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, 1997
[ ] 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 29, 1997, 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 $1,060,100,000. 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 29, 1997, there were 26,198,183 shares of Capital Stock
outstanding.
Documents Incorporated by Reference
Portions of the 1997 Annual Report to Shareholders are incorporated by
reference into Parts I, II and IV.
Portions of the Proxy Statement for the 1997 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.
On July 2, 1997, an initial public offering of approximately 20 percent of a
newly formed subsidiary of the company, JLK Direct Distribution Inc. (JLK) was
consummated. The new subsidiary was incorporated on April 28, 1997 and
operates the metalworking industrial supply operations of the company. The
company currently has approximately 80 percent ownership. (see Note 3 to the
consolidated financial statements presented on page 31 of the 1997 Annual
Report to Shareholders, and such information is incorporated herein by
reference).
The matters discussed in this Form 10-K contain "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.
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 1997 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 1997 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 that 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.
Issuance of Subsidiary Stock
- ----------------------------
On July 2, 1997, an initial public offering ("IPO") of approximately
4.9 million shares of common stock at a price of $20 per share of a newly
formed subsidiary of the company, JLK was consummated. JLK operates the
industrial supply operations consisting of the company's wholly owned J&L
America, Inc. ("J&L") subsidiary and its Full Service Supply programs. The
net proceeds from the offering were approximately $90 million and represented
approximately 20 percent of JLK's common stock. The net proceeds were used by
JLK to repay $20 million of indebtedness related to a dividend to the company
and $20 million related to intercompany obligations to the company. The
company used these proceeds to repay short term debt. The company today owns
approximately 80 percent of the outstanding common stock of JLK and intends to
retain a majority of both the economic and voting interests of JLK.
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
$21 million, thereby increasing the company's ownership interest to 95 percent
at June 30, 1997.
International Operations
- ------------------------
The company's principal international operations are conducted in Western
Europe and Canada. In addition, the company has joint ventures in China,
India, Italy, Poland and Russia, manufacturing and 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 1997 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 1997
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 United States.
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 $24.1 million, $20.6
million and $18.7 million in 1997, 1996 and 1995, 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.
- -------------------------------------------------------------
* Trademark owned by Kennametal Inc. or Kennametal Hertel AG
Employees
- ---------
The company employed approximately 7,500 persons at June 30, 1997, of which
4,700 were located in the United States and 2,800 in other parts of the world,
principally Europe and Asia Pacific. Approximately 1,100 employees were
represented by labor unions, of which 170 were hourly-rated employees located
at plants in the Latrobe, Pennsylvania area. The remaining 930 employees
represented by labor unions were employed at seven 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.
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 Statement of Financial Accounting Standards
No. 5, "Accounting for Contingencies."
Corporate Directory
- -------------------
The following is a summary of the company's consolidated subsidiaries and
affiliated companies as of June 30, 1997:
CONSOLIDATED SUBSIDIARIES (% OWNERSHIP)
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 (70%)
Xuzhou-Kennametal Mining Cutting Systems Manufacturing
Company Limited, China (70%)
Kennametal Hertel Limited, England
Kennametal Hertel AG, Germany (95%)
Kennametal Hardpoint H.K. Ltd., Hong Kong (90%)
Kobe Kennametal K.K., Japan (51%)
Kennametal Hertel (Malaysia) Sdn. Bhd., Malaysia
Kennametal de Mexico, S.A. de C.V., Mexico
Kennametal/Becker-Warkop Ltd., Poland (84%)
Kennametal Hertel (Singapore) Pte. Ltd., Singapore
Kennametal South Africa (Proprietary) Limited, South Africa
Kennametal Hardpoint (Taiwan) Inc., Taiwan (90%)
Kennametal Hertel Co., Ltd., Thailand (48%)
Adaptive Technologies Corp., United States
Kennametal Hardpoint Inc., United States (90%)
Circle Machine Company, United States
JLK Direct Distribution Inc., United States
CONSOLIDATED SUBSIDIARIES OF KENNAMETAL HERTEL AG
Kennametal Hertel Belgium S.A., Belgium
Kennametal Hertel France S.A., France
Materiels de Precision et de Production S.A., France
Kennametal Hertel G.m.b.H., Germany
Kennametal Hertel Nederland B.V., Netherlands
Nederlandse Hardmetaal Fabrieken B.V., Netherlands
Kennametal GTS G.m.b.H. Korea, South Korea (branch)
CONSOLIDATED SUBSIDIARIES OF JLK DIRECT DISTRIBUTION INC.
J&L America, Inc., United States
CONSOLIDATED SUBSIDIARIES OF J&L AMERICA, INC.
J&L Industrial Supply UK, England (branch)
Mill & Abrasive Supply, Inc., United States
Strelinger Company, United States
AFFILIATED COMPANIES (% OWNERSHIP)
Kennametal Hertel G. Beisteiner G.m.b.H., Austria (26%)
Birla Kennametal Ltd., India (40%)
Drillco Hertel Ltd., India (50%)
Kennametal Ca.Me.S., S.p.A., Italy (51%)
Kennametal Hertel S.p.A., Italy (40%)
Wilke Carbide B.V., Netherlands (50%)
PIGMA-Kennametal Joint Venture, Russia (49%)
Kenci, S.A., Spain (20%)
ITEM 2. PROPERTIES
Presented below is a summary of principal manufacturing facilities used by the
company and its majority-owned subsidiaries.
Location Owned/Leased Principal Products
-------- ------------ ------------------
UNITED STATES:
Monrovia, California Leased Boring Bars
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):
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
Bordeaux, France Leased Metalworking Cutting Tools
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
(a) In January 1996, the company began construction of a $20-million facility
in Shanghai, China, to manufacture cemented carbide metalcutting tools.
Operations are planned to begin in 1998.
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 world 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 Kennametal Hertel AG, under
German law, the company is required to offer to minority shareholders to
purchase their shares for a reasonable compensation and to guarantee dividends
while the Domination Contract is in effect (having an indefinite term which
may be terminated by giving six months notice to the end of each fiscal year
of Kennametal Hertel AG) and to pay Kennametal Hertel AG any net cumulative
losses it sustains during the term of the contract and has liability to
Kennametal Hertel AG creditors as if Kennametal Hertel AG 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 Kennametal Hertel AG 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 1997, there were no matters submitted
to a vote of security holders through the solicitation of proxies or
otherwise.
<TABLE>
<CAPTION>
OFFICERS OF THE REGISTRANT
<S> <C>
Name, Age, and Position Experience During Past Five Years (2)
- ----------------------- -------------------------------------
Robert L. McGeehan, 60 (1) President and Director since 1989. Chief
President Executive Officer since October 1, 1991.
Chief Executive Officer
Director
William R. Newlin, 56 (1) Chairman of the Board since October 28, 1996.
Chairman of the Board Director since 1982.
David B. Arnold, 58 (1) Vice President since 1979. Chief Technical
Vice President Officer since 1988.
Chief Technical Officer
James R. Breisinger, 47 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, 52 (1) Vice President since 1986. Secretary and
Vice President General Counsel since 1982.
Secretary and General Counsel
Richard P. Gibson, 62 Assistant Treasurer since 1985. Director of
Assistant Treasurer Taxes since 1980.
Director of Taxes
Derwin R. Gilbreath, 49 Vice President since January 1997. Director of
Vice President Global Manufacturing since 1995. Director of
Director of Global Manufacturing North America Metalworking Manufacturing from
1994 to 1995. Vice President of Operations
for DeZurik, a unit of General Signal, prior to
joining the Company in 1994.
Richard C. Hendricks, 58 (1) Vice President since 1982. Director of
Vice President Corporate Business Development since 1992.
Director of Corporate Business
Development
Timothy D. Hudson, 51 Vice President since 1994. Director of
Vice President Human Resources since 1992. Corporate
Director of Human Resources Manager of Human Resources from 1978 to 1992.
H. Patrick Mahanes, Jr., 54 (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, 59 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, 46 Vice President since 1994. Treasurer
Vice President since 1987.
Treasurer
Kevin G. Nowe, 45 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, 56 (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.
Michael W. Ruprich, 41 (1) Named President of JLK Direct Distribution
President, JLK Direct Distribution Inc. Inc. in April 1997. Director of Global
Vice President, Kennametal Inc. Marketing and Sales from 1996 to 1997. Vice
President of Kennametal Inc. since 1994.
President, J&L America, Inc. from 1994 to
1996. 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, 49 Vice President since 1992. Director of
Vice President Kennametal Distribution Services since
Director of Kennametal Distribution 1990.
Services
Lawrence L. Shrum, 56 Vice President since January 1997. Named
Vice President Director of Global Management Information
Director of Global Management Systems in 1994. Manager of User Systems
Information Systems Support from 1992 to 1994.
A. David Tilstone, 43 (1) Vice President since July 1997. Named
Vice President Director of Global Marketing in April 1997.
Director of Global Marketing Joined Kennametal in 1972 and held various
marketing positions from 1980 through 1991,
prior to his departure in 1991 to become the
business manager of an architectural firm.
Returned to Kennametal in 1994 as Manager of
Business Development, Asia Pacific and served
as Director of Asia Pacific Operations from
1995 to 1997.
<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 1997
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 1997 Annual Report
-------------------------------------
<S> <C> <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
1993 to 1997) 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, 1997 ("1997 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 1997 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 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is certain information set forth in the notes
to the table under the caption "Election of Directors" and the information set
forth in the section entitled "Certain Relationships and Related Transactions"
in the 1997 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, 1997 and 1996, the
consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended June 30, 1997,
and the notes to consolidated financial statements, together with the
report hereon of Arthur Andersen LLP dated July 21, 1997, presented in
the company's 1997 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 1997 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 95 percent interest.
Financial Statement Schedule:
-----------------------------
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts for the Three Years
Ended June 30, 1997
<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)* 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.
(10.8)* Directors Stock Incentive Exhibit 10.2 of the company's
Plan September 30, 1992 Form 10-Q is
incorporated herein by reference.
(10.9) Underwriting Agreement Exhibit 1.1 of the company's
(U.S. Version) March 31, 1994 Form 10-Q is
incorporated herein by reference.
(10.10) Underwriting Agreement Exhibit 1.2 of the company's
(International Version) March 31, 1994 Form 10-Q is
incorporated herein by reference.
(10.11) 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
(10.12)* Performance Bonus Stock Exhibit A of the company's 1995
Plan of 1995 annual meeting proxy statement.
(10.13)* Stock Option and Incentive Exhibit 10.14 of the company's
Plan of 1996 September 30, 1996 Form 10-Q is
incorporated herein by reference.
(10.14)* Stock Option and Exhibit 10.8 of the company's
Incentive Plan of 1992, December 31, 1996 Form 10-Q is
as amended incorporated herein by reference.
(10.15)* Form of Employment Exhibit 10.1 of the company's
Agreement with certain March 31, 1997 Form 10-Q is
officers incorporated herein by reference.
(10.16)* Supplemental Executive Exhibit 10.2 of the company's
Retirement Plan March 31, 1997 Form 10-Q is
incorporated herein by reference.
(10.17) Amendment to Credit Exhibit 10.3 of the company's
Agreement dated March 31, 1997 Form 10-Q is
April 19, 1996 incorporated herein by reference.
(13) Annual Report to Shareholders Portions of the 1997 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.
-----------------------
<FN>
* Denotes management contract or compensatory plan or arrangement.
</FN>
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1997.
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, 1997
<TABLE>
<CAPTION>
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.
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM R. NEWLIN
- --------------------------------
William R. Newlin Chairman of the Board September 18, 1997
/s/ ROBERT L. MCGEEHAN
- --------------------------------
Robert L. McGeehan President, Chief Executive September 18, 1997
Officer and Director
/s/ JAMES R. BREISINGER
- --------------------------------
James R. Breisinger Vice President, Controller September 18, 1997
and Chief Accounting Officer
/s/ RICHARD J. ORWIG
- --------------------------------
Richard J. Orwig Vice President, Chief September 18, 1997
Financial and Administrative
Officer
/s/ RICHARD C. ALBERDING
- --------------------------------
Richard C. Alberding Director September 18, 1997
/s/ PETER B. BARTLETT
- --------------------------------
Peter B. Bartlett Director September 18, 1997
/s/ A. PETER HELD
- --------------------------------
A. Peter Held Director September 18, 1997
/s/ WARREN H. HOLLINSHEAD
- --------------------------------
Warren H. Hollinshead Director September 18, 1997
/s/ QUENTIN C. MCKENNA
- --------------------------------
Quentin C. McKenna Director September 18, 1997
/s/ ALOYSIUS T. MCLAUGHLIN
- --------------------------------
Aloysius T. McLaughlin, Jr. Director September 18, 1997
/s/ LARRY YOST
- -------------------------------
Larry Yost Director September 18, 1997
</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 21, 1997. 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 21, 1997
<PAGE>
<TABLE>
<CAPTION>
KENNAMETAL INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 1997
- ---------------------------------------
(Dollars in thousands)
Additions
------------------------------------------
Balance at Charged to Deductions Balance at
Beginning of Costs and Other from End of
Description Year Expenses Recoveries Adjustments(a) Reserves (b) Year
- ----------- ------------ ---------- ---------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
1997
Allowance for
doubtful accounts $ 9,296 $1,979 $136 $ (546) $3,540 $ 7,325
1996
Allowance for
doubtful accounts $12,106 $1,810 $213 $ (871) $3,962 $ 9,296
1995
Allowance for
doubtful accounts $ 9,328 $1,477 $237 $2,131 $1,067 $12,106
<FN>
(a) Represents foreign currency translation adjustment.
(b) Represents uncollected accounts charged against the allowance.
</FN>
</TABLE>
(a)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
No. Reference
- ------- -------------------------------------------------
<S> <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 date
May 1, 1990 - 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 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.
10.8 Directors Stock Incentive Plan Exhibit 10.2 of the company's September 30, 1992
Form 10-Q is incorporated herein by reference.
10.9 Underwriting Agreement Exhibit 1.1 of the company's March 31, 1994
(U.S. Version) Form 10-Q is incorporated herein by reference.
10.10 Underwriting Agreement Exhibit 1.2 of the company's March 31, 1994
(International Version) Form 10-Q is incorporated herein by reference.
10.11 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
10.12 Performance Bonus Stock Exhibit A of the company's 1995 annual meeting
Plan of 1995 proxy statement.
10.13 Stock Option and Incentive Exhibit 10.14 of the company's September 30, 1996
Plan of 1996 Form 10-Q is incorporated herein by reference.
10.14 Stock Option and Incentive Plan Exhibit 10.8 of the company's December 31, 1996
of 1992, as amended Form 10-Q is incorporated herein by reference.
10.15 Form of Employment Agreement Exhibit 10.1 of the company's March 31, 1997
with certain executive officers Form 10-Q is incorporated herein by reference.
10.16 Supplemental Executive Exhibit 10.2 of the company's March 31, 1997
Retirement Plan Form 10-Q is incorporated herein by reference.
10.17 Amendment to Credit Agreement Exhibit 10.3 of the company's March 31, 1997
dated April 19, 1996 Form 10-Q is incorporated herein by reference.
13 Annual Report to Shareholders Portions of the 1997 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>
KENNAMETAL INC. 1997 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 Kennametal (the company) and the related footnotes.
Comparison of Fiscal 1997 and Fiscal 1996
- -----------------------------------------
OVERVIEW. Net income for 1997 was $72.0 million, compared to $69.7 million
last year. While revenues and earnings rose to records, earnings were affected
by weakness in the European market, primarily in Germany, and from negative
effects of foreign currency translations due to the strength of the U.S.
dollar. Earnings for 1997 also were affected by additional costs related to
the J&L Industrial Supply (J&L) showroom expansion program, integration of new
client-server information systems and relocation and related costs associated
with the construction of a new world headquarters in Latrobe, Pa. Earnings in
1997 benefited from slightly higher sales of metalworking products in North
America and from higher sales of metalworking products and industrial supplies
sold to the Industrial Supply market through mail order and Full Service
Supply programs.
SALES AND MARKETS. Sales for the year ended June 30, 1997, were $1.2 billion,
up 7 percent from $1.1 billion last year. Sales primarily increased in 1997
because of higher sales of metalworking products and industrial supplies sold
to the Industrial Supply market through J&L and through Full Service Supply
programs. The increase in sales was offset in part by lower sales of
metalworking products in Europe due to weak economic conditions, especially
the German market, and from negative foreign currency translation effects.
Sales in the North America Metalworking market increased 3 percent over 1996,
despite the transfer of small customer accounts to J&L, as a result of
improved economic conditions in the United States and from the continued
emphasis on milling and drilling products. Sales in Canada rose 15 percent
because of increased sales of metalworking products to aerospace and
automotive companies. Additionally, sales of traditional metalworking products
sold through all sales channels in North America, including sales through the
Industrial Supply market, increased 7 percent.
Sales in the Europe Metalworking market decreased 7 percent. Demand for
metalworking products continued to be slow due to weak economic conditions in
Europe, primarily in the German market. Demand in Europe was weak for most of
1997 but began to show improvement during the fourth quarter of fiscal 1997.
Despite the economic situation in Europe, sales continued to post gains in the
United Kingdom and France. In the Asia Pacific Metalworking market, sales rose
16 percent as a result of increased demand in China, Japan and Taiwan,
although sales were affected by soft economic conditions in Korea and
Thailand. Excluding foreign currency translation effects, sales in the Europe
Metalworking market decreased 2 percent, while sales in the Asia Pacific
Metalworking market increased 21 percent.
The Industrial Supply market was the major contributor to the overall sales
increase because of the continual growth of mail order and Full Service Supply
programs. Sales rose 28 percent primarily because of the expanded product
offering of over 20,000 new stock keeping units (SKUs) in the J&L 1997 master
catalog, from the addition of five new showrooms and from innovative marketing
programs. Full Service Supply programs increased, to a lesser extent, from the
<TABLE>
<CAPTION>
SALES BY MARKET AND GEOGRAPHIC AREA
Year ended June 30 1997 1996 1995
- ------------------ ------------------------------ ------------------------------ --------------------
(in thousands) Percent Percent Percent Percent Percent
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 33% $ 378,679 3% 34% $ 368,481 --% 37% $367,807
Europe 22 251,304 (7) 25 271,004 7 26 254,037
Asia Pacific 4 41,425 16 3 35,854 46 3 24,579
Industrial Supply 28 328,531 28 24 256,703 28 20 201,152
Mining and Construction 13 156,404 6 14 147,921 9 14 136,298
---- ---------- --- ---- ---------- --- ---- --------
Net sales 100% $1,156,343 7% 100% $1,079,963 10% 100% $983,873
==== ========== === ==== ========== === ==== ========
BY GEOGRAPHIC AREA
Within the United States 65% $ 752,268 13% 62% $ 665,510 10% 62% $606,623
International 35 404,075 (3) 38 414,453 10 38 377,250
---- ---------- --- ---- ---------- --- ---- --------
Net sales 100% $1,156,343 7% 100% $1,079,963 10% 100% $983,873
==== ========== === ==== ========== === ==== ========
</TABLE>
(PAGE 22)
continued ramp-up of existing Full Service Supply programs. Also contributing
to the sales increase was the acquisition of two industrial supply companies
during the fourth quarter of 1997. The acquired companies had annual sales of
$36 million in their latest fiscal year and will provide four additional
showroom locations in the Midwest. Excluding these acquisitions, the
Industrial Supply market sales increased 26 percent. At June 30, 1997, the
company now operates a total of 28 showrooms, including six distribution
centers in the United States and one in the United Kingdom, and provides Full
Service Supply programs to around 60 customers covering about 120 different
facilities.
Sales in the Mining and Construction market increased 6 percent from 1996 as a
result of increased domestic and international demand for mining tools.
Highway construction tool sales were flat in the United States, while
international sales declined slightly as a result of weak economic conditions
in Europe.
COSTS AND EXPENSES. As a percentage of sales, gross profit margin for the year
ended June 30, 1997, was 42.2 percent, compared to 42.1 percent last year. The
gross profit margin improved slightly as a result of the positive effects of
productivity improvements related to the Focused Factory initiative. These
benefits were partially offset by a less favorable sales mix coupled with
unfavorable foreign currency translation effects.
Operating expenses as a percentage of sales were 31.0 percent, compared to
30.4 percent last year, excluding the effects of the one-time restructuring
charge in fiscal 1996. Operating expenses increased primarily because of
higher costs related to the J&L showroom expansion program, including higher
direct mail costs and increased direct marketing in new territories in the
United States and in Europe. Operating expenses also increased from higher
costs to support new and existing Full Service Supply programs, from the
integration of new client-server information systems, from higher research and
development costs and from relocation and related costs of $4.7 million
associated with the construction of a new world headquarters.
Interest expense decreased 8 percent because of lower average borrowings
coupled with slightly lower interest rates. The effective tax rate was
38.4 percent in 1997, compared to 38.6 percent in 1996. The decrease in the
effective tax rate resulted from additional tax benefits derived from
international operations.
Comparison of Fiscal 1996 and Fiscal 1995
- -----------------------------------------
OVERVIEW. Net income for 1996 was $69.7 million, up 2 percent from
$68.3 million in 1995. The 1996 results included 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.
SALES AND MARKETS. Sales for the year ended June 30, 1996, were $1.1 billion,
up 10 percent from $984 million in 1995. 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.
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 showroom expansion program at J&L and new and existing
Full Service Supply programs with large customers. During fiscal 1996, J&L
opened seven showroom locations and at the end of fiscal 1996 operated a total
of 18 showrooms 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 from the North America Metalworking market to J&L to provide added
customer service and to further leverage J&L's full complement of metalcutting
supplies.
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, gross profit margin for the year
ended June 30, 1996, was 42.1 percent, compared to 43.0 percent in 1995. 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.
(PAGE 23)
Operating expenses as a percentage of sales were 30.4 percent, compared to
29.9 percent in 1995. 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 showroom expansion programs at J&L. Results of operations also
included 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 was made to globalize key
functions and to provide a more efficient corporate structure. 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 is constructing a new world headquarters building
estimated to cost $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 were not included in the one-time charge and will be
included in operating expenses as incurred. The costs related to these items
were estimated to be $9 million pretax and will be incurred during fiscal 1997
and 1998.
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 $280 million, of which
$160 million was unused at June 30, 1997. The company and its subsidiaries
generally obtain local financing through credit lines with commercial banks.
During 1997, the company generated $99.9 million in cash from operations. Cash
provided by operations increased from 1996 primarily because of lower working
capital requirements and slightly higher net income. Capital expenditures,
totaling $73.8 million, are being made to construct a new world headquarters
in Latrobe, Pa., and a manufacturing facility in China, for new client-server
information systems and to upgrade machinery and equipment. Additionally, the
company paid $17.5 million of cash dividends and paid $19 million to acquire
five small companies throughout 1997. The effects of the acquisitions were not
significant to the company.
On January 31, 1997, the company initiated a stock repurchase program to
repurchase from time to time up to a total of 1.6 million shares of its
outstanding capital stock. During the year ended June 30, 1997, the company
repurchased approximately 781,000 shares of its common stock at a total cost
of approximately $28.7 million. The repurchases were made in the open market
or in negotiated or other permissible transactions. The repurchase of common
stock was financed principally by cash from operations and short-term
borrowings.
On July 2, 1997, an initial public offering (IPO) of approximately 4.9 million
shares of common stock at a price of $20 per share of JLK Direct Distribution
Inc. (JLK), a newly formed subsidiary of the company, was consummated. JLK
operates the industrial supply operations consisting of the company's wholly
owned J&L subsidiary and its Full Service Supply programs. The net proceeds
from the offering were approximately $90 million and represented approximately
20 percent of JLK's common stock. The net proceeds were used by JLK to repay
$20 million of indebtedness related to a dividend to the company and
$20 million related to intercompany obligations to the company. The company
used these proceeds to repay short-term debt. In connection with the IPO, the
remaining net proceeds were loaned to the company, under an intercompany
debt/investment and cash management agreement at a fluctuating rate of
interest equal to the company's short-term borrowing costs. The company will
maintain unused lines of credit to enable it to repay any portion of the
borrowed funds as the amounts are due on demand by JLK.
The company today owns approximately 80 percent of the outstanding common
stock of JLK and intends to retain a majority of both the economic and voting
interests of JLK.
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 to modernize
facilities, to upgrade machinery and equipment, and to acquire new information
systems. In January 1996, the company announced plans to build a $20 million
facility in Shanghai, China, to manufacture cemented carbide metalcutting
tools. Pilot production is planned to commence in October 1997 with full
production beginning 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.
Capital expenditures for fiscal 1998 are estimated to be $70-$80 million and
will be used primarily to complete the construction of a new world
headquarters in Latrobe, Pa., and a manufacturing facility in China, to
acquire additional client-server information systems, to construct or acquire
a new Midwest distribution center and to upgrade machinery and equipment.
Financial Condition
- -------------------
Kennametal's financial condition continues to remain strong. Total assets were
$869 million in 1997, up 9 percent from $799 million in 1996. Net working
capital was $176 million, down 19 percent from the previous year. The ratio of
current assets to current liabilities was 1.6 in 1997, compared with 2.0 in
1996.
(PAGE 24)
Accounts receivable increased 6 percent to $201 million because of increased
sales and from the effects of acquisitions. Inventories rose slightly to
$210 million due to the growth of sales to the Industrial Supply market, the
effects of acquisitions, offset by the company's inventory reduction efforts
of manufactured products. Inventory turnover was 3.2 in 1997 and 3.0 in 1996.
The company will continue to focus on ways to improve inventory turnover and
overall asset utilization.
Total debt (including capital lease obligations) increased 33 percent to
$174 million in 1997. In 1997, total debt was increased principally by the
stock repurchase program and from increased capital expenditures. The ratio of
total debt to total invested capital was 27.5 percent in 1997 as compared with
23.0 percent in 1996. To maintain financial flexibility and to optimize the
cost of capital, Kennametal's financial objective is to maintain a total debt-
to-capital ratio of not more than 40 percent over the long term. Cash from
operations and the company's debt capacity are expected to continue to be
sufficient to fund capital expenditures, dividend payments, stock repurchases,
acquisitions and operating requirements.
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. See Note 14 to the consolidated financial
statements.
New Accounting Standards
- ------------------------
The Financial Accounting Standards Board (FASB) recently issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" and SFAS
No. 129, "Disclosure of Information about Capital Structures." SFAS No. 128
was issued in February 1997 and is effective for periods ending after
December 15, 1997. This statement, upon adoption, will require all prior year
earnings per share (EPS) data to be restated to conform to the provisions of
the statement. This statement's objective is to simplify the computations of
EPS and to make the U.S. standard for EPS computations more compatible with
that of the International Accounting Standards Committee. The company will
adopt SFAS No. 128 in fiscal 1998 and does not anticipate that the statement
will have a significant impact on its reported EPS.
SFAS No. 129 was issued in February 1997 and is effective for periods ending
after December 15, 1997. This statement, upon adoption, will require all
companies to provide specific disclosure regarding their capital structure.
SFAS No. 129 will specify the disclosure for all companies, including
descriptions of their capital structure and the contractual rights of the
holders of such securities. The company will adopt SFAS No. 129 in fiscal 1998
and does not anticipate that the statement will have a significant impact on
its disclosures.
Effective July 1, 1996, the company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The adoption of SFAS No. 121 did not have an impact on the consolidated
financial statements, as the statement is consistent with existing company
policy.
Additionally on July 1, 1996, the company also adopted 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. The company will continue
to use the intrinsic-value-based method, which does not result in compensation
cost. The company's stock compensation plans are discussed in Note 13.
Effects of Inflation
- --------------------
Despite modest inflation in recent years, rising costs continue to affect the
company's operations throughout the world. Kennametal strives to minimize the
effects of inflation through cost containment, productivity improvements and
price increases under highly competitive conditions.
Outlook
- -------
In looking to fiscal 1998, management expects consolidated sales to increase
from the $1.2 billion achieved this year. The outlook for the upcoming year
will be based in part on continued stable economic conditions in the United
States and from the recovery of the 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 stable
economic conditions in the United States. Sales in the Europe Metalworking
market are also expected to benefit from improved economic conditions in
Europe, primarily in Germany. 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 new showroom locations, from the expanded product offering in the
new J&L Industrial Supply master catalog, from recent acquisitions and from
new and existing Full Service Supply programs. In addition, the formation of
JLK should provide additional benefits from more focused leadership and
entrepreneurial incentives to that portion of our business. Lastly, 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 9-19 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 25)
Financial graphs contained on Page 25 are not included. All graph data is
contained in the financial highlights on Pages 40 and 41.
<PAGE> (PAGE 26)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Year ended June 30 1997 1996 1995
- ------------------------------------- ---------- ---------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
OPERATIONS
Net sales $1,156,343 $1,079,963 $983,873
Cost of goods sold 668,415 625,473 560,867
---------- ---------- --------
Gross profit 487,928 454,490 423,006
Research and development expenses 24,105 20,585 18,744
Selling, marketing and distribution expenses 263,980 242,375 219,271
General and administrative expenses 69,911 65,417 55,853
Restructuring charge -- 2,666 --
Amortization of intangibles 2,907 1,596 2,165
---------- ---------- --------
Operating income 127,025 121,851 126,973
Interest expense 10,393 11,296 12,793
Other income (expense) 300 3,077 (886)
---------- ---------- --------
Income before income taxes 116,932 113,632 113,294
Provision for income taxes 44,900 43,900 45,000
---------- ---------- --------
Net income $ 72,032 $ 69,732 $ 68,294
========== ========== ========
PER SHARE DATA
Earnings per share $ 2.71 $ 2.62 $ 2.58
========== ========== ========
Dividends per share $ 0.66 $ 0.60 $ 0.60
========== ========== ========
Weighted average shares outstanding 26,575 26,635 26,486
========== ========== ========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> (PAGE 27)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
As of June 30 1997 1996
- -------------- --------- ---------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 21,869 $ 17,090
Accounts receivable, less allowance
for doubtful accounts of $7,325 and $9,296 200,515 189,820
Inventories 210,111 204,934
Deferred income taxes 25,384 24,620
--------- ---------
Total current assets 457,879 436,464
--------- ---------
Property, plant and equipment:
Land and buildings 156,292 156,064
Machinery and equipment 473,850 415,443
Less accumulated depreciation (329,756) (304,400)
--------- ---------
Net property, plant and equipment 300,386 267,107
--------- ---------
Other assets:
Investments in affiliated companies 11,736 8,742
Intangible assets, less accumulated
amortization of $23,960 and $20,795 49,915 33,756
Deferred income taxes 34,307 41,757
Other 15,086 11,665
--------- ---------
Total other assets 111,044 95,920
--------- ---------
Total assets $ 869,309 $ 799,491
========= =========
LIABILITIES
Current liabilities:
Current maturities of term debt and capital leases $ 13,853 $ 17,543
Notes payable to banks 120,166 57,549
Accounts payable 60,322 64,663
Accrued vacation pay 18,176 19,228
Other 69,485 59,830
--------- ---------
Total current liabilities 282,002 218,813
--------- ---------
Term debt and capital leases, less current maturities 40,445 56,059
Deferred income taxes 21,055 20,611
Other liabilities 57,060 52,559
--------- ---------
Total liabilities 400,562 348,042
--------- ---------
Minority interest in consolidated subsidiaries 9,139 12,500
--------- ---------
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 91,049 87,417
Retained earnings 406,083 351,594
Treasury shares, at cost; 3,263 and 2,667 shares held (62,400) (35,734)
Cumulative translation adjustments (11,836) (1,040)
--------- ---------
Total shareholders' equity 459,608 438,949
--------- ---------
Total liabilities and shareholders' equity $ 869,309 $ 799,491
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> (PAGE 28)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30 1997 1996 1995
- ------------------ ---------- --------- --------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 72,032 $ 69,732 $ 68,294
Adjustments for noncash items:
Depreciation and amortization 41,399 40,240 39,315
Other 5,356 9,000 11,953
Changes in certain assets and liabilities,
net of effects from acquisitions:
Accounts receivable (8,032) (20,359) (23,815)
Inventories 1,379 (9,758) (34,389)
Accounts payable and accrued liabilities (600) (1,342) (9,340)
Other (11,684) (2,034) 4,615
-------- -------- --------
Net cash flow from operating activities 99,850 85,479 56,633
-------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (73,779) (57,556) (43,371)
Disposals of property, plant and equipment 1,063 6,348 3,725
Acquisitions, net of cash (18,995) (1,441) (1,948)
Other 907 2,614 (3,320)
-------- -------- --------
Net cash flow used for investing activities (90,804) (50,035) (44,914)
-------- -------- --------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt 55,689 5,019 (5,721)
Increase in term debt 943 7,780 8,163
Reduction in term debt (19,359) (28,278) (9,721)
Purchase of treasury stock (28,657) -- --
Dividend reinvestment and employee stock plans 5,623 2,652 4,439
Cash dividends paid to shareholders (17,543) (15,976) (15,884)
-------- -------- --------
Net cash flow used for financing activities (3,304) (28,803) (18,724)
-------- -------- --------
Effect of exchange rate changes on cash (963) (378) 642
-------- -------- --------
CASH AND EQUIVALENTS
Net increase (decrease) in cash and equivalents 4,779 6,263 (6,363)
Cash and equivalents, beginning 17,090 10,827 17,190
-------- -------- --------
Cash and equivalents, ending $ 21,869 $ 17,090 $ 10,827
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 10,563 $ 11,436 $ 12,569
Income taxes paid 45,307 39,521 23,125
-------- -------- --------
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> (PAGE 29)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year ended June 30 1997 1996 1995
- ------------------ -------- -------- --------
(in thousands)
<S> <C> <C> <C>
CAPITAL STOCK
Balance at beginning of year $ 36,712 $ 36,712 $ 36,712
-------- -------- --------
Balance at end of year 36,712 36,712 36,712
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 87,417 85,768 83,839
Dividend reinvestment and stock purchase plan 1,132 882 1,015
Employee stock plans 2,500 767 914
-------- -------- --------
Balance at end of year 91,049 87,417 85,768
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of year 351,594 297,838 245,428
Net income 72,032 69,732 68,294
Cash dividends (17,543) (15,976) (15,884)
-------- -------- --------
Balance at end of year 406,083 351,594 297,838
-------- -------- --------
TREASURY SHARES
Balance at beginning of year (35,734) (36,737) (39,247)
Purchase of treasury stock (28,657) -- --
Dividend reinvestment and stock purchase plan 708 537 938
Employee stock plans 1,283 466 1,572
-------- -------- --------
Balance at end of year (62,400) (35,734) (36,737)
-------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance at beginning of year (1,040) 8,304 (3,360)
Current year translation adjustments (10,796) (9,344) 11,664
-------- -------- --------
Balance at end of year (11,836) (1,040) 8,304
-------- -------- --------
PENSION LIABILITY ADJUSTMENT
Balance at beginning of year -- -- (536)
Minimum pension liability adjustment -- -- 536
-------- -------- --------
Balance at end of year -- -- --
-------- -------- --------
Total shareholders' equity, June 30 $459,608 $438,949 $391,885
======== ======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> (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 consolidated 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 $12.8 million and $16.6 million of receivables
from affiliates at June 30, 1997 and 1996, 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. The company assesses the recoverability of
goodwill by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through undiscounted future operating cash
flows of the acquired entities.
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
transfer of title to the customer.
NEW ACCOUNTING STANDARDS. Effective July 1, 1996, the company adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The adoption of SFAS No. 121 did not
have an impact on the consolidated financial statements, as the statement is
consistent with existing company policy.
(PAGE 31)
Additionally on July 1, 1996, the company adopted 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. The company will continue to use the
intrinsic-value-based method, which does not result in compensation cost. The
company's stock compensation plans are discussed in Note 13.
The Financial Accounting Standards Board recently issued SFAS No. 128,
"Earnings Per Share" and SFAS No. 129, "Disclosure of Information about Capital
Structures." SFAS No. 128 was issued in February 1997 and is effective for
periods ending after December 15, 1997. This statement, upon adoption, will
require all prior ending earnings per share (EPS) data to be restated to
conform to the provisions of the statement. This statement's objective is to
simplify the computations of EPS and to make the U.S. standard for EPS
computations more compatible with that of the International Accounting
Standards Committee. The company will adopt SFAS No. 128 in fiscal 1998 and
does not anticipate that the statement will have a significant impact on its
reported EPS.
SFAS No. 129 was issued in February 1997 and is effective for periods ending
after December 15, 1997. This statement, upon adoption, will require all
companies to provide specific disclosure regarding their capital structure.
SFAS No. 129 will specify the disclosure for all companies, including
descriptions of their capital structure and the contractual rights of the
holders of such securities. The company will adopt SFAS No. 129 in fiscal 1998
and does not anticipate that the statement will have a significant impact on
its disclosures.
RECLASSIFICATIONS. Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform with the current year
presentation.
NOTE 3
Issuance of Subsidiary Stock
- ----------------------------
On July 2, 1997, an initial public offering (IPO) of approximately 4.9 million
shares of common stock at a price of $20 per share of JLK Direct Distribution
Inc. (JLK), a newly formed subsidiary of the company, was consummated. JLK
operates the industrial supply operations consisting of the company's wholly
owned J&L Industrial Supply (J&L) subsidiary and its Full Service Supply
programs. The net proceeds from the offering were approximately $90 million
and represented approximately 20 percent of JLK's common stock. The net
proceeds were used by JLK to repay $20 million of indebtedness related to a
dividend to the company and $20 million related to intercompany obligations to
the company. The company used these proceeds to repay short-term debt. In
connection with the IPO, the remaining net proceeds were loaned to the
company, under an intercompany debt/investment and cash management agreement
at a fluctuating rate of interest equal to the company's short-term borrowing
costs. The company will maintain unused lines of credit to enable it to repay
any portion of the borrowed funds as the amounts are due on demand by JLK.
The company today owns approximately 80 percent of the outstanding common
stock of JLK and intends to retain a majority of both the economic and voting
interests of JLK.
NOTE 4
Inventories
- -----------
Inventories consisted of the following:
(in thousands) 1997 1996
- -------------- -------- --------
Finished goods $183,961 $169,108
Work in process and powder blends 50,351 59,326
Raw materials and supplies 16,494 16,514
-------- --------
Inventories at current cost 250,806 244,948
Less LIFO valuation (40,695) (40,014)
-------- --------
Total inventories $210,111 $204,934
======== ========
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 56 and 55 percent of total inventories at June 30, 1997 and
1996, respectively. 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) 1997 1996
- -------------- ------- -------
Federal and state income taxes $17,563 $16,898
Accrued compensation 8,522 7,259
Accrued benefits 6,894 3,613
Payroll, state and local taxes 6,098 7,910
Accrued product warranty costs 4,621 5,119
Accrued advertising expenses 1,363 906
Accrued professional fees 1,284 1,013
Accrued interest expense 766 996
Accrued restructuring charge -- 2,666
Other accrued expenses 22,374 13,450
------- -------
Total other current liabilities $69,485 $59,830
======= =======
(PAGE 32)
NOTE 6
Term Debt and Capital Leases
- ----------------------------
Term debt and capital lease obligations consisted of the following:
(in thousands) 1997 1996
- -------------- -------- --------
Senior notes, 9.64%, due in installments
through 2000 $ 30,000 $ 40,000
Borrowings outside the U.S., varying from
6.60% to 10.25% in 1997 and 1996,
due in installments through 2003 6,750 13,472
Lease of office facilities with terms
expiring through 2011 at 6.75% to 7.55% 11,068 12,654
Other 6,480 7,476
-------- --------
Total term debt and capital leases 54,298 73,602
-------- --------
Less current maturities:
Term debt (12,287) (16,016)
Capital leases (1,566) (1,527)
-------- --------
Total current maturities (13,853) (17,543)
-------- --------
Long-term debt and capital leases $ 40,445 $ 56,059
======== ========
Future principal maturities of term debt are $12.3 million, $12.2 million,
$12.1 million, $1.1 million and $1.1 million, respectively, in fiscal years
1998 through 2002.
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:
1998 $ 1,566
1999 1,511
2000 1,355
2001 1,355
2002 1,355
After 2002 8,770
-------
Total future minimum lease payments 15,912
Less amount representing interest (4,844)
-------
Present value of minimum lease payments $11,068
=======
Future minimum lease payments under operating leases with noncancelable terms
beyond one year were not significant at June 30, 1997.
NOTE 7
Notes Payable and Lines of Credit
- ---------------------------------
Notes payable to banks of $120.2 million and $57.5 million at June 30, 1997
and 1996, respectively, represent short-term borrowings under U.S. and
international credit lines with commercial banks. These credit lines totaled
approximately $280 million at June 30, 1997, of which $160 million was unused.
The weighted average interest rate for short-term borrowings was 6.3 percent
and 5.6 percent at June 30, 1997 and 1996, respectively.
The company has available U.S. credit lines totaling $175 million that are
covered by a revolving credit agreement that amounts to $150 million and
another agreement totaling $25 million. The revolving credit agreement allows
the company to borrow up to $150 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.
During 1997, the company's J&L subsidiary obtained a $25 million line of
credit with a bank and borrowed $20 million under the line of credit to fund a
dividend to the company. Interest payable under the line of credit was based
on LIBOR plus 25 basis points. The company guaranteed repayment of the line of
credit in the event of default by J&L. The line of credit was repaid and
canceled in full during July 1997.
NOTE 8
Income Taxes
- ------------
Income before income taxes and the provision for income taxes consisted of the
following:
(in thousands) 1997 1996 1995
- -------------- -------- -------- --------
Income before income taxes:
United States $ 95,029 $ 76,020 $ 83,401
International 21,903 37,612 29,893
-------- -------- --------
Total income before income taxes $116,932 $113,632 $113,294
======== ======== ========
Current income taxes:
Federal $ 30,600 $ 28,100 $ 26,500
State 6,000 5,500 6,100
International 4,400 1,800 4,000
-------- -------- --------
Total 41,000 35,400 36,600
Deferred income taxes 3,900 8,500 8,400
-------- -------- --------
Provision for income taxes $ 44,900 $ 43,900 $ 45,000
======== ======== ========
Effective tax rate 38.4% 38.6% 39.7%
======== ======== ========
(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) 1997 1996 1995
- -------------- ------- ------- -------
Income taxes at U.S. statutory rate $40,926 $39,772 $39,653
State income taxes, net of federal
tax benefits 3,917 3,575 3,981
Combined tax effects of
international income (1,990) (2,942) 1,288
International losses with no
related tax benefits 102 421 219
Other 1,945 3,074 (141)
------- ------- -------
Provision for income taxes $44,900 $43,900 $45,000
======= ======= =======
Deferred tax assets and liabilities consisted of the following:
(in thousands) 1997 1996
- -------------- -------- --------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 27,160 $ 35,985
Other postretirement benefits 15,153 14,649
Inventory valuation and reserves 7,981 6,836
Accrued vacation compensation 4,316 3,965
Property and equipment 1,259 2,547
Other accruals 7,436 6,571
Pension benefits (2,133) (1,053)
Accumulated depreciation (18,922) (19,558)
-------- --------
Total 42,250 49,942
Less valuation allowance (3,614) (4,176)
-------- --------
Net deferred tax assets $ 38,636 $ 45,766
======== ========
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, 1997.
Included in deferred tax assets at June 30, 1997, are unrealized tax benefits
totaling $27.2 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 $23.6 million
relates to net operating loss carryforwards in Germany, which can be carried
forward indefinitely. The company's operations in Germany are 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
$3.6 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) 1997 1996 1995
- -------------- -------- -------- --------
Service cost $ 7,728 $ 6,722 $ 5,906
Interest cost 14,569 13,688 13,016
Return on plan assets (46,845) (45,888) (37,746)
Net amortization and deferral 22,457 24,682 17,628
-------- -------- --------
Net pension credit $ (2,091) $ (796) $ (1,196)
======== ======== ========
The funded status of the plans and amounts recognized in the consolidated
balance sheets were as follows:
(in thousands) 1997 1996
- -------------- -------- --------
Plan assets, at fair value $318,229 $269,380
-------- --------
Present value of accumulated benefit
obligations:
Vested benefits 161,160 151,209
Nonvested benefits 2,271 2,144
-------- --------
Accumulated benefit obligations 163,431 153,353
Effect of future salary increases 48,054 44,369
-------- --------
Projected benefit obligations 211,485 197,722
-------- --------
Plan assets in excess of projected benefit
obligations 106,744 71,658
Amounts not recognized in the financial
statements:
Unrecognized net assets from July 1, 1986 (12,329) (14,509)
Unrecognized prior service costs 672 826
Unrecognized net gains (87,118) (52,312)
-------- --------
Prepaid pension costs $ 7,969 $ 5,663
======== ========
Prepaid pension costs are included in other noncurrent assets.
Plan assets consist principally of common stocks, corporate bonds and U.S.
government securities. The significant actuarial assumptions used to determine
the present value of pension benefit obligations were as follows:
1997 1996
----- -----
Discount rate 7.50% 7.50%
Rate of future salary increases 4.50% 4.50%
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) 1997 1996 1995
- -------------- ------ ------ ------
Service cost $ 877 $ 735 $ 231
Interest cost 1,480 1,573 967
Return on plan assets (709) (661) --
Net amortization and deferral (45) (45) --
------ ------ ------
Net pension cost $1,603 $1,602 $1,198
====== ====== ======
(PAGE 34)
The return on plan assets and the net amortization and deferral in 1995 were
not significant.
The funded status of the international plans and amounts recognized in the
consolidated balance sheets were as follows:
(in thousands) June 30, 1997 June 30, 1996
- -------------- ------------------- ------------------
Assets ABO Assets ABO
Exceed Exceed Exceed Exceed
ABO Assets ABO Assets
------- -------- ------ --------
Plan assets, at fair value $ 9,417 $ -- $8,274 $ --
------- -------- ------ --------
Present value of accumulated
benefit obligations (ABO):
Vested benefits 5,643 11,863 5,602 10,922
Nonvested benefits 13 1,465 13 2,618
------- -------- ------ --------
Accumulated benefit obligations 5,656 13,328 5,615 13,540
Effect of future salary increases 1,393 210 1,383 584
------- -------- ------ --------
Projected benefit obligations 7,049 13,538 6,998 14,124
Plan assets greater (less) than
projected benefit obligations 2,368 (13,538) 1,276 (14,124)
Amounts not recognized in the
financial statements:
Unrecognized net assets (850) -- (905) --
Unrecognized net gains (1,550) -- (413) --
------- -------- ------ --------
Net pension liability $ (32) $(13,538) $ (42) $(14,124)
======= ======== ====== ========
Accrued pension costs are included in other noncurrent liabilities. Plan
assets consist principally of common stocks, corporate bonds and government
securities.
The significant actuarial assumptions used to determine the present value of
pension benefit obligations for international plans were as follows:
1997 1996
----------- -----------
Discount rate 8.00%-7.00% 8.00%-7.50%
Rate of future salary increases 5.50%-4.00% 5.50%-4.50%
Rate of return on plan assets 9.00% 9.00%
=========== ===========
Total pension cost for U.S. and international plans amounted to $0.6 million,
$2.1 million and $0.8 million in 1997, 1996 and 1995, 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 also are 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.
The components of other postretirement benefit costs for the company's U.S.
plans were as follows:
(in thousands) 1997 1996 1995
- -------------- ------ ------ ------
Service cost $1,220 $1,100 $ 959
Interest cost 2,427 2,661 2,626
Net amortization and deferral (70) -- (32)
------ ------ ------
Other postretirement benefit costs $3,577 $3,761 $3,553
====== ====== ======
Accumulated postretirement benefit obligations and amounts recognized in the
consolidated balance sheets were as follows:
(in thousands) 1997 1996
- -------------- ------- -------
Present value of accumulated benefit obligations:
Retirees $17,446 $21,333
Fully eligible active participants 2,742 6,862
Other active participants 14,392 9,321
------- -------
Accumulated benefit obligations 34,580 37,516
Plan assets, at fair value -- --
------- -------
Accumulated benefit obligations
in excess of plan assets 34,580 37,516
Unrecognized net gains 4,340 626
------- -------
Accrued postretirement benefits $38,920 $38,142
======= ========
Included in other noncurrent liabilities were accrued postretirement benefits
of $36.0 million and $35.1 million at June 30, 1997 and 1996, respectively.
The significant actuarial assumptions used to determine the present value of
accumulated postretirement benefit obligations were as follows:
1997 1996
----- -----
Discount rate 7.50% 7.50%
Rate of increase in health care costs:
Initial rate 8.00% 8.50%
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 $0.1 million in 1997 and the accumulated
benefit obligation by $1.0 million at June 30, 1997.
The company provides for postemployment benefits pursuant to SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The company accrues the
cost of separation and other benefits provided to former or inactive employees
after employment but before retirement. Postemployment benefit costs were not
significant in 1997, 1996 and 1995, respectively.
(PAGE 35)
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 is constructing
a new world headquarters at an estimated cost of $20 million. The relocation
was made to globalize key functions and to provide a more efficient corporate
structure. The action affected approximately 300 employees in Raleigh, N.C.,
all of whom were 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 were not included in the one-time charge and will be included in
operating expenses as incurred. The costs related to these items were
estimated to be approximately $9 million pretax, $4.7 million that was
recorded in fiscal 1997 and the remainder that will be incurred in fiscal
1998.
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. The restructuring was substantially
complete in 1997.
NOTE 12
Financial Instruments
- ---------------------
FAIR VALUE. The company had $21.9 million in cash and equivalents at June 30,
1997, which approximates fair value because of the short maturity of these
investments.
The estimated fair value of term debt was $44.9 million at June 30, 1997. 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 forward foreign exchange 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, 1997.
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, 1997, the company had no significant
concentrations of credit risk.
NOTE 13
Stock Options
- -------------
Under stock option plans approved by shareholders in 1996, 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, no options may be granted under the 1992 plan
after October 2002 and no options may be granted under the 1996 plan after
October 2006. 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 $0.5 million (11,684
shares), $0.9 million (22,740 shares) and $0.4 million (13,728 shares) were
delivered in 1997, 1996 and 1995, respectively.
Under the 1996, 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 1997, 1996 and 1995.
The company adopted the disclosure requirements of SFAS No. 123 effective with
the 1997 consolidated financial statements, but elected to continue to measure
compensation expense in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation expense for stock options has been recognized in the accompanying
consolidated financial statements. If compensation expense had been determined
based on the estimated fair value of options granted in 1997 and 1996,
consistent with the methodology in SFAS No. 123, the effect on the company's
1997 and 1996 net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
(in thousands) 1997 1996
- -------------- ------- -------
Net income:
As reported $72,032 $69,732
Pro forma 70,140 65,610
Earnings per share:
As reported $ 2.71 $ 2.62
Pro forma 2.64 2.46
======= =======
The fair values of the options granted were estimated on the date of their
grant using the Black-Scholes option-pricing model based on the following
weighted average assumptions:
1997 1996
----- -----
Risk-free interest rate 6.64% 6.28%
Expected life (years) 5 5
Expected volatility 27.9% 30.2%
Expected dividend yield 2.0% 1.9%
===== =====
(PAGE 36)
NOTE 13 (CONTINUED)
<TABLE>
<CAPTION>
Stock option activity for 1997, 1996 and 1995 is set forth below:
1997 1996 1995
---------------------------- --------------------------- ---------------------------
Weighted Average Weighted Average Weighted Average
Number of Shares Options Exercise Price Options Exercise Price Options Exercise Price
- ---------------- --------- ---------------- -------- ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 994,244 $30.41 521,148 $20.55 475,650 $20.53
Granted 327,000 31.42 580,500 36.86 204,950 24.75
Exercised (116,877) 22.65 (105,904) 17.16 (157,452) 16.94
Lapsed and forfeited (35,000) 36.45 (1,500) 37.06 (2,000) 16.94
--------- ------ -------- ------ -------- ------
Options outstanding, end of year 1,169,367 $30.85 994,244 $30.41 521,148 $20.55
--------- ------ -------- ------ -------- ------
Options exercisable, end of year 1,132,111 $31.16 960,970 $30.88 281,482 $24.75
--------- ------ -------- ------ -------- ------
Weighted average fair value of
options granted during the year $ 9.48 $11.56 N/A
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Stock options outstanding at June 30, 1997:
Options Outstanding Options Exercisable
- ---------------------------------------------------------- ---------------------------------------------------
Weighted
Range of Average Remaining Weighted Average Weighted Average
Exercise Prices Options Contractual Life (years) Exercise Price Options Exercise Price
- --------------- --------- ------------------------ ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$14.06-$16.34 6,463 1.94 $15.73 6,463 $15.73
16.94 102,000 2.59 16.94 74,744 16.94
20.53 100,000 6.35 20.53 100,000 20.53
24.75 163,904 7.15 24.75 163,904 24.75
30.81 260,000 9.08 30.81 250,000 30.81
31.06 20,000 8.33 31.06 20,000 31.06
34.06 61,000 9.33 34.06 61,000 34.06
37.06 456,000 8.08 37.06 456,000 37.06
--------- ---- ------ --------- ------
1,169,367 7.62 $30.85 1,132,111 $31.16
========= ==== ====== ========= ======
</TABLE>
(PAGE 37)
NOTE 14
Environmental Matters
- ---------------------
The company has been involved in various environmental cleanup and remediation
activities at several of its manufacturing facilities. In addition, the
company has been named as a potentially responsible party at four Superfund
sites in the United States. However, it is management's opinion, based on its
evaluations and discussions with outside counsel and independent consultants,
that the ultimate resolution of these environmental matters will not have a
material adverse effect on the results of operations, 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 15
Shareholder Rights Plan
- -----------------------
Pursuant to the company's Shareholder Rights Plan, one-half of a right is
associated with each share of capital stock. Each right entitles a shareholder
to buy 1/100th of a share of a new series of preferred stock at a price of
$105 (subject to adjustment).
The rights will be exercisable only if a person or group of persons acquires
or intends to make a tender offer for 20 percent or more of the company's
capital stock. If any person acquires 20 percent of the capital stock, each
right will entitle the shareholder to receive that number of shares of capital
stock having a market value of two times the exercise price. If the company is
acquired in a merger or other business combination, each right will entitle
the shareholder to purchase at the exercise price that number of shares of the
acquiring company having a market value of two times the exercise price. The
rights will expire on November 2, 2000, and are subject to redemption by the
company at $0.01 per right.
NOTE 16
Acquisitions
- ------------
During fiscal 1997, the company acquired five companies with annual sales
totaling approximately $16 million for a total consideration of approximately
$19 million. The acquisitions were accounted for using the purchase method of
accounting. The consolidated financial statements include the operating
results of each business from the date of acquisition. Pro forma results of
operations have not been presented because the effects of these acquisitions
were not significant.
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) 1997 1996 1995
- -------------- ---------- ---------- ----------
Sales:
United States $ 867,321 $ 784,295 $ 726,977
Europe 306,065 328,732 311,178
Other international 125,856 114,432 91,269
---------- ---------- ----------
Total 1,299,242 1,227,459 1,129,424
---------- ---------- ----------
Intersegment transfers:
United States 100,000 97,343 92,939
Europe 33,629 38,452 41,252
Other international 9,270 11,701 11,360
---------- ---------- ----------
Total 142,899 147,496 145,551
---------- ---------- ----------
Net sales $1,156,343 $1,079,963 $ 983,873
========== ========== ==========
Operating income:
United States $ 90,421 $ 79,517 $ 95,228
Europe 18,876 27,614 22,977
Other international 15,949 15,247 13,792
Eliminations 1,779 (527) (5,024)
---------- ---------- ----------
Total operating income 127,025 121,851 126,973
---------- ---------- ----------
Interest expense (10,393) (11,296) (12,793)
Other income (expense) 300 3,077 (886)
---------- ---------- ----------
Income before income taxes $ 116,932 $ 113,632 $ 113,294
========== ========== ==========
Identifiable assets:
United States $ 560,631 $ 495,452 $ 462,812
Europe 210,711 239,594 284,378
Other international 79,477 83,130 64,233
Eliminations (10,390) (37,884) (43,419)
Corporate 28,880 19,199 13,605
---------- ---------- ----------
Total assets $ 869,309 $ 799,491 $ 781,609
========== ========== ==========
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
$15.1 million, $21.4 million and $27.4 million in 1997, 1996 and 1995,
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 1997:
Net sales $275,203 $273,435 $295,365 $312,340
Gross profit 114,710 113,346 126,566 133,306
Net income 15,203 14,567 19,928 22,334
Earnings per share 0.57 0.54 0.75 0.85
Fiscal 1996:
Net sales $254,903 $259,174 $286,095 $ 79,791
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
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 8, 1997, was 2,857.
Stock price ranges and dividends declared and paid were as follows:
Quarter Ended
-------------------------------------------
Sep. 30 Dec. 31 Mar. 31 Jun. 30
------- ------- ------- -------
FISCAL 1997:
High $34 3/8 $39 $43 1/8 $44 1/8
Low 28 7/8 32 3/4 34 7/8 33 1/8
Dividends 0.15 0.17 0.17 0.17
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
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 that is distributed to all employees.
/s/ ROBERT L. MCGEEHAN
- ------------------------------------------
Robert L. McGeehan
President and Chief Executive Officer
Shareholder
/s/ RICHARD J. ORWIG
- ------------------------------------------
Richard J. Orwig
Vice President
Chief Financial and Administrative Officer
Shareholder
(PAGE 39)
REPORT OF AUDIT COMMITTEE
To the Shareholders of Kennametal Inc.
- --------------------------------------
The Audit Committee of the Board of Directors, composed of three independent
directors, met four times during fiscal year 1997.
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
Shareholder
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, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1997. 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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
- ------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 21, 1997
<PAGE> (PAGE 40)
<TABLE>
<CAPTION>
TEN-YEAR FINANCIAL HIGHLIGHTS
10-YR
(dollars in thousands, except per share data) Notes CAGR 1997 1996 1995
----- ----- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales 12.6% $1,156,343 $1,079,963 $983,873
Cost of goods sold 12.5 668,415 625,473 560,867
Research and development expenses 8.9 24,105 20,585 18,744
Selling, marketing and distribution
expenses 13.8 263,980 242,375 219,271
General and administrative expenses 8.9 69,911 65,417 55,853
Interest expense 3.7 10,393 11,296 12,793
Unusual or nonrecurring items (1) n.m. -- 2,666 --
Income taxes 12.0 44,900 43,900 45,000
Accounting changes, net of tax (2) n.m. -- -- --
Net income (loss) (3) 15.4 72,032 69,732 68,294
FINANCIAL POSITION
Net working capital 5.6% $ 175,877 $ 217,651 $184,072
Inventories 8.6 210,111 204,934 200,680
Property, plant and equipment, net 7.9 300,386 267,107 260,342
Total assets 10.3 869,309 799,491 781,609
Long-term debt, including capital
leases (5.6) 40,445 56,059 78,700
Total debt, including capital leases 6.5 174,464 131,151 149,730
Total shareholders' equity (4) 10.7 459,608 438,949 391,885
PER SHARE DATA
Earnings (loss) (3) 12.3% $ 2.71 $ 2.62 $ 2.58
Dividends 3.1 0.66 0.60 0.60
Book value (at year-end) 8.0 17.61 16.44 14.75
Market price (at year-end) 10.8 43.00 34.00 34.50
OTHER DATA
Capital expenditures 8.0% $ 73,779 $ 57,556 $ 43,371
Number of employees (at year-end) 4.7 7,550 7,260 7,030
Average sales per employee 7.8 $ 159 $ 152 $ 146
Average shares outstanding
(in thousands) (4) 2.7 26,575 26,635 26,486
KEY RATIOS
Sales growth 7.1% 9.8% 22.6%
Gross profit margin 42.2 42.1 43.0
Operating profit margin 11.2 11.7 13.1
Return on sales (3) 6.2 6.5 6.9
Return on equity (3) 15.8 17.0 19.3
Total debt to capital 27.5 23.0 27.6
Dividend payout (5) 25.0 35.8 53.9
Inventory turnover 3.2x 3.0x 3.1x
<FN>
n.m.--Not meaningful CAGR--Compound annual growth rate
NOTES
1. Unusual charges (credits) reflect restructuring costs 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 in 1996, net income was $71,369; earnings per share were $2.68;
return on sales was 6.6 percent; and return on equity was 17.4 percent. 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.
</FN>
</TABLE>
(PAGE 41)
<TABLE>
<CAPTION>
[TEN-YEAR FINANCIAL HIGHLIGHTS CONTINUED]
(dollars in thousands, except per share data) 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $802,513 $598,496 $594,533 $617,833 $589,023 $472,200 $419,900
Cost of goods sold 472,533 352,773 362,967 358,529 342,434 274,929 244,026
Research and development expenses 15,201 14,714 13,656 14,750 13,325 11,969 9,757
Selling, marketing and distribution
expenses 189,487 144,850 137,494 136,319 123,286 94,934 84,820
General and administrative expenses 58,612 41,348 45,842 49,219 42,648 31,443 29,497
Interest expense 13,811 9,549 10,083 11,832 10,538 8,960 8,601
Unusual or nonrecurring items 24,749 (1,738) -- 6,350 -- -- --
Income taxes 15,500 14,000 8,100 17,300 23,000 20,900 19,100
Accounting changes, net of tax 15,003 -- -- -- -- -- --
Net income (loss) (4,088) 20,094 12,872 21,086 32,113 29,994 24,319
FINANCIAL POSITION
Net working capital $130,777 $120,877 $108,104 $ 88,431 $108,954 $ 91,032 $ 99,565
Inventories 158,179 115,230 118,248 119,767 114,593 105,033 96,473
Property, plant and equipment, net 243,098 192,305 200,502 193,830 175,523 166,390 161,788
Total assets 697,532 448,263 472,167 476,194 451,379 383,252 359,258
Long-term debt, including capital
leases 90,178 87,891 95,271 73,113 81,314 57,127 74,405
Total debt, including capital leases 147,295 110,628 127,954 130,710 116,212 95,860 103,982
Total shareholders' equity 322,836 255,141 251,511 243,535 231,598 204,465 186,238
PER SHARE DATA
Earnings (loss) $ (0.17) $ 0.93 $ 0.60 $ 1.00 $ 1.54 $ 1.45 $ 1.19
Dividends 0.58 0.58 0.58 0.58 0.58 0.56 0.52
Book value (at year-end) 12.25 11.64 11.64 11.42 11.02 9.84 9.04
Market price (at year-end) 24.63 16.75 17.13 17.81 17.25 15.88 18.38
OTHER DATA
Capital expenditures $ 27,313 $ 23,099 $ 36,555 $ 55,323 $ 35,998 $ 28,491 $ 46,336
Number of employees (at year-end) 6,600 4,850 4,980 5,360 5,580 5,420 4,990
Average sales per employee $ 125 $ 122 $ 116 $ 113 $ 107 $ 94 $ 85
Average shares outstanding
(in thousands) 24,304 21,712 21,452 21,094 20,872 20,696 20,526
KEY RATIOS
Sales growth 34.1% 0.7% (3.8)% 4.9% 24.7% 12.5% 18.5%
Gross profit margin 41.1 41.1 38.9 42.0 41.9 41.8 41.9
Operating profit margin 8.3 7.5 5.8 9.6 11.4 12.5 12.3
Return on sales n.m. 3.4 2.2 3.4 5.5 6.4 5.8
Return on equity n.m. 8.1 5.2 8.7 14.9 15.4 13.9
Total debt to capital 31.3 30.2 33.7 34.9 33.4 31.9 35.8
Dividend payout 127.9 68.8 55.4 43.6 41.6 48.1 75.4
Inventory turnover 3.1x 3.1x 3.0x 3.0x 3.1x 2.9x 2.4x
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL SUBSIDIARIES
Jurisdiction in Which
Name of Subsidiary Organized or Incorporated
<S> <C>
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 Limited England
Kennametal Hertel AG Germany
Kennametal Hardpoint H.K. Ltd. Hong Kong
Kobe Kennametal K.K. Japan
Kennametal Hertel (Malaysia) Sdn. Bhd. Malaysia
Kennametal de Mexico, S.A. de C.V. Mexico
Kennametal/Becker-Warkop Ltd. Poland
Kennametal Hertel (Singapore) Pte. Ltd. Singapore
Kennametal South Africa (Proprietary) Limited South Africa
Kennametal Hardpoint (Taiwan) Inc. Taiwan
Kennametal Hertel Co., Ltd. Thailand
Circle Machine Company California, United States
Kennametal Hardpoint, Inc. Delaware, United States
Adaptive Technologies Corp. Michigan, United States
JLK Direct Distribution Inc. Pennsylvania, United States
CONSOLIDATED SUBSIDIARIES OF KENNAMETAL HERTEL AG
Kennametal Hertel Belgium S.A. Belgium
Kennametal Hertel France S.A. France
Materiels de Precision et de Production S.A. France
Kennametal Hertel G.m.b.H. Germany
Kennametal Hertel Nederland B.V. Netherlands
Nederlandse Hardmetaal Fabrieken B.V. Netherlands
CONSOLIDATED SUBSIDIARIES OF JLK DIRECT DISTRIBUTION INC.
J&L America, Inc. Michigan, United States
CONSOLIDATED SUBSIDIARIES OF J&L AMERICA, INC.
Mill & Abrasive Supply, Inc. Michigan, United States
Strelinger Company Michigan, United States
</TABLE>
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, Form S-8, Registration No. 33-65023, Form S-8, Registration No. 333-
18423, Form S-8, Registration No. 333-18429, and Form S-8, Registration No.
333-18437, 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), Performance Bonus Stock Plan of 1995,
Kennametal Thrift Plan, Kennametal Inc. Stock Option and Incentive Plan of
1992 (as amended), and the Kennametal Inc. Stock Option and Incentive Plan of
1996. It should be noted that we have not audited any financial statements of
the Company subsequent to June 30, 1997 or performed any audit procedures
subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
----------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
September 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ARTICLE 5 FINANCIAL DATA SCHEDULE FOR 10-K
This schedule contains summary financial information extracted from the
June 30, 1997 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-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> JUN-30-1997
<CASH> 21,869
<SECURITIES> 0
<RECEIVABLES> 207,840
<ALLOWANCES> 7,325
<INVENTORY> 210,111
<CURRENT-ASSETS> 457,879
<PP&E> 630,142
<DEPRECIATION> 329,756
<TOTAL-ASSETS> 869,309
<CURRENT-LIABILITIES> 282,002
<BONDS> 0
0
0
<COMMON> 36,712
<OTHER-SE> 422,896
<TOTAL-LIABILITY-AND-EQUITY> 869,309
<SALES> 1,156,343
<TOTAL-REVENUES> 1,156,343
<CGS> 668,415
<TOTAL-COSTS> 668,415
<OTHER-EXPENSES> 27,012
<LOSS-PROVISION> 1,979
<INTEREST-EXPENSE> 10,393
<INCOME-PRETAX> 116,932
<INCOME-TAX> 44,900
<INCOME-CONTINUING> 72,032
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,032
<EPS-PRIMARY> 2.71
<EPS-DILUTED> 0
</TABLE>
