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, 1996
[ ] 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.)
State Route 981 South
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 30, 1996, 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 $671,100,000. 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 30, 1996, there were 26,747,827 shares of Capital Stock
outstanding.
Documents Incorporated by Reference
Portions of the 1996 Annual Report to Shareholders are incorporated by
reference into Parts I, II and IV.
Portions of the Proxy Statement for the 1996 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. The company also distributes a broad range of industrial supplies
used in the metalworking industry. 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.
Business Segment and Markets
- ----------------------------
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 markets: metalworking, industrial supply, and mining and construction.
The company's sales by market are presented on page 21 of the 1996 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 37 of the 1996 Annual Report to
Shareholders, and such information is incorporated herein by reference.
Metalworking Markets
- --------------------
Kennametal markets, manufactures and distributes a full line of products and
services for the metalworking industry. The company provides metalcutting
tools to manufacturing companies in a wide range of industries throughout the
world.
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.
Industrial Supply Market
- ------------------------
Kennametal distributes a full line of industrial supplies to the metalworking
industry. These products include cutting tools, abrasives, precision
measuring devices, power tools and hand tools, machine tool accessories and to
a lesser extent, some maintenance, repair and operating supplies. The
majority of industrial supplies distributed by the company are purchased from
other manufacturers, although the industrial supply product offering does
include Kennametal-manufactured items.
Mining and Construction Market
- ------------------------------
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.
The company also 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 that are sold to
manufacturers of cemented carbide products, oil and gas drilling equipment and
diamond drill bits.
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.
Since January 1, 1994, the company purchased additional shares of Hertel for
$19 million, thereby increasing the company's ownership interest to 94 percent
at June 30, 1996.
International Operations
- ------------------------
The company's principal international operations are conducted in western
Europe and Canada. In addition, the company has joint ventures in India,
Italy and Russia, sales subsidiaries 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 21 of the 1996 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 30 of the 1996
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: a direct
sales force, full-service supply programs, and retail showrooms 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 retail showrooms
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 North America and
Europe. 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, 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 competition exists from both U.S.-based and
international-based concerns. In addition, the company competes with
thousands of industrial supply distributors.
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 global presence, its state
of the art manufacturing capabilities, 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 generally is not significant to its
operations. Approximately 80 percent of all orders are filled from stock, and
the balance generally is 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 $20.6 million, $18.7
million and $15.2 million in 1996, 1995 and 1994, 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 products to market during the past few
years. These include metalcutting inserts that incorporate innovative tool
geometries or compositions for improved chip control and productivity. These
new compositions include KC994M* multi-coated metalcutting inserts for milling
applications, KC9010* and KC9025* multi-coated metalcutting inserts for
turning applications, Kyon 3500* ceramic metalcutting inserts for machining
cast irons, and KCD25* diamond-coated metalcutting inserts for machining
aluminum alloys and other nonferrous materials.
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 thousands of suppliers located in the United States and abroad.
Employees
- ---------
The company employed approximately 7,300 persons at June 30, 1996, of which
4,500 were located in the United States and 2,800 in other parts of the world,
principally Europe and Canada. Approximately 1,100 employees were represented
by labor unions, of which 130 were hourly-rated employees located at plants in
the Latrobe, Pennsylvania, area. The remaining 970 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. or Kennametal Hertel AG
ITEM 2. PROPERTIES
Presented below is a summary of principal manufacturing facilities used by the
company and its majority-owned subsidiaries.
<TABLE>
<CAPTION>
Location Owned/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 (a):
Port Coquitlam, Canada (b) Owned Metallurgical Powders
Victoria, Canada Owned Wear Parts
Shanxi, China Owned Mining Tools
Xuzhou, China Owned Mining Tools
Blaydon, England Leased 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
<FN>
(a) In January 1996, the company announced plans to build a $20-million
facility in Shanghai, China, to manufacture cemented carbide metalcutting
tools. Operations are planned to begin in 1998.
(b) During the fourth quarter of 1996, the company decided to close this
facility. The manufacture of products produced at this location will be
continued from other company locations.
</FN>
</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,
and in Fuerth, Germany.
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) 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 of the contract and has liability to Hertel creditors as if Hertel
merged with the company. Several 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 through litigation in Germany. It is management's opinion
that the company and Hertel have 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, cash flows or financial
position of the company.
(b) 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 1996, 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, 59 (1) President and Director since 1989. Chief
President Executive Officer since October 1, 1991.
Chief Executive Officer
Director
David B. Arnold, 57 (1) Vice President since 1979. Chief Technical
Vice President Officer since 1988.
Chief Technical Officer
James R. Breisinger, 46 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, 51 (1) Vice President since 1986. Secretary and
Vice President General Counsel since 1982.
Secretary and General Counsel
Richard P. Gibson, 61 Assistant Treasurer since 1985. Director
Assistant Treasurer of Taxes since 1980.
Director of Taxes
James W. Heaton, 64 Vice President since 1984. Senior
Senior Vice President Vice President and Director of Customer
Director of Customer Satisfaction Satisfaction since 1990.
Richard C. Hendricks, 57 (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, 50 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., 53 (1) Vice President since 1987. Named Chief
Vice President Operating Officer in 1995. Director of
Chief Operating Officer Operations from 1991 to 1995.
Richard V. Minns, 58 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, 45 Vice President since 1994. Treasurer
Vice President since 1987.
Treasurer
Kevin G. Nowe, 44 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, 55 (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.
Alan G. Ringler, 46 (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.
Michael W. Ruprich, 40 (1) Named Director of Global Marketing and Sales
Vice President, Kennametal Inc. in 1996. Vice President of Kennametal Inc.
President, J&L America Inc. and President, J&L America Inc. since 1994.
Director of Global Marketing and Sales General Manager 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, 48 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 1996
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 1996 Annual Report
-------------------------------------
<S> <C>
ITEM 5. Market for the Registrant's Quarterly Financial Information
Capital Stock and Related (Unaudited) on page 38.
Stockholder Matters
ITEM 6. Selected Financial Data Ten-Year Financial Highlights
(information with respect to the years
1992 to 1996) on pages 40 and 41.
ITEM 7. Management's Discussion and Management's Discussion & Analysis
Analysis of Financial Condition on pages 21 to 24.
and Results of Operations
ITEM 8. Financial Statements and Item 14(a)1 herein and Quarterly
Supplementary Data Financial Information (Unaudited) on
page 38.
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, 1996 ("1996 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 1996 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 1996 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" in the 1996 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, 1996 and 1995, the
consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended June 30, 1996, and the
notes to consolidated financial statements, together with the report
thereon of Arthur Andersen LLP dated July 22, 1996, presented in the
company's 1996 Annual Report to Shareholders, are incorporated herein
by reference.
2. Financial Statement Schedules
The financial statement schedule shown below should be read in
conjunction with the financial statements contained in the 1996 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 94 percent interest.
Financial Statement Schedule:
-----------------------------
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts for the Three Years
Ended June 30, 1996
<TABLE>
<CAPTION>
3. Exhibits
<S> <C> <C>
(3) Articles of Incorporation and Bylaws
------------------------------------
(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 (SEC
file no. reference 1-5318; docket
entry date - May 14, 1991) 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
(SEC file no. reference 1-5318;
docket entry date - November 1, 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 of Form 10-K (SEC file no. reference
May 1, 1990 1-5318; docket entry date -
September 26, 1990) is incorporated
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 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 1996
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
(SEC file no. reference 1-5318;
docket entry date - February 14, 1986)
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
(SEC file no. reference 1-5318;
docket entry date - February 9, 1989)
is incorporated herein by reference.
(10.4)* Officer employment Exhibit 10.3 of the company's 1988
agreements, as amended Form 10-K (SEC file no. reference
and restated 1-5318; docket entry date -
September 23, 1988) is incorporated
herein by reference.
(10.5)* Deferred Fee Plan for Exhibit 10.4 of the company's 1988
Outside Directors Form 10-K (SEC file no. reference
1-5318; docket entry date -
September 23, 1988) is incorporated
herein by reference.
(10.6)* Executive Deferred Exhibit 10.5 of the company's 1988
Compensation Trust Form 10-K (SEC file no. reference
Agreement 1-5318; docket entry date -
September 23, 1988) is incorporated
herein by reference.
(10.7)* Form of Employment Exhibit 10.8 of the company's 1990
Agreement with certain Form 10-K (SEC file no. reference
executive officers 1-5318; docket entry date -
September 26, 1990) is incorporated
herein by reference.
(10.8)* 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.
(10.9)* Directors Stock Incentive Exhibit 10.2 of the company's
Plan September 30, 1992 Form 10-Q is
incorporated herein by reference.
(10.10) Underwriting Agreement Exhibit 1.1 of the company's
(U.S. Version) March 31, 1994 Form 10-Q is
incorporated herein by reference.
(10.11) Underwriting Agreement Exhibit 1.2 of the company's
(International Version) March 31, 1994 Form 10-Q is
incorporated herein by reference.
(10.12) Credit Agreement dated Exhibit 10.17 of the company's
as of April 19, 1996 by and March 31,1996 Form 10-Q is
among Kennametal Inc. and incorporated herein by reference.
Deutsche Bank AG, Mellon
Bank N.A. and PNC Bank,
National Association
(10.13)* Performance Bonus Stock Exhibit A of the company's 1995
Plan of 1995 annual meeting proxy statement.
(13) Annuual Report to Shareholders Portions of the 1996 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>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
- ------------------------------------------------------------------
* 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 /s/ RICHARD J. ORWIG
------------------------------------
Richard J. Orwig
Vice President, Chief Financial
and Administrative Officer
Date: September 18, 1996
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>
/s/ QUENTIN C. MCKENNA
- ----------------------------------
Quentin C. McKenna Chairman of the Board September 18, 1996
/s/ ROBERT L. MCGEEHAN
- ----------------------------------
Robert L. McGeehan President, Chief Executive September 18, 1996
Officer and Director
/s/ JAMES R. BREISINGER
- ----------------------------------
James R. Breisinger Vice President, Controller September 18, 1996
and Chief Accounting Officer
/s/ RICHARD J. ORWIG
- ----------------------------------
Richard J. Orwig Vice President, Chief September 18, 1996
Financial and Administrative
Officer
/s/ RICHARD C. ALBERDING
- ----------------------------------
Richard C. Alberding Director September 18, 1996
/s/ PETER B. BARTLETT
- ----------------------------------
Peter B. Bartlett Director September 18, 1996
/s/ A. PETER HELD
- ----------------------------------
A. Peter Held Director September 18, 1996
/s/ WARREN H. HOLLINSHEAD
- ----------------------------------
Warren H. Hollinshead Director September 18, 1996
/s/ ALOYSIUS T. MCLAUGHLIN, JR.
- ----------------------------------
Aloysius T. McLaughlin, Jr. Director September 18, 1996
/s/ WILLIAM R. NEWLIN
- ----------------------------------
William R. Newlin Director September 18, 1996
/s/ LARRY YOST
- ----------------------------------
Larry Yost Director September 18, 1996
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
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 22, 1996. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed
in the index in Item 14(a)2 of this Form 10-K is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
-----------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 22, 1996
<PAGE>
<TABLE>
KENNAMETAL INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 1996
- ---------------------------------------
(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>
1996
Allowance for
doubtful accounts $12,106 $1,810 $213 $ (871) (a) $3,962 $ 9,296
======= ====== ==== ====== ====== =======
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
======= ====== ==== ====== ====== =======
<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 September 30, 1994
of Incorporation as Amended Form 10-Q is incorporated herein by reference.
3.2 Bylaws Exhibit 3.1 of the company's March 31, 1991
Form 10-Q (SEC file no. reference 1-5318;
docket entry date - May 14, 1991) is
incorporated herein by reference.
4.1 Rights Agreement dated Exhibit 4 of the company's Form 8-K dated
October 25, 1990 October 23, 1990 (SEC file no. reference 1-5318;
docket entry date - November 1, 1990) is
incorporated herein by reference.
4.2 Form of Note Agreement with Exhibit 4.3 of the company's 1990 Form 10-K
various creditors dated as of (SEC file no. reference 1-5318; docket entry
May 1, 1990 date - September 26, 1990) is incorporated
herein by reference.
10.1 Management Performance The discussion regarding the Management
Bonus Plan Performance Bonus Plan under the caption
"Report of the Board of Directors Committee on
Executive Compensation" contained in the
company's 1996 Proxy Statement is incorporated
herein by reference.
10.2 Stock Option Plan of 1982, as Exhibit 10.3 of the company's December 31, 1985
amended Form 10-Q (SEC file no. reference 1-5318;
docket entry date - February 14, 1986) is
incorporated herein by reference.
10.3 Stock Option and Incentive Plan Exhibit 10.1 of the company's December 31, 1988
of 1988 Form 10-Q (SEC file no. reference 1-5318;
docket entry date - February 9, 1989) is
incorporated herein by reference.
10.4 Officer employment agreements, Exhibit 10.3 of the company's 1988 Form 10-K
as amended and restated (SEC file no. reference 1-5318; docket entry
date - September 23, 1988) is incorporated
herein by reference.
10.5 Deferred Fee Plan for Outside Exhibit 10.4 of the company's 1988 Form 10-K
Directors (SEC file no. reference 1-5318; docket entry
date - September 23, 1988) is incorporated
herein by reference.
10.6 Executive Deferred Compensation Exhibit 10.5 of the company's 1988 Form 10-K
Trust Agreement (SEC file no. reference 1-5318; docket entry
date - September 23, 1988) is incorporated
herein by reference.
10.7 Form of Employment Agreement Exhibit 10.8 of the company's 1990 Form 10-K
with certain executive officers (SEC file no. reference 1-5318; docket entry
date - September 26, 1990) is incorporated
herein by reference.
10.8 Stock Option and Incentive Plan Exhibit 10.1 of the company's September 30, 1992
of 1992 Form 10-Q is incorporated herein by reference.
10.9 Directors Stock Incentive Plan Exhibit 10.2 of the company's September 30, 1992
Form 10-Q is incorporated herein by reference.
10.10 Underwriting Agreement Exhibit 1.1 of the company's March 31, 1994
(U.S. Version) Form 10-Q is incorporated herein by reference.
10.11 Underwriting Agreement Exhibit 1.2 of the company's March 31, 1994
(International Version) Form 10-Q is incorporated herein by reference.
10.12 Credit Agreement dated Exhibit 10.17 of the company's March 31, 1996
as of April 19, 1996 by and Form 10-Q is incorporated herein by reference.
among Kennametal Inc. and
Deutsche Bank AG, Mellon
Bank N.A. and PNC Bank,
National Association
10.13 Performance Bonus Stock Exhibit A of the company's 1995 annual meeting
Plan of 1995 proxy statement.
13 Annual Report to Shareholders Portions of the 1996 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. 1996 ANNUAL REPORT
(Page 21)
[MANAGEMENT'S DISCUSSION AND ANALYSIS]
RESULTS OF OPERATIONS
The following discussion should be read in connection with the consolidated
financial statements of the company and the related footnotes.
COMPARISON OF FISCAL 1996 AND FISCAL 1995
OVERVIEW. Net income for 1996 was $69.7 million, up 2 percent from $68.3
million last year. The 1996 results include a restructuring charge totaling
$2.7 million ($0.06 per share) for the relocation of the North America
Metalworking Headquarters and for the closure of a manufacturing facility in
Canada. Excluding the restructuring charge, net income for 1996 was up
5 percent.
Earnings for 1996 increased because of the rapid growth in industrial supply
sales, primarily through mail order and full service supply programs and from
slightly higher sales of metalcutting products in each of the three
metalworking markets. Earnings were affected by a less favorable sales mix and
lower production levels. Further, costs associated with the implementation of
new client-server information systems and focused factory programs reduced
pretax earnings by $10.4 million during 1996.
In order to provide more meaningful information and to better reflect the
strategic direction of the company, during 1996 Kennametal began to report
sales by five markets: Metalworking North America, Metalworking Europe,
Metalworking Asia-Pacific, Industrial Supply, and Mining and Construction.
This is a revision to the three product sales classes used formerly, which
were: Metalworking, Mining and Construction, and Metallurgical Powders. Since
a growing portion of sales is being derived from industrial supplies, the
company is reporting these sales separately. Sales of Metallurgical Powders
will be combined with Mining and Construction. Prior year amounts have been
reclassified to conform to the new presentation.
SALES AND MARKETS. Sales for the year ended June 30, 1996, were $1.1 billion,
up 10 percent from $984 million last year. Sales increased in each of the five
markets over 1995. Sales increased in 1996 because of slightly higher sales
volumes and modest price increases.
Sales in the North America Metalworking market were flat compared to the prior
year. Sales of metalcutting inserts and toolholding devices in the United
States were flat as sales growth was affected by weak economic conditions.
Sales of metalworking products in Canada increased 11 percent because of
increased demand.
In the Europe Metalworking market, sales increased 7 percent because of higher
sales volumes. Demand for metalworking products was slow in Germany, while
sales grew at a faster pace in the United Kingdom and France. Demand in Europe
was stronger in the first half of the fiscal year but slowed as the year
progressed. In the Asia-Pacific Metalworking market, sales rose 11 percent as
a result of increased demand. Sales also increased because, effective July 1,
1995, Kennametal began to consolidate its majority-owned subsidiaries in China
and Japan. Excluding foreign currency translation effects, sales in the Europe
and Asia-Pacific Metalworking markets increased 6 and 7 percent, respectively.
<TABLE>
<CAPTION>
[SALES BY MARKET AND GEOGRAPHIC AREA]
Year ended June 30 1996 1995 1994
--------------------------- -------------------------- -----------------
Percent Percent Percent Percent Percent
(in thousands) of Total Amount Change of Total Amount Change of Total Amount
- -------------- -------- ------ ------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BY MARKET:
Metalworking:
North America 34% $ 368,481 --% 37% $367,807 15% 40% $318,734
Europe 25 271,004 7 26 254,037 35 23 188,791
Asia-Pacific 3 35,854 46 3 24,579 22 2 20,102
Industrial Supply 24 256,703 28 20 201,152 28 20 157,694
Mining and Construction 14 147,921 9 14 136,298 16 15 117,192
---- ---------- --- ---- -------- --- ---- --------
Net Sales 100% $1,079,963 10% 100% $983,873 23% 100% $802,513
-==== ========== === ==== ======== === ==== ========
BY GEOGRAPHIC AREA:
Within the United States 62% $ 665,510 10% 62% $606,623 17% 65% $517,856
International 38 414,453 10 38 377,250 33 35 284,657
---- ---------- --- ---- -------- --- ---- --------
Net Sales 100% $1,079,963 10% 100% $983,873 23% 100% $802,513
==== ========== === ==== ======== === ==== ========
</TABLE>
(Page 22)
The Industrial Supply market accounted for the largest percentage sales gain
because of the rapid growth of mail order and full service supply programs.
Sales rose 28 percent as a result of aggressive marketing programs, the
successful geographic expansion program at J&L Industrial Supply and new and
existing full service supply programs with large customers. During fiscal
1996, J&L opened seven locations and now operates a total of 18 locations in
the United States and one location in the United Kingdom. Full service supply
added 18 new contracts, bringing the total number to slightly more than 50
contracts covering more than 100 plant locations in 1996. Also, during June
1996, the company began transferring small customer accounts with an estimated
sales value of $20 million from the North America Metalworking market to J&L
Industrial Supply to provide added customer service and to further leverage
J&L's full complement of metalcutting supplies. These sales will be included
in the Industrial Supply market on a prospective basis.
Sales in the Mining and Construction market increased 9 percent over 1995 as a
result of strong domestic demand for both mining and highway construction
tools. International sales rose only slightly because of increased
competition.
COSTS AND EXPENSES. As a percentage of sales, the gross profit margin for the
year ended June 30, 1996, was 42.1 percent, compared to 43.0 percent last
year. The gross profit margin benefited from higher sales volumes and modest
price increases. These benefits were offset by a less favorable sales mix,
slightly higher raw material costs, costs associated with the implementation
of focused factory programs and reduced manufacturing efficiencies because of
lower production levels.
Operating expenses as a percentage of sales were 30.4 percent, compared to
29.9 percent last year. Operating expenses increased 12 percent primarily
because of costs related to the implementation of new client-server
information systems, costs necessary to support the higher sales levels, and
marketing and branch expansion programs at J&L Industrial Supply. Results of
operations also include a restructuring charge related to the consolidation of
the North America Metalworking Headquarters from Raleigh, N.C., to Latrobe,
Pa., and the closure of a manufacturing facility in Canada. These pretax items
were recorded during the fourth quarter of fiscal 1996 and amounted to
$2.7 million.
Interest expense decreased 12 percent because of lower average borrowings and
slightly lower interest rates. The effective tax rate was 38.6 percent in
1996, compared to 39.7 percent in 1995. The decrease in the effective tax rate
resulted from additional tax benefits derived from international operations.
RESTRUCTURING CHARGE. During the fourth quarter of fiscal 1996, the company
recorded a pretax charge of $2.7 million to relocate its North America
Metalworking Headquarters from Raleigh, N.C., to Latrobe, Pa., and to close a
manufacturing facility in Canada. The relocation is being made to globalize
key functions and to provide a more efficient corporate structure. The action
will affect approximately 300 employees in Raleigh, N.C., all of whom have
been offered the opportunity to move to Latrobe, Pa. As a result, a pretax
charge of $2.7 million was recorded to cover the related one-time costs of
employee separation arrangements and early retirements. In connection with the
relocation, the company will construct a new headquarters building at an
estimated cost of $20 million.
Certain costs resulting from the relocation of employees, hiring and training
new employees, and other costs resulting from the temporary duplication of
certain operations have not been included in the one-time charge and will be
included in operating expenses as incurred. The costs related to these items
are estimated to be $9 million pretax and will be incurred during the next two
years.
COMPARISON OF FISCAL 1995 AND FISCAL 1994
OVERVIEW. Net income for 1995 was $68.3 million, up from $31.3 million (before
the restructuring charge and accounting changes) in 1994. Earnings increased
in 1995 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. However, earnings in 1995 increased substantially as
the result of improved economic conditions and the successful turnaround and
integration of Hertel in Europe. The results of operations for 1994 included
the results of Hertel AG and its subsidiaries for 11 months.
SALES AND MARKETS. Sales for the year ended June 30, 1995, were $984 million,
up 23 percent from $803 million in 1994. Sales in 1995 rose primarily because
of higher sales volume, favorable foreign currency translation effects and
modest price increases.
Sales in the North America Metalworking market increased 15 percent on higher
sales volumes and modest price increases. Sales of metalcutting inserts and
toolholding devices in the United States increased 16 percent because of
increased demand for products.
(Page 23)
Sales in the Europe Metalworking market rose 35 percent because of higher
sales volumes and favorable foreign currency translation effects. Demand was
particularly strong in Germany, while demand in the United Kingdom and France
also grew, but at a slower pace than Germany. In the Asia-Pacific Metalworking
market, sales rose 22 percent due to increased demand in the Pacific Rim.
In the Industrial Supply market, sales rose 28 percent because of the addition
of five new locations at J&L Industrial Supply and additional full service
supply programs.
Sales in the Mining and Construction market rose 16 percent because of
increased demand for mining and highway construction tools in the United
States and strong demand for carbide intermediate and diamond matrix powders.
COSTS AND EXPENSES. As a percentage of sales, the gross profit margin for 1995
was 43.0 percent, compared to 41.1 percent in 1994. The improvement in 1995
resulted from a better sales mix, favorable effects of foreign currency
impacts of international sales manufactured in the United States and improved
manufacturing efficiency. In addition, higher raw material costs generally
were 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. As a percentage of sales,
operating expenses declined to 29.9 percent in 1995 as compared to
32.8 percent in 1994 because of higher sales volumes and improved operating
efficiency, particularly in Europe.
In connection with the acquisition of Hertel AG, the company incurred a
restructuring charge of $24.7 million ($20.4 million after taxes) in 1994 for
costs associated with the closing of its manufacturing facility in
Neunkirchen, Germany, and other integration activities. The restructuring was
substantially complete in 1995.
Interest expense decreased slightly because of lower average borrowings and
interest rates. The effective tax rate was 39.7 percent in 1995, compared to
58.7 percent in 1994. Excluding the effects of the Hertel restructuring
charge, the effective tax rate was 39.1 percent in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Kennametal's cash flow from operations is a primary source of financing for
capital expenditures and internal growth. Additionally, the company maintains
global credit lines with commercial banks totaling $230 million, of which
$172 million was unused at June 30, 1996. The company and its subsidiaries
generally obtain local financing through credit lines with commercial banks.
During 1996, the company generated $85 million in cash from operations, which
was used primarily to finance $58 million of capital expenditures and to pay
$16 million of cash dividends. Capital expenditures were made primarily for
new client-server information systems, to modernize facilities and to upgrade
machinery and equipment.
In January 1996, the company announced plans to build a $20-million facility
in Shanghai, China, to manufacture cemented carbide metalcutting tools.
Manufacturing is planned to commence early in calendar 1998.
During 1995, the company generated $57 million in cash from operations, which
was used primarily to finance $43 million of capital expenditures and to pay
$16 million of cash dividends. Capital expenditures were made to modernize
facilities, to upgrade machinery and equipment, and to acquire new information
systems.
During 1994, the company generated $30 million in cash from operations. Also,
during 1994, the company acquired 81 percent 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 the assets acquired and
liabilities assumed were $241 million and $194 million, respectively.
Also, during 1994, 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 ($38.7 million) and certain borrowings under revolving
credit agreements ($34.9 million) related to the acquisition of Hertel AG.
Capital expenditures totaling $27 million were made to upgrade machinery and
equipment and to modernize facilities.
Capital expenditures for fiscal 1997 are estimated to be $70-$80 million and
will be used primarily to construct a new corporate headquarters and a
manufacturing facility in China, to acquire additional client-server
information systems and to upgrade machinery and equipment.
(Page 24)
FINANCIAL CONDITION
Kennametal's financial condition continues to remain strong. Total assets were
$799 million in 1996, up 2 percent from $782 million in 1995. Net working
capital was $218 million, up 18 percent from the previous year. The ratio of
current assets to current liabilities was 2.0 in 1996 as compared with 1.8 in
1995.
Accounts receivable increased 8 percent to $190 million because of increased
sales. Inventories rose 2 percent to $205 million to support increased product
demand and due to the growth of the Industrial Supply market. Inventory
turnover was 3.0 in 1996 and 3.1 in 1995. Kennametal will continue to focus on
ways to improve inventory turnover and overall asset utilization.
Total debt (including capital lease obligations) decreased 12 percent to
$131 million in 1996. The ratio of total debt to total invested capital was
23.0 percent in 1996 as compared with 27.6 percent in 1995. 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 completed the restructuring and integration activities
related to the acquisition of Hertel AG in 1994. Cash payments and other
charges applied to the restructuring reserves totaled $26.1 million in 1995.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The company's required adoption date is July 1, 1996. SFAS No. 121
standardizes the accounting practices for the recognition and measurement of
impairment losses on certain long-lived assets. The adoption of SFAS No. 121
will not have an impact on the financial statements, as the statement is
consistent with existing company policy.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the provisions of SFAS No. 123, companies may elect to
account for stock-based compensation plans using a fair-value-based method or
may continue measuring compensation expense for those plans using the
intrinsic-value-based method.
Companies electing to continue using the intrinsic-value-based method must
provide pro forma disclosures of net income and earnings per share as if the
fair-value-based method had been applied. Management intends to continue to
account for stock-based compensation using the intrinsic-value-based method
and, as such, SFAS No. 123 will not have an impact on the company's results of
operations or financial position.
In 1994, the company changed its method 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.
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 1997, management expects consolidated sales to increase
from the $1.1 billion achieved this year. However, the outlook for the
upcoming year will be based in part on the recoveries of the U.S. and European
economies. In addition, future results could be affected to the extent that
the company would make acquisitions.
Sales in the North America Metalworking market should benefit from slowly
improving economic conditions in the United States and from increased sales
through the marketing alliance with W.W. Grainger. Sales in the Europe
Metalworking market are not expected to improve before early calendar 1997.
Sales in the Asia-Pacific Metalworking market should improve as a result of
increased demand in the Pacific Rim.
Sales in the Industrial Supply market should continue to benefit from the
expansion of additional J&L Industrial Supply locations, from the transfer of
customer accounts from the North America Metalworking operations, from growth
in catalog sales and from additional full service supply programs. Further, if
any slowdown is foreseen in other markets, investments into the Industrial
Supply business could be accelerated. In addition, sales of mining and highway
construction tools should continue to increase in existing and developing
markets.
This annual report, including the letter to shareholders, the business
discussion on pages 9-18 and the foregoing paragraphs of Outlook, contains
"forward-looking statements" as defined by Section 21E of the Securities
Exchange Act of 1934. Actual results can differ from those in the forward-
looking statements to the extent that the economic conditions in the United
States, Europe and, to a lesser extent, Asia-Pacific change from the company's
expectations.
(Page 26)
<TABLE>
[CONSOLIDATED STATEMENTS OF INCOME]
<CAPTION>
Year ended June 30 1996 1995 1994
- ------------------------------------- ---------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
OPERATIONS
Net sales $1,079,963 $983,873 $802,513
Cost of goods sold 625,473 560,867 472,533
---------- -------- --------
Gross profit 454,490 423,006 329,980
Research and development expenses 20,585 18,744 15,201
Selling, marketing and distribution expenses 242,375 219,271 189,487
General and administrative expenses 65,417 55,853 58,612
Restructuring charge 2,666 -- 24,749
Amortization of intangibles 1,596 2,165 3,996
---------- -------- --------
Operating income 121,851 126,973 37,935
Interest expense 11,296 12,793 13,811
Other income (expense) 3,077 (886) 2,291
---------- -------- --------
Income before taxes and cumulative effect of
accounting changes 113,632 113,294 26,415
Provision for income taxes 43,900 45,000 15,500
---------- -------- --------
Income before cumulative effect of accounting changes 69,732 68,294 10,915
Cumulative effect of accounting changes,
net of income taxes:
Postretirement benefits -- -- (20,060)
Income taxes -- -- 5,057
---------- -------- --------
Net income (loss) $ 69,732 $ 68,294 $ (4,088)
========== ======== ========
Per Share Data
Earnings before cumulative effect of accounting changes $ 2.62 $ 2.58 $ 0.45
Cumulative effect of accounting changes:
Postretirement benefits -- -- (0.83)
Income taxes -- -- 0.21
---------- -------- --------
Earnings (loss) per share $ 2.62 $ 2.58 $ (0.17)
========== ======== ========
Dividends per share $ 0.60 $ 0.60 $ 0.58
========== ======== ========
Weighted average shares outstanding 26,635 26,486 24,304
========== ======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
(Page 27)
<TABLE>
[CONSOLIDATED BALANCE SHEETS]
<CAPTION>
As of June 30 1996 1995
- -------------- -------- --------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 17,090 $ 10,827
Accounts receivable, less allowance for doubtful
accounts of $9,296 and $12,106 189,820 175,405
Inventories 204,934 200,680
Deferred income taxes 24,620 22,362
-------- --------
Total current assets 436,464 409,274
-------- --------
Property, plant and equipment:
Land and buildings 156,064 151,905
Machinery and equipment 415,443 365,275
Less accumulated depreciation (304,400) (256,838)
-------- --------
Net property, plant and equipment 267,107 260,342
-------- --------
Other assets:
Investments in affiliated companies 8,742 6,873
Intangible assets, less accumulated amortization
of $20,795 and $19,009 33,756 32,253
Deferred income taxes 41,757 56,629
Other 11,665 16,238
-------- --------
Total other assets 95,920 111,993
-------- --------
Total assets $799,491 $781,609
======== ========
LIABILITIES
Current liabilities:
Current maturities of term debt and capital leases $ 17,543 $ 17,475
Notes payable to banks 57,549 53,555
Accounts payable 64,663 60,211
Accrued vacation pay 19,228 18,424
Other 59,830 75,537
-------- --------
Total current liabilities 218,813 225,202
-------- --------
Term debt and capital leases, less current maturities 56,059 78,700
Deferred income taxes 20,611 20,998
Other liabilities 52,559 51,615
-------- --------
Total liabilities 348,042 376,515
-------- --------
Minority interest in consolidated subsidiaries 12,500 13,209
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, 5,000 shares authorized; none issued -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
29,370 shares issued 36,712 36,712
Additional paid-in capital 87,417 85,768
Retained earnings 351,594 297,838
Treasury shares, at cost; 2,667 and 2,793 shares held (35,734) (36,737)
Cumulative translation adjustments (1,040) 8,304
-------- --------
Total shareholders' equity 438,949 391,885
-------- --------
Total liabilities and shareholders' equity $799,491 $781,609
======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
(Page 28)
<TABLE>
[CONSOLIDATED STATEMENTS OF CASH FLOWS]
<CAPTION>
Year ended June 30 1996 1995 1994
- ------------------ ------- ------- -------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $69,732 $68,294 $(4,088)
Adjustments for noncash items:
Depreciation and amortization 40,240 39,315 43,232
Other 9,000 11,953 14,984
Changes in certain assets and liabilities,
net of effects from acquisitions:
Accounts receivable (20,359) (23,815) (11,352)
Inventories (9,758) (34,389) 9,638
Accounts payable and accrued liabilities (1,342) (9,340) (18,007)
Other (2,034) 4,615 (4,158)
------- ------- -------
Net cash flow from operating activities 85,479 56,633 30,249
------- ------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (57,556) (43,371) (27,313)
Disposals of property, plant and equipment 6,348 3,725 6,716
Acquisition of Hertel AG, net of cash -- -- (19,595)
Other 1,173 (5,268) (2,344)
------- ------- -------
Net cash flow used for investing activities (50,035) (44,914) (42,536)
------- ------- -------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt 5,019 (5,721) 11,246
Increase in term debt 7,780 8,163 5,715
Reduction in term debt (28,278) (9,721) (64,098)
Net proceeds from issuance of capital stock -- -- 73,594
Dividend reinvestment and employee stock plans 2,652 4,439 8,658
Cash dividends paid to shareholders (15,976) (15,884) (14,015)
Other -- -- 2,731
------- ------- -------
Net cash flow from (used for) financing activities (28,803) (18,724) 23,831
------- ------- -------
Effect of exchange rate changes on cash (378) 642 1,497
------- ------- -------
CASH AND EQUIVALENTS
Net increase (decrease) in cash and equivalents 6,263 (6,363) 13,041
Cash and equivalents, beginning 10,827 17,190 4,149
------- ------- -------
Cash and equivalents, ending $17,090 $10,827 $17,190
======= ======= =======
SUPPLEMENTAL DISCLOSURES
Interest paid $11,436 $12,569 $12,403
Income taxes paid 39,521 23,125 16,296
The accompanying notes are an integral part of these statements.
</TABLE>
(Page 29)
<TABLE>
[CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY]
<CAPTION>
Year ended June 30 1996 1995 1994
- ------------------ -------- -------- --------
(in thousands)
<S> <C> <C> <C>
CAPITAL STOCK
Balance at beginning of year $ 36,712 $ 36,712 $ 15,891
Issuance of capital stock -- -- 2,465
Stock split (2-for-1) -- -- 18,356
-------- -------- --------
Balance at end of year 36,712 36,712 36,712
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 85,768 83,839 28,135
Dividend reinvestment and stock purchase plan 882 1,015 424
Employee stock plans 767 914 2,507
Issuance of capital stock -- -- 71,129
Stock split (2-for-1) -- -- (18,356)
-------- -------- --------
Balance at end of year 87,417 85,768 83,839
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of year 297,838 245,428 263,531
Net income (loss) 69,732 68,294 (4,088)
Cash dividends (15,976) (15,884) (14,015)
-------- -------- --------
Balance at end of year 351,594 297,838 245,428
-------- -------- --------
TREASURY SHARES
Balance at beginning of year (36,737) (39,247) (44,974)
Dividend reinvestment and stock purchase plan 537 938 590
Employee stock plans 466 1,572 5,137
-------- -------- --------
Balance at end of year (35,734) (36,737) (39,247)
-------- ------- --------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance at beginning of year 8,304 (3,360) (7,442)
Current year translation adjustments (9,344) 11,664 4,082
-------- -------- --------
Balance at end of year (1,040) 8,304 (3,360)
-------- -------- --------
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 $438,949 $391,885 $322,836
======== ======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
(Page 30)
[NOTES TO CONSOLIDATED FINANCIAL STATEMENTS]
Note 1:
- -------
NATURE OF OPERATIONS
The company is a global enterprise engaged in the manufacture, purchase and
distribution of a broad range of tools, tooling systems, supplies and services
for the metalworking, mining and highway construction industries.
Note 2:
- -------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies 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.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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 $16.6 million and $16.4 million of receivables
from affiliates at June 30, 1996 and 1995, 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 is 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 is 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.
EARNINGS PER SHARE is computed using the weighted average number of shares
outstanding during the year.
REVENUE RECOGNITION. The company recognizes revenue from product sales upon
shipment to the customer.
NEW ACCOUNTING STANDARDS. In March 1995, the Financial Accounting Standards
Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." The company's required
adoption date is July 1, 1996. SFAS No. 121 standardizes the accounting
practices for the recognition and measurement of impairment losses on certain
long-lived assets. The adoption of SFAS No. 121 will not have an impact on the
financial statements, as the statement is consistent with existing company
policy.
(Page 31)
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Under the provisions of SFAS No. 123, companies may elect to
account for stock-based compensation plans using a fair-value-based method or
may continue measuring compensation expense for those plans using the
intrinsic-value-based method.
Companies electing to continue using the intrinsic-value-based method must
provide pro forma disclosures of net income and earnings per share as if the
fair-value-based method had been applied. Management intends to continue to
account for stock-based compensation using the intrinsic-value-based method
and, as such, SFAS No. 123 will not have an impact on the company's results of
operations or financial position.
NOTE 3:
- -------
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 $19 million, thereby increasing the company's ownership
interest to 94 percent at June 30, 1996.
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 8) 40,600
Other noncurrent assets 10,500
Current liabilities 104,100
Long-term liabilities 89,400
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 complete in 1995.
NOTE 4:
- -------
INVENTORIES
Inventories consisted of the following:
(in thousands) 1996 1995
- -------------- -------- --------
Finished goods $169,108 $147,231
Work in process and powder blends 59,326 65,231
Raw materials and supplies 16,514 24,629
-------- --------
Inventories at current cost 244,948 237,091
Less LIFO valuation (40,014) (36,411)
-------- --------
Total inventories $204,934 $200,680
======== ========
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, 1996 and 1995.
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 5:
- -------
OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
(in thousands) 1996 1995
- -------------- ------- -------
Federal and state income taxes $16,898 $19,060
Accrued compensation 7,259 14,139
Payroll, state and local taxes 7,910 8,406
Accrued product warranty costs 5,119 4,779
Accrued benefits 3,613 4,089
Accrued restructuring charge (see Note 11) 2,666 --
Accrued professional fees 1,013 2,456
Accrued interest expense 996 1,005
Other accrued expenses 14,356 21,603
------- -------
Total other current liabilities $59,830 $75,537
======= =======
(PAGE 32)
NOTE 6:
- -------
TERM DEBT AND CAPITAL LEASES
Term debt and capital lease obligations consisted of the following:
(in thousands) 1996 1995
- -------------- ------- -------
Senior notes, 9.64%, due in
installments through 2000 $40,000 $50,000
Borrowings outside the U.S., varying
from 6.60% to 10.25% (1996)
and 5.75% to 10.25% (1995),
due in installments through 2003 13,472 21,070
Lease of office facilities with terms
expiring through 2011 at 6.75% to 7.55% 12,654 14,547
Other 7,476 10,558
------- -------
Total term debt and capital leases 73,602 96,175
------- -------
Less current maturities:
Term debt (16,016) (15,782)
Capital leases (1,527) (1,693)
------- --------
Total current maturities (17,543) (17,475)
------- -------
Long-term debt and capital leases $56,059 $78,700
======= =======
Future principal maturities of term debt are $16.0 million, $11.4 million,
$11.3 million, $15.0 million and $1.3 million, respectively, in fiscal years
1997 through 2001.
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:
1997 $ 1,527
1998 1,527
1999 1,527
2000 1,527
2001 1,527
After 2001 11,286
-------
Total future minimum lease payments 18,921
Less amount representing interest (6,267)
-------
Present value of minimum lease payments $12,654
=======
Future minimum lease payments under operating leases with noncancelable terms
beyond one year were not significant at June 30, 1996.
NOTE 7:
- -------
NOTES PAYABLE AND LINES OF CREDIT
Notes payable to banks of $57.5 million and $53.6 million at June 30, 1996 and
1995, respectively, represent short-term borrowings under U.S. and
international credit lines with commercial banks. These credit lines totaled
approximately $230 million at June 30, 1996, of which $172 million was unused.
The weighted average interest rate for short-term borrowings was 5.6 percent
and 6.1 percent at June 30, 1996 and 1995, respectively.
The company has available U.S. credit lines totaling $115 million that are
covered by two revolving credit agreements. The primary revolving credit
agreement allows the company to borrow up to $90 million at fixed or variable
interest rates. This credit line expires during fiscal 2001 and requires the
company to pay a facility fee on the total line. The company has the option to
terminate this agreement in whole or in part at any time.
NOTE 8:
- -------
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.
Income before taxes and the provision for income taxes consisted of the
following:
(in thousands) 1996 1995 1994
- -------------- -------- -------- --------
Income before taxes:
United States $ 76,020 $ 83,401 $ 39,095
International 37,612 29,893 (12,680)
-------- -------- --------
Total income before taxes $113,632 $113,294 $ 26,415
======== ======== ========
Current income taxes:
Federal $ 28,100 $ 26,500 $ 15,000
State 5,500 6,100 3,100
International 1,800 4,000 (900)
-------- -------- --------
Total 35,400 36,600 17,200
Deferred income taxes 8,500 8,400 (1,700)
-------- -------- --------
Provision for income taxes $ 43,900 $ 45,000 $ 15,500
======== ======== ========
Effective tax rate 38.6% 39.7% 58.7%
======== ======== ========
Note: Excluding the effects of the restructuring charge, the effective tax
rate was 39.1 percent in 1994.
(Page 33)
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) 1996 1995 1994
- -------------- ------- ------- -------
Income taxes at U.S.
statutory rate $39,772 $39,653 $ 9,245
State income taxes, net of
federal tax benefits 3,575 3,981 2,018
Combined tax effects of
international income (2,942) 1,288 2,883
International losses with no
related tax benefits 421 219 2,325
Other 3,074 (141) (971)
------- ------- -------
Provision for income taxes $43,900 $45,000 $15,500
======= ======= =======
Deferred tax assets and liabilities consisted of the following:
(in thousands) 1996 1995
- -------------- ------- -------
Deferred tax assets (liabilities):
Net operating loss carryforwards $35,985 $52,923
Other postretirement benefits 14,649 14,122
Inventory valuation and reserves 6,836 6,643
Accrued vacation compensation 3,965 3,680
Property and equipment 2,547 2,866
Other accruals 6,571 4,463
Accumulated depreciation (20,611) (20,998)
------- -------
Total 49,942 63,699
Less valuation allowance (4,176) (5,706)
------- -------
Net deferred tax assets $45,766 $57,993
======= =======
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, 1996.
Included in deferred tax assets at June 30, 1996, are unrealized tax benefits
totaling $36.0 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 $31.8 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
$4.2 million to offset the deferred tax benefits that may not be realized
before the expiration of the carryforward periods.
NOTE 9:
- -------
PENSION BENEFITS
The components of net pension credit for the company's U.S. defined benefit
pension plans were as follows:
(in thousands) 1996 1995 1994
- -------------- ------- ------- -------
Service cost $ 6,722 $ 5,906 $ 5,777
Interest cost 13,688 13,016 12,345
Return on plan assets (45,888) (37,746) (8,885)
Net amortization and deferral 24,682 17,628 (11,099)
------- ------- -------
Net pension credit $ (796) $(1,196) $(1,862)
======= ======= =======
The funded status of the plans and amounts recognized in the consolidated
balance sheets were as follows:
(in thousands) 1996 1995
- -------------- -------- --------
Plan assets, at fair value $269,380 $231,007
Present value of accumulated
benefit obligations:
Vested benefits 151,209 131,552
Nonvested benefits 2,144 2,933
-------- --------
Accumulated benefit obligations 153,353 134,485
Effect of future salary increases 44,369 40,550
-------- --------
Projected benefit obligations 197,722 175,035
-------- --------
Plan assets in excess of projected
benefit obligations 71,658 55,972
Amounts not recognized in the
financial statements:
Unrecognized net assets
from July 1, 1986 (14,509) (16,689)
Unrecognized prior service costs 826 909
Unrecognized net gains (52,312) (36,037)
-------- --------
Prepaid pension costs $ 5,663 $ 4,155
======== ========
Prepaid pension costs are included in other noncurrent assets.
(Page 34)
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:
1996 1995
------- -------
Discount rate 7.50% 8.00%
Rate of future salary increases 4.50% 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) 1996 1995 1994
- -------------- ------ ------ -----
Service cost $ 735 $ 231 $143
Interest cost 1,573 967 833
------ ------ ----
Net pension cost $2,308 $1,198 $976
====== ====== ====
The return on plan assets and the net amortization and deferral in 1996 were
$661 and $45, respectively. Similar amounts for 1995 and 1994 were not
significant.
The funded status of the international plans and amounts recognized in the
consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
(in thousands) June 30, 1996 June 30, 1995
- -------------- ------------------- -------------------
Assets Accum. Assets Accum.
Exceed Benefits Exceed Benefits
Accum. Exceed Accum. Exceed
Benefits Assets Benefits Assets
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Plan assets, at fair value $8,274 $ -- $7,456 $ --
Present value of
accumulated benefit
obligations:
Vested benefits 5,602 10,922 5,213 11,314
Nonvested benefits 13 2,618 12 2,555
------ ------- ------ --------
Accumulated benefit
obligations 5,615 13,540 5,225 13,869
Effect of future salary
increases 1,383 584 1,287 143
------ ------- ------ --------
Projected benefit
obligations 6,998 14,124 6,512 14,012
------ -------- ------ --------
Plan assets greater
(less than) projected
benefit obligations 1,276 (14,124) 944 (14,012)
Amounts not recognized in
the financial statements:
Unrecognized net assets (905) -- (944) --
Unrecognized net gains (413) -- -- --
------ -------- ------ --------
Net pension liability $ (42) $(14,124) $ -- $(14,012)
====== ======== ====== ========
</TABLE>
Accrued pension costs are included in other noncurrent liabilities. Plan
assets consist principally of common stocks, corporate bonds and government
securities.
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:
1996 1995
----------- -----------
Discount rate 8.00%-7.50% 8.00%-7.75%
Rate of future salary increases 5.50%-4.50% 5.50%-5.00%
Rate of return on plan assets 9.00% 9.00%
Total pension cost (credit) for U.S. and international plans amounted to
$2.1 million, $0.8 million and $(1.2) million in 1996, 1995 and 1994,
respectively.
NOTE 10:
- --------
OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The company presently provides varying levels of postretirement health care
and life insurance benefits to most U.S. employees. Postretirement health care
benefits are available to employees and their spouses retiring at or after age
65 with five or more years of service after age 40. Employees (and their
spouses) retiring under age 65 before January 1, 1998, with 20 or more years
of service after age 40 are also eligible to receive postretirement health
care benefits. Beginning with retirements on or after January 1, 1998,
Kennametal's portion of the costs of postretirement health care benefits will
be capped at 1996 levels.
Effective July 1, 1993, the company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Under the new
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) 1996 1995 1994
- -------------- ------ ------ ------
Service cost $1,100 $ 959 $1,080
Interest cost 2,661 2,626 2,820
Net amortization and deferral -- (32) --
------ ------ ------
Other postretirement
benefit costs $3,761 $3,553 $3,900
====== ====== ======
(Page 35)
Accumulated postretirement benefit obligations and amounts recognized in the
consolidated balance sheets were as follows:
(in thousands) 1996 1995
- -------------- -------- --------
Present value of accumulated
benefit obligations:
Retirees $21,333 $19,692
Fully eligible active participants 6,862 6,335
Other active participants 9,321 8,604
------- -------
Accumulated benefit obligations 37,516 34,631
Plan assets, at fair value -- --
------- -------
Accumulated benefit obligations
in excess of plan assets 37,516 34,631
Unrecognized net gains 626 2,231
------- -------
Accrued postretirement benefits $38,142 $36,862
======= =======
Included in other noncurrent liabilities were accrued postretirement benefits
of $35.1 million and $33.5 million at June 30, 1996 and 1995, respectively.
The significant actuarial assumptions used to determine the present value of
accumulated postretirement benefit obligations were as follows:
1996 1995
------ ------
Discount rate 7.50% 8.00%
Rate of increase in health care costs:
Initial rate 8.50% 9.00%
Ultimate rate in 2003 and after 5.00% 5.00%
A 1 percent increase in the health care cost trend rate would have increased
other postretirement benefit costs by $0.2 million in 1996 and the accumulated
benefit obligation by $1.7 million at June 30, 1996.
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. The adoption of this standard did
not have a material effect on the results of operations or financial position
of the company. Postemployment benefit costs were not significant in 1996 and
1995.
NOTE 11:
- --------
RESTRUCTURING CHARGE
On April 29, 1996, the Board of Directors approved the company's plan (the
Plan) to relocate its North America Metalworking Headquarters from Raleigh,
N.C., to Latrobe, Pa. In connection with the Plan, the company will construct
a new headquarters at an estimated cost of $20 million. The relocation is
being made to globalize key functions and to provide a more efficient
corporate structure. The action will affect approximately 300 employees in
Raleigh, N.C., all of whom have been offered the opportunity to move to
Latrobe, Pa. As a result, a pretax charge of $2.0 million was recorded in the
fourth quarter of fiscal 1996. The charge was taken to cover the one-time
costs of employee separation arrangements and early retirement costs.
The costs resulting from the relocation of employees, hiring and training new
employees, and other costs resulting from the temporary duplication of certain
operations have not been included in the one-time charge and will be included
in operating expenses as incurred. The costs related to these items are
estimated to be approximately $9 million pretax and will be incurred during
the next two years.
During the fourth quarter of fiscal 1996, the company also recorded a one-time
pretax charge of $0.7 million related to the closure of a manufacturing
facility in Canada. The supply of products produced at this location will be
continued from other company locations.
NOTE 12:
- --------
FINANCIAL INSTRUMENTS
FAIR VALUE. The company had $17.1 million in cash and equivalents at June 30,
1996, which approximates fair value because of the short maturity of these
investments.
The estimated fair value of term debt was $62.5 million at June 30, 1996. 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, 1996.
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 numerous customers in many industries and
geographic areas. As of June 30, 1996, the company had no significant
concentrations of credit risk.
(Page 36)
NOTE 13:
- --------
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.
NOTE 14:
- --------
STOCK OPTIONS
Under stock option plans approved by shareholders in 1992 and 1988, stock
options generally are 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 $0.9 million (22,740
shares), $0.4 million (13,728 shares) and $1.2 million (62,934 shares) were
delivered in 1996, 1995 and 1994, 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 1996,
1995 and 1994 (see also Note 2).
Transactions under the company's stock option plans were as follows:
<TABLE>
<CAPTION>
1996 Option
Number of Shares 1996 1995 1994 Prices Per Share
- ---------------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 521,148 475,650 914,616 $24.75-14.50
Granted 580,500 204,950 100,000 37.06
Exercised (105,904) (157,452) (508,966) 24.75-14.50
Lapsed and forfeited (1,500) (2,000) (30,000) 37.06
-------- -------- -------- ------------
Options outstanding, end of year 994,244 521,148 475,650 $37.06-16.00
======== ======== ======== ============
Exercisable at year-end 960,970 281,482 235,504 $37.06-16.00
======== ======== ======== ============
Available for future grant 275,710 754,820 961,290
======== ======== ========
</TABLE>
NOTE 15:
- --------
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, financial position or
cash flows of the company.
The company maintains a Corporate Environmental, Health and Safety (EH&S)
Department as well as an EH&S Policy Committee to ensure compliance with
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."
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
(Page 37)
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, which represents a single business segment. The following
table presents the company's operations by geographic area:
(in thousands) 1996 1995 1994
- -------------- ---------- ---------- --------
Sales:
United States $ 784,295 $ 726,977 $610,320
International 430,962 390,358 296,702
---------- ---------- --------
Total 1,215,257 1,117,335 907,022
---------- ---------- --------
Intersegment transfers:
United States 97,343 92,939 70,005
International 37,951 40,523 34,504
---------- ---------- --------
Total 135,294 133,462 104,509
---------- ---------- --------
Net sales $1,079,963 $ 983,873 $802,513
========== ========== ========
Operating income:
United States $ 79,517 $ 95,228 $ 47,560
International 42,861 36,769 (8,263)
Eliminations (527) (5,024) (1,362)
---------- ---------- --------
Total operating income 121,851 126,973 37,935
---------- ---------- --------
Interest expense (11,296) (12,793) (13,811)
Other income (expense) 3,077 (886) 2,291
---------- ---------- --------
Income before taxes $ 113,632 $ 113,294 $ 26,415
========== ========== ========
Identifiable assets:
United States $ 495,452 $ 462,812 $422,517
International 313,340 336,193 279,558
Eliminations (28,500) (31,001) (26,455)
Corporate 19,199 13,605 21,912
---------- ---------- -------
Total assets $ 799,491 $ 781,609 $697,532
========== ========== ========
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
$21.4 million, $27.4 million and $22.7 million in 1996, 1995 and 1994,
respectively.
(Page 38)
[QUARTERLY FINANCIAL INFORMATION] Unaudited
SELECTED QUARTERLY FINANCIAL DATA
Quarter Ended
-----------------------------------------
(in thousands, except per share) Sep. 30 Dec. 31 Mar. 31 Jun. 30
- -------------------------------- -------- -------- -------- --------
FISCAL 1996:
Net sales $254,903 $259,174 $286,095 $279,791
Gross profit 106,442 107,804 123,966 116,278
Net income 13,639 13,876 23,364 18,853
Earnings per share 0.51 0.52 0.88 0.71
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
During the fourth quarter of 1996, the company recorded a restructuring charge
of $2.7 million ($1.6 million after taxes) related to the relocation of the
North America Metalworking Headquarters and for the closure of a manufacturing
facility in Canada.
STOCK PRICE RANGES AND DIVIDENDS PAID
The company's capital stock is traded on the New York Stock Exchange (symbol
KMT). The number of shareholders of record as of August 9, 1996, was 2,863.
Stock price ranges and dividends declared and paid were as follows:
Quarter Ended
----------------------------------------
(in thousands, except per share) Sep. 30 Dec. 31 Mar. 31 Jun. 30
- -------------------------------- ------- ------- ------- -------
FISCAL 1996:
High $41 1/8 $36 1/4 $37 1/4 $38 1/4
Low 34 5/8 28 3/4 27 3/4 33 5/8
Dividends 0.15 0.15 0.15 0.15
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
[REPORT OF MANAGEMENT]
TO THE SHAREHOLDERS OF KENNAMETAL INC.
The management of Kennametal Inc. is responsible for the integrity of all
information contained in this report. The financial statements and related
information were prepared by management in accordance with generally accepted
accounting principles and, as such, contain amounts that are based on
management's best judgment and estimates.
Management maintains a system of policies, procedures and controls designed to
provide reasonable, but not absolute, assurance that the financial data and
records are reliable in all material respects and that assets are safeguarded
from improper or unauthorized use. The company maintains an active internal
audit department that monitors compliance with this system.
The Board of Directors, acting through its Audit Committee, is ultimately
responsible for determining that management fulfills its responsibilities in
the preparation of the financial statements. The Audit Committee meets
periodically with management, the internal auditors and the independent public
accountants to discuss auditing and financial reporting matters. The internal
auditors and independent public accountants have full access to the Audit
Committee without the presence of management.
Kennametal has always placed the utmost importance on conducting its business
activities in accordance with the spirit and letter of the law and the highest
ethical standards. This philosophy is embodied in a code of business ethics
and conduct, which is distributed annually to all employees.
/s/ ROBERT L. MCGEEHAN
- -------------------------------
Robert L. McGeehan
President and
Chief Executive Officer
/s/ RICHARD J. ORWIG
- -------------------------------
Richard J. Orwig
Vice President
Chief Financial and Administrative Officer
(Page 39)
[REPORT OF AUDIT COMMITTEE]
TO THE SHAREHOLDERS OF KENNAMETAL INC.
The Audit Committee of the Board of Directors is composed of three independent
directors and met six times during fiscal year 1996.
The Audit Committee monitors the company's financial reporting process for
accuracy, completeness and timeliness. In fulfilling its responsibility, the
committee recommended to the Board of Directors the reappointment of Arthur
Andersen LLP as the company's independent public accountants. The Audit
Committee reviewed with management, the internal auditors and the independent
public accountants the overall scope and specific plans for their respective
audits. The committee evaluated with management Kennametal's annual and
quarterly reporting process and the adequacy of the company's internal
controls. The committee met with the internal auditors and independent public
accountants, with and without management present, to review the results of
their examinations, their evaluations of the company's internal controls and
the overall quality of Kennametal's financial reporting.
The Audit Committee participates in a self-assessment program whereby the
composition, activities and interactions of the committee are periodically
evaluated by the committee. The purpose of the program is to provide guidance
with regard to the continual fulfillment of the committee's responsibilities.
/s/ RICHARD C. ALBERDING
- -------------------------------
Richard C. Alberding
Chairman, Audit Committee
[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, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1996. 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, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
As discussed in Notes 8 and 10 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.
/s/ ARTHUR ANDERSEN LLP
- ------------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 22, 1996
(Page 40)
[TEN-YEAR FINANCIAL HIGHLIGHTS]
<TABLE>
<CAPTION>
(dollars in thousands,
except per share data) Notes 10-YR CAGR 1996 1995 1994
- ---------------------- ----- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales 11.8% $1,079,963 $983,873 $802,513
Cost of goods sold 11.1 625,473 560,867 472,533
Research and development expenses 5.7 20,585 18,744 15,201
Selling, marketing and distribution
expenses 13.2 242,375 219,271 189,487
General and administrative expenses 8.4 65,417 55,853 58,612
Interest expense 3.9 11,296 12,793 13,811
Unusual or nonrecurring items (1) n.m. 2,666 -- 24,749
Provision for income taxes 71.5 43,900 45,000 15,500
Accounting changes, net of tax (2) n.m. -- -- 15,003
Net income (loss) (3) 61.7 69,732 68,294 (4,088)
FINANCIAL POSITION
Net working capital 7.9% $ 217,651 $184,072 $130,777
Inventories 9.0 204,934 200,680 158,179
Property, plant and equipment, net 7.7 267,107 260,342 243,098
Total assets 10.3 799,491 781,609 697,532
Long-term debt, including capital
leases (2.1) 56,059 78,700 90,178
Total debt, including capital leases 5.1 131,151 149,730 147,295
Total shareholders' equity (4) 11.1 438,949 391,885 322,836
PER SHARE DATA
Earnings (loss) (3) 56.4% $ 2.62 $ 2.58 $ (0.17)
Dividends 3.4 0.60 0.60 0.58
Book value (at year-end) 8.0 16.44 14.75 12.25
Market price (at year-end) 11.4 34.00 34.50 24.63
OTHER DATA
Capital expenditures 9.1% $ 57,556 $ 43,371 $ 27,313
Number of employees (at year-end) 4.2 7,260 7,030 6,600
Average sales per employee 7.9 $ 152 $ 146 $ 125
Average shares outstanding
(in thousands) (4) 2.6 26,635 26,486 24,304
KEY RATIOS
Sales growth 9.8% 22.6% 34.1%
Gross profit margin 42.1 43.0 41.1
Operating profit margin 11.7 13.1 8.3
Return on sales (3) 6.5 6.9 n.m.
Return on equity (3) 17.0 19.3 n.m.
Total debt to capital 23.0 27.6 31.3
Dividend payout (5) 27.5 37.9 62.8
Inventory turnover 3.0x 3.1x 3.1x
<FN>
n.m. -- Not meaningful
CAGR -- Compound annual growth rate
Note 1. Unusual charges (credits) reflect restructuring charges for the relocation of the
North America Metalworking Headquarters from Raleigh, N.C., to Latrobe, Pa., and to
close a manufacturing facility in 1996, restructuring and integration costs
associated with the acquisition of Hertel AG in 1994, settlement and partial
reversal of accrued patent litigation costs in 1993 and accrued patent litigation
costs in 1991.
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.
5. Uses a trailing three-year average earnings and excludes unusual charges (credits).
</FN>
</TABLE>
(Page 41)
[TEN-YEAR FINANCIAL HIGHLIGHTS CONTINUED]
<TABLE>
<CAPTION>
(dollars in thousands,
except per share data) 1993 1992 1991 1990 1989 1988 1987
- ---------------------- -------- -------- -------- -------- -------- -------- --------
<S> <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
Cost of goods sold 352,773 362,967 358,529 342,434 274,929 244,026 205,682
Research and development expenses 14,714 13,656 14,750 13,325 11,969 9,757 10,265
Selling, marketing and distribution
expenses 144,850 137,494 136,319 123,286 94,934 84,820 72,400
General and administrative expenses 41,348 45,842 49,219 42,648 31,443 29,497 29,767
Interest expense 9,549 10,083 11,832 10,538 8,960 8,601 7,246
Unusual or nonrecurring items (1,738) -- 6,350 -- -- -- --
Provision for income taxes 14,000 8,100 17,300 23,000 20,900 19,100 14,400
Accounting changes, net of tax -- -- -- -- -- -- --
Net income (loss) 20,094 12,872 21,086 32,113 29,994 24,319 17,200
FINANCIAL POSITION
Net working capital $120,877 $108,104 $ 88,431 $108,954 $ 91,032 $ 99,565 $102,271
Inventories 115,230 118,248 119,767 114,593 105,033 96,473 92,232
Property, plant and equipment, net 192,305 200,502 193,830 175,523 166,390 161,788 139,815
Total assets 448,263 472,167 476,194 451,379 383,252 359,258 326,994
Long-term debt, including capital
leases 87,891 95,271 73,113 81,314 57,127 74,405 72,085
Total debt, including capital leases 110,628 127,954 130,710 116,212 95,860 103,982 93,303
Total shareholders' equity 255,141 251,511 243,535 231,598 204,465 186,238 166,190
PER SHARE DATA
Earnings (loss) $ 0.93 $ 0.60 $ 1.00 $ 1.54 $ 1.45 $ 1.19 $ 0.85
Dividends 0.58 0.58 0.58 0.58 0.56 0.52 0.485
Book value (at year-end) 11.64 11.64 11.42 11.02 9.84 9.04 8.15
Market price (at year-end) 16.75 17.13 17.81 17.25 15.88 18.38 15.44
OTHER DATA
Capital expenditures $ 23,099 $ 36,555 $ 55,323 $ 35,998 $ 28,491 $ 46,336 $ 34,111
Number of employees (at year-end) 4,850 4,980 5,360 5,580 5,420 4,990 4,760
Average sales per employee $ 122 $ 116 $ 113 $ 107 $ 94 $ 85 $ 75
Average shares outstanding
(in thousands) 21,712 21,452 21,094 20,872 20,696 20,526 20,322
KEY RATIOS
Sales growth 0.7% (3.8)% 4.9% 24.7% 12.5% 18.5% (0.3)%
Gross profit margin 41.1 38.9 42.0 41.9 41.8 41.9 42.0
Operating profit margin 7.5 5.8 9.6 11.4 12.5 12.3 10.3
Return on sales 3.4 2.2 3.4 5.5 6.4 5.8 4.9
Return on equity 8.1 5.2 8.7 14.9 15.4 13.9 10.9
Total debt to capital 30.2 33.7 34.9 33.4 31.9 35.8 36.0
Dividend payout 65.4 52.4 41.7 41.6 48.1 58.6 65.2
Inventory turnover 3.1x 3.0x 3.0x 3.1x 2.9x 2.4x 2.3x
</TABLE>
EXHIBIT 21
PRINCIPAL SUBSIDIARIES
Jurisdiction in Which
Name of Subsidiary Organized or Incorporated
- ------------------ -------------------------
CONSOLIDATED SUBSIDIARIES
Kennametal Australia Pty. Ltd. Australia
Kennametal Foreign Sales Corporation Barbados
Kennametal Ltd. Canada
Kennametal (China) Limited China
Kennametal (Shanghai) Ltd. China
Shanxi-Kennametal Mining Cutting Systems
Manufacturing Company Limited China
Xuzhou-Kennametal Mining Cutting Systems
Manufacturing Company Limited China
Kennametal Hertel AG Germany
Kennametal Hardpoint H.K. Ltd. Hong Kong
Kobe Kennametal K.K. Japan
Kennametal de Mexico, S.A. de C.V. Mexico
Kennametal Hertel (Singapore) Pte. Ltd. Singapore
Kennametal Hardpoint (Taiwan) Inc. Taiwan
Kennametal GTS Co., Ltd. Thailand
Adaptive Technologies Corp. Michigan, United States
J&L America Inc. Michigan, United States
CONSOLIDATED SUBSIDIARIES OF KENNAMETAL HERTEL AG
Kennametal Hertel Belgium S.A. Belgium
Kennametal Hertel France S.A. France
Kennametal Hertel G.m.b.H. Germany
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, Form S-3, Registration No. 33-
61854 and Form S-8, Registration No. 33-65023, 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, Dividend Reinvestment and Stock Purchase Plan (as
amended) and the Performance Bonus Stock Plan of 1995. It should be noted
that we have not audited any financial statements of the Company subsequent to
June 30, 1996 or performed any audit procedures subsequent to the date of our
report.
/s/ ARTHUR ANDERSEN LLP
-----------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
September 18, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
June 30, 1996 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-30-1996
<PERIOD-START> JUL-1-1995
<PERIOD-END> JUN-30-1996
<CASH> 17,090
<SECURITIES> 0
<RECEIVABLES> 199,116
<ALLOWANCES> 9,296
<INVENTORY> 204,934
<CURRENT-ASSETS> 436,464
<PP&E> 571,507
<DEPRECIATION> 304,400
<TOTAL-ASSETS> 799,491
<CURRENT-LIABILITIES> 218,813
<BONDS> 0
0
0
<COMMON> 36,712
<OTHER-SE> 402,237
<TOTAL-LIABILITY-AND-EQUITY> 799,491
<SALES> 1,079,963
<TOTAL-REVENUES> 1,079,963
<CGS> 625,473
<TOTAL-COSTS> 625,473
<OTHER-EXPENSES> 22,181
<LOSS-PROVISION> 1,810
<INTEREST-EXPENSE> 11,296
<INCOME-PRETAX> 113,632
<INCOME-TAX> 43,900
<INCOME-CONTINUING> 69,732
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,732
<EPS-PRIMARY> 2.62
<EPS-DILUTED> 0
</TABLE>
