| Pennsylvania (State or other jurisdiction of incorporation or organization) |
25-0900168 (I.R.S. Employer Identification No.) |
World Headquarters |
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1600 Technology Way |
||
P.O. Box 231 |
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Latrobe, Pennsylvania
|
15650-0231 | |
(Address of principal executive offices)
|
(Zip Code) |
| Large accelerated filer [X] | Accelerated filer [ ] |
| Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [ ] |
| Title of Each Class | Outstanding at April 30, 2010 | |
| Capital Stock, par value $1.25 per share | 81,734,194 |
| ITEM 1. | FINANCIAL STATEMENTS |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands, except per share data) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Sales |
$ | 493,165 | $ | 424,387 | $ | 1,345,425 | $ | 1,613,822 | ||||||||
Cost of goods sold |
322,841 | 321,959 | 917,212 | 1,136,112 | ||||||||||||
Gross profit |
170,324 | 102,428 | 428,213 | 477,710 | ||||||||||||
Operating expense |
120,062 | 106,469 | 354,126 | 385,543 | ||||||||||||
Restructuring and asset impairment charges (Notes 8 and 19) |
20,720 | 142,826 | 31,898 | 157,442 | ||||||||||||
Amortization of intangibles |
3,239 | 3,196 | 9,946 | 9,874 | ||||||||||||
Operating income (loss) |
26,303 | (150,063 | ) | 32,243 | (75,149 | ) | ||||||||||
Interest expense |
6,531 | 6,658 | 18,856 | 21,741 | ||||||||||||
Other income, net |
(1,496 | ) | (5,319 | ) | (6,314 | ) | (9,949 | ) | ||||||||
Income (loss) from continuing operations before
income taxes |
21,268 | (151,402 | ) | 19,701 | (86,941 | ) | ||||||||||
Provision (benefit) for income taxes |
11,065 | (14,281 | ) | 11,026 | (1,203 | ) | ||||||||||
Income (loss) from continuing operations |
10,203 | (137,121 | ) | 8,675 | (85,738 | ) | ||||||||||
Loss from discontinued operations |
- | (592 | ) | (1,423 | ) | (165 | ) | |||||||||
Net income (loss) |
10,203 | (137,713 | ) | 7,252 | (85,903 | ) | ||||||||||
Less: Net income attributable to noncontrolling interests |
518 | 161 | 1,417 | 845 | ||||||||||||
Net income (loss) attributable to Kennametal |
$ | 9,685 | $ | (137,874 | ) | $ | 5,835 | $ | (86,748 | ) | ||||||
Amounts attributable to Kennametal Shareowners: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 9,685 | $ | (137,282 | ) | $ | 7,258 | $ | (86,583 | ) | ||||||
Loss from discontinued operations |
- | (592 | ) | (1,423 | ) | (165 | ) | |||||||||
Net income (loss) attributable to Kennametal |
$ | 9,685 | $ | (137,874 | ) | $ | 5,835 | $ | (86,748 | ) | ||||||
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL (Note 16) |
||||||||||||||||
Basic earnings (loss) per share: |
||||||||||||||||
Continuing operations |
$ | 0.12 | $ | (1.89 | ) | $ | 0.09 | $ | (1.18 | ) | ||||||
Discontinued operations |
- | (0.01 | ) | (0.02 | ) | - | ||||||||||
| $ | 0.12 | $ | (1.90 | ) | $ | 0.07 | $ | (1.18 | ) | |||||||
Diluted earnings (loss) per share: |
||||||||||||||||
Continuing operations |
$ | 0.12 | $ | (1.89 | ) | $ | 0.09 | $ | (1.18 | ) | ||||||
Discontinued operations |
- | (0.01 | ) | (0.02 | ) | - | ||||||||||
| $ | 0.12 | $ | (1.90 | ) | $ | 0.07 | $ | (1.18 | ) | |||||||
Dividends per share |
$ | 0.12 | $ | 0.12 | $ | 0.36 | $ | 0.36 | ||||||||
Basic weighted average shares outstanding |
81,358 | 72,673 | 80,756 | 73,238 | ||||||||||||
Diluted weighted average shares outstanding |
82,189 | 72,673 | 81,397 | 73,238 | ||||||||||||
1
| March 31, | June 30, | |||||||
| (in thousands, except per share data) | 2010 | 2009 | ||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 110,893 | $ | 69,823 | ||||
Accounts receivable, less allowance for doubtful accounts of
$27,649 and $25,228 |
317,136 | 278,977 | ||||||
Inventories (Note 12) |
372,594 | 381,306 | ||||||
Deferred income taxes |
52,347 | 51,797 | ||||||
Other current assets |
41,369 | 94,001 | ||||||
Total current assets |
894,339 | 875,904 | ||||||
Property, plant and equipment: |
||||||||
Land and buildings |
353,075 | 357,285 | ||||||
Machinery and equipment |
1,312,122 | 1,322,107 | ||||||
Less accumulated depreciation |
(983,603 | ) | (959,066 | ) | ||||
Property, plant and equipment, net |
681,594 | 720,326 | ||||||
Other assets: |
||||||||
Investments in affiliated companies |
2,253 | 2,138 | ||||||
Goodwill (Note 19) |
499,318 | 502,983 | ||||||
Other intangible assets, less accumulated amortization of $62,240 and
$53,159 (Note 19) |
162,686 | 174,453 | ||||||
Deferred income taxes |
22,206 | 23,129 | ||||||
Other |
48,913 | 48,041 | ||||||
Total other assets |
735,376 | 750,744 | ||||||
Total assets |
$ | 2,311,309 | $ | 2,346,974 | ||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt and capital leases (Note 13) |
$ | 2,604 | $ | 21,147 | ||||
Notes payable to banks |
16,085 | 28,218 | ||||||
Accounts payable |
94,256 | 87,176 | ||||||
Accrued income taxes |
10,930 | 18,897 | ||||||
Accrued expenses |
86,383 | 81,838 | ||||||
Other current liabilities (Note 8) |
167,001 | 141,693 | ||||||
Total current liabilities |
377,259 | 378,969 | ||||||
Long-term debt and capital leases, less current maturities (Note 13) |
317,486 | 436,592 | ||||||
Deferred income taxes |
73,954 | 71,281 | ||||||
Accrued pension and postretirement benefits |
132,014 | 132,787 | ||||||
Accrued income taxes |
5,005 | 5,497 | ||||||
Other liabilities |
31,270 | 54,393 | ||||||
Total liabilities |
936,988 | 1,079,519 | ||||||
Commitments and contingencies |
||||||||
EQUITY (Note 17) |
||||||||
Kennametal shareowners’ equity: |
||||||||
Preferred stock, no par value; 5,000 shares authorized; none issued |
- | - | ||||||
Capital stock, $1.25 par value; 120,000 shares authorized;
81,677 and 73,232 shares issued |
102,096 | 91,540 | ||||||
Additional paid-in capital |
484,870 | 357,839 | ||||||
Retained earnings |
762,751 | 786,345 | ||||||
Accumulated other comprehensive income |
3,215 | 11,719 | ||||||
Total Kennametal shareowners’ equity |
1,352,932 | 1,247,443 | ||||||
Noncontrolling interests |
21,389 | 20,012 | ||||||
Total equity |
1,374,321 | 1,267,455 | ||||||
Total liabilities and equity |
$ | 2,311,309 | $ | 2,346,974 | ||||
2
| Nine months ended March 31 (in thousands) | 2010 | a | 2009 | a | ||||
OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | 7,252 | $ | (85,903 | ) | |||
Adjustments for non-cash items: |
||||||||
Depreciation |
61,323 | 62,650 | ||||||
Amortization |
9,946 | 9,874 | ||||||
Stock-based compensation expense |
12,529 | 6,241 | ||||||
Restructuring and asset impairment charges (Note 8 and 19) |
366 | 113,730 | ||||||
Loss on divestiture |
527 | - | ||||||
Deferred income tax provision |
306 | (8,369 | ) | |||||
Other |
(3,969 | ) | (1,035 | ) | ||||
Changes in certain assets and liabilities, excluding effects of
acquisitions and divestitures: |
||||||||
Accounts receivable |
(34,750 | ) | 173,901 | |||||
Inventories |
4,524 | 4,319 | ||||||
Accounts payable and accrued liabilities |
9,109 | (87,953 | ) | |||||
Accrued income taxes |
16,686 | (12,759 | ) | |||||
Other |
8,788 | (10,957 | ) | |||||
Net cash flow provided by operating activities |
92,637 | 163,739 | ||||||
INVESTING ACTIVITIES |
||||||||
Purchases of property, plant and equipment |
(30,438 | ) | (92,712 | ) | ||||
Disposals of property, plant and equipment |
4,087 | 2,386 | ||||||
Acquisition of business assets, net of cash acquired |
- | (64,519 | ) | |||||
Proceeds from divestitures |
27,788 | - | ||||||
Other |
286 | (20 | ) | |||||
Net cash flow provided by (used for) investing activities |
1,723 | (154,865 | ) | |||||
FINANCING ACTIVITIES |
||||||||
Net decrease in notes payable |
(12,187 | ) | (16,053 | ) | ||||
Net (decrease) increase in short-term revolving and other lines of credit |
(18,400 | ) | 55,526 | |||||
Term debt borrowings |
439,327 | 779,319 | ||||||
Term debt repayments |
(555,041 | ) | (645,287 | ) | ||||
Purchase of capital stock |
(224 | ) | (127,648 | ) | ||||
Proceeds from interest rate swap agreement termination (Note 7) |
- | 12,566 | ||||||
Net proceeds from equity offering (Note 17) |
120,693 | - | ||||||
Dividend reinvestment and employee benefit and stock plans |
6,603 | 3,985 | ||||||
Cash dividends paid to shareowners |
(29,429 | ) | (26,686 | ) | ||||
Other |
(1,096 | ) | 1,642 | |||||
Net cash flow (used for) provided by financing activities |
(49,754 | ) | 37,364 | |||||
Effect of exchange rate changes on cash and cash equivalents |
(3,536 | ) | (34,526 | ) | ||||
CASH AND CASH EQUIVALENTS |
||||||||
Net increase in cash and cash equivalents |
41,070 | 11,712 | ||||||
Cash and cash equivalents, beginning of period |
69,823 | 86,478 | ||||||
Cash and cash equivalents, end of period |
$ | 110,893 | $ | 98,190 | ||||
3
| 1. | ORGANIZATION | |
| Kennametal Inc. was incorporated in Pennsylvania in 1943 and maintains its world headquarters in Latrobe, Pennsylvania. Kennametal Inc. and its subsidiaries (collectively, Kennametal or the Company) is a leading global manufacturer and supplier of tooling, engineered components and advanced materials consumed in production processes. End users of our products include metalworking manufacturers and suppliers across a diverse array of industries including the aerospace, automotive, 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, engines to oil wells and turbochargers to motorcycle parts. We operate two global business units consisting of Metalworking Solutions & Services Group (MSSG) and Advanced Materials Solutions Group (AMSG). |
| 2. | BASIS OF PRESENTATION | |
| The condensed consolidated financial statements, which include our accounts and those of our consolidated subsidiaries, should be read in conjunction with our 2009 Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, 2009 was derived from the audited balance sheet included in our 2009 Annual Report on Form 10-K. These interim statements are unaudited; however, we believe that all adjustments necessary for a fair statement of the results of the interim periods were made and all adjustments are normal, recurring adjustments. The results for the nine months ended March 31, 2010 and 2009 are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. For example, a reference to 2010 is to the fiscal year ending June 30, 2010. When used in this Form 10-Q, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its consolidated subsidiaries. |
| 3. | NEW ACCOUNTING STANDARDS | |
| As of September 30, 2009, Kennametal adopted Accounting Standards Codification (ASC) 105-10, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (ASC 105-10). The FASB Accounting Standards Codification (Codification) is the single source of authoritative nongovernmental accounting principles generally accepted in the United States of America (U.S. GAAP). The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all of the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. The Codification affects the way companies reference U.S. GAAP in financial statements and in their accounting policies. | ||
| As of March 31, 2010, Kennametal adopted Accounting Standards Update (ASU) 2010-09, “Subsequent events | ||
| (Topic 855) – Amendments to Certain Recognition and Disclosure Requirements” (ASU 2010-09). The FASB has amended its guidance on subsequent events to remove the date through which an entity has evaluated subsequent events. ASU 2010-09 is effective upon issuance. See Note 21 for additional disclosures. | ||
| As of March 31, 2010, Kennametal adopted ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements.” ASU 2010-06 requires new disclosures for fair value measurements and provides clarification for existing disclosures requirements. More specifically, this update will require (1) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers, and (2) information about purchases, sales, issuances and settlements to be presented separately (i.e., present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications are effective for Kennametal beginning | ||
| January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for Kennametal beginning July 1, 2011. See Note 5 for additional disclosures. |
4
| In February 2010, the FASB issued ASU 2010-08, “Technical Corrections to Various Topics.” This ASU primarily contains (1) technical corrections to various topics in the FASB Codification to eliminate inconsistencies and outdated provisions, and (2) miscellaneous clarifications to U.S. GAAP, including guidance on embedded derivatives and hedging. None of the corrections fundamentally change U.S. GAAP. However, clarifications made to the guidance on embedded derivatives and hedging may cause a change in application. ASU 2010-08 is effective for Kennametal beginning July 1, 2010. We do not expect this ASU to have a material impact on our condensed consolidated financial statements. | ||
| In December 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” The amendments in this update to the Codification are the result of Statement of Financial Accounting Standard (SFAS) No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASU 2009-17). ASU 2009-17 modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. ASU 2009-17 clarifies that the determination of whether a company is required to consolidate a variable interest entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. ASU 2009-17 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. ASU 2009-17 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. ASU 2009-17 is effective for Kennametal beginning July 1, 2010. We are in the process of evaluating the provisions of ASU 2009-17 to determine the impact of adoption on our condensed consolidated financial statements. | ||
| In December 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets.” The amendments in this update to the Codification are the result of SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140.” ASU 2009-16 requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. ASU 2009-16 is effective for Kennametal beginning July 1, 2010. We are in the process of evaluating the provisions of ASU 2009-16 to determine the impact of adoption on our condensed consolidated financial statements. | ||
| In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements.” The amendments in this update to the Codification are the result of Emerging Issues Task Force (EITF) Issue No. 08-1, “Revenue Arrangements with Multiple Deliverables” (ASU 2009-13). ASU 2009-13 will allow companies to allocate arrangement consideration in multiple deliverable arrangements in a manner that better reflects the transaction’s economics and will often result in earlier revenue recognition. In addition, the residual method of allocating arrangement consideration is no longer permitted under ASU 2009-13. ASU 2009-13 is to be applied prospectively and is effective for Kennametal beginning July 1, 2010. We are in the process of evaluating the provisions of ASU 2009-13 to determine the impact of adoption on our condensed consolidated financial statements. | ||
| As of September 30, 2009, Kennametal adopted ASU 2009-05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.” ASU 2009-05 supplements and amends the guidance in ASC 820, “Fair Value Measurements and Disclosures,” to clarify how an entity should measure the fair value of liabilities. ASU 2009-05 also clarifies that restrictions preventing the transfer of a liability should not be considered as a separate input or adjustment in the measurements of its fair value. The adoption of ASU 2009-05 did not have a material impact on our condensed consolidated financial statements. See Note 5 for additional disclosures. | ||
| As of September 30, 2009, Kennametal adopted ASC 825-10, “Interim Disclosure about Fair Value of Financial Instruments.” ASC 825-10 expands required fair value disclosures to interim periods for all financial instruments that are within the scope of ASC 825-10, “Disclosures about Fair Value of Financial Instruments.” ASC 825-10 also requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments as well as significant changes in such methods and assumptions from prior periods. The adoption of ASC 825-10 expanded the related disclosures in our condensed consolidated financial statements. See Note 6 for additional disclosures. | ||
| As of July 1, 2009, Kennametal adopted ASC 805-20, “Business Combinations” which establishes principles and requirements for how an acquirer accounts for business combinations and includes guidance for the recognition, measurement and disclosure of the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. It also provides guidance for the measurement of goodwill, the recognition of contingent consideration and the accounting for preacquisition gain and loss contingencies, as well as acquisition-related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. ASC 805-20 is to be applied prospectively. The adoption of ASC 805-20 expanded the disclosure requirements for goodwill and requires companies to disclose the gross amount of goodwill before and after accumulated impairment losses. See Note 19 for additional disclosures. |
5
| As of July 1, 2009, Kennametal adopted ASC 805-20, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” This new guidance amends the previous guidance on “Business Combinations” and establishes a model to account for preacquisition contingencies. ASC 805-20 requires an acquirer to recognize at fair value an asset or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value can be determined during the measurement period. If the acquisition-date fair value cannot be determined, then the acquirer should follow the recognition criteria ASC 450-20, “Accounting for Contingencies” and “Reasonable Estimation of the Amount of a Loss,” to determine whether the contingency should be recognized as of the acquisition date or after it. The adoption of ASC 805-20, which is to be applied prospectively, had no impact on our condensed consolidated financial statements given we had no acquisitions during the nine months ended March 31, 2010. | ||
| As of July 1, 2009, Kennametal adopted ASC 350-30, “Accounting for Defensive Intangible Assets.” ASC 350-30 applies to all acquired intangible assets in situations in which the entity does not intend to actively use the asset but intends to hold the asset to prevent others from obtaining access to the asset with limited exceptions. ASC 350-30 requires that defensive intangible assets be accounted for as a separate unit of accounting and be assigned a useful life. The adoption of ASC 350-30 had no impact on our condensed consolidated financial statements as we have no defensive intangible assets. | ||
| As of July 1, 2009, Kennametal adopted ASC 715-20, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” ASC 715-20 expands the current disclosure requirements in ASC 715-20, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The additional guidance in ASC 715-20 requires companies to disclose how investment allocation decisions are made by management, major categories of plan assets, significant concentrations of risk within plan assets and information about the valuation of plan assets. Additional footnote disclosures will be required in our consolidated financial statements included in our 2010 Annual Report on Form 10-K. | ||
| As of July 1, 2009, Kennametal adopted ASC 323-10, “Equity Method Investment Accounting Considerations.” ASC 323-10 addresses a number of matters associated with the impact that ASC 805-20 and ASC 810-10 “Noncontrolling Interest in Consolidated Financial Statements” might have on the accounting for equity method investments. ASC 323-10 provides guidance on how an equity method investment should initially be measured, how it should be tested for impairment and how changes in classification from equity method to cost method should be treated as well as other issues. The adoption of ASC 323-10 had no impact on our condensed consolidated financial statements. | ||
| As of July 1, 2009, Kennametal adopted ASC 260-10, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” ASC 260-10 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The adoption of ASC 260-10 did not have a material impact on our condensed consolidated financial statements. | ||
| As of July 1, 2009, Kennametal adopted ASC 810-10, “Noncontrolling Interests in Consolidated Financial Statements” to establish accounting and reporting standards for any noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810-10 clarifies that a noncontrolling interest in a subsidiary should be reported as a component of equity in the consolidated financial statements and requires disclosure on the face of the consolidated statement of income of the amounts of consolidated net income attributable to the parent and to the noncontrolled interest. ASC 810-10 has also changed the related disclosure requirements for our condensed consolidated financial statements. See the condensed consolidated statements of income, condensed consolidated balance sheet and Note 17 for required disclosures. | ||
| On July 1, 2009, Kennametal adopted ASC 820-10, “Fair Value Measurements” as it relates to nonfinancial assets and nonfinancial liabilities. The adoption of ASC 820-10 did not have an impact on our condensed consolidated financial statements. |
6
| 4. | SUPPLEMENTAL CASH FLOW DISCLOSURES |
| Nine months ended March 31 (in thousands) | 2010 | 2009 | ||||||
Cash paid (refunded) during the period for: |
||||||||
Interest |
$ | 16,043 | $ | 15,474 | ||||
Income taxes |
(5,129 | ) | 12,361 | |||||
Supplemental disclosure of non-cash information: |
||||||||
Contribution of stock to employees’ defined contribution benefit plans |
4,248 | 225 | ||||||
Change in fair value of interest rate swaps |
- | 730 | ||||||
Changes in accounts payable related to purchases of property, plant and
equipment |
- | (12,800 | ) | |||||
| 5. | FAIR VALUE MEASUREMENTS | |
| Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Fair value measurements are assigned a level within the hierarchy based on the lowest significant input level. The three levels of the fair value hierarchy are described 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 identical or 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, 2010, the fair values of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows: |
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
||||||||||||||||
Current assets: |
||||||||||||||||
Derivative contracts |
||||||||||||||||
Range forward contracts a |
$ | - | $ | 66 | $ | - | $ | 66 | ||||||||
Currency forward contracts a |
- | 56 | - | 56 | ||||||||||||
Total current assets |
$ | - | $ | 122 | $ | - | $ | 122 | ||||||||
Current liabilities: |
||||||||||||||||
Derivative contracts |
||||||||||||||||
Range forward contracts a |
$ | - | $ | 8 | $ | - | $ | 8 | ||||||||
Currency forward contracts a |
- | 814 | - | 814 | ||||||||||||
Total current liabilities |
$ | - | $ | 822 | $ | - | $ | 822 | ||||||||
| a Foreign currency derivative contracts are valued based on observable market spot and forward rates and are classified within Level 2 of the fair value hierarchy. |
7
| 6. | FINANCIAL INSTRUMENTS | |
| The methods used to estimate the fair value of our financial instruments are as follows: | ||
| Cash and Equivalents, Current Maturities of Long-Term Debt and Notes Payable to Banks The carrying amounts approximate their fair value because of the short maturity of the instruments. | ||
| Long-Term Debt Fixed rate debt had a fair market value of $325.9 million and $314.1 million at March 31, 2010 and June 30, 2009, respectively. The fair value is determined based on the quoted market price of this debt as of March 31, 2010 and June 30, 2009, respectively. |
| 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 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, net. | ||
| The fair value of derivatives designated and not designated as hedging instruments in the condensed consolidated balance sheet are as follows: |
| March 31, | June 30, | |||||||
| (in thousands) | 2010 | 2009 | ||||||
Derivatives designated as hedging instruments: |
||||||||
Other current assets - range forward contracts |
$ | 66 | $ | 182 | ||||
Other current liabilities - range forward contracts |
(8 | ) | - | |||||
Total derivatives designated as hedging instruments |
58 | 182 | ||||||
Derivatives not designated as hedging instruments: |
||||||||
Other current assets - currency forward contracts |
56 | 13 | ||||||
Other current liabilities - currency forward contracts |
(814 | ) | (36 | ) | ||||
Total derivatives not designated as hedging instruments |
(758 | ) | (23 | ) | ||||
Total derivatives |
$ | (700 | ) | $ | 159 | |||
| Certain currency forward contracts hedging significant cross-border intercompany loans are considered as other derivatives and therefore do not qualify for hedge accounting. These contracts are recorded at fair value in the balance sheet, with the offset to other income, net. Losses (gains) related to derivatives not designated as hedging instruments have been recognized as follows: |
| Nine months ended March 31 (in thousands) | 2010 | 2009 | ||||||
Other expense (income), net - currency forward contracts |
$ | 794 | $ | (10 | ) | |||
| FAIR VALUE HEDGES | ||
| Fixed-to-floating interest rate swap agreements, designated as fair value hedges, are entered into from time to time to hedge our exposure to fair value fluctuations on a portion of our fixed rate debt. These interest rate swap agreements convert a portion of our fixed rate debt to floating rate debt. These contracts require periodic settlement and the difference between amounts to be received and paid under the interest rate swap agreements is recognized in interest expense. We record the gain or loss on these contracts as an asset or a liability, as applicable, in the balance sheet, with the offset to the carrying value of the debt. Any gain or loss resulting from changes in the fair value of these contracts offsets the corresponding gains or losses from changes in the fair values of the debt. |
8
| In February 2009, we terminated interest rate swap agreements to convert $200.0 million of our fixed rate debt to floating rate debt. These agreements 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 nine months ended March 31, 2010, $4.2 million was recognized as a reduction in interest expense. We had no such agreements outstanding at March 31, 2010. | ||
| Gains related to fair value hedges represent a reduction in interest expense and have been recognized as follows: |
| Nine months ended March 31 (in thousands) | 2010 | 2009 | ||||||
Interest expense – interest rate swap agreements |
$ | (4,167 | ) | $ | (1,804 | ) | ||
| 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 (loss), net of tax, and are recognized as a component of other income, net when the underlying sale of products or services are recognized into earnings. The notional amount of the contracts translated into U.S. dollars at March 31, 2010 and 2009, was $17.8 million and $38.0 million, respectively. The time value component of the fair value of range forwards is excluded from the assessment of hedge effectiveness. Over the next 12 months assuming the market rates remain constant with the rates at March 31, 2010, we do not expect to recognize into earnings any significant gains or losses on outstanding derivatives. | ||
| Floating-to-fixed interest rate swap agreements, designated as cash flow hedges, are entered into from time to time to hedge our exposure to interest rate changes on a portion of our floating rate debt. These interest rate swap agreements convert a portion of our floating rate debt to fixed rate debt. We record the fair value of these contracts as an asset or a liability, as applicable, in the balance sheet, with the offset to accumulated other comprehensive income (loss), net of tax (AOCI). We had no such agreements outstanding at March 31, 2010. | ||
| Losses (gains) related to cash flow hedges have been recognized as follows: |
| Nine months ended March 31 (in thousands) | 2010 | 2009 | ||||||
Loss (gains) recognized in other comprehensive (loss) income -
range forward
contracts |
$ | 27 | $ | (5,400 | ) | |||
Gains reclassifed from accumulated other comprehensive (loss) income
into other (income) expense, net – range forward contracts |
$ | (1,477 | ) | $ | (4,816 | ) | ||
| For the nine months ended March 31, 2010 and 2009, no portion of the gains or losses recognized in earnings were due to ineffectiveness and no amount was excluded from our effectiveness testing. |
| 8. | RESTRUCTURING CHARGES | |
| As previously announced, the Company continued to implement restructuring plans to reduce costs and improve operating efficiencies. These actions relate to the rationalization of certain manufacturing and service facilities, as well as other employment and cost reduction programs. Restructuring and related charges recorded in the nine months ended March 31, 2010 amounted to $35.6 million, including $32.2 million of restructuring charges, of which $0.3 million related to inventory disposals and were recorded in cost of goods sold. During the nine months ended March 31, 2010, restructuring related charges of $2.3 million were recorded in cost of goods sold and $1.1 million in operating expense. We realized pre-tax benefits from these restructuring programs of approximately $36 million and $98 million for the three and nine months ended March 31, 2010, respectively. | ||
| Restructuring and related charges recorded in the nine months ended March 31, 2009 amounted to $52.1 million, including $47.4 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 $5.9 million were recorded in cost of goods sold and a restructuring-related benefit of $1.2 million was recorded in operating expense during the nine months ended March 31, 2009. |
9
| Asset | Cash | |||||||||||||||||||||||
| (in thousands) | June 30, 2009 | Expense | Write-down | Expenditures | Translation | March 31, 2010 | ||||||||||||||||||
MSSG |
||||||||||||||||||||||||
Severance |
$ | 19,988 | $ | 10,667 | $ | - | $ | (25,401 | ) | $ | 215 | $ | 5,469 | |||||||||||
Facilities |
518 | 552 | (288 | ) | (141 | ) | (20 | ) | 621 | |||||||||||||||
Other |
201 | 384 | - | (744 | ) | 135 | (24 | ) | ||||||||||||||||
Total MSSG |
20,707 | 11,603 | (288 | ) | (26,286 | ) | 330 | 6,066 | ||||||||||||||||
AMSG |
||||||||||||||||||||||||
Severance |
4,465 | 13,128 | - | (5,003 | ) | 4 | 12,594 | |||||||||||||||||
Facilities |
158 | 78 | (78 | ) | - | - | 158 | |||||||||||||||||
Other |
48 | 300 | - | (79 | ) | (8 | ) | 261 | ||||||||||||||||
Total AMSG |
4,671 | 13,506 | (78 | ) | (5,082 | ) | (4 | ) | 13,013 | |||||||||||||||
Corporate |
||||||||||||||||||||||||
Severance |
1,584 | 7,077 | - | (3,716 | ) | (10 | ) | 4,935 | ||||||||||||||||
Total Corporate |
1,584 | 7,077 | - | (3,716 | ) | (10 | ) | 4,935 | ||||||||||||||||
Total |
$ | 26,962 | $ | 32,186 | $ | (366 | ) | $ | (35,084 | ) | $ | 316 | $ | 24,014 | ||||||||||
| 9. | DISCONTINUED OPERATIONS | |
| On June 30, 2009, we completed the sale of our high speed steel drills and related product lines as we continued to focus on shaping our business portfolio and rationalizing our manufacturing footprint. This divestiture, which was part of our MSSG segment, was accounted for as discontinued operations. Cash proceeds received from this divestiture amounted to $29.0 million. We did not incur any pre-tax charges related to this divestiture during the three months ended March 31, 2010. We incurred pre-tax charges related to the divestiture of $2.3 million during the nine months ended March 31, 2010. These pre-tax charges as well as the related tax effects were recorded in discontinued operations. We do not expect to incur any additional pre-tax charges related to this divestiture. | ||
| The following represents the results of discontinued operations: |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Sales |
$ | - | $ | 16,924 | $ | - | $ | 65,438 | ||||||||
Loss from discontinued operations before income taxes |
$ | - | $ | (972 | ) | $ | (2,269 | ) | $ | (419 | ) | |||||
Income tax benefit |
- | 380 | 846 | 254 | ||||||||||||
Loss from discontinued operations |
$ | - | $ | (592 | ) | $ | (1,423 | ) | $ | (165 | ) | |||||
10
| 10. | STOCK-BASED COMPENSATION | |
| Stock options are granted to eligible employees at fair market value on the date of grant. Stock options are exercisable under specific conditions for up to 10 years from the date of grant. On October 21, 2008, at its Annual Meeting of Shareowners, the Company’s shareowners approved the Amended and Restated Kennametal Stock and Incentive Plan of 2002 (the 2002 Plan). The 2002 Plan was amended primarily to (i) increase the aggregate number of shares of the Company’s Capital Stock available for issuance under the 2002 Plan from 7,500,000 to 9,000,000, (ii) place a limit on the number of full share awards that may be made under the 2002 Plan, and (iii) provide that shares delivered to or withheld by the Company to pay withholding taxes under the 2002 Plan or any of the Company’s prior stock plans and shares not issued upon the net settlement or net exercise of stock appreciation rights, in each case, will no longer be available for future grants under the 2002 Plan. In addition to stock option grants, the 2002 Plan permits the award of restricted stock and restricted stock units to directors, officers and key employees. | ||
| Options | ||
| The assumptions used in our Black-Scholes valuation related to stock option grants made during the nine months ended March 31, 2010 and 2009 were as follows: |
| 2010 | 2009 | |||||||
Risk-free interest rate |
2.3% | 3.0% | ||||||
Expected life (years) (1) |
4.5 | 4.5 | ||||||
Expected volatility (2) |
43.9% | 27.7% | ||||||
Expected dividend yield |
1.8% | 1.3% | ||||||
| Weighted | ||||||||||||||||
| Weighted | Average | Aggregate | ||||||||||||||
| Average Exercise | Remaining | Intrinsic value | ||||||||||||||
| Options | Price | Life (years) | (in thousands) | |||||||||||||
Options outstanding, June 30, 2009 |
3,389,355 | $ | 25.95 | |||||||||||||
Granted |
937,537 | 21.63 | ||||||||||||||
Exercised |
(238,553 | ) | 18.17 | |||||||||||||
Lapsed and forfeited |
(234,302 | ) | 27.85 | |||||||||||||
Options outstanding, March 31, 2010 |
3,854,037 | $ | 25.27 | 6.4 | $ | 16,431 | ||||||||||
Options vested and expected to vest, March 31, 2010 |
3,754,634 | $ | 25.28 | 6.4 | $ | 15,996 | ||||||||||
Options exercisable, March 31, 2010 |
2,195,467 | $ | 24.59 | 4.8 | $ | 10,459 | ||||||||||
11
| Weighted | ||||||||
| Average Fair | ||||||||
| Shares | Value | |||||||
Unvested restricted stock awards, June 30, 2009 |
419,761 | $ | 31.99 | |||||
Vested |
(179,173 | ) | 31.33 | |||||
Lapsed and forfeited |
(27,854 | ) | 32.80 | |||||
Unvested restricted stock awards, March 31, 2010 |
212,734 | $ | 32.56 | |||||
| Weighted | ||||||||
| Stock | Average Fair | |||||||
| Units | Value | |||||||
Unvested time vesting restricted stock units, June 30, 2009 |
- | $ | - | |||||
Granted |
602,883 | 24.23 | ||||||
Lapsed and forfeited |
(13,179 | ) | 21.55 | |||||
Unvested time vesting restricted stock units, March 31,
2010 |
589,704 | $ | 24.28 | |||||
| 2010 | 2009 | |||||||
Expected quarterly dividend per share |
N/A | $ | 0.12 | |||||
Risk-free interest rate |
N/A | 2.3% | ||||||
12
| 2010 | 2009 | |||||||
Expected volatility |
N/A | 34.1 | % | |||||
Expected dividend yield |
N/A | 2.0 | % | |||||
Risk-free interest rate |
N/A | 2.3 | % | |||||
| 11. | BENEFIT PLANS | |
| We sponsor several defined benefit pension plans. Additionally, we provide varying levels of postretirement health care and life insurance benefits to most U.S. employees. | ||
| The table below summarizes the components of net periodic pension cost: |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Service cost |
$ | 1,976 | $ | 1,912 | $ | 5,971 | $ | 5,800 | ||||||||
Interest cost |
10,525 | 10,191 | 31,875 | 31,044 | ||||||||||||
Expected return on plan assets |
(11,519 | ) | (11,519 | ) | (34,683 | ) | (34,996 | ) | ||||||||
Amortization of transition obligation |
12 | 13 | 41 | 44 | ||||||||||||
Amortization of prior service credit |
(70 | ) | (54 | ) | (210 | ) | (160 | ) | ||||||||
Special termination benefits |
1,610 | - | 3,577 | - | ||||||||||||
Recognition of actuarial losses |
1,104 | 467 | 3,355 | 1,425 | ||||||||||||
Net periodic pension cost |
$ | 3,638 | $ | 1,010 | $ | 9,926 | $ | 3,157 | ||||||||
13
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Service cost |
$ | 25 | $ | 89 | $ | 74 | $ | 267 | ||||||||
Interest cost (benefit) |
316 | (233 | ) | 949 | 604 | |||||||||||
Amortization of prior service cost |
2 | 12 | 6 | 36 | ||||||||||||
Recognition of actuarial gains |
(92 | ) | (21 | ) | (276 | ) | (63 | ) | ||||||||
Curtailment gain |
- | (3,169 | ) | - | (3,169 | ) | ||||||||||
Net periodic other postretirement
cost (benefit) |
$ | 251 | $ | (3,322 | ) | $ | 753 | $ | (2,325 | ) | ||||||
| 12. | INVENTORIES | |
| We used the last-in, first-out (LIFO) method of valuing inventories for approximately 50 percent and 49 percent of total inventories at March 31, 2010 and June 30, 2009, respectively. Because inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs. Therefore, the interim financial results are subject to any final year-end LIFO inventory adjustments. | ||
| Inventories consisted of the following: |
| March 31, | June 30, | |||||||
| (in thousands) | 2010 | 2009 | ||||||
Finished goods |
$ | 229,846 | $ | 242,276 | ||||
Work in process and powder blends |
133,245 | 134,713 | ||||||
Raw materials and supplies |
72,224 | 78,851 | ||||||
Inventories at current cost |
435,315 | 455,840 | ||||||
Less: LIFO valuation |
(62,721 | ) | (74,534 | ) | ||||
Total inventories |
$ | 372,594 | $ | 381,306 | ||||
| 13. | DEBT AND CAPITAL LEASES | |
| Debt and capital lease obligations consist primarily of Senior Unsecured Notes issued in June 2002 having an aggregate face amount of $300.0 million as well as borrowings under a five-year, multi currency, revolving credit facility entered into in March 2006 (2006 Credit Agreement) which permits revolving credit loans of up to $500.0 million. The 2006 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). | ||
| On July 6, 2009, we entered into an amendment to our 2006 Credit Agreement. The amendment provides for the exclusion of certain cash restructuring charges from the earnings component used in the calculation of the leverage and interest ratios. In addition, the amendment provides for an increase in the permitted leverage ratio for certain quarterly measurement dates. The amendment also provides restrictions on share repurchases and securitizations, as well as future acquisitions and capital leases should leverage ratios exceed the permitted ratio that prevailed prior to the amendment. Furthermore, the amendment would require security interest in our domestic accounts receivable and inventories should our leverage ratio exceed a certain threshold. The amendment includes an increase in interest rates on borrowings of approximately 200 basis points. |
14
| 14. | ENVIRONMENTAL MATTERS | |
| We are subject to various U.S. Federal, state and international environmental laws and regulatory requirements and are involved from time to time in investigations or proceedings of various potential environmental issues concerning activities at our facilities or former facilities or remediation efforts as a result of past activities (including past activities of companies we have acquired). From time to time, we receive notices from the U.S. Environmental Protection Agency or equivalent state or international environmental agencies that we are a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as the “Superfund Act”) and/or equivalent laws. These notices assert potential liability for cleanup costs at various sites, which include sites owned by us, sites we previously owned and treatment or disposal sites not owned by us. | ||
| Superfund Sites We are involved as a PRP at several Superfund sites, and have responded to notices for other Superfund sites as to which our records disclose no involvement or for which predecessors of certain of our acquired companies have acknowledged responsibility. We have established reserves that we believe to be adequate to cover our share of the potential costs of remediation at certain of the Superfund sites; at March 31, 2010, the total of these accruals was $0.2 million. For the remaining Superfund sites, proceedings in those matters have not yet progressed to a stage 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 Issues We also maintain reserves for other potential environmental issues. At March 31, 2010, the total of these accruals was $5.1 million and represents anticipated costs associated with the remediation of these issues. We recorded favorable foreign currency translation adjustments of $0.2 million during the nine months ended March 31, 2010 related to these reserves. |
| 15. | INCOME TAXES | |
| The effective income tax rate for the three months ended March 31, 2010 and 2009 was 52.0 percent (provision on income) compared to 9.4 percent (benefit on a loss), respectively. The change in the rate from the prior year was primarily driven by restructuring and related charges in tax jurisdictions where the associated tax benefits were offset by a valuation allowance and a greater percent of earnings in higher tax jurisdictions in the current year, as well as the impact of a goodwill impairment charge recorded in the prior year. | ||
| The effective income tax rate for the nine months ended March 31, 2010 and 2009 was 56.0 percent (provision on income) compared to 1.4 percent (benefit on a loss), respectively. The current year rate reflects the impact of restructuring and related charges in tax jurisdictions where the associated tax benefits were offset by a valuation allowance and a greater percent of earnings in higher tax jurisdictions. The prior year rate reflects the impact of a goodwill impairment charge. |
| 16. | EARNINGS PER SHARE | |
| Basic earnings per share is computed using the weighted average number of shares outstanding during the period, while diluted earnings per share is calculated to reflect the potential dilution that occurs related to the issuance of capital stock under stock option grants, 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, restricted stock awards and restricted stock units by 0.8 million shares and 0.6 million shares for the three and nine months ended March 31, 2010, respectively. For the three and nine months ended March 31, 2009, the effect of all unexercised capital stock options, restricted stock awards and restricted stock units were anti-dilutive as the Company was in a net loss position and therefore had been excluded from diluted shares outstanding as well as from the diluted earnings per share calculation. Common stock equivalents of 1.2 million shares for the three months ended March 31, 2010 and 3.0 million shares for the nine months ended March 31, 2010 are not included in the computation of diluted earnings per share because they would have been anti-dilutive. |
15
| 17. | 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, 2010 is as follows: |
| 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 to
shareowners |
- | - | (29,429 | ) | - | - | (29,429 | ) | ||||||||||||||||
Cash dividends paid to
noncontrolling
interests |
- | - | - | - | (176 | ) | (176 | ) | ||||||||||||||||
Balance as of
March 31, 2010 |
$ | 102,096 | $ | 484,870 | $ | 762,751 | $ | 3,215 | $ | 21,389 | $ | 1,374,321 | ||||||||||||
| During July 2009, we completed the issuance of 8,050,000 shares of our capital stock generating gross proceeds of $126.8 million and net proceeds, after deduction of fees, of $120.7 million. The net proceeds were used to pay down outstanding indebtedness under our revolving credit facility. |
16
| 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, 2009 is as follows: |
| Kennametal Shareowners’ Equity | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | other | Non- | ||||||||||||||||||||||
| Capital | paid-in | Retained | comprehensive | controlling | ||||||||||||||||||||
| (in thousands) | stock | capital | earnings | income (loss) | interests | Total Equity | ||||||||||||||||||
Balance as of June 30,
2008 |
$ | 96,076 | $ | 468,169 | $ | 941,553 | $ | 142,109 | $ | 21,527 | $ | 1,669,434 | ||||||||||||
Net (loss) income |
- | - | (86,748 | ) | - | 845 | (85,903 | ) | ||||||||||||||||
Other comprehensive
loss |
- | - | - | (166,395 | ) | (3,226 | ) | (169,621 | ) | |||||||||||||||
Dividend reinvestment |
30 | 502 | - | - | - | 532 | ||||||||||||||||||
Capital stock issued
under employee
benefit and stock
plans |
299 | 8,067 | - | - | - | 8,366 | ||||||||||||||||||
Purchase of capital
stock |
(4,995 | ) | (122,653 | ) | - | - | - | (127,648 | ) | |||||||||||||||
Cash dividends paid
to shareowners |
- | - | (26,686 | ) | - | - | (26,686 | ) | ||||||||||||||||
Cash dividends paid to
noncontrolling
interests |
- | - | - | - | (303 | ) | (303 | ) | ||||||||||||||||
Noncontrolling interest
share buy out |
- | - | - | - | (165 | ) | (165 | ) | ||||||||||||||||
Balance as of
March 31, 2009 |
$ | 91,410 | $ | 354,085 | $ | 828,119 | $ | (24,286 | ) | $ | 18,678 | $ | 1,268,006 | |||||||||||
| The amounts of comprehensive (loss) income attributable to Kennametal shareowners’ and noncontrolling interests are disclosed in Note 18. |
| 18. | COMPREHENSIVE (LOSS) INCOME | |
| Comprehensive (loss) income is as follows: |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net income (loss) |
$ | 10,203 | $ | (137,713 | ) | $ | 7,252 | $ | (85,903 | ) | ||||||
Unrealized gain (loss) on derivatives designated and qualified as
cash flow hedges, net of income tax |
55 | (1,404 | ) | (990 | ) | (273 | ) | |||||||||
Reclassification of unrealized losses (gains) on expired
derivatives
designated and qualified as cash flow hedges, net of income tax |
(47 | ) | 534 | (27 | ) | 5,400 | ||||||||||
Unrecognized net pension and other postretirement benefit gains,
net of income tax |
2,045 | 84 | 2,599 | 4,648 | ||||||||||||
Reclassification of net pension and other postretirement benefit
losses, net of income tax |
172 | 631 | 1,363 | 1,529 | ||||||||||||
Foreign currency translation adjustments, net of income tax |
(34,674 | ) | (37,002 | ) | (11,313 | ) | (180,925 | ) | ||||||||
Total comprehensive loss |
(22,246 | ) | (174,870 | ) | (1,116 | ) | (255,524 | ) | ||||||||
Comprehensive income (loss) attributable to noncontrolling
interests |
124 | (557 | ) | 1,553 | (2,381 | ) | ||||||||||
Comprehensive loss attributable to Kennametal Shareowners |
$ | (22,370 | ) | $ | (174,313 | ) | $ | (2,669 | ) | $ | (253,143 | ) | ||||
17
| 19. | 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. We also perform specific impairment tests on an interim basis if we deem that a triggering event indicating impairment of the goodwill for a reporting unit or an indefinite-lived intangible asset may have occurred. We evaluate the recoverability of goodwill for each of our reporting units by comparing the fair value of each reporting unit with its carrying value. The fair values of our reporting units are determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit. We estimate the fair value of indefinite-lived intangible assets using a discounted cash flow analysis based on projected financial information. This evaluation is sensitive to changes in market interest rates and other external factors. |
| A summary of the carrying amount of goodwill attributable to each segment as well as the changes in such are as follows: |
| (in thousands) | MSSG | AMSG | Total | |||||||||
Goodwill |
$ | 278,614 | $ | 375,211 | $ | 653,825 | ||||||
Accumulated impairment losses |
(15,674 | ) | (135,168 | ) | (150,842 | ) | ||||||
Balance as of June 30, 2009 |
$ | 262,940 | $ | 240,043 | $ | 502,983 | ||||||
Acquisitions / Divestitures |
(178 | ) | - | (178 | ) | |||||||
Adjustments |
99 | 19 | 118 | |||||||||
Translation |
(3,683 | ) | 78 | (3,605 | ) | |||||||
Change in Goodwill |
(3,762 | ) | 97 | (3,665 | ) | |||||||
Goodwill |
274,852 | 375,308 | 650,160 | |||||||||
Accumulated impairment losses |
(15,674 | ) | (135,168 | ) | (150,842 | ) | ||||||
Balance as of March 31, 2010 |
$ | 259,178 | $ | 240,140 | $ | 499,318 | ||||||
| During the three months ended March 31, 2009, we made an assessment of the possible impairment of the goodwill and other long-lived assets of our various reporting units. As a result of this assessment, we determined that the magnitude and duration of the economic downturn, as well as other factors, served as a triggering event for an impairment test of our surface finishing machines and services business as well as our engineered products business. These businesses are both part of our AMSG segment. As a result of our test, we recorded a non-cash pre-tax impairment charge of $111.0 million. The pre-tax impairment charge related to our surface finishing machines and services business was $48.1 million of which $37.3 million was for goodwill and $10.8 million was for the indefinite-lived trademark. No goodwill remains on the books for our surface finishing machines and services business and the remaining balance for the trademark was $5.0 million as of March 31, 2009. The pre-tax impairment charge for the engineered products business was $62.9 million, all of which was for goodwill. As of March 31, 2009, the remaining balance of goodwill for the engineered products business was $39.6 million. |
| The components of other intangible assets and their useful lives are as follows: |
| Estimated | March 31, 2010 | June 30, 2009 | ||||||||||||||||||
| Useful Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||
| (in thousands) | (in years) | Amount | Amortization | Amount | Amortization | |||||||||||||||
Contract-based |
4 to 15 | $ | 6,376 | $ | (5,157 | ) | $ | 6,357 | $ | (4,896 | ) | |||||||||
Technology-based and other |
4 to 15 | 38,478 | (20,686 | ) | 39,472 | (18,971 | ) | |||||||||||||
Customer-related |
10 to 20 | 111,056 | (28,279 | ) | 111,687 | (22,773 | ) | |||||||||||||
Unpatented technology |
30 | 19,397 | (4,431 | ) | 19,484 | (3,802 | ) | |||||||||||||
Trademarks |
5 to 20 | 10,748 | (3,687 | ) | 10,782 | (2,717 | ) | |||||||||||||
Trademarks |
Indefinite | 38,871 | - | 39,830 | - | |||||||||||||||
Total |
$ | 224,926 | $ | (62,240 | ) | $ | 227,612 | $ | (53,159 | ) | ||||||||||
| During the nine months ended March 31, 2010, we recorded amortization expense of $9.9 million related to our other intangible assets and unfavorable foreign currency translation adjustments of $1.9 million. |
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| 20. | SEGMENT DATA |
| We operate two reportable operating segments consisting of MSSG and AMSG, and Corporate. We do not allocate certain corporate shared service costs, certain employee benefit costs, certain employment costs, such as performance-based bonuses and stock-based compensation expense, interest expense, other expense, income taxes or noncontrolling interest to our operating segments. |
| Our external sales, intersegment sales and operating income (loss) by segment are as follows: |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
External sales: |
||||||||||||||||
MSSG |
$ | 291,571 | $ | 245,530 | $ | 784,049 | $ | 972,932 | ||||||||
AMSG |
201,594 | 178,857 | 561,376 | 640,890 | ||||||||||||
Total external sales |
$ | 493,165 | $ | 424,387 | $ | 1,345,425 | $ | 1,613,822 | ||||||||
Intersegment sales: |
||||||||||||||||
MSSG |
$ | 33,812 | $ | 25,263 | $ | 92,467 | $ | 112,306 | ||||||||
AMSG |
4,355 | 3,025 | 12,588 | 14,640 | ||||||||||||
Total intersegment sales |
$ | 38,167 | $ | 28,288 | $ | 105,055 | $ | 126,946 | ||||||||
Total sales: |
||||||||||||||||
MSSG |
$ | 325,383 | $ | 270,793 | $ | 876,516 | $ | 1,085,238 | ||||||||
AMSG |
205,949 | 181,882 | 573,964 | 655,530 | ||||||||||||
Total sales |
$ | 531,332 | $ | 452,675 | $ | 1,450,480 | $ | 1,740,768 | ||||||||
Operating income (loss): |
||||||||||||||||
MSSG |
$ | 30,988 | $ | (39,062 | ) | $ | 25,015 | $ | 10,221 | |||||||
AMSG |
24,816 | (102,502 | ) | 77,851 | (53,075 | ) | ||||||||||
Corporate |
(29,501 | ) | (8,499 | ) | (70,623 | ) | (32,295 | ) | ||||||||
Total operating income (loss) |
$ | 26,303 | $ | (150,063 | ) | $ | 32,243 | $ | (75,149 | ) | ||||||
| 21. | SUBSEQUENT EVENTS | |
| We evaluated subsequent events after the balance sheet date of March 31, 2010, prior to the issuance of these condensed consolidated financial statements and concluded that no subsequent events occurred that would require recognition or disclosure in these condensed consolidated financial statements. |
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
20
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
21
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
22
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
External sales |
$ | 291,571 | $ | 245,530 | $ | 784,049 | $ | 972,932 | ||||||||
Intersegment sales |
33,812 | 25,263 | 92,467 | 112,306 | ||||||||||||
Operating income (loss) |
30,988 | (39,062 | ) | 25,015 | 10,221 | |||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
External sales |
$ | 201,594 | $ | 178,857 | $ | 561,376 | $ | 640,890 | ||||||||
Intersegment sales |
4,355 | 3,025 | 12,588 | 14,640 | ||||||||||||
Operating income (loss) |
24,816 | (102,502 | ) | 77,851 | (53,075 | ) | ||||||||||
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Operating loss |
$ | (29,501 | ) | $ | (8,499 | ) | $ | (70,623 | ) | $ | (32,295 | ) | ||||
24
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
25
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
26
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
| Average Price Paid per | ||||||||
| Period | Total Number of Shares Purchased (1) | Share | ||||||
January 1 through January 31, 2010 |
10,620 | $ | 26.34 | |||||
February 1 through February 28, 2010 |
2,998 | 26.61 | ||||||
March 1 through March 31, 2010 |
4,208 | 27.52 | ||||||
Total |
17,826 | $ | 26.67 | |||||
| (1) | During the three months ended March 31, 2010, employees delivered 14,009 shares of restricted stock to Kennametal, upon vesting, to satisfy tax-withholding requirements and 819 shares of Kennametal stock as payment for the exercise price of stock options. Also during the three months ended March 31, 2010, 2,998 shares were purchased on the open market on behalf of Kennametal to fund the Company’s dividend reinvestment program. |
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(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. |
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| KENNAMETAL INC. |
||||
| Date: May 5, 2010 | By: | /s/ Martha A. Bailey | ||
| Martha A. Bailey | ||||
| Vice President Finance and Corporate Controller | ||||
29