FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File Number 1-5318
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0900168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Route 981 at Westmoreland County Airport
P. O. Box 231
Latrobe, Pennsylvania 15650
(Address of principal executive offices)
Registrant's telephone number, including area code: (412) 539-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Capital Stock, par value $1.25 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of August 31, 1995, the aggregate market value of the registrant's Capital
Stock held by non-affiliates of the registrant, estimated solely for the
purposes of this Form 10-K, was approximately $891,200,000. For purposes of
the foregoing calculation only, all directors and executive officers of the
registrant and each person who may be deemed to own beneficially more than 5%
of the registrant's Capital Stock, have been deemed affiliates.
As of August 31, 1995, there were 26,606,068 shares of Capital Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1995 Annual Report to Shareholders are incorporated by
reference into Parts I, II, and IV.
Portions of the Proxy Statement for the 1995 Annual Meeting of Shareholders
are incorporated by reference into Parts III and IV.
<PAGE>
TABLE OF CONTENTS
Item No.
--------
PART I
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
Officers of the Registrant
PART II
5. Market for the Registrant's Capital Stock and Related Stockholder
Matters
6. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements on Accounting and Financial Disclosure
PART III
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
--------
Kennametal Inc. was incorporated in Pennsylvania in 1943. Kennametal Inc. and
subsidiaries ("Kennametal" or the "company") manufacture, purchase and
distribute a broad range of tools, tooling systems, supplies and services for
the metalworking, mining and highway construction industries. Kennametal
specializes in developing and manufacturing metalcutting tools and wear
resistant parts using a specialized type of powder metallurgy. Kennametal's
metalcutting tools are made of cemented carbides, ceramics, cermets and other
hard materials. The company manufactures a complete line of toolholders and
toolholding systems by machining and fabricating steel bars and other metal
alloys. Kennametal's mining and construction cutting tools are tipped with
cemented carbide and are used for underground coal mining and highway
construction, repair and maintenance. Metallurgical products consist of
powders made from ore concentrates, compounds and secondary materials.
Business Segment and Product Classes
------------------------------------
The company operates predominantly as a tooling supplier specializing in
powder metallurgy, which represents a single business segment. While many of
the company's products are similar in composition, sales are classified into
three major categories: metalworking products, mining and construction
products and metallurgical products. The company's sales by product class are
presented on page 23 of the 1995 Annual Report to Shareholders, and such
information is incorporated herein by reference. Additional information about
the company's operations by geographic area is presented on page 31 of the
1995 Annual Report to Shareholders, and such information is incorporated
herein by reference.
Metalworking Products
---------------------
Kennametal markets, manufactures and distributes a full line of products and
services for the metalworking industry. The company provides metalcutting
tools, abrasives, precision measuring devices, power tools, hand tools and
machine tool accessories to manufacturing companies in a wide range of
industries.
A Kennametal tooling system usually consists of a steel toolholder and an
indexable cutting tool called an insert. During a metalworking operation, the
toolholder is positioned in a machine tool which provides the turning power.
While the workpiece or toolholder is rapidly rotating, the cutting tool insert
contacts the workpiece and cuts or shapes the workpiece. The cutting tool
insert is consumed during use and must be replaced periodically. Metalcutting
operations include turning, boring, threading, grooving, milling and drilling.
The company also makes wear resistant parts for use in abrasive environments
and specialty applications.
Mining and Construction Products
--------------------------------
Mining and construction cutting tools are fabricated from steel parts and
tipped with cemented carbide. Mining tools, used primarily in the coal
industry, include longwall shearer and continuous miner drums, blocks, bits,
pinning rods, augers and a wide range of mining tool accessories. The company
also supplies compacts for mining, quarrying, water well drilling and oil and
gas exploration.
Construction cutting tools include carbide-tipped bits for ditching, trenching
and road planing; grader blades for site preparation and routine roadbed
control and snowplow blades and shoes for winter road plowing.
Metallurgical Products
----------------------
The company makes proprietary metallurgical powders for use as a basic
material in many of its metalworking, mining and construction products. In
addition, the company produces a variety of metallurgical powders and related
materials for specialized markets. These products include intermediate
carbide powders, hardfacing materials and matrix powders which are sold to
manufacturers of cemented carbide products, oil and gas drilling equipment and
diamond drill bits.
Recent Acquisition
-------------------
In August 1993, the company acquired an 81 percent interest in Hertel AG
("Hertel") for $43 million in cash and $55 million of assumed debt. Hertel,
based in Fuerth, Germany, is a manufacturer and marketer of cemented carbide
tools and tooling systems which are similar to the metalcutting tools and
tooling systems produced by the company. The acquisition of Hertel has not
materially changed the product lines offered by the company. While the
company's primary market is the United States, Hertel's primary market is
Germany and western Europe. The acquisition of Hertel significantly increased
the company's market share in these markets. Hertel had consolidated sales of
approximately $201 million for the year ended December 31, 1992.
Since January 1, 1994, the company purchased additional shares of Hertel for
$12 million, thereby increasing the company's ownership interest to 91 percent
at June 30, 1995.
International Operations
------------------------
The company's principal international operations are conducted in western
Europe and Canada. In addition, the company has joint ventures in Japan,
India and Italy, sales offices and sales agents in Asia-Pacific and sales
agents and distributors in eastern Europe and other areas of the world. The
company's international operations are subject to the usual risks of doing
business in those countries, including currency fluctuations and changes in
social, political and economic environments. In management's opinion, the
company's business is not materially dependent upon any one international
location involving significant risk.
The company's international sales are presented on page 23 of the 1995 Annual
Report to Shareholders, and such information is incorporated herein by
reference. Information pertaining to the effects of foreign currency
fluctuations is contained under the caption "Foreign Currency Translation" in
the notes to the consolidated financial statements on page 24 of the 1995
Annual Report to Shareholders, and such information is incorporated herein by
reference.
Marketing and Distribution
--------------------------
The company's products are sold through three distinct channels: direct
sales, full-service supply and mail order catalogs. The company's
manufactured products are sold to end-users primarily through a direct sales
force. Service engineers and technicians directly assist customers with
product design, selection and application. In addition, Kennametal-
manufactured products, together with a broad range of purchased products, are
sold through full-service supply programs and mail order catalogs. The
company also uses independent distributors and sales agents in the United
States and certain international markets.
The company's products are marketed under various trademarks and tradenames,
such as Kennametal*, Hertel*, the letter K combined with other identifying
letters and/or numbers, Block Style K*, Kendex*, Kenloc*, Top Notch*,
Erickson*, Kyon*, KM*, Drill-Fix* and Fix-Perfect*. Purchased products are
sold under the manufacturer's name or a private label.
Competition
-----------
Kennametal is one of the world's leading producers of cemented carbide tools
and maintains a strong competitive position, especially in the United States
and Canada. There is active competition in the sale of all products made by
the company, with approximately 30 companies engaged in the cemented carbide
business in the United States and many more outside the U.S. Several
competitors are divisions of larger corporations. In addition, several
hundred fabricators and toolmakers in the United States, many of whom operate
out of relatively small shops, produce tools similar to those made by the
company and buy the cemented carbide components for such tools from cemented
carbide producers, including the company. Major domestic competition exists
from both U.S.-based and international-based concerns. In addition, the
company competes with thousands of industrial supply companies in the United
States.
The principal methods of competition in the company's business are service,
product innovation, quality, availability and price. The company believes
that its competitive strength rests on its customer service capabilities
including its multiple distribution channels, its ability to develop new and
improved tools responsive to the needs of its customers and the consistent
high quality of its products. These factors frequently permit the company to
sell such products based on the value added for the customer rather than
strictly on competitive prices.
Seasonality
-----------
Seasonal variations do not have a major effect on the company's business.
However, to varying degrees, traditional summer vacation shutdowns of
metalworking customers' plants and holiday shutdowns often affect the
company's sales levels during the first and second quarters of its fiscal
year.
Backlog
-------
The company's backlog of orders is generally not significant to its
operations. Approximately 80 percent of all orders are filled from stock and
the balance is generally filled within short lead-times.
Research and Development
------------------------
The company is involved in research and development of new products and
processes. Research and development expenses totaled $18.7 million, $15.2
million and $14.7 million in 1995, 1994 and 1993, respectively. Additionally,
certain costs associated with improving manufacturing processes are included
in cost of goods sold. The company holds a number of patents and licenses
which, in the aggregate, are not material to the operation of the business.
The company has brought a number of new or improved products to market during
the past few years. These include metalcutting inserts that incorporate
innovative tool geometries for improved chip control and productivity, grade
KC994M* multi-coated metalcutting inserts for milling applications, grades
KC9010* and KC9025* multi-coated metalcutting inserts for turning
applications, grade Kyon 3500* ceramic metalcutting inserts and grade KCD25*
diamond-coated metalcutting inserts.
Raw Materials and Supplies
--------------------------
Major metallurgical raw materials consist of ore concentrates, compounds and
secondary materials containing tungsten, tantalum, titanium, niobium and
cobalt. Although these raw materials are in relatively adequate supply, major
sources are located abroad and prices at times have been volatile. For these
reasons, the company exercises great care in the selection, purchase and
inventory availability of these materials. The company also purchases
substantial quantities of steel bars and forgings for making toolholders and
other tool parts and accessories. Products purchased for resale are obtained
from hundreds of suppliers located in the U.S. and abroad.
Employees
---------
The company employed approximately 7,000 persons at June 30, 1995, of which
4,400 were located in the United States and 2,600 in other parts of the world,
principally Europe and Canada. Approximately 1,200 employees were represented
by labor unions, of which 140 were hourly-rated employees located at plants in
the Latrobe, Pennsylvania area. The remaining 1,060 employees represented by
labor unions were employed at eight plants located outside of the United
States. The company considers its labor relations to be generally good.
Regulation
----------
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 the company's
capital expenditures, earnings or competitive position for the year covered by
this report, nor is such compliance expected to have a material effect in the
future.
-------------------------------------
* Trademark owned by Kennametal Inc.
<PAGE>
ITEM 2. PROPERTIES
Presented below is a summary of principal manufacturing facilities used by the
company and its majority-owned subsidiaries.
<TABLE>
<CAPTION>
Owned/
Location Leased Principal Products
-------- ------ ------------------
<S> <C> <C>
UNITED STATES:
Troy, Michigan Leased Metalworking Toolholders
Fallon, Nevada Owned Metallurgical Powders
Henderson, North Carolina Owned Metallurgical Powders
Roanoke Rapids, North Carolina Owned Metalworking Inserts
Orwell, Ohio Owned Metalworking Inserts
Solon, Ohio Owned Metalworking Toolholders
Bedford, Pennsylvania Owned Mining and Construction Tools
and Wear Parts
Latrobe, Pennsylvania Owned Metallurgical Powders
and Wear Parts
Johnson City, Tennessee Owned Metalworking Inserts
New Market, Virginia Owned Metalworking Toolholders
INTERNATIONAL:
Port Coquitlam, Canada Owned Metallurgical Powders
Victoria, Canada Owned Wear Parts
Shanxi, China Owned Mining Tools
Kingswinford, England Leased Metalworking Toolholders
Ebermannstadt, Germany Owned Metalworking Inserts
Mistelgau, Germany Owned Metallurgical Powders,
Metalworking Inserts
and Wear Parts
Nabburg, Germany Owned Metalworking Toolholders
Vohenstrauss, Germany Leased Metalworking Carbide Drills
Arnhem, Netherlands Owned Wear Products
</TABLE>
The company also has a network of warehouses and customer service centers
located throughout North America, western Europe, Asia and Australia, a
significant portion of which are leased. The majority of the company's
research and development efforts are conducted in a corporate technology
center located adjacent to corporate headquarters in Latrobe, Pennsylvania.
All significant properties are used in the company's dominant business of
powder metallurgy, tools, tooling systems and supplies. The company's
production capacity is adequate for its present needs. The company believes
that its properties have been adequately maintained, are generally in good
condition and are suitable for the company's business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS
(a) On August 13, 1993, the company was served with a Notice of
Violation dated August 9, 1993, issued by the United States Environmental
Protection Agency ("EPA"). The EPA alleges violations concerning visible
emissions from the company's Fallon, Nevada facility. On October 6, 1993, the
EPA issued an interim compliance order with respect to this matter. On April
26, 1994, the company was served with a second Notice of Violation dated April
19, 1994, which relates to the first Notice of Violation. The EPA alleges in
the second but related notice the violation of a regulation concerning the
allowable particulate emission rate. The company has agreed with EPA to pay a
civil fine of $425,000 to settle those alleged violations without an admission
of liability.
(b) In connection with a Domination Contract with Hertel, under German
law, the company is required to offer to minority shareholders to purchase
their shares for a reasonable compensation and to guarantee dividends during
the term of the Domination Contract (ending June 30, 1996, subject to annual
renewals) and to pay to Hertel any net cumulative losses it sustains during
the term and has liability to Hertel creditors as if Hertel merged with the
company. Minority shareholders are contesting the reasonableness of the
purchase price for minority shares and the minimum dividend on minority shares
offered by the company in connection with the Domination Contract. It is
management's opinion that Hertel has viable defenses to the contest of the
reasonableness of the minority share purchase price and minimum dividend and,
in any event, that the ultimate outcome of this matter will not have a
material adverse effect on the results of operations or financial position of
the company.
(c) There are no other material pending legal proceedings, other than
litigation incidental to the ordinary course of business, to which the company
or any of its subsidiaries is a party or of which any of their property is the
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1995, there were no matters submitted
to a vote of security holders through the solicitation of proxies or
otherwise.
<TABLE>
<CAPTION>
OFFICERS OF THE REGISTRANT
Name, Age, and Position Experience During Past Five Years (2)
----------------------- -------------------------------------
<S> <C>
Robert L. McGeehan, 58 (1) President and Director since 1989. Chief
President Executive Officer since October 1, 1991.
Chief Executive Officer
Director
David B. Arnold, 56 (1) Vice President since 1979. Chief Technical
Vice President Officer since 1988.
Chief Technical Officer
James R. Breisinger, 45 Vice President since 1990. Renamed
Vice President Controller in 1994. Managing Director of
Controller Europe from 1991 to 1994. Controller from
1983 to 1991.
David T. Cofer, 50 (1) Vice President since 1986. Secretary and
Vice President General Counsel since 1982.
Secretary and General Counsel
Richard P. Gibson, 60 Assistant Treasurer since 1985. Director
Assistant Treasurer of Taxes since 1980.
Director of Taxes
James W. Heaton, 63 Senior Vice President and Director of
Senior Vice President Customer Satisfaction since 1990.
Director of Customer Satisfaction
Richard C. Hendricks, 56 (1) Vice President since 1982. Director of
Vice President Corporate Business Development since 1992.
Director of Corporate Business General Manager of the Mining and
Development Metallurgical Division from 1990 to 1992.
Timothy D. Hudson, 49 Vice President since 1994. Director
Vice President of Human Resources since 1992. Corporate
Director of Human Resources Manager of Human Resources from 1978 to
1992.
H. Patrick Mahanes, Jr., 52 (1) Vice President since 1987. Named Chief
Vice President Operating Officer in 1995. Director of
Chief Operating Officer Operations from 1991 to 1995. Director of
Metalworking Manufacturing from 1988 to
1991.
Richard V. Minns, 57 Vice President since 1990. Director of
Vice President Sales for the Metalworking Systems Division
Director of Metalworking Sales, since 1985.
North America
James E. Morrison, 44 Vice President since 1994. Treasurer
Vice President since 1987.
Treasurer
Kevin G. Nowe, 43 Joined the company as Assistant General
Assistant Secretary Counsel in 1992 and was elected Assistant
Assistant General Counsel Secretary in 1993. Previously was Senior
Counsel and Corporate Secretary of Emro
Marketing Company in Enon, Ohio.
Richard J. Orwig, 54 (1) Vice President since 1987. Named Chief
Vice President Financial and Administrative Officer in
Chief Financial and Administrative 1994. Director of Administration from
Officer 1991 to 1994. Director of Human Resources
from 1989 to 1991.
Alan G. Ringler, 45 (1) Vice President since 1989. Director of
Vice President Metalworking Systems Division since 1992.
Director of Metalworking Systems Director of Metalworking, North America,
Division from 1991 to 1992. Managing Director,
Europe, from 1990 to 1991.
Michael W. Ruprich, 39 (1) Vice President and President of J&L
Vice President, Kennametal Inc. America Inc. since 1994. General Manager
President, J&L America Inc. of J&L from 1993 to 1994. National Sales
and Marketing Manager from 1992 to 1993.
General Manager-East Coast Region from
1990 to 1992.
P. Mark Schiller, 47 Vice President since 1992. Director of
Vice President Kennametal Distribution Services since
Director of Kennametal Distribution 1990.
Services
<FN>
Notes:
-----
(1) Executive officer of the Registrant.
(2) Each officer has been elected by the Board of Directors to serve
until removed or until a successor is elected and qualified, and
has served continuously as an officer since first elected.
</FN>
</TABLE>
PART II
The information required under Items 5 through 8 is included in the 1995 Annual
Report to Shareholders and such information is incorporated herein by reference
as indicated by the following table.
<TABLE>
<CAPTION>
Incorporated by Reference to Captions
and Pages of the 1995 Annual Report
-------------------------------------
<S> <C>
Item 5. Market for the Registrant's Quarterly Financial Information
Capital Stock and Related (Unaudited) on page 32.
Stockholder Matters
Item 6. Selected Financial Data Ten-Year Financial Highlights
(information with respect to the years
1991 to 1995) on pages 34 and 35.
Item 7. Management's Discussion and Management's Discussion & Analysis
Analysis of Financial Condition on pages 15 to 23.
and Results of Operations
Item 8. Financial Statements and Item 14(a)1. herein and Quarterly
Supplementary Data Financial Information (Unaudited) on
page 32.
Item 9. Changes in and Disagreements Not applicable.
on Accounting and Financial
Disclosure
</TABLE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information set forth in Part I under
the caption "Officers of the Registrant," and the information set forth under
the caption "Election of Directors" in the company's definitive proxy
statement to be filed with the Securities and Exchange Commission within 120
days after June 30, 1995 ("1995 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information set forth under the
caption "Compensation of Executive Officers" and certain information regarding
directors' fees under the caption "Board of Directors and Board Committees" in
the 1995 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information set forth under the
caption "Ownership of Capital Stock by Directors, Nominees and Executive
Officers" with respect to the directors' and officers' shareholdings and under
the caption "Principal Holders of Voting Securities" with respect to other
beneficial owners in the 1995 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is certain information set forth in the notes
to the table under the caption "Election of Directors" and under the caption
"Certain Transactions" in the 1995 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K report.
1. Financial Statements
The consolidated balance sheets as of June 30, 1995 and 1994, the
consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended June 30,
1995,and the notes to consolidated financial statements, together
with the report thereon of Arthur Andersen LLP dated July 24, 1995,
presented in the company's 1995 Annual Report to Shareholders, are
incorporated herein by reference.
2. Financial Statement Schedules
The financial statement schedules shown below should be read in
conjunction with the financial statements contained in the 1995
Annual Report to Shareholders. Other schedules are omitted because
they are not applicable or the required information is shown in the
financial statements or notes thereto.
Separate financial statements of the company are omitted because the
company is primarily an operating company and all significant
subsidiaries included in the consolidated financial statements are
wholly-owned, with the exception of Kennametal Hertel AG, in which
the company has a 91 percent interest.
Financial Statement Schedules:
Report of Independent Public Accountants
II - Valuation and Qualifying Accounts for the Three Years Ended
June 30, 1995
3. Exhibits
(3) Articles of Incorporation and Bylaws
(3.1) Amended and Restated Exhibit 3.1 of the company's
Articles of Incorporation September 30, 1994 Form 10-Q
as Amended is incorporated herein by
reference.
(3.2) Bylaws Exhibit 3.1 of the company's
March 31, 1991 Form 10-Q is
incorporated herein by
reference.
(4) Instruments Defining the Rights
of Security Holders, Including
Indentures
(4.1) Rights Agreement dated Exhibit 4 of the company's
October 25, 1990 Form 8-K dated October 23,
1990 is incorporated herein
by reference.
(4.2) Form of Note Agreement Exhibit 4.3 of the company's
with various creditors 1990 Form 10-K is incorporated
dated as of May 1, 1990 herein by reference.
Note: Copies of instruments
with respect to long-term
debt or capitalized lease
obligations which do not
exceed 10% of consolidated
assets will be furnished
to the Securities and
Exchange Commission upon
request.
(10) Material Contracts
(10.1)* Management Performance The discussion regarding
Bonus Plan the Management Performance
Bonus Plan under the caption
"Report of the Board of
Directors Committee on
Executive Compensation"
contained in the company's
1995 Proxy Statement is
incorporated herein by
reference.
(10.2)* Stock Option Plan Exhibit 10.3 of the company's
of 1982, as amended December 31, 1985 Form 10-Q
is incorporated herein by
reference.
(10.3)* Stock Option and Exhibit 10.1 of the company's
Incentive Plan of 1988 December 31, 1988 Form 10-Q
is incorporated herein by
reference.
(10.4)* Form of Stock Option Exhibit 10.2 of the company's
Agreement with respect December 31, 1988 Form 10-Q
to the Plan set forth is incorporated herein by
as Exhibit 10.3 hereof reference.
(10.5)* Officer employment Exhibit 10.3 of the company's
agreements, as amended 1988 Form 10-K is incorporated
and restated herein by reference.
(10.6)* Deferred Fee Plan for Exhibit 10.4 of the company's
Outside Directors 1988 Form 10-K is incorporated
herein by reference.
(10.7)* Executive Deferred Exhibit 10.5 of the company's
Compensation Trust 1988 Form 10-K is incorporated
Agreement herein by reference.
(10.8)* Form of Employment Exhibit 10.8 of the company's
Agreement with certain 1990 Form 10-K is incorporated
executive officers herein by reference.
(10.9)* Stock Option and Exhibit 10.1 of the company's
Incentive Plan of 1992 September 30, 1992 Form 10-Q
is incorporated herein by
reference.
(10.10)* Directors Stock Exhibit 10.2 of the company's
Incentive Plan September 30, 1992 Form 10-Q
is incorporated herein by
reference.
(10.11)* Severance Agreement Exhibit 10.11 of the company's
executed by and between 1993 Form 10-K is incorporated
Kennametal Inc. and herein by reference.
H. L. Dykema
(10.12) Credit Agreement dated Exhibit 10.12 of the company's
as of July 29, 1993 1993 Form 10-K is incorporated
by and among Kennametal herein by reference.
Inc. and Deutsche Bank
AG, Mellon Bank N.A. and
PNC Bank, National
Association
(10.13) Underwriting Agreement Exhibit 1.1 of the company's
(U.S. Version) March 31, 1994 Form 10-Q is
incorporated herein by
reference.
(10.14) Underwriting Agreement Exhibit 1.2 of the company's
(International Version) March 31, 1994 Form 10-Q is
incorporated herein by
reference.
(10.15) Amendment No. 1 dated Exhibit 10.15 of the company's
as of October 26, 1993 June 30, 1994 Form 10-K is
to Credit Agreement incorporated herein by
dated as of July 29, 1993 reference.
by and among Kennametal
Inc. and Deutsche Bank AG,
Mellon Bank N.A. and PNC
Bank, National Association
(10.16) Amendment No. 2 dated Exhibit 10.16 of the company's
as of June 15, 1994 to June 30, 1994 Form 10-K is
Credit Agreement dated incorporated herein by
as of July 29, 1993 by reference.
and among Kennametal Inc.
and Deutsche Bank AG,
Mellon Bank N.A. and PNC
Bank, National Association
(13) Annual Report to Shareholders Portions of the 1995 Annual
Report are filed herewith.
(21) Subsidiaries of the Registrant Filed herewith.
(23) Consent of Independent Public Filed herewith.
Accountants
(27) Financial Data Schedule Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1995.
-------------------------------------------
* Denotes management contract or compensatory plan or arrangement.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
KENNAMETAL INC.
By RICHARD J. ORWIG
-------------------------------
Richard J. Orwig
Vice President, Chief Financial
and Administrative Officer
Date: September 19, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
QUENTIN C. MCKENNA
------------------------------
Quentin C. McKenna Chairman of the Board September 19, 1995
ROBERT L. MCGEEHAN
------------------------------
Robert L. McGeehan President, Chief Executive September 19, 1995
Officer and Director
JAMES R. BREISINGER
------------------------------
James R. Breisinger Vice President, Controller September 19, 1995
and Chief Accounting Officer
RICHARD J. ORWIG
------------------------------
Richard J. Orwig Vice President, Chief September 19, 1995
Financial and Administrative
Officer
RICHARD C. ALBERDING
------------------------------
Richard C. Alberding Director September 19, 1995
PETER B. BARTLETT
------------------------------
Peter B. Bartlett Director September 19, 1995
ROBERT N. ESLYN
------------------------------
Robert N. Eslyn Director September 19, 1995
A. PETER HELD
------------------------------
A. Peter Held Director September 19, 1995
WARREN H. HOLLINSHEAD
------------------------------
Warren H. Hollinshead Director September 19, 1995
ALOYSIUS T. MCLAUGHLIN, JR.
------------------------------
Aloysius T. McLaughlin, Jr. Director September 19, 1995
WILLIAM R. NEWLIN
------------------------------
William R. Newlin Director September 19, 1995
LARRY YOST
------------------------------
Larry Yost Director September 19, 1995
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders of
Kennametal Inc.
We have audited, in accordance with generally accepted auditing standards, the
financial statements included in Kennametal Inc.'s annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated July 24, 1995. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedules listed
in the index in Item 14(a)2 of this Form 10-K are the responsibility of the
Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not a part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
July 24, 1995
<PAGE>
<TABLE>
KENNAMETAL INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 1995
----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<CAPTION>
Additions
----------------------------------------
Balance at Charged to Deductions Balance at
Beginning of Costs and Other from End of
Description Year Expenses Recoveries Adjustments Reserves (c) Year
----------- ------------ ---------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
1995
----
Allowance for doubtful
accounts $9,328 $1,477 $237 $2,131 (a) $1,067 $12,106
====== ====== ==== ====== ====== =======
1994
----
Allowance for doubtful
accounts $2,062 $ 608 $334 $6,682 (b) $ 358 $ 9,328
====== ===== ==== ====== ====== =======
1993
----
Allowance for doubtful
accounts $2,054 $ 754 $247 $ - $ 993 $ 2,062
====== ====== ==== ====== ====== =======
<FN>
(a) Represents foreign currency translation adjustment.
(b) Represents the allowance recognized in connection with the purchase of an 81 percent interest in Hertel AG.
(c) Represents uncollected accounts charged against the allowance.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
No. Reference
------- ------------------------------------
<S> <C> <C>
3.1 Amended and Restated Articles Exhibit 3.1 of the company's
of Incorporation as Amended September 30, 1994 Form 10-Q is
incorporated herein by reference.
3.2 Bylaws Exhibit 3.1 of the company's
March 31, 1991 Form 10-Q is
incorporated herein by reference.
4.1 Rights Agreement dated Exhibit 4 of the company's
October 25, 1990 Form 8-K dated October 23,
1990 is incorporated herein
by reference.
4.2 Form of Note Agreement with Exhibit 4.3 of the company's 1990
various creditors dated as Form 10-K is incorporated herein
of May 1, 1990 by reference.
10.1 Management Performance The discussion regarding the
Bonus Plan Management Performance Bonus Plan
under the caption "Report of the
Board of Directors Committee on
Executive Compensation" contained in
the company's 1995 Proxy Statement is
incorporated herein by reference.
10.2 Stock Option Plan of 1982, Exhibit 10.3 of the company's
as amended December 31, 1985 Form 10-Q is
incorporated herein by reference.
10.3 Stock Option and Exhibit 10.1 of the company's
Incentive Plan of 1988 December 31, 1988 Form 10-Q is
incorporated herein by reference.
10.4 Form of Stock Option Exhibit 10.2 of the company's
Agreement with respect to December 31, 1988 Form 10-Q is
the Plan set forth as incorporated herein by reference.
Exhibit 10.3 hereof
10.5 Officer employment agreements, Exhibit 10.3 of the company's 1988
as amended and restated Form 10-K is incorporated herein by
reference.
10.6 Deferred Fee Plan for Exhibit 10.4 of the company's 1988
Outside Directors Form 10-K is incorporated herein by
reference.
10.7 Executive Deferred Exhibit 10.5 of the company's 1988
Compensation Trust Form 10-K is incorporated herein by
Agreement reference.
10.8 Form of Employment Agreement Exhibit 10.8 of the company's 1990
with certain executive officers Form 10-K is incorporated herein by
reference.
10.9 Stock Option and Exhibit 10.1 of the company's
Incentive Plan of 1992 September 30, 1992 Form 10-Q is
incorporated herein by reference.
10.10 Directors Stock Incentive Plan Exhibit 10.2 of the company's
September 30, 1992 Form 10-Q is
incorporated herein by reference.
10.11 Severance Agreement executed Exhibit 10.11 of the company's 1993
by and between Kennametal Inc. Form 10-K is incorporated herein by
and H.L. Dykema reference.
10.12 Credit Agreement dated as of Exhibit 10.12 of the company's 1993
July 29, 1993 by and among Form 10-K is incorporated herein by
Kennametal Inc. and Deutsche reference.
Bank AG, Mellon Bank N.A. and
PNC Bank, National Association
10.13 Underwriting Agreement Exhibit 1.1 of the company's
(U.S. Version) March 31, 1994 Form 10-Q is
incorporated herein by reference.
10.14 Underwriting Agreement Exhibit 1.2 of the company's
(International Version) March 31, 1994 Form 10-Q is
incorporated herein by reference.
10.15 Amendment No. 1 dated as of Exhibit 10.15 of the company's
October 26, 1993 to Credit June 30, 1994 Form 10-K is
Agreement dated as of incorporated herein by reference.
July 29, 1993 by and among
Kennametal Inc. and Deutsche
Bank AG, Mellon Bank N.A. and
PNC Bank, National Association
10.16 Amendment No. 2 dated as of Exhibit 10.16 of the company's
June 15, 1994 to Credit June 30, 1994 Form 10-K is
Agreement dated as of incorporated herein by reference.
July 29, 1993 by and among
Kennametal Inc. and Deutsche
Bank AG, Mellon Bank N.A. and
PNC Bank, National Association
13 Annual Report to Shareholders Portions of the 1995 Annual Report
are filed herewith.
21 Subsidiaries of the Registrant Filed herewith.
23 Consent of Independent Public Filed herewith.
Accountants
27 Financial Data Schedule Filed herewith.
</TABLE>
EXHIBIT 13
KENNAMETAL INC. 1995 ANNUAL REPORT
(Page 15)
MANAGEMENT'S DISCUSSION AND ANALYSIS
MATTERS AFFECTING COMPARABILITY
HERTEL ACQUISITION. In fiscal 1994, Kennametal acquired 81 percent
(subsequently increased to 91 percent during 1995) of the shares of Hertel AG,
a manufacturer of metalcutting tools and tooling systems based in Fuerth,
Germany. The results of operations for 1994 included the results of Hertel AG
and its subsidiaries for 11 months. The fair values of assets acquired and
liabilities assumed were $241 million and $194 million, respectively.
RESTRUCTURING OF OPERATIONS. In connection with the acquisition of Hertel,
Kennametal incurred a restructuring charge of $24.7 million ($20.4 million
after taxes) in 1994 for costs associated with closing its manufacturing
facility in Neunkirchen, Germany, and other integration activities.
ACCOUNTING CHANGES. In 1995, Kennametal adopted Statement of Financial
Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment
Benefits." Under this new accounting rule, employers must accrue the cost of
separation and other benefits provided to former or inactive employees after
employment but before retirement. The adoption of this standard did not have a
material effect on the results of operations or financial position of the
company.
In 1994, Kennametal changed its methods of accounting for postretirement
health care and life insurance benefits (SFAS No. 106) and income taxes (SFAS
No. 109). The net cumulative effect of these accounting changes resulted in a
reduction in net income of $15 million. While these accounting changes did not
affect cash flows in 1994, they significantly increased deferred tax assets
and other noncurrent liabilities.
(Page 16)
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year Ended June 30 1995 1994 1993
------------------ ---- ---- ----
In thousands, except per share data
<S> <C> <C> <C>
OPERATIONS
Net sales $983,873 $802,513 $598,496
Cost of goods sold 560,867 472,533 352,773
-------- -------- --------
Gross profit 423,006 329,980 245,723
Research and development expenses 18,744 15,201 14,714
Selling, marketing and distribution expenses 219,271 189,487 144,850
General and administrative expenses 55,853 58,612 41,348
Restructuring charge - 24,749 -
Amortization of intangibles 2,165 3,996 3,425
Patent litigation settlement - - (1,738)
-------- -------- --------
Operating income 126,973 37,935 43,124
Interest expense 12,793 13,811 9,549
Other income (expense) (886) 2,291 519
-------- -------- --------
Income before taxes and
cumulative effect of accounting changes 113,294 26,415 34,094
Provision for income taxes 45,000 15,500 14,000
-------- -------- --------
Income before cumulative effect of
accounting changes 68,294 10,915 20,094
Cumulative effect of accounting changes,
net of income taxes:
Postretirement benefits - (20,060) -
Income taxes - 5,057 -
-------- -------- --------
Net income (loss) $ 68,294 $ (4,088) $ 20,094
======== ======== ========
PER SHARE DATA
Earnings before cumulative effect of
accounting changes $ 2.58 $ 0.45 $ 0.93
Cumulative effect of accounting changes:
Postretirement benefits - (0.83) -
Income taxes - 0.21 -
-------- -------- --------
Earnings (loss) per share $ 2.58 $ (0.17) $ 0.93
======== ======== ========
Dividends per share $ 0.60 $ 0.58 $ 0.58
======== ======== ========
Weighted average shares outstanding 26,486 24,304 21,712
======== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
(Page 17)
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
RESULTS OF OPERATIONS
NET SALES. Net sales increased 23 percent and 34 percent in 1995 and 1994,
respectively. Excluding the acquisition of Hertel, sales in 1994 increased 9
percent. Sales in 1995 rose primarily because of higher sales volume,
favorable foreign currency translation effects and modest price increases.
Sales in 1994 increased primarily from higher sales volume, partially offset
by negative currency translation effects. Sales volume increased 17 percent
and 10 percent in 1995 and 1994, respectively.
Sales in the United States increased 17 percent and 18 percent in 1995 and
1994, respectively. Excluding the acquisition of Hertel, sales in the United
States increased 14 percent in 1994. International sales rose 33 percent and
78 percent in 1995 and 1994, respectively. Most of the sales increase in 1994
related to the acquisition of Hertel.
Worldwide sales of metalworking products increased 25 percent and 41 percent
in 1995 and 1994, respectively. Excluding the acquisition of Hertel, worldwide
sales of metalworking products increased 11 percent
in 1994. Sales increased primarily due to higher sales volume and modest price
increases in both years.
In the United States, sales of traditional metalcutting products increased 16
percent and 11 percent in 1995 and 1994, respectively, primarily because of
increased volume. In addition, sales of industrial supplies rose 25 percent
and 22 percent, respectively, primarily because of higher sales volume and
additional satellite branches in the direct mail operations.
Sales of mining and construction products increased
6 percent and 2 percent in 1995 and 1994, respectively. Increased demand for
mining and construction tools in the United States was largely offset by lower
international demand. Sales of metallurgical products increased 27 percent and
19 percent, respectively, due to strong demand for carbide intermediate and
diamond matrix powders in 1995 and hardfacing products in 1994.
COSTS AND EXPENSES. As a percentage of sales, the gross profit margin was 43.0
percent in 1995 and 41.1 percent in 1994 and 1993. The improvement in 1995
resulted from a better sales mix, favorable foreign currency impacts of
international sales manufactured in the United States and improved
manufacturing efficiency. In addition, higher raw material costs were
generally offset by increased selling prices.
Operating expenses increased 12 percent in 1995 primarily because of costs
necessary to support the higher sales volume and increased spending on
research and development and marketing activities. Operating expenses
increased 31 percent in 1994 primarily because of the acquisition of Hertel.
As a percentage of sales, operating expenses declined to 29.9 percent in 1995
as compared with 32.8 percent in 1994 and 33.6 percent in 1993 because of
higher sales volume and improved operating efficiency, particularly in Europe.
Average total employment increased 5 percent in 1995 primarily because of
increased production levels in the manufacturing operations. Average total
employment increased 31 percent in 1994 because of the acquisition of Hertel.
NET INCOME. Net income was $68.3 million, $31.3 million (before the
restructuring charge and accounting changes discussed previously) and $20.1
million in 1995, 1994 and 1993, respectively. Earnings increased in 1995 and
1994 primarily because of higher sales volume, a more favorable sales mix and
improved operating efficiency. The acquisition of Hertel reduced earnings by
$2.6 million in 1994. Earnings in 1995, however, increased substantially as
the result of improved economic conditions and the successful turnaround and
integration of Hertel in Europe.
EFFECTS OF INFLATION. Despite modest inflation in recent years, rising costs
continue to affect the company's businesses throughout the world. Kennametal
strives to minimize the effects of inflation through cost containment,
productivity efforts and price increases under highly competitive conditions.
OUTLOOK. In looking to fiscal 1996, management expects continued growth in
sales of metalworking products throughout the world. Sales of metalcutting
products in the United States should benefit from continued expansion of the
U.S. economy, opportunities in milling and drilling applications, and the
strategic marketing alliance with W. W. Grainger.
Sales of industrial supply products should continue to increase from expansion
of direct mail and full service supply. Sales in Europe and Asia-Pacific
should continue to benefit from the enhanced product offerings and technical
expertise of Kennametal and Hertel in those regions.
In addition, sales of mining and construction tools should continue to
increase from selected opportunities in existing markets and developing
opportunities in China and Poland.
(Page 18)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
As of June 30 1995 1994
------------- ---- ----
In thousands
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 10,827 $ 17,190
Accounts receivable, less allowance for
doubtful accounts of $12,106 and $9,328 175,405 143,691
Inventories 200,680 158,179
Deferred income taxes 22,362 13,744
-------- --------
Total current assets 409,274 332,804
-------- --------
Property, Plant and Equipment:
Land and buildings 151,905 138,956
Machinery and equipment 365,275 328,696
Less accumulated depreciation (256,838) (224,554)
-------- --------
Net property, plant and equipment 260,342 243,098
-------- --------
Other Assets:
Investments in affiliated companies 6,873 6,393
Intangible assets, less accumulated
amortization of $19,009 and $16,540 32,253 32,141
Deferred income taxes 56,629 65,606
Other 16,238 17,490
-------- --------
Total other assets 111,993 121,630
-------- --------
Total assets $781,609 $697,532
======== ========
LIABILITIES
Current Liabilities:
Current maturities of term debt and capital
leases $ 17,475 $ 4,364
Notes payable to banks 53,555 52,753
Accounts payable 60,211 52,148
Accrued vacation pay 18,424 15,569
Other 75,537 77,193
-------- --------
Total current liabilities 225,202 202,027
-------- --------
Term Debt and Capital Leases, Less Current
Maturities 78,700 90,178
Deferred Income Taxes 20,998 19,279
Other Liabilities 51,615 51,800
-------- --------
Total liabilities 376,515 363,284
-------- --------
Minority Interest in Consolidated Subsidiaries 13,209 11,412
-------- --------
SHAREHOLDERS' EQUITY
Shareholders' Equity:
Preferred stock, 5,000 shares authorized;
none issued - -
Capital stock, $1.25 par value; 70,000 and
30,000 shares authorized; 29,370 shares issued 36,712 36,712
Additional paid-in capital 85,768 83,839
Retained earnings 297,838 245,428
Treasury shares, at cost; 2,793 and 3,015 shares
held (36,737) (39,247)
Cumulative translation adjustments 8,304 (3,360)
Pension liability adjustment - (536)
Total shareholders' equity 391,885 322,836
-------- --------
Total liabilities and shareholders' equity $781,609 $697,532
======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
(Page 19)
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
FINANCIAL CONDITION
Kennametal's financial condition remains strong. Total assets were $782
million in 1995, up 12 percent from $698 million in 1994. Net working capital
was $184 million, up 40 percent from the previous year. The ratio of current
assets to current liabilities was 1.8 in 1995 as compared with 1.6 in 1994.
Accounts receivable increased 22 percent to $175 million entirely because of
increased sales. Inventories rose 27 percent to $201 million to support
increased product demand and to maintain adequate supplies of essential raw
materials. Inventory turnover was 3.1 in both 1995 and 1994. During the next
several years, Kennametal will focus on ways to improve inventory turnover and
overall asset utilization.
Total debt (including capital lease obligations) increased 2 percent to $150
million in 1995. The ratio of total debt to total invested capital was 27.6
percent in 1995 as compared with 31.3 percent in 1994. In order to maintain
financial flexibility and to optimize the cost of capital, Kennametal's
financial objective is to maintain a debt to capital ratio of not more than 40
percent.
In 1995, Kennametal substantially completed restructuring and integration
activities related to the acquisition of Hertel in 1994. Cash payments and
other charges applied to the restructuring reserves totaled $26.1 million in
1995.
(Page 20)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30 1995 1994 1993
------------------ ---- ---- ----
In thousands
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $68,294 $(4,088) $20,094
Adjustments for noncash items:
Depreciation and amortization 39,315 43,232 30,927
Other 11,953 14,984 3,202
Changes in certain assets and liabilities,
net of effects from acquisitions:
Accounts receivable (23,815) (11,352) (1,644)
Inventories (34,389) 9,638 (1,524)
Accounts payable and accrued liabilities (9,340) (18,007) (1,422)
Other 4,615 (4,158) (7,615)
------- ------- -------
Net cash flow from operating activities 56,633 30,249 42,018
------- ------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (43,371) (27,313) (23,099)
Disposals of property, plant and equipment 3,725 6,716 1,460
Acquisition of Hertel AG, net of cash - (19,595) -
Other (5,268) (2,344) (2,373)
------- ------- -------
Net cash flow used for investing activities (44,914) (42,536) (24,012)
------- ------- -------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt (5,721) 11,246 (7,310)
Increase in term debt 8,163 5,715 1,000
Reduction in term debt (9,721) (64,098) (9,266)
Net proceeds from issuance of capital stock - 73,594 -
Dividend reinvestment and employee stock plans 4,439 8,658 4,301
Cash dividends paid to shareholders (15,884) (14,015) (12,579)
Other - 2,731 1,180
------- ------- -------
Net cash flow from (used for) financing
activities (18,724) 23,831 (22,674)
------- ------- -------
Effect of exchange rate changes on cash 642 1,497 (190)
------- ------- -------
CASH AND EQUIVALENTS
Net increase (decrease) in cash and equivalents (6,363) 13,041 (4,858)
Cash and equivalents, beginning 17,190 4,149 9,007
------- ------- -------
Cash and equivalents, ending $10,827 $17,190 $ 4,149
======= ======= =======
SUPPLEMENTAL DISCLOSURES
Interest paid $12,569 $12,403 $ 9,617
Income taxes paid 23,125 16,296 13,232
------- ------- -------
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
(Page 21)
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Kennametal's cash flow from operations is a primary source of financing for
capital expenditures and internal growth. In addition, the company maintains
global credit lines with commercial banks totaling $219 million, of which $165
million was unused at June 30, 1995. The company's non-U.S. subsidiaries and
affiliates generally obtain local financing through credit lines with
commercial banks.
Kennametal generated net cash flow from operations of $57 million, $30 million
and $42 million in 1995, 1994 and 1993, respectively. Cash flow increased in
1995 as a result of increased earnings, which was partially offset by higher
working capital requirements. Cash flow decreased in 1994 primarily because of
increased working capital requirements and payments for Hertel integration
costs.
Capital expenditures totaled $43 million, $27 million and $23 million in 1995,
1994 and 1993, respectively. Investments were made to modernize facilities,
upgrade machinery and equipment, and acquire new information technology.
Capital expenditures for 1996 are estimated to be $60 - 70 million and will be
used primarily to upgrade machinery and equipment and acquire new information
technology.
As a public company, Kennametal also maintains access to global capital
markets for potential offerings of debt and equity securities. In 1994,
Kennametal issued approximately 4 million shares of capital stock for net
proceeds of $73.6 million. The proceeds were used to repay a bridge loan
($38.7 million) and certain borrowings under revolving credit agreements
($34.9 million).
(Page 22)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended June 30 1995 1994 1993
------------------ ---- ---- ----
In thousands
<S> <C> <C> <C>
CAPITAL STOCK
Balance at beginning of year $ 36,712 $ 15,891 $ 15,891
Issuance of capital stock - 2,465 -
Stock split (2-for-1) - 18,356 -
-------- -------- --------
Balance at end of year 36,712 36,712 15,891
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 83,839 28,135 27,594
Dividend reinvestment and stock purchase plan 1,015 424 144
Employee stock plans 914 2,507 397
Issuance of capital stock - 71,129 -
Stock split (2-for-1) - (18,356) -
-------- -------- --------
Balance at end of year 85,768 83,839 28,135
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of year 245,428 263,531 256,016
Net income (loss) 68,294 (4,088) 20,094
Cash dividends (15,884) (14,015) (12,579)
-------- -------- --------
Balance at end of year 297,838 245,428 263,531
-------- -------- --------
TREASURY SHARES
Balance at beginning of year (39,247) (44,974) (48,734)
Dividend reinvestment and stock purchase plan 938 590 1,567
Employee stock plans 1,572 5,137 2,193
-------- -------- --------
Balance at end of year (36,737) (39,247) (44,974)
-------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance at beginning of year (3,360) (7,442) 744
Current year translation adjustments 11,664 4,082 (8,186)
-------- -------- --------
Balance at end of year 8,304 (3,360) (7,442)
-------- -------- --------
PENSION LIABILITY ADJUSTMENT
Balance at beginning of year (536) - -
Minimum pension liability adjustment 536 (536) -
-------- -------- --------
Balance at end of year - (536) -
-------- -------- --------
Total shareholders' equity, June 30 $391,885 $322,836 $255,141
======== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
(Page 23)
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
<TABLE>
<CAPTION>
SALES BY PRODUCT CLASS AND GEOGRAPHIC AREA
Year Ended June 30 1995 1994 1993
------------------ Percent Percent Percent
of Total Amount Change Amount Change Amount
In thousands -------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BY PRODUCT CLASS:
Metalworking products 86% $844,626 25% $676,355 41% $478,137
Mining and construction products 11 108,019 6 101,575 2 99,614
Metallurgical products 3 31,228 27 24,583 19 20,745
---- -------- --- -------- --- --------
Net sales 100% $983,873 23% $802,513 34% $598,496
==== ======== === ======== === ========
BY GEOGRAPHIC AREA:
Within the United States 62% $606,623 17% $517,856 18% $438,910
International 38 377,250 33 284,657 78 159,586
---- -------- --- -------- --- --------
Net sales 100% $983,873 23% $802,513 34% $598,496
==== ======== === ======== === ========
</TABLE>
(Page 24)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management has prepared the accompanying consolidated financial statements in
accordance with generally accepted accounting principles. The summary of
significant accounting policies within these principles is presented below to
assist in evaluating the company's financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the company and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
CASH EQUIVALENTS. Temporary cash investments having original maturities of
three months or less are considered cash equivalents. Cash equivalents consist
principally of investments in money market funds and certificates of deposit.
ACCOUNTS RECEIVABLE included $16.4 million and $6.3 million of receivables
from affiliates at June 30, 1995 and 1994, respectively.
INVENTORIES are carried at the lower of cost or market. The company uses the
last-in, first-out (LIFO) method for determining the cost of a significant
portion of its U.S. inventories. The remainder of inventories are determined
under the first-in, first-out (FIFO) or average cost methods.
PROPERTY, PLANT AND EQUIPMENT are carried at cost. Major improvements are
capitalized, while maintenance and repairs are generally expensed as incurred.
Retirements and disposals are removed from cost and accumulated depreciation
accounts, with the gain or loss reflected in income. Interest is capitalized
during the construction of major facilities. Capitalized interest is included
in the cost of the constructed asset and amortized over its estimated useful
life.
DEPRECIATION, for financial reporting purposes, is computed using the
straight-line method over the estimated useful lives of the assets ranging
from 3 to 40 years. Leased property and equipment under capital leases are
amortized using the straight-line method over the terms of the related leases.
INTANGIBLE ASSETS, which include the excess of cost over net assets of
acquired companies, are amortized using the straight-line method over periods
ranging from 3 to 40 years.
RESEARCH AND DEVELOPMENT costs are expensed as incurred.
INCOME TAXES. Deferred income taxes are recognized based on the future income
tax effects (using enacted tax laws and rates) of differences in the carrying
amounts of assets and liabilities for financial reporting and tax purposes. A
valuation allowance is recognized if it is "more likely than not" that some or
all of a deferred tax asset will not be realized.
FOREIGN CURRENCY TRANSLATION. For the most part, assets and liabilities of
international operations are translated into U.S. dollars using year-end
exchange rates, while revenues and expenses are translated at average exchange
rates throughout the year. The resulting net translation adjustments are
recorded as a separate component of shareholders' equity.
PENSION PLANS cover substantially all employees. Pension benefits are based on
years of service and, for certain plans, on average compensation immediately
preceding retirement. Pension costs are determined in accordance with
Statement of Financial Accounting Standards (SFAS) No. 87, "Employers'
Accounting for Pensions." The company funds pension costs in accordance with
the funding requirements of the Employee Retirement Income Security Act of
1974 (ERISA) for U.S. plans and in accordance with local regulations or
customs for non-U.S. plans.
CHANGES IN ACCOUNTING PRINCIPLES. In 1995, the company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." Under this standard,
employers must accrue the cost of separation and other benefits provided to
former or inactive employees after employment but before retirement. The
company's previous practice was to generally accrue these costs
as they arose. Therefore, the adoption of this standard did not have a
material effect on the results of operations or financial position of the
company.
In 1994, the company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Under this standard, employers
must accrue the expected cost of providing postretirement health care and life
insurance benefits during employees' active service. The company's previous
practice was to expense these costs as incurred. The company elected to
immediately recognize the cumulative postretirement benefit obligation, which
resulted in a one-time charge to earnings of $34 million ($20.1 million after
taxes). See also Note 9.
Also in 1994, the company adopted SFAS No. 109, "Accounting for Income Taxes."
Under this standard, deferred income taxes are recognized based on the future
income tax effects of differences in the carrying
(Page 25)
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS (CONTINUED)
amounts of assets and liabilities for financial reporting and tax purposes.
The adoption of SFAS No. 109 resulted in an increase in net income of $5.1
million. The financial statements for 1993 and prior years were accounted for
under the deferred method of accounting and have not been restated. See also
Note 7.
NOTE 2:
HERTEL ACQUISITION AND RESTRUCTURING
On August 4, 1993, the company acquired 81 percent of the outstanding shares
of Hertel AG (Hertel) for $43 million in cash and assumed $55 million in debt.
Hertel is a manufacturer of metalcutting tools and tooling systems based in
Fuerth, Germany. Since January 1, 1994, the company purchased additional
shares of Hertel for $12 million, thereby increasing the company's ownership
interest to 91 percent at June 30, 1995.
The acquisition of Hertel was accounted for under the purchase method and,
accordingly, the results of operations of Hertel have been included in the
accompanying consolidated financial statements since August 1993. The purchase
price was allocated to assets acquired and liabilities assumed based on fair
market values at the date of acquisition. The excess of the purchase price
over the fair market value of the net assets acquired was recognized as
goodwill and is being amortized over 20 years. The fair values of assets
acquired and liabilities assumed are summarized as follows:
In thousands 1994
------------ --------
Current assets $114,800
Property, plant and equipment 70,200
Intangible assets (goodwill) 5,300
Deferred tax assets (see Note 7) 40,600
Other noncurrent assets 10,500
Current liabilities 104,100
Long-term liabilities 89,400
Included in current liabilities was a reserve of approximately $36 million
(pretax) for restructuring Hertel's operations. The restructuring costs
primarily included amounts for severance, phaseout and relocation. Cash
payments and other costs applied to the restructuring reserve were $19.9
million in 1995 and $16.1 million in 1994. The restructuring, which began in
fiscal 1994, was substantially completed in fiscal 1995.
In connection with the acquisition of Hertel, Kennametal recognized a
restructuring charge in 1994 of approximately $24.7 million ($20.4 million
after taxes) related to closing its manufacturing facility in Neunkirchen,
Germany, and other integration activities. Cash payments and other costs
applied to the restructuring reserve were $6.2 million in 1995 and $18.5
million in 1994. The restructuring was substantially completed in fiscal 1995.
NOTE 3:
INVENTORIES
Inventories consisted of the following:
In thousands 1995 1994
------------ -------- --------
Finished goods $147,231 $112,202
Work in process and powder blends 65,231 54,831
Raw materials and supplies 24,629 20,571
-------- --------
Inventories at current cost 237,091 187,604
Less LIFO valuation (36,411) (29,425)
-------- --------
Total inventories $200,680 $158,179
======== ========
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for a significant portion of U.S.
inventories and the first-in, first-out (FIFO) method or average cost for
other inventories. The company used the LIFO method of valuing its inventories
for approximately 55 percent of total inventories at June 30, 1995 and 1994.
The company uses the LIFO method for valuing the majority of its inventories
in order to more closely match current costs with current revenues, thereby
reducing the effects of inflation on earnings.
NOTE 4:
OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
In thousands 1995 1994
------------ ------- -------
Accrued restructuring costs $ - $25,631
Federal and state income taxes 19,060 5,546
Accrued compensation 14,139 11,961
Payroll, state and local taxes 8,406 8,172
Accrued product warranty costs 4,779 4,651
Accrued benefits 4,089 2,074
Accrued professional fees 2,456 1,449
Accrued interest expense 1,005 1,114
Other accrued expenses 21,603 16,595
------- -------
Total other current liabilities $75,537 $77,193
======= =======
(Page 26)
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS (CONTINUED)
NOTE 5:
TERM DEBT AND CAPITAL LEASES
Term debt and capital lease obligations consisted of
the following:
In thousands 1995 1994
------------ ------- -------
Senior notes, 9.64%, due in
installments through 2000 $50,000 $50,000
Industrial Revenue Notes, 8.05%
tax exempt, due in 1996 833 1,667
Borrowings outside the U.S., varying
from 5.75% to 10.25% (1995) and
5.0% to 10.25% (1994), due in
installments through 2008 21,070 20,291
Lease of office facilities with terms
expiring through 2011 at
6.75% to 7.55% 14,547 13,182
Other 9,725 9,402
------- -------
Total term debt and capital leases 96,175 94,542
------- -------
Less current maturities:
Term debt (15,782) (2,811)
Capital leases (1,693) (1,553)
------- -------
Total current maturities (17,475) (4,364)
------- -------
Long-term debt and capital leases $78,700 $90,178
======= =======
Future principal maturities of term debt are $15.8 million, $18.3 million,
$12.6 million, $12.5 million and $12.4 million, respectively, in fiscal years
1996 through 2000.
Certain of the term debt agreements contain various restrictions relating to,
among other things, minimum net worth, maximum indebtedness, fixed charge
coverage and debt guarantees.
Future minimum lease payments under capital leases for the next five years and
in total are as follows:
In thousands
------------
YEAR ENDING JUNE 30:
1996 $ 1,693
1997 1,693
1998 1,693
1999 1,693
2000 1,693
After 2000 14,007
-------
Total future minimum lease payments 22,472
Less amount representing interest (7,925)
-------
Present value of minimum lease payments $14,547
=======
Future minimum lease payments under operating leases with noncancelable terms
beyond one year were not significant at June 30, 1995.
NOTE 6:
NOTES PAYABLE AND LINES OF CREDIT
Notes payable to banks of $53.6 million and $52.8 million at June 30, 1995 and
1994, respectively, represent short-term borrowings under U.S. and
international credit lines with commercial banks. These credit lines totaled
approximately $219 million at June 30, 1995, of which $165 million was unused.
The weighted average interest rate for short-term borrowings was 6.1 percent
and 6.0 percent at June 30, 1995 and 1994, respectively.
Primary U.S. credit lines totaling $90 million are covered by a single
revolving credit agreement. Borrowings under this agreement are available at
fixed or variable interest rates. The credit lines expire during fiscal 1997,
and require the company to pay a facility fee on the total line and a
commitment fee on unborrowed amounts under one of the lines. The company has
the option to terminate this agreement in whole or in part at any time.
NOTE 7:
INCOME TAXES
Effective July 1, 1993, the company adopted SFAS No. 109, "Accounting for
Income Taxes," which resulted in the recognition of net deferred tax
liabilities of $5.6 million for temporary differences between the carrying
amounts of assets and liabilities for financial reporting and income tax
purposes, and net operating loss carryforwards in certain international
operations. In connection with the adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," the company
recognized additional deferred tax assets at July 1, 1993 of $13.9 million.
The net effect of these accounting changes resulted in the recognition of net
deferred tax assets of $8.3 million and an increase in net income of $5.1
million in 1994.
(Page 27)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income before taxes and the provision for income taxes consisted of the
following:
In thousands 1995 1994 1993
------------ -------- -------- -------
Income before taxes:
United States $ 83,401 $39,095 $33,655
International 29,893 (12,680) 439
-------- ------- -------
Total income
before taxes $113,294 $26,415 $34,094
======== ======= =======
Current income taxes:
Federal $ 26,500 $15,000 $ 7,100
State 6,100 3,100 2,000
International 4,000 (900) 2,000
-------- ------- -------
Total 36,600 17,200 11,100
Deferred
income taxes 8,400 (1,700) 2,900
-------- ------- -------
Provision for
income taxes $ 45,000 $15,500 $14,000
======== ======= =======
Effective tax rate 39.7% 58.7% 41.1%
======== ======= =======
Note: Excluding the effects of the restructuring charge, the effective tax
rate was 39.1 percent in 1994.
The reconciliation of income taxes computed using the statutory U.S. income
tax rate and the provision for income taxes was as follows:
In thousands 1995 1994 1993
------------ ------- ------- -------
Income taxes at U.S.
statutory rate $39,653 $ 9,245 $11,592
State income taxes,
net of federal
tax benefits 3,981 2,018 1,331
Combined tax effects
of international
income 1,288 2,883 (255)
International losses
with no related
tax benefits 219 2,325 540
Other (141) (971) 792
------- ------- -------
Provision for
income taxes $45,000 $15,500 $14,000
======= ======= =======
Deferred tax assets and liabilities consisted of
the following:
In thousands 1995 1994
------------ ------- -------
Deferred tax assets (liabilities):
Net operating loss carryforwards $52,923 $50,839
Other postretirement benefits 14,122 13,972
Inventory valuation and reserves 6,643 8,071
Accrued vacation compensation 3,680 3,471
Property and equipment 2,866 2,131
Other accruals 4,463 6,626
Accumulated depreciation (20,998) (19,279)
------- -------
Total 63,699 65,831
Less valuation allowance (5,706) (5,760)
------- -------
Net deferred tax assets $57,993 $60,071
======= =======
The sources of deferred income taxes in 1993 were as follows:
In thousands 1993
------------ ------
Patent litigation settlement $2,200
Inventory valuation and reserves 400
Depreciation 200
Accrued vacation compensation 200
Other, net (100)
------
Total $2,900
======
Deferred income taxes have not been provided on cumulative undistributed
earnings of international subsidiaries and affiliates. Any U.S. income taxes
on such earnings, if distributed, would generally be offset by available
foreign tax credits. In addition, there were no significant undistributed
earnings of unconsolidated affiliates at June 30, 1995.
Included in deferred tax assets at June 30, 1995 are unrealized tax benefits
totaling $52.9 million related to net operating loss carryforwards. The
realization of these tax benefits is contingent on future taxable income in
certain international operations. Of this amount, approximately $47.2 million
relates to net operating loss carryforwards in Germany, which can be carried
forward indefinitely. The company's operations in Germany are currently
profitable.
The remaining unrealized tax benefits relate to net operating loss
carryforwards in certain other international operations, which expire at
various dates through 2002. The company established a valuation allowance of
$5.7 million to offset the deferred tax benefits that may not be realized
before the expiration of the carryforward periods.
(Page 28)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8:
PENSION BENEFITS
The components of net pension cost (credit) for the company's U.S. defined
benefit pension plans were as follows:
In thousands 1995 1994 1993
------------ ------- ------- -------
Service cost $ 5,906 $ 5,777 $ 6,338
Interest cost 13,016 12,345 12,644
Return on plan assets (37,746) (8,885) (27,814)
Net amortization
and deferral 17,628 (11,099) 9,946
-------- -------- -------
Net pension
cost (credit) $ (1,196) $ (1,862) $ 1,114
======== ======== =======
The funded status of the plans and amounts recognized in the consolidated
balance sheets were as follows:
In thousands 1995 1994
------------ -------- --------
Plan assets, at fair value $231,007 $203,715
-------- --------
Present value of accumulated
benefit obligations:
Vested benefits 131,552 119,025
Nonvested benefits 2,933 2,881
-------- --------
Accumulated benefit obligations 134,485 121,906
Effect of future salary increases 40,550 39,442
-------- --------
Projected benefit obligations 175,035 161,348
-------- --------
Plan assets in excess of projected
benefit obligations 55,972 42,367
Amounts not recognized in the
financial statements:
Unrecognized net assets
from July 1, 1986 (16,689) (18,868)
Unrecognized prior
service costs 909 1,299
Unrecognized net gains (36,037) (21,959)
Adjustment to recognize
minimum liability - (1,624)
-------- --------
Prepaid pension costs $ 4,155 $ 1,215
======== ========
Prepaid pension costs are included in other noncurrent assets.
Plan assets consist principally of common stocks, corporate bonds and U.S.
government securities. The significant actuarial assumptions used to determine
the present value of pension benefit obligations were as follows:
1995 1994
----- -----
Discount rate 8.00% 8.25%
Rate of future salary increases 5.00% 5.00%
Rate of return on plan assets 9.00% 9.00%
Pension plans of international subsidiaries are not required to report to U.S.
government agencies pursuant to ERISA. The components of net pension cost for
the company's significant international defined benefit pension plans were as
follows:
In thousands 1995 1994
------------ ------ ----
Service cost $ 231 $143
Interest cost 967 833
------ ----
Net pension cost $1,198 $976
====== ====
Net pension cost for international plans was not significant in 1993.
The funded status of the international plans and amounts recognized in the
consolidated balance sheets were as follows:
In thousands 1995 1994
------------ ------- -------
Present value of accumulated
benefit obligations:
Vested benefits $11,314 $ 8,980
Nonvested benefits 2,555 2,539
------- -------
Accumulated benefit obligations 13,869 11,519
Effect of future salary increases 143 369
------- -------
Projected benefit obligations 14,012 11,888
Plan assets, at fair value - -
------- -------
Accrued pension costs $14,012 $11,888
======= =======
In connection with the acquisition of Hertel, the company assumed the unfunded
vested benefit obligations of Hertel.
The significant actuarial assumptions used to determine the present value of
pension benefit obligations for international plans were as follows:
1995 1994
----- -----
Discount rate 7.75% 7.75%
Rate of future salary increases 5.00% 5.00%
Total pension cost (credit) for U.S. and international plans amounted to $0.8
million, $(1.2) million and $1.8 million in 1995, 1994 and 1993, respectively.
NOTE 9:
OTHER POSTRETIREMENT BENEFITS
The company presently provides varying levels of postretirement health care
and life insurance benefits to most U.S. employees who complete 10 years of
service and retire on or after age 55. Beginning with retirements on or after
January 1, 1997, postretirement health care benefits will be capped at 1996
levels. In addition, benefits will be provided to employees who retire on or
after the normal retirement age of 65 and complete at least five years of
service after age 40. These benefits are currently unfunded.
Effective July 1, 1993, the company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Under the new
(Page 29)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
standard, the expected cost of providing such benefits must be accrued during
the periods in which employees render the necessary service. The company
previously expensed these costs as incurred. The cumulative effect of the
change in accounting method resulted in a one-time charge to earnings of $34
million ($20.1 million after taxes) in 1994.
The components of other postretirement benefit costs for the company's U.S.
plans were as follows (excluding the one-time charge in 1994):
In thousands 1995 1994
------------ ------ ------
Service cost $ 959 $1,080
Interest cost 2,626 2,820
Net amortization and deferral (32) -
------ ------
Other postretirement benefit costs $3,553 $3,900
====== ======
Other postretirement benefit costs were $1.9 million in fiscal 1993.
Accumulated postretirement benefit obligations and amounts recognized in the
consolidated balance sheets were as follows:
In thousands 1995 1994
------------ ------- -------
Present value of accumulated
benefit obligations:
Retirees $19,692 $14,800
Fully eligible active
participants 6,335 8,000
Other active participants 8,604 13,000
------- -------
Accumulated benefit obligations 34,631 35,800
Plan assets, at fair value - -
------- -------
Accumulated benefit obligations in
excess of plan assets 34,631 35,800
Unrecognized net gains 2,231 -
------- -------
Accrued postretirement benefits $36,862 $35,800
======= =======
Included in other noncurrent liabilities were accrued postretirement benefits
of $33.5 million and $33.8 million at June 30, 1995 and 1994, respectively.
The significant actuarial assumptions used to determine the present value of
accumulated postretirement benefit obligations were as follows:
1995 1994
----- -----
Discount rate 8.00% 8.50%
Rate of increase in health care costs:
Initial rate 9.00% 9.50%
Ultimate rate in 2003 and after 5.00% 5.00%
A one percent increase in the health care cost trend rate would increase other
postretirement benefit costs by $0.2 million in 1995 and the accumulated
benefit obligation by $1.6 million at June 30, 1995.
NOTE 10:
FINANCIAL INSTRUMENTS
FAIR VALUE. The company had $10.8 million in cash and equivalents at June 30,
1995, which approximates fair value because of the short maturity of these
investments.
The estimated fair value of term debt was $85.2 million at June 30, 1995. Fair
value was determined using discounted cash flow analysis and the company's
incremental borrowing rates for similar types of arrangements.
OFF-BALANCE-SHEET RISK. The company uses currency forward contracts in the
normal course of business to hedge foreign currency exposures of underlying
receivables and payables. These financial instruments involve credit risk in
excess of the amount recognized in the financial statements. The company
controls credit risk through credit evaluations, limits and monitoring
procedures. There were no financial instruments with significant off-balance-
sheet risk at June 30, 1995.
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject
the company to concentrations of credit risk consist primarily of temporary
cash investments and trade receivables. By policy, the company makes temporary
cash investments with high credit quality financial institutions. With respect
to trade receivables, concentrations of credit risk are significantly reduced
because the company serves a large number of customers in many industries and
geographic areas. As of June 30, 1995, the company had no significant
concentrations of credit risk.
NOTE 11:
STOCK ISSUANCE AND STOCK SPLIT
On August 1, 1994, the company's Board of Directors authorized a 2-for-1 stock
split in the form of a 100 percent stock dividend payable to shareholders of
record on August 10, 1994. The split resulted in the issuance in 1994 of
approximately 14.7 million shares of capital stock from authorized and
unissued shares. The stock split also resulted in the transfer of $18.4
million from additional paid-in capital to capital stock, representing the par
value of the shares issued. All references to the number of shares and per
share amounts were restated to reflect the split.
On December 23, 1993, the company issued approximately 4 million shares of
capital stock for net proceeds of $73.6 million. The proceeds were used to
repay a bridge loan and certain borrowings under revolving credit agreements.
(Page 30)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12:
STOCK OPTIONS
Transactions under the company's stock option plans were as follows:
<TABLE>
<CAPTION>
1995 Option
Prices
Number of Shares 1995 1994 1993 Per Share
---------------- -------- -------- --------- ------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 475,650 914,616 1,115,384 $20.53-14.06
Granted 204,950 100,000 42,000 24.75
Exercised (157,452) (508,966) (201,196) 16.94-14.22
Lapsed and forfeited (2,000) (30,000) (41,572) 16.94
-------- -------- --------- ------------
Options outstanding, end of year 521,148 475,650 914,616 $24.75-14.50
======== ======== ========= ============
Exercisable at year-end 281,482 235,504 741,710 $24.75-14.50
======== ======== ========= ============
Available for future grant 754,820 961,290 1,031,290
======== ======== =========
</TABLE>
Under stock option plans approved by shareholders in 1992 and 1988, stock
options are generally granted to eligible employees at fair market value at
the date of grant. Options are exercisable under specified conditions for up
to 10 years from the date of grant. No options may be granted under the 1988
plan after October 1998, and no options may be granted under the 1992 plan
after October 2002. No charges to income have resulted from the operation of
the plans.
Under provisions of the plans, participants may deliver Kennametal stock in
payment of the option price and receive credit for the fair market value of
the shares on the date of delivery. Shares valued at $0.4 million (13,728
shares), $1.2 million (62,934 shares) and $0.3 million (20,668 shares) were
delivered in 1995, 1994 and 1993, respectively.
Under the 1992 and 1988 plans, shares may be awarded to eligible employees
without payment. The respective plans specify such shares are awarded in the
name of the employee, who has all the rights of a shareholder, subject to
certain restrictions or forfeitures. Such awards were not significant in 1995,
1994 and 1993.
NOTE 13:
PATENT LITIGATION SETTLEMENT
In 1993, the company settled a patent infringement suit for $5.8 million in
cash, which resulted in the reversal of a portion of previously established
reserves of $1.7 million ($1.0 million after taxes).
NOTE 14:
ENVIRONMENTAL MATTERS
The company has been involved in various environmental cleanup and remediation
activities at several of its manufacturing facilities. In addition, the
company has been named as a potentially responsible party at four Superfund
sites in the United States. However, it is management's opinion, based on its
evaluations and discussions with outside counsel and independent consultants,
that the ultimate resolution of these environmental matters will not have a
material adverse effect on the results of operations or financial position of
the company.
The company maintains a Corporate Environmental, Health and Safety (EH&S)
Department to ensure compliance with all environmental regulations and to
monitor and oversee remediation activities. In addition, the company has
established an EH&S administrator at each of its domestic manufacturing
facilities. The company's financial management team periodically meets with
members of the Corporate EH&S Department and the Corporate Legal Department to
review and evaluate the status of environmental projects and contingencies. On
a quarterly and annual basis, management establishes or adjusts financial
provisions and reserves for environmental contingencies in accordance with
SFAS No. 5, "Accounting for Contingencies."
(Page 31)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 15:
CONTRACT DISPUTE
Prior to its acquisition by Kennametal, a non-U.S. subsidiary recorded sales
of approximately $60 million in calendar 1993 under contracts with a certain
customer to provide various equipment, know-how and training for a
manufacturing facility. Upon the acquisition by Kennametal, the subsidiary
decided to complete performance under the contracts with this customer but to
not enter into any such contracts in the future.
Pursuant to a United States embargo effective June 6, 1995, the subsidiary
suspended performance under the contracts pending issuance by the U.S.
government of definitive embargo regulations. Other than finalizing the
transfer of know-how and training to commence production, performance was
substantially completed prior to the suspension. The estimated costs to
complete performance are not material and were accrued in the consolidated
financial statements as of June 30, 1995. However, the customer has disputed
the suspension and has advised that it may file suit to require completion of
performance as well as for compensation for alleged damages.
At the present time, management is unable to predict the outcome of this
matter; however, management believes that the ultimate resolution of this
matter will not have a material adverse impact on the financial position of
the company.
NOTE 16:
SHAREHOLDER RIGHTS PLAN
Pursuant to the company's Shareholder Rights Plan, one-half of a right is
associated with each share of capital stock. Each right entitles a shareholder
to buy 1/100th of a share of a new series of preferred stock at a price of
$105 (subject to adjustment).
The rights will be exercisable only if a person or group of persons acquires
or intends to make a tender offer for 20 percent or more of the company's
capital stock. If any person acquires 20 percent of the capital stock, each
right will entitle the shareholder to receive that number of shares of capital
stock having a market value of two times the exercise price. If the company is
acquired in a merger or other business combination, each right will entitle
the shareholder to purchase at the exercise price, that number of shares of
the acquiring company having a market value of two times the exercise price.
The rights will expire on November 2, 2000, and are subject to redemption by
the company at $0.01 per right.
NOTE 17:
SEGMENT DATA
The company operates predominantly as a tooling supplier specializing in
powder metallurgy. The following table presents the company's operations
by geographic area:
In thousands 1995 1994 1993
------------ --------- -------- --------
Sales:
United States $ 726,977 $610,320 $512,748
International 390,358 296,702 156,183
--------- -------- --------
Total 1,117,335 907,022 668,931
--------- -------- --------
Intersegment transfers:
United States 92,939 70,005 52,492
International 40,523 34,504 17,943
--------- -------- --------
Total 133,462 104,509 70,435
--------- -------- --------
Net sales $ 983,873 $802,513 $598,496
========= ======== ========
Operating income:
United States $ 95,228 $ 47,560 $ 41,190
International 36,769 (8,263) 1,483
Eliminations (5,024) (1,362) 451
--------- -------- --------
Total operating income 126,973 37,935 43,124
--------- -------- --------
Interest expense (12,793) (13,811) (9,549)
Other income
(expense) (886) 2,291 519
--------- -------- --------
Income before
taxes $ 113,294 $ 26,415 $ 34,094
========= ======== ========
Identifiable assets:
United States $ 462,812 $422,517 $359,996
International 336,193 279,558 94,730
Eliminations (31,001) (26,455) (18,316)
Corporate 13,605 21,912 11,853
--------- -------- --------
Total assets $ 781,609 $697,532 $448,263
========= ======== ========
Intersegment transfers are accounted for at arm's-length prices reflecting
prevailing market conditions within the various geographic areas. Such sales
and associated costs are eliminated in the consolidated financial statements.
Identifiable assets are those assets that are identified with the operations
in each geographic area. Corporate assets consist mainly of cash and cash
equivalents, investments in affiliated companies and other assets.
Sales to a single customer did not aggregate 10 percent or more of total
sales. Export sales from U.S. operations to unaffiliated customers were $27.4
million, $22.7 million and $21.7 million in 1995, 1994 and 1993, respectively.
(Page 32)
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
SELECTED QUARTERLY FINANCIAL DATA
Quarter Ended
In thousands -----------------------------------------------------
except per share Sep. 30 Dec. 31 Mar. 31 Jun. 30
---------------- -------- -------- -------- --------
FISCAL 1995:
Net sales $218,838 $230,335 $268,064 $266,636
Gross profit 90,787 94,621 119,225 118,373
Net income 10,668 11,873 22,150 23,603
Earnings per
share 0.40 0.45 0.84 0.89
======== ======== ======== ========
FISCAL 1994:
Net sales $175,665 $195,167 $211,809 $219,872
Gross profit 70,018 76,913 88,429 94,620
Net income
(loss) (33,057) 4,088 11,090 13,791
Earnings (loss)
per share (1.51) 0.18 0.43 0.52
======== ======== ======== ========
Earnings (loss) per share were computed independently for each quarter in 1994
and, therefore, do not equal the amount computed for the entire fiscal year.
In the first quarter of 1994, the company incurred a restructuring charge of
$24.7 million ($20.4 million after taxes) related to the acquisition of Hertel
and recognized the net cumulative effect of accounting changes of $15 million
(after taxes). Net loss before the net cumulative effect of accounting changes
was $18.1 million and net loss per share was $0.82.
STOCK PRICE RANGES AND DIVIDENDS PAID
The company's capital stock is traded on the New York Stock Exchange (symbol
KMT). The approximate number of shareholders of record as of August 10, 1995,
was 2,870. Stock price ranges and dividends declared and paid were as follows:
Quarter Ended
--------------------------------------------------
In dollars Sep. 30 Dec. 31 Mar. 31 Jun. 30
---------- -------- -------- -------- --------
FISCAL 1995:
High $28 $29 $28-5/8 $35-3/4
Low 24-1/8 23-1/4 23 26-3/4
Dividends 0.15 0.15 0.15 0.15
======== ======== ======== ========
FISCAL 1994:
High $19-1/16 $23 $29-9/16 $29-9/16
Low 15-3/8 18-3/16 21-1/16 23-1/8
Dividends 0.145 0.145 0.145 0.145
======== ======== ======== ========
(Page 33)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF KENNAMETAL INC.
We have audited the accompanying consolidated balance sheets of Kennametal
Inc. and subsidiaries as of June 30, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1995. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kennametal
Inc. and subsidiaries as of June 30, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1995, in conformity with generally accepted accounting principles.
As discussed in Notes 7 and 9 to the consolidated financial statements,
effective July 1, 1993, the company changed its methods of accounting for
income taxes and postretirement benefits other than pensions.
ARTHUR ANDERSEN LLP
-------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 24, 1995
(Page 34)
TEN-YEAR FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
10-Year
Notes CAGR 1995 1994
----- ------- -------- --------
Dollars in thousands,
except per share data
<S> <C> <C> <C> <C>
OPERATING RESULTS
Net sales 11.2% $983,873 $802,513
Cost of goods sold 11.1 560,867 472,533
Research and development 4.9 18,744 15,201
Selling, marketing and distribution 12.7 219,271 189,487
General and administrative 6.4 55,853 58,612
Interest expense 11.6 12,793 13,811
Unusual or nonrecurring items (1) n.m. - 24,749
Income taxes 11.4 45,000 15,500
Accounting changes, net of tax (2) n.m. - 15,003
Net income (loss) (3) 13.6 68,294 (4,088)
----- -------- --------
FINANCIAL POSITION
Net working capital 3.9% $184,072 $130,777
Inventories 5.4 200,680 158,179
Property, plant and equipment, net 7.3 260,342 243,098
Total assets 9.1 781,609 697,532
Long-term debt, including capital leases 8.7 78,700 90,178
Total debt, including capital leases 12.4 149,730 147,295
Total shareholders' equity (4) 6.1 391,885 322,836
----- -------- --------
PER SHARE DATA
Earnings (loss) (3) 13.0% $ 2.58 $ (0.17)
Dividends 4.4 0.60 0.58
Book value (at year-end) 5.5 14.75 12.25
Market price (at year-end) 13.4 34.50 24.63
----- -------- --------
OTHER DATA
Capital expenditures 6.0% $ 43,371 $ 27,313
Number of employees (at year-end) 2.5 7,030 6,600
Average shares outstanding (in thousands) (4) 0.5 26,486 24,304
----- -------- --------
KEY RATIOS
Sales growth 22.6% 34.1%
Gross profit margin 43.0 41.1
Operating profit margin 13.1 8.3
Return on sales (3) 6.9 n.m.
Return on equity (3) 19.3 n.m.
Total debt to capital 27.6 31.3
Dividend payout 23.3 n.m.
Inventory turnover 3.1x 3.1x
Average sales per employee 8.9% $ 146 $ 125
----- -------- --------
<FN>
n.m. - Not meaningful
CAGR - Compound annual growth rate
Note 1. Unusual charges (credits) reflect restructuring and integration costs associated with the
acquisition of Hertel AG in 1994, settlement and partial reversal of accrued patent litigation
costs in 1993, accrued patent litigation costs in 1991, and rationalization of production
facilities and disposition of certain assets in 1986.
2. Accounting changes in 1994 reflect changes in the methods of accounting for postretirement health
care and life insurance benefits (SFAS No. 106) and income taxes (SFAS No. 109).
3. Excluding unusual charges and accounting changes in 1994, net income was $31,330; earnings per
share were $1.29; return on sales was 3.9 percent; and return on equity was 11.4 percent.
4. In 1994, the company issued approximately 4 million shares of capital stock for net proceeds of
$73.6 million. In 1986, the company repurchased approximately 4.8 million shares of capital stock
for $60 million.
</FN>
</TABLE>
(Page 35)
<TABLE>
TEN-YEAR FINANCIAL HIGHLIGHTS (CONTINUED)
<CAPTION>
1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- -------- --------
Dollars in thousands,
except per share data
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $598,496 $594,533 $617,833 $589,023 $472,200 $419,900 $354,450 $355,377
Cost of goods sold 352,773 362,967 358,529 342,434 274,929 244,026 205,682 217,999
Research and development 14,714 13,656 14,750 13,325 11,969 9,757 10,265 11,783
Selling, marketing and
distribution 144,850 137,494 136,319 123,286 94,934 84,820 72,400 70,175
General and administrative 41,348 45,842 49,219 42,648 31,443 29,497 29,767 29,209
Interest expense 9,549 10,083 11,832 10,538 8,960 8,601 7,246 7,707
Unusual or nonrecurring
items (1,738) - 6,350 - - - - 20,402
Income taxes 14,000 8,100 17,300 23,000 20,900 19,100 14,400 200
Accounting changes,
net of tax - - - - - - - -
Net income (loss) 20,094 12,872 21,086 32,113 29,994 24,319 17,200 571
-------- -------- -------- -------- -------- -------- -------- --------
FINANCIAL POSITION
Net working capital $120,877 $108,104 $ 88,431 $108,954 $ 91,032 $ 99,565 $102,271 $101,442
Inventories 115,230 118,248 119,767 114,593 105,033 96,473 92,232 86,956
Property, plant and
equipment, net 192,305 200,502 193,830 175,523 166,390 161,788 139,815 126,734
Total assets 448,263 472,167 476,194 451,379 383,252 359,258 326,994 300,024
Long-term debt, including
capital leases 87,891 95,271 73,113 81,314 57,127 74,405 72,085 69,286
Total debt, including
capital leases 110,628 127,954 130,710 116,212 95,860 103,982 93,303 79,928
Total shareholders' equity 255,141 251,511 243,535 231,598 204,465 186,238 166,190 153,325
-------- -------- -------- -------- -------- -------- -------- --------
PER SHARE DATA
Earnings (loss) $ 0.93 $ 0.60 $ 1.00 $ 1.54 $ 1.45 $ 1.19 $ 0.85 $ 0.03
Dividends 0.58 0.58 0.58 0.58 0.56 0.52 0.485 0.43
Book value (at year-end) 11.64 11.64 11.42 11.02 9.84 9.04 8.15 7.58
Market price (at year-end) 16.75 17.13 17.81 17.25 15.88 18.38 15.44 11.50
-------- -------- -------- -------- -------- -------- -------- --------
OTHER DATA
Capital expenditures $ 23,099 $ 36,555 $ 55,323 $ 35,998 $ 28,491 $ 46,336 $ 34,111 $ 24,083
Number of employees
(at year-end) 4,850 4,980 5,360 5,580 5,420 4,990 4,760 4,800
Average shares outstanding
(in thousands) 21,712 21,452 21,094 20,872 20,696 20,526 20,322 20,582
-------- -------- -------- -------- -------- -------- -------- --------
KEY RATIOS
Sales growth 0.7% (3.8)% 4.9% 24.7% 12.5% 18.5% (0.3)% 4.1%
Gross profit margin 41.1 38.9 42.0 41.9 41.8 41.9 42.0 38.7
Operating profit margin 7.5 5.8 9.6 11.4 12.5 12.3 10.3 7.4
Return on sales 3.4 2.2 3.4 5.5 6.4 5.8 4.9 0.2
Return on equity 8.1 5.2 8.7 14.9 15.4 13.9 10.9 0.4
Total debt to capital 30.2 33.7 34.9 33.4 31.9 35.8 36.0 34.3
Dividend payout 62.4 96.7 58.0 37.7 38.6 43.7 57.1 n.m.
Inventory turnover 3.1x 3.0x 3.0x 3.1x 2.9x 2.4x 2.3x 2.1x
Average sales per employee $ 122 $ 116 $ 113 $ 107 $ 94 $ 85 $ 75 $ 71
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
EXHIBIT 21
PRINCIPAL SUBSIDIARIES
Jurisdiction in Which
Name of Subsidiary Organized or Incorporated
------------------ -------------------------
CONSOLIDATED SUBSIDIARIES
Adaptive Technologies Corp. Michigan, United States
Hertel Cutting Technologies Inc. Tennessee, United States
J&L America Inc. Michigan, United States
Kennametal Australia Pty. Ltd. Australia
Kennametal China Limited China
Kennametal Foreign Sales Corporation Barbados
Kennametal GTS Co., Ltd. Thailand
Kennametal GTS Pte. Ltd. Singapore
Kennametal Hardpoint, Inc. Delaware, United States
Kennametal Hertel AG Germany
Kennametal Ltd. Canada
Kennametal de Mexico, S.A. de C.V. Mexico
CONSOLIDATED SUBSIDIARIES OF KENNAMETAL HERTEL AG
Hertel Iberica S.A. Spain
Hertel Japan Limited Japan
Kennametal Hertel G.m.b.H. Germany
Kennametal Hertel Belgium S.A. Belgium
Kennametal Hertel France S.A. France
Kennametal Hertel Nederland B.V. Netherlands
Nederlandse Hardmetaal Fabrieken B.V. Netherlands
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports, included or incorporated by reference in this Form 10-K, into the
Company's previously filed registration statements on Form S-8, Registration
No. 2-80182; Form S-8, Registration No. 33-25331; Form S-8, Registration
No. 33-55768; Form S-8, Registration No. 33-55766; and Form S-3, Registration
No. 33-61854, including the prospectuses therein, relating to the company's
Stock Option Plan of 1982, Stock Option and Incentive Plan of 1988, Stock
Option and Incentive Plan of 1992, Directors Stock Incentive Plan and the
Dividend Reinvestment and Stock Purchase Plan (as amended). It should be
noted that we have not audited any financial statements of the Company
subsequent to June 30, 1995 or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
September 19, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the June 30, 1995 Consolidated Financial
Statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-1-1994
<PERIOD-END> JUN-30-1995
<CASH> 10,827
<SECURITIES> 0
<RECEIVABLES> 187,511
<ALLOWANCES> 12,106
<INVENTORY> 200,680
<CURRENT-ASSETS> 409,274
<PP&E> 517,180
<DEPRECIATION> 256,838
<TOTAL-ASSETS> 781,609
<CURRENT-LIABILITIES> 225,202
<BONDS> 0
<COMMON> 36,712
0
0
<OTHER-SE> 355,173
<TOTAL-LIABILITY-AND-EQUITY> 781,609
<SALES> 983,873
<TOTAL-REVENUES> 983,873
<CGS> 560,867
<TOTAL-COSTS> 560,867
<OTHER-EXPENSES> 20,909
<LOSS-PROVISION> 1,477
<INTEREST-EXPENSE> 12,793
<INCOME-PRETAX> 113,294
<INCOME-TAX> 45,000
<INCOME-CONTINUING> 68,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,294
<EPS-PRIMARY> 2.58
<EPS-DILUTED> 2.58
</TABLE>
