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 MARCH 31, 2012
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.) | |
World Headquarters 1600 Technology Way P.O. Box 231 Latrobe, Pennsylvania | 15650-0231 | |
| (Zip Code) |
Website:www.kennametal.com
Registrant’s telephone number, including area code:(724) 539-5000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate 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][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):
Large accelerated filer [X] | Accelerated filer [ ] | |||||
Non-accelerated filer [ | 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.
Title of Each Class | Outstanding at April 30, | |||
Capital Stock, par value $1.25 per share | 80,045,908 |
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011
This Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that do not relate strictly to historical or current facts. You can identify forward-looking statements by the fact they use words such as “should,” “anticipate,” “estimate,” “approximate,” “expect,” “may,” “will,” “project,” “intend,” “plan,” “believe” and other words of similar meaning and expression in connection with any discussion of future operating or financial performance or events. Forward-looking statements in this Form 10-Q may concern, among other things, Kennametal’s expectations regarding our strategy, goals, plans and projections regarding our financial position, liquidity and capital resources, results of operations, market position, and product development, all of which are based on current estimates that involve inherent risks and uncertainties. Among the factors that could cause the actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties related to: prolonged economic recession; anticipated benefits resulting from our recently completed restructuring and related actions (including associated costs and anticipated benefits);activities; availability and cost of the raw materials we use to manufacture our products; our foreign operations and international markets, such as currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; changes in the regulatory environment in which we operate, including environmental, health and safety regulations; our ability to protect and defend our intellectual property; competition; our ability to retain our management and employees; demands on management resources; successful completion of information systems upgrades, including our enterprise system software; potential claims relating to our products; integrating acquisitions and achieving the expected savings and synergies; business divestitures; global or regional catastrophic events; energy costs; commodity prices; labor relations; demand for and market acceptance of new and existing products; and implementation of environmental remediation matters; and implementation of a new segment structure.matters. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, actual outcomes could vary materially from those indicated. These and other risks are more fully described in the “Risk Factors” Section of our Annual Report on Form 10-K and in our other periodic filings with the Securities and Exchange Commission. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.
3
KENNAMETAL INC.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands, except per share amounts) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
| Sales | $ | 614,830 | $ | 493,165 | $ | 1,709,756 | $ | 1,345,425 | ||||||||
| Cost of goods sold | 384,849 | 322,841 | 1,091,010 | 917,212 | ||||||||||||
| Gross profit | 229,981 | 170,324 | 618,746 | 428,213 | ||||||||||||
| Operating expense | 138,322 | 120,062 | 395,447 | 354,126 | ||||||||||||
| Restructuring charges (Note 7) | 1,046 | 20,720 | 7,697 | 31,898 | ||||||||||||
| Amortization of intangibles | 2,836 | 3,239 | 8,696 | 9,946 | ||||||||||||
| Operating income | 87,777 | 26,303 | 206,906 | 32,243 | ||||||||||||
| Interest expense | 5,767 | 6,531 | 17,294 | 18,856 | ||||||||||||
| Other expense (income), net | 1,413 | (1,496 | ) | 3,071 | (6,314 | ) | ||||||||||
| Income from continuing operations before income taxes | 80,597 | 21,268 | 186,541 | 19,701 | ||||||||||||
| Provision for income taxes | 15,394 | 11,065 | 41,092 | 11,026 | ||||||||||||
| Income from continuing operations | 65,203 | 10,203 | 145,449 | 8,675 | ||||||||||||
| Loss from discontinued operations (Note 8) | - | - | - | (1,423 | ) | |||||||||||
| Net income | 65,203 | 10,203 | 145,449 | 7,252 | ||||||||||||
| Less: Net income attributable to noncontrolling interests | 520 | 518 | 2,376 | 1,417 | ||||||||||||
| Net income attributable to Kennametal | $ | 64,683 | $ | 9,685 | $ | 143,073 | $ | 5,835 | ||||||||
| Amounts attributable to Kennametal Shareowners: | ||||||||||||||||
| Income from continuing operations | $ | 64,683 | $ | 9,685 | $ | 143,073 | $ | 7,258 | ||||||||
| Loss from discontinued operations | - | - | - | (1,423 | ) | |||||||||||
| Net income | $ | 64,683 | $ | 9,685 | $ | 143,073 | $ | 5,835 | ||||||||
| PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREOWNERS | ||||||||||||||||
| Basic earnings (loss) per share: | ||||||||||||||||
| Continuing operations | $ | 0.79 | $ | 0.12 | $ | 1.74 | $ | 0.09 | ||||||||
| Discontinued operations | - | - | - | (0.02 | ) | |||||||||||
| $ | 0.79 | $ | 0.12 | $ | 1.74 | $ | 0.07 | |||||||||
| Diluted earnings (loss) per share: | ||||||||||||||||
| Continuing operations | $ | 0.77 | $ | 0.12 | $ | 1.72 | $ | 0.09 | ||||||||
| Discontinued operations | - | - | - | (0.02 | ) | |||||||||||
| $ | 0.77 | $ | 0.12 | $ | 1.72 | $ | 0.07 | |||||||||
| Dividends per share | $ | 0.12 | $ | 0.12 | $ | 0.36 | $ | 0.36 | ||||||||
| Basic weighted average shares outstanding | 82,138 | 81,358 | 82,144 | 80,756 | ||||||||||||
| Diluted weighted average shares outstanding | 83,495 | 82,189 | 83,164 | 81,397 | ||||||||||||
| 0000000000 | 0000000000 | 0000000000 | 0000000000 | |||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands, except per share amounts) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Sales | $ | 696,411 | $ | 614,830 | $ | 1,997,030 | $ | 1,709,756 | ||||||||
Cost of goods sold | 449,965 | 384,849 | 1,267,638 | 1,091,010 | ||||||||||||
Gross profit | 246,446 | 229,981 | 729,392 | 618,746 | ||||||||||||
Operating expense | 138,904 | 138,322 | 419,459 | 395,447 | ||||||||||||
Restructuring charges (Note 8) | - | 1,046 | - | 7,697 | ||||||||||||
Amortization of intangibles | 4,250 | 2,836 | 10,982 | 8,696 | ||||||||||||
Operating income | 103,292 | 87,777 | 298,951 | 206,906 | ||||||||||||
Interest expense | 8,003 | 5,767 | 18,746 | 17,294 | ||||||||||||
Other (income) expense, net | (486 | ) | 1,413 | (1,169 | ) | 3,071 | ||||||||||
Income before income taxes | 95,775 | 80,597 | 281,374 | 186,541 | ||||||||||||
Provision for income taxes | 19,538 | 15,394 | 57,093 | 41,092 | ||||||||||||
Net income | 76,237 | 65,203 | 224,281 | 145,449 | ||||||||||||
Less: Net income attributable to noncontrolling interests | 738 | 520 | 3,099 | 2,376 | ||||||||||||
Net income attributable to Kennametal | $ | 75,499 | $ | 64,683 | $ | 221,182 | $ | 143,073 | ||||||||
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREOWNERS |
| |||||||||||||||
Basic earnings per share | $ | 0.94 | $ | 0.79 | $ | 2.76 | $ | 1.74 | ||||||||
Diluted earnings per share | $ | 0.93 | $ | 0.77 | $ | 2.72 | $ | 1.72 | ||||||||
Dividends per share | $ | 0.14 | $ | 0.12 | $ | 0.40 | $ | 0.36 | ||||||||
Basic weighted average shares outstanding | 80,110 | 82,138 | 80,179 | 82,144 | ||||||||||||
Diluted weighted average shares outstanding | 81,535 | 83,495 | 81,434 | 83,164 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
| March 31, | June 30, | |||||||
| (in thousands, except per share data) | 2011 | 2010 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 184,192 | $ | 118,129 | ||||
| Accounts receivable, less allowance for doubtful accounts of $24,245 and $24,789 | 418,546 | 326,699 | ||||||
| Inventories (Note 11) | 466,125 | 364,268 | ||||||
| Deferred income taxes | 71,424 | 62,083 | ||||||
| Other current assets | 52,510 | 44,752 | ||||||
| Total current assets | 1,192,797 | 915,931 | ||||||
| Property, plant and equipment: | ||||||||
| Land and buildings | 365,565 | 341,748 | ||||||
| Machinery and equipment | 1,346,888 | 1,281,872 | ||||||
| Less accumulated depreciation | (1,047,597 | ) | (959,085 | ) | ||||
| Property, plant and equipment, net | 664,856 | 664,535 | ||||||
| Other assets: | ||||||||
| Investments in affiliated companies | 833 | 2,251 | ||||||
| Goodwill (Note 18) | 507,969 | 489,443 | ||||||
| Other intangible assets, less accumulated amortization of $75,492 and $63,343 (Note 18) | 153,858 | 155,306 | ||||||
| Deferred income taxes | 12,310 | 11,827 | ||||||
| Other | 36,599 | 28,530 | ||||||
| Total other assets | 711,569 | 687,357 | ||||||
| Total assets | $ | 2,569,222 | $ | 2,267,823 | ||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Current maturities of long-term debt and capital leases (Note 12) | $ | 476 | $ | 3,539 | ||||
| Notes payable to banks | 5,700 | 19,454 | ||||||
| Accounts payable | 166,085 | 125,360 | ||||||
| Accrued income taxes | 23,109 | 17,857 | ||||||
| Accrued expenses | 98,423 | 73,989 | ||||||
| Other current liabilities (Note 7) | 156,333 | 152,806 | ||||||
| Total current liabilities | 450,126 | 393,005 | ||||||
| Long-term debt and capital leases, less current maturities (Note 12) | 310,667 | 314,675 | ||||||
| Deferred income taxes | 67,650 | 63,266 | ||||||
| Accrued pension and postretirement benefits | 146,382 | 129,701 | ||||||
| Accrued income taxes | 5,870 | 5,193 | ||||||
| Other liabilities | 26,140 | 28,540 | ||||||
| Total liabilities | 1,006,835 | 934,380 | ||||||
| Commitments and contingencies | ||||||||
| EQUITY (Note 16) | ||||||||
| Kennametal Shareowners’ Equity: | ||||||||
| Preferred stock, no par value; 5,000 shares authorized; none issued | - | - | ||||||
| Capital stock, $1.25 par value; 120,000 shares authorized; 81,814 and 81,903 shares issued | 102,267 | 102,379 | ||||||
| Additional paid-in capital | 495,140 | 492,454 | ||||||
| Retained earnings | 906,648 | 793,448 | ||||||
| Accumulated other comprehensive income (loss) | 36,115 | (72,781 | ) | |||||
| Total Kennametal Shareowners’ Equity | 1,540,170 | 1,315,500 | ||||||
| Noncontrolling interests | 22,217 | 17,943 | ||||||
| Total equity | 1,562,387 | 1,333,443 | ||||||
| Total liabilities and equity | $ | 2,569,222 | $ | 2,267,823 | ||||
| 000000000000 | 000000000000 | |||||||
| March 31, | June 30, | |||||||
| (in thousands, except per share data) | 2012 | 2011 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 125,549 | $ | 204,565 | ||||
Accounts receivable, less allowance for doubtful accounts of $18,709 and $20,958 | 481,821 | 447,835 | ||||||
Inventories (Note 11) | 630,870 | 519,973 | ||||||
Deferred income taxes | 57,380 | 60,257 | ||||||
Other current assets | 51,823 | 54,955 | ||||||
Total current assets | 1,347,443 | 1,287,585 | ||||||
Property, plant and equipment: | ||||||||
Land and buildings | 383,199 | 373,971 | ||||||
Machinery and equipment | 1,408,431 | 1,396,306 | ||||||
Less accumulated depreciation | (1,051,971 | ) | (1,073,215 | ) | ||||
Property, plant and equipment, net | 739,659 | 697,062 | ||||||
Other assets: | ||||||||
Investments in affiliated companies | 752 | 829 | ||||||
Goodwill (Note 18) | 731,348 | 511,328 | ||||||
Other intangible assets, less accumulated amortization of $85,700 and $78,712 (Note 18) | 254,924 | 152,279 | ||||||
Deferred income taxes | 33,683 | 29,876 | ||||||
Other | 90,765 | 75,510 | ||||||
Total other assets | 1,111,472 | 769,822 | ||||||
Total assets | $ | 3,198,574 | $ | 2,754,469 | ||||
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt and capital leases (Note 12) | $ | 333,745 | $ | 307,304 | ||||
Notes payable to banks | 667 | 3,659 | ||||||
Accounts payable | 223,656 | 222,678 | ||||||
Accrued income taxes | 47,677 | 38,098 | ||||||
Accrued expenses | 94,143 | 102,576 | ||||||
Other current liabilities (Note 8) | 154,321 | 167,206 | ||||||
Total current liabilities | 854,209 | 841,521 | ||||||
Long-term debt and capital leases, less current maturities (Note 12) | 306,459 | 1,919 | ||||||
Deferred income taxes | 124,573 | 83,310 | ||||||
Accrued pension and postretirement benefits | 128,536 | 134,919 | ||||||
Accrued income taxes | 3,093 | 3,094 | ||||||
Other liabilities | 36,005 | 31,065 | ||||||
Total liabilities | 1,452,875 | 1,095,828 | ||||||
Commitments and contingencies | ||||||||
EQUITY (Note 16) | ||||||||
Kennametal Shareowners’ Equity: | ||||||||
Preferred stock, no par value; 5,000 shares authorized; none issued | - | - | ||||||
Capital stock, $1.25 par value; 120,000 shares authorized; 80,027 and 81,129 shares issued | 100,035 | 101,411 | ||||||
Additional paid-in capital | 441,638 | 470,758 | ||||||
Retained earnings | 1,172,222 | 983,374 | ||||||
Accumulated other comprehensive income | 5,341 | 82,529 | ||||||
Total Kennametal Shareowners’ Equity | 1,719,236 | 1,638,072 | ||||||
Noncontrolling interests | 26,463 | 20,569 | ||||||
Total equity | 1,745,699 | 1,658,641 | ||||||
Total liabilities and equity | $ | 3,198,574 | $ | 2,754,469 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
| Nine months ended March 31 (in thousands) | 2011 | 2010(1) | ||||||
| OPERATING ACTIVITIES | ||||||||
| Net income | $ | 145,449 | $ | 7,252 | ||||
| Adjustments for non-cash items: | ||||||||
| Depreciation | 60,165 | 61,323 | ||||||
| Amortization | 8,696 | 9,946 | ||||||
| Stock-based compensation expense | 15,727 | 12,529 | ||||||
| Restructuring charges | 2,609 | 366 | ||||||
| Loss on divestitures | - | 527 | ||||||
| Deferred income tax (benefit) provision | (2,878 | ) | 306 | |||||
| Other | 4,637 | (3,969 | ) | |||||
| Changes in certain assets and liabilities, excluding effects of divestitures: | ||||||||
| Accounts receivable | (71,692 | ) | (34,750 | ) | ||||
| Inventories | (74,706 | ) | 4,524 | |||||
| Accounts payable and accrued liabilities | 37,250 | 9,109 | ||||||
| Accrued income taxes | 4,378 | 16,686 | ||||||
| Other | (4,610 | ) | 8,788 | |||||
| Net cash flow provided by operating activities | 125,025 | 92,637 | ||||||
| INVESTING ACTIVITIES | ||||||||
| Purchases of property, plant and equipment | (33,348 | ) | (30,438 | ) | ||||
| Disposals of property, plant and equipment | 8,063 | 4,087 | ||||||
| Proceeds from divestitures (Note 8) | - | 27,788 | ||||||
| Other | 2,349 | 286 | ||||||
| Net cash flow (used for) provided by investing activities | (22,936 | ) | 1,723 | |||||
| FINANCING ACTIVITIES | ||||||||
| Net decrease in notes payable | (13,844 | ) | (12,187 | ) | ||||
| Net decrease in short-term revolving and other lines of credit | - | (18,400 | ) | |||||
| Term debt borrowings | 365,082 | 439,327 | ||||||
| Term debt repayments | (366,653 | ) | (555,041 | ) | ||||
| Purchase of capital stock | (26,457 | ) | (224 | ) | ||||
| Net proceeds from equity offering | - | 120,693 | ||||||
| Dividend reinvestment and the effect of employee benefit and stock plans | 15,081 | 6,603 | ||||||
| Cash dividends paid to shareowners | (29,873 | ) | (29,429 | ) | ||||
| Other | (1,045 | ) | (1,096 | ) | ||||
| Net cash flow used for financing activities | (57,709 | ) | (49,754 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | 21,683 | (3,536 | ) | |||||
| CASH AND CASH EQUIVALENTS | ||||||||
| Net increase in cash and cash equivalents | 66,063 | 41,070 | ||||||
| Cash and cash equivalents, beginning of period | 118,129 | 69,823 | ||||||
| Cash and cash equivalents, end of period | $ | 184,192 | $ | 110,893 | ||||
| 0000000000 | 0000000000 | |||||||
| Nine months ended March 31 (in thousands) | 2012 | 2011 | ||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 224,281 | $ | 145,449 | ||||
Adjustments for non-cash items: | ||||||||
Depreciation | 63,163 | 60,165 | ||||||
Amortization | 10,982 | 8,696 | ||||||
Stock-based compensation expense | 17,108 | 15,727 | ||||||
Restructuring charges | - | 2,609 | ||||||
Deferred income tax provision (benefit) | 3,827 | (2,878 | ) | |||||
Other | (11,311 | ) | 4,637 | |||||
Changes in certain assets and liabilities: | ||||||||
Accounts receivable | (1,478 | ) | (71,692 | ) | ||||
Inventories | (85,276 | ) | (74,706 | ) | ||||
Accounts payable and accrued liabilities | (56,969 | ) | 37,250 | |||||
Accrued income taxes | 2,307 | 4,378 | ||||||
Other | (2,398 | ) | (4,610 | ) | ||||
Net cash flow provided by operating activities | 164,236 | 125,025 | ||||||
INVESTING ACTIVITIES | ||||||||
Purchases of property, plant and equipment | (60,657 | ) | (33,348 | ) | ||||
Disposals of property, plant and equipment | 4,397 | 8,063 | ||||||
Business acquisition, net of cash acquired (Note 5) | (382,562 | ) | - | |||||
Purchase of technology license | (10,000 | ) | - | |||||
Other | 400 | 2,349 | ||||||
Net cash flow used for investing activities | (448,422 | ) | (22,936 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Net decrease in notes payable | (2,708 | ) | (13,844 | ) | ||||
Net increase in short-term revolving and other lines of credit | 29,200 | - | ||||||
Term debt borrowings | 980,926 | 365,082 | ||||||
Term debt repayments | (683,573 | ) | (366,653 | ) | ||||
Purchase of capital stock | (66,786 | ) | (26,457 | ) | ||||
Settlement of interest rate swap agreement (Note 7) | (22,406 | ) | - | |||||
Dividend reinvestment and the effect of employee benefit and stock plans | 23,072 | 15,081 | ||||||
Cash dividends paid to shareowners | (32,334 | ) | (29,873 | ) | ||||
Other | (8,909 | ) | (1,045 | ) | ||||
Net cash flow provided by (used for) financing activities | 216,482 | (57,709 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (11,312 | ) | 21,683 | |||||
CASH AND CASH EQUIVALENTS | ||||||||
Net (decrease) increase in cash and cash equivalents | (79,016 | ) | 66,063 | |||||
Cash and cash equivalents, beginning of period | 204,565 | 118,129 | ||||||
Cash and cash equivalents, end of period | $ | 125,549 | $ | 184,192 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
| 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 in our principle products, has helped us to achieve a leading market presence in our primary markets. End users of our products include metalworking manufacturers and suppliers across a diverse array of industries including the aerospace, defense, transportation, machine tool, light machinery and heavy machinery industries, as well as manufacturers, producers and suppliers in a number of other industries including coal mining, highway construction, quarrying, oil and gas exploration and production industries. Our end users’ products and services include everything from airframes to coal, engines to oil wells and turbochargers to construction. We operate two global business units consisting of Industrial and Infrastructure.
7
| Nine months ended March 31 (in thousands) | 2011 | 2010 | ||||||
| Cash paid (received) during the period for: | ||||||||
| Interest | $ | 14,684 | $ | 16,043 | ||||
| Income taxes | 40,741 | (5,129 | ) | |||||
| Supplemental disclosure of non-cash information: | ||||||||
| Contribution of capital stock to employees’ defined contribution benefit plans | 948 | 4,248 | ||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 4,416 | $ | - | $ | 4,416 | ||||||||
| Total assets at fair value | $ | - | $ | 4,416 | $ | - | $ | 4,416 | ||||||||
| Liabilities: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 1,640 | $ | - | $ | 1,640 | ||||||||
| Total liabilities at fair value | $ | - | $ | 1,640 | $ | - | $ | 1,640 | ||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 43 | $ | - | $ | 43 | ||||||||
| Total assets at fair value | $ | - | $ | 43 | $ | - | $ | 43 | ||||||||
| Liabilities: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 3,453 | $ | - | $ | 3,453 | ||||||||
| Total liabilities at fair value | $ | - | $ | 3,453 | $ | - | $ | 3,453 | ||||||||
8
| March 31, | June 30, | |||||||
| (in thousands) | 2011 | 2010 | ||||||
| Derivatives designated as hedging instruments | ||||||||
| Other current assets - range forward contracts | $ | 3 | $ | 34 | ||||
| Other current liabilities - range forward contracts | (426 | ) | (2 | ) | ||||
| Other assets - forward starting interest rate swap contracts | 2,990 | - | ||||||
| Other liabilities - forward starting interest rate swap contracts | (659 | ) | (2,348 | ) | ||||
| Total derivatives designated as hedging instruments | 1,908 | (2,316 | ) | |||||
| Derivatives not designated as hedging instruments | ||||||||
| Other current assets - currency forward contracts | 1,423 | 9 | ||||||
| Other current liabilities - currency forward contracts | (555 | ) | (1,103 | ) | ||||
| Total derivatives not designated as hedging instruments | 868 | (1,094 | ) | |||||
| Total derivatives | $ | 2,776 | $ | (3,410 | ) | |||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
| Other expense (income), net - currency forward contracts | $ | 480 | $ | (6,261 | ) | $ | (1,302 | ) | $ | 794 | ||||||
9
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
| Gains (losses) recognized in other comprehensive loss | $ | 239 | $ | 8 | $ | 2,660 | $ | (1,017 | ) | |||||||
| Losses (gains) reclassified from accumulated other comprehensive loss into other expense (income), net | $ | 293 | $ | 114 | $ | 603 | $ | (1,234 | ) | |||||||
10
| Asset | Cash | |||||||||||||||||||||||
| (in thousands) | June 30, 2010 | Expense | Write-down | Expenditures | Translation | March 31, 2011 | ||||||||||||||||||
| Industrial | ||||||||||||||||||||||||
| Severance | $ | 18,327 | $ | 2,374 | $ | - | $ | (13,678 | ) | $ | 1,471 | $ | 8,494 | |||||||||||
| Facilities | 508 | 1,589 | (1,589 | ) | (408 | ) | - | 100 | ||||||||||||||||
| Other | 403 | 1,355 | - | (778 | ) | 76 | 1,056 | |||||||||||||||||
| Total Industrial | 19,238 | 5,318 | (1,589 | ) | (14,864 | ) | 1,547 | 9,650 | ||||||||||||||||
| Infrastructure | ||||||||||||||||||||||||
| Severance | 7,637 | 1,523 | - | (8,779 | ) | 944 | 1,325 | |||||||||||||||||
| Facilities | 211 | 1,020 | (1,020 | ) | (211 | ) | - | - | ||||||||||||||||
| Other | 168 | 870 | - | (500 | ) | 49 | 587 | |||||||||||||||||
| Total Infrastructure | 8,016 | 3,413 | (1,020 | ) | (9,490 | ) | 993 | 1,912 | ||||||||||||||||
| Total | $ | 27,254 | $ | 8,731 | $ | (2,609 | ) | $ | (24,354 | ) | $ | 2,540 | $ | 11,562 | ||||||||||
| Asset | Cash | |||||||||||||||||||||||
| (in thousands) | June 30, 2009 | Expense | Write-down | Expenditures | Translation | June 30, 2010 | ||||||||||||||||||
| Industrial | ||||||||||||||||||||||||
| Severance | $ | 18,378 | $ | 29,082 | $ | - | $ | (28,086 | ) | $ | (1,047 | ) | $ | 18,327 | ||||||||||
| Facilities | 477 | 790 | (604 | ) | (142 | ) | (13 | ) | 508 | |||||||||||||||
| Other | 176 | 1,393 | - | (1,241 | ) | 75 | 403 | |||||||||||||||||
| Total Industrial | 19,031 | 31,265 | (604 | ) | (29,469 | ) | (985 | ) | 19,238 | |||||||||||||||
| Infrastructure | ||||||||||||||||||||||||
| Severance | 7,659 | 12,119 | - | (11,704 | ) | (437 | ) | 7,637 | ||||||||||||||||
| Facilities | 199 | 329 | (251 | ) | (59 | ) | (7 | ) | 211 | |||||||||||||||
| Other | 73 | 580 | - | (517 | ) | 32 | 168 | |||||||||||||||||
| Total Infrastructure | 7,931 | 13,028 | (251 | ) | (12,280 | ) | (412 | ) | 8,016 | |||||||||||||||
| Total | $ | 26,962 | $ | 44,293 | $ | (855 | ) | $ | (41,749 | ) | $ | (1,397 | ) | $ | 27,254 | |||||||||
| Nine Months Ended | ||||
| (in thousands) | March 31, 2010 | |||
| Sales | $ | - | ||
| Loss from discontinued operations before income taxes | $ | (2,269 | ) | |
| Income tax benefit | 846 | |||
| Loss from discontinued operations | $ | (1,423 | ) | |
11
| 2011 | 2010 | |||||||
| Risk-free interest rate | 1.4 | % | 2.3 | % | ||||
Expected life (years)(1) | 4.5 | 4.5 | ||||||
Expected volatility(2) | 47.0 | % | 43.9 | % | ||||
| Expected dividend yield | 2.0 | % | 1.8 | % | ||||
| Weighted | ||||||||||||||||
| Weighted | Average | Aggregate | ||||||||||||||
| Average | Remaining | Intrinsic value | ||||||||||||||
| Options | Exercise Price | Life (years) | (in thousands) | |||||||||||||
| Options outstanding, June 30, 2010 | 3,582,075 | $ | 25.59 | |||||||||||||
| Granted | 545,987 | 27.01 | ||||||||||||||
| Exercised | (539,658 | ) | 22.04 | |||||||||||||
| Lapsed and forfeited | (68,854 | ) | 26.11 | |||||||||||||
| Options outstanding, March 31, 2011 | 3,519,550 | $ | 26.35 | 6.2 | $ | 44,527 | ||||||||||
| Options vested and expected to vest, March 31, 2011 | 3,408,301 | $ | 26.38 | 6.1 | $ | 43,003 | ||||||||||
| Options exercisable, March 31, 2011 | 2,053,102 | $ | 26.66 | 4.9 | $ | 25,348 | ||||||||||
12
| Weighted | ||||||||
| Average Fair | ||||||||
| Shares | Value | |||||||
| Unvested restricted stock awards, June 30, 2010 | 198,701 | $ | 32.71 | |||||
| Vested | (105,466 | ) | 32.56 | |||||
| Forfeited | (1,040 | ) | 34.02 | |||||
| Unvested restricted stock awards, March 31, 2011 | 92,195 | $ | 32.90 | |||||
| Performance | |||||||||||||||||
| Performance | Vesting | Time Vesting | |||||||||||||||
| Vesting | Weighted | Time Vesting | Weighted Average | ||||||||||||||
| Stock | Average Fair | Stock | Fair | ||||||||||||||
| Units | Value | Units | Value | ||||||||||||||
| Unvested performance vesting and time vesting restricted stock units, June 30, 2010 | - | $ | - | 546,713 | $ | 24.29 | |||||||||||
| Granted | 134,807 | 26.89 | 525,250 | 26.93 | |||||||||||||
| Vested | - | - | (73,806 | ) | 23.24 | ||||||||||||
| Forfeited | (12,396 | ) | 26.89 | (40,883 | ) | 25.51 | |||||||||||
| Unvested performance vesting and time vesting restricted stock units, March 31, 2011 | 122,411 | $ | 26.89 | 957,274 | $ | 25.78 | |||||||||||
13
| Weighted | ||||||||
| Stock | Average Fair | |||||||
| Units | Value | |||||||
| Unvested EPS performance-based restricted stock units, June 30, 2010 | 502,371 | $ | 35.54 | |||||
| Granted | - | - | ||||||
| Forfeited | (41,519 | ) | 37.45 | |||||
| Unvested EPS performance-based restricted stock units, March 31, 2011 | 460,852 | $ | 35.37 | |||||
| Weighted | ||||||||
| Stock | Average Fair | |||||||
| Units | Value | |||||||
| Unvested TSR performance-based restricted stock units, June 30, 2010 | 270,501 | $ | 8.35 | |||||
| Granted | - | - | ||||||
| Forfeited | (22,355 | ) | 9.20 | |||||
| Unvested TSR performance-based restricted stock units, March 31, 2011 | 248,146 | $ | 8.28 | |||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
| Service cost | $ | 1,927 | $ | 1,976 | $ | 5,748 | $ | 5,971 | ||||||||
| Interest cost | 10,319 | 10,525 | 30,776 | 31,875 | ||||||||||||
| Expected return on plan assets | (12,074 | ) | (11,519 | ) | (36,146 | ) | (34,683 | ) | ||||||||
| Amortization of transition obligation | 13 | 12 | 39 | 41 | ||||||||||||
| Amortization of prior service credit | (70 | ) | (70 | ) | (211 | ) | (210 | ) | ||||||||
| Special termination benefits | - | 1,610 | - | 3,577 | ||||||||||||
| Settlement loss | 277 | - | 810 | - | ||||||||||||
| Recognition of actuarial losses | 3,076 | 1,104 | 9,208 | 3,355 | ||||||||||||
| Net periodic pension cost | $ | 3,468 | $ | 3,638 | $ | 10,224 | $ | 9,926 | ||||||||
14
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
| Service cost | $ | 19 | $ | 25 | $ | 57 | $ | 74 | ||||||||
| Interest cost | 259 | 316 | 777 | 949 | ||||||||||||
| Amortization of prior service cost | - | 2 | - | 6 | ||||||||||||
| Recognition of actuarial gains | (47 | ) | (92 | ) | (142 | ) | (276 | ) | ||||||||
| Net periodic other postretirement benefit cost | $ | 231 | $ | 251 | $ | 692 | $ | 753 | ||||||||
| March 31, | June 30, | |||||||
| (in thousands) | 2011 | 2010 | ||||||
| Finished goods | $ | 292,068 | $ | 227,096 | ||||
| Work in process and powder blends | 153,811 | 134,732 | ||||||
| Raw materials and supplies | 91,359 | 62,673 | ||||||
| Inventories at current cost | 537,238 | 424,501 | ||||||
| Less: LIFO valuation | (71,113 | ) | (60,233 | ) | ||||
| Total inventories | $ | 466,125 | $ | 364,268 | ||||
15
16
| Kennametal Shareowners’ Equity | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | other | Non- | ||||||||||||||||||||||
| Capital | paid-in | Retained | comprehensive | controlling | ||||||||||||||||||||
| (in thousands) | stock | capital | earnings | (loss) income | interests | Total equity | ||||||||||||||||||
| Balance as of June 30, 2010 | $ | 102,379 | $ | 492,454 | $ | 793,448 | $ | (72,781 | ) | $ | 17,943 | $ | 1,333,443 | |||||||||||
| Net income | - | - | 143,073 | - | 2,376 | 145,449 | ||||||||||||||||||
| Other comprehensive income | - | - | - | 108,896 | 2,030 | 110,926 | ||||||||||||||||||
| Dividend reinvestment | 9 | 225 | - | - | - | 234 | ||||||||||||||||||
| Capital stock issued under employee benefit and stock plans | 762 | 28,035 | - | - | - | 28,797 | ||||||||||||||||||
| Purchase of capital stock | (883 | ) | (25,574 | ) | - | - | - | (26,457 | ) | |||||||||||||||
| Cash dividends paid | - | - | (29,873 | ) | - | (132 | ) | (30,005 | ) | |||||||||||||||
| Total equity, March 31, 2011 | $ | 102,267 | $ | 495,140 | $ | 906,648 | $ | 36,115 | $ | 22,217 | $ | 1,562,387 | ||||||||||||
| Kennametal Shareowners’ Equity | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | other | Non- | ||||||||||||||||||||||
| Capital | paid-in | Retained | comprehensive | controlling | ||||||||||||||||||||
| (in thousands) | stock | capital | earnings | income | interests | Total equity | ||||||||||||||||||
| Balance as of June 30, 2009 | $ | 91,540 | $ | 357,839 | $ | 786,345 | $ | 11,719 | $ | 20,012 | $ | 1,267,455 | ||||||||||||
| Net income | - | - | 5,835 | - | 1,417 | 7,252 | ||||||||||||||||||
| Other comprehensive (loss) income | - | - | - | (8,504 | ) | 136 | (8,368 | ) | ||||||||||||||||
| Dividend reinvestment | 12 | 212 | - | - | - | 224 | ||||||||||||||||||
| Capital stock issued under employee benefit and stock plans | 493 | 16,401 | - | - | - | 16,894 | ||||||||||||||||||
| Purchase of capital stock | (12 | ) | (212 | ) | - | - | - | (224 | ) | |||||||||||||||
| Equity offering | 10,063 | 110,630 | - | - | - | 120,693 | ||||||||||||||||||
| Cash dividends paid | - | - | (29,429 | ) | - | (176 | ) | (29,605 | ) | |||||||||||||||
| Total equity, March 31, 2010 | $ | 102,096 | $ | 484,870 | $ | 762,751 | $ | 3,215 | $ | 21,389 | $ | 1,374,321 | ||||||||||||
17
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| Net income | $ | 65,203 | $ | 10,203 | $ | 145,449 | $ | 7,252 | ||||||||
| Unrealized gain (loss) on derivatives designated and qualified as cash flow hedges, net of income tax | 142 | 55 | 365 | (990 | ) | |||||||||||
| Reclassification of unrealized loss (gain) on expired derivatives designated and qualified as cash flow hedges, net of income tax | 98 | (47 | ) | 2,285 | (27 | ) | ||||||||||
| Unrecognized net pension and other postretirement benefit (losses) gains, net of income tax | (1,294 | ) | 2,045 | (2,916 | ) | 2,599 | ||||||||||
| Reclassification of net pension and other postretirement benefit losses, net of income tax | 1,868 | 172 | 5,588 | 1,363 | ||||||||||||
| Foreign currency translation adjustments, net of income tax | 38,646 | (34,674 | ) | 105,604 | (11,313 | ) | ||||||||||
| Total comprehensive income (loss) | 104,663 | (22,246 | ) | 256,375 | (1,116 | ) | ||||||||||
| Comprehensive income attributable to noncontrolling interests | 1,258 | 124 | 4,406 | 1,553 | ||||||||||||
| Comprehensive income (loss) attributable to Kennametal Shareowners | $ | 103,405 | $ | (22,370 | ) | $ | 251,969 | $ | (2,669 | ) | ||||||
| (in thousands) | Industrial | Infrastructure | Total | |||||||||
| Goodwill | $ | 393,974 | $ | 246,311 | $ | 640,285 | ||||||
| Accumulated impairment losses | (150,842 | ) | - | (150,842 | ) | |||||||
| Balance as of June 30, 2010 | $ | 243,132 | $ | 246,311 | $ | 489,443 | ||||||
| Adjustments | $ | 192 | $ | - | $ | 192 | ||||||
| Translation | 15,204 | 3,130 | 18,334 | |||||||||
| Change in goodwill | 15,396 | 3,130 | 18,526 | |||||||||
| Goodwill | 409,370 | 249,441 | 658,811 | |||||||||
| Accumulated impairment losses | (150,842 | ) | - | (150,842 | ) | |||||||
| Balance as of March 31, 2011 | $ | 258,528 | $ | 249,441 | $ | 507,969 | ||||||
18
| Estimated | March 31, 2011 | June 30, 2010 | ||||||||||||||||||
| Useful Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||
| (in thousands) | (in years) | Amount | Amortization | Amount | Amortization | |||||||||||||||
| Contract-based | 4 to 15 | $ | 6,336 | $ | (5,321 | ) | $ | 6,357 | $ | (5,218 | ) | |||||||||
| Technology-based and other | 4 to 15 | 39,588 | (24,584 | ) | 37,136 | (20,422 | ) | |||||||||||||
| Customer-related | 10 to 20 | 113,015 | (36,153 | ) | 108,470 | (29,255 | ) | |||||||||||||
| Unpatented technology | 30 | 19,495 | (4,722 | ) | 19,216 | (4,572 | ) | |||||||||||||
| Trademarks | 5 to 20 | 10,930 | (4,712 | ) | 10,647 | (3,876 | ) | |||||||||||||
| Trademarks | Indefinite | 39,986 | - | 36,823 | - | |||||||||||||||
| Total | $ | 229,350 | $ | (75,492 | ) | $ | 218,649 | $ | (63,343 | ) | ||||||||||
19
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2011 | 2010(1) | 2011 | 2010(1) | |||||||||||||
| External sales: | ||||||||||||||||
| Industrial | $ | 391,763 | $ | 305,802 | $ | 1,091,560 | $ | 831,939 | ||||||||
| Infrastructure | 223,067 | 187,363 | 618,196 | 513,486 | ||||||||||||
| Total external sales | $ | 614,830 | $ | 493,165 | $ | 1,709,756 | $ | 1,345,425 | ||||||||
| Operating income (loss): | ||||||||||||||||
| Industrial | $ | 54,145 | $ | 10,808 | $ | 132,410 | $ | (1,140 | ) | |||||||
| Infrastructure | 35,639 | 18,556 | 83,708 | 48,454 | ||||||||||||
| Corporate | (2,007 | ) | (3,061 | ) | (9,212 | ) | (15,071 | ) | ||||||||
| Total operating income | $ | 87,777 | $ | 26,303 | $ | 206,906 | $ | 32,243 | ||||||||
| Interest expense | $ | 5,767 | $ | 6,531 | $ | 17,294 | $ | 18,856 | ||||||||
| Other expense (income), net | 1,413 | (1,496 | ) | 3,071 | (6,314 | ) | ||||||||||
| Income from continuing operations before income taxes | $ | 80,597 | $ | 21,268 | $ | 186,541 | $ | 19,701 | ||||||||
| March 31, | June 30, | |||||||
| (in thousands) | 2011 | 2010(1) | ||||||
| Total assets: | ||||||||
| Industrial | $ | 1,441,302 | $ | 1,310,635 | ||||
| Infrastructure | 758,363 | 682,169 | ||||||
| Corporate | 369,557 | 275,019 | ||||||
| Total assets | $ | 2,569,222 | $ | 2,267,823 | ||||
20
| 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 2011 Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, 2011 was derived from the audited balance sheet included in our 2011 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 adjustments. The results for the March quarter across both business segments and all regions. Our sales for the quarternine months ended March 31, 2012 and 2011 grew 25 percent comparedare not necessarily indicative of the results to salesbe expected for a full fiscal year. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. For example, a reference to 2012 is to the March quarter onefiscal year ago. Operating margin forending June 30, 2012. When used in this Form 10-Q, unless the quarter increased by $61.5 million on sales that were $121.7 million higher, resultingcontext requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its consolidated subsidiaries.
| 3. | NEW ACCOUNTING STANDARDS |
Adopted
As of January 1, 2012, Kennametal adopted changes to fair value measurements and disclosure. Many of the amendments in 50.5 percent year-over-year operating leverage. During the quarter, we continuedthis guidance represent clarifications to experience certain raw material cost increases, particularly tungsten. We believe these costs will ultimately be recovered, as we continue to implement price increases as necessary.
Issued
In December 2011, the Financial Accounting Standards Board (FASB) deferred the requirement to present reclassifications of other comprehensive income on the face of the income statement. Companies would still be required to adopt the other requirements contained in the accounting guidance on presentation of other comprehensive income. This guidance is effective for Kennametal beginning July 1, 2012.
In June 2011, the FASB issued guidance on presentation of comprehensive income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate consecutive statements. Each component of net income and other comprehensive income, together with totals for comprehensive income and its two parts, net income and other comprehensive income, would need to be displayed under either alternative. This guidance is effective for Kennametal beginning July 1, 2012.
In September 2011, the FASB issued additional guidance on testing goodwill for impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This guidance is effective for Kennametal beginning July 1, 2012.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| 4. | SUPPLEMENTAL CASH FLOW DISCLOSURES |
| 0000000000 | 0000000000 | |||||||
| Nine months ended March 31 (in thousands) | 2012 | 2011 | ||||||
Cash paid during the period for: | ||||||||
Interest | $ | 14,603 | $ | 14,684 | ||||
Income taxes | 44,715 | 40,741 | ||||||
Supplemental disclosure of non-cash information: | ||||||||
Contribution of capital stock to employees’ defined contribution benefit plans | - | 948 | ||||||
| 5. | ACQUISITION |
On March 1, 2012, the Company acquired all of the shares of Deloro Stellite Holdings 1 Limited (Stellite) pursuant to the terms of the Share Sale and Purchase Agreement dated January 13, 2012. The U.K.-based Stellite is a global manufacturer and provider of alloy-based critical wear solutions for extreme environments involving high temperature, corrosion and abrasion. Stellite employs approximately 1,300 people across seven primary operating facilities globally, including locations in the U.S., Canada, Germany, Italy, India and China. Stellite’s proprietary metal alloys, materials expertise, engineering design and fabrication capabilities complement Kennametal’s current business in the oil and gas, power generation, transportation and aerospace end markets. This acquisition is in alignment with Kennametal’s growth strategy and positions us to further achieve geographic and end market balance.
Kennametal acquired Stellite for a purchase price of approximately $383 million; net of cash acquired, and funded the acquisition through existing credit facilities and operating cash flows. As part of the acquisition of Stellite, Kennametal incurred for both the three and nine months ended March 31, 2011.
Purchase Price Allocation
This acquisition was accounted for under the acquisition method of accounting and accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on estimated fair values at the date of the acquisition. The Condensed Consolidated Balance Sheet as of March 31, 2012 reflects the preliminary allocation of the purchase price and is subject to revision when appraisals are finalized, which is expected to occur in the June quarter of 2012.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The preliminary allocation of the total purchase price to the fair values of the assets acquired and liabilities assumed is as follows:
| 00000000000 | ||||
| (in thousands) | Total | |||
ASSETS | ||||
Current assets: | ||||
Accounts receivable | $ | 45,484 | ||
Inventories | 49,618 | |||
Other current assets | 4,007 | |||
Total current assets | 99,109 | |||
Property and equipment | 72,794 | |||
Goodwill | 235,883 | |||
Other intangible assets | 102,721 | |||
Deferred income taxes | 2,478 | |||
Other | 70 | |||
Total assets | $ | 513,055 | ||
LIABILITIES | ||||
Current liabilities: | ||||
Short term debt and current maturities of long-term debt | $ | 4,685 | ||
Accounts payable | 43,534 | |||
Accrued income taxes | 9,530 | |||
Other current liabilities | 16,045 | |||
Total current liabilities | 73,794 | |||
Long-term debt and capital leases | 5,379 | |||
Deferred income taxes | 46,109 | |||
Total liabilities | 125,282 | |||
Noncontrolling interest | 5,211 | |||
Net assets acquired | $ | 382,562 | ||
In connection with this acquisition, we identified and valued certain intangible assets, including existing customer relationships, technologies and trademarks, as further discussed in Note 18. The goodwill recorded of $235.9 million is not deductible for tax purposes and is attributable to the operating synergies we expect to gain from the acquisition. These intangible assets are part of the Infrastructure segment.
Stellite realized net sales of $22.5 million and a net loss of $4.7 million during the month ended March 31, 2011, we recorded net income attributable2012 to Kennametalthe Company, including $5.7 million of $64.7 million, or $0.77 per diluted share, comparedacquisition related pre-tax costs.
Unaudited Pro Forma Financial Information
The following unaudited pro forma summary of operating results presents the consolidated results of operations as if the Stellite acquisition had occurred on July 1, 2010. These amounts were calculated after the conversion to $9.7 million, or $0.12 per diluted share,U.S. GAAP, applying our accounting policies and adjusting Stellite’s results to reflect increased depreciation and amortization expense resulting from recording fixed assets and intangible assets at fair value and decreasing interest expense to reflect Kennametal’s more favorable borrowing rate, together with the related tax effects. The pro forma results for the three months ended March 31, 2010.2012 excluded $5.7 million of acquisition related pre-tax costs. The drivers of our improved performance were higher sales volumepro forma results for the three and price realization, improved capacity utilization and incremental restructuring benefits of $5.4 million. These benefits were partially offset by higher raw material costs, higher employment costs of $12.9 million and the restoration of temporary cost reductions of $4.7 million.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unaudited pro forma summary of operating performance.results of the Company, assuming the acquisition had occurred as of July 1, 2010 are as follows:
| 000000000000 | 000000000000 | 000000000000 | 000000000000 | |||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Pro forma (unaudited): | ||||||||||||||||
Net Sales | $ | 733,518 | $ | 687,121 | $ | 2,170,532 | $ | 1,901,888 | ||||||||
Net income attributable to Kennametal | $ | 83,955 | $ | 68,819 | $ | 237,144 | $ | 145,028 | ||||||||
Per share data attributable to Kennametal : | ||||||||||||||||
Basic earnings per share | $ | 1.05 | $ | 0.84 | $ | 2.96 | $ | 1.77 | ||||||||
Diluted earnings per share | $ | 1.03 | $ | 0.82 | $ | 2.91 | $ | 1.74 | ||||||||
| 6. | 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 technology and innovationan orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three levels to continue delivering a high level of new products to our customers. Research and development expenses totaled $18.2 millionprioritize 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 March 31, 2012, the fair values of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows:
| 000000000 | 000000000 | 000000000 | 000000000 | |||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 487 | $ | - | $ | 487 | ||||||||
Total assets at fair value | $ | - | $ | 487 | $ | - | $ | 487 | ||||||||
Liabilities: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 58 | $ | - | $ | 58 | ||||||||
Total liabilities at fair value | $ | - | $ | 58 | $ | - | $ | 58 | ||||||||
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2011, the fair value of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows:
| september300 | september300 | september300 | september300 | |||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 896 | $ | - | $ | 896 | ||||||||
Total assets at fair value | $ | - | $ | 896 | $ | - | $ | 896 | ||||||||
Liabilities: | ||||||||||||||||
Derivatives (1) | $ | - | $ | 3,330 | $ | - | $ | 3,330 | ||||||||
Total liabilities at fair value | $ | - | $ | 3,330 | $ | - | $ | 3,330 | ||||||||
| (1) | Foreign currency derivative and interest rate swap contracts are valued based on observable market spot and forward rates and are classified within Level 2 of the fair value hierarchy. |
| 7. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
As part of our financial risk management program, we use certain derivative financial instruments. We do not enter into derivative transactions for speculative purposes and therefore hold no derivative instruments for trading purposes. We use derivative financial instruments to provide predictability to the effects of changes in foreign currency exchange rates on our consolidated results and to achieve our targeted mix of fixed and floating interest rates on outstanding debt. We account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated as a hedge of such items. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow, allowing us to focus more of our attention on business operations. With respect to interest rate management, these derivative instruments allow us to achieve our targeted fixed-to-floating interest rate mix as a separate decision from funding arrangements in the bank and public debt markets. We measure hedge effectiveness by assessing the changes in the fair value or expected future cash flows of the hedged item. The ineffective portions are recorded in other (income) expense, net.
The fair value of derivatives designated in the condensed consolidated balance sheet are as follows:
| september30 | september30 | |||||||
| March 31, | June 30, | |||||||
| (in thousands) | 2012 | 2011 | ||||||
Derivatives designated as hedging instruments | ||||||||
Other current assets - range forward contracts | $ | 435 | $ | 87 | ||||
Other current liabilities - range forward contracts | (4 | ) | (159 | ) | ||||
Other assets - forward starting interest rate swap contracts | - | 772 | ||||||
Other liabilities - forward starting interest rate swap contracts | - | (3,169 | ) | |||||
Total derivatives designated as hedging instruments | 431 | (2,469 | ) | |||||
Derivatives not designated as hedging instruments | ||||||||
Other current assets - currency forward contracts | 52 | 37 | ||||||
Other current liabilities - currency forward contracts | (54 | ) | (2 | ) | ||||
Total derivatives not designated as hedging instruments | (2 | ) | 35 | |||||
Total derivatives | $ | 429 | $ | (2,434 | ) | |||
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 balance sheet, with the offset to other (income) expense, net. (Gains) losses related to derivatives not designated as hedging instruments have been recognized as follows:
| september3 | september3 | september3 | september3 | |||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Other (income) expense, net - currency forward contracts | $ | (747 | ) | $ | 56 | $ | 33 | $ | (1,963 | ) | ||||||
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE HEDGES
In February 2009, we terminated interest rate swap contracts to convert $200.0 million of our fixed rate debt to floating rate debt. These contracts were originally set to mature in June 2012. Upon termination, we received a cash payment of $13.2 million. This gain is being amortized as a component of interest expense over the remaining term of the related debt using the effective interest rate method. During the three and nine months ended March 31, 2011.
CASH FLOW HEDGES
Currency forward contracts and range forward contracts (a transaction where both a put option is purchased and a call option is sold), designated as cash flow hedges, hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts at maturity are recorded in accumulated other comprehensive income, net of tax, and are recognized as a component of other (income) expense, 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 March 31, 2012 and June 30, 2011, was $43.1 million an increaseand $37.6 million, respectively. The time value component of $364.6 million, or 27 percent,the fair value of range forward contracts is excluded from $1,345.4the assessment of hedge effectiveness. Assuming the market rates remain constant with the rates at March 31, 2012, we expect to recognize a gain of $0.3 million in the prior year period. Sales increased organically by 29 percent, partially offset bynext 12 months on outstanding derivatives.
We enter into floating-to-fixed interest rate swap contracts, designated as cash flow hedges, from time to time to hedge our exposure to interest rate changes on a 1 percent unfavorable impact from foreign currency effects andportion of our floating rate debt. These interest rate swap contracts convert a portion of our floating rate debt to fixed rate debt. We record the fair value of these contracts as an unfavorable impact from fewer business days. The improvement in sales was driven by better performance in both business segments and across all regions, led by growthasset or a liability, as applicable, in the general engineering and transportation served end marketsbalance sheet, with the offset to accumulated other comprehensive income, net of 41 percent and 32 percent, respectively.
In February 2012, we settled forward starting interest rate swap contracts to convert $150.0 million of our floating rate debt to fixed rate debt. Upon settlement, we made a cash payment of $22.4 million. The loss is being amortized as a component of interest expense over the term of the related debt using the effective interest rate method. During the three months ended March 31, 2011 was $230.0 million, an increase of $59.7 million from $170.3 million in the prior year quarter. This increase was due to higher organic sales, improved absorption of manufacturing costs due to higher production levels, restructuring and other cost reduction benefits, favorable product and market mix and favorable foreign currency effects of $1.1 million. The impact of these items was partially offset by higher raw material costs and the restoration of employment costs that had been temporarily reduced in the prior year. The gross profit margin for the three months ended March 31, 2011 was 37.4 percent, as compared to 34.5 percent generated in the prior year quarter.
21
Amounts related to cash flow hedges have been recognized as follows:
| september | september | september | september | |||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Gains (losses) recognized in other comprehensive income, net | $ | 155 | $ | (57 | ) | $ | 11,742 | $ | (2,286 | ) | ||||||
Losses reclassified from accumulated other comprehensive income into other (income) expense, net | $ | 11 | $ | 182 | $ | 177 | $ | 374 | ||||||||
No portion of the gains or losses recognized in the prior year period. This increaseearnings was due to higher organic sales, improved absorption of manufacturing costs due to higher production levels, favorable productineffectiveness and market mix and restructuring and other cost reduction benefits. The impact of these items was partially offset by higher raw material costs, restoration of employment costs that had been temporarily reduced in the prior year and unfavorable foreign currency effects of $8.9 million. The prior year was also favorably impacted by one-time benefitsno amounts were excluded from certain labor negotiations in Europe. The gross profit marginour effectiveness testing for the three and nine months ended March 31, 2012 and 2011.
| 8. | RESTRUCTURING AND RELATED CHARGES |
During fiscal year 2011, was 36.2 percent, as compared to 31.8 percent generated in the prior year period.
Restructuring and related charges recorded during the nine months ended March 31, 2011 amounted to $14.9 million, including $8.7 million of restructuring charges of which $1.0 million were related to inventory disposals and recorded in cost of goods sold. Restructuring relatedRestructuring-related charges of $3.0 million and $3.2 million were recorded in cost of goods sold and operating expense, respectively, during the same period.
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:
| september3 | september3 | september3 | september3 | september3 | september3 | |||||||||||||||||||
| (in thousands) | June 30, 2011 | Expense | Asset Write-down | Cash Expenditures | Translation | March 31, 2012 | ||||||||||||||||||
Industrial | ||||||||||||||||||||||||
Severance | $ | 7,811 | $ | - | $ | - | $ | (6,136 | ) | $ | (179 | ) | $ | 1,496 | ||||||||||
Facilities | 525 | - | - | (500 | ) | (25 | ) | - | ||||||||||||||||
Other | 1,604 | - | - | (790 | ) | (102 | ) | 712 | ||||||||||||||||
Total Industrial | 9,940 | - | - | (7,426 | ) | (306 | ) | 2,208 | ||||||||||||||||
Infrastructure | ||||||||||||||||||||||||
Severance | 1,650 | - | - | (1,573 | ) | (77 | ) | - | ||||||||||||||||
Facilities | 269 | - | - | (226 | ) | (10 | ) | 33 | ||||||||||||||||
Other | 852 | - | - | (339 | ) | (44 | ) | 469 | ||||||||||||||||
Total Infrastructure | 2,771 | - | - | (2,138 | ) | (131 | ) | 502 | ||||||||||||||||
Total | $ | 12,711 | $ | - | $ | - | $ | (9,564 | ) | $ | (437 | ) | $ | 2,710 | ||||||||||
| (in thousands) | June 30, 2010 | Expense | Asset Write-down | Cash Expenditures | Translation | June 30, 2011 | ||||||||||||||||||
Industrial | ||||||||||||||||||||||||
Severance | $ | 18,327 | $ | 4,363 | $ | - | $ | (16,510 | ) | $ | 1,631 | $ | 7,811 | |||||||||||
Facilities | 508 | 2,318 | (1,857 | ) | (444 | ) | - | 525 | ||||||||||||||||
Other | 403 | 2,031 | - | (931 | ) | 101 | 1,604 | |||||||||||||||||
Total Industrial | 19,238 | 8,712 | (1,857 | ) | (17,885 | ) | 1,732 | 9,940 | ||||||||||||||||
Infrastructure | ||||||||||||||||||||||||
Severance | 7,637 | 2,484 | - | (9,399 | ) | 928 | 1,650 | |||||||||||||||||
Facilities | 211 | 1,319 | (1,057 | ) | (204 | ) | - | 269 | ||||||||||||||||
Other | 168 | 1,156 | - | (530 | ) | 58 | 852 | |||||||||||||||||
Total Infrastructure | 8,016 | 4,959 | (1,057 | ) | (10,133 | ) | 986 | 2,771 | ||||||||||||||||
Total | $ | 27,254 | $ | 13,671 | $ | (2,914 | ) | $ | (28,018 | ) | $ | 2,718 | $ | 12,711 | ||||||||||
| 9. | STOCK-BASED COMPENSATION |
On October 26, 2010, the Company’s shareowners approved the Kennametal Inc., Stock and Incentive Plan of 2010 (the 2010 Plan). The 2010 Plan authorizes the issuance of up to 3,500,000 shares of the Company’s common stock plus the remaining shares from the Kennametal Inc., Stock Incentive Plan of 2002, as amended (the 2002 Plan). Shares can be issued in the form of incentive stock options, non-statutory stock options, stock appreciation rights, performance share awards, performance unit awards, restricted stock awards, restricted unit awards and share awards.
Stock Options
The assumptions used in our Black-Scholes valuation related to grants made during the nine months ended March 31, 2011. We realized pre-tax2012 and 2011 were as follows:
| 2012 | 2011 | |||||||
Risk-free interest rate | 1.2% | 1.4% | ||||||
Expected life (years)(2) | 4.5 | 4.5 | ||||||
Expected volatility(3) | 47.5% | 47.0% | ||||||
Expected dividend yield | 1.5% | 2.0% | ||||||
(2) Expected life is derived from historical experience.
(3) Expected volatility is based on the historical volatility of our common stock.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes in our stock options for the nine months ended March 31, 2012 were as follows:
| Weighted | ||||||||||||||||
| Weighted | Average | Aggregate | ||||||||||||||
| Average | Remaining | Intrinsic value | ||||||||||||||
| Options | Exercise Price | Life (years) | (in thousands) | |||||||||||||
Options outstanding, June 30, 2011 | 3,388,003 | $ | 26.50 | |||||||||||||
Granted | 354,618 | 38.95 | ||||||||||||||
Exercised | (730,000 | ) | 24.89 | |||||||||||||
Lapsed and forfeited | (50,675 | ) | 30.22 | |||||||||||||
Options outstanding, March 31, 2012 | 2,961,946 | $ | 28.32 | 6.0 | $ | 48,000 | ||||||||||
Options vested and expected to vest, March 31, 2012 | 2,895,598 | $ | 28.28 | 5.9 | $ | 47,056 | ||||||||||
Options exercisable, March 31, 2012 | 1,775,085 | $ | 27.76 | 4.8 | $ | 29,774 | ||||||||||
During the nine months ended March 31, 2012 and 2011, compensation expense related to stock options was $4.6 million and $4.2 million, respectively. As of March 31, 2012, the total unrecognized compensation cost related to options outstanding was $4.5 million and is expected to be recognized over a weighted average period of 2.0 years.
Weighted average fair value of options granted during the nine months ended March 31, 2012 and 2011 was $13.84 and $9.22, respectively. Fair value of options vested during the nine months ended March 31, 2012 and 2011 was $4.6 million and $4.4 million, respectively.
Tax benefits, relating to excess stock-based compensation deductions, are presented in the statement of cash flow as financing cash inflows. Tax benefits resulting from these restructuring programs of approximately $122stock-based compensation deductions exceeded amounts reported for financial reporting purposes by $3.9 million and $2.4 million for the nine months ended March 31, 2011.
The amount of cash received from the three months ended March 31, 2010 amounted to $22.9 million, including $21.0 millionexercise of restructuring charges, of which $0.3 million related to inventory disposals recorded in cost of goods sold. Restructuring related charges of $1.3 million and $0.6 million were recorded in cost of goods sold and operating expense, respectively, during the three months ended March 31, 2010.
22
Under the provisions of $1.5 millionthe 2010 Plan participants may deliver stock, owned by the holder for at least six months, in payment of the option price and receive credit for the threefair market value of the shares on the date of delivery. The fair market value of shares delivered during the nine months ended March 31, 2010. The decrease2012 and 2011 was primarily driven by unfavorable foreign currency transaction results of $2.7 million.
Restricted Stock Awards
Changes in our restricted stock awards for the nine months ended March 31, 2012 were as follows:
| Weighted | ||||||||
| Average Fair | ||||||||
| Shares | Value | |||||||
Unvested restricted stock awards, June 30, 2011 | 89,315 | $ | 32.90 | |||||
Vested | (64,412 | ) | 34.46 | |||||
Forfeited | (582 | ) | 29.60 | |||||
Unvested restricted stock awards, March 31, 2012 | 24,321 | $ | 28.85 | |||||
During the nine months ended March 31, 2012 and 2011, compensation expense related to restricted stock awards was $3.1$0.8 million comparedand $1.6 million, respectively. As of March 31, 2012, the total unrecognized compensation cost related to other income, netunvested restricted stock awards was $0.2 million and is expected to be recognized over a weighted average period of $6.3 million0.4 years.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Restricted Stock Units – Time Vesting and Performance Vesting
Performance vesting restricted stock units (performance units) were granted to certain individuals. These performance units are earned pro rata each year if certain performance goals are met over a 3-year period, and are also subject to a service condition that requires the individual to be employed by the Company at the payment date after the 3-year performance period, with the exception of retirement eligible grantees, who upon retirement are entitled to receive payment for any units that have been earned, including a prorated portion in the partially completed fiscal year in which the retirement occurs.
Changes in our time vesting and performance vesting restricted stock units for the nine months ended March 31, 2010. The decrease was primarily driven by unfavorable foreign currency transaction results of $7.8 million.2012 were as follows:
| september30 | september30 | september30 | september30 | |||||||||||||
| Performance | ||||||||||||||||
| Performance | Vesting | Time Vesting | ||||||||||||||
| Vesting | Weighted | Weighted | ||||||||||||||
| Stock | Average Fair | Time Vesting | Average Fair | |||||||||||||
| Units | Value | Stock Units | Value | |||||||||||||
Unvested performance vesting and time vesting restricted stock units, June 30, 2011 | 116,368 | $ | 26.89 | 906,082 | $ | 25.81 | ||||||||||
Granted | 129,977 | 38.95 | 335,327 | 38.95 | ||||||||||||
Vested | - | - | (239,824 | ) | 25.89 | |||||||||||
Forfeited | - | - | (38,511 | ) | 31.12 | |||||||||||
Unvested performance vesting and time vesting restricted stock units, March 31, 2012 | 246,345 | $ | 31.27 | 963,074 | $ | 30.16 | ||||||||||
During the threenine months ended March 31, 2012 and 2011, compensation expense related to time vesting and performance vesting restricted stock units was $11.6 million and $8.6 million, respectively. As of March 31, 2012, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $17.7 million and is expected to be recognized over a weighted average period of 2.3 years.
Restricted Stock Units – STEP
On November 26, 2007, the Company adopted a one-time, long-term equity program, the Kennametal Inc. 2008 Strategic Transformational Equity Program, under the 2002 Plan (STEP). The STEP was designed to compensate participating executives for achievement of certain performance conditions during the period which began on October 1, 2007 and ended on September 30, 2011. Each participant was awarded a maximum number of restricted stock units, each representing a contingent right to receive one share of capital stock of the Company to the extent the unit was earned during the performance period and would have become payable under the STEP. The performance conditions were based on the Company’s total shareholder return (TSR) which governed 35 percent of the awarded restricted stock units, and cumulative adjusted earnings per share (EPS), which governed 65 percent of the awarded restricted stock units. The performance period for the STEP ended on September 30, 2011 and 2010 was 19.1 percent comparedthe minimum threshold levels of performance were not achieved. Therefore, all outstanding restricted stock units were forfeited by participating executives. As of March 31, 2012, no restricted stock units had been earned or paid under the STEP. There were no voting rights or dividends associated with restricted stock units under the STEP.
Changes to 52.0 percent, respectively. The current year rate reflects the favorable impactEPS performance-based portion of stronger operating results under our pan-European business strategy. The prior year rate was unfavorably impacted by restructuring and related charges in tax jurisdictions that did not result in a tax benefit.
| Weighted | ||||||||
| Stock | Average Fair | |||||||
| Units | Value | |||||||
Unvested EPS performance-based restricted stock units, June 30, 2011 | 431,789 | $ | 35.23 | |||||
Forfeited | (431,789) | 35.23 | ||||||
Unvested EPS performance-based restricted stock units, March 31, 2012 | - | $ | - | |||||
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes to 56.0 percent, respectively. The current year rate reflects the favorable impact of stronger operating results under our pan-European business strategy. The prior year rate reflects the impact of restructuring and related charges in tax jurisdictions that did not result in a tax benefit.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| External sales | $ | 391,763 | $ | 305,802 | $ | 1,091,560 | $ | 831,939 | ||||||||
| Operating income (loss) | 54,145 | 10,808 | 132,410 | (1,140 | ) | |||||||||||
23
| septmeber | septmeber | |||||||
| Weighted | ||||||||
| Stock | Average Fair | |||||||
| Units | Value | |||||||
Unvested TSR performance-based restricted stock units, June 30, 2011 | 232,497 | $ | 8.21 | |||||
Forfeited | (232,497 | ) | 8.21 | |||||
Unvested TSR performance-based restricted stock units, March 31, 2012 | - | $ | - | |||||
During the nine months ended March 31, 2012 and 2011, Industrial segment operating income increased $133.6 million. compensation expense related to STEP restricted stock units was $0.2 million and $0.3 million, respectively.
| 10. | BENEFIT PLANS |
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 primary driverstable below summarizes the components of net periodic pension cost:
| september | september | september | september | |||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Service cost | $ | 1,728 | $ | 1,927 | $ | 5,178 | $ | 5,748 | ||||||||
Interest cost | 10,402 | 10,319 | 31,113 | 30,776 | ||||||||||||
Expected return on plan assets | (12,752 | ) | (12,074 | ) | (38,168 | ) | (36,146 | ) | ||||||||
Amortization of transition obligation | 16 | 13 | 48 | 39 | ||||||||||||
Amortization of prior service credit | (46 | ) | (70 | ) | (139 | ) | (211 | ) | ||||||||
Settlement loss | 268 | 277 | 787 | 810 | ||||||||||||
Recognition of actuarial losses | 2,066 | 3,076 | 6,190 | 9,208 | ||||||||||||
Net periodic pension cost | $ | 1,682 | $ | 3,468 | $ | 5,009 | $ | 10,224 | ||||||||
The table below summarizes the components of the net periodic other postretirement benefit cost: |
| |||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Service cost | $ | 19 | $ | 19 | $ | 56 | $ | 57 | ||||||||
Interest cost | 257 | 259 | 772 | 777 | ||||||||||||
Amortization of prior service cost | (22 | ) | - | (67 | ) | - | ||||||||||
Recognition of actuarial gains | (14 | ) | (47 | ) | (42 | ) | (142 | ) | ||||||||
Net periodic other postretirement benefit cost | $ | 240 | $ | 231 | $ | 719 | $ | 692 | ||||||||
| 11. | INVENTORIES |
We used the last-in, first-out (LIFO) method of valuing inventories for approximately 49 percent and 50 percent of total inventories at March 31, 2012 and June 30, 2011, respectively. Because inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs. Therefore, the interim financial results are subject to any final year-end LIFO inventory adjustments.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories consisted of the increasefollowing:
| 0000000000 | 0000000000 | |||||||
| (in thousands) | March 31, 2012 | June 30, 2011 | ||||||
Finished goods | $ | 349,671 | $ | 303,716 | ||||
Work in process and powder blends | 256,215 | 202,940 | ||||||
Raw materials | 147,590 | 109,683 | ||||||
Inventories at current cost | 753,476 | 616,339 | ||||||
Less: LIFO valuation | (122,606 | ) | (96,366 | ) | ||||
Total inventories | $ | 630,870 | $ | 519,973 | ||||
| 12. | LONG-TERM DEBT AND CAPITAL LEASES |
On February 14, 2012, we issued $300 million of 3.875 percent Senior Unsecured Notes due in operating income were higher sales volume2022. Interest will be paid semi-annually on February 15 and price realization, improved capacity utilization and incremental restructuring benefits. These benefits were partially offset by higher raw material costs, higher employment costs and the restorationAugust 15 of temporary cost reductions.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| External sales | $ | 223,067 | $ | 187,363 | $ | 618,196 | $ | 513,486 | ||||||||
| Operating income | 35,639 | 18,556 | 83,708 | 48,454 | ||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| Corporate unallocated expense | $ | (2,007 | ) | $ | (3,061 | ) | $ | (9,212 | ) | $ | (15,071 | ) | ||||
The 7.20 percent 10 year Senior Unsecured Notes issued in the prior year period.
24
The 20102011 Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the agreement). We were in compliance with these financial covenants as of March 31, 2011.2012. We had $29.2 million of borrowings outstanding under the 2011 Credit Agreement as of March 31, 2012. We had no borrowings outstanding under the 2010 Credit Agreement as of March 31,June 30, 2011.
Borrowings under the 20102011 Credit Agreement are guaranteed by our significant domestic subsidiaries.
Fixed rate debt was $316.8had a fair market value of $604.6 million and total Kennametal shareowners’ equity was $1,540.2 million. Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide access to the capital markets. We closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers.
25
| 13. | ENVIRONMENTAL MATTERS |
The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain of our locations. With respect to the environmental proceedings listed below, if any one or more of them were decided against Kennametal, we believe that it would not have a material effect on our consolidated financial position. However, it is not possible to predict the ultimate outcome of any of these proceedings or whether such ultimate outcome may have a material effect on our consolidated financial position. We report these proceedings to comply with Securities and Exchange Commission regulations, which require us to disclose proceedings arising under federal, state or local provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings will result in monetary sanctions of $0.1 million or more.
Superfund SitesWe are involved as a Potentially Responsible Party (PRP) at various sites designated by the U.S. Environmental Protection Agency (USEPA) as Superfund sites. For certain of these sites, we have evaluated the claims and potential liabilities and have determined that neither are material, individually or in the aggregate. For certain other sites, proceedings are in the very early stages and have not yet progressed to a point where it is possible to estimate the ultimate cost of remediation, the timing and extent of remedial action that may be required by governmental authorities or the amount of our liability alone or in relation to that of any other PRPs.
Other Environmental MattersWe establish and maintain reserves for other potential environmental costs, which amounted to $5.3$4.3 million and $5.4 million as of March 31, 2011.2012 and June 30, 2011, respectively. This accrual represents anticipated costs associated with the remediation of these issues. For the nine months ended March 31, 2011,2012 we recorded approximately $1.4 million related to an environmental liability in our international operations and unfavorablefavorable foreign currency translation adjustments of $0.8$0.4 million, partially offset by a $1.1an adjustment of $0.4 million reversaland cash payments of an international environmental liability. In addition, we paid a civil penalty of $0.2$0.3 million duringagainst the nine months ended March 31, 2011 related to our Chestnut Ridge, Pennsylvania facility closure discussed below.
26
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reserves we have established for environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the USEPA, other governmental agencies, and by the PRP groups in which we are participating. Although the reserves currently appear to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The reserved and unreserved exposures for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.
We maintain a Corporate Environmental, Health and Safety (EHS) Department, as well as an EHS Steering Committee, to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS coordinators who are responsible for each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EHS Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly basis, we review financial provisions and reserves for environmental contingencies and adjust these reserves when appropriate.
| 14. | INCOME TAXES |
The effective income tax rate for the three months ended March 31, 2012 and 2011 was 20.4 percent and 19.1 percent, respectively. The current year rate was unfavorably impacted by non-deductible acquisition related costs. These drivers were partially offset by favorable adjustments to certain tax reserves and the impact of stronger earnings in our pan European business model.
The effective income tax rate for the nine months ended March 31, 2012 and 2011 was 20.3 percent and 22.0 percent, respectively. The current year rate was favorably impacted by a $5.6 million reduction of a valuation allowance in the Netherlands, as well as the favorable impact of stronger operating results under our pan-European business strategy.
| 15. | EARNINGS PER SHARE |
Basic earnings per share are computed using the weighted average number of shares outstanding during the period, while diluted earnings per share are calculated to reflect the potential dilution that may occur related to the issuance of capital stock through grants of capital stock options, restricted stock awards and restricted stock units. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options, restricted stock awards and restricted stock units.
For purposes of determining the number of diluted shares outstanding, weighted average shares outstanding for basic earnings per share calculations were increased due solely to the dilutive effect of unexercised capital stock options, unvested restricted stock awards and unvested restricted stock units by 1.4 million shares for both the three months ended March 31, 2012 and 2011, respectively, and 1.3 million shares and 1.0 million shares for the nine months ended March 31, 2012 and 2011, respectively. Unexercised capital stock options, restricted stock units and restricted stock awards of 0.2 million shares for the three months ended March 31, 2012 and for the nine months ended March 31, 2012 and 2011 of 0.4 million and 0.7 million shares, respectively, were not included in the computation of diluted earnings per share because the inclusion would have been anti-dilutive. For the three months ended March 31, 2011 anti-dilutive shares were immaterial.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| 16. | EQUITY |
A summary of the changes in the carrying amounts of total equity, Kennametal shareowners’ equity and equity attributable to noncontrolling interests as of March 31, 2012 and 2011 is as follows:
| Kennametal Shareowners’ Equity | ||||||||||||||||||||||||
| (in thousands) | Capital stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Non- controlling interests | Total equity | ||||||||||||||||||
Balance as of June 30, 2011 | $ | 101,411 | $ | 470,758 | $ | 983,374 | $ | 82,529 | $ | 20,569 | $ | 1,658,641 | ||||||||||||
Net income | - | - | 221,182 | - | 3,099 | 224,281 | ||||||||||||||||||
Other comprehensive loss | - | - | - | (77,188 | ) | (2,249 | ) | (79,437 | ) | |||||||||||||||
Dividend reinvestment | 8 | 195 | - | - | - | 203 | ||||||||||||||||||
Capital stock issued under employee benefit and stock plans | 1,124 | 34,963 | - | - | - | 36,087 | ||||||||||||||||||
Purchase of capital stock | (2,508 | ) | (64,278 | ) | - | - | - | (66,786 | ) | |||||||||||||||
Cash dividends paid | - | - | (32,334 | ) | - | (167 | ) | (32,501 | ) | |||||||||||||||
Noncontrolling interest acquisition | - | - | - | - | 5,211 | 5,211 | ||||||||||||||||||
Total equity, March 31, 2012 | $ | 100,035 | $ | 441,638 | $ | 1,172,222 | $ | 5,341 | $ | 26,463 | $ | 1,745,699 | ||||||||||||
| Kennametal Shareowners’ Equity | ||||||||||||||||||||||||
| (in thousands) | Capital stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive (loss) income | Non- controlling interests | Total equity | ||||||||||||||||||
Balance as of June 30, 2010 | $ | 102,379 | $ | 492,454 | $ | 793,448 | $ | (72,781 | ) | $ | 17,943 | $ | 1,333,443 | |||||||||||
Net income | - | - | 143,073 | - | 2,376 | 145,449 | ||||||||||||||||||
Other comprehensive income | - | - | - | 108,896 | 2,030 | 110,926 | ||||||||||||||||||
Dividend reinvestment | 9 | 225 | - | - | - | 234 | ||||||||||||||||||
Capital stock issued under employee benefit and stock plans | 762 | 28,035 | - | - | - | 28,797 | ||||||||||||||||||
Purchase of capital stock | (883 | ) | (25,574 | ) | - | - | - | (26,457 | ) | |||||||||||||||
Cash dividends paid | - | - | (29,873 | ) | - | (132 | ) | (30,005 | ) | |||||||||||||||
Total equity, March 31, 2011 | $ | 102,267 | $ | 495,140 | $ | 906,648 | $ | 36,115 | $ | 22,217 | $ | 1,562,387 | ||||||||||||
The amounts of comprehensive income attributable to Kennametal shareowners and noncontrolling interests are disclosed in Note 17.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| 17. | COMPREHENSIVE INCOME |
Comprehensive income is as follows:
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| (in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Net income | $ | 76,237 | $ | 65,203 | $ | 224,281 | $ | 145,449 | ||||||||
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges, net of income tax (benefit) expense of ($0.0) million, $0.1 million, ($7.3) million and $1.4 million, respectively | (57 | ) | 98 | (11,591 | ) | 2,285 | ||||||||||
Reclassification of unrealized (gain) loss on expired derivatives designated and qualified as cash flow hedges, net of income tax expense (benefit) of $0.1 million, ($0.1) million, ($0.0) million and ($0.2) million, respectively | (88 | ) | 142 | 35 | 365 | |||||||||||
Unrecognized net pension and other postretirement benefit (loss) gain, net of income tax (benefit) expense of ($0.2) million, ($0.3) million, $0.2 million and ($0.8) million, respectively | (672 | ) | (1,294 | ) | 393 | (2,916 | ) | |||||||||
Reclassification of net pension and other postretirement benefit loss, net of income tax benefit of $0.7 million, $1.0 million, $2.2 million and $2.9 million, respectively | 1,291 | 1,868 | 3,864 | 5,588 | ||||||||||||
Foreign currency translation adjustments, net of income tax expense (benefit) of $17.2 million, $29.0 million, ($42.8) million and $ 11.3 million, respectively | 28,603 | 38,646 | (72,138 | ) | 105,604 | |||||||||||
Total comprehensive income | 105,314 | 104,663 | 144,844 | 256,375 | ||||||||||||
Comprehensive income attributable to noncontrolling interests | 1,323 | 1,258 | 850 | 4,406 | ||||||||||||
Comprehensive income attributable to Kennametal Shareowners | $ | 103,991 | $ | 103,405 | $ | 143,994 | $ | 251,969 | ||||||||
| 18. | GOODWILL AND OTHER INTANGIBLE ASSETS |
Goodwill represents the excess of cost over the fair value of the net assets of acquired companies. Goodwill and other intangible assets with indefinite lives are tested at least annually for impairment. We perform our annual impairment tests during the June quarter in connection with our annual planning process, unless there are impairment indicators that warrant a test prior to that. We have noted no impairment indicators warranting additional testing.
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 | |||||||||
Goodwill | $ | 411,945 | $ | 250,225 | $ | 662,170 | ||||||
Accumulated impairment losses | (150,842 | ) | - | (150,842 | ) | |||||||
Balance as of June 30, 2011 | $ | 261,103 | $ | 250,225 | $ | 511,328 | ||||||
Acquisition | $ | - | $ | 235,883 | $ | 235,883 | ||||||
Translation | (10,679 | ) | (5,184 | ) | (15,863 | ) | ||||||
Change in goodwill | (10,679 | ) | 230,699 | 220,020 | ||||||||
Goodwill | 401,266 | 480,924 | 882,190 | |||||||||
Accumulated impairment losses | (150,842 | ) | - | (150,842 | ) | |||||||
Balance as of March 31, 2012 | $ | 250,424 | $ | 480,924 | $ | 731,348 | ||||||
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of our other intangible assets were as follows:
| Estimated | March 31, 2012 | June 30, 2011 | ||||||||||||||||||
| (in thousands) | Useful Life (in years) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||
Contract-based | 4 to 15 | $ | 21,089 | $ | (5,659 | ) | $ | 6,349 | $ | (5,380 | ) | |||||||||
Technology-based and other | 4 to 15 | 38,405 | (24,693 | ) | 39,743 | (25,442 | ) | |||||||||||||
Customer-related | 10 to 20 | 182,527 | (41,867 | ) | 113,977 | (38,275 | ) | |||||||||||||
Unpatented technology | 15 to 30 | 47,529 | (6,319 | ) | 19,540 | (4,740 | ) | |||||||||||||
Trademarks | 5 to 20 | 14,236 | (7,162 | ) | 10,902 | (4,875 | ) | |||||||||||||
Trademarks | Indefinite | 36,838 | - | 40,480 | - | |||||||||||||||
Total | $ | 340,624 | $ | (85,700 | ) | $ | 230,991 | $ | (78,712 | ) | ||||||||||
As of March 1, 2012 we acquired Stellite in our Infrastructure segment. As a result we increased goodwill by $235.9 million and other intangible assets by $102.7 million based on preliminary purchase price allocations. These allocations are subject to revision based upon the finalization of the valuation of net assets expected to be completed in the fourth quarter of 2012. We recorded customer-related intangible assets of $72.7 million with an estimated useful life of 20 years, technology-based intangible assets of $28.3 million with an estimated useful life of 15 - 17 years and trademarks of $1.7 million with an estimated useful life of 5 years. These intangible assets will be amortized using the straight-line method over their respective estimated useful lives.
During the nine months ended March 31, 2012, we entered into a technology license agreement in our Infrastructure segment. This resulted in a $15.0 million increase of contract-based intangible assets. The technology license agreement will be amortized using the straight-line method over an estimated useful life of 10 years.
During the nine months ended March 31, 2012, we recorded amortization expense of $11.0 million related to our other intangible assets and unfavorable foreign currency translation adjustments of $4.1 million.
| 19. | SEGMENT DATA |
Kennametal delivers productivity to customers seeking peak performance in demanding environments by providing innovative custom and standard wear-resistant solutions, enabled through our advanced materials sciences, application knowledge and commitment to a sustainable environment. Our product offering includes a wide array of standard and custom solution products in metalworking, such as metalcutting tools and tooling systems, and advanced materials, such as cemented tungsten carbide products, to address customer demands. These products are offered through a variety of channels via an enterprise approach to customers in both of our operating segments.
The Industrial segment serves customers that operate in industrial end markets such as aerospace, defense, transportation and general engineering. The customers in these end markets manufacture engines, airframes, automobiles, trucks, ships and various industrial goods. The technology needs and level of customization vary by customer and industry served. We deliver value to our Industrial segment customers through our application expertise and diverse product offering.
The Infrastructure segment, which includes the Stellite acquisition, serves customers that operate in the earthworks and energy end markets. These customers support primary industries such as oil and gas, power generation, underground mining, surface and hard rock mining, highway construction and road maintenance. Generally, our Infrastructure segment customers are served through a customer intimacy model that allows us to offer full system solutions by gaining an in-depth understanding of our customers’ engineering needs. Our product offering promotes value by bringing enhanced performance and productivity to our customers’ processes and systems.
Corporate expenses related to executive retirement plans, the Company’s Board of Directors and strategic initiatives, as well as certain other costs, are reported as Corporate.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Our external sales and operating income by segment are as follows:
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| (in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
External sales: | ||||||||||||||||
Industrial | $ | 418,554 | $ | 391,763 | $ | 1,246,261 | $ | 1,091,560 | ||||||||
Infrastructure | 277,857 | 223,067 | 750,769 | 618,196 | ||||||||||||
Total external sales | $ | 696,411 | $ | 614,830 | $ | 1,997,030 | $ | 1,709,756 | ||||||||
Operating income: | ||||||||||||||||
Industrial | $ | 71,195 | $ | 54,145 | $ | 206,778 | $ | 132,410 | ||||||||
Infrastructure | 34,060 | 35,639 | 99,927 | 83,708 | ||||||||||||
Corporate | (1,963 | ) | (2,007 | ) | (7,754 | ) | (9,212 | ) | ||||||||
Total operating income | $ | 103,292 | $ | 87,777 | $ | 298,951 | $ | 206,906 | ||||||||
Interest expense | $ | 8,003 | $ | 5,767 | $ | 18,746 | $ | 17,294 | ||||||||
Other (income) expense, net | (486 | ) | 1,413 | (1,169 | ) | 3,071 | ||||||||||
Income before income taxes | $ | 95,775 | $ | 80,597 | $ | 281,374 | $ | 186,541 | ||||||||
| 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 believe that our reputation for manufacturing excellence, as well as our technological expertise and innovation in our principal products, has helped us to achieve a leading market presence in our primary markets. We believe we are one of the largest global providers of consumable metalcutting tools and tooling supplies. End users of our products include metalworking manufacturers and suppliers across a diverse array of industries, including the aerospace, defense, transportation, machine tool, light machinery and heavy machinery industries, as well as manufacturers, producers and suppliers in a number of other industries including coal mining, highway construction, quarrying, and oil and gas exploration and production industries. Our end users’ products include items ranging from airframes to coal mining, engines to oil wells and turbochargers to construction.
On March 1, 2012, we acquired all of the shares of Deloro Stellite Holdings 1 Limited (Stellite) pursuant to the terms of the Share Sale and Purchase Agreement dated January 13, 2012. The UK-based Stellite is a global manufacturer and provider of alloy-based critical wear solutions for extreme environments involving high temperature, corrosion and abrasion. Stellite employs approximately 1,300 people across seven primary operating facilities globally, including locations in the U.S., Canada, Germany, Italy, India and China. Stellite’s proprietary metal alloys, materials expertise, engineering design and fabrication capabilities complement Kennametal’s current business in the oil and gas, power generation, transportation and aerospace end markets. This acquisition is in alignment with our growth strategy and positions us to further achieve geographic and end market balance.
We acquired Stellite for a purchase price of approximately $383 million and funded the acquisition through existing credit facilities and operating cash flows, and remain committed to maintaining our investment grade ratings. The transaction is expected to be accretive to earnings in the fiscal year ending June 30, 2013.
We experienced strong growth for the March quarter across both business segments and all regions. Our sales of $696.4 million for the quarter ended March 31, 2012 grew 13 percent compared to sales for the March quarter one year ago. Sales growth was primarily due to organic growth which includes both volume and price and the impact of the Stellite acquisition.
We consumed higher cost raw materials in the quarter, while price levels remained unchanged. We had previously executed appropriate pricing actions and have continued to maintain our cost discipline during the quarter. We continue to monitor changes in raw material costs to ensure appropriate pricing.
Operating income was $103.3 million, an increase of $15.5 million compared to operating income of $87.8 million in the prior year quarter. The increase in operating income was driven by higher sales volume and price, partially offset by higher raw material costs and acquisition related charges.
We delivered a record March quarter earnings per diluted share of $0.93.
We had cash inflow from operating activities of $164.2 million during the nine months ended March 31, 2012, driven by our operating performance. Capital expenditures were $60.7 million during the nine months ended March 31, 2012.
In addition, we invested further in technology and innovation to continue delivering a high level of new products to our customers. Research and development expenses included in operating expense totaled $9.1 million for the three months ended March 31, 2012.
The following narrative provides further discussion and analysis of our results of operations, liquidity and capital resources, as well as other pertinent matters.
RESULTS OF CONTINUING OPERATIONS
SALES
Sales for the three months ended March 31, 2012 were $696.4 million, an increase of $81.6 million, or 13 percent, from $614.8 million in the prior year quarter. Sales increased due to organic growth of 8 percent and the impacts of acquisition of 4 percent and more business days of 3 percent, partially offset by an unfavorable impact from foreign currency. The improvement in sales was driven by better performance in both business segments and across all regions. Organic sales growth drivers were aerospace and defense of 14 percent, earthworks market of 12 percent, energy markets of 12 percent, general engineering of 7 percent while the transportation end market sales remained at a relatively similar level as the prior year.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |
| AND RESULTS OF OPERATIONS (CONTINUED) |
Sales for the nine months ended March 31, 2012 were $1,997.0 million, an increase of $287.2 million or 17 percent, from $1,709.8 million in the prior year quarter. Sales increased due to organic growth of 13 percent, the impact of more business days of 2 percent and a slightly favorable impact due to both acquisition and foreign currency effects. The improvement in sales was driven by better performance in both business segments and across all regions. Organic sales growth drivers were energy markets of 18 percent, earthworks market of 14 percent, general engineering of 13 percent, aerospace and defense of 13 percent and transportation of 7 percent.
GROSS PROFIT
Gross profit for the three months ended March 31, 2012 was $246.4 million, an increase of $16.4 million from $230.0 million in the prior year quarter. This increase was primarily due to an organic sales increase of $52 million, partially offset by higher raw material costs. The gross profit margin for the three months ended March 31, 2012 was 35.4 percent, as compared to 37.4 percent generated in the prior year quarter.
Gross profit for the nine months ended March 31, 2012 was $729.4 million, an increase of $110.7 million from $618.7 million in the prior year quarter. This increase was primarily due to an organic sales increase of $226.2 million, partially offset by higher raw material costs. The gross profit margin for the nine months ended March 31, 2012 was 36.5 percent, as compared to 36.2 percent generated in the prior year quarter.
OPERATING EXPENSE
Operating expense for the three months ended March 31, 2012 increased $0.6 million or less than 1 percent to $138.9 million compared to $138.3 million in the prior year quarter. The increase is primarily due to acquisition related costs of $5.7 million and Stellite operating expenditures of $2.5 million, partially offset by lower professional fees of $3.4 million, a decrease in restructuring and related charges of $2.5 million and favorable currency effects of $1.8 million.
Operating expense for the nine months ended March 31, 2012 increased $24.1 million or 6.1 percent to $419.5 million compared to $395.4 million in the prior year quarter. The increase is primarily due to an increase in employment costs of $13.5 million, including higher sales compensation of $8.1 million due to better operating performance, acquisition related costs of $5.7 million, Stellite operating expenditures of $2.5 million and an unfavorable impact of foreign currency effects of $6.9 million, partially offset by a decrease in restructuring and related charges of $3.2 million.
RESTRUCTURING CHARGES
During fiscal year 2011, we completed our restructuring plans to reduce costs and improve operating efficiencies. These actions related to the rationalization of certain manufacturing and service facilities as well as other employment cost reduction programs. As the restructuring programs were completed in fiscal 2011, there were no restructuring and related charges for the three and nine months ended March 31, 2012. The Company’s restructuring programs are delivering annual ongoing pre-tax savings of approximately $170 million now that all programs are fully implemented.
Restructuring and related charges recorded during the three months ended March 31, 2011 amounted to $5.5 million, including $1.6 million of restructuring charges, of which $0.6 million were related to inventory disposals and recorded in cost of goods sold. Restructuring related charges of $1.5 million and $2.4 million were recorded in cost of goods sold and operating expense, respectively, during the three months ended March 31, 2011.
Restructuring and related charges recorded during the nine months ended March 31, 2011 amounted to $14.9 million, including $8.7 million of restructuring charges, of which $1.0 million were related to inventory disposals and recorded in cost of goods sold. Restructuring related charges of $3.0 million and $3.2 million were recorded in cost of goods sold and operating expense, respectively, during the nine months ended March 31, 2011.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2012 of $8.0 million increased $2.2 million or 38.8 percent, from $5.8 million in the prior year quarter due to increased borrowings. Interest expense for the nine months ended March 31, 2012 of $18.7 million increased $1.4 million or 8.4 percent, from $17.3 million in the prior year quarter due to increased borrowings
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |
| AND RESULTS OF OPERATIONS (CONTINUED) |
OTHER (INCOME) EXPENSE, NET
Other income, net for the three months ended March 31, 2012 was $0.5 million compared to other expense, net of $1.4 million for the prior year quarter. The increase was primarily driven by favorable foreign currency transaction results of $1.5 million.
Other income, net for the nine months ended March 31, 2012 was $1.2 million compared to other expense, net of $3.1 million for the prior year quarter. The increase was primarily driven by favorable foreign currency transaction results of $3.9 million.
INCOME TAXES
The effective income tax rate for the three months ended March 31, 2012 and 2011 was 20.4 percent and 19.1 percent, respectively. The current year rate was unfavorably impacted by non-deductible acquisition related costs. These drivers were partially offset by favorable adjustments to certain tax reserves and the impact of stronger earnings in our pan European business model.
The effective income tax rate for the nine months ended March 31, 2012 and 2011 was 20.3 percent and 22.0 percent, respectively. The current year rate was favorably impacted by a $5.6 million reduction of a valuation allowance in the Netherlands as well as the favorable impact of stronger operating results under our pan-European business strategy.
During the quarter, we implemented a strategy that would provide incremental taxable income in the Netherlands. Based on this assessment, we believe that it is more likely than not that we will be able to realize an additional portion of the net deferred tax assets in this jurisdiction. With respect to the other jurisdictions, we will continue to monitor our ability to realize the net deferred tax assets in these jurisdictions, and if appropriate, will adjust the valuation allowance. Such an adjustment may result in a material reduction to tax expense in the period the adjustment occurs.
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 internal organizational structure, the manner in which we organize segments for making operating decisions and assessing performance, the availability of separate financial results and materiality considerations.
INDUSTRIAL
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| (in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
External sales | $ | 418,554 | $ | 391,763 | $ | 1,246,261 | $ | 1,091,560 | ||||||||
Operating income | 71,195 | 54,145 | 206,778 | 132,410 | ||||||||||||
For the three months ended March 31, 2012, Industrial external sales increased by 6.8 percent driven by organic sales growth of 5 percent and the impact of more business days of 4 percent, partially offset by unfavorable foreign currency effects. On an organic basis, sales growth was led by aerospace and defense growth of 14 percent and general engineering growth of 7 percent, while transportation end market sales remained at a relatively similar level as the prior year. The aerospace and defense end markets’ growth is due to the significant increase in commercial aircraft production. Growth in the general engineering end markets is attributable to new orders for industrial machinery as manufacturers have increased their capital spending, as well as increased metalworking machinery production driven by a modest reacceleration of the global economy. On a regional basis, organic sales increased by approximately 12 percent in the Americas, 11 percent in Europe and were relatively flat in Asia due to strong comparisons to the prior year. The increase in the Americas and Europe was driven by growth in the general engineering end markets. For comparison purposes, organic sales increased by approximately 32 percent in Asia, 29 percent in Europe and 23 percent in the Americas during the three months ended March 31, 2011.
For the three months ended March 31, 2012, Industrial operating income increased $17.1 million. The primary drivers of the increase in operating income were higher organic sales of $21.3 million, partially offset by an increase in raw material costs.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |
| AND RESULTS OF OPERATIONS (CONTINUED) |
For the nine months ended March 31, 2012, Industrial external sales increased by 14.2 percent, driven by organic sales growth of 12 percent, favorable foreign currency effects and the impact of more business days. On an organic basis, sales increased in all served market sectors led by strong growth in general engineering of 13 percent, aerospace and defense of 13 percent and transportation of 7 percent. Growth in the general engineering end markets is attributable to new orders for industrial machinery as manufacturers have increased their capital spending as well as increased metalworking machinery production driven by a reaccelerating economy. The aerospace and defense end markets’ growth is due to a significant increase in commercial aircraft production and the growth in the transportation end markets was due to an overall increase in global vehicles sales and production. On a regional basis, organic sales increased by approximately 15 percent in Europe, 15 percent in the Americas and 2 percent in Asia. The increase in the Americas and Europe was driven by growth in the general engineering end markets, and the growth in Asia was driven by the transportation end markets.
For the nine months ended March 31, 2012, Industrial operating income increased $74.4 million. The primary drivers of the increase in operating income were organic sales growth of $126.3 million, partially offset by higher raw material costs.
INFRASTRUCTURE
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| (in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
External sales | $ | 277,857 | $ | 223,067 | $ | 750,769 | $ | 618,196 | ||||||||
Operating income | 34,060 | 35,639 | 99,927 | 83,708 | ||||||||||||
For the three months ended March 31, 2012, Infrastructure external sales increased by 24.6 percent, driven by organic sales growth of 13 percent, 10 percent growth from acquisition and business days also favorably impacted sales by 3 percent, partially offset by unfavorable foreign currency effects. The organic increase was driven by higher sales in the energy and earthworks markets of 12 percent each. Energy related product sales increased due to increased drilling activity. Sales in the earthworks end markets increased due to an increase in construction machinery production. On a regional basis, organic sales increased by approximately 24 percent in Asia, 16 percent in Europe and 13 percent in the Americas. The increase in Asia and the Americas was driven by the performance in the earthworks markets, while the European increase was more evenly split between both the earthworks and energy markets. For comparison purposes, organic sales increased by approximately 20 percent in the Americas, 15 percent in Asia and 11 percent in Europe during the three months ended March 31, 2011.
For the three months ended March 31, 2012, Infrastructure operating income decreased $1.6 million. Operating income included $5.7 million of acquisition related costs. Operating income benefited from higher organic sales of $28.8 million, partially offset in part by an increase in raw material costs and $5.7 million of acquisition related costs.
For the nine months ended March 31, 2012, Infrastructure external sales increased by 21.4 percent, driven by organic sales growth of 16 percent, 4 percent growth from acquisition and favorable foreign currency effects. The organic increase was driven by higher sales in the energy and earthworks markets of 18 percent and 14 percent, respectively. Energy related product sales increased due to higher U.S. and international rig counts, as well as increased shale production and increased natural gas inventories. Sales in the earthworks end markets increased due to mining capacity expansion and the increase in construction machinery production. On a regional basis, organic sales increased by approximately 25 percent in Asia, 15 percent in the Americas and 13 percent in Europe. The increase in Asia and the Americas was driven by the performance in the earthworks markets, while the European increase was more evenly split between both the earthworks and energy markets.
For the nine months ended March 31, 2012, Infrastructure operating income increased $16.2 million. Operating income grew primarily due to higher organic sales of $99.8 million, partially offset by increase in raw material costs.
CORPORATE
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
| (in thousands) | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Corporate unallocated expense | $ | (1,963) | $ | (2,007) | $ | (7,754) | $ | (9,212) | ||||||||
For the three months ended March 31, 2012, unallocated expense remained relatively flat.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |
| AND RESULTS OF OPERATIONS (CONTINUED) |
For the nine months ended March 31, 2012, unallocated expense decreased $1.5 million to $7.8 million. The decrease was primarily due to lower strategic project spending of $4.7 million, offset by an increase in professional fees of $1.0 million and the timing of certain other charges.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is our primary source of funding for capital expenditures and internal growth.
On October 21, 2011, we entered into an amendment to our five year, multi-currency, revolving credit facility (2010 Credit Agreement), which is used to augment cash flow from operations and as an additional source of funds. The five-year, multi-currency, revolving credit facility (2011 Credit Agreement) extends to October 2016. 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 requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the agreement). We were in compliance with these financial covenants as of March 31, 2012. We had $29.2 million of borrowings outstanding under the 2011 Credit Agreement as of March 31, 2012. For the nine months ended March 31, 2012 average borrowings outstanding under the 2010 and 2011 Credit Agreements were approximately $117.1 million.
Borrowings under the 2011 Credit Agreement are guaranteed by our significant domestic subsidiaries.
On February 14, 2012, we issued $300 million of 3.875 percent Senior Unsecured Notes due in 2022. Interest will be paid semi-annually on February 15 and August 15 of each year. We intend to apply the net proceeds from this notes offering to the repayment of our outstanding 7.20 percent Senior Unsecured Notes at their June 15, 2012 maturity. Pending such use, proceeds will be utilized to repay outstanding indebtedness under our credit facility and for general corporate purposes.
Our 7.20 percent 10 year Senior Unsecured Notes issued in June 2002 with an aggregate face amount of $300 million were reclassified to current maturities of long-term debt as of June 30, 2011.
We 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 March 31, 2012, cash and cash equivalents of $125 million and short term intercompany advances made by our foreign subsidiaries to our United States parent of $216 million would not be available for use in the United States on a long term basis, without incurring U.S. federal and state income tax consequences. These short term intercompany advances are in the form of intercompany loans made over quarter end to repay borrowings under our revolving credit agreement and have duration of not more than fourteen days. We have not, 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, including liquidity needs associated with our domestic debt service requirements.
At March 31, 2012, cash and cash equivalents were $125.5 million, total debt, including notes payable and capital lease obligations, was $640.9 million and total Kennametal shareowners’ equity was $1,719.2 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 continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers.
On March 1, 2012 we acquired Stellite from Duke Street Capital for $382.6 million. We funded the acquisition through existing facilities and operating cash flow, and remain committed to maintaining our investment grade ratings.
There have been no other material changes in our contractual obligations and commitments since June 30, 2011.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |
| AND RESULTS OF OPERATIONS (CONTINUED) |
Cash Flow Provided by Operating Activities
During the nine months ended March 31, 2012, cash flow provided by operating activities was $164.2 million, compared to $125.0 million for the prior year period. Cash flow provided by operating activities for the current year period consisted of net income and non-cash items amounting to an inflow of $308.1 million, partially offset by changes in certain assets and liabilities netting to $143.9 million. Contributing to the changes in certain assets and liabilities was an increase in inventory of $85.3 million driven by higher inventory levels to meet higher demand, a decrease in accounts payable and accrued liabilities of $57.0 million primarily driven by accounts payable payments of $35.1 million and payment of $27.0 million of incentive compensation, a decrease in other of $2.4 million and an increase in accounts receivable of $1.5 million, offset by an increase in accrued income taxes of $2.3 million.
During the nine months ended March 31, 2011, cash flow provided by operating activities consisted of net income and non-cash items amounting to an inflow of $234.4 million, partially offset by changes in certain assets and liabilities netting to $109.4 million. Contributing to the changes in certain assets and liabilities was an increase in inventory of $74.7 million driven by an increase in production to meet higher demand and an increase in accounts receivable of $71.7 million due to higher sales volumes, partially offset by an increase in accounts payable and accrued liabilities of $37.3 million.
Cash Flow Used for Investing Activities
Cash flow used for investing activities was $448.4 million for the nine months ended March 31, 2012, compared to $22.9 million in the prior year period. During the current year period, cash flow used for investing activities included the acquisition of Stellite for $382.6 million and capital expenditures, net of $56.3 million, which consisted primarily of equipment upgrades and $10.0 million for the purchase of a technology license intangible in our Infrastructure segment.
During the nine months ended March 31, 2011, cash flow used for investing activities included capital expenditures, net of $25.3 million, which consisted primarily of an Enterprise Resource Planning system and equipment upgrades.
Cash Flow Provided by (Used for) Financing Activities
Cash flow provided by financing activities was $216.5 million for the nine months ended March 31, 2012 compared to cash flow used for financing activities of $57.7 million in the prior year period. During the current year period, cash flow provided by financing activities included $323.8 million net increase in borrowings, which included the issuance of $300 million of 3.875 percent Senior Unsecured Notes due in 2022 and $29.2 million of borrowings outstanding on our revolving credit facility, and $23.1 million of dividend reinvestment and the effect of employee benefit and stock plans. These cash flows were partially offset by $66.8 million used for the purchase of capital stock, $32.3 million of cash dividends paid to shareowners and $22.4 million payment related to the settlement of forward starting interest rate swap contracts.
During the nine months ended March 31, 2011, cash flow used for financing activities included $29.9 million of cash dividends paid to shareowners, $26.5 million used for the purchase of capital stock and $15.4 million net decrease in borrowings, partially offset by $15.1 million of dividend reinvestment and the effect of employee benefit and stock plans.
FINANCIAL CONDITION
Working capital was $493.2 million at March 31, 2012, an increase of $47.1 million from $446.1 million at June 30, 2011. The increase in working capital was driven primarily by an increase in inventories of $110.9 million due to higher business activity, an increase in accounts receivable of $34.0 million, a decrease in other current liabilities of $12.9 million driven primarily by the payout of incentive compensation and a decrease in accrued expenses of $8.4 million due to the timing of payments, partially offset by a decrease in cash and cash equivalents of $79.0 million driven primarily by the acquisition of Stellite and purchase of capital stock, partially offset by net increase in borrowings due to the issuance of $300 million of 3.875 percent Senior Unsecured Notes, an increase in current maturities of long-term debt and capital leases of $26.4 million, primarily due to the $29.2 million outstanding on the revolving credit facility, an increase in accrued income taxes of $9.6 million and a decrease in other current assets of $3.1 million. Foreign currency effects and the impact of the Stellite acquisition accounted for $39.6 million and $45.8 million of the working capital change, respectively.
Property, plant and equipment, net increased $42.6 million from $697.1 million at June 30, 2011 to $739.7 million at March 31, 2012, primarily due to the Stellite acquisition of $72.8 million and capital additions of $60.7 million, partially offset by depreciation expense of $63.2 million, unfavorable foreign currency impact of $20.7 million and capital disposals of $4.4 million.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |
| AND RESULTS OF OPERATIONS (CONTINUED) |
At March 31, 2012, other assets were $1,111.5 million, an increase of $341.7 million from $769.8 million at June 30, 2011. The driver for the increase was an increase in goodwill of $220.0 million, an increase in other intangible assets of $102.6 million, an increase in other assets of $15.3 million and an increase in deferred income taxes of $3.8 million. The change in goodwill was primarily due to an increase of $235.9 million related to the acquisition of Stellite and unfavorable foreign currency effects of $15.9 million. The change in other intangible assets was due to an increase of $102.7 million related to the to the intangibles acquired as part of the of Stellite acquisition, technology license intangible asset acquisition in our Infrastructure segment for $15.0 million, offset by amortization expense of $11.0 million and unfavorable foreign currency translation adjustments of $4.1 million. The increase in other assets was primarily due to increase in pension assets due to higher return on plan assets, higher deferred financing fees related to the issuance of $300 million of 3.875 percent Senior Unsecured Notes due in 2022 and higher prepaid charges.
Kennametal shareowners’ equity was $1,719.2 million at March 31, 2012, an increase of $81.1 million from $1,638.1 million at June 30, 2011. The increase was primarily due to net income attributable to Kennametal of $221.2 million and capital stock issued under employee benefit and stock plans of $36.1 million, partially offset by foreign currency translation adjustments of $72.1 million, purchase of capital stock of $66.8 million and cash dividends paid to shareowners of $32.3 million.
ENVIRONMENTAL MATTERS
The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain of our locations.
Superfund Sites We are involved as a PRP at various sites designated by the USEPA as Superfund sites. For certain of these sites, we have evaluated the claims and potential liabilities and have determined that neither are material, individually or in the aggregate. For certain other sites, proceedings are in the very early stages and have not yet progressed to a point where it is possible to estimate the ultimate cost of remediation, the timing and extent of remedial action that may be required by governmental authorities or the amount of our liability alone or in relation to that of any other PRPs.
Other Environmental MattersWe establish and maintain reserves for other potential environmental costs, which amounted to $4.3 million and $5.4 million as of March 31, 2012 and June 30, 2011, respectively. This accrual represents anticipated costs associated with the remediation of these issues. For the nine months ended March 31, 2012 we recorded favorable foreign currency translation adjustments of $0.4 million, an adjustment of $0.4 million and cash payments of $0.3 million against the reserve.
The reserves we have established for environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the USEPA, other governmental agencies, and by the PRP groups in which we are participating. Although the reserves currently appear to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The reserved and unreserved exposures for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.
We maintain a Corporate EHS Department, as well as an EHS Steering Committee, to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS coordinators who are responsible for each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EHS Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly basis, we review financial provisions and reserves for environmental contingencies and adjust these reserves when appropriate.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
There have been no changes to our critical accounting policies since June 30, 2010.
NEW ACCOUNTING STANDARDS
See Note 3 to our condensed consolidated financial statements set forth in Part I Item 1 of this Form 10-Q for a description of new accounting standards.
There have been no material changes to our market risk exposure since June 30, 2010.
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 were effective as of March 31, 2011.
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.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ISSUER PURCHASES OF EQUITY SECURITIES
| Maximum Number of | ||||||||||||||||
| Total Number of Shares | Shares that May Yet | |||||||||||||||
| Total Number of | Purchased as Part of | Be Purchased Under | ||||||||||||||
| Shares | Average Price | Publicly Announced | the Plans or | |||||||||||||
| Period | Purchased(1) | Paid per Share | Plans or Programs | Programs(2) | ||||||||||||
| January 1 through January 31, 2011 | 11,901 | $ | 39.48 | - | 7,702,200 | |||||||||||
| February 1 through February 28, 2011 | 379,837 | 40.36 | 374,100 | 7,328,100 | ||||||||||||
| March 1 through March 31, 2011 | 29,612 | 38.46 | 26,500 | 7,301,600 | ||||||||||||
| Total | 421,350 | $ | 40.20 | 400,600 | ||||||||||||
| 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) | ||||||||||||
January 1 through January 31, 2012 | 18,798 | $ | 39.14 | - | 4,505,100 | |||||||||||
February 1 through February 29, 2012 | 1,410 | 47.36 | - | 4,505,100 | ||||||||||||
March 1 through March 31, 2012 | 607 | 46.86 | - | 4,505,100 | ||||||||||||
Total | 20,815 | $ | 39.93 | - | ||||||||||||
| (1) | During the current period, |
| (2) | On October 26, 2010, the Company publicly announced a repurchase |
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| (2) | Plan of acquisition, reorganization, arrangement,liquidation or succession | |||
| Tax Deed Covenant relating to Deloro Stellite Holdings 1 Limited dated March 1, 2012 | Filed herewith. | |||
| (4) | Instruments defining the rights of security holders, including indentures | |||
| (4.1) | Indenture, dated as of February 14, 2012, by and between Kennametal Inc., as Issuer, and U.S. Bank National Association, as Trustee | Exhibit 4.1 of the Form 8-K filed February 14, 2012 is incorporated herein by reference. | ||
| (4.2) | First Supplemental Indenture, dated as of February 14, 2012, by and between Kennametal Inc., as Issuer, and U.S. Bank National Association, as Trustee | Exhibit 4.2 of the Form 8-K filed February 14, 2012 is incorporated herein by reference. | ||
| (31) | Rule 13a-14(a)/15d-14(a) Certifications | |||
| (31.1) | Certification executed by Carlos M. Cardoso, Chairman, President and Chief Executive Officer of Kennametal Inc. | Filed herewith. | ||
| (31.2) | Certification executed by Frank P. Simpkins, Vice President and Chief Financial Officer of Kennametal Inc. | Filed herewith. | ||
(32) | Section 1350 Certifications | |||
| (32.1) | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Carlos M. Cardoso, Chairman, President and Chief Executive Officer of Kennametal Inc., and Frank P. Simpkins, Vice President and Chief Financial Officer of Kennametal Inc. | Filed herewith. | ||
| (101) | XBRL | |||
| (101.INS)** | XBRL Instance Document | Filed herewith. | ||
| (101.SCH)** | XBRL Taxonomy Extension Schema Document | Filed herewith. | ||
| (101.CAL)** (101.DEF)** | XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Definition Linkbase | Filed herewith. Filed herewith. | ||
| (101.LAB)** | XBRL Taxonomy Extension Label Linkbase Document | Filed herewith. | ||
| (101.PRE)** | XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith. | ||
| ** | The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or part of a registration statement or prospects for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of these sections. |
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| KENNAMETAL INC. | ||||||
| Date: May 9, | By: | /s/ Martha A. Bailey | ||||
| Martha A. Bailey | ||||||
| Vice President Finance and Corporate Controller | ||||||
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