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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JANUARY 28, 2004
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
Commission file number 1-5318
PENNSYLVANIA 25-0900168
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
WORLD HEADQUARTERS
1600 TECHNOLOGY WAY
P.O. BOX 231
LATROBE, PENNSYLVANIA 15650-0231
(Address of registrant's principal executive offices)
Registrant's telephone number, including area code: (724) 539-5000
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ITEM 12. RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On January 28, 2004, Kennametal Inc. ("Kennametal" or "the Company") issued a
press release announcing financial results for its second quarter ended December
31, 2003.
The press release contains non-GAAP financial measures, including gross profit,
operating expense, operating income, other (income) expense, net income and
diluted EPS in each case excluding special items. The special items include:
restructuring charges, Widia integration costs, pension curtailment, gain on
Toshiba investment, and a charge related to a note receivable from a divestiture
of a business by Kennametal in 2002. Kennametal management excludes these items
in measuring and compensating internal performance to more easily compare the
Company's financial performance period to period. We believe investors should
have available the same information that management uses to measure and
compensate performance. Kennametal management believes that presentation of
these non-GAAP financial measures provides useful information into the results
of operations of the Company for the current, past and future periods.
In addition to the items above, the press release also contains free operating
cash flow and debt to capital. These financial measures are defined below:
Free Operating Cash Flow
Free operating cash flow is a non-GAAP presentation and is defined as cash
provided by continuing operations (in accordance with GAAP) less capital
expenditures plus proceeds from asset disposals. Free operating cash flow is
considered to be an important indicator of Kennametal's ability to generate
liquidity because it better represents cash generated from operations that can
be used for strategic initiatives, dividends or debt repayment.
Debt-to-Capital
Debt to capital is defined by Kennametal as total current and long term debt,
capital leases and notes payable divided by total Shareowner's equity plus
minority interest plus total debt, capital leases and notes payable. Management
believes that these financial measures provide additional insight into the
underlying capital structure and performance of the Company.
Additionally, during our quarterly teleconference we may use various other
non-GAAP financial measures to describe the underlying operating results.
Accordingly, we have compiled below certain reconciliations as required by
Regulation G.
Primary Working Capital
Primary working capital is a non-GAAP presentation and is defined as accounts
receivable, net plus inventories, net minus accounts payable. The most directly
comparable GAAP measure is working capital, which is defined as current assets
less current liabilities. We believe primary working capital better represents
Kennametal's performance in managing certain assets and liabilities controllable
at the business unit level and is used as such for internal performance
measurement.
EBIT
EBIT is an acronym for Earnings Before Interest and Taxes and is not a
calculation in accordance with GAAP. The most directly comparable GAAP measure
is net income. However, we believe that EBIT is widely used as a measure of
operating performance and we believe EBIT to be an important indicator of the
Company's operational strength and performance. Nevertheless, the measure should
not be considered in isolation or as a substitute for operating income, cash
flows from operating activities or any other measure for determining liquidity
that is calculated in accordance with GAAP. Additionally, Kennametal will adjust
EBIT for restructuring charges, interest income, and other items.
Adjusted Sales
Kennametal adjusted sales as reported under GAAP for specific items including
acquisitions and foreign currency translation. Management believes that
adjusting the sales as reported under GAAP provides additional insight into the
underlying operations. Management uses this information in reviewing operating
performance and in the determination of compensation.
Adjusted Gross Profit
Kennametal adjusted gross profit as recorded under GAAP for specific items
including Widia integration and restructuring charges and pension curtailment.
Management believes that the adjusted gross profit information is an important
indicator of the Company's underlying operating performance.
Operating Expense Reconciliation
Kennametal adjusted operating expense as reported under GAAP for Widia
Integration, restructuring charges, Widia operating expense, pension
curtailment, a note receivable from a divestiture of a business by Kennametal
in 2002, foreign exchange and decreased pension income. Management believes that
the adjusted operating expense provides additional insight into the underlying
operations. Management uses this information in reviewing operating performance
and in the determination of compensation.
FINANCIAL HIGHLIGHTS
RECONCILIATION TO GAAP WORKING CAPITAL (UNAUDITED):
December 31,
----------------------------------------------
2003 2002
---------------------- ----------------------
Current assets $ 751,903 $ 755,018
Current liabilities 309,270 281,431
---------------------- ----------------------
Working capital in accordance with GAAP 442,633 473,587
Excluded items:
Cash and cash equivalents (15,086) (18,155)
Deferred income taxes (88,020) (80,204)
Other current assets (39,460) (53,868)
---------------------- ----------------------
Total excluded current assets $ (142,566) $ (152,227)
Adjusted current assets 609,337 602,791
Short-term debt, including notes payable (12,872) (17,591)
Accrued liabilities (183,835) (171,726)
---------------------- ----------------------
Total excluded current liabilities $ (196,707) $ (189,317)
Adjusted current liabilities 112,563 92,114
Primary working capital $ 496,774 $ 510,677
-more-
SUPPLEMENTAL INFORMATION AND RECONCILIATIONS
KENNAMETAL INC. EBIT RECONCILIATION (UNAUDITED):
Quarter Ended Six Months Ended
December 31, December 31,
---------------------------------- ---------------------------
2003 2002 2003 2002
----------------- --------------- ------------ ------------
Net income, as reported $ 10,892 $ 2,470 $19,656 $13,299
As % of sales 2.4% 0.6% 2.2% 1.6%
Add back:
Interest 6,547 9,594 13,147 18,079
Taxes 5,315 893 9,767 6,148
----------------- --------------- ------------ ------------
EBIT 22,754 12,957 42,570 37,526
Additional adjustments:
Minority interest 404 709 1,099 1,047
Restructuring and asset impairment charges (1) 3,127 8,561 6,520 8,380
Widia integration - 1,364 1,559 2,075
Pension Curtailment 1,299 - 1,299 -
Gain on Toshiba Investment (4,397) - (4,397) -
Note Receivable 2,000 - 2,000 -
Interest income (439) (849) (875) (1,489)
Securitization fees 483 536 880 1,073
----------------- --------------- ------------ ------------
Adjusted EBIT $ 25,231 $ 23,278 $50,655 $48,612
================= =============== ============ ============
As % of Sales 5.5% 5.4% 5.6% 5.8%
(1) Includes charges in cost of goods sold and restructuring expense.
-more-
FINANCIAL HIGHLIGHTS (CONTINUED)
MSSG SEGMENT (UNAUDITED):
Quarter Ended Six Months Ended
December 31, December 31,
---------------------------------- -------------------------------
2003 2002 2003 2002
----------------- --------------- -------------- --------------
Sales, as reported $ 283,493 $ 269,413 $554,622 $510,234
Widia sales (1) - - (26,018) -
Foreign currency exchange (21,013) - (32,111) -
----------------- --------------- -------------- --------------
Adjusted sales $ 262,480 $ 269,413 $496,493 $510,234
================= =============== ============== ==============
MSSG EBIT (UNAUDITED):
Quarter Ended Six Months Ended
December 31, December 31,
---------------------------------- -------------------------------
2003 2002 2003 2002
----------------- --------------- -------------- --------------
MSSG operating income, as reported $ 22,684 $ 17,394 $46,186 $41,004
As % of sales 8.0% 6.5% 8.3% 8.0%
Other income 1,702 563 1,966 752
----------------- --------------- -------------- --------------
EBIT 24,386 17,957 48,152 41,756
Adjustments:
MSSG restructuring (2) 1,630 4,849 5,023 4,849
Widia integration - 1,360 1,511 2,071
----------------- --------------- -------------- --------------
EBIT, excluding special charges $ 26,016 $ 24,166 $54,686 $48,676
================= =============== ============== ==============
As % of sales 9.2% 9.0% 9.9% 9.5%
(1) Widia was acquired on August 30, 2002. Sales related to Widia for July
and August have been removed from the 2003 results in order to reflect
comparable Widia activity for both years.
(2) Includes charges in cost of goods sold and restructuring expense.
-more-
FINANCIAL HIGHLIGHTS (CONTINUED)
AMSG SEGMENT (UNAUDITED):
Quarter Ended Six Months Ended
December 31, December 31,
---------------------------------- ------------------------------
2003 2002 2003 2002
----------------- --------------- -------------- --------------
Sales, as reported $ 94,751 $ 83,305 $188,382 $166,714
Widia acquisition (1) - - (5,476) -
Foreign currency exchange (4,592) - (7,367) -
----------------- --------------- -------------- --------------
Adjusted sales $ 90,159 $ 83,305 $175,539 $166,714
================= =============== ============== ==============
AMSG EBIT (UNAUDITED):
Quarter Ended Six Months Ended
December 31, December 31,
---------------------------------- ------------------------------
2003 2002 2003 2002
----------------- --------------- -------------- --------------
AMSG operating income, as reported $ 9,407 $ 6,339 $21,229 $17,724
As % of sales 9.9% 7.6% 11.3% 10.6%
Other income (expense) 947 (103) 1,060 (45)
----------------- --------------- -------------- --------------
EBIT 10,354 6,236 22,289 17,679
Adjustments:
AMSG restructuring (2) 1,497 2,259 1,497 2,078
Widia integration - 4 48 4
----------------- --------------- -------------- --------------
EBIT, excluding special charges $ 11,851 $ 8,499 $23,834 $19,761
================= =============== ============== ==============
As % of sales 12.5% 10.2% 12.7% 11.9%
(1) Widia was acquired on August 30, 2002. Sales related to Widia for July
and August have been removed from the 2003 results in order to reflect
comparable Widia activity for both years.
(2) Includes charges in cost of goods sold and restructuring expense.
-more-
FINANCIAL HIGHLIGHTS (CONTINUED)
J&L SEGMENT (UNAUDITED):
Quarter Ended Six Months Ended
December 31, December 31,
---------------------------------- ----------------------------------
2003 2002 2003 2002
----------------- --------------- ----------------- ---------------
Sales, as reported $ 50,341 $ 48,076 $ 98,480 $ 96,283
Foreign currency exchange (450) - (671) -
----------------- --------------- ----------------- ---------------
Adjusted sales $ 49,891 $ 48,076 $ 97,809 $ 96,283
================= =============== ================= ===============
J&L EBIT (UNAUDITED):
Quarter Ended Six Months Ended
December 31, December 31,
---------------------------------- ----------------------------------
2003 2002 2003 2002
----------------- --------------- ----------------- ---------------
J&L operating income, as reported $ 4,306 $ 1,722 $ 6,991 $ 3,886
As % of sales 8.6% 3.6% 7.1% 4.0%
Other (expense) 25 (38) 25 (49)
----------------- --------------- ----------------- ---------------
EBIT 4,331 1,684 7,016 3,837
Adjustments:
J&L restructuring - 466 - 466
----------------- --------------- ----------------- ---------------
EBIT, excluding special charges $ 4,331 $ 2,150 $ 7,016 $ 4,303
================= =============== ================= ===============
As % of sales 8.6% 4.5% 7.1% 4.5%
-more-
FINANCIAL HIGHLIGHTS (CONTINUED)
FSS SEGMENT (UNAUDITED):
Quarter Ended Six Months Ended
December 31, December 31,
---------------------------------- ---------------------------
2003 2002 2003 2002
----------------- --------------- ------------- ------------
Sales, as reported $ 32,193 $ 30,937 $63,869 $62,718
Foreign currency exchange (137) - (216) -
----------------- --------------- ------------- ------------
Adjusted sales $ 32,056 $ 30,937 $63,653 $62,718
================= =============== ============= ============
FSS EBIT (UNAUDITED):
Quarter Ended Six Months Ended
December 31, December 31,
---------------------------------- ---------------------------
2003 2002 2003 2002
----------------- --------------- ------------- ------------
FSS operating (loss), as reported $ (159) $ (332) $ (440) $ (351)
As % of sales -0.5% -1.1% -0.7% -0.6%
Other (expense) income - (42) 2 58
----------------- --------------- ------------- ------------
EBIT (159) (374) (438) (293)
Adjustments:
FSS restructuring - 29 - 29
----------------- --------------- ------------- ------------
EBIT, excluding special charges $ (159) $ (345) $ (438) $ (264)
================= =============== ============= ============
As % of sales -0.5% -1.1% -0.7% -0.4%
-more-
SUPPLEMENTAL INFORMATION AND RECONCILIATIONS
RECONCILIATION TO GAAP - GROSS PROFIT (UNAUDITED):
QUARTER ENDED QUARTER ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------------- ------------------------ ------------------------
AS A % AS A % AS A %
2003 OF SALES 2002 OF SALES 2003 OF SALES
---- -------- ---- -------- ---- --------
Gross profit $147,632 32.0% $137,483 31.8% $291,739 32.2%
Widia integration and restructuring charges 7 0.0% 54 0.0% 2,961 0.3%
Pension Curtailment 779 0.2% - 0.0% 779 0.1%
----------- ----------- ------------ ----------- ------------ -----------
Gross profit, excluding special items $ 148,418 32.2% $137,537 31.8% $ 295,479 32.6%
=========== =========== ============ =========== ============ ===========
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
AS A %
2002 OF SALES
---- --------
Gross profit $ 268,452 32.1%
Widia integration and restructuring charges 54 0.0%
Pension Curtailment - 0.0%
------------ ------------
Gross profit, excluding special items $ 268,506 32.1%
============ ============
OPERATING EXPENSE RECONCILIATION (UNAUDITED):
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002
------------- ------------- ------------- -------------
Operating expense, as reported $ 124,723 $ 115,677 $ 245,962 $ 220,512
Integration costs - (1,310) (1,448) (2,021)
Pension Curtailment (520) - (520) -
Note Receivable (1,817) - (1,817) -
----------------- ----------------- --------------------- -----------------
Operating expense, excluding special items 122,386 114,367 242,177 218,491
Less:
Widia operating expense (1) - - 8,441 -
Unfavorable foreign exchange 7,220 - 12,199 -
----------------- ----------------- --------------------- -----------------
Operating expense, excluding special items,
Widia expense and foreign exchange $ 115,166 $ 114,367 $ 221,537 $ 218,491
================= ================= ===================== =================
(1) Widia was acquired on August 30, 2002. Operating expenses related to
Widia for July and August have been removed from the 2003 results in
order to reflect comparable Widia activity for both years.
-end-
Exhibit Index
Exhibit Description
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99.1 Press Release dated January 28, 2004. Furnished herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KENNAMETAL INC.
Date: January 28, 2004 By: /s/ TIMOTHY A. HIBBARD
---------------------------------
Timothy A. Hibbard
Corporate Controller and
Chief Accounting Officer