Filed with the SEC from July 12 to July 18:
Atlantic Investment Management owns 5,175,508 shares (6.5%), after buying 1,692,508 from May 31 through July 12 at $31.43 to $35.05 per share. Atlantic saidit will continue "active" discussions with management on ways to maximize shareholder value.
OVERVIEW Kennametal Inc. was incorporated in Pennsylvania in 1943. We deliver 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. We believe that our reputation for manufacturing excellence, as well as our technological expertise and innovation in our principal products, has helped us to achieve a leading market presence in our primary markets. End users of our products include metalworking manufacturers and suppliers across a diverse array of industries, including the aerospace, defense, transportation, machine tool, light machinery and heavy machinery industries, as well as manufacturers, producers and suppliers in a number of other industries including coal mining, highway construction, quarrying, and oil and gas exploration and production industries. Our end usersâ€™ products include items ranging from airframes to coal mining, engines to oil wells and turbochargers to construction.
Our product offering includes a wide array of standard and custom solution products in metalworking, such as metal cutting 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. We are a leading global supplier of tooling, engineered components and advanced materials consumed in production processes. We believe we are one of the largest global providers of consumable metal cutting tools and tooling supplies.
We specialize in developing and manufacturing metalworking tools and wear-resistant parts and coatings using a specialized type of powder metallurgy. Our metalworking tools are made of cemented tungsten carbides, ceramics, cermets and other hard materials. We also manufacture and market a complete line of toolholders, toolholding systems and rotary cutting tools by machining and fabricating steel bars and other metal alloys. We also manufacture products made from tungsten carbide or other hard materials that are used in engineered applications, mining and highway construction and other similar applications, including compacts and metallurgical powders. Additionally, we manufacture and market engineered components with a proprietary metal cladding technology and provide our customers with engineered component process technology and materials that focus on component deburring, polishing and producing controlled radii.
Unless otherwise specified, any reference to a â€śyearâ€ť is to a fiscal year ended June 30.
BUSINESS SEGMENT REVIEW 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 start of 2011. Our operations are now organized into two reportable operating segments; Industrial and Infrastructure. Segment determination is based upon internal organizational structure, the manner in which we organize segments for making operating decisions and assessing performance, the availability of separate financial results and materiality considerations. Sales and operating income by segment are presented in Managementâ€™s Discussion and Analysis set forth in Item 7 of this annual report on Form 10-K (MD&A). Additional segment data is provided in Note 20 of our consolidated financial statements set forth in Item 8 of this annual report.
INDUSTRIAL The Industrial segment is focused on customers within the transportation, aerospace, defense and general engineering market sectors, as well as the machine tool industry. 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.
INFRASTRUCTURE The Infrastructure segment is focused on customers within the energy and earthworks industries. 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 customersâ€™ engineering needs. Our product offering promotes value by bringing enhanced performance and productivity to our customersâ€™ processes and systems.
INTERNATIONAL OPERATIONS During 2011, we generated 56.7 percent of our sales in markets outside of the U.S. Our principal international operations are conducted in Western Europe, Asia Pacific, India, Latin America and Canada. In addition, we have manufacturing and distribution operations in Israel and South Africa, as well as sales companies, sales agents and distributors in Eastern Europe and other areas of the world. The diversification of our overall operations tends to minimize the impact of changes in demand in any one particular geographic area on total sales and earnings. Our international operations are subject to the risks of doing business in those countries, including foreign currency exchange rate fluctuations and changes in social, political and economic environments.
Our international assets and sales are presented in Note 20 of our consolidated financial statements set forth in Item 8 of this annual report on Form 10-K (Item 8). Information pertaining to the effects of foreign currency exchange rate risk is presented in Quantitative and Qualitative Disclosures About Market Risk as set forth in Item 7A of this annual report on Form 10-K.
GENERAL DEVELOPMENT OF BUSINESS We continue to engage in balancing our geographic footprint between North America, Western Europe, and the rest of the world markets. This strategy, together with steps to enhance the balance of our sales among our served end markets and business units, has helped to create a more diverse business base and thereby provide additional sales opportunities, as well as limit reliance on and exposure to any specific region or market sector.
In fiscal 2011, we experienced sequential sales growth in every quarter, as well as year-over-year quarterly sales growth. Our sales for the year ended June 30, 2011 were $2.4 billion, comprised of 46 percent in North America, 28 percent in Western Europe and 26 percent in the rest of the world. We completed our restructuring programs which are expected to reduce our cost structure by approximately $170 million annually, yielding higher benefits on costs that were lower than anticipated.
While the global economy continues to improve, we remain confident in our ability to respond quickly to changes in global markets while continuing to serve our customers and preserve our competitive strengths. At the same time, we continue to focus on and maximize cash flow and liquidity. Further discussion and analysis of the developments in our business is set forth in MD&A.
ACQUISITIONS AND DIVESTITURES We continue to evaluate new opportunities for the expansion of existing product lines into new market areas where appropriate. We also continue to evaluate opportunities for the introduction of new and/or complementary product offerings into new and/or existing market areas where appropriate. Going forward, we expect to evaluate potential acquisitions to continue to grow our business and further enhance our market position.
MARKETING AND DISTRIBUTION We sell our products through the following distinct sales channels: (i) a direct sales force; (ii) a network of independent distributors and sales agents in North America, Europe, Latin America, Asia Pacific and other markets around the world; (iii) integrated supply; and (iv) the Internet. Application engineers and technicians directly assist customers with product design, selection, application and support.
We market our products through two basic brand names; Kennametal and Widia. These master brands also include sub-brands under various trademarks and trade names, such as Kennametal with other identifying sub-brands: Kennametal Conforma Clad, Kennametal Tricon, Kennametal Extrude Hone, Kennametal Sintec, Kennametal International Specialty Alloys, Kennametal Camco, and similarly with Widia and other identifying sub-brands: Widia GTD, Widia Rubig, Widia Circle, Widia Manchester, Widia Hanita, Widia Clappdico, as well as various product names such as ToolBoss, Kyon, Fix-Perfect and Mill1â„˘. Kennametal Inc. or a subsidiary of Kennametal Inc. owns these trademarks and trade names. We also sell products to customers who resell such products under the customersâ€™ names or private labels.
RAW MATERIALS AND SUPPLIES Major metallurgical raw materials consist of ore concentrates, compounds and secondary materials containing tungsten, tantalum, titanium, niobium and cobalt. Although an adequate supply of these raw materials currently exists, our major sources for raw materials are located abroad and prices fluctuate at times. We have entered into extended raw material supply agreements and will implement product price increases as deemed necessary to mitigate rising costs. For these reasons, we exercise great care in selecting, purchasing and managing availability of raw materials. We also purchase steel bars and forgings for making toolholders and other tool parts, as well as for producing rotary cutting tools and accessories. We obtain products purchased for use in manufacturing processes and for resale from thousands of suppliers located in the U.S. and abroad.
RESEARCH AND DEVELOPMENT Our product development efforts focus on providing solutions to our customers for their manufacturing challenges and productivity requirements. Our product development program provides discipline and focus for the product development process by establishing â€śgateways,â€ť or sequential tests, during the development process to remove inefficiencies and accelerate improvements. This program speeds and streamlines development into a series of actions and decision points, combining efforts and resources to produce new and enhanced products faster. This program is designed to assure a strong link between customer requirements and corporate strategy, and to enable us to gain full benefit from our investment in new product development. We hold a number of patents which, in the aggregate, are material to the operation of our businesses.
Research and development expenses included in operating expense totaled $33.3 million, $28.0 million and $27.6 million in 2011, 2010 and 2009, respectively.
SEASONALITY Our business is not materially affected by seasonal variations. However, to varying degrees, traditional summer vacation shutdowns of customersâ€™ plants and holiday shutdowns often affect our sales levels during the first and second quarters of our fiscal year.
BACKLOG Our backlog of orders generally is not significant to our operations.
COMPETITION We are one of the worldâ€™s leading producers of cemented carbide products, and we maintain a strong competitive position in all major markets worldwide. We actively compete in the sale of all our products with approximately 30 companies engaged in the cemented tungsten carbide business in the U.S. and many more outside the U.S. Several of our competitors are divisions of larger corporations. In addition, several hundred fabricators and toolmakers, many of which operate out of relatively small shops, produce tools similar to ours and buy the cemented tungsten carbide components for such tools from cemented tungsten carbide producers, including us. Major competition exists from both U.S.-based and internationally-based concerns. In addition, we compete with thousands of industrial supply distributors.
The principal elements of competition in our businesses are service, product innovation and performance, quality, availability, price and productivity delivered to our customers. We believe that our competitive strength derives from our global presence, our ability to develop solutions to address customer needs through new and improved tools, consistent high quality of our products, our customer service capabilities, our state-of-the-art manufacturing capabilities and multiple sales channels. With these strengths, we are able to sell products based on the value added productivity to the customer rather than strictly on competitive prices.
REGULATION From time to time, we are a party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible, or intellectual property. While we currently believe that the amount of ultimate liability, if any, with respect to these actions will not materially affect our financial position, results of operations or liquidity, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur or if protracted litigation were to ensue, the impact could be material to us.
Compliance with government laws and regulations pertaining to the discharge of materials or pollutants into the environment or otherwise relating to the protection of the environment did not have a material effect on our capital expenditures or competitive position for the years covered by this report, nor is such compliance expected to have a material effect in the future.
We are involved as a potentially responsible party (PRP) at various sites designated by the United States 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.
Reserves for other potential environmental issues at June 30, 2011 and 2010 were $5.4 million and $5.2 million, respectively. The reserves that 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 take into consideration our prior experience in remediation and that of other companies, as well as public information released by the USEPA, other governmental agencies, and by the PRP groups in which we are participating. Although the reserves currently appear to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The reserved and unreserved liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the U.S. 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.
EMPLOYEES We employed approximately 11,600 persons at June 30, 2011, of which approximately 4,800 were located in the U.S. and 6,800 in other parts of the world, principally Europe, India and Asia Pacific. At June 30, 2011, approximately 3,000 of the above employees were represented by labor unions. We consider our labor relations to be generally good.
AVAILABLE INFORMATION Our Internet address is www.kennametal.com. On the SEC Filings page of our Web Site, which is accessible under the Investor Relations tab, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): our annual report on Form 10-K, our annual proxy statement, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act). Our Sec Filings Web page also includes Forms 3, 4 and 5 filed pursuant to Section 16(a) of the Exchange Act. All filings posted on our SEC Filings Web page are available to be viewed on this page free of charge. On the Corporate Governance page of our Web site, which is under the Investor Relations tab, we post the following charters and guidelines: Audit Committee Charter, Compensation Committee Charter, Nominating/Corporate Governance Committee Charter, Kennametal Inc. Corporate Governance Guidelines, Code of Business Ethics and Conduct and Stock Ownership Guidelines. All charters and guidelines posted on our Corporate Governance Web page are available to be viewed on this page free of charge. Information contained on our Web site is not part of this annual report on Form 10-K or our other filings with the SEC.
WILLIAM J. HARVEY Director since 2011
Mr. Harvey serves as President â€” DuPont Packaging & Industrial Polymers (a multi-billion dollar global business unit of E.I. DuPont de Nemours & Company), a position he has held since 2009. Mr. Harvey joined DuPont in 1977. After leaving DuPont in 1992 to become General Managers of the Peroxygen Chemical Division of FMC Corporation, Mr. Harvey rejoined DuPont in 1996 and was appointed Global Business Director for DuPont Packaging & Industrial Polymers. Since that time Mr. Harvey has held various management-level positions with DuPont including Vice President and General Manager of the DuPont Advanced Fiber businesses - Kevlar and Nomex fibers, Vice President - DuPont Corporate Operations and Vice President - DuPont Corporate Plans. Mr. Harvey holds a bachelorâ€™s degree in economics from Virginia Commonwealth University and a masterâ€™s degree from the University of Virginia Darden Graduate School of Business.
Qualifications : Mr. Harvey brings to the board keen strategic insight and commercial expertise. His wealth of global experience and business acumen position him well to make an excellent contribution to our Company.
PHILIP A. DUR Director since 2006
Mr. Dur is the retired Corporate Vice President and President, Ship Systems Sector of Northrop Grumman Corporation (a global defense company), having served in those positions from October 2001 to December 2005. Prior to that, he was the Vice President of Program Operations at the Electronic Sensors and Systems Sector for Northrop Grumman. Mr. Dur joined Northrop Grumman in 1999 following five years with Tenneco, Inc. (a global manufacturer of products for the automobile industry), where he held a number of strategic and executive positions, with the latest being Vice President, Worldwide Business Development and Strategy. Mr. Dur also had a long and distinguished career in the U.S. Navy, ultimately rising to the rank of Rear Admiral. He is a Director of TechPrecision Corporation (a provider of specialty and large-scale metallic fabrication, machining and assembly). Mr. Dur holds a bachelorâ€™s and masterâ€™s degree from the University of Notre Dame and a masterâ€™s degree and doctorate from Harvard University.
Qualifications : Mr. Dur brings to our Board extensive executive experience in operations and keen strategic insight into the transportation industry and future business opportunities for our Company. He also brings valuable perspective from his service on the board of another public company.
TIMOTHY R. MCLEVISH Director since 2004
Mr. McLevish served as the Executive Vice President and Chief Financial Officer of Kraft Foods Inc. (a food and beverage company), from October 2007 until May 2011. Before joining Kraft Foods, Mr. McLevish was the Senior Vice President and Chief Financial Officer of Ingersoll-Rand Company Limited (a diversified industrial company) from May 2002 to August 2007. Prior to that, he held a series of finance, administration and leadership roles for Mead Corporation (a forest products company), which he joined in 1987. His final role with Mead was Vice President and Chief Financial Officer, a position he held from December 1999 through March 2002. Mr. McLevish holds a bachelorâ€™s degree in accounting from the University of Minnesota and a masterâ€™s degree in business administration from Harvard Business School. In addition, he is a certified public accountant.
Qualifications : With his experience as a Chief Financial Officer and as a senior finance leader for multiple public companies that operate in diverse global industries, Mr. McLevish brings deep knowledge of financial reporting, internal controls and procedures and risk management to our Board. His extensive experience in public company finance and knowledge of the financial and capital markets enables him to provide insight and guidance to our Board in these areas. He has been designated by our Board as an â€śaudit committee financial expertâ€ť and currently serves as the Chair of our Audit Committee.
STEVEN H. WUNNING Director since 2005
Mr. Wunning has served as the Group President and an Executive Office member of Caterpillar Inc. (a global manufacturer of construction, mining and industrial equipment) since January 2004. He is responsible for the Resource Industries Group, which includes Advanced Components & Systems Division, Diversified Products Division, Global Purchasing Division, Integrated Manufacturing Operations Division, Mining & Quarry (Solutions) Division and Product Development & Global Technology Division. He is also responsible for driving manufacturing excellence through the Caterpillar Production System. Mr. Wunning originally joined Caterpillar in 1973, and has held numerous positions there with increasing responsibility, including Vice President and then President of Cat Logistics, Corporate Vice President of the Logistics & Product Services Division and Corporate Vice President of Cat Logistics. He has a bachelorâ€™s degree from the University of Missouri Rolla â€” now Missouri University of Science and Technology â€” and an Executive MBA from the University of Illinois.
Qualifications : Mr. Wunning brings to our Board his extensive operational and management experience in the areas of quality, manufacturing, product support and logistics for a complex, global organization. He has a deep understanding of the challenges of managing a global manufacturing organization and is able to provide valuable insight and perspective with respect to operations, supply chain logistics and customer relations.
RONALD M. DEFEO Director since 2001
Mr. DeFeo serves as the Chairman of the Board of Terex Corporation (a global manufacturer of machinery and industrial products), a position he has held since March 1998. Since March 1995, he has also served as the Chief Executive Officer of Terex. From October 1993 through December 2006, Mr. DeFeo was also the President and Chief Operating Officer of Terex. He joined Terex in 1992 as the President of the Heavy Equipment Group and later assumed responsibility for Terexâ€™s former Clark Material Handling Company subsidiary. Before joining Terex, Mr. DeFeo was a Senior Vice President of J.I. Case Company, the former Tenneco farm and construction equipment division and also served as a Managing Director of Case Construction Equipment throughout Europe. While at J.I. Case, Mr. DeFeo was also a Vice President of North American Construction Equipment Sales and General Manager of Retail Operations. Mr. DeFeo holds a bachelorâ€™s of arts degree in Economics and Philosophy from Iona College.
Qualifications : Mr. Defeo has extensive experience in leading and managing manufacturing companies that operate globally, such as ours. As the Chairman and Chief Executive Officer of a U.S.-based, public, industrial company, Mr. DeFeo brings strong leadership skills and deep knowledge of the manufacturing industry to the Board, as well as valuable perspective from serving on the Board of Terex Corporation.
WILLIAM R. NEWLIN Director since 1982
Mr. Newlin serves as the Chairman of Newlin Investment Company LLC (a private investment firm founded by Mr. Newlin), a position he has held since April 2007. Since 2009, he has also served as the Chairman of Plextronics, Inc., (a private technology company). From October 2003 to March 2007, Mr. Newlin served as Executive Vice President and Chief Administrative Officer of Dickâ€™s Sporting Goods, Inc. (a sporting goods retailer). He was Chairman and Chief Executive Officer of Buchanan Ingersoll Professional Corporation (now Buchanan Ingersoll & Rooney PC, a law firm) from September 1980 to October 2003. Mr. Newlin is a Director of ArvinMeritor, Inc. and Calgon Carbon Corporation. Mr. Newlin holds a bachelorâ€™s degree from Princeton University and a juris doctorate from the University of Pittsburgh Law School.
Qualifications : Mr. Newlin has significant experience in leading and managing large organizations, including professional service providers and public and private businesses. He brings extensive experience in major corporate transactions to our Board, along with deep executive leadership and entrepreneurial experience, years of experience providing strategic counsel and legal advice to complex organizations like ours and those of our customers and valuable perspective gained from serving on the boards of other public and private companies.
LAWRENCE W. STRANGHOENER Director since 2003
Mr. Stranghoener serves as the Executive Vice President and Chief Financial Officer of The Mosaic Company (a crop nutrition company), a position that he has held since September 2004. Before joining Mosaic, Mr. Stranghoener was the Executive Vice President and Chief Financial Officer of Thrivent Financial for Lutherans (a Fortune 500 financial services company) from 2001 to 2004. Prior to that, Mr. Stranghoener spent 17 years at Honeywell Inc. where he served in a variety of positions in the U.S. and in Europe, including three years as Chief Financial Officer until Honeywell merged with AlliedSignal in 1999. Mr. Stranghoener started his career as an Investment Analyst at Dain Rauscher. Mr. Stranghoener serves on the board of directors of Aleris International, where he chairs the audit committee. He holds a bachelor of arts degree from St. Olaf College and a master of business administration degree from Northwestern University.
Qualifications : Mr. Stranghoener has extensive experience as a Chief Financial Officer for a variety of organizations. He brings strong leadership skills and a deep understanding of financial reporting and risk management to our Board. His knowledge of the financial and capital markets enables him to provide guidance and valuable insight to our Board and management on these matters. He has been designated by our Board as an â€śaudit committee financial expertâ€ť and has served as the Chair of our Audit Committee in the past.
MANAGEMENT DISCUSSION FROM LATEST 10K
OVERVIEW Kennametal Inc. 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. We believe that our reputation for manufacturing excellence, as well as our technological expertise and innovation in our principal products, has helped us to achieve a leading market presence in our primary markets. We believe that we are one of the largest global providers of consumable metalcutting tools and tooling supplies.
In 2011, the Company achieved sequential sales growth each quarter, with an organic sales increase of 28 percent for the year. The Company had strong earnings per diluted share (EPS) of $2.76 as a result of sales growth and solid operating margins. We completed our restructuring programs which are expected to reduce our cost structure by approximately $170 million annually, yielding higher benefits on costs that were lower than anticipated.
For 2011, sales were $2.4 billion, an increase of 27.6 percent compared to prior year sales of $1.9 billion. Operating income was $321.7 million, an increase of $228.4 million compared to operating income of $93.2 million in 2010. The increase in operating income was primarily due to sales volume and price realization, improved capacity utilization and incremental restructuring benefits of approximately $28 million, partially offset by higher raw material costs.
We generated cash flow from operating activities of $230.8 million in the current year. Capital expenditures were $83.4 million during the year.
In addition, we invested further in technology and innovation to continue delivering a high level of new products to our customers. Research and development expenses included in operating expense totaled $33.3 million for 2011. In 2011, we generated approximately 40 percent of our sales from new products.
NEW OPERATING STRUCTURE 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 as of July 1, 2010. We restated the segment financial information for the years ended June 30, 2010 and 2009, respectively, to reflect the change in reportable operating segments.
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 primarily focused on customers within the transportation, aerospace, defense and general engineering market sectors. The Infrastructure business is primarily 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. The remaining corporate expenses that are determined to be non-allocable will continue to be reported as Corporate.
RESTRUCTURING ACTIONS During 2011, we completed our restructuring programs to reduce costs and improve operating efficiencies. These programs related to the rationalization of certain manufacturing and service facilities, as well as other employment and cost reduction programs. Restructuring and related charges recorded in 2011 amounted to $21.5 million. This included $13.7 million of restructuring charges of which $1.1 million were related to inventory disposals and recorded as cost of goods sold. Restructuring related charges of $4.4 million were recorded in cost of goods sold and $3.4 million in operating expense during 2011. We realized pre-tax benefits from these restructuring programs of approximately $165 million during 2011.
The Companyâ€™s restructuring programs are expected to deliver annual ongoing pre-tax savings of approximately $170 million now that all programs are fully implemented. Total pre-tax charges recorded from inception to June 30, 2011 was approximately $150 million.
ACQUISITIONS AND DIVESTITURES In 2011 and 2010, we had no acquisitions or divestitures.
In 2009, we acquired Tricon Metals and Services Inc. (Tricon) in our Infrastructure segment for a net purchase price of $64.1 million. Tricon is a leading supplier of custom wear solutions specializing in consumable proprietary steels for the surface and underground mining markets, including hard rock and coal. During 2009, we also made an acquisition within our Industrial segment. We also had one divestiture in 2009 that was accounted for as discounted operations and described below.
DISCONTINUED OPERATIONS On June 30, 2009, we divested our high speed steel business (HSS) from our Industrial segment as part of our continuing focus to shape our business portfolio and rationalize our manufacturing footprint. This divestiture was accounted for as discontinued operations. Cash proceeds from this divestiture amounted to $28.5 million. We incurred pre-tax charges related to the divestiture of $2.3 million and $25.9 million during 2010 and 2009, respectively. The 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.
RESULTS OF CONTINUING OPERATIONS
SALES Sales of $2,403.5 million in 2011 increased 27.6 percent from $1,884.1 million in 2010 as a result of strong organic growth. Organic sales increased in both segments and across all regions. Organic sales growth drivers were general engineering of 40 percent, transportation of 30 percent and energy markets of 26 percent.
Sales of $1,884.1 million in 2010 decreased 5.8 percent from $1,999.9 million in 2009. Sales declined organically by 8 percent as a result of the global economy, partially offset by a 1 percent increase from favorable foreign currency effects and a 1 percent increase from an acquisition. Organic sales declined in Europe and the Americas, partially offset by an organic sales increase in Asia. Organic sales decreased in both segments primarily due to lower sales in general engineering of 14 percent and reduced demand in energy markets of 13 percent, partially offset by an increase in the transportation and earthworks market sectors of 8 percent and 3 percent, respectively.
GROSS PROFIT Gross profit increased $256.7 million to $884.4 million in 2011 from $627.7 million in 2010. The increase was primarily due to increased organic sales of $523.9 million, price realization, improved absorption of manufacturing costs due to higher production levels, cost reduction benefits, favorable business mix and favorable foreign currency effects of $3.5 million. The impact of these items was partially offset by higher raw material costs and one-time benefits in the prior year from certain labor negotiations in Europe that did not occur in the current period. The gross profit margin for 2011 increased to 36.8 percent from 33.3 percent in 2010.
Gross profit increased $51.2 million to $627.7 million in 2010 from $576.5 million in 2009. The increase was primarily due to restructuring and other cost reduction benefits, lower raw material costs which more than offset unfavorable price realization, one-time benefits from certain labor negotiations in Europe, favorable foreign currency effects of $7.5 million, a decrease in restructuring and related charges of $7.0 million, as well as improved absorption of manufacturing costs due to higher production levels. The impact of these items was partially offset by lower organic sales of $151.2, unfavorable business mix and the restoration of salaries and other employment costs that had been temporarily reduced. The gross profit margin for 2010 increased to 33.3 percent from 28.8 percent in 2009.
OPERATING EXPENSE Operating expense in 2011 was $538.5 million, an increase of $61.0 million, or 12.8 percent, compared to $477.5 million in 2010. The increase is primarily driven by higher employment costs of $31.9 million due to the reinstatement of salaries and other temporary employment cost reductions and a higher provision for incentive compensation of $18.7 million, as a result of better operating performance. Foreign currency unfavorably impacted operating expense by $2.1 million
Operating expense in 2010 was $477.5 million, a decrease of $12.1 million, or 2.5 percent, compared to $489.6 million in 2009. The decrease is primarily attributable to a $40.2 million decrease in employment expenses driven by restructuring and cost management activities and a $5.4 million decrease in the provision for bad debts. These decreases were partially offset by higher provisions for incentive compensation programs of $20.5 million, increased spending on strategic projects of $8.2 million and the unfavorable impact of foreign currency of $4.3 million.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES During 2011, we completed our restructuring programs and recognized $21.5 million of restructuring charges of which $13.7 million were recorded as restructuring charges including $1.1 million related to inventory disposals and recorded in cost of goods sold. No asset impairment occurred in 2011. See the discussion under the heading â€śRestructuring Actionsâ€ť within this MD&A for additional information.
During 2010, we continued to implement restructuring actions and recognized $48.9 million of restructuring charges of which $44.3 million were recorded as restructuring charges including $0.4 million related to inventory disposals and recorded in cost of goods sold. No asset impairment occurred in 2010.
During 2009, restructuring and related charges amounted to $73.3 million, including $64.7 million of restructuring charges of which $2.1 million were related to inventory disposals and recorded in cost of goods sold. During 2009, we recorded a goodwill impairment charge of $100.2 million. Of this amount, $37.3 million related to our surface finishing machines and services business and $62.9 million related to our engineered products business. No goodwill remains on the books for our surface finishing machines and services business and $39.6 million of goodwill remains on the engineered products business. We also recorded a $10.8 million impairment charge for the indefinite-lived trademark for our surface finishing machines and services business.
AMORTIZATION OF INTANGIBLES Amortization expense was $11.6 million, $13.1 million and $13.1 million in 2011, 2010 and 2009, respectively.
INTEREST EXPENSE Interest expense decreased $2.4 million to $22.8 million in 2011, compared with $25.2 million in 2010. This decrease was due to a decrease in the average interest rates on domestic borrowings to 4.8 percent, compared to 5.0 percent in 2010, partially offset by higher borrowings. The portion of our debt subject to variable rates of interest was approximately 2 percent and 6 percent at June 30, 2011 and 2010, respectively.
Interest expense decreased $2.0 million to $25.2 million in 2010, compared with $27.2 million in 2009. This decrease was due to lower borrowings, partially offset by an increase in the average interest rates on domestic borrowings to 5.0 percent compared to 3.9 percent in 2009. The portion of our debt subject to variable rates of interest was approximately 6 percent and 34 percent at June 30, 2010 and 2009, respectively, due to lower borrowings outstanding against our revolving credit facility.
OTHER EXPENSE (INCOME), NET In 2011, other expense, net decreased by $11.4 million to $2.8 million expense, net compared to $8.6 million income, net in 2010. The decrease was primarily due to a $10.2 million unfavorable change in foreign currency transaction results, primarily driven by the euro.
In 2010, other income, net decreased by $6.0 million to $8.6 million compared to $14.6 million in 2009. The decrease was primarily due to an unfavorable change in foreign currency transaction results of $3.2 million, primarily due to the euro and a $3.1 million decrease in interest income due to a decrease in interest rates.
INCOME TAXES The effective tax rate from continuing operations for 2011 was 21.6 percent compared to 35.2 percent for 2010. The change in the effective rate from 2010 to 2011 was primarily driven by increased income in international locations where the tax rate is lower than the U.S. as well as restructuring charges in the prior year in jurisdictions where no tax benefit could be recognized.
The 2011 effective rate was favorably impacted by a $21.5 million release of a valuation allowance in the United Kingdom, but that impact was offset by the tax cost of approximately $22.0 million, predominately U.S., associated with dividends of current year net income from some of our international subsidiaries. The 2010 effective rate was unfavorably impacted by the expiration of the research, development and experimental tax credit as well as the impact of restructuring charges in jurisdictions where no tax benefit could be recognized.
During 2011, we generated taxable income in other jurisdictions where we have valuation allowances recorded against our net deferred tax assets. The corresponding impact on the 2011 effective tax rate was immaterial. In conjunction with our annual planning process during the fourth quarter of 2011, we determined that sustainability of future income in the United Kingdom is likely, and as a result, we believe that it is more likely than not that we will be able to realize the net deferred tax assets in this jurisdiction. Accordingly, we recorded a valuation allowance adjustment of $21.5 million that reduced tax expense. With respect to the other jurisdictions, we believe sustainability of future income remains uncertain. We therefore have not adjusted the valuation allowance in these jurisdictions. We will continue to monitor our ability to realize the net deferred tax assets in these jurisdictions, and if appropriate, will adjust the valuation allowance. Such an adjustment would likely result in a material reduction to tax expense in the period the adjustment occurs.
The effective tax rate from continuing operations for 2010 was 35.2 percent (provision on income) compared to 10.0 percent (benefit on a loss) for 2009. The change in the effective rate from 2009 to 2010 was primarily driven by asset impairment charges in the prior period. In addition, the 2010 effective rate was unfavorably impacted by the expiration of the research, development and experimental tax credit as well as the impact of restructuring charges in jurisdictions where no tax benefit could be recognized. The 2009 effective rate benefited from a valuation allowance adjustment in Europe.
INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KENNAMETAL SHAREOWNERS Income from continuing operations attributable to Kennametal Shareowners was $229.7 million, or $2.76 per diluted share, in 2011 compared to $47.8 million, or $0.59 per diluted share, in 2010. The increase in income from continuing operations was a result of the factors previously discussed.
Income from continuing operations attributable to Kennametal Shareowners was $47.8 million, or $0.59 per diluted share, in 2010 compared to loss of ($102.4) million, or ($1.40) per diluted share, in 2009. The increase in income from continuing operations was a result of the factors previously discussed.
BUSINESS SEGMENT REVIEW We operate two reportable operating segments consisting of Industrial and Infrastructure. Corporate expenses that do not have a meaningful base for allocation are reported in Corporate. Segment determination is based upon internal organizational structure, the manner in which we organize segments for making operating decisions and assessing performance, the availability of separate financial results and materiality considerations.
LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is our primary source of funding for capital expenditures. During the year ended June 30, 2011, cash flow provided by operating activities was $230.8 million, driven by our operating performance.
To augment cash from operations and as an additional source of funds, we maintain a syndicated revolving credit-facility. On June 25, 2010 we entered into a five-year, multi-currency, revolving credit facility (2010 Credit Agreement) that extends to June 2015. This agreement replaces the prior credit facility that was scheduled to mature in March 2011. The 2010 Credit Agreement 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 June 30, 2011. We had no borrowings outstanding under the 2010 Credit Agreement as of June 30, 2011.
Borrowings under the 2010 Credit Agreement are guaranteed by our significant domestic subsidiaries.
Our $300 million Senior Unsecured Notes due in June 2012 have been reclassified to current maturities of long-term debt as of June 30, 2011. The repayment of this debt is expected to be financed in due course through a new corporate bond issuance.
Additionally, we obtain local financing through credit lines with commercial banks in the various countries in which we operate. At June 30, 2011, these borrowings amounted to $3.7 million of notes payable and $3.3 million of term debt, capital leases and other debt. We believe that cash flow from operations and the availability under our credit lines will be sufficient to meet our cash requirements over the next 12 months.
Based upon our debt structure at June 30, 2011 and 2010, approximately 2 percent and 6 percent of our debt, respectively, was exposed to variable rates of interest. The decrease in the portion of our debt subject to variable rates was due to a reduction in notes payable and term debt subject to variable interest rates.
At June 30, 2011, we had cash and cash equivalents of $204.6 million. Total Kennametal shareownersâ€™ equity was $1,658.1 million and total debt was $312.9 million. Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Kennametal Inc. is a leading global manufacturer and supplier of tooling, engineered components and advanced materials consumed in production processes. We believe that our reputation for manufacturing excellence, as well as our technological expertise and innovation in our principal products, has helped us to achieve a leading market presence in our primary markets. We believe we are one of the largest global providers of consumable metalcutting tools and tooling supplies. End users of our products include metalworking manufacturers and suppliers across a diverse array of industries, including the aerospace, defense, transportation, machine tool, light machinery and heavy machinery industries, as well as manufacturers, producers and suppliers in a number of other industries including coal mining, highway construction, quarrying, and oil and gas exploration and production industries. Our end usersâ€™ products include items ranging from airframes to coal mining, engines to oil wells and turbochargers to construction.
On March 1, 2012, we acquired all of the shares of Deloro Stellite Holdings 1 Limited (Stellite) pursuant to the terms of the Share Sale and Purchase Agreement dated January 13, 2012. The UK-based Stellite is a global manufacturer and provider of alloy-based critical wear solutions for extreme environments involving high temperature, corrosion and abrasion. Stellite employs approximately 1,300 people across seven primary operating facilities globally, including locations in the U.S., Canada, Germany, Italy, India and China. Stelliteâ€™s proprietary metal alloys, materials expertise, engineering design and fabrication capabilities complement Kennametalâ€™s current business in the oil and gas, power generation, transportation and aerospace end markets. This acquisition is in alignment with our growth strategy and positions us to further achieve geographic and end market balance.
We acquired Stellite for a purchase price of approximately $383 million and funded the acquisition through existing credit facilities and operating cash flows, and remain committed to maintaining our investment grade ratings. The transaction is expected to be accretive to earnings in the fiscal year ending June 30, 2013.
We experienced strong growth for the March quarter across both business segments and all regions. Our sales of $696.4 million for the quarter ended March 31, 2012 grew 13 percent compared to sales for the March quarter one year ago. Sales growth was primarily due to organic growth which includes both volume and price and the impact of the Stellite acquisition.
We consumed higher cost raw materials in the quarter, while price levels remained unchanged. We had previously executed appropriate pricing actions and have continued to maintain our cost discipline during the quarter. We continue to monitor changes in raw material costs to ensure appropriate pricing.
Operating income was $103.3 million, an increase of $15.5 million compared to operating income of $87.8 million in the prior year quarter. The increase in operating income was driven by higher sales volume and price, partially offset by higher raw material costs and acquisition related charges.
We delivered a record March quarter earnings per diluted share of $0.93.
We had cash inflow from operating activities of $164.2 million during the nine months ended March 31, 2012, driven by our operating performance. Capital expenditures were $60.7 million during the nine months ended March 31, 2012.
In addition, we invested further in technology and innovation to continue delivering a high level of new products to our customers. Research and development expenses included in operating expense totaled $9.1 million for the three months ended March 31, 2012.
The following narrative provides further discussion and analysis of our results of operations, liquidity and capital resources, as well as other pertinent matters.
RESULTS OF CONTINUING OPERATIONS
Sales for the three months ended March 31, 2012 were $696.4 million, an increase of $81.6 million, or 13 percent, from $614.8 million in the prior year quarter. Sales increased due to organic growth of 8 percent and the impacts of acquisition of 4 percent and more business days of 3 percent, partially offset by an unfavorable impact from foreign currency. The improvement in sales was driven by better performance in both business segments and across all regions. Organic sales growth drivers were aerospace and defense of 14 percent, earthworks market of 12 percent, energy markets of 12 percent, general engineering of 7 percent while the transportation end market sales remained at a relatively similar level as the prior year.
Sales for the nine months ended March 31, 2012 were $1,997.0 million, an increase of $287.2 million or 17 percent, from $1,709.8 million in the prior year quarter. Sales increased due to organic growth of 13 percent, the impact of more business days of 2 percent and a slightly favorable impact due to both acquisition and foreign currency effects. The improvement in sales was driven by better performance in both business segments and across all regions. Organic sales growth drivers were energy markets of 18 percent, earthworks market of 14 percent, general engineering of 13 percent, aerospace and defense of 13 percent and transportation of 7 percent.
Gross profit for the three months ended March 31, 2012 was $246.4 million, an increase of $16.4 million from $230.0 million in the prior year quarter. This increase was primarily due to an organic sales increase of $52 million, partially offset by higher raw material costs. The gross profit margin for the three months ended March 31, 2012 was 35.4 percent, as compared to 37.4 percent generated in the prior year quarter.
Gross profit for the nine months ended March 31, 2012 was $729.4 million, an increase of $110.7 million from $618.7 million in the prior year quarter. This increase was primarily due to an organic sales increase of $226.2 million, partially offset by higher raw material costs. The gross profit margin for the nine months ended March 31, 2012 was 36.5 percent, as compared to 36.2 percent generated in the prior year quarter.
Operating expense for the three months ended March 31, 2012 increased $0.6 million or less than 1 percent to $138.9 million compared to $138.3 million in the prior year quarter. The increase is primarily due to acquisition related costs of $5.7 million and Stellite operating expenditures of $2.5 million, partially offset by lower professional fees of $3.4 million, a decrease in restructuring and related charges of $2.5 million and favorable currency effects of $1.8 million.
Operating expense for the nine months ended March 31, 2012 increased $24.1 million or 6.1 percent to $419.5 million compared to $395.4 million in the prior year quarter. The increase is primarily due to an increase in employment costs of $13.5 million, including higher sales compensation of $8.1 million due to better operating performance, acquisition related costs of $5.7 million, Stellite operating expenditures of $2.5 million and an unfavorable impact of foreign currency effects of $6.9 million, partially offset by a decrease in restructuring and related charges of $3.2 million.
During fiscal year 2011, we completed our restructuring plans to reduce costs and improve operating efficiencies. These actions related to the rationalization of certain manufacturing and service facilities as well as other employment cost reduction programs. As the restructuring programs were completed in fiscal 2011, there were no restructuring and related charges for the three and nine months ended March 31, 2012. The Companyâ€™s restructuring programs are delivering annual ongoing pre-tax savings of approximately $170 million now that all programs are fully implemented.
Restructuring and related charges recorded during the three months ended March 31, 2011 amounted to $5.5 million, including $1.6 million of restructuring charges, of which $0.6 million were related to inventory disposals and recorded in cost of goods sold. Restructuring related charges of $1.5 million and $2.4 million were recorded in cost of goods sold and operating expense, respectively, during the three months ended March 31, 2011.
Restructuring and related charges recorded during the nine months ended March 31, 2011 amounted to $14.9 million, including $8.7 million of restructuring charges, of which $1.0 million were related to inventory disposals and recorded in cost of goods sold. Restructuring related charges of $3.0 million and $3.2 million were recorded in cost of goods sold and operating expense, respectively, during the nine months ended March 31, 2011.
Interest expense for the three months ended March 31, 2012 of $8.0 million increased $2.2 million or 38.8 percent, from $5.8 million in the prior year quarter due to increased borrowings. Interest expense for the nine months ended March 31, 2012 of $18.7 million increased $1.4 million or 8.4 percent, from $17.3 million in the prior year quarter due to increased borrowings.
OTHER (INCOME) EXPENSE, NET
Other income, net for the three months ended March 31, 2012 was $0.5 million compared to other expense, net of $1.4 million for the prior year quarter. The increase was primarily driven by favorable foreign currency transaction results of $1.5 million.
Other income, net for the nine months ended March 31, 2012 was $1.2 million compared to other expense, net of $3.1 million for the prior year quarter. The increase was primarily driven by favorable foreign currency transaction results of $3.9 million.
The effective income tax rate for the three months ended March 31, 2012 and 2011 was 20.4 percent and 19.1 percent, respectively. The current year rate was unfavorably impacted by non-deductible acquisition related costs. These drivers were partially offset by favorable adjustments to certain tax reserves and the impact of stronger earnings in our pan European business model.
The effective income tax rate for the nine months ended March 31, 2012 and 2011 was 20.3 percent and 22.0 percent, respectively. The current year rate was favorably impacted by a $5.6 million reduction of a valuation allowance in the Netherlands as well as the favorable impact of stronger operating results under our pan-European business strategy.
During the quarter, we implemented a strategy that would provide incremental taxable income in the Netherlands. Based on this assessment, we believe that it is more likely than not that we will be able to realize an additional portion of the net deferred tax assets in this jurisdiction. With respect to the other jurisdictions, we will continue to monitor our ability to realize the net deferred tax assets in these jurisdictions, and if appropriate, will adjust the valuation allowance. Such an adjustment may result in a material reduction to tax expense in the period the adjustment occurs.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is our primary source of funding for capital expenditures and internal growth.
On October 21, 2011, we entered into an amendment to our five year, multi-currency, revolving credit facility (2010 Credit Agreement), which is used to augment cash flow from operations and as an additional source of funds. The five-year, multi-currency, revolving credit facility (2011 Credit Agreement) extends to October 2016. The 2011 Credit Agreement permits revolving credit loans of up to $600.0 million for working capital, capital expenditures and general corporate purposes. The 2011 Credit Agreement allows for borrowings in U.S. dollars, euro, Canadian dollars, pound sterling and Japanese yen. Interest payable under the 2011 Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us.
The 2011 Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the agreement). We were in compliance with these financial covenants as of March 31, 2012. We had $29.2 million of borrowings outstanding under the 2011 Credit Agreement as of March 31, 2012. For the nine months ended March 31, 2012 average borrowings outstanding under the 2010 and 2011 Credit Agreements were approximately $117.1 million.
Borrowings under the 2011 Credit Agreement are guaranteed by our significant domestic subsidiaries.
On February 14, 2012, we issued $300 million of 3.875 percent Senior Unsecured Notes due in 2022. Interest will be paid semi-annually on February 15 and August 15 of each year. We intend to apply the net proceeds from this notes offering to the repayment of our outstanding 7.20 percent Senior Unsecured Notes at their June 15, 2012 maturity. Pending such use, proceeds will be utilized to repay outstanding indebtedness under our credit facility and for general corporate purposes.
Our 7.20 percent 10 year Senior Unsecured Notes issued in June 2002 with an aggregate face amount of $300 million were reclassified to current maturities of long-term debt as of June 30, 2011.
We consider the unremitted earnings of our non-U.S. subsidiaries that have not previously been taxed in the U.S., to be permanently reinvested. As of March 31, 2012, cash and cash equivalents of $125 million and short term intercompany advances made by our foreign subsidiaries to our United States parent of $216 million would not be available for use in the United States on a long term basis, without incurring U.S. federal and state income tax consequences. These short term intercompany advances are in the form of intercompany loans made over quarter end to repay borrowings under our revolving credit agreement and have duration of not more than fourteen days. We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.
At March 31, 2012, cash and cash equivalents were $125.5 million, total debt, including notes payable and capital lease obligations, was $640.9 million and total Kennametal shareownersâ€™ equity was $1,719.2 million. Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide access to the capital markets. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers.
On March 1, 2012 we acquired Stellite from Duke Street Capital for $382.6 million. We funded the acquisition through existing facilities and operating cash flow, and remain committed to maintaining our investment grade ratings.
There have been no other material changes in our contractual obligations and commitments since June 30, 2011.
Cash Flow Provided by Operating Activities
During the nine months ended March 31, 2012, cash flow provided by operating activities was $164.2 million, compared to $125.0 million for the prior year period. Cash flow provided by operating activities for the current year period consisted of net income and non-cash items amounting to an inflow of $308.1 million, partially offset by changes in certain assets and liabilities netting to $143.9 million. Contributing to the changes in certain assets and liabilities was an increase in inventory of $85.3 million driven by higher inventory levels to meet higher demand, a decrease in accounts payable and accrued liabilities of $57.0 million primarily driven by accounts payable payments of $35.1 million and payment of $27.0 million of incentive compensation, a decrease in other of $2.4 million and an increase in accounts receivable of $1.5 million, offset by an increase in accrued income taxes of $2.3 million.
During the nine months ended March 31, 2011, cash flow provided by operating activities consisted of net income and non-cash items amounting to an inflow of $234.4 million, partially offset by changes in certain assets and liabilities netting to $109.4 million. Contributing to the changes in certain assets and liabilities was an increase in inventory of $74.7 million driven by an increase in production to meet higher demand and an increase in accounts receivable of $71.7 million due to higher sales volumes, partially offset by an increase in accounts payable and accrued liabilities of $37.3 million.
Cash Flow Used for Investing Activities
Cash flow used for investing activities was $448.4 million for the nine months ended March 31, 2012, compared to $22.9 million in the prior year period. During the current year period, cash flow used for investing activities included the acquisition of Stellite for $382.6 million and capital expenditures, net of $56.3 million, which consisted primarily of equipment upgrades and $10.0 million for the purchase of a technology license intangible in our Infrastructure segment.
During the nine months ended March 31, 2011, cash flow used for investing activities included capital expenditures, net of $25.3 million, which consisted primarily of an Enterprise Resource Planning system and equipment upgrades.
Cash Flow Provided by (Used for) Financing Activities
Cash flow provided by financing activities was $216.5 million for the nine months ended March 31, 2012 compared to cash flow used for financing activities of $57.7 million in the prior year period. During the current year period, cash flow provided by financing activities included $323.8 million net increase in borrowings, which included the issuance of $300 million of 3.875 percent Senior Unsecured Notes due in 2022 and $29.2 million of borrowings outstanding on our revolving credit facility, and $23.1 million of dividend reinvestment and the effect of employee benefit and stock plans. These cash flows were partially offset by $66.8 million used for the purchase of capital stock, $32.3 million of cash dividends paid to shareowners and $22.4 million payment related to the settlement of forward starting interest rate swap contracts.
During the nine months ended March 31, 2011, cash flow used for financing activities included $29.9 million of cash dividends paid to shareowners, $26.5 million used for the purchase of capital stock and $15.4 million net decrease in borrowings, partially offset by $15.1 million of dividend reinvestment and the effect of employee benefit and stock plans.
Working capital was $493.2 million at March 31, 2012, an increase of $47.1 million from $446.1 million at June 30, 2011. The increase in working capital was driven primarily by an increase in inventories of $110.9 million due to higher business activity, an increase in accounts receivable of $34.0 million, a decrease in other current liabilities of $12.9 million driven primarily by the payout of incentive compensation and a decrease in accrued expenses of $8.4 million due to the timing of payments, partially offset by a decrease in cash and cash equivalents of $79.0 million driven primarily by the acquisition of Stellite and purchase of capital stock, partially offset by net increase in borrowings due to the issuance of $300 million of 3.875 percent Senior Unsecured Notes, an increase in current maturities of long-term debt and capital leases of $26.4 million, primarily due to the $29.2 million outstanding on the revolving credit facility, an increase in accrued income taxes of $9.6 million and a decrease in other current assets of $3.1 million. Foreign currency effects and the impact of the Stellite acquisition accounted for $39.6 million and $45.8 million of the working capital change, respectively.
Property, plant and equipment, net increased $42.6 million from $697.1 million at June 30, 2011 to $739.7 million at March 31, 2012, primarily due to the Stellite acquisition of $72.8 million and capital additions of $60.7 million, partially offset by depreciation expense of $63.2 million, unfavorable foreign currency impact of $20.7 million and capital disposals of $4.4 million.
Thank you, Regina. Welcome, everyone. Thank you for joining us today to review Kennametal's Third Quarter of Fiscal 2012 Results. We issued our quarterly earnings press release earlier today. You may access this announcement via our website at www.kennametal.com. Consistent with our practice in prior quarterly conference calls, we've invited various members of the media to listen in on this call. It's also being broadcast live on our website, and a recording of this call will be available on our site for replay through May 25, 2012.
I'm Quynh McGuire, Director of Investor Relations for Kennametal. Joining me for our call today are Chairman, President and Chief Executive Officer, Carlos Cardoso; Vice President and Chief Financial Officer, Frank Simpkins; and Vice President, Finance and Corporate Controller, Martha Bailey. Carlos and Frank will provide further explanation on the quarter's financial performance. After their remarks, we'll be happy to answer your questions.
At this time, I'd like to direct your attention to our forward-looking disclosure statement. The discussion we'll have today contains comments that may constitute forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of assumptions, risks and uncertainties that could cause the company's actual results, performance or achievements to differ materially from those expressed in or implied by such forward-looking statements. Additional information regarding these risk factors and uncertainties is detailed in Kennametal's filings with the Securities and Exchange Commission.
In addition, Kennametal provided the SEC with a Form 8-K, a copy of which is currently available on our website. This enables us to discuss non-GAAP financial measures during this call in accordance with SEC Regulation G. This 8-K presents GAAP financial measures that we believe are most directly comparable to those non-GAAP financial measures, and it provides a reconciliation of those measures as well.
I'll now turn the call over to Carlos.
Carlos M. Cardoso
Thank you, Quynh. Good morning, everyone. Thank you for joining us today. I'm pleased to report that for the March quarter of fiscal 2012, Kennametal, again, delivered strong performance. For the period, organic sales grew by 8% year-over-year. This growth rate reflects ongoing customer demand on top of the strong comparisons of 25% from the prior year quarter. We believe that our results were due to our global team's successful implementation of our proven strategies to continue outperforming industrial productions and gain market share.
For the March quarter, global investor production increased by 2.7%, indicating that expansion is still occurring in all end markets. In addition to favorable economic environment, Kennametal benefited from our own growth strategies, management discipline and execution capabilities.
For the 9-month period ending March 31, industrial production growth was 2.2%, while Kennametal realized 13% organic sales growth for the same time frame.
Kennametal's served geographies continue to reflect increased demand year-over-year. In our industrial segment, both the Americas and Europe show strong growths. In our Infrastructure segment, all major regions demonstrated high demand, with Asia reporting the strongest growth. Currently, Kennametal's rest of the world markets represented 25% of sales in the March quarter. Customer demand in the industrial markets remain strong, particularly in aerospace and general engineering.
Infrastructure markets continue to show growth in both our Earthworks and Energy business. However, we expect that some sectors may be impacted in the near term by lower production activities. Overall, Kennametal's diverse and market mix lessens our exposure to any single market. As a result, we have reduced cyclicality in our business. Therefore, we believe that we can continue to grow throughout the entire economic cycle.
During the March quarter, we continue to implement our channel strategy through the WIDIA brands. We continue to gain market share. For the first 9 months of fiscal 2012, WIDIA product sales increased 20% year-over-year, indicating the success of our strategy and the momentum of this brand.
Let's now discuss end market trends. In aerospace, Airbus and Boeing, together, received more than 2,200 net orders in calendar year 2011, which was twice the prior year level and significantly higher than 1,011 jets that were delivered. Currently, the 2 companies have combined backlogs that are equivalent to approximately 7 years of outputs. Production increases are under way for both Airbus and Boeing, and the growth cycle is expected to continue.
In transportation, global demand is forecasted to continue, with some unevenness in Western Europe due to the ongoing recession in the eurozone. In the Americas, annual North America light vehicle production increased to 13.5 million units in February, representing the highest level in 3 years, with further production increases expected. In China, while there was a weak start for auto sales in January and February, passenger car sales increased 4.5% in March. According to the China Association of Automobile Manufacturers, deliveries of passenger automobiles, combined, climbed to 1.4 million units last month. In Latin America, Brazilian automakers are reporting that export demand and growth had been strong.
In the general engineering markets, U.S. new orders in industrial machinery are approximately 7% higher than the same period last year, with production expected to moderate over the next couple of quarters. U.S. annual exports are at high levels and expected to further expand. The Association of Manufacturing Technology reported that order showed an increase of approximately 9% from the prior months and grew 35% year-over-year.
Globally, metalworking machining production is at a significantly higher level currently and more growth is expected. This is driven by a modest re-acceleration in the worldwide economy.
In the underground coal mining, the market is expected to be challenging for the remainder of calendar year 2012. Weaker growth in demand for electricity generation and coal plant retirement are offsetting ongoing increasing exports. Therefore, coal production is expected to remain relatively flat, and it is projected that supply will drop further than demand, resulting in another year of contracting inventories.
In road construction, highway funding is generally expected to decline in 2012 compared with the prior year. In Europe, the sovereign debt crisis and ongoing economic slowdown will result in lower construction activities. However, highway funding in the U.S. is expected to benefit from the recent passing of certain stopgap legislation in Congress and should be at similar level as prior year.
In the energy market, natural gas inventories in North America are expected to reach record levels by the end of calendar year 2012. Currently, natural gas prices are low, and gas-directed rig counts are below 700 units. According to IHS global insight, production levels are expected to decline in the coming months. In the near term, residential and commercial consumption of natural gas is expected to be lower due to unseasonably warmer weather. While production is expected to reflect slowing for now, the longer-term infrastructure building continues. Natural gas is expected to be the preferred fuel of the future, which has been reinforced by domestic regulations creating new restrictions on carbon dioxide footprint on any new plant. In the U.S., there are 2 coal plants being retrofitted for natural gas and 12 plants are slated for future construction.
Regarding our cost-reduction measures, we continue to retain savings from our restructuring initiatives, realizing $107 million reduction of annualized expenses and have been permanently removed from our cost structure. Also other actions to streamline our business have both strengthened our foundation and improve our operating excellence. As a result, we continue to expect that Kennametal can support at least $3 billion in sales without significant capital investment.
Kennametal's margins performance during the March quarter reflected our continued recovery of raw materials' cost inflation, specifically, tungsten. We will continue to maintain our disciplined approach related to pricing actions.
I would also like to mention that Kennametal received an important recognition during the quarter. We were named among the world's most ethical companies. The Ethisphere Institute, a leading international think tank dedicated to best practices in business ethics, corporate social responsibility, anti-corruption and sustainability, selected Kennametal for exhibiting leadership in promoting ethical business standards through our global operations and for introducing better business practices. The recognition helps to support Kennametal as an employer of choice, which enabled us to attract the best talent in our industry. In addition, it helps make Kennametal a supplier of choice for our customers worldwide.
As always, Kennametal's global team continues to execute our growth strategies to further increase our addressable market. We continue to maximize our enterprise structure to drive organic growth, as well as to evaluate potential acquisitions. For example, the recent announced Deloro Stellite transaction, reinforced our strategy to acquire technologies that strengthen our core business. We'll continue to expand our presence in the rest of the world markets and growing sales in distribution channels through our WIDIA brand strategy. In addition, we continue to improve our customers' productivity through new product introductions and by showcasing our technology and innovation. As a result, we are further expanding our reach to penetrate new markets and continually grow market share.
I'll now turn the call over to Frank, who will discuss our financial results for the quarter in greater detail. Frank?
Frank P. Simpkins
Thank you, Carlos. I'll provide some comments on our performance for the March quarter, and I'll move on to our outlook for the remainder of fiscal year 2012. Some of my comments are non-GAAP, so please refer to the reconciliation schedules that we provide in our earnings release and related Form 8-K.
So let me start off. I'd say the March quarter was very active. Results were as expected operationally with below-the-line benefits related to interest and taxes. We continue to deliver on our goal of achieving 15% EBIT and 15% return on invested capital one year ahead of schedule.
Our March quarter highlights included: organic sales growth was 8%, which was essentially in line with our expectations; earnings per share were $0.93 a share, which was a March quarter record. Our reported earnings per share included transaction-related costs of $0.05 from the Stellite acquisition and was consistent with our integration plan. The $0.05 per share is primarily transaction-related costs, which are OpEx and some purchase accounting step-up costs for inventory and cost of goods sold and a minimal amount of net income contribution.
Our operating margin was 14.8% and adjusting for the Stellite acquisition, our operating margin reached 16%. We also issued new $300 million 10-year, 3.875 public notes in February to refinance our existing term notes that mature in June, and we closed the acquisition of Stellite on March 1, which allows us to strengthen our business. And our adjusted return on invested capital of 16.9% was a March quarter record.
Now I'll walk through some of the key items in the income statements. Sales for the quarter increased $82 million or 13% to $696 million compared to $615 million in the March quarter last year. The increase in sales is due to our organic growth that I mentioned of 8%, the impact of the Stellite acquisition contributed 4%, more business days added 3% and this was partly offset by unfavorable foreign currency effects of 2%.
Similar to Carlos, I'd like to point out that our organic growth of 8% was achieved on top of stronger comparisons to double-digit organic growth of 25% in the prior year quarter, and this represents the ninth consecutive quarter of year-over-year organic sales growth.
Turning to the business segment sales performance. Industrial segment sales of $419 million increased 7% from the prior year quarter. This was driven by organic growth of 5% and the impact of more business days of 4%, partly offset by 2% unfavorable foreign currency effects. On an organic basis, sales growth was led by Aerospace and Defense growth of 14% and General Engineering growth of 7%, while Transportation end market sales remain at a relatively similar level to the prior year.
Regionally, sales including workdays, increased by approximately 12% in the Americas, 11% in Europe, and were relatively flat in Asia due to the strong comparisons for the prior year. This trend is consistent with the December quarter. As you know, the growth we experienced in the prior year March quarter was also strong across all regions, especially the emerging markets. For comparison purposes, last year, Asia was up 32%, Europe was up 29%, and the Americas was up 23% last year.
Before I cover the Infrastructure segment, I want to remind everybody that the acquisition of Stellite results are now included in the Infrastructure segment. Please keep this in mind for comparative purposes. Infrastructure segment sales of $278 million increased 25% from the prior year quarter, driven by organic growth of 13%. And the acquisition of Stellite contributed 10% of the growth. Business days were also favorably impacted sales by 3%, partly offset by 1% unfavorable foreign currency. The organic increase was driven by 12% higher sales of Energy and related products and 12% increase in demand for Earthwork products.
Regionally, sales including the workdays increased 24% in Asia, 16% in Europe and 13% in the Americas. By geography, our Infrastructure business also had very strong prior year sales growth of 20% in the Americas, 15% in Asia and 11% in Europe.
Now a recap of our operating performance. Our gross profit margin was 35.4%. Our gross margin also included one month of operating results from the Stellite acquisition, which was dilutive to Kennametal's gross margins. Excluding Stellite, our margins would have been similar with the December quarter.
Gross margin percent declined year-over-year, as a result of higher raw material costs consumed in the March quarter, while pricing levels remained unchanged. This had a dilutive impact on the margin percent. Margin was also impacted by lower productivity due to our inventory reduction initiative.
Operating expense remained relatively flat year-over-year. Overall, lower employments and related costs and favorable foreign currency exchange effects were offset by acquisition and related costs. We remained focused on controlling G&A costs and making select investments in our selling-related costs. And we continue to focus on controlling our G&A to fund our selling expenses.
Operating expense as a percent of sales was 19.9% for the quarter, down approximately 300 basis points from the prior year of 22.5%. Note also that Stellite's operating expenses as a percent of sales are lower than Kennametal's and overall accretive to the percentage.
Our operating income increased to $103 million compared to $88 million in the prior year quarter. Absent restructuring and related charges, operating income is $93 million in the prior year quarter. Our leverage was solid on a reported basis of 19 on both an actual and constant currency basis and was impacted by higher raw material costs and lower productivity than the prior year. Operating margin for the March quarter was 14.8%, and adjusting for the Stellite acquisition, our operating margin reached 16%.
Turning to the business segment operating performance. The Industrial segment operating income was $71 million compared with $54 million in the same quarter last year. Industrial operating income included $2 million of restructuring and related charges last year. Industrial operating margin increased 320 basis points to 17% the prior year quarter. The primary drivers of the increase on operating income were higher sales volume, price realization, partly offset by higher raw material costs.
The Infrastructure segment, operating income was $34 million compared with $36 million in the same quarter of last year. Infrastructure's operating income included $6 million of acquisition-related costs. Infrastructure's operating income also included restructuring-related benefits of $1 million in the prior year. Infrastructure's operating margin was 12.3% compared to 16% in the prior year, and operating margin excluding the impact of the Stellite acquisition was 15.1% for the March quarter. Our operating income benefited from higher sales volume, including price realization. But this was offset by raw material costs and the acquisition-related costs.
The effective tax rate was 20.4% compared to 19.1% in the prior year quarter. And I'll comment that the primary difference from our previously provided effective tax rate guidance of 22% was a benefit related to a valuation allowance adjustments, which was a discrete benefit in the quarter.
And regarding our EPS, we reported March quarter diluted earnings per share of $0.93 compared to the prior year diluted earnings per share of $0.77. And the current year earnings per share included the impact of Stellite acquisition charges of $0.05, while the prior year EPS included restructuring and related charges of $0.06.
Turning to cash flow. Our cash flow from operating activities were $164 million compared to $125 million in the prior year. Our capital expenditures were $56 million year-to-date compared to $25 million in the prior year period. And our free operating cash flow for the 9 months ended March 31 was $108 million compared to $100 million in the prior year period. The balance sheet continues to remain strong. Our cash position was $126 million, and we remained focused on improving our working capital. And DSO and ITO were at relatively similar levels in the March quarter compared to December. However, we made further progress with our days payable, which increased 3 days from December to March. We also initiated actions to better balance our inventory levels, as we discussed last quarter, and expect to make further progress in the upcoming quarters.
At March 31, our total debt was $641 million, that's up $328 million from the June quarter due to the new bond issuance of $300 million and $29 million outstanding on a revolving bank credit facility. Our debt-to-cap ratio at March 31, 2012 was 26.9%, and this compares to 15.9% at June 30 last year.
As I mentioned earlier, we issued new $300 million, 10-year, 3.875 notes in February to refinance the existing like value and term notes that mature in June of this year. The proceeds from the new bond issue will be used to pay down the existing notes when they mature at June 15, 2012. We're pleased with the favorable 1.875 credits spread we achieved. The transaction was well received and multiple times oversubscribed. This refinancing measure, in combination with our October 2011 amendment extension and upsizing of the revolving credit facility to $600 million, significantly extends our debt maturity profile and further enhances liquidity.
The all-in rate for the new bond is approximately 4.7%, including the impact from our forward starting swaps, and Kennametal realized annual interest savings with the new bonds compared to the all-in rate of 5.5% expiring notes, including the amortization of gain from the 2009 swap termination. Our U.S. pension plans continue to remain 100% funded. And as I mentioned earlier, our return on invested capital on an adjusted basis was 16.9%, up significantly from 14.8% in June.
Now I'll just give you a quick update on our acquisition of Stellite. Overall, the Stellite acquisition is progressing well and in line with our integration plan. We completed the acquisition on March 1 at a cost of $383 million, net of cash acquired. We've established a full-time integration team that has been assigned and is working with the Stellite team to drive critical work streams to ensure a smooth transition. Our day one activities were initiated across the organization to welcome the Stellite team and introduce them to the Kennametal culture. We also launched their new enterprise brand, Kennametal Stellite. The initial focus on the integration has been on the financial processes, purchase accounting, compliance programs and safety. We have also begun the investments necessary to convert their ERP systems to SAP.
The Kennametal and the Stellite growth teams have initiated synergy workshops to identify opportunities to further accelerate growth. The impact of the Kennametal Stellite acquisition on the March quarter earnings per share was $0.05 a share and that was driven primarily by the transaction costs and purchase accounting effects I previously mentioned. And we have reaffirmed that the Kennametal Stellite acquisition is expected to be approximately $0.10 dilutive to our fiscal '12 reported earnings per share.
Now turning to the outlook included in our release, we have updated our fiscal 2012 organic sales growth guidance to a range of 10% to 11% from a range of 10% to 12%. We also increased the total sales growth guidance to a range of 16% to 17% from our previous estimate of 10% to 12% due to the acquisition of Stellite.
Our earnings per share guidance for fiscal 2012 is now in the range of $3.80 to $3.90 per share, up from our previous range of $3.70 to $3.90 per share. We continue to expect global economic conditions and worldwide industrial production to reflect moderate expansion with manufacturing leading the recovery.
The increase to our prior guidance of 5% at the midpoint includes the following facts: first, we tightened our top line growth slightly due to expected softness in our Mining and Energy sectors and near-term slowing in China related to the Transportation sector; secondly, interest expense. Now that we have completed our bond refinancing, we expect interest expense to be lower than the prior guidance. We estimate this will add $0.03 of earnings per share. Our effective tax rate, as a result of the March quarter discrete benefit, this will add $0.02 per share, and the full year tax rate guidance remains unchanged. Foreign currency is not expected to have any significant impact in the fourth quarter, and our inventory reduction plans remain in place for the June quarter, but will be impacted by some market sectors slowing as reflected in our revised top line projections.
The acquisition of Stellite is expected to impact earnings per share by approximately $0.10 in fiscal 2012 and that includes transaction-related costs, which occurred in the March quarter. And this is consistent with our previously communicated guidance. The impact of Stellite has not been reflected in Kennametal's current EPS guidance.
Cash flow from operations is now expected to be in the range of $300 million to $310 million for fiscal 2012. Based on capital expenditures of approximately $100 million, the company expects to generate between $200 million to $210 million of free operating cash flow for the full fiscal year.
At this time, I'll turn it back to Carlos for some closing comment.
Carlos M. Cardoso
Thank you, Frank. As we move forward, we'll continue to execute our strategies in ways that help us achieve our goals. We'll remain focused on our commitment to outperform industrial production, as has been consistently demonstrated by our results. We'll also further balance our served end markets, business mix and geographic presence. As an example, the recent acquisition of Deloro Stellite will advance our strategies by further diversifying our business.
In addition to those measures, we'll continue to maximize opportunities to expand our progress in distribution channels and gain market share. We have already streamlined our cost structure, and we continue to be disciplined in our cost-reduction focus. Most importantly, we remain committed to being a customer-focused, market-facing enterprise. We believe this positions Kennametal to identify new revenue opportunities and increase our levels of profitability.
As always, we remain disciplined in our allocation of capital. Our uses of cash include reinvesting in our business, making acquisition, purchasing shares and paying dividends. Our global team is highly focused on achieving our next milestone targets of 15% EBIT and 15% return on investment capital, one year earlier than planned.
We have a strong financial position, and we have repositioned the company for improved margins and returns. Kennametal will continue to deliver our promise to be a breakaway company and enterprise that is profitable throughout the economic cycle.
Thank you for your time and your interest in Kennametal. We'll now take your questions.