QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
||
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011 | ||
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 | |
(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, 2011 | |
Capital Stock, par value $1.25 per share | 81,803,328 |
Item No. | Page No. | |||||||
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27 | ||||||||
27 | ||||||||
28 | ||||||||
28 | ||||||||
29 | ||||||||
30 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
3
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 | ||||||||||||
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 | ||||
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 | ||||
(1) | Amounts presented include cash flows from discontinued operations. |
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. |
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 2010 Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, 2010 was derived from the audited balance sheet included in our 2010 Annual Report on Form 10-K. These interim statements are unaudited; however, we believe that all adjustments necessary for a fair statement of the results of the interim periods were made and all adjustments are normal, recurring adjustments. The results for the nine months ended March 31, 2011 and 2010 are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a year is to a fiscal year ended June 30. For example, a reference to 2011 is to the fiscal year ending June 30, 2011. When used in this Form 10-Q, unless the context requires otherwise, the terms we, our and us refer to Kennametal Inc. and its consolidated subsidiaries. |
3. | NEW ACCOUNTING STANDARDS | |
Adopted | ||
As of January 1, 2011, Kennametal adopted changes to intangible impairment testing for reporting units with zero or negative carrying amounts. These changes require an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not that an intangible impairment exists based on qualitative factors, resulting in the elimination of an entitys ability to assert that such a reporting units intangible assets are not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. The adoption of this guidance did not have an impact on our condensed consolidated financial statements. | ||
As of January 1, 2011, Kennametal adopted changes to the disclosures related to business combinations for a public entity that presents comparative financial statements. This guidance also expanded the supplemental pro forma business combination disclosures. The adoption of this guidance did not have an impact on our condensed consolidated financial statements. | ||
As of July 1, 2010, Kennametal adopted new guidance on consolidations for enterprises involved with variable interest entities. The guidance modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar) rights should be consolidated and clarifies that the determination of whether a company is required to consolidate a variable interest entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. This guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity and also requires additional disclosures about a companys involvement in variable interest entities and any significant changes in risk exposure due to that involvement. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. | ||
As of July 1, 2010, Kennametal adopted new guidance on accounting for transfers of financial assets. This guidance requires additional disclosure regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. | ||
As of July 1, 2010, Kennametal adopted new guidance on revenue recognition for multiple-deliverable revenue arrangements. The guidance allows companies to allocate arrangement consideration in multiple deliverable arrangements in a manner that better reflects the transactions economics and may result in earlier revenue recognition. In addition, the residual method of allocating arrangement consideration is no longer permitted. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements. |
7
4. | SUPPLEMENTAL CASH FLOW DISCLOSURES |
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 | ||||||
5. | FAIR VALUE MEASUREMENTS | |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three levels to prioritize the inputs used in valuations, as defined below: | ||
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | ||
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. | ||
Level 3: Inputs that are unobservable. | ||
As of March 31, 2011, the fair values of the Companys financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows: |
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
||||||||||||||||
Derivatives (1) |
$ | - | $ | 4,416 | $ | - | $ | 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 | ||||||||
(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. |
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
||||||||||||||||
Derivatives (1) |
$ | - | $ | 43 | $ | - | $ | 43 | ||||||||
Total assets at fair value |
$ | - | $ | 43 | $ | - | $ | 43 | ||||||||
Liabilities: |
||||||||||||||||
Derivatives (1) |
$ | - | $ | 3,453 | $ | - | $ | 3,453 | ||||||||
Total liabilities at fair value |
$ | - | $ | 3,453 | $ | - | $ | 3,453 | ||||||||
(1) | Foreign currency derivative and interest rate swap contracts are valued based on observable market spot and forward rates and are classified within Level 2 of the fair value hierarchy. |
8
6. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | |
As part of our financial risk management program, we use certain derivative financial instruments. We do not enter into derivative transactions for speculative purposes and therefore hold no derivative instruments for trading purposes. We use derivative financial instruments to provide predictability to the effects of changes in foreign exchange rates on our consolidated results and to achieve our targeted mix of fixed and floating interest rates on outstanding debt. We account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated as a hedge of such items. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow, allowing us to focus more of our attention on business operations. With respect to interest rate management, these derivative instruments allow us to achieve our targeted fixed-to-floating interest rate mix as a separate decision from funding arrangements in the bank and public debt markets. We measure hedge effectiveness by assessing the changes in the fair value or expected future cash flows of the hedged item. The ineffective portions are recorded in other (income) expense, net. | ||
The fair value of derivatives designated in the condensed consolidated balance sheet are as follows: |
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 | ) | |||
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 expense (income), net. Losses (gains) related to derivatives not designated as hedging instruments have been recognized as follows: |
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 | ||||||
FAIR VALUE HEDGES |
Fixed-to-floating interest rate swap contracts, designated as fair value hedges, are entered into from time to time to hedge our exposure to fair value fluctuations on a portion of our fixed rate debt. These interest rate swap contracts convert a portion of our fixed rate debt to floating rate debt. These contracts require periodic settlement, and the difference between amounts to be received and paid under the interest rate swap contracts is recognized in interest expense. We had no such contracts outstanding at March 31, 2011 and June 30, 2010, respectively. |
In February 2009, we terminated interest rate swap contracts to convert $200.0 million of our fixed rate debt to floating rate debt. These contracts were originally set to mature in June 2012. Upon termination, we received a cash payment of $13.2 million. This gain is being amortized as a component of interest expense over the remaining term of the related debt using the effective interest rate method. During the three and nine months ended March 31, 2011, $1.5 million and $4.4 million, respectively, were recognized as reductions in interest expense. During the three and nine months ended March 31, 2010, $1.4 million and $4.2 million, respectively, were recognized as reductions in interest expense. |
9
CASH FLOW HEDGES |
Currency forward contracts and range forward contracts (a transaction where both a put option is purchased and a call option is sold), designated as cash flow hedges, hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts at maturity are recorded in accumulated other comprehensive loss, net of tax, and are recognized as a component of other expense (income), net when the underlying sale of products or services is recognized into earnings. The notional amount of the contracts translated into U.S. dollars at March 31, 2011 and 2010, was $41.4 million and $17.8 million, respectively. The time value component of the fair value of range forwards is excluded from the assessment of hedge effectiveness. Assuming the market rates remain constant with the rates at March 31, 2011, we expect to recognize a loss of $0.4 million in the next 12 months on outstanding derivatives. |
We enter into floating-to-fixed interest rate swap contracts, designated as cash flow hedges, from time to time to hedge our exposure to interest rate changes on a portion of our floating rate debt. These interest rate swap contracts convert a portion of our floating rate debt to fixed rate debt. We record the fair value of these contracts as an asset or a liability, as applicable, in the balance sheet, with the offset to accumulated other comprehensive loss, net of tax. At March 31, 2011, we had forward starting interest rate swap contracts outstanding for forecasted transactions that effectively converted a cumulative notional amount of $125 million from floating to fixed interest rates. As of March 31, 2011, we recorded a net asset of $2.3 million on these contracts which was recorded as an offset in other comprehensive income, net of tax. Over the next 12 months, assuming the market rates remain constant with the rates at March 31, 2011, we do not expect to recognize into earnings any significant gains or losses on outstanding derivatives. We had no such contracts outstanding at March 31, 2010. |
Amounts related to cash flow hedges have been recognized as follows: |
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 | ) | |||||||
No portion of the gains or losses recognized in earnings was due to ineffectiveness and no amounts were excluded from our effectiveness testing for the nine months ended March 31, 2011 and 2010, respectively. |
7. | RESTRUCTURING CHARGES AND RELATED CHARGES |
We continued to implement restructuring plans to reduce costs and improve operating efficiencies. These actions taken during the nine months ended March 31, 2011 related primarily to the rationalization of certain manufacturing facilities. 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. |
Restructuring and related charges recorded during 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. Restructuring-related charges of $2.3 million and $1.1 million were recorded in cost of goods sold and operating expense, respectively, during the same period. |
The combined total pre-tax charges are not expected to exceed $165 million, and are expected to be approximately 70% Industrial and 30% Infrastructure. We expect the majority of these pre-tax charges to be severance charges. Total restructuring and related charges since inception of $143 million have been recorded through March 31, 2011: approximately $99 million in Industrial, approximately $42 million in Infrastructure and approximately $2 million in Corporate for the write-off our pre-existing ERP system. The remaining restructuring charges are expected to be completed within the next three months and are anticipated to be mostly cash expenditures. |
10
The restructuring accrual is recorded in other current liabilities in our condensed consolidated balance sheet and the amount attributable to each segment is as follows: |
Asset | Cash | |||||||||||||||||||||||
(in thousands) | June 30, 2010 | Expense | Write-down | Expenditures | Translation | 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 | |||||||||
8. | DISCONTINUED OPERATIONS |
On June 30, 2009, we completed the sale of our high speed steel drills and related product lines. This divestiture was accounted for as discontinued operations. Cash proceeds received from this divestiture amounted to $28.5 million of which $27.0 million was received during the nine months ended March 31, 2010. We did not incur any pre-tax charges related to this divestiture during the three and nine months ended March 31, 2011. We incurred pre-tax charges related to this divestiture of $2.3 million during the nine months ended March 31, 2010. We do not expect to incur any additional pre-tax charges related to this divestiture. |
The following represents the results of discontinued operations: |
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
9. | STOCK-BASED COMPENSATION |
On October 26, 2010, the Companys shareowners approved the Kennametal Inc., Stock and Incentive Plan of 2010 (the 2010 Plan). The 2010 Plan authorizes the issuance of up to 3,500,000 shares of the Companys common stock plus the remaining shares from the 2002 Plan. Shares can be issued in the form of incentive stock options, non-statutory stock options, stock appreciation rights, performance share awards, performance unit awards, restricted stock awards, restricted unit awards and share awards. |
Stock Options |
The assumptions used in our Black-Scholes valuation related to grants made during the nine months ended March 31, 2011 and 2010 were as follows: |
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 | % | ||||
(1) | Expected life is derived from historical experience. | |
(2) | Expected volatility is based on the historical volatility of our stock. |
Changes in our stock options for the nine months ended March 31, 2011 were as follows: |
Weighted | ||||||||||||||||
Weighted | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic value | ||||||||||||||
Options | Exercise Price | Life (years) | (in thousands) | |||||||||||||
Options outstanding, June 30, 2010 |
3,582,075 | $ | 25.59 | |||||||||||||
Granted |
545,987 | 27.01 | ||||||||||||||
Exercised |
(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 | ||||||||||
During the nine months ended March 31, 2011 and 2010, compensation expense related to stock options was $4.2 million and $3.8 million, respectively. As of March 31, 2011, the total unrecognized compensation cost related to options outstanding was $5.4 million and is expected to be recognized over a weighted average period of 2.4 years. |
Weighted average fair value of options granted during the nine months ended March 31, 2011 and 2010 was $9.22 and $7.31, respectively. Fair value of options vested during the nine months ended March 31, 2011 and 2010 was $4.4 million and $4.1 million, respectively. |
Tax benefits, relating to excess stock-based compensation deductions, are presented in the statement of cash flow as financing cash inflows. Tax benefits resulting from stock-based compensation deductions exceeded amounts reported for financial reporting purposes by $2.4 million for the nine months ended March 31, 2011. Amounts reported for financial reporting purposes exceeded the tax benefit by $0.2 million for the nine months ended March 31, 2010. |
The amount of cash received from the exercise of capital stock options during the nine months ended March 31, 2011 and 2010 was $11.3 million and $4.3 million, respectively. The related tax benefit for the nine months ended March 31, 2011 and 2010 was $2.6 million and $0.5 million, respectively. The total intrinsic value of options exercised during the nine months ended March 31, 2011 and 2010 was $8.0 million and $1.8 million, respectively. |
Under the provisions of the 2010 Plan participants may deliver stock, owned by the holder for at least six months, in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. The fair market value of shares delivered during the nine months ended March 31, 2011 was $0.6 million and was immaterial for the nine months ended March 31, 2010. |
12
Restricted Stock Awards |
Changes in our restricted stock awards for the nine months ended March 31, 2011 were as follows: |
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 | |||||
During the nine months ended March 31, 2011 and 2010, compensation expense related to restricted stock awards was $1.6 million and $2.2 million, respectively. As of March 31, 2011, the total unrecognized compensation cost related to unvested restricted stock awards was $1.3 million and is expected to be recognized over a weighted average period of 1.1 years. |
Restricted Stock Units Time Vesting and Performance Vesting |
Performance vesting restricted stock units (performance units) were granted to certain individuals. These performance units are earned pro rata each year if certain performance goals are met over a 3-year period, and are also subject to a service condition that requires the individual to be employed by the Company at the payment date after the 3-year performance period. |
Changes in our time vesting and performance vesting restricted stock units for the nine months ended March 31, 2011 were as follows: |
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 | |||||||||||
During the nine months ended March 31, 2011 and 2010, compensation expense related to time vesting and performance vesting restricted stock units was $8.6 million and $1.9 million, respectively. As of March 31, 2011, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $15.2 million and is expected to be recognized over a weighted average period of 2.6 years. |
Restricted Stock Units STEP |
As of March 31, 2011, participating executives had been granted awards under the Kennametal Inc. 2008 Strategic Transformational Equity Program, under the 2002 Plan (STEP), equal to that number of restricted stock units having a value of $27.8 million. A further amount of $9.5 million remains available under the STEP for additional awards that could be made to other executives; however, the Company has decided that it will not make any further awards under the STEP. No new grants under the STEP were made in the nine months ended March 31, 2011, and it is assumed that none of these units will vest. There are no voting rights or dividends associated with restricted stock units under the STEP. |
13
Changes to the EPS performance-based portion of the STEP restricted stock units for the nine months ended March 31, 2011 were as follows: |
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 | |||||
Changes to the TSR performance-based portion of the STEP restricted stock units for the nine months ended March 31, 2011 were as follows: |
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 | |||||
During the nine months ended March 31, 2011 and 2010, compensation expense related to STEP restricted stock units was $0.3 million and $0.5 million, respectively. As of March 31, 2011, the total unrecognized compensation cost related to unvested STEP restricted stock units was $0.3 million and is expected to be recognized over a weighted average period of 0.5 years. |
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 table below summarizes the components of net periodic pension cost: |
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 | ||||||||
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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) | 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 | ||||||||
11. | INVENTORIES |
We used the last-in, first-out (LIFO) method of valuing inventories for approximately 47 percent and 51 percent of total inventories at March 31, 2011 and June 30, 2010, respectively. Because inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs. Therefore, the interim financial results are subject to any final year-end LIFO inventory adjustments. |
Inventories consisted of the following: |
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 | ||||
12. | LONG-TERM DEBT AND CAPITAL LEASES |
Long-term debt and capital lease obligations consist primarily of Senior Unsecured Notes issued in June 2002 having an aggregate face amount of $300.0 million, maturing in June 2012, as well as borrowings under a five-year, multi-currency, revolving credit facility (2010 Credit Agreement) which permits revolving credit loans of up to $500.0 million for working capital, capital expenditures and general corporate purposes. The 2010 Credit Agreement allows for borrowings in U.S. dollars, euro, Canadian dollars, pound sterling and Japanese yen. Interest payable under the 2010 Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us. |
The 2010 Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the agreement). We were in compliance with these financial covenants as of March 31, 2011. We had no borrowings outstanding under the 2010 Credit Agreement as of March 31, 2011 and June 30, 2010. |
Borrowings under the 2010 Credit Agreement are guaranteed by our significant domestic subsidiaries. |
Fixed rate debt had a fair market value of $319.1 million and $325.5 million at March 31, 2011 and June 30, 2010, respectively. The fair value is determined based on the quoted market price of this debt as of March 31, 2011 and June 30, 2010, respectively. |
15
13. | ENVIRONMENTAL MATTERS |
The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain of our locations. |
Superfund Sites We are involved as a Potentially Responsible Party (PRP) at various sites designated by the U.S. Environmental Protection Agency (USEPA) as Superfund sites. For certain of these sites, we have evaluated the claims and potential liabilities and have determined that neither are material, individually or in the aggregate. For certain other sites, proceedings are in the very early stages and have not yet progressed to a point where it is possible to estimate the ultimate cost of remediation, the timing and extent of remedial action that may be required by governmental authorities or the amount of our liability alone or in relation to that of any other PRPs. |
Other Environmental We establish and maintain reserves for other potential environmental costs, which amounted to $5.3 million as of March 31, 2011. This accrual represents anticipated costs associated with the remediation of these issues. For the nine months ended March 31, 2011 we recorded approximately $1.4 million related to an environmental liability in our international operations and unfavorable foreign currency translation adjustments of $0.8 million, partially offset by a $1.1 million reversal of an international environmental liability. In addition, we paid a civil penalty of $0.2 million during the nine months ended March 31, 2011 related to our Chestnut Ridge, Pennsylvania facility closure. |
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, 2011 and 2010 was 19.1 percent compared to 52.0 percent, respectively. The current year rate reflects the favorable impact of stronger operating results under our pan-European business strategy. The prior year rate was unfavorably impacted by restructuring and related charges in tax jurisdictions that did not result in a tax benefit. |
The effective income tax rate for the nine months ended March 31, 2011 and 2010 was 22.0 percent compared 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. |
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. |
16
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 and 0.8 million shares for the three months ended March 31, 2011 and 2010, respectively and 1.0 million shares and 0.6 million shares for the nine months ended March 31, 2011 and 2010, respectively. Unexercised capital stock options, restricted stock units and restricted stock awards for the three months ended March 31, 2010 of 1.2 million shares and for the nine months ended March 31, 2011 and 2010 of 0.7 million and 3.0 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. |
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, 2011 and 2010 is as follows: |
Kennametal Shareowners Equity | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | other | Non- | ||||||||||||||||||||||
Capital | paid-in | Retained | comprehensive | controlling | ||||||||||||||||||||
(in thousands) | stock | capital | earnings | (loss) income | interests | Total equity | ||||||||||||||||||
Balance as of June 30, 2010 |
$ | 102,379 | $ | 492,454 | $ | 793,448 | $ | (72,781 | ) | $ | 17,943 | $ | 1,333,443 | |||||||||||
Net income |
- | - | 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 | ||||||||||||
The amounts of comprehensive income (loss) attributable to Kennametal shareowners and noncontrolling interests are disclosed in Note 17. |
17
17. | COMPREHENSIVE INCOME (LOSS) |
Comprehensive income (loss) is as follows: |
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 | ) | ||||||
18. | GOODWILL AND OTHER INTANGIBLE ASSETS |
Goodwill represents the excess of cost over the fair value of the net assets of acquired companies. Goodwill and other intangible assets with indefinite lives are tested at least annually for impairment. We perform our annual impairment tests during the June quarter in connection with our annual planning process, unless there are impairment indicators that warrant a test prior to that. In conjunction with the implementation of our new operating structure on July 1, 2010, we tested goodwill for impairment and determined that there was no impairment at that time. We have noted no impairment indicators warranting additional testing. See Note 19 for further discussion regarding the Companys segments. |
A summary, of the carrying amount of goodwill attributable to each segment, as well as the changes in such, is as follows: |
(in thousands) | Industrial | Infrastructure | Total | |||||||||
Goodwill |
$ | 393,974 | $ | 246,311 | $ | 640,285 | ||||||
Accumulated impairment losses |
(150,842 | ) | - | (150,842 | ) | |||||||
Balance as of June 30, 2010 |
$ | 243,132 | $ | 246,311 | $ | 489,443 | ||||||
Adjustments |
$ | 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
The components of our other intangible assets were as follows: |
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 | ) | ||||||||||
During the nine months ended March 31, 2011, we recorded amortization expense of $8.7 million related to our other intangible assets and favorable foreign currency translation adjustments of $7.2 million. |
19. | SEGMENT DATA |
In order to take additional advantage of growth opportunities as well as to provide a better platform for continually improving the efficiency and effectiveness of operations, we implemented a new operating structure at the beginning of fiscal 2011. |
The new structure provides for an enhanced market sector approach coupled with a more customer-centric focus for the sales organization and other key market-facing functions such as customer service, marketing, product management, engineering and product development. The new structure also involves the formation of a single, global integrated supply chain and logistics organization that unleashes additional opportunities to achieve higher customer satisfaction and realize lower costs to serve. Furthermore, the new structure provides for more uniform management of administrative functions on a global basis to further improve the consistency, effectiveness and efficiency of the services provided by these functions. |
A key attribute of the new structure is the establishment of two new operating segments, by market sector, which replace the previous two operating segments that were based on a product focus. The two new reportable operating segments are named Industrial and Infrastructure. The Industrial business is focused on customers within the transportation, aerospace, defense and general engineering market sectors, as well as the machine tool industry. The Infrastructure business is focused on customers within the energy and earthworks industries. The formation of the two new reportable operating segments is consistent with the new management approach and internal financial reporting established under the new structure. |
Under the new structure, more corporate expenses will be allocated to the new segments than were allocated to the previous segments. Corporate expenses related to executive retirement plans, the Companys Board of Directors and strategic initiatives, as well as certain other costs, will continue to be reported as Corporate. |
Kennametal delivers productivity to customers seeking peak performance in demanding environments by providing innovative custom and standard wear-resistant solutions, enabled through our advanced materials sciences, application knowledge and commitment to a sustainable environment. Our product offering includes a wide array of standard and custom solution products in metalworking, such as 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 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. |
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Our external sales and operating income by segment are as follows: |
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 | ||||||||
Our total assets by segment are as follows: |
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 | ||||
(1) | Amounts for the three and nine months ended March 31, 2010 and for the period as of June 30, 2010 have been restated to reflect the change in reportable operating segments. |
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
21
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
22
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
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 | ) | |||||||||||
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
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 | ) | ||||
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
25
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
26
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED) |
27
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 | ||||||||||||
(1) | During the current period, 1,898 shares were purchased on the open market on behalf of Kennametal to fund the Companys dividend reinvestment program. Also, during the current period, employees delivered 15,048 shares of restricted stock to Kennametal, upon vesting, to satisfy tax-withholding requirements and 3,804 shares of Kennametal stock as payment for the exercise price of stock options. | |
(2) | On October 26, 2010, the Company publicly announced a repurchase programs of up to 8 million shares of its outstanding common stock. |
28
(31)
|
Rule 13a-14(a)/15d-14(a) Certifications | |||
(31.1)
|
Certification executed by Carlos M. Cardoso, Chairman, President and Chief Executive Officer of Kennametal Inc. | Filed herewith. | ||
(31.2)
|
Certification executed by Frank P. Simpkins, Vice President and Chief Financial Officer of Kennametal Inc. | Filed herewith. | ||
(32)
|
Section 1350 Certifications | |||
(32.1)
|
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Carlos M. Cardoso, Chairman, President and Chief Executive Officer of Kennametal Inc., and Frank P. Simpkins, Vice President and Chief Financial Officer of Kennametal Inc. | Filed herewith. | ||
(101)
|
XBRL | |||
(101.INS)**
|
XBRL Instance Document | Filed herewith. | ||
(101.SCH)**
|
XBRL Taxonomy Extension Schema Document | Filed herewith. | ||
(101.CAL)**
|
XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith. | ||
(101.LAB)**
|
XBRL Taxonomy Extension Label Linkbase Document | Filed herewith. | ||
(101.PRE)**
|
XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith. |
** | The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed filed or part of a registration statement or prospects for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of these sections. |
29
KENNAMETAL INC. |
||||
Date: May 9, 2011 | By: | /s/ Martha A. Bailey | ||
Martha A. Bailey | ||||
Vice President Finance and Corporate Controller |
30