and is expected to be recognized over a weighted average period of 2.41.8 years.
Weighted average fair value of options granted during the sixthree months ended December 31,September 30, 2015 and 2014 was $6.847.17 and $10.16, respectively.per option. Fair value of options vested during the sixthree months ended December 31,September 30, 2016 and 2015 and 2014 was $2.3$2.6 million and $6.91.9 million, respectively.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Tax benefits relating to excess stock-based compensation deductions are presented in the condensed consolidated statements of cash flow as financing cash inflows. There were no tax benefits resulting from stock-based compensation deductions for the three months ended September 30, 2016. Tax benefits resulting from stock-based compensation deductions were less than amounts reported for financial reporting purposes by $1.7$1.4 million for the sixthree months ended December 31, 2015 and exceeded amounts reported for financial reporting purposes by $1.3 million for the six months ended December 31, 2014.September 30, 2015.
The amount of cash received from the exercise of capital stock options was immaterial during the sixthree months ended December 31, 2015September 30, 2016 and 20142015. There was $1.0 millionno related tax benefit for the three months ended September 30, 2016, and $6.1 million, respectively. Thethe related tax benefit was immaterial for the sixthree months ended December 31, 2015 and was $1.3 million during the six months ended December 31, 2014.September 30, 2015. The total intrinsic value of options exercised was immaterial during the sixthree months ended December 31, 2015September 30, 2016 and was $3.4 million during the six months ended December 31, 2014.2015.
Under the provisions of the Kennametal Inc. Stock and Incentive Plan of 2010 as amended and restated on October 22, 2013 and as further amended January 27, 2015, 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 both the sixthree months ended December 31,September 30, 2016 and 2015 and 2014 was immaterial.
Restricted Stock Units – Time Vesting and Performance Vesting
Performance vesting restricted stock units are earned pro rata each year if certain performance goals are met over a three-year period and are also subject to a service condition that requires the individual to be employed by the Company at the paymentvesting date after the three-year performance period, with the exception of retirement eligible grantees, who upon retirement are entitled to receive payment forvest in any units that have been earned, including a prorated portion in the partially completed fiscal year in which the retirement occurs. Time vesting stock units are valued at the market value of the stock on the grant date. Performance vesting stock units with a market condition are valued using a Monte Carlo model.
Changes in our time vesting and performance vesting restricted stock units for the six months ended December 31, 2015 were as follows:
|
| | | | | | | | | | | | | |
| Performance Vesting Stock Units |
| | Performance Vesting Weighted Average Fair Value |
| | Time Vesting Stock Units |
| | Time Vesting Weighted Average Fair Value |
|
Unvested performance vesting and time vesting restricted stock units, June 30, 2015 | 101,245 |
| | $ | 43.00 |
| | 689,268 |
| | $ | 41.53 |
|
Granted | 117,589 |
| | 31.60 |
| | 499,162 |
| | 31.06 |
|
Vested | — |
| | — |
| | (276,649 | ) | | 40.92 |
|
Performance metric not achieved | (42,697 | ) | | 31.60 |
| | — |
| | — |
|
Forfeited | (15,703 | ) | | 35.93 |
| | (52,148 | ) | | 39.02 |
|
Unvested performance vesting and time vesting restricted stock units, December 31, 2015 | 160,434 |
| | $ | 35.53 |
| | 859,633 |
| | $ | 35.78 |
|
During the six months ended December 31, 2015 and 2014, compensation expense related to time vesting and performance vesting restricted stock units was $8.8 million and $10.6 million, respectively. As of December 31, 2015, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $18.6 million and is expected to be recognized over a weighted average period of 2.3 years.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes in our time vesting and performance vesting restricted stock units for the three months ended September 30, 2016 were as follows:
|
| | | | | | | | | | | | | |
| Performance Vesting Stock Units | | Performance Vesting Weighted Average Fair Value | | Time Vesting Stock Units | | Time Vesting Weighted Average Fair Value |
Unvested performance vesting and time vesting restricted stock units, June 30, 2016 | 115,467 |
| | $ | 36.96 |
| | 1,014,744 |
| | $ | 31.97 |
|
Granted | 235,241 |
| | 26.35 |
| | 582,219 |
| | 24.98 |
|
Vested | (16,084 | ) | | 45.24 |
| | (276,114 | ) | | 36.76 |
|
Performance metric not achieved | (35,980 | ) | | 26.35 |
| | — |
| | — |
|
Forfeited | — |
| | — |
| | (27,830 | ) | | 28.46 |
|
Unvested performance vesting and time vesting restricted stock units, September 30, 2016 | 298,644 |
| | $ | 28.13 |
| | 1,293,019 |
| | $ | 27.87 |
|
During the three months ended September 30, 2016 and 2015, compensation expense related to time vesting and performance vesting restricted stock units was $8.3 million and $5.7 million, respectively. As of September 30, 2016, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $24.2 million and is expected to be recognized over a weighted average period of 2.3 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 (income):income:
| | | Three Months Ended December 31, | | Six Months Ended December 31, | Three Months Ended September 30, |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
Service cost | $ | 1,156 |
| | $ | 1,384 |
| | $ | 2,319 |
| | $ | 2,799 |
| $ | 733 |
| | $ | 1,163 |
|
Interest cost | 9,438 |
| | 9,745 |
| | 18,923 |
| | 19,681 |
| 7,809 |
| | 9,485 |
|
Expected return on plan assets | (14,657 | ) | | (14,900 | ) | | (29,364 | ) | | (29,947 | ) | (14,757 | ) | | (14,709 | ) |
Amortization of transition obligation | 21 |
| | 19 |
| | 42 |
| | 40 |
| 23 |
| | 21 |
|
Amortization of prior service credit | (104 | ) | | (71 | ) | | (209 | ) | | (141 | ) | (113 | ) | | (104 | ) |
Recognition of actuarial losses | 1,815 |
| | 937 |
| | 3,648 |
| | 1,937 |
| 2,112 |
| | 1,833 |
|
Curtailment loss | — |
| | 358 |
| | — |
| | 358 |
| |
Special termination benefit charge | 54 |
| | 459 |
| | 107 |
| | 459 |
| — |
| | 54 |
|
Net periodic pension (income) | $ | (2,277 | ) | | $ | (2,069 | ) | | $ | (4,534 | ) | | $ | (4,814 | ) | |
Net periodic pension income | | $ | (4,193 | ) | | $ | (2,257 | ) |
The special termination benefit charge of $0.1 million during the sixthree months ended December 31,September 30, 2015 is the result of lump sum payments to several terminated Executive Retirement Plan participants.
During the three and six months ended December 31, 2014 we recognized a special termination benefit charge of $0.5 million and a curtailment loss of $0.4 million for one of our U.S.-based defined benefit pension plans resulting from a plant closure. The special termination benefit charge was recognized in restructuring expense.
The table below summarizes the components of net periodic other postretirement benefit cost:
| | | Three Months Ended December 31, | | Six Months Ended December 31, | Three Months Ended September 30, |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
Service cost | $ | — |
| | $ | 27 |
| | $ | — |
| | $ | 54 |
| |
Interest cost | 210 |
| | 259 |
| | 420 |
| | 519 |
| $ | 168 |
| | $ | 210 |
|
Amortization of prior service credit | (5 | ) | | (28 | ) | | (11 | ) | | (55 | ) | (6 | ) | | (6 | ) |
Recognition of actuarial loss | 81 |
| | 207 |
| | 162 |
| | 414 |
| 89 |
| | 81 |
|
Curtailment gain | — |
| | (221 | ) | | — |
| | (221 | ) | |
Net periodic other postretirement benefit cost | $ | 286 |
| | $ | 244 |
| | $ | 571 |
| | $ | 711 |
| $ | 251 |
| | $ | 285 |
|
The curtailment gain
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We used the last-in, first-out (LIFO) method of valuing inventories for 4745 percent and 4744 percent of total inventories at December 31, 2015September 30, 2016 and June 30, 2015,2016, respectively. Since 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.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories consisted of the following:
| | (in thousands) | December 31, 2015 | | June 30, 2015 | September 30, 2016 | | June 30, 2016 |
Finished goods | $ | 295,609 |
| | $ | 324,840 |
| $ | 290,530 |
| | $ | 284,054 |
|
Work in process and powder blends | 173,360 |
| | 249,629 |
| 153,944 |
| | 166,274 |
|
Raw materials | 70,628 |
| | 100,881 |
| 72,623 |
| | 68,472 |
|
Inventories at current cost | 539,597 |
| | 675,350 |
| 517,097 |
| | 518,800 |
|
Less: LIFO valuation | (62,098 | ) | | (99,819 | ) | (57,801 | ) | | (59,970 | ) |
Total inventories | $ | 477,499 |
| | $ | 575,531 |
| $ | 459,296 |
| | $ | 458,830 |
|
Our $600 millionThe five-year, multi-currency, revolving credit facility, (2011as amended and restated in April 2016 (Credit Agreement) permits revolving credit loans of up to $600 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement)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 all covenants as of December 31, 2015.September 30, 2016. We had $5.4 million and $42.8 million ofno borrowings outstanding under the 2011 Credit Agreement as of December 31, 2015September 30, 2016 and June 30, 2015, respectively.2016. Borrowings under the 2011 Credit Agreement are guaranteed by our significant domestic subsidiaries. The 2011 Credit Agreement matures in April 2018.2021.
Fixed rate debt had a fair market value of $692.5$709.0 million and $698.0$704.0 million at December 31, 2015September 30, 2016 and June 30, 2015,2016, respectively. The Level 2 fair value is determined based on the quoted market price of this debt as of December 31, 2015September 30, 2016 and June 30, 2015,2016, respectively.
12.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 WeAmong other environmental laws, we are involved as a potentially responsible party (PRP) at various sitessubject to the Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund), under which we have been designated by the United States Environmental Protection Agency (USEPA) as a potentially responsible party (PRP) with respect to environmental remedial costs at certain Superfund sites. For certainWe have evaluated our claims and liabilities associated with these Superfund sites based upon best currently available information. We believe our environmental accruals are adequate to cover our portion of thesethe environmental remedial costs at the Superfund sites where we have evaluatedbeen designated a PRP, to the claimsextent these expenses are probable 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 costreasonably estimable.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Environmental Matters We establish and maintain reserves for other potential environmental issues. At December 31, 2015September 30, 2016 and June 30, 2015,2016, the balances of these reserves were $12.2 million and $12.6 million.$12.5 million. These reserves represent anticipated costs associated with the remediation of these issues.
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 liabilities 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 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.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effective income tax rates for the three months ended December 31,September 30, 2016 and 2015 and 2014 were 29.7 percent (benefit on a loss) and 12.729.9 percent (provision on a loss), respectively. The effective income tax rates for the six months ended December 31, 2015 and 2014 were 27.7 percent (benefit on a loss) and 20.1292.8 percent (provision on a loss), respectively. The change in both periods was primarily driven by the asset impairment charges recordeda discrete tax charge in the current and prior year quarters, the tax impact onquarter for the sale of certain non-core businesses and a loss in the U.S. in the current quarter lower relative U.S. current year earnings compared with the restfor which we could not record a tax benefit due to a full valuation allowance on our U.S deferred tax assets as of the world where the tax rates are generally lower and favorable effectsfourth quarter of the permanent extension of the credit for increasing research activities contained in the Protecting Americans from Tax Hikes Act of 2015 that was enacted during the current quarter.fiscal 2016.
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 would occur related to the issuance of capital stock under stock option grants and restricted stock units. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options and restricted stock units.
For the three and six months ended December 31,September 30, 2016 and 2015, and December 31, 2014, the effecteffects of unexercised capital stock options and unvested restricted stock units waswere anti-dilutive as a result of a net losslosses in the periods and therefore hashave been excluded from diluted shares outstanding as well as from the diluted earnings per share calculation.
A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests as of December 31, 2015 and 2014 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Kennametal Shareholders’ Equity | | | | |
(in thousands) | Capital stock |
| | Additional paid-in capital |
| | Retained earnings |
| | Accumulated other comprehensive loss |
| | Non- controlling interests |
| | Total equity |
|
Balance as of June 30, 2015 | $ | 99,219 |
| | $ | 419,829 |
| | $ | 1,070,282 |
| | $ | (243,523 | ) | | $ | 29,628 |
| | $ | 1,375,435 |
|
Net (loss) income | — |
| | — |
| | (175,453 | ) | | — |
| | 939 |
| | (174,514 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | (20,904 | ) | | (1,067 | ) | | (21,971 | ) |
Dividend reinvestment | 8 |
| | 159 |
| | — |
| | — |
| | — |
| | 167 |
|
Capital stock issued under employee benefit and stock plans | 369 |
| | 6,874 |
| | — |
| | — |
| | — |
| | 7,243 |
|
Purchase of capital stock | (8 | ) | | (159 | ) | | — |
| | — |
| | — |
| | (167 | ) |
Cash dividends paid | — |
| | — |
| | (31,845 | ) | | — |
| | (71 | ) | | (31,916 | ) |
Balance as of December 31, 2015 | $ | 99,588 |
| | $ | 426,703 |
| | $ | 862,984 |
| | $ | (264,427 | ) | | $ | 29,429 |
| | $ | 1,154,277 |
|
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests as of September 30, 2016 and 2015 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Kennametal Shareholders’ Equity | | | | |
(in thousands) | Capital stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Non- controlling interests | | Total equity |
Balance as of June 30, 2016 | $ | 99,618 |
| | $ | 436,617 |
| | $ | 780,597 |
| | $ | (352,509 | ) | | $ | 31,478 |
| | $ | 995,801 |
|
Net (loss) income | — |
| | — |
| | (21,656 | ) | | — |
| | 455 |
| | (21,201 | ) |
Other comprehensive income | — |
| | — |
| | — |
| | 3,474 |
| | 415 |
| | 3,889 |
|
Dividend reinvestment | 3 |
| | 60 |
| | — |
| | — |
| | — |
| | 63 |
|
Capital stock issued under employee benefit and stock plans | 290 |
| | 6,609 |
| | — |
| | — |
| | — |
| | 6,899 |
|
Purchase of capital stock | (3 | ) | | (60 | ) | | — |
| | — |
| | — |
| | (63 | ) |
Cash dividends paid | — |
| | — |
| | (15,980 | ) | | — |
| | — |
| | (15,980 | ) |
Balance as of September 30, 2016 | $ | 99,908 |
| | $ | 443,226 |
| | $ | 742,961 |
| | $ | (349,035 | ) | | $ | 32,348 |
| | $ | 969,408 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Kennametal Shareholders’ Equity | | | | |
(in thousands) | Capital stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Non- controlling interests | | Total equity |
Balance as of June 30, 2015 | $ | 99,219 |
| | $ | 419,829 |
| | $ | 1,070,282 |
| | $ | (243,523 | ) | | $ | 29,628 |
| | $ | 1,375,435 |
|
Net (loss) income | — |
| | — |
| | (6,226 | ) | | — |
| | 522 |
| | (5,704 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | (17,333 | ) | | (539 | ) | | (17,872 | ) |
Dividend reinvestment | 4 |
| | 76 |
| | — |
| | — |
| | — |
| | 80 |
|
Capital stock issued under employee benefit and stock plans | 289 |
| | 2,856 |
| | — |
| | — |
| | — |
| | 3,145 |
|
Purchase of capital stock | (4 | ) | | (76 | ) | | — |
| | — |
| | — |
| | (80 | ) |
Cash dividends paid | — |
| | — |
| | (15,915 | ) | | — |
| | — |
| | (15,915 | ) |
Balance as of September 30, 2015 | $ | 99,508 |
| | $ | 422,685 |
| | $ | 1,048,141 |
| | $ | (260,856 | ) | | $ | 29,611 |
| | $ | 1,339,089 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Kennametal Shareholders’ Equity | | | | |
(in thousands) | Capital stock |
| | Additional paid-in capital |
| | Retained earnings |
| | Accumulated other comprehensive loss |
| | Non- controlling interests |
| | Total equity |
|
Balance as of June 30, 2014 | $ | 98,340 |
| | $ | 395,890 |
| | $ | 1,501,157 |
| | $ | (66,131 | ) | | $ | 32,352 |
| | $ | 1,961,608 |
|
Net income | — |
| | — |
| | (348,814 | ) | | — |
| | 1,236 |
| | (347,578 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | (69,352 | ) | | (2,274 | ) | | (71,626 | ) |
Dividend reinvestment | 5 |
| | 163 |
| | — |
| | — |
| | — |
| | 168 |
|
Capital stock issued under employee benefit and stock plans | 592 |
| | 16,089 |
| | — |
| | — |
| | — |
| | 16,681 |
|
Purchase of capital stock | (5 | ) | | (163 | ) | | — |
| | — |
| | — |
| | (168 | ) |
Cash dividends paid | — |
| | — |
| | (28,451 | ) | | — |
| | (47 | ) | | (28,498 | ) |
Balance as of December 31, 2014 | $ | 98,932 |
| | $ | 411,979 |
| | $ | 1,123,892 |
| | $ | (135,483 | ) | | $ | 31,267 |
| | $ | 1,530,587 |
|
The amounts of comprehensive loss attributable to Kennametal Shareholders and noncontrolling interests are disclosed in the condensed consolidated statements of comprehensive income.
| |
17.16. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
Total accumulated other comprehensive loss (AOCL) consists of net lossincome (loss) and other changes in equity from transactions and other events from sources other than shareholders. It includes postretirement benefit plan adjustments, currency translation adjustments and unrealized gains and losses from derivative instruments designated as cash flow hedges.
The components of, and changes in, AOCL were as follows (net of tax) for the three months ended December 31, 2015 (in thousands):
|
| | | | | | | | | | | | |
Attributable to Kennametal: | Postretirement benefit plans | Currency translation adjustment | Derivatives | Total |
Balance, September 30, 2015 | $ | (136,575 | ) | $ | (115,619 | ) | $ | (8,662 | ) | $ | (260,856 | ) |
Other comprehensive loss before reclassifications | 1,450 |
| (23,111 | ) | 277 |
| (21,384 | ) |
Amounts reclassified from AOCL | 1,203 |
| 17,028 |
| (418 | ) | 17,813 |
|
Net current period other comprehensive loss | 2,653 |
| (6,083 | ) | (141 | ) | (3,571 | ) |
AOCL, December 31, 2015 | $ | (133,922 | ) | $ | (121,702 | ) | $ | (8,803 | ) | $ | (264,427 | ) |
| | | | |
Attributable to noncontrolling interests: | | | | |
Balance, September 30, 2015 | $ | — |
| $ | (2,797 | ) | $ | — |
| $ | (2,797 | ) |
Other comprehensive loss before reclassifications | — |
| (528 | ) | — |
| (528 | ) |
Net current period other comprehensive loss | — |
| (528 | ) | — |
| (528 | ) |
AOCL, December 31, 2015 | $ | — |
| $ | (3,325 | ) | $ | — |
| $ | (3,325 | ) |
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of, and changes in, AOCL were as follows, (netnet of tax)tax, for the sixthree months ended December 31, 2015September 30, 2016 (in thousands):
|
| | | | | | | | | | | | |
Attributable to Kennametal: | Postretirement benefit plans | Currency translation adjustment | Derivatives | Total |
Balance, June 30, 2015 | $ | (138,793 | ) | $ | (97,309 | ) | $ | (7,421 | ) | $ | (243,523 | ) |
Other comprehensive loss before reclassifications | 2,449 |
| (41,421 | ) | 802 |
| (38,170 | ) |
Amounts reclassified from AOCL | 2,422 |
| 17,028 |
| (2,184 | ) | 17,266 |
|
Net current period other comprehensive loss | 4,871 |
| (24,393 | ) | (1,382 | ) | (20,904 | ) |
AOCL, December 31, 2015 | $ | (133,922 | ) | $ | (121,702 | ) | $ | (8,803 | ) | $ | (264,427 | ) |
| | | | |
Attributable to noncontrolling interests: | | | | |
Balance, June 30, 2015 | $ | — |
| $ | (2,258 | ) | $ | — |
| $ | (2,258 | ) |
Other comprehensive loss before reclassifications | — |
| (1,067 | ) | — |
| (1,067 | ) |
Net current period other comprehensive loss | — |
| (1,067 | ) | — |
| (1,067 | ) |
AOCL, December 31, 2015 | $ | — |
| $ | (3,325 | ) | $ | — |
| $ | (3,325 | ) |
|
| | | | | | | | | | | | |
Attributable to Kennametal: | Postretirement benefit plans | Currency translation adjustment | Derivatives | Total |
Balance, June 30, 2016 | $ | (212,163 | ) | $ | (131,212 | ) | $ | (9,134 | ) | $ | (352,509 | ) |
Other comprehensive income (loss) before reclassifications | 630 |
| 749 |
| (126 | ) | 1,253 |
|
Amounts reclassified from AOCL | 1,834 |
| — |
| 387 |
| 2,221 |
|
Net current period other comprehensive income | 2,464 |
| 749 |
| 261 |
| 3,474 |
|
AOCL, September 30, 2016 | $ | (209,699 | ) | $ | (130,463 | ) | $ | (8,873 | ) | $ | (349,035 | ) |
| | | | |
Attributable to noncontrolling interests: | | | | |
Balance, June 30, 2016 | $ | — |
| $ | (3,446 | ) | $ | — |
| $ | (3,446 | ) |
Other comprehensive income before reclassifications | — |
| 415 |
| — |
| 415 |
|
Net current period other comprehensive income | — |
| 415 |
| — |
| 415 |
|
AOCL, September 30, 2016 | $ | — |
| $ | (3,031 | ) | $ | — |
| $ | (3,031 | ) |
The components of, and changes in, AOCL were as follows, (netnet of tax)tax, for the three months ended December 31, 2014September 30, 2015 (in thousands):
|
| | | | | | | | | | | | |
Attributable to Kennametal: | Postretirement benefit plans | Currency translation adjustment | Derivatives | Total |
Balance, September 30, 2014 | $ | (89,347 | ) | $ | (11,210 | ) | $ | (9,329 | ) | $ | (109,886 | ) |
Other comprehensive (loss) income before reclassifications | 1,924 |
| (29,427 | ) | 1,206 |
| (26,297 | ) |
Amounts reclassified from AOCL | 735 |
| — |
| (35 | ) | 700 |
|
Net current period other comprehensive (loss) income | 2,659 |
| (29,427 | ) | 1,171 |
| (25,597 | ) |
AOCL, December 31, 2014 | $ | (86,688 | ) | $ | (40,637 | ) | $ | (8,158 | ) | $ | (135,483 | ) |
| | | | |
Attributable to noncontrolling interests: | | | | |
Balance, September 30, 2014 | $ | — |
| $ | (405 | ) | $ | — |
| $ | (405 | ) |
Other comprehensive income before reclassifications | — |
| (782 | ) | — |
| (782 | ) |
Net current period other comprehensive income | — |
| (782 | ) | — |
| (782 | ) |
AOCL, December 31, 2014 | $ | — |
| $ | (1,187 | ) | $ | — |
| $ | (1,187 | ) |
|
| | | | | | | | | | | | |
Attributable to Kennametal: | Postretirement benefit plans | Currency translation adjustment | Derivatives | Total |
Balance, June 30, 2015 | $ | (138,793 | ) | $ | (97,309 | ) | $ | (7,421 | ) | $ | (243,523 | ) |
Other comprehensive income (loss) before reclassifications | 999 |
| (18,310 | ) | 525 |
| (16,786 | ) |
Amounts reclassified from AOCL | 1,219 |
| — |
| (1,766 | ) | (547 | ) |
Net current period other comprehensive income (loss) | 2,218 |
| (18,310 | ) | (1,241 | ) | (17,333 | ) |
AOCL, September 30, 2015 | $ | (136,575 | ) | $ | (115,619 | ) | $ | (8,662 | ) | $ | (260,856 | ) |
| | | | |
Attributable to noncontrolling interests: | | | | |
Balance, June, 2015 | $ | — |
| $ | (2,258 | ) | $ | — |
| $ | (2,258 | ) |
Other comprehensive loss before reclassifications | — |
| (539 | ) | — |
| (539 | ) |
Net current period other comprehensive loss | — |
| (539 | ) | — |
| (539 | ) |
AOCL, September 30, 2015 | $ | — |
| $ | (2,797 | ) | $ | — |
| $ | (2,797 | ) |
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of, and changes in, AOCL were as follows (net of tax) for the six months ended December 31, 2014 (in thousands):
|
| | | | | | | | | | | | |
Attributable to Kennametal: | Postretirement benefit plans | Currency translation adjustment | Derivatives | Total |
Balance, June 30, 2014 | $ | (93,742 | ) | $ | 38,811 |
| $ | (11,200 | ) | $ | (66,131 | ) |
Other comprehensive loss before reclassifications | 5,565 |
| (79,448 | ) | 2,713 |
| (71,170 | ) |
Amounts reclassified from AOCL | 1,489 |
| — |
| 329 |
| 1,818 |
|
Net current period other comprehensive loss | 7,054 |
| (79,448 | ) | 3,042 |
| (69,352 | ) |
AOCL, December 31, 2014 | $ | (86,688 | ) | $ | (40,637 | ) | $ | (8,158 | ) | $ | (135,483 | ) |
| | | | |
Attributable to noncontrolling interests: | | | | |
Balance, June 30, 2014 | $ | — |
| $ | 1,087 |
| $ | — |
| $ | 1,087 |
|
Other comprehensive loss before reclassifications | — |
| (2,274 | ) | — |
| (2,274 | ) |
Net current period other comprehensive loss | — |
| (2,274 | ) | — |
| (2,274 | ) |
AOCL, December 31, 2014 | $ | — |
| $ | (1,187 | ) | $ | — |
| $ | (1,187 | ) |
Reclassifications out of AOCL for the three and six months ended December 31,September 30, 2016 and 2015 and 2014 consisted of the following (in thousands):
| | | Three Months Ended December 31, | | Six Months Ended December 31, | | Three Months Ended September 30, | |
Details about AOCL components | 2015 | | 2014 | | 2015 | | 2014 | Affected line item in the Income Statement | 2016 | | 2015 | | Affected line item in the Income Statement |
Gains and losses on cash flow hedges: | | | | | | | | | | | | |
Forward starting interest rate swaps | $ | 525 |
| | $ | 505 |
| | $ | 1,049 |
| | $ | 1,010 |
| Interest expense | $ | 545 |
| | $ | 525 |
| | Interest expense |
Currency exchange contracts | (1,199 | ) | | (562 | ) | | (4,572 | ) | | (474 | ) | Other (income) expense, net | (158 | ) | | (3,373 | ) | | Other expense, net |
Total before tax | (674 | ) | | (57 | ) | | (3,523 | ) | | 536 |
| | 387 |
| | (2,848 | ) | | |
Tax expense (benefit) | 256 |
| | 22 |
| | 1,339 |
| | (207 | ) | (Benefit) provision for income taxes | |
Tax expense | | — |
| | 1,082 |
| | Provision for income taxes |
Net of tax | $ | (418 | ) | | $ | (35 | ) | | $ | (2,184 | ) | | $ | 329 |
| | $ | 387 |
| | $ | (1,766 | ) | |
| | | | | | | | | | | | |
Postretirement benefit plans: | | | | | | | | | | | | |
Amortization of transition obligations | $ | 21 |
| | $ | 19 |
| | $ | 42 |
| | $ | 40 |
| See note 10 for further details | $ | 23 |
| | $ | 21 |
| | See note 9 for further details |
Amortization of prior service credit | (109 | ) | | (99 | ) | | (220 | ) | | (196 | ) | See note 10 for further details | (119 | ) | | (110 | ) | | See note 9 for further details |
Recognition of actuarial losses | 1,896 |
| | 1,144 |
| | 3,810 |
| | 2,351 |
| See note 10 for further details | 2,201 |
| | 1,914 |
| | See note 9 for further details |
Total before taxes | 1,808 |
| | 1,064 |
| | 3,632 |
| | 2,195 |
| | |
Tax (benefit) | (605 | ) | | (329 | ) | | (1,210 | ) | | (706 | ) | (Benefit) provision for income taxes | |
Net of tax | $ | 1,203 |
| | $ | 735 |
| | $ | 2,422 |
| | $ | 1,489 |
| | |
| | | | | | | | | |
Foreign currency translation adjustments: | | | | | | | | | |
Released due to divestiture | $ | 17,028 |
| | $ | — |
| | $ | 17,028 |
| | $ | — |
| Loss on divestiture | |
Total before taxes | 17,028 |
| | — |
| | 17,028 |
| | — |
| | |
Total before tax | | 2,105 |
| | 1,825 |
| | |
Tax benefit | — |
| | — |
| | — |
| | — |
| (Benefit) provision for income taxes | (271 | ) | | (606 | ) | | Provision for income taxes |
Net of tax | $ | 17,028 |
| | $ | — |
| | $ | 17,028 |
| | $ | — |
| | $ | 1,834 |
| | $ | 1,219 |
| |
The amount of income tax allocated to each component of other comprehensive income (loss) for the three months ended September 30, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2016 | | | | | 2015 | |
(in thousands) | Pre-tax | Tax impact | Net of tax | | | Pre-tax | Tax impact | Net of tax |
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges | $ | (126 | ) | $ | — |
| $ | (126 | ) | | | $ | 847 |
| $ | (322 | ) | $ | 525 |
|
Reclassification of unrealized loss (gain) on expired derivatives designated and qualified as cash flow hedges | 387 |
| — |
| 387 |
| | | (2,848 | ) | 1,082 |
| (1,766 | ) |
Unrecognized net pension and other postretirement benefit gain | 716 |
| (86 | ) | 630 |
| | | 1,267 |
| (268 | ) | 999 |
|
Reclassification of net pension and other postretirement benefit loss | 2,105 |
| (271 | ) | 1,834 |
| | | 1,825 |
| (606 | ) | 1,219 |
|
Foreign currency translation adjustments | 1,164 |
| — |
| 1,164 |
| | | (18,905 | ) | 56 |
| (18,849 | ) |
Other comprehensive income (loss) | $ | 4,246 |
| $ | (357 | ) | $ | 3,889 |
| | | $ | (17,814 | ) | $ | (58 | ) | $ | (17,872 | ) |
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amount of income tax allocated to each component of other comprehensive (loss) for the three months ended December 31, 2015 and 2014:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2015 | | | | | 2014 | |
(in thousands) | Pre-tax | Tax impact | Net of tax | | | Pre-tax | Tax impact | Net of tax |
Unrealized gain on derivatives designated and qualified as cash flow hedges | $ | 447 |
| $ | (170 | ) | $ | 277 |
| | | $ | 1,964 |
| $ | (758 | ) | $ | 1,206 |
|
Reclassification of unrealized gain on expired derivatives designated and qualified as cash flow hedges | (674 | ) | 256 |
| (418 | ) | | | (57 | ) | 22 |
| (35 | ) |
Unrecognized net pension and other postretirement benefit gain | 1,949 |
| (499 | ) | 1,450 |
| | | 2,608 |
| (684 | ) | 1,924 |
|
Reclassification of net pension and other postretirement benefit loss | 1,808 |
| (605 | ) | 1,203 |
| | | 1,064 |
| (329 | ) | 735 |
|
Foreign currency translation adjustments | (24,643 | ) | 1,004 |
| (23,639 | ) | | | (31,675 | ) | 1,466 |
| (30,209 | ) |
Reclassification of foreign currency translation adjustment loss realized upon sale | 17,028 |
| — |
| 17,028 |
| | | — |
| — |
| — |
|
Other comprehensive (loss) | $ | (4,085 | ) | $ | (14 | ) | $ | (4,099 | ) | | | $ | (26,096 | ) | $ | (283 | ) | $ | (26,379 | ) |
The amount of income tax allocated to each component of other comprehensive (loss) for the six months ended December 31, 2015 and 2014:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2015 | | | | | 2014 | |
(in thousands) | Pre-tax | Tax impact | Net of tax | | | Pre-tax | Tax impact | Net of tax |
Unrealized gain on derivatives designated and qualified as cash flow hedges | $ | 1,294 |
| $ | (492 | ) | $ | 802 |
| | | $ | 4,419 |
| $ | (1,706 | ) | $ | 2,713 |
|
Reclassification of unrealized (gain) loss on expired derivatives designated and qualified as cash flow hedges | (3,523 | ) | 1,339 |
| (2,184 | ) | | | 536 |
| (207 | ) | 329 |
|
Unrecognized net pension and other postretirement benefit gain | 3,216 |
| (767 | ) | 2,449 |
| | | 7,586 |
| (2,021 | ) | 5,565 |
|
Reclassification of net pension and other postretirement benefit loss | 3,632 |
| (1,210 | ) | 2,422 |
| | | 2,195 |
| (706 | ) | 1,489 |
|
Foreign currency translation adjustments | (43,548 | ) | 1,060 |
| (42,488 | ) | | | (86,519 | ) | 4,797 |
| (81,722 | ) |
Reclassification of foreign currency translation adjustment loss realized upon sale | 17,028 |
| — |
| 17,028 |
| | | — |
| — |
| — |
|
Other comprehensive (loss) | $ | (21,901 | ) | $ | (70 | ) | $ | (21,971 | ) | | | $ | (71,783 | ) | $ | 157 |
| $ | (71,626 | ) |
| |
18.17. | 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 based on the results of an ongoing cumulative qualitative assessment that warrant a test prior to that. We evaluate the recoverability of goodwill for each of our reporting units by comparing the fair value of each reporting unit with its carrying value. The fair values of our reporting units are determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit. We evaluate the recoverability of indefinite-lived intangible assets using a discounted cash flow analysis based on projected financial information. This evaluation is sensitive to changes in market interest rates and other external factors.
Identifiable assets with finite lives are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable.
During the three months ended September 30, 2016, we reorganized our operating structure in a manner that changed the composition of our reporting units. The Industrial and WIDIA reporting units in fiscal 2017 were formed from the fiscal 2016 Industrial reporting unit. In connection with this reporting unit realignment, during the three months ended September 30, 2016 we updated our goodwill impairment assessment based on a quantitative analysis. We evaluated the goodwill of our reporting units immediately prior to and after the realignment and concluded in both cases that there was no impairment. We allocated our goodwill from the former Industrial segment to the current Industrial and WIDIA segments using a relative fair value approach. The restated Industrial reporting unit passed the goodwill impairment test with fair value substantially exceeded the carrying value. The new WIDIA reporting unit's fair value approximates its carrying value.
See Note 18 for further discussion regarding the Company's segments.
We are currently exploring strategic alternatives for one of our non-core Infrastructure businesses. The estimated net book value of the business is approximately $30 million as of September 30, 2016. As the strategic direction has not yet been determined for this business, the Company cannot determine if additional impairment charges will be incurred.
A summary of the carrying amount of goodwill attributable to each segment, as well as the changes in such, is as follows:
|
| | | | | | | | | | | | | | | |
(in thousands) | Industrial | | WIDIA | | Infrastructure | | Total |
Gross goodwill | $ | 408,705 |
| | $ | 40,624 |
| | $ | 633,211 |
| | $ | 1,082,540 |
|
Accumulated impairment losses | (137,204 | ) | | (13,638 | ) | | (633,211 | ) | | (784,053 | ) |
Balance as of June 30, 2016 | $ | 271,501 |
| | $ | 26,986 |
| | $ | — |
| | $ | 298,487 |
|
| | | | | | | |
Activity for the three months ended September 30, 2016: | | | | | | | |
Change in gross goodwill due to translation | 210 |
| | 21 |
| | — |
| | 231 |
|
| | | | | | | |
Gross goodwill | 408,915 |
| | 40,645 |
| | 633,211 |
| | 1,082,771 |
|
Accumulated impairment losses | (137,204 | ) | | (13,638 | ) | | (633,211 | ) | | (784,053 | ) |
Balance as of September 30, 2016 | $ | 271,711 |
| | $ | 27,007 |
| | $ | — |
| | $ | 298,718 |
|
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2016 December Quarter Impairment Charge
Late in the December quarter of fiscal 2016, the Company experienced a further unexpected deterioration in customer demand in many of its end markets and certain geographies. Industrial production indices in the US and China have declined, as well as further reductions in mining and oil and gas activity. In view of these declines and the significant impact on our near term financial forecasts as well as a significant and sustained decline in the Company’s stock price, we determined an interim impairment test of our goodwill and other long-lived assets of our Industrial and Infrastructure reporting units was required. As a result of this interim test, we recorded a preliminary non-cash pre-tax impairment charge during the three months ended December 31, 2015 of $106.1 million in the Infrastructure segment, of which $105.7 million was for goodwill and $0.4 million was for an indefinite-lived trademark intangible asset. We also recorded a preliminary non-cash pre-tax impairment charge during the three months ended December 31, 2015 of $2.3 million in the Industrial segment for an indefinite-lived trademark intangible asset. These impairment charges are recorded in restructuring and asset impairment charges in our condensed consolidated statements of income. There is $298.0 million of goodwill at the Industrial reporting unit. The fair value exceeds the carrying value by approximately 70 percent, a decrease of approximately 20 percentage points from the fiscal 2015 annual impairment valuation. The Infrastructure reporting unit goodwill impairment charge is preliminary and subject to finalization of fair values related to intangibles and property, plant and equipment, which we expect to complete in the third quarter of fiscal 2016. The Infrastructure segment has no remaining goodwill recorded.
During the December quarter, we also performed a preliminary review of our identifiable assets with finite lives and preliminarily determined that the assets were not impaired. This review is subject to finalization using consistent assumptions as used in our aforementioned 2016 December quarter goodwill impairment valuation, which we expect to complete in the third quarter of fiscal 2016.
Divestiture Impact on Goodwill and Other Intangible Assets
During the three months ended December 31, 2015, we completed the sale of non-core businesses, see Note 5. As a result of this transaction, goodwill decreased by $1.1 million and $6.5 million in our Industrial and Infrastructure segments, respectively. These decreases are recorded in the loss on divestiture account in our condensed consolidated statements of income.
2015 December Quarter Impairment Charge
As previously disclosed, we recorded a non-cash pre-tax impairment charge during the three months ended December 31, 2014 of $376.5 million in the Infrastructure segment, of which $375.0 million was for goodwill and $1.5 million was for an indefinite-lived trademark intangible asset.
The further acceleration or extended persistence of the current downturn in the global end markets could have a further negative impact on our business and financial performance. We cannot provide assurance that we will achieve all of the anticipated benefits from restructuring actions we have taken and will continue to take. If we are unable to effectively restructure our operations in the light of evolving market conditions, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. We are currently exploring strategic alternatives for one of our non-core Infrastructure businesses. The estimated net book value of the business is approximately $40 million as of December 31, 2015. As the strategic direction has not yet been determined for this business, the business is classified as held and used, and the Company cannot determine if additional impairment charges will be incurred.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the carrying amount of goodwill attributable to each segment, as well as the changes in such, is as follows:
|
| | | | | | | | | | | |
(in thousands) | Industrial |
| | Infrastructure |
| | Total |
|
Gross goodwill | $ | 455,371 |
| | $ | 640,360 |
| | $ | 1,095,731 |
|
Accumulated impairment losses | (150,842 | ) | | (527,500 | ) | | (678,342 | ) |
Balance as of June 30, 2015 | $ | 304,529 |
| | $ | 112,860 |
| | $ | 417,389 |
|
| | | | | |
Activity for the six months ended December 31, 2015: | | | | | |
Divestiture | (1,075 | ) | | (6,461 | ) | | (7,536 | ) |
Translation | (5,479 | ) | | (688 | ) | | (6,167 | ) |
Change in gross goodwill | (6,554 | ) | | (7,149 | ) | | (13,703 | ) |
Impairment charges | — |
| | (105,711 | ) | | (105,711 | ) |
| | | | | |
Gross goodwill | 448,817 |
| | 633,211 |
| | 1,082,028 |
|
Accumulated impairment losses | (150,842 | ) | | (633,211 | ) | | (784,053 | ) |
Balance as of December 31, 2015 | $ | 297,975 |
| | $ | — |
| | $ | 297,975 |
|
The components of our other intangible assets were as follows:
|
| | | | | | | | | | | | | | | | | | |
| Estimated Useful Life (in years) | | December 31, 2015 | June 30, 2015 |
(in thousands) | | Gross Carrying Amount |
| | Accumulated Amortization |
| | | Gross Carrying Amount |
| | Accumulated Amortization |
|
Contract-based | 3 to 15 | | $ | 7,164 |
| | $ | (6,538 | ) | | | $ | 8,523 |
| | $ | (6,990 | ) |
Technology-based and other | 4 to 20 | | 47,116 |
| | (25,945 | ) | | | 52,820 |
| | (29,723 | ) |
Customer-related | 10 to 21 | | 205,566 |
| | (60,263 | ) | | | 275,796 |
| | (90,141 | ) |
Unpatented technology | 10 to 30 | | 31,934 |
| | (4,128 | ) | | | 59,449 |
| | (14,426 | ) |
Trademarks | 5 to 20 | | 12,644 |
| | (8,090 | ) | | | 18,575 |
| | (12,090 | ) |
Trademarks | Indefinite | | 16,567 |
| | — |
| | | 24,876 |
| | — |
|
Total | | | $ | 320,991 |
| | $ | (104,964 | ) | | | $ | 440,039 |
| | $ | (153,370 | ) |
As previously mentioned, during the three months ended December 31, 2015, we recorded $2.3 million and $0.4 million of impairment charges in the Industrial and Infrastructure segments, respectively, for indefinite-lived trademark intangible assets as a result of our interim impairment analysis.
The divestiture of non-core businesses completed during the six months ended December 31, 2015 resulted in a reduction of $30.0 million in Customer-related, $15.4 million in Unpatented technology, $5.0 million in Indefinite-lived Trademarks, $1.1 million in Definite-lived Trademarks, $0.8 million in Technology-based and other and $0.5 million in Contract-based.
|
| | | | | | | | | | | | | | | | | | |
| Estimated Useful Life (in years) | | September 30, 2016 | June 30, 2016 |
(in thousands) | | Gross Carrying Amount |
| | Accumulated Amortization |
| | | Gross Carrying Amount |
| | Accumulated Amortization |
|
Contract-based | 3 to 15 | | $ | 7,063 |
| | $ | (6,948 | ) | | | $ | 7,152 |
| | $ | (6,886 | ) |
Technology-based and other | 4 to 20 | | 46,506 |
| | (27,253 | ) | | | 47,323 |
| | (27,011 | ) |
Customer-related | 10 to 21 | | 205,377 |
| | (70,120 | ) | | | 205,471 |
| | (66,938 | ) |
Unpatented technology | 10 to 30 | | 31,820 |
| | (4,867 | ) | | | 31,837 |
| | (4,614 | ) |
Trademarks | 5 to 20 | | 12,357 |
| | (7,998 | ) | | | 12,668 |
| | (8,644 | ) |
Trademarks | Indefinite | | 16,934 |
| | — |
| | | 16,850 |
| | — |
|
Total | | | $ | 320,057 |
| | $ | (117,186 | ) | | | $ | 321,301 |
| | $ | (114,093 | ) |
During the three months ended December 31, 2014, an impairment of $10.5 million was recorded for a contract-based technology intangible asset that was part of the Infrastructure segment, resulting in a non-cash impairment charge of $5.5 millionSeptember 30, 2016 and a reduction in a liability of $5.0 million. As previously mentioned, we recorded a $1.5 million impairment for an indefinite-lived trademark intangible asset as a result of our impairment test of our Infrastructure segment.
During the six months ended December 31, 2015, and 2014, we recorded amortization expense of $11.9$4.3 million and $14.0$6.2 million, respectively, related to our other intangible assets.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Kennametal delivers productivity to customers seeking peak performance in demanding environments by providing innovative custom and standard wear-resistant solutions. To provide these solutions, we harness our knowledge of advanced materials and application development with a commitment to environmental sustainability. Our product offering includes a wide selection of standard and customized technologies for metalworking, such as sophisticated metalcuttingmetal cutting tools, tooling systems and services, as well as advanced, high-performance materials, such as cemented tungsten carbide products, super alloys, coatings and investment castings to address customer demands. We offer these products through a variety of channels to meet customer-specified needs.
The Company manages and reports its business in the following two segments: Industrial and Infrastructure. The Company's reportable operating segments have been determined in accordance with the Company's internal management structure, which is organized based on operating activities, the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results. We do not allocate certain corporate expenses related to executive retirement plans, the Company’s Board of Directors and strategic initiatives, as well as certain other costs and report them in Corporate. NeitherNone of our twothree reportable operating segments represent the aggregation of two or more operating segments.
The Industrial segment generally serves customers that operate in industrial end markets such as transportation, general engineering and aerospace and defense.defense, delivering high performance metalworking tools for specified purposes. The customers in these end markets manufacture engines, airframes, automobiles, trucks, ships and various types of industrial equipment. The technology and customization requirements for customers we serve vary by customer, application and industry. The value we deliver to our Industrial segment customers centers on our application expertise and our diverse offering of products and services.services, with products delivered through a diverse base including direct and indirect channels.
The WIDIA segment generally serves customers that operate in industrial end markets, primarily in general engineering, delivering high performance metalworking tools for general purposes. Whereas the Industrial segment's core is in application expertise and specific customer needs, WIDIA offers a competitive alternative for general metal cutting solutions across a broader platform for application, with products delivered primarily through indirect channels.
The Infrastructure segment generally serves customers that operate in the earthworks and energy sectors who support primary industries such as oil and gas, power generation, underground, surface and hard-rock mining, highway construction and road maintenance. Generally, we rely on customer intimacy to serve this segment. By gaining an in-depth understanding of our customers’ engineering and development needs, we are able to offer complete system solutions and high-performance capabilities to optimize and add value to their operations.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Our sales and operating income (loss) by segment are as follows:
| | | Three Months Ended December 31, | | Six Months Ended December 31, | Three Months Ended September 30, |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
Sales: | | | | | | | | | | |
Industrial(4) | $ | 310,883 |
| | $ | 371,557 |
| | $ | 624,217 |
| | $ | 749,415 |
| $ | 269,043 |
| | $ | 270,191 |
|
WIDIA (4) | | 41,015 |
| | 43,142 |
|
Infrastructure | 213,138 |
| | 304,074 |
| | 455,159 |
| | 621,157 |
| 167,082 |
| | 242,021 |
|
Total sales | $ | 524,021 |
| | $ | 675,631 |
| | $ | 1,079,376 |
| | $ | 1,370,572 |
| $ | 477,140 |
| | $ | 555,354 |
|
Operating income (loss): | | | | | | | | |
Industrial (5) | $ | 7,360 |
| | $ | 41,795 |
| | $ | 27,109 |
| | $ | 85,812 |
| |
Infrastructure (5) | (237,738 | ) | | (371,920 | ) | | (246,166 | ) | | (352,699 | ) | |
Operating (loss) income: | | | | |
Industrial (4) | | $ | 5,556 |
| | $ | 21,459 |
|
WIDIA (4) | | (5,756 | ) | | (1,709 | ) |
Infrastructure | | (7,587 | ) | | (8,428 | ) |
Corporate | (3,578 | ) | | (3,646 | ) | | (8,286 | ) | | (5,864 | ) | (1,424 | ) | | (4,708 | ) |
Total operating loss | (233,956 | ) | | (333,771 | ) | | (227,343 | ) | | (272,751 | ) | |
Total operating (loss) income | | (9,211 | ) | | 6,614 |
|
Interest expense | 6,803 |
| | 7,960 |
| | 13,782 |
| | 16,170 |
| 6,993 |
| | 6,979 |
|
Other (income) expense, net | (732 | ) | | 2,223 |
| | 353 |
| | 409 |
| |
Other expense, net | | 118 |
| | 1,087 |
|
Loss from continuing operations before income taxes | $ | (240,027 | ) | | $ | (343,954 | ) | | $ | (241,478 | ) | | $ | (289,330 | ) | $ | (16,322 | ) | | $ | (1,452 | ) |
(5) See Note 5 regarding IndustrialTotal assets by segment are as follows:
|
| | | | | | | |
(in thousands) | September 30, 2016 | | June 30, 2016 |
Industrial (4) | $ | 1,086,170 |
| | $ | 1,019,887 |
|
WIDIA (4) | 193,576 |
| | 195,339 |
|
Infrastructure | 764,546 |
| | 849,447 |
|
Corporate | 263,141 |
| | 298,110 |
|
Total assets | $ | 2,307,433 |
| | $ | 2,362,783 |
|
(4) Amounts for the three months ended September 30, 2015 and Infrastructure segment losses on divestiture. See Note 18 regarding impairment charges for Infrastructure goodwill and for Industrial and Infrastructure other intangible assets.as of June 30, 2016 have been restated to reflect the change in reportable operating segments.
On February 3, 2016, we appointed Ronald M. DeFeo to serve as President and Chief Executive Officer of the Company, succeeding Donald A. Nolan who left the Company on February 3, 2016 and was previously the Company’s President and Chief Executive Officer. Mr. DeFeo will continue to serve as a member of the Board of Directors.
Item 2. MANAGEMENT’S 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 deliver productivity solutions to customers seeking peak performance in demanding environments. The Company provides innovative wear-resistant products, application engineering and services backed by advanced material science serving customers across diverse sectors of industrial production, transportation, earthworks, energy, construction, process industries and aerospace. Kennametal solutions are built around industry-essential technology platforms, including precision-engineered metalworking tools and components, surface technologies and earth cutting tools that are mission-critical to customer operations battling extreme conditions associated with wear fatigue, corrosion and high temperatures. The Company’s reputation for material and industrial technology excellence, as well as expertise and innovation in development of custom solutions and services, contributes to its leading position in its primary industrial and infrastructure markets. End users of the Company’s products include manufacturers, metalworking suppliers, machinery operators and processors engaged in a diverse array of industries, including the manufacture of transportation vehicles and systems;components; machine tool, light machinery and heavy machinery industries; airframe and aerospace components, and systems, defense; as well as producers and suppliers in equipment-intensive operations such as coal mining, road construction, quarrying, oil and gas exploration, refining, production and supply. We believe we are one of the largest global providers of consumable metalcuttingmetal cutting tools and tooling supplies.
Our sales of $524.0$477.1 million for the quarter ended December 31, 2015September 30, 2016 decreased 2214 percent compared to sales for the quarter ended September 30, 2015. Sales were in line with expectations. The Industrial segment grew organically for the first time since December 31, 2014. of fiscal 2015. Infrastructure comparables, while still difficult, are expected to get easier going forward. Although the WIDIA segment requires improvement, we are focused on re-establishing and growing the WIDIA brand across the globe.
Operating loss was $234.0$9.2 million, compared to $333.8operating income of $6.6 million in the prior year quarter. OurYear-over-year comparative operating results were negatively impacted byreflect incremental restructuring and related charges, the loss on divestiture,negative impacts of unfavorable mix in all segments, organic sales decline and higher employment-related costs, offset by the positive effects of lower fixed cost absorption, unfavorable mix and unfavorable currency exchange, offset partially by lower goodwill and other intangible asset impairment charges,raw material costs, incremental restructuring benefits and lower raw material costs.
During the quarter the Company completed the sale of several non-core businesses related to certain castings, steel-plate fabrication and deburring for an aggregate price of approximately $70 million prior to working capital adjustments, or $61.1 million including working capital adjustments of approximately $9 million. Annual sales for these non-core businesses were approximately $220 million. A portionslightly better productivity. Our cost reduction initiatives are mitigating challenging end market conditions. We have identified 75 percent of the transaction proceeds were usedtargeted employment reduction of 1,000, corresponding to pay down revolver debtapproximately 65 percent of the estimated annualized savings associated with the remaining balance being held as cash on hand. The transaction resulted in a pre-tax loss on the sale of approximately $133.3 million.
We reported current quarter loss per diluted share of $2.12, which includes $1.20 per share of loss on divestiture, $0.98 per share of goodwill and other intangible assets impairment charges and $0.08 per share of restructuring and related charges.
We generated cash flow from operating activities of $104.5 million and $135.3 million during the six months ended December 31, 2015 and 2014, respectively. The decrease is due primarily to lower cash earnings, net of tax, partially offset by improved working capital management. Capital expenditures were $61.2 million and $54.7 million during the six months ended December 31, 2015 and 2014, respectively.
We invested further in technology and innovation to continue delivering a high level of new products to our customers. Research and development expenses included in operating expense totaled $10.3 million and $20.3 million for the three and six months ended December 31, 2015, respectively.
this initiative.
The permanent savings that we are realizing from restructuring are the result of programs that we have undertaken over the past 2721 months. Pre-tax benefits from these restructuring actions reachedwere approximately $19$18 million in the current quarter, due to rationalization of certain manufacturing facilities and employment and cost reduction programs, of which approximately $13$9 million were incremental to the same quarter one year ago. Approximate savings since inceptionRefer to the Results of Continuing Operations section of Item 2 for further discussion and analysis of our restructuring programs.
We reported current quarter loss per diluted share of $0.27, which includes $0.38 per share of restructuring programs reached $77 millionand related charges. Loss per diluted share of $0.08 in the quarter.prior year quarter included $0.14 per share of restructuring and related charges and $0.08 per share of divestiture-related charges. Overall results were mostly in-line with our expectations, with the exception of the tax rate variation driven primarily by jurisdictional mix and statutory profitability by geography.
We generated cash flow from operating activities of $21.9 million and $38.7 million during the three months ended September 30, 2016 and 2015, respectively. The decrease is due primarily to lower cash earnings and comparatively lower reductions in primary working capital, partially offset by lower payments for taxes and pensions. Capital expenditures were $42.3 million and $37.2 million during the three months ended September 30, 2016 and 2015, respectively.
We invested further in technology and innovation to continue meeting our customers' needs. Research and development expenses included in operating expense totaled $10.3 million and $10.0 million for the three months ended September 30, 2016, and 2015 respectively.
The following narrative provides further discussion and analysis of our results of operations, liquidity and capital resources, as well as other pertinent matters.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In order to take advantage of the growth opportunities of our WIDIA brand, we implemented a new operating structure in 2017.
RESULTS OF CONTINUING OPERATIONS
SALES
Sales for the three months ended December 31, 2015 were $524.0 million, a decrease of $151.6 million or 22 percent, from $675.6 million in the prior year quarter. The decrease in sales was driven by organic decline due to the weakening of our served end markets of 12 percent, unfavorable currency exchange of 6 percent and 4 percent from divestiture. Excluding the impact of currency exchange and divestiture, sales decreased by approximately 33 percent in energy, approximately18 percent in earthworks, approximately 12 percent in general engineering, approximately 5 percent in transportation and approximately 1 percent in aerospace and defense markets. On a regional basis excluding the impact of currency exchange and divestiture, sales decreased 22 percent in the Americas, 12 percent in Asia and 2 percent in Europe.
Sales for the six months ended December 31, 2015 were $1,079.4 million, a decrease of $291.2 million or 21 percent, from $1,370.6 million in the prior year period. The decrease in sales was driven by organic decline of 13 percent, unfavorable currency exchange of 7 percent, and 1 percent due to divestiture. Excluding the impact of currency exchange and divestiture, sales decreased by approximately 33 percent in energy, approximately 13 percent in earthworks, approximately 13 percent in general engineering, approximately 5 percent in transportation and approximately 2 percent in aerospace and defense markets. On a regional basis excluding the impact of currency exchange and divestiture, sales decreased 22 percent in the Americas, 10 percent in Asia and 2 percent in Europe.
GROSS PROFIT
Gross profit for the three months ended December 31, 2015 was $140.8 million, a decrease of $58.7 million from $199.5 million in the prior year quarter. The decrease was primarily due to organic sales decline leading to lower fixed cost absorption, unfavorable currency exchange, unfavorable business mix and one month less of gross profit due to the divestiture of non-core businesses, partially offset by lower raw material costs and restructuring benefits. The gross profit margin for the three months ended December 31, 2015 was 26.9 percent, as compared to 29.5 percent generated in the prior year quarter.
Gross profit for the six months ended December 31, 2015 was $292.0 million, a decrease of $125.5 million from $417.6 million in the prior year period. The decrease was primarily due to organic sales decline leading to lower fixed cost absorption, unfavorable currency exchange and unfavorable business mix, partially offset by restructuring benefits and lower raw material costs. The gross profit margin for the six months ended December 31, 2015 was 27.1 percent, as compared to 30.5 percent generated in the prior year period.
OPERATING EXPENSE
Operating expense for the three months ended December 31, 2015 decreased $13.9 million or 10.1 percent to $123.6 million as compared to $137.5 million in the prior year quarter. The decrease was primarily due to favorable foreign currency exchange impacts of $7.9 million, restructuring benefits and continued cost reduction actions of approximately $8 million and divestiture impact of $1.9 million.
Operating expense for the six months ended December 31, 2015 decreased $33.1 million or 11.6 percent to $252.8 million as compared to $285.9 million in the prior year period. The decrease was primarily due to favorable foreign currency exchange impacts of $17.9 million, restructuring benefits and continued cost reduction actions of approximately $15 million and divestiture impact of $2.1 million, offset partially by higher restructuring related charges of $2.3 million.
RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES
We have recorded restructuring and related charges of $8.9 million and $12.9 million for the three months ended December 31, 2015 and 2014, respectively. Of these amounts, restructuring charges totaled $3.5 million and $6.7 million, of which benefits of $0.3 million and $0.1 million were related to inventory and were recorded in cost of goods sold, respectively. Restructuring-related charges of $2.0 million and $2.8 million were recorded in cost of goods sold and $3.4 million and $3.4 million in operating expense for the three months ended December 31, 2015 and 2014, respectively.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
We have recorded restructuring and related charges of $24.0 million and $20.4 million for the six months ended December 31, 2015 and 2014, respectively. Of these amounts, restructuring charges totaled $12.6 million and $8.6 million, of which a benefit of $0.3 million and an expense of $0.2 million were related to inventory and were recorded in cost of goods sold, respectively. Restructuring-related charges of $3.6 million and $6.3 million were recorded in cost of goods sold and $7.8 million and $5.5 million in operating expense for the six months ended December 31, 2015 and 2014, respectively.
Total restructuring and related charges since the inception of our restructuring plans through December 31, 2015 were $101.2 million. See Note 8 in our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q (Note 8).
|
| | | | | | | |
RESTRUCTURING AND RELATED CHARGES AND SAVINGS (PRE-TAX) | | |
| Estimated Charges | Current Quarter Charges | Charges To Date | Estimated Annualized Savings | Approximate Current Quarter Savings | Approximate Savings Since Inception | Expected Completion Date |
Phase 1 | $55M-$60M | $1M | $58M | $40M-$45M | $10M | $52M | 6/30/2016 |
Phase 2 | $90M-$100M | $6M | $38M | $40M-$50M | $8M | $24M | 12/31/2018 |
Phase 3 | $40M-$45M | $2M | $5M | $25M-$30M | $1M | $1M | 3/31/2017 |
Total | $185M-$205M | $9M | $101M | $105M-$125M | $19M | $77M | |
Phase 1
We are implementing restructuring actions to achieve synergies across Kennametal as a result of the Tungsten Materials Business (TMB) acquisition by consolidating operations among both organizations, reducing administrative overhead and leveraging the supply chain. These restructuring actions are expected to be completed by the end of fiscal 2016 and are anticipated to be mostly cash expenditures.
Phase 2
We are implementing restructuring actions to streamline the Company's cost structure. These initiatives are expected to enhance operational efficiencies through the rationalization of certain manufacturing facilities as well as other employment and cost reduction programs. These restructuring actions are expected to be completed by December of fiscal 2017 and are anticipated to be mostly cash expenditures.
Phase 3
We are implementing restructuring actions to further enhance operational efficiencies through an enterprise-wide cost reduction program as well as the consolidation of certain manufacturing facilities. These restructuring actions are expected to be completed by March of fiscal 2017 and are anticipated to be mostly cash expenditures.
Asset Impairment Charges
We recorded non-cash pre-tax asset impairment charges of $108.5 million and $376.5 million during the three months ended December 31, 2015 and December 31, 2014, respectively. See Note 18 in our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q (Note 18).
The further acceleration or extended persistence of the current downturn in the global end markets could have a further negative impact on our business and financial performance. We cannot provide assurance that we will achieve all of the anticipated benefits from restructuring actions we have taken and will continue to take. If we are unable to effectively restructure our operations in the light of evolving market conditions, it could have a material adverse effect on our business, financial condition, results of operations and cash flows. We are currently exploring strategic alternatives for one of our non-core Infrastructure businesses. The estimated net book value of the business is approximately $40 million as of December 31, 2015. As the strategic direction has not yet been determined for this business, the business is classified as held and used, and the Company cannot determine if additional impairment charges will be incurred.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LOSS ON DIVESTITURE
During the three months ended December 31, 2015, we completed the divestiture of non-core businesses for net proceeds of $61.1 million and recognized a pre-tax loss on divestiture of $133.3 million. See Note 5 in our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q (Note 5).
INTEREST EXPENSE
Interest expense for the three months ended December 31, 2015 decreased $1.2 million to $6.8 million as compared to $8.0 million in the prior year quarter. Interest expense for the six months ended December 31, 2015 decreased $2.4 million to $13.8 million as compared to $16.2 million in the prior year period. The decrease in interest expense in both periods was primarily due to lower year-over-year borrowings.
OTHER (INCOME) EXPENSE, NET
Other income, net for the three months ended December 31, 2015, was $0.7 million compared to other expense, net of $2.2 million, for the prior year quarter. The year-over-year change was primarily due to gains on derivatives of $2.5 million in the current year quarter.
Other expense, net for the six months ended December 31, 2015 and 2014, was $0.4 million. Current period derivative gains were offset by a loss on sale of assets.
INCOME TAXES
The effective income tax rates for the three months ended December 31, 2015 and 2014 were 29.7 percent (benefit on a loss) and 12.7 percent (provision on a loss), respectively. The effective income tax rates for the six months ended December 31, 2015 and 2014 were 27.7 percent (benefit on a loss) and 20.1 percent (provision on a loss), respectively. The change in both periods was primarily driven by the asset impairment charges recorded in the current and prior year quarters, the tax impact on the sale of certain non-core businesses in the current quarter, lower relative U.S. current year earnings compared with the rest of the world where the tax rates are generally lower and favorable effects of the permanent extension of the credit for increasing research activities contained in the Protecting Americans from Tax Hikes Act of 2015 that was enacted during the current quarter.
BUSINESS SEGMENT REVIEW
We operate two reportable segments consisting of Industrial and Infrastructure. Expenses that are not allocated are reported in Corporate. Segment determination is based upon the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results.
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 |
Sales | $ | 310,883 |
| | $ | 371,557 |
| | $ | 624,217 |
| | $ | 749,415 |
|
Operating income | 7,360 |
| | 41,795 |
| | 27,109 |
| | 85,812 |
|
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ForA key attribute of the new structure is the establishment of the WIDIA operating segment. In order to better leverage the opportunities that lie in this business, in addition to being more agile and competitive in the marketplace, we are placing higher levels of focus, determination and leadership in the business. Industrial and WIDIA in 2017 were formed from the 2016 Industrial segment. We now have three reportable operating segments going forward: Industrial, WIDIA and Infrastructure.
In connection with this change, we updated our goodwill impairment assessment based on a quantitative analysis during the three months ended December 31, 2015,September 30, 2016. We evaluated the goodwill of our reporting units immediately prior to and after the realignment and concluded in both cases that there was no impairment. We allocated our goodwill from the former Industrial segment to the current Industrial and WIDIA segments using a relative fair value approach. The restated Industrial reporting unit passed the goodwill impairment test with fair value substantially exceeded the carrying value. The new WIDIA reporting unit's fair value approximates its carrying value. The amount of goodwill allocated to the WIDIA reporting unit is $27.0 million.
We completed Step 1 of the WIDIA goodwill impairment test using both an income approach and a market approach. The discounted cash flow method was used to measure the fair value of our equity under the income approach. A terminal value utilizing a constant growth rate of cash flows was used to calculate a terminal value after the explicit projection period. The estimates and assumptions used in our calculations include revenue growth rates, expense growth rates, expected capital expenditures to determine projected cash flows, expected tax rates and an estimated discount rate to determine present value of expected cash flows. These estimates are based on historical experiences, our projections of future operating activity and our weighted average cost of capital ("WACC"). The discount rate used was 14.5 percent. In order to determine the discount rate, the Company uses a market perspective WACC approach. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculations of estimated fair value. Management forecasts were used for the years ending June 30, 2017-2021, with a residual period growth rate of 3.0 percent. The tax rate used was 25.0 percent. Under the market approach, we estimate the fair value based on market multiples of revenue and earnings of comparable publicly traded companies and comparable transactions of similar companies.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the goodwill and indefinite-lived intangible impairment test will prove to be an accurate prediction of the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales decreasedvolume driven by 16a prolonged weakness in consumer demand or other competitive pressures adversely affecting our long term volume trends, unfavorable working capital changes and an inability to successfully achieve our cost savings targets; (ii) inability to achieve all of the anticipated benefits from restructuring actions assumed; (iii) an economic recovery that significantly differs from our assumptions in timing and/or degree; (iv) volatility in the equity and debt markets or other country specific factors which could result in a higher discount rate; and (v) sensitivity to market transaction multiples.
RESULTS OF CONTINUING OPERATIONS
SALES
Sales for the three months ended September 30, 2016 were $477.1 million, a decrease of $78.2 million or 14 percent, due tofrom $555.4 million in the prior year quarter. The decrease in sales was driven by 9 percent decline from divestiture, organic decline of 93 percent and unfavorable currency exchange of 72 percent. Excluding the impact of currency exchange and divestiture, sales decreased by approximately 3121 percent in earthworks and 8 percent in energy, approximately 9 percent in general engineering, approximately 5 percent in transportation and approximately 3 percent in aerospace and defense. Energy end market activity continued to be weak, adversely impacting the general engineering end market where the Company believes there was destocking in the indirect channel, particularly in the Americas. Lower sales activity in the transportation end market was also impacted by destocking in Asia. On a segment regional basis excluding the impact of divestiture and currency exchange, sales decreased 15 percent in the Americas and 14 percent in Asia, partially offset by a 14 percent increase in Europe. The sales decrease in the Americas was primarily driven by the performance in the energy and general engineering end markets and to a lesser extent the transportation end market, partially offset by a slight increase in aerospace and defense. The sales decrease in Asia was primarily driven by the energy, general engineering and transportation end markets. The sales increase in Europe was primarily driven by slight increases in general engineering and transportation, partially offset by a decline in aerospace and defense and energy end markets.
For the three months ended December 31, 2015, Industrial operating income decreased by $34.4 million, driven by organic sales decline, lower fixed cost absorption, loss on divestiture of $7.3 million, unfavorable currency exchange, intangible asset impairment of $2.3 million1 percent increases in both general engineering and unfavorable business mix, offset partially by an increase in restructuring program benefits of $9.1 million and lower raw material costs. Industrial operating margin was 2.4 percent compared with 11.2 percent in the prior year.
For the six months ended December 31, 2015, Industrial sales decreased by 17 percent due to unfavorable currency exchange of 9 percent and organic decline of 8 percent. Excludingtransportation. On a regional basis excluding the impact of currency exchange and divestiture, sales decreased approximately 31 percent in energy, approximately 9 percent in general engineering, approximately 5 percent in transportation and approximately 2 percent in aerospace and defense. Energy end market activity continued to be weak, particularly in oil and gas as rig counts decline, declines in U.S. and China coal mining, as well as declines in process end markets, impacting the general engineering end market where the Company believes there was destocking in the indirect channel, particularly in the Americas. Lower sales activity in the transportation end market was driven by lower light vehicle production levels in China and overall destocking in Asia. On a segment regional basis excluding the impact of divestiture and currency exchange, sales decreased 157 percent in the Americas 10and 2 percent in Asia and remained flatEurope, offset by a 2 percent increase in Europe. The salesAsia.
GROSS PROFIT
Gross profit for the three months ended September 30, 2016 was $143.5 million, a decrease of $7.7 million from $151.2 million in the Americasprior year quarter. The decrease was primarily driven by the performance in the energy, general engineering and transportation end markets anddue to a lesser extent the aerospace and defense. The sales decrease in Asia was primarily driven by the energy, general engineering and transportation end markets, offset partially by gains in aerospace and defense. Sales in Europe had gains in general engineering, which were offset by the energy and aerospace and defense end markets, while transportation remained flat.
For the six months ended December 31, 2015, Industrial operating income decreased by $58.7 million, driven byunfavorable business mix, organic sales decline, lower fixed cost absorption,divestiture impact of $7.7 million and unfavorable currency exchange loss on divestiture of $7.3$2.6 million, intangible asset impairment of $2.3 million and unfavorable mix,partially offset partially by an increase in restructuring program benefits of $15.9 million, lower raw material costs, incremental restructuring benefits of $4.0 million, and a decrease in restructuring charges of $4.5 million. Industrial operatingslightly better productivity. The gross profit margin for the three months ended September 30, 2016 was 4.330.1 percent, as compared with 11.5to 27.2 percent generated in the prior year.year quarter.
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 |
Sales | $ | 213,138 |
| | $ | 304,074 |
| | $ | 455,159 |
| | $ | 621,157 |
|
Operating loss | (237,738 | ) | | (371,920 | ) | | (246,166 | ) | | (352,699 | ) |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ForOPERATING EXPENSE
Operating expense for the three months ended September 30, 2016 decreased $9.4 million or 7.3 percent to $119.9 million as compared to $129.2 million in the prior year quarter. The decrease was primarily due to divestiture impact of $6.3 million, incremental restructuring benefits of $5.7 million, $3.3 million less in restructuring-related charges and favorable foreign currency exchange impacts of $1.6 million, offset partially by $5.9 million higher employment-related costs.
RESTRUCTURING AND RELATED CHARGES
We have recorded restructuring and related charges of $31.7 million and $15.1 million for the three months ended September 30, 2016 and 2015, respectively. Of these amounts, restructuring charges totaled $28.6 million and $9.1 million, respectively. During the three months ended September 30, 2016, an immaterial amount of restructuring charges was related to inventory disposals and were recorded in cost of goods sold. Restructuring-related charges of $2.0 million and $1.6 million were recorded in cost of goods sold and $1.1 million and $4.4 million in operating expense for the three months ended September 30, 2016 and 2015, respectively.
Total restructuring and related charges since the inception of our restructuring plans through September 30, 2016 were $102.8 million. See Note 7 in our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q (Note 7).
We are implementing restructuring actions to streamline the Company's cost structure. These initiatives are expected to improve the alignment of our cost structure with the current operating environment through headcount reductions; rationalization and consolidation of certain manufacturing facilities; enhancement of operational efficiencies through an enterprise-wide cost reduction program; and other employment and cost reduction programs. These restructuring actions are currently anticipated to deliver annual ongoing pre-tax savings of $140 million to $155 million once completed by December 31,of fiscal 2019 and are anticipated to be mostly cash expenditures. The total pre-tax charges for these programs are expected to be in the range of $155 million to $175 million.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 2016 and 2015 Infrastructure sales decreased bywas $7.0 million.
OTHER EXPENSE, NET
Other expense, net for the three months ended September 30, percent,2016, was $0.1 million compared to $1.1 million in the prior year quarter. The year-over-year decrease was primarily due to a 20 percent organic sales decline, a 6 percent decline dueloss on the sale of assets in the prior year and transition services related to the divestiture of non-core businesses, partially offset by losses on derivatives and a 4 percent unfavorable currency exchange impact. Excluding the impact of currency exchange and divestiture, sales decreased by approximately 34 percent in energy, approximately 23 percent in general engineering and approximately 18 percent in earthworks. lower interest income.
INCOME TAXES
The continued weakening in global demand for energy resources and the related over-supply of these commodities, coupled with the economic downturn in Asia, particularly China, has had a significant impact on demandeffective income tax rates for the Company's products. This reduced demand has been most severe in the North American region with the Company's concentration in oilthree months ended September 30, 2016 and gas2015 were 29.9 percent (provision on a loss) and underground mining markets. On a segment regional basis excluding the impact of divestiture and currency exchange, sales decreased 28292.8 percent in the Americas, 10 percent in Europe and 9 percent in Asia.(provision on loss), respectively. The sales decrease in the Americas was driven by the performance in the energy, general engineering and earthworks end markets. The sales decrease in Europechange was primarily driven by the energy end market, offset partially by an increasea discrete tax charge in general engineering and earthworks end markets. The sales decrease in Asia was driven primarily by the general engineering and earthworks end markets offset partially by an increase in the energy end market.
For the three months ended December 31, 2015, Infrastructure operating loss was $237.7 million compared to operating loss of $371.9 million for the prior year period. Operating results for the current period increased by $134.2 million, driven by lower impairment charges in the current verses prior year period. See Note 18. The current quarter also had a loss on divestiture for the sale of non-core businesses of $126.0 million, see Note 5. In addition, operating results were negatively impacted by lower organic sales, lower fixed cost absorption and unfavorable business mix, offset partially by an increasea loss in restructuring program benefits of $3.6 million and lower raw material costs.
For the six months ended December 31, 2015, Infrastructure sales decreased by 27 percent,U.S. in the current quarter for which we could not record a tax benefit due to a 20 percent organic sales decline, a 4 percent unfavorable currency exchange impact and a 3 percent decline due to divestiture. Excludingfull valuation allowance on our U.S deferred tax assets as of the impactfourth quarter of currency exchange and divestiture, sales decreased by approximately 33 percent in energy, approximately 26 percent in general engineering and approximately 13 percent in earthworks. Sales were lower year-over-year due to persistent weak demand in oil and gas as rig counts decline, underground mining, particularly in the U.S. and China and general engineering. On a segment regional basis excluding the impact of divestiture and currency exchange, sales decreased 28 percent in the Americas, 10 percent in Asia and 5 percent in Europe. The sales decrease in the Americas was driven by the performance in the energy, general engineering and earthworks end markets. The sales decrease in Asia was driven primarily by the general engineering end market, offset partially by an increase in the energy and earthworks end markets. The sales decrease in Europe was primarily driven by the energy end market, offset partially by an increase in general engineering and earthworks end markets.fiscal 2016.
For the six months ended December 31, 2015, Infrastructure operating loss was $246.2 million compared to an operating loss of $352.7 million for the prior year period. Operating results for the current period increased by $106.5 million, primarily driven by lower impairment charges in the current verses prior year period. See Note 18. The current year also had a loss on divestiture for the sale of non-core businesses of $126.0 million, see Note 5. In addition to the aforementioned impairment charge and loss on divestiture, operating results for the current period were negatively impacted by lower organic sales, lower fixed cost absorption and unfavorable mix, offset partially by an increase in restructuring program benefits of $8.1 million and lower raw material costs.BUSINESS SEGMENT REVIEW
CORPORATEWe operate three reportable segments consisting of Industrial, WIDIA, and Infrastructure. Expenses that are not allocated are reported in Corporate. Segment determination is based upon the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results.
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| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
(in thousands) | 2015 | | 2014 | | 2015 | | 2014 |
Corporate unallocated expense | $ | (3,578 | ) | | $ | (3,646 | ) | | $ | (8,286 | ) | | $ | (5,864 | ) |
ForAmounts for the three months ended December 31,September 30, 2015 Corporate unallocated expense increased $0.1 million, or 1.9 percent, primarily duefor Industrial and WIDIA have been restated to increased restructuring and related charges, mostly offset by lower professional feesreflect the change in the current period.reportable operating segments.
For the six months ended December 31, 2015, Corporate unallocated expense increased $2.4 million, or 41.3 percent, primarily due to increased restructuring and related charges in the current period, partially offset by lower professional fees.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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| | | | | | | |
| Three Months Ended September 30, |
(in thousands) | 2016 | | 2015 |
Sales | $ | 269,043 |
| | $ | 270,191 |
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Operating income | 5,556 |
| | 21,459 |
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For the three months ended September 30, 2016, Industrial sales remained flat, reflecting organic growth of 3 percent, offset by unfavorable currency exchange of 2 percent and divestiture impact of 1 percent. Excluding the impact of currency exchange and divestiture, sales increased approximately 6 percent in aerospace and defense, 5 percent in general engineering, and 1 percent in transportation, offset partially by a decrease of approximately 11 percent in energy. Activity in the aerospace sector remains elevated with sales growing globally. General engineering sales in Americas and Asia have benefited from stability in the indirect channel stock levels, offsetting the general industrial weakness caused by the continued decline in the energy sector. The transportation market was mixed with more projects contributing to higher sales in Asia, partially offset by less favorable conditions in Europe and Americas. On a segment regional basis excluding the impact of divestiture and currency exchange, sales increased 7 percent in Asia and 4 percent in the Americas, offset partially by a decrease of 1 percent in Europe. The sales increase in Asia was primarily driven by the transportation and general engineering end markets and to a lesser extent the aerospace and defense end market, partially offset by a decrease in the energy end market. The sales increase in the Americas was primarily driven by the performance in the general engineering end market and to a lesser extent in the aerospace and defense end market, partially offset by decreases in the energy and transportation end markets. The sales decrease in Europe was primarily driven by the performance in the transportation and energy end markets, offset partially by an increase in the aerospace and defense end market, while general engineering remained flat.
For the three months ended September 30, 2016, Industrial operating income decreased by $15.9 million, driven primarily by $13.3 million more restructuring and related charges, $5.1 million higher employment-related costs and unfavorable mix, partially offset by incremental restructuring benefits of $6.1 million and organic sales growth. Industrial operating margin was 2.1 percent compared with 7.9 percent in the prior year.
WIDIA
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| | | | | | | |
| Three Months Ended September 30, |
(in thousands) | 2016 | | 2015 |
Sales | $ | 41,015 |
| | $ | 43,142 |
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Operating loss | (5,756 | ) | | (1,709 | ) |
For the three months ended September 30, 2016, the WIDIA segment, selling primarily in the general engineering end market, recorded a sales decrease of 5 percent, due to organic decline of 3 percent, unfavorable currency exchange of 1 percent and an unfavorable business days impact of 1 percent. On a segment regional basis excluding the impact of currency exchange, sales decreased 10 percent in Europe and 5 percent in the Americas, offset partially by an increase of 5 percent in Asia.
For the three months ended September 30, 2016, WIDIA operating loss was $5.8 million compared to operating loss of $1.7 million for the prior year period. Operating loss increased by $4.0 million, driven primarily by organic sales decline, $2.3 million higher restructuring and related charges and unfavorable mix. WIDIA operating loss margin was 14.0 percent compared with 4.0 percent in the prior year.
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| Three Months Ended September 30, |
(in thousands) | 2016 | | 2015 |
Sales | $ | 167,082 |
| | $ | 242,021 |
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Operating loss | (7,587 | ) | | (8,428 | ) |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three months ended September 30, 2016, Infrastructure sales decreased by 31 percent, reflecting a 20 percent decline due to divestiture, a 10 percent organic sales decline and a 1 percent unfavorable currency exchange impact. Excluding the impact of currency exchange and divestiture, sales decreased by approximately 22 percent in earthworks, 6 percent in energy and 4 percent in general engineering. Key energy markets, particularly in North America, continued to see contraction in the first quarter, with U.S. rig counts declining over 40 percent year-over-year. In addition, conditions in underground mining in North America declined further, with sales down 36 percent year-over-year. As previously disclosed, this weakness is expected to continue for the foreseeable future. On a segment regional basis excluding the impact of divestiture and currency exchange, sales decreased 16 percent in the Americas, 8 percent in Asia and 3 percent in Europe. The sales decrease in the Americas was driven by decreases in earthworks, energy and general engineering end markets. The sales decrease in Asia was driven primarily by the performance in the earthworks end market, offset partially by an increase in the general engineering end market. The sales decrease in Europe was primarily driven by decreases in energy and general engineering end markets, and to a lesser extent the earthworks end market.
For the three months ended September 30, 2016, Infrastructure operating loss was $7.6 million compared to operating loss of $8.4 million for the prior year period. Operating loss for the current period decreased by $0.8 million, due primarily to lower raw material costs and incremental restructuring program benefits of $4 million, offset partially by lower organic sales, unfavorable mix and $4.3 million more restructuring and related charges. Infrastructure operating loss margin was 4.5 percent compared with 3.5 percent in the prior year.
CORPORATE
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| Three Months Ended September 30, |
(in thousands) | 2016 | | 2015 |
Corporate unallocated expense | $ | (1,424 | ) | | $ | (4,708 | ) |
For the three months ended September 30, 2016, Corporate unallocated expense decreased $3.3 million, or 69.8 percent, due to $3.3 million lower restructuring-related charges in the current period.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is the primary source of funding for capital expenditures and internal growth. Year to date December 31, 2015September 30, 2016 cash flow provided by operating activities was $104.521.9 million, primarily driven by working capital improvements and cash earnings, partially offset by a decrease in taxes payable and lump sum payments to several terminated Executive Retirement Plan participants.earnings.
Our five-year, multi-currency, revolving credit facility, (2011 Creditas amended and restated in April 2016 (Credit Agreement) is used to augment cash from operations and as an additional source of funds. The 2011 Credit Agreement permits revolving credit loans of up to $600.0 million for working capital, capital expenditures and general corporate purposes. The 2011 Credit Agreement allows for borrowings in U.S. dollars, euro, Canadian dollars, pound sterling and Japanese yen. Interest payable under the 2011 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 2011 Credit Agreement matures in April 2018.2021. We had $5.4 million ofno borrowings outstanding on our 2011 Credit Agreement as of December 31, 2015.
September 30, 2016.
The 2011 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 all covenants as of December 31, 2015.September 30, 2016. For the sixthree months ended December 31, 2015,September 30, 2016, average daily borrowings outstanding under the 2011 Credit Agreement were approximately $30.4$3.3 million. Borrowings under the 2011 Credit Agreement are guaranteed by our significant domestic subsidiaries.
Except as noted below, weWe consider the unremitted earnings of our non-U.S. subsidiaries that have not previously been taxed in the U.S. to be permanently reinvested. As of December 31, 2015,September 30, 2016, cash and cash equivalents of $60.5$41.2 million and short-term intercompany advances made by our foreign subsidiaries to our U.S. parent of $20.8 million would not be available for use in the U.S. on a long-termlong term basis without incurring U.S. federal and state income tax consequences. We have not, repatriated, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business or associated with our domestic debt service requirements. Notwithstanding the above, we redeployed cash from certain non-U.S. subsidiaries related to the transaction specified in Note 5
Item 1 of this Quarterly Report on Form 10-Q. As such, the six month period ended December 31, 2015 includes a discrete tax charge of $4.2 million related to this change in assertion with respect to a portion of our foreign subsidiaries' undistributed earnings, which are no longer considered permanently reinvested. The remaining undistributed earnings of our foreign subsidiaries continue to be indefinitely reinvested and would not be available for use in the U.S. on a long term basis without incurring U.S. federal and state income tax consequences.2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At December 31, 2015,September 30, 2016, cash and cash equivalents were $139.0$119.4 million, total debt was $706.7$695.4 million and total Kennametal Shareholders' equity was $1,124.8$937.1 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 believe that we have sufficient resources available to meet cash requirements for the next 12 months as of December 31, 2015.September 30, 2016. We continue to 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 other material changes in our contractual obligations and commitments since June 30, 2015.2016.
Cash Flow Provided by Operating Activities
During the three months ended September 30, 2016, cash flow provided by operating activities was $21.9 million, compared to $38.7 million for the prior year period. Cash flow provided by operating activities for the current year period consisted of net loss and non-cash items amounting to an inflow of $14.4 million and changes in certain assets and liabilities netting to an inflow of $7.5 million. Contributing to the changes in certain assets and liabilities were a decrease in accounts receivable of $23.1 million due to lower sales volume. Offsetting these cash inflows were a decrease in accrued pension and postretirement benefits of $5.6 million and a net decrease of accounts payable and accrued liabilities of $3.8 million primarily driven by lower accrued compensation, partially offset by an increase in accounts payable.
During the three months ended September 30, 2015, cash flow provided by operating activities for the period consisted of net loss and non-cash items amounting to an inflow of $57.4 million, and by changes in certain assets and liabilities netting to an inflow of $18.7 million. Contributing to the changes in certain assets and liabilities were a decrease in accounts receivable of $35.5 million due to lower sales volume and a decrease in inventory of $20.3 million due to our continued focus on working capital management. Offsetting these cash flows were a decrease in accrued income taxes of $28.6 million primarily driven by payment of a capital gains tax related to a prior period tax reorganization; a decrease of accounts payable and accrued liabilities of $27.8 million primarily driven by lower accrued compensation, payroll timing and lower restructuring liabilities; and a decrease in accrued pension and postretirement benefits of $11.4 million.
Cash Flow Used for Investing Activities
Cash flow used for investing activities was $41.0 million for the three months ended September 30, 2016, compared to $35.4 million the prior year period. During the current year period, cash flow used for investing activities included capital expenditures, net of $41.1 million, which consisted primarily of equipment upgrades.
For the three months ended September 30, 2015, cash flow used for investing activities included capital expenditures, net of $35.3 million, which consisted primarily of equipment upgrades.
Cash Flow Used for Financing Activities
Cash flow used for financing activities was $23.4 million for the three months ended September 30, 2016 compared to $12.3 million in the prior year period. During the current year period, cash flow used for financing activities included $16.0 million of cash dividends paid to Shareholders, a $6.6 million payment on the remaining contingent consideration related to a prior acquisition, $0.4 million of dividend reinvestment and the effect of employee benefit and stock plans and $0.4 million net decrease in borrowings.
For the three months ended September 30, 2015, cash flow used for financing activities included $15.9 million of cash dividends paid to Shareholders and $0.7 million net decrease in borrowings. These cash flows were partially offset by $4.1 million of other financing activities and $0.4 million of dividend reinvestment and the effect of employee benefit and stock plans.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Cash Flow Provided by Operating Activities
During the six months ended December 31, 2015, cash flow provided by operating activities was $104.5 million, compared to $135.3 million for the prior year period. Cash flow provided by operating activities for the current year period consisted of net loss and non-cash items amounting to an inflow of $64.2 million and by changes in certain assets and liabilities netting to an inflow of $40.4 million. Contributing to the changes in certain assets and liabilities were a decrease in accounts receivable of $69.8 million due to lower sales volume and a decrease in inventory of$46.6 million due to our continued focus on working capital management. Offsetting these cash inflows were a decrease of accounts payable and accrued liabilities of $44.1 million primarily driven by lower accrued compensation and lower restructuring liabilities; a decrease in accrued pension and postretirement benefits of $18.2 million primarily due to payments to previous executives: and a decrease of accrued income taxes of $12.4 million primarily driven by payment of a capital gains tax related to a prior period tax reorganization.
During the six months ended December 31, 2014, cash flow provided by operating activities for the period consisted of net loss and non-cash items amounting to an inflow of $111.8 million, partially offset by changes in certain assets and liabilities netting to an outflow of $23.5 million. Contributing to the changes in certain assets and liabilities were a decrease in accounts payable and accrued liabilities of $75.0 million primarily driven by timing of payroll payments and a decrease in accrued bonus payable. Offsetting these cash outflows were a decrease in accounts receivable of $54.9 million due to lower sales volume and an increase in accrued income taxes of $45.6 million.
Cash Flow Provided by (Used for) Investing Activities
Cash flow provided by investing activities was $5.1 million for the six months ended December 31, 2015, compared to $53.8 million used for investing activities in the prior year period. During the current year period, cash flow provided by investing activities included $61.1 million of proceeds from the sale of non-core businesses, partially offset by capital expenditures, net of $56.8 million, which consisted primarily of equipment upgrades.
For the six months ended December 31, 2014, cash flow used for investing activities included capital expenditures, net of $53.7 million, which consisted primarily of equipment upgrades.
Cash Flow Used for Financing Activities
Cash flow used for financing activities was $75.4 million for the six months ended December 31, 2015 compared to $105.6 million in the prior year period. During the current year period, cash flow used for financing activities primarily included $44.5 million net decrease in borrowings and $31.8 million of cash dividends paid to Shareholders. These cash flows were partially offset by $1.5 million of dividend reinvestment and the effect of employee benefit and stock plans.
For the six months ended December 31, 2014, cash flow used for financing activities included $80.1 million net decrease in borrowings and $28.5 million of cash dividends paid to Shareholders. These cash flows were partially offset by $7.9 million of dividend reinvestment and the effect of employee benefit and stock plans.
FINANCIAL CONDITION
Working capital was $668.0589.3 million at December 31, 2015,September 30, 2016, a decrease of $107.858.8 million from $775.8$648.1 million at June 30, 2015.2016. The decrease in working capital was primarily driven by a decrease in cash and cash equivalents of $42.2 million, a decrease in deferred income taxes of $26.7 million due to the impact of prospective adoption of a new accounting standard requiring all deferred tax assets and liabilities to be classified as long-term and a decrease in accounts receivable of $112.0$22.4 million due to lower sales volume and a decrease in inventory of $98.0 million due primarily to lower work in process, raw materials and finished goods as a result of our focus on working capital management.volume. Partially offsetting these items were a decrease in accounts payable of $35.8 million; an increase in cash and cash equivalents of $33.5 million; and a decrease in other current liabilities of $24.6 million due primarily to lower restructuring liabilities and lower accrued compensation; and a decrease in accrued expenses of $22.0$13.2 million driven by payroll timing and lower accrued vacation pay.pay, a decrease in accounts payable of $6.0 million as a result of both lower volumes and our focus on working capital management, and a decrease in other current liabilities of $5.8 million due primarily to the payment to relieve the remaining contingent consideration related to a prior year acquisition and lower accrued compensation, offset partially by higher restructuring liabilities. Currency exchange rate effects accounted for $25.3 million of theincreased working capital decrease. $32.9 million of the decrease in working capital is related to the sale of non-core businesses.by $1.5 million.
Property, plant and equipment, net decreased $96.3increased $4.8 million from $815.8$730.6 million at June 30, 20152016 to $719.5$735.4 million at December 31, 2015,September 30, 2016, primarily due to $67.6 million sold as part of sale of non-core businesses, depreciation expense of $50.4 million, unfavorable currency exchange impact of $12.3 million during the current period and disposals of $4.4 million, partially offset by capital expenditures of $61.2$42.3 million, which includes $16.4$15.4 million change in accounts payable related to purchases of property, plant and equipment.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
At December 31, 2015,September 30, 2016, other assets were $657.7$580.1 million, a decreasean increase of $117.4$23.3 million from $775.2$556.8 million at June 30, 2015.2016. The primary drivers for the decreaseincrease were a decreasean increase in goodwilldeferred income taxes of $119.4$21.4 million and aan increase in other assets of $6.0 million, primarily attributable to an increase in pension plan assets. These increases were partially offset by $4.3 million decrease in other intangible assets, of $70.6 million. The change in goodwillwhich was due to a goodwill impairment charge of $105.7 million in the Infrastructure segment, $7.5 million of goodwill written off as part of the sale of non-core businesses and $6.0 million of unfavorable currency exchange. The change in other intangible assets was due primarily to $52.7 million intangibles sold as part of the sale of non-core businesses, amortization expense of $11.9 million and unfavorable currency exchange effects of $1.8$4.3 million. These decreases were partially offset by $48.8 million increase in deferred income taxes.
Long-term debt and capital leases decreasedincreased by $35.2$0.5 million to $700.7$694.0 million at December 31, 2015September 30, 2016 from $735.9$693.5 million at June 30, 2015. This change was driven primarily by the $37.2 million decrease of European borrowings outstanding on the revolver.2016.
Kennametal Shareholders' equity was $1,124.8$937.1 million at December 31, 2015,September 30, 2016, a decrease of $221.0$27.3 million from $1,345.8$964.3 million at June 30, 2015.2016. The decrease was primarily due to net loss attributable to Kennametal of $175.5 million, unfavorable currency exchange of $20.9$21.7 million and cash dividends paid to Shareholders of $31.8$16.0 million, partially offset by capital stock issued under employee benefit and stock plans of $7.2$6.9 million, reclassification of net pension and other postretirement benefit loss of $1.8 million and favorable currency exchange of $1.2 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.
Superfund Sites WeAmong other environmental laws, we are involved as a potentially responsible party (PRP) at various sitessubject to the Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund), under which we have been designated by the United States Environmental Protection Agency (USEPA) as a potentially responsible party (PRP) with respect to environmental remedial costs at certain Superfund sites. For certainWe have evaluated our claims and liabilities associated with these Superfund sites based upon best currently available information. We believe our environmental accruals are adequate to cover our portion of thesethe environmental remedial costs at the Superfund sites where we have evaluatedbeen designated a PRP, to the claimsextent these expenses are probable 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.reasonably estimable.
Other Environmental Matters We establish and maintain reserves for other potential environmental issues. At December 31, 2015September 30, 2016 and June 30, 2015,2016, the balances of these reserves were $12.2 million and $12.6 million, respectively.$12.5 million. These reserves represent anticipated costs associated with the remediation of these issues.
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 liabilities 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.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
We maintain a Corporate Environmental Health and Safety (EHS) Department, 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, 2015.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NEW ACCOUNTING STANDARDS
See Note 3 to our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q for a description of new accounting standards.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes to our market risk exposures since June 30, 2015.2016.
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ITEM 4. CONTROLS AND PROCEDURES |
As of the end of the period covered by this quarterly report on Form 10-Q, the Company's management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). The Company's 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 Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance at December 31, 2015September 30, 2016 to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS |
The information set forth in Part I, Item 1, under the caption “Regulation” of the annual report on Form 10-K for the year ended June 30, 2016 is incorporated into this Item 1. From time to time, we are party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible or intellectual property. Although certain of these actions are currently pending, we do not believe that any individual proceeding is material or that our pending legal proceedings in the aggregate are material to Kennametal.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ISSUER PURCHASES OF EQUITY SECURITIES
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Period | Total Number of Shares Purchased(1) |
| | Average Price Paid per Share |
| | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
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October 1 through October 31, 2015 | 5,364 |
| | $ | 28.00 |
| | — |
| | 10,100,100 |
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November 1 through November 30, 2015 | 3,596 |
| | 27.86 |
| | — |
| | 10,100,100 |
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December 1 through December 31, 2015 | 3,210 |
| | 26.30 |
| | — |
| | 10,100,100 |
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Total | 12,170 |
| | $ | 27.51 |
| | — |
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Period | Total Number of Shares Purchased (1) |
| | Average Price Paid per Share |
| | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
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July 1 through July 31, 2016 | 1,188 |
| | $ | 22.26 |
| | — |
| | 10,100,100 |
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August 1 through August 31, 2016 | 63,056 |
| | 25.09 |
| | — |
| | 10,100,100 |
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September 1 through September 30, 2016 | 4,821 |
| | 27.78 |
| | — |
| | 10,100,100 |
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Total | 69,065 |
| | $ | 25.23 |
| | — |
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(1) | During the current period, 2,5542,213 shares were purchased on the open market on behalf of Kennametal to fund the Company’s dividend reinvestment program. Also, during the current period employees delivered 9,61666,852 shares of restricted stock to Kennametal, upon vesting, to satisfy tax withholding requirements. |
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(2) | On July 25, 2013, the Company publicly announced an amended repurchase program for up to 17 million shares of its outstanding capital stock.stock outside of the Company's dividend reinvestment program. |
UNREGISTERED SALES OF EQUITY SECURITIES
None.
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(10) | | Material Contracts | | |
(10.1) | | Officer's Employment Agreement with Ronald M. DeFeoForm of Kennametal Inc. Performance Unit Award (granted under Amendment No. 1 to the Kennametal Inc. Stock and Incentive Plan of 2010 (As Amended and Restated October 22, 2013)) | | Exhibit 10.1Filed herewith. |
(10.2) | | Form of Kennametal Inc. Performance Unit Award - President and CEO (granted under Amendment No. 1 to the Kennametal Inc. Stock and Incentive Plan of 2010 (As Amended and Restated October 22, 2013)) | | Filed herewith. |
(10.3) | | Kennametal Inc. 2016 Stock and Incentive Plan | | Appendix C of the Form 8-K2016 Proxy Statement filed February 5,September 13, 2016 (File NoNo. 001-05318) is incorporated herein by reference. |
(10.2)(10.4) | | Form of NonstatutoryKennametal Inc. Restricted Unit Award (granted under the Kennametal Inc. 2016 Stock Option Award Agreement - CEOand Incentive Plan) | | Exhibit 10.2 of the Form 8-K filed February 5, 2016 (File No 001-05318) is incorporated herein by reference.Filed herewith. |
(10.3)(10.5) | | Form of RestrictedKennametal Inc. Cash Settled Share-Based Award for China-based Employees (granted under the Kennametal Inc. 2016 Stock Unit Award Agreement - CEOand Incentive Plan) | | Exhibit 10.3 of the Form 8-K filed February 5, 2016 (File No 001-05318) is incorporated herein by reference.Filed herewith. |
(31) | | Rule 13a-14(a)/15d-14(a) Certifications | | |
(31.1) | | Certification executed by Ronald M. DeFeo,De Feo, President and Chief Executive Officer of Kennametal Inc. | | Filed herewith. |
(31.2) | | Certification executed by Jan Kees van Gaalen, 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 Ronald M. DeFeo,De Feo, President and Chief Executive Officer of Kennametal Inc., and Jan Kees van Gaalen, 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.DEF) | | XBRL Taxonomy Definition Linkbase | | Filed herewith. |
(101.LAB) | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith. |
(101.PRE) | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith. |
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.
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| KENNAMETAL INC. |
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Date: | February 8,November 7, 2016 | By: | | /s/ Martha Fusco |
| Martha Fusco Vice President Finance and Corporate Controller |