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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
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.)
WORLD HEADQUARTERS
1600 TECHNOLOGY WAY
P. O. BOX 231
LATROBE, PENNSYLVANIA 15650-0231
(Address of principal executive offices)
Registrant's telephone number, including area code: 724-539-5000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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Capital Stock, par value $1.25 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of August 31, 1998, 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 $622,900,000. For purposes of the
foregoing calculation only, all directors and executive officers of the
registrant and each person who may be deemed to own beneficially more than 5% of
the registrant's Capital Stock have been deemed affiliates.
As of August 31, 1998, there were 29,872,372 shares of Capital Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Shareholders are incorporated by reference
into Parts I, II and IV.
Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders are
incorporated by reference into Parts III and IV.
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TABLE OF CONTENTS
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Item No. Page
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PART I
1. Business...................................................................................... 1
2. Properties.................................................................................... 8
3. Legal Proceedings............................................................................. 9
4. Submission of Matters to a Vote of Security Holders........................................... 9
Officers of the Registrant.................................................................... 10
PART II
5. Market for the Registrant's Capital Stock and Related Stockholder
Matters....................................................................................... 13
6. Selected Financial Data....................................................................... 13
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................... 13
7A. Qualitative and Quantitative Disclosures About Market Risk.................................... 13
8. Financial Statements and Supplementary Data................................................... 13
9. Changes in and Disagreements on Accounting and Financial Disclosure........................... 13
PART III
10. Directors and Executive Officers of the Registrant............................................ 14
11. Executive Compensation........................................................................ 14
12. Security Ownership of Certain Beneficial Owners and Management................................ 14
13. Certain Relationships and Related Transactions................................................ 14
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 15
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PART I
ITEM 1. BUSINESS
Overview
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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, high-speed
steel and other hard materials. The company manufactures a complete line of
toolholders, toolholding systems and rotary cutting tools 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.
During fiscal 1998, the company expanded its metalworking focus by acquiring
Greenfield Industries, Inc. ("Greenfield"), a leading worldwide manufacturer of
consumable cutting tools and related products used in a variety of industrial,
electronics, energy and construction, engineered and consumer markets.
Greenfield manufactures a complete line of high-speed steel and tungsten carbide
products, including industrial drill bits, taps and dies and fixed limit gages,
energy and construction products used in oil and gas drilling, mining and
highway resurfacing, carbide drills, endmills and routers used to make printed
circuit boards for the electronics industry, and "made-to-order" tungsten
carbide parts for demanding wear applications such as plastics processing, tool
and die manufacturing and petroleum flow control. The company also manufactures
cutting tools, drill bits, saw blades and other tools for builders, contractors,
mechanics and "do-it-yourselfers."
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, and the effect of third party or company failures to achieve timely
remediation of year 2000 issues, change from the company's expectations. The
company undertakes no obligation to publicly release any revisions to
forward-looking statements to reflect events or circumstances occurring after
the date hereof.
Business Segment and Markets
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The company operates predominantly as a tooling supplier specializing in powder
metallurgy, which represents a single business segment. The company expended its
metalworking focus with the acquisition of Greenfield in November 1997. 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 29 of the 1998
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 49 of the 1998 Annual Report to Shareholders, and such
information is incorporated herein by reference.
Metalworking Markets
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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.
Metalcutting operations include turning, boring, threading, grooving, milling
and drilling.
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A Kennametal tooling system consists of a steel toolholder and an indexable
cutting tool such as an insert or a drill made from cemented carbides, ceramics,
cermets, high-speed steel and other hard materials. 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 or drill contacts the workpiece and cuts or shapes the
workpiece. The cutting tool insert or drill is consumed during use and must be
replaced periodically.
The company markets metalcutting tools to manufacturing companies in a wide
range of industries throughout the world and believes it is the largest North
American and the second largest global provider of consumable metalcutting tools
and supplies. The company also manufactures cutting tools, drill bits, saw
blades and other tools for the consumer market which are marketed under private
label and other proprietary brands.
The company is also a leading manufacturer of carbide products used in
engineered product applications. The company also makes industrial
wear-resistant parts for use in abrasive environments and specialty applications
such as plastics processing, tool and die manufacturing and petroleum flow
control.
Industrial Supply Market
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Through its subsidiary, JLK Direct Distribution Inc. ("JLK"), Kennametal
distributes a broad range of metalworking consumables and related products to
customers in the United States, offering a full line of cutting tools, carbide
and other tool inserts, abrasives, drills, machine tool accessories, hand tools
and other industrial supplies. JLK also conducts its direct-marketing program
for small and medium-sized customers in the United Kingdom and Germany. The
majority of industrial supplies distributed by JLK are purchased from other
manufacturers, although the industrial supply product offering does include
Kennametal-manufactured items. To meet the varying supply needs of small-,
medium- and large-sized customers, JLK offers: (i) a direct-marketing program,
whereby JLK supplies predominately small and medium-sized customers through
mail-order catalog, showroom sales, and a direct field sales force, and (ii)
integrated industrial supply programs or Full Service Supply programs, by which
large industrial manufacturers engage JLK to carry out all aspects of complex
metalworking supply processes, including needs assessment, cost analysis,
procurement planning, supplier selection, "just-in-time" restocking of supplies
and ongoing technical support.
Mining and Construction Market
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Mining and highway 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. The company believes that it is the largest independent
supplier of oil field compacts in the world. Compacts are the cutting edges of
oil well drilling bits, which are commonly referred to as "rock bits". Highway
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 highway 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.
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International Operations
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The company's principal international operations are conducted in Western
Europe, Canada, South Africa and Mexico. In addition, the company has joint
ventures in China, India, Poland and Russia, manufacturing and sales
subsidiaries in Israel and in the Asia Pacific region 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 29 of the 1998 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 40 of the 1998 Annual
Report to Shareholders, and such information is incorporated herein by
reference.
Marketing and Distribution
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The company's products are sold primarily through the following distinct sales
channels: a direct sales force, JLK's Full Service Supply programs, retail
showrooms and mail-order catalogs, and a network of independent distributors and
sales agents in the United States and certain international markets. The
company's manufactured products are sold to end users through a direct sales
force and a network of independent distributors. 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 JLK's Full Service Supply
programs, retail showrooms and mail-order catalogs.
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*, Fix-Perfect*, and Disston*. The company also
sells products to customers who resell such products under the customers' names
or private labels.
Raw Materials and Supplies
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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, high-speed steel
and other tool parts, rotary cutting tools and accessories. Products purchased
for resale are obtained from thousands of suppliers located in the United States
and abroad.
Research and Development
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The company is involved in research and development of new products and
processes. Research and development expenses totaled $20.4 million, $24.1
million and $20.6 million in 1998, 1997 and 1996, respectively. Additionally,
certain costs associated with improving
* Trademark owned by Kennametal Inc. or Kennametal Hertel AG
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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 and drills that incorporate innovative
tool geometries or compositions for improved chip control and productivity as
well as new mining and highway construction tools and toolholders. Some of these
new compositions include KC715M*, a general purpose steel milling grade insert,
KT315* a steel turning cermet grade, KC7310* insert for turning inconel,
titanium and cast iron, KC705M* for milling inconel, titanium and cast iron,
KC709M* for milling ductile iron, KC721M* for milling stainless steel and
aerospace materials, KC7115* for stainless steel drilling, KC7040* for carbon
steel drilling, MN insert geometry for steel machining, KSEM*, BF*, SEFAS*, and
TX* product lines for drilling deeper faster or combining drilling and
chamfering operations, milling cutters for aeroframe machining, and an improved
K3560* for mining with significantly improved thermal fatigue resistance.
Seasonality
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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
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The company's backlog of orders generally is not significant to its operations.
Approximately 90 percent of all orders are filled from stock, and the balance
generally is filled within short lead times.
Competition
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Kennametal is one of the world's leading producers of cemented carbide tools and
high-speed steel 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 elements 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.
Regulation
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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
* Trademark owned by Kennametal Inc. or Kennametal Hertel AG
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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 one Superfund site 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."
Stock Issuances
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On March 20, 1998, the company sold 3.45 million shares of common stock
resulting in net proceeds of $171.4 million. The proceeds were used to reduce a
portion of the company's long term debt incurred in connection with the
acquisition of Greenfield.
On July 2, 1997, an initial public offering of approximately 4.9 million shares
of common stock of JLK was consummated at a price of $20.00 per share. 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 $90.4 million and represented
approximately 20 percent of JLK's common stock. The net proceeds were used by
JLK to repay $20.0 million of indebtedness related to a dividend to the company
and $20.0 million related to intercompany obligations to the company incurred in
1997. The company used these proceeds to repay short term debt. JLK used the
remaining net proceeds of $50.4 million from the offering during 1998 to make
additional acquisitions. The company today owns approximately 83 percent of the
outstanding common stock of JLK and intends to retain a majority of both the
economic and voting interests of JLK.
Acquisitions
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In November 1997, the company completed the acquisition of Greenfield for $1.0
billion. The company acquired all of Greenfield's outstanding common stock for
$38.00 per share, including the assumption of outstanding debt and convertible
securities of $320.0 million. Greenfield is a manufacturer of consumable cutting
tools and related products used in a variety of industrial, electronics, energy
and construction, engineered and consumer markets. The acquisition of Greenfield
increased the company's market share in the high-speed rotary steel product
markets.
Additionally, the company also has made several other acquisitions in fiscal
1998 to expand its product offering and distribution channels. All acquisitions
were accounted for using the purchase method of accounting.
The company will continue to evaluate new opportunities that allow for the
expansion of existing product lines into new market areas, either directly or
indirectly through joint ventures, where appropriate.
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Employees
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The company employed approximately 14,400 persons at June 30, 1998, of which
10,200 were located in the United States and 4,200 in other parts of the world,
principally Europe and Asia Pacific. Approximately 2,200 employees were
represented by labor unions, of which 700 were hourly-rated employees located at
six plants in the United States. The remaining 1,500 employees represented by
labor unions were employed at eighteen plants located outside of the United
States. The company considers its labor relations to be generally good.
Corporate Directory
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The following is a summary of the company's consolidated subsidiaries and
affiliated companies as of June 30, 1998:
CONSOLIDATED SUBSIDIARIES (% OWNERSHIP)
Kennametal Australia Pty. Ltd., Australia
Kennametal Foreign Sales Corporation, Barbados
Kennametal Ltd., Canada
Presto Cutting Tools Canada Limited, 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 AG, Germany (96%)
Kennametal Hardpoint H.K. Ltd., Hong Kong (90%)
Kennametal Hertel Japan Ltd., Japan
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 (75%)
Adaptive Technologies Corp., United States
Circle Machine Company, United States
Greenfield Industries, Inc., United States
JLK Direct Distribution Inc., United States (83%)
CONSOLIDATED SUBSIDIARIES OF KENNAMETAL HERTEL AG
Kennametal Hertel Belgium S.A., Belgium
Kennametal Hertel Limited, England
Kennametal Hertel France S.A., France
Materiels de Precision et de Production S.A., France
Kennametal Hertel G.m.b.H., Germany
Rubig G.m.b.H., Germany
Kennametal Hertel Nederland B.V., Netherlands
Nederlandse Hardmetaal Fabrieken B.V., Netherlands
Kennametal Hertel Korea G.m.b.H. Korea Branch, South Korea (branch)
CONSOLIDATED SUBSIDIARIES OF JLK DIRECT DISTRIBUTION INC.
J&L America, Inc., United States
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CONSOLIDATED SUBSIDIARIES OF J&L AMERICA, INC.
J&L Industrial Supply UK, England (branch)
J&L Werkzeuge Und Industriebedarf G.m.b.H., Germany
Abrasive Tool Specialties Company, United States
ATS Industrial Supply Company, United States
Dalworth Tool & Supply Inc., United States
GRS Industrial Supply Co., United States
Production Tools Sales, Inc., United States
Strong Tool Co., United States
CONSOLIDATED SUBSIDIARIES OF GREENFIELD INDUSTRIES INC.
Greenfield Industries Foreign Sales Corporation, Barbados
Greenfield Industries, Inc., Canada
Cirbo Limited, England
Presto Engineers Cutting Tools Ltd., England
Hanita Metal Works G.m.b.H., Germany
Kemmer Hartmetallwerkzeuge G.m.b.H., Germany
Kemmer Prazision G.m.b.H., Germany
Hanita Metal Works, Ltd., Israel
Kemmer-Cirbo S.r.L., Italy
Cleveland Twist Drill de Mexico, S.A. de C.V., Mexico
Greenfield Tools de Mexico, S.A. de C.V., Mexico
Herramientas Cleveland, S.A. de C.V., Mexico
Cleveland Europe Limited, Scotland
Kemmer AG, Switzerland
Basset Rotary Tool Company, United States
Carbidie Corporation, United States
The Cleveland Twist Drill Company, United States
Hanita Cutting Tools, Inc., United States
Rogers Tool Works, Inc., United States
Remgrit Abrasive Tools, Inc., United States
Rule Cutting Tools, Inc., United States
Rule Paint and Chemical, Inc., United States
AFFILIATED COMPANIES (% OWNERSHIP)
Kennametal Hertel G. Beisteiner G.m.b.H., Austria (26%)
Birla Kennametal Ltd., India (44%)
Drillco Hertel Ltd., India (50%)
Kennametal Ca.Me.S., S.p.A., Italy (61%)
Kennametal Hertel S.p.A., Italy (52%)
Kemmer Japan, Japan (29%)
Wilke Carbide B.V., Netherlands (50%)
PIGMA-Kennametal Joint Venture, Russia (49%)
Carbidie Asia Pacific Pte. Ltd., Singapore (50%)
Kenci, S.A., Spain (20%)
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ITEM 2. PROPERTIES
Presented below is a summary of principal manufacturing facilities used by the
company and its majority-owned subsidiaries.
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Location Owned/Leased Principal Products
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United States:
Bentonville, Arkansas Owned Carbide Round Tools
Pine Bluff, Arkansas Owned High Speed Steel Drills
Rogers, Arkansas Owned Carbide Products
Monrovia, California Leased Boring Bars
Placentia, California Leased Wear Parts
Evans, Georgia Owned High Speed Steel Drills
Chicago, Illinois Leased Circuit Board Drills
Elk Grove Village, Illinois Leased Fixed Limited Gages
Rockford, Illinois Owned Indexable Tooling
Monticello, Indiana Owned Carbide Round Tools
Framingham, Massachusetts Leased Fixed Limited Gages
Greenfield, Massachusetts Owned High Speed Taps
South Deerfield, Massachusetts Leased Consumer Products
Traverse City, Michigan Owned Ceramic Wear Parts
Troy, Michigan Leased Metalworking Toolholders
Malden, Missouri Leased Carbide Round Tools
Fallon, Nevada Owned Metallurgical Powders
Asheboro, North Carolina Owned High Speed End Mills
Henderson, North Carolina Owned Metallurgical Powders
Roanoke Rapids, North Carolina Owned Metalworking Inserts
Orwell, Ohio Owned Metalworking Inserts
Solon, Ohio Owned Metalworking Toolholders
Solon, Ohio Owned High Speed Special Drills
Bedford, Pennsylvania Owned Mining and Construction
Tools and Wear Parts
Irwin, Pennsylvania Owned Carbide Wear Parts
Latrobe, Pennsylvania Owned Metallurgical Powders
and Wear Parts
Hendersonville, Tennessee Leased Fixed Limited Gages
Johnson City, Tennessee Owned Metalworking Inserts
Whitehouse, Tennessee Leased Fixed Limited Gages
Clemson, South Carolina Owned High Speed Steel Drills
Lyndonville, Vermont Leased High Speed Taps
Chilhowee, Virginia Owned Mining and Construction
Tools and Wear Parts
New Market, Virginia Owned Metalworking Toolholders
Janesville, Wisconsin Leased Circuit Board Drills
</TABLE>
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<TABLE>
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Location Owned/Leased Principal Products
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International:
Victoria, Canada Owned Wear Parts
Shanghai, China Owned Metalworking Inserts
Shanxi, China Owned Mining Tools
Xuzhou, China Owned Mining Tools
Blaydon, England Leased Mining Tools
Bodmin, England Owned Circuit Board Drills and
Routers
Crewe, England Leased Circuit Board Drill Repoint
Center
Kingswinford, England Leased Metalworking Toolholders
Sheffield, England Leased High Speed Steel Drills, Taps
and End Mills
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
Schwabisch Gmund, Germany Leased Circuit Board Drills
Vohenstrauss, Germany Owned Metalworking Carbide Drills
Pachuca, Mexico Owned High Speed Steel Drills
Arnhem, Netherlands Owned Wear Products
</TABLE>
The company also has a network of warehouses and customer service centers
located throughout North America, Western Europe, Asia and Australia, a
significant portion of which are leased. The majority of the company's research
and development efforts are conducted in a corporate technology center located
adjacent to world headquarters in Latrobe, Pennsylvania and in Furth, 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) There are no 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 1998, there were no matters submitted
to a vote of security holders through the solicitation of proxies or otherwise.
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OFFICERS OF THE REGISTRANT
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Name, Age, and Position Experience During Past Five Years (2)
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Robert L. McGeehan, 61 (1) President and Director since 1989. Chief
President Executive Officer since October 1, 1991.
Chief Executive Officer
Director
William R. Newlin, 57 (1) Chairman of the Board since October 28, 1996.
Chairman of the Board Director since 1982.
Bart A. Aitken, 39 Elected Vice President of Kennametal in 1998.
Vice President and Director, Vice President of Greenfield's Engineered
Engineered Products Group, Products Group since 1995, Director of
Greenfield Industries Manufacturing of Greenfield's Circuit Board
Vice President, Kennametal Inc. Drill Group since 1992.
David B. Arnold, 59 (1) Vice President since 1979. Chief Technical
Vice President Officer since 1988.
Chief Technical Officer
James R. Breisinger, 48 (1) Vice President since 1990. Named Chief
Vice President, Financial Officer in September 1998.
Chief Financial Officer Chief Operating Officer, Greenfield Industries
and Corporate Controller from March through September 1998. Renamed
Controller in 1994. Managing Director of
Europe from 1991 to 1994.
Controller from 1983 to 1991.
David T. Cofer, 53 (1) Vice President since 1986. Secretary and
Vice President General Counsel since 1982.
Secretary and General Counsel
Derwin R. Gilbreath, 50 Vice President since January 1997.
Chief Operating Officer, Elected Chief Operating Officer, Greenfield
Greenfield Industries Industries in September 1998. Director of
Vice President Global Manufacturing since 1995. Director of
Director of Global Manufacturing North America Metalworking Manufacturing
Kennametal Inc. from 1994 to 1995.
Richard C. Hendricks, 59 (1) Vice President since 1982. Director of
Vice President Corporate Business Development since 1992.
Director of Corporate Business
Development
Timothy D. Hudson, 52 Vice President since 1994. Director
Vice President of Human Resources since 1992. Corporate
Director of Human Resources Manager of Human Resources from 1978 to
1992.
</TABLE>
-10-
<PAGE> 13
<TABLE>
<CAPTION>
Name, Age, and Position Experience During Past Five Years (2)
- ----------------------- -------------------------------------
<S> <C>
Brian E. Kelly, 35 Elected Assistant Treasurer and named
Assistant Treasurer Director of Taxes in September 1998.
Director of Taxes Manager of Corporate Tax from 1996 to 1998.
Formerly, Tax Consultant with Westinghouse
Electric Corp. from 1995 to 1996. Formerly,
Senior Tax Analyst with E.I. Du Pont De
Nemours & Co. from 1987 to 1994.
H. Patrick Mahanes, Jr., 55 (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, 60 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, 47 Vice President since 1994. Treasurer
Vice President since 1987.
Treasurer
Wayne D. Moser, 45 Elected Vice President in 1998. Director of
Vice President Mining and Construction Division since 1997.
Director of Mining and Construction Chief Financial Officer of Kennametal Hertel
AG from 1993 to 1997.
Kevin G. Nowe, 46 Joined the company as Assistant General
Assistant Secretary Counsel in 1992 and was elected Assistant
Assistant General Counsel Secretary in 1993.
Richard J. Orwig, 57 (1) Named President and Chief Executive Officer
President and Chief Executive Officer, of JLK Direct Distribution Inc. in September
JLK Direct Distribution Inc. 1998. Elected a Vice President of Kennametal Inc.
in 1987 and was Chief Financial and Administrative
Officer of Kennametal Inc. from 1994 to 1998.
Director of Administration of Kennametal Inc.
from 1991 to 1994.
Ajita G. Rajendra, 46 Elected Vice President of Kennametal in 1998.
Vice President and Director, Vice President of Greenfield's Electronic
Industrial Products Group, Products Group since 1996. Previously in
Greenfield Industries various positions with Corning, Inc.
Vice President, Kennametal Inc.
P. Mark Schiller, 50 Vice President since 1992. Director of
Vice President Kennametal Distribution Services since
Director of Kennametal Distribution 1990.
Services
Lawrence L. Shrum, 57 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.
</TABLE>
-11-
<PAGE> 14
<TABLE>
<CAPTION>
Name, Age, and Position Experience During Past Five Years (2)
- ----------------------- -------------------------------------
<S> <C>
A. David Tilstone, 44 (1) Vice President since July 1997. Named
Vice President Director of Global Marketing in April 1997.
Director of Global Marketing Director of Asia Pacific Operations from 1995
to 1997. Manager of Business Development
from 1994 to 1995.
</TABLE>
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.
-12-
<PAGE> 15
PART II
The information required under Items 5 through 8 is included in the 1998 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 1998 Annual Report
-----------------------------------
<S> <C> <C>
ITEM 5. Market for the Registrant's Quarterly Financial Information
Capital Stock and Related (Unaudited) on page 50.
Stockholder Matters Stock Issuances on page 42.
ITEM 6. Selected Financial Data Ten-Year Financial Highlights
(information with respect to the years
1994 to 1998) on pages 52 and 53.
ITEM 7. Management's Discussion and Management's Discussion & Analysis
Analysis of Financial Condition on pages 29 to 34.
and Results of Operations
ITEM 7A. Quantitative and Qualitative Financial Instruments on page 47.
Disclosure About Market Risk
ITEM 8. Financial Statements and Item 14(a)1 herein and Quarterly
Supplementary Data Financial Information (Unaudited) on
page 50.
ITEM 9. Changes in and Disagreements Not applicable.
on Accounting and Financial
Disclosure
</TABLE>
-13-
<PAGE> 16
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, 1998 ("1998 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 1998 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 1998 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 1998 Proxy Statement.
-14-
<PAGE> 17
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, 1998 and 1997, the
consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended June 30, 1998,
and the notes to consolidated financial statements, together with the
report thereon of Arthur Andersen LLP dated July 21, 1998, presented
in the company's 1998 Annual Report to Shareholders, are incorporated
herein by reference.
2. Financial Statement Schedule
The financial statement schedule shown below should be read in
conjunction with the consolidated financial statements contained in
the 1998 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 96 percent interest, and JLK Direct Distribution Inc.,
in which the company has an 83 percent interest.
Financial Statement Schedule: Page
----------------------------- ----
Report of Independent Public Accountants 21
Schedule II - Valuation and Qualifying Accounts for the
Three Years Ended June 30, 1998 22
3. Exhibits
<TABLE>
<S> <C> <C>
(2) Plan of Acquisition, Reorganization,
------------------------------------
Arrangement, Liquidation, or Succession
---------------------------------------
(2.1) Agreement and Plan of merger by Exhibit (c)(1) of the company's
and among Kennametal Inc., Schedule 14D-1 (SEC file no.
Kennametal Acquisition Corp. reference no. 1-5318; docket entry
(formerly, Palmer Acquisition date - October 17, 1997) is
Corp.) and Greenfield Industries, incorporated herein by reference.
Inc. dated as of October 10, 1997
(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.
</TABLE>
-15-
<PAGE> 18
<TABLE>
<S> <C> <C>
(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.
(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.
</TABLE>
- ---------------------------------------------------------
* Denotes management contract or compensatory plan or arrangement.
-16-
<PAGE> 19
<TABLE>
<S> <C>
(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
(SEC file no. reference 1-5318; docket
entry date - November 10, 1992) is
incorporated herein by reference.
(10.8)* Directors Stock Incentive Exhibit 10.2 of the company's
Plan September 30, 1992 Form 10-Q
(SEC file no. reference 1-5318; docket
entry date - November 10, 1992) is
incorporated herein by reference.
(10.9)* Performance Bonus Stock Exhibit A of the company's 1995
Plan of 1995 annual meeting proxy statement.
(10.10)* 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.
(10.11)* 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.
(10.12)* 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.
(10.13)* Supplemental Executive Exhibit 10.2 of the company's
Retirement Plan March 31, 1997 Form 10-Q is
incorporated herein by reference.
(10.14)* Form of Employment Exhibit 10.1 of the company's
Agreement December 31, 1997 Form 10-Q is
incorporated herein by reference.
(10.15) Credit Agreement with Mellon Exhibit 10.2 of the company's
Bank, N.A. and various creditors December 31, 1997 Form 10-Q
dated as of November 17, 1997 is incorporated herein by reference.
(10.16) Guaranty and Suretyship Exhibit 10.3 of the company's
Agreement with Mellon Bank, December 31, 1997 Form 10-Q
N.A. dated November 17, 1997 is incorporated herein by reference.
(10.17)* Greenfield Industries, Inc. Exhibit 10.71 of the Greenfield
Executive Deferred Compensation Industries, Inc. December 31, 1995
Plan Form 10-K is incorporated herein
by reference.
</TABLE>
- ---------------------------------------------------------
* Denotes management contract or compensatory plan or arrangement.
-17-
<PAGE> 20
<TABLE>
<S> <C> <C>
(10.18) Amendment to Credit Agreement Filed herewith.
with Mellon Bank, N.A. and
various creditors dated as of
November 26, 1997
(10.19) Amendment to Credit Agreement Filed herewith.
with Mellon Bank, N.A. and
various creditors dated as of
December 19, 1997
(10.20) Amendment to Credit Agreement Filed herewith.
with Mellon Bank, N.A. and
various creditors dated as of
March 19, 1998
(13) Annual Report to Shareholders Portions of the 1998 Annual
----------------------------- Report are filed herewith.
(21) Subsidiaries of the Registrant Filed herewith.
------------------------------
(23) Consent of Independent Public Filed herewith.
-----------------------------
Accountants
-----------
(27) Financial Data Schedule Filed herewith.
-----------------------
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
-18-
<PAGE> 21
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/ JAMES R. BREISINGER
--------------------------------
James R. Breisinger
Vice President, Chief Financial
Officer and Corporate Controller
Date: September 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM R. NEWLIN
- -----------------------------
William R. Newlin Chairman of the Board September 24, 1998
/s/ ROBERT L. MCGEEHAN
- -----------------------------
Robert L. McGeehan President, Chief Executive September 24, 1998
Officer and Director
/s/ JAMES R. BREISINGER
- -----------------------------
James R. Breisinger Vice President, Chief September 24, 1998
Financial Officer and
Corporate Controller
</TABLE>
-19-
<PAGE> 22
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RICHARD C. ALBERDING
- ---------------------------------
Richard C. Alberding Director September 24, 1998
/s/ PETER B. BARTLETT
- ---------------------------------
Peter B. Bartlett Director September 24, 1998
/s/ A. PETER HELD
- ---------------------------------
A. Peter Held Director September 24, 1998
/s/ WARREN H. HOLLINSHEAD
- ---------------------------------
Warren H. Hollinshead Director September 24, 1998
/s/ TIMOTHY S. LUCAS
- ---------------------------------
Timothy S. Lucas Director September 24, 1998
/s/ ALOYSIUS T. MCLAUGHLIN, JR.
- ---------------------------------
Aloysius T. McLaughlin, Jr. Director September 24, 1998
/s/ LARRY YOST
- ---------------------------------
Larry Yost Director September 24, 1998
</TABLE>
-20-
<PAGE> 23
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
consolidated 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, 1998. 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, 1998
-21-
<PAGE> 24
<TABLE>
<CAPTION>
KENNAMETAL INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(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>
1998
Allowance for
doubtful accounts $ 7,325 $2,453 $336 $5,061 $3,201 $11,974
======= ====== ==== ====== ====== =======
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
======= ====== ==== ======= ====== =======
</TABLE>
(a) Represents foreign currency translation adjustment and reserves acquired
through business combinations.
(b) Represents uncollected accounts charged against the allowance.
-22-
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Reference
- ------- -------------------------------------------------------
<S> <C> <C>
2.1 Agreement and Plan of merger by Exhibit (c)(1) of the company's Schedule 14D-1
and among Kennametal Inc., (SEC file no. reference no. 1-5318; docket entry
Kennametal Acquisition Corp. (formerly, date - October 17, 1997) is incorporated herein by
Palmer Acquisition Corp.) and reference.
Greenfield Industries, Inc. dated as of
October 10, 1997
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.
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.
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit
No. Reference
- ------- -------------------------------------------------------
<S> <C> <C>
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 (SEC file no. reference 1-5318; docket
entry date - November 10, 1992) is incorporated
herein by reference.
10.8 Directors Stock Incentive Plan Exhibit 10.2 of the company's September 30, 1992
Form 10-Q (SEC file no. reference 1-5318; docket
entry date - November 10, 1992) is incorporated herein by
reference.
10.9 Performance Bonus Stock Exhibit A of the company's 1995 annual meeting
Plan of 1995 proxy statement.
10.10 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.
10.11 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.
10.12 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.
10.13 Supplemental Executive Exhibit 10.2 of the company's March 31, 1997
Retirement Plan Form 10-Q is incorporated herein by reference.
10.14 Form of Employment Agreement Exhibit 10.1 of the company's December 31, 1997
Form 10-Q is incorporated herein by reference.
10.15 Credit Agreement with Mellon Exhibit 10.2 of the company's December 31, 1997
Bank, N.A. and various creditors Form 10-Q is incorporated herein by reference.
dated as of November 17, 1997
10.16 Guaranty and Suretyship Agreement Exhibit 10.3 of the company's December 31, 1997
with Mellon Bank, N.A. Form 10-Q is incorporated herein by reference.
dated as of November 17, 1997
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
Exhibit
No. Reference
- ------- -------------------------------------------------------
<S> <C> <C>
10.17 Greenfield Industries, Inc. Executive Exhibit 10.71 of the Greenfield Industries, Inc.
Deferred Compensation Plan December 31, 1995 Form 10-K is incorporated
herein by reference
10.18 Amendment to Credit Agreement Filed herewith.
with Mellon Bank, N.A. and various
creditors dated as of November 26, 1997
10.19 Amendment to Credit Agreement Filed herewith.
with Mellon Bank, N.A. and various
creditors dated as of December 19, 1997
10.20 Amendment to Credit Agreement Filed herewith.
with Mellon Bank, N.A. and various
creditors dated as of March 19, 1998
13 Annual Report to Shareholders Portions of the 1998 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>
<PAGE> 1
EXHIBIT 10.18
AMENDMENT TO TRANSACTION DOCUMENTS
THIS AMENDMENT, dated as of November 26, 1997, by and among KENNAMETAL
INC., a Pennsylvania corporation (the "Borrower"), the Lenders party to the
Credit Agreement referred to below, and MELLON BANK, N.A., as Administrative
Agent under such Credit Agreement.
RECITALS:
A. The Borrower has entered into a Credit Agreement (as amended hereby,
the "Credit Agreement") dated as of November 17, 1997 among the Borrower, the
Lenders parties thereto from time to time, and Mellon Bank, N.A., as
Administrative Agent.
B. The parties hereto desire to amend the Credit Agreement as set forth
herein.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
SECTION 1. AMENDMENT TO THE CROSS-DEFAULT PROVISION FOR THE PURPOSE OF
EXTENDING THE POST-CLOSING GRACE PERIOD APPLICABLE TO THE $75,000,000 SENIOR
NOTES OF THE TARGET. Section 8.01(f)(i) of the Credit Agreement is amended by
deleting the proviso at the end thereof and replacing it with the following
proviso: "provided, that the foregoing clause (B) shall not apply to
Cross-Default Excepted Indebtedness until the 45th day after the Closing Date
(or, in the case of the Cross-Default Excepted Indebtedness described in
paragraph 1 of Schedule 8.01(f)(i), until the 90th day after the Closing Date),
and".
SECTION 2. EFFECTIVENESS AND EFFECT, ETC.
(a) EFFECTIVENESS. This Amendment shall become effective when Mellon
Bank, N.A., as Administrative Agent, shall have received counterparts hereof
duly executed by the Borrower, the Administrative Agent, and the Required
Lenders (as defined in the Credit Agreement).
(b) EFFECT. The Credit Agreement, as amended hereby, is and shall
continue to be in full force and effect and is hereby in all respects ratified
and confirmed. Except to the extent expressly set forth herein, the execution,
delivery and effectiveness of this Amendment shall not operate as a waiver of
any right, power or remedy under the Credit Agreement or constitute a waiver of
any provision of the Credit Agreement.
SECTION 3. MISCELLANEOUS. This Amendment may be executed in any number
of counterparts and by the different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same document.
Section and other headings herein are for reference purposes only and shall not
affect the interpretation of this Amendment in any respect. This Amendment shall
be governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania, without regard to choice of law rules. This Amendment is a
requested amendment within the meaning of Section 10.06(a)(ii) of the Credit
Agreement.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
KENNAMETAL INC.
By /s/ JAMES E. MORRISON
-------------------------------------
James E. Morrison
Vice President and Treasurer
MELLON BANK, N.A.,
individually and as Administrative Agent
By /s/ DAVID R. JARDINI
-------------------------------------
David R. Jardini
Vice President
CONSENTED AND AGREED:
BANKBOSTON, N.A.
By /s/ M. PAULA ZAIKEN
------------------------------------
M. Paula Zaiken
Director
DEUTSCHE BANK AG, NEW YORK BRANCH
AND/OR CAYMAN ISLANDS BRANCH
By /s/ HANS-JOSEF THIELE
------------------------------------
Hans-Josef Thiele
Director
By /s/ STEPHAN WIEDEMANN
------------------------------------
Stephan Wiedemann
Director
PNC BANK, NATIONAL ASSOCIATION
By /s/ LAWRENCE W. JACOBS
------------------------------------
Lawrence W. Jacobs
Vice President
<PAGE> 1
EXHIBIT 10.19
AMENDMENT TO TRANSACTION DOCUMENTS
THIS AMENDMENT, dated as of December 19, 1997, by and among KENNAMETAL
INC., a Pennsylvania corporation (the "Borrower"), the Lenders party to the
Credit Agreement referred to below, and MELLON BANK, N.A., as Administrative
Agent under such Credit Agreement.
RECITALS:
A. The Borrower has entered into a Credit Agreement (as amended, the
"Credit Agreement") dated as of November 17, 1997 among the Borrower, the
Lenders parties thereto from time to time, and Mellon Bank, N.A., as
Administrative Agent. The Credit Agreement has been amended by an Amendment to
Transaction Documents dated as of November 26, 1997.
B. The parties hereto desire to amend further the Credit Agreement as
set forth herein.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
SECTION 1. AMENDMENTS RELATING TO RECAPTURE INDEBTEDNESS.
(a) Section 2.07(b)(i) of the Credit Agreement is hereby amended by deleting the
first two sentences thereof and replacing them with the following:
"Reduction Event" shall mean any of the events defined as such
in Section 2.07(b)(ii), (iii), (iv), (v), (vi) or (vii). If a Reduction
Event shall occur, an amount not less than the corresponding Reduction
Event Application Amount shall be applied (x) first, to prepayment of
the unpaid principal amount of outstanding Term Loans, if any, and then
(y) the balance, if any, shall be applied to reduction of the aggregate
Revolving Credit Committed Amounts; provided, that the Borrower shall
not be obligated to make any application pursuant to the foregoing
clause (y) in the event that (A) such Reduction Event does not arise
under Section 2.07(b)(vii) (relating to Recapture Indebtedness) and the
Investment Grade Rating Condition is satisfied on the Reduction Event
Date corresponding to such Reduction Event, or (B) such Reduction Event
arises under Section 2.07(b)(vi) (relating to Excess Cash Flow).
(b) Section 2.07(b) of the Credit Agreement is hereby amended by adding the
following new Section 2.07(b)(vii) following Section 2.07(b)(vi):
(vii) RECAPTURE INDEBTEDNESS. "Reduction Event" shall include
the following: incurrence by the Borrower of any Recapture
Indebtedness; provided, that incurrence of successor Recapture
Indebtedness to refinance predecessor Recapture Indebtedness shall not
constitute a Reduction Event to the extent of the principal amount of
the predecessor Recapture Indebtedness so refinanced. The "Reduction
Event Application Amount" corresponding to the foregoing Reduction
Event shall be the principal amount of such Recapture Indebtedness. The
"Reduction Event Date" corresponding to the foregoing Reduction Event
shall be five Business Days after the date the Borrower incurs such
Recapture Indebtedness.
<PAGE> 2
(c) Section 7.02 of the Credit Agreement is hereby amended as follows: (i) in
Section 7.02(h), the word "and" following the semicolon is deleted, (ii) in
Section 7.02(i), the period at the end thereof is replaced with a semicolon, and
(iii) the following new Section 7.02(j) is added following Section 7.02(i):
(j) Other unsecured Indebtedness ("Recapture Indebtedness")
for borrowed money of the Borrower (and not of any Subsidiary) incurred
by the Borrower after the date of this Agreement; provided, that
Recapture Indebtedness may not be Disqualified Indebtedness, unless
(i) at the time the Borrower incurred such Recapture
Indebtedness the Investment Grade Rating Condition was
satisfied, or
(ii) such Recapture Indebtedness is incurred to
refinance predecessor Recapture Indebtedness which was
incurred in compliance with this subsection (j), the principal
amount of such successor Recapture Indebtedness does not
exceed that of the predecessor Recapture Indebtedness so
refinanced, and by the terms of such successor Recapture
Indebtedness no direct or indirect payment, prepayment,
purchase, redemption, retirement, defeasance, acquisition, or
other payment on account of principal of such successor
Recapture Indebtedness shall be required (whether at stated
maturity or upon the happening of an event) earlier or in
greater amount than under the terms of the predecessor
Recapture Indebtedness so refinanced; and
further provided, that the Borrower shall not, and shall not permit any
Subsidiary of the Borrower to, directly or indirectly, pay, prepay,
purchase, redeem, retire, defease or acquire, or otherwise make any
payment on account of principal of, any Recapture Indebtedness, except
(x) as and when required to do so by the mandatory
terms thereof,
(y) at a time when the Investment Grade Rating
Condition is satisfied, or
(z) as part of a refinancing of predecessor Recapture
Indebtedness by successor Recapture Indebtedness incurred in
compliance with this subsection (j).
(d) Section 7.09(e) of the Credit Agreement is hereby amended to read as
follows:
(e) with respect to the foregoing clause (x), (i) restrictions
on property subject to a Permitted Lien in favor of the holder of such
Permitted Lien, and (ii) restrictions contained in agreements governing
Recapture Indebtedness;
(e) Annex A to the Credit Agreement, Section 1.01, is hereby amended by adding
the following definitions of "Disqualified Indebtedness" and "Recapture
Indebtedness" in the appropriate places in alphabetical order:
"Disqualified Indebtedness" shall mean any Indebtedness that,
other than solely at the option of the issuer thereof, by its terms (or
by the terms of any security, instrument or obligation into which it is
convertible or exchangeable), (i) matures in whole or in part on or
prior to the Revolving Credit Maturity Date, (ii) is (or upon the
happening of an event or the passage of time would be) required to be
redeemed or repurchased, in whole or in part, on or prior to the
Revolving Credit Maturity Date, or (iii) has (or upon the happening of
an event or the passage of time would have) a redemption or similar
payment, in whole or in part, due on or prior to the Revolving Credit
Maturity Date.
"Recapture Indebtedness" has the meaning given that term in
Section 7.02(j).
(f) Exhibit D to the Credit Agreement (form of Compliance Certificate), is
hereby amended by inserting in paragraph 2 the term "7.02(j)," between the terms
"7.02(h)," and "7.04(f),".
<PAGE> 3
SECTION 2. AMENDMENT RELATING TO THE REQUIRED RATE HEDGE. Section
6.12(a) is hereby amended by deleting the first sentence thereof and replacing
it with the following:
The Borrower shall, not later than the 150th day after the Term Loans
are made, enter into one or more Interest Rate Hedging Agreements on
such terms as shall be reasonably satisfactory to the Administrative
Agent and which (when taken together with the Borrower's obligations
under the Term Loans) have the economic effect of fixing the Borrower's
effective interest cost on at least 50% of the scheduled outstanding
principal amount of Term Loans (taking into account any prepayments of
the Term Loans before such 150th day) for the period through and
including the thirteenth Quarterly Amortization Date.
SECTION 3. AMENDMENTS RELATING TO AVAILABILITY OF ADDITIONAL LIBOR
FUNDING PERIODS THROUGH MARCH 31, 1998. Section 2.03(c) of the Credit Agreement
is hereby amended to read as follows:
(c) FUNDING PERIODS. At any time when the Borrower shall
select, convert to or renew the Euro-Rate Option to apply to any part
of the Committed Loans, the Borrower shall specify one or more Funding
Periods during which such Option shall apply, such Funding Periods
being as set forth in the table below:
INTEREST RATE OPTION AVAILABLE FUNDING PERIODS
Euro-Rate Option One, two, three
or six months or,
subject to the
following clause (iv),
one, two or three weeks
(each, a "Euro-Rate
Funding Period");
provided, that:
(i) Each Euro-Rate Funding Period shall begin on a London
Business Day, and the terms "month" and "week," when used in
connection with a Euro-Rate Funding Period, shall be construed in
accordance with prevailing practices in the interbank eurodollar
market at the commencement of such Euro-Rate Funding Period, as
determined by the Administrative Agent (which determination shall
be conclusive absent manifest error);
(ii) The Borrower may not select a Euro-Rate Funding Period
that would end after the Revolving Credit Maturity Date;
(iii) The aggregate number of Funding Segments of the
Euro-Rate Portions of the Committed Loans at any time shall not
exceed 15, and
(iv) The Borrower may not select a Euro-Rate Funding Period
shorter than one month that would end after March 31, 1998.
SECTION 4. EFFECTIVENESS AND EFFECT, ETC. This Amendment shall become
effective when Mellon Bank, N.A., as Administrative Agent, shall have received
counterparts hereof duly executed by the Borrower, the Administrative Agent and
the Required Lenders (as defined in the Credit Agreement). The Credit Agreement,
as amended by the Amendment to Transaction Documents dated as of November 26,
1997 and as further amended hereby, is and shall continue to be in full force
and effect and is hereby in all respects ratified and confirmed. Except to the
extent expressly set forth herein, the execution, delivery and effectiveness of
this Amendment shall not operate as a waiver of any right, power or remedy under
the Credit Agreement or constitute a waiver of any provision of the Credit
Agreement.
SECTION 5. MISCELLANEOUS. This Amendment may be executed in any number
of counterparts and by the different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall
<PAGE> 4
constitute but one and the same document. Section and other headings herein are
for reference purposes only and shall not affect the interpretation of this
Amendment in any respect. This Amendment shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, without regard to
choice of law principles. This Amendment is a requested amendment within the
meaning of Section 10.06(a)(ii) of the Credit Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
KENNAMETAL INC.
By /s/ JAMES E. MORRISON
-------------------------------------
James E. Morrison
Vice President and Treasurer
MELLON BANK, N.A.,
individually and as Administrative Agent
By /s/ DAVID R. JARDINI
-------------------------------------
David R. Jardini
Vice President
<PAGE> 1
EXHIBIT 10.20
AMENDMENT TO TRANSACTION DOCUMENTS
THIS AMENDMENT, dated as of March 19, 1998, by and among KENNAMETAL
INC., a Pennsylvania corporation (the "Borrower"), the Lenders party to the
Credit Agreement referred to below, and MELLON BANK, N.A., as Administrative
Agent under such Credit Agreement.
RECITALS:
A. The Borrower has entered into a Credit Agreement (as amended, the
"Credit Agreement") dated as of November 17, 1997 among the Borrower, the
Lenders parties thereto from time to time, and Mellon Bank, N.A., as
Administrative Agent. The Credit Agreement has been amended by an Amendment to
Transaction Documents dated as of November 26, 1997 and an Amendment to
Transaction Documents dated as of December 19, 1997.
B. The parties hereto desire to amend further the Credit Agreement as
set forth herein.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
SECTION 1. AMENDMENT RELATING TO THE REQUIRED RATE HEDGE. Section
6.12(a) is hereby amended by deleting the first sentence thereof and replacing
it with the following:
The Borrower shall, not later than December 31, 1998, enter into one or
more Interest Rate Hedging Agreements on such terms as shall be
reasonably satisfactory to the Administrative Agent and which (when
taken together with the Borrower's obligations under the Term Loans)
have the economic effect of fixing the Borrower's effective interest
cost on at least 50% of the scheduled outstanding principal amount of
Term Loans (taking into account any prepayments of the Term Loans
before October 15, 1998) for the period through and including the
thirteenth Quarterly Amortization Date.
SECTION 2. AMENDMENT RELATING TO PERMITTED LOANS, ADVANCES AND
INVESTMENTS. Section 7.05(e) of the Credit Agreement is hereby amended to by
deleting the term "$50,000,000" and replacing it with the term "$100,000,000."
SECTION 3. EFFECTIVENESS AND EFFECT, ETC. This Amendment shall become
effective when Mellon Bank, N.A., as Administrative Agent, shall have received
counterparts hereof duly executed by the Borrower and the Administrative Agent,
and consents hereto duly executed by the Required Lenders (as defined in the
Credit Agreement). The Credit Agreement, as amended by the Amendments to
Transaction Documents dated as of November 26, 1997 and December 19, 1997 and as
further amended hereby, is and shall continue to be in full force and effect and
is hereby in all respects ratified and confirmed. Except to the extent expressly
set forth herein, the execution, delivery and effectiveness of this Amendment
shall not operate as a waiver of any right, power or remedy under the Credit
Agreement or constitute a waiver of any provision of the Credit Agreement.
<PAGE> 2
SECTION 4. MISCELLANEOUS. This Amendment may be executed in any number
of counterparts and by the different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same document.
Section and other headings herein are for reference purposes only and shall not
affect the interpretation of this Amendment in any respect. This Amendment shall
be governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania, without regard to choice of law principles. This Amendment is a
requested amendment within the meaning of Section 10.06(a)(ii) of the Credit
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
KENNAMETAL INC.
By /s/ JAMES E. MORRISON
-------------------------------------
James E. Morrison
Vice President and Treasurer
MELLON BANK, N.A.,
individually and as Administrative Agent
By /s/ DANIEL A. BRAILER
-------------------------------------
Daniel A. Brailer
Senior Vice President
<PAGE> 1
EXHIBIT 13
KENNAMETAL INC., 1998 ANNUAL REPORT
(PAGE 29)
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 1998 AND FISCAL 1997
OVERVIEW. Net income for 1998 was $71.2 million, compared to $72.0 million in
1997. The 1998 results include the effects from the acquisition of Greenfield
Industries, Inc. (Greenfield) that occurred on November 17, 1997. The Greenfield
acquisition reduced 1998 earnings by approximately $17.5 million, or $0.65 per
share, including one-time costs of $0.28 per share. Excluding the effects of the
Greenfield acquisition, diluted earnings per share would have been $3.23 per
share. Fiscal 1998 results include an additional 3.45 million shares of common
stock issued on March 20, 1998.
Excluding the effects of the Greenfield acquisition, Kennametal's results for
1998 were favorably affected by strong economic conditions in the United States
and from the continued strengthening of the European economies. The company's
JLK Direct Distribution Inc. (JLK) subsidiary also benefited from higher sales
of metalworking products as a result of an expanded product offering in the 1998
master catalog, acquisitions and from further penetration of existing customers.
Earnings also were favorably affected by productivity improvements and cost
reductions related to the Focused Factory initiative, offset in part by
unfavorable foreign currency translation effects due to the strength of the U.S.
dollar.
SALES AND MARKETS. Sales for the year ended June 30, 1998, were $1.7
billion, up 45 percent from $1.2 billion last year. The increase in sales was
directly attributable to the acquisition of Greenfield and other companies, from
higher sales of metalworking products in North America and Europe and from
higher sales of industrial supplies sold through JLK. Excluding acquisitions and
unfavorable foreign currency translation effects, sales increased 8 percent in
1998.
Sales of traditional metalworking products sold through all sales channels in
North America, including sales of these products to the Industrial Supply
market, increased 10 percent over 1997. Sales benefited from strong economic
conditions in the United States and Canada and from continued emphasis on
milling and drilling products. The sales increase was broad based across most
industries. Sales, as reflected in the North America Metalworking market,
increased 7 percent over 1997.
Sales in the Europe Metalworking market increased 16 percent. The company also
made two acquisitions in Europe during 1998 to strengthen its competitive
position in the European market place. Demand for metalworking products
continued to show strong gains in nearly all industries in the European market,
primarily Germany, with particular strength coming from export-oriented
businesses such as the automotive and machine tool builder industries. This was
partly offset by unfavorable foreign currency translation effects of 9 percent
due to the strength of the U.S. dollar during 1998. Sales also increased in the
United Kingdom and France. Excluding acquisitions and foreign currency
translation effects, Europe Metalworking sales increased 12 percent in 1998.
In the Asia Pacific Metalworking market, sales decreased 16 percent. The results
were affected by weak economic conditions across most Asia Pacific countries.
Excluding foreign currency translation effects, sales in the Asia Pacific
Metalworking market decreased 4 percent.
SALES AND GEOGRAPHIC AREA
<TABLE>
<CAPTION>
Year ended June 30 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
(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>
SALES
Metalworking:
North America 24% $ 405,863 7% 33% $ 378,679 3% 34% $ 368,481
Europe 17 291,898 16 22 251,304 (7) 25 271,004
Asia Pacific 2 34,947 (16) 4 41,425 16 3 35,854
Industrial Supply 26 438,434 33 28 328,531 28 24 256,703
Mining and Construction 10 164,148 5 13 156,404 6 14 147,921
Greenfield Industries 21 343,098 -- -- -- -- -- --
--- ---------- -- --- ---------- - --- ----------
Net sales 100% $1,678,388 45% 100% $1,156,343 7% 100% $1,079,963
=== ========== == === ========== = === ==========
GEOGRAPHIC AREA
Within the United States 68% $1,134,966 51% 65% $ 752,268 13% 62% $ 665,510
International 32 543,422 34 35 404,075 (3) 38 414,453
--- ---------- -- --- ---------- - --- ----------
Net sales 100% $1,678,388 45% 100% $1,156,343 7% 100% $1,079,963
=== ========== == === ========== = === ==========
</TABLE>
<PAGE> 2
KENNAMETAL INC., 1998 ANNUAL REPORT
(PAGE 30)
Sales in the Industrial Supply market increased 33 percent. Sales increased
primarily because of acquisitions, an expanded product offering and from further
penetration of existing customers. These gains were offset by a significant
reduction in sales due to the General Electric Full Service Supply contract
disengagement in April 1997. During 1998, the company's JLK subsidiary continued
to implement its acquisition strategy and acquired six metalworking distribution
companies with combined annual sales of approximately $137.0 million.
Additionally, during 1998, JLK added nine showroom locations, including a
distribution center in the United States, and a distribution center in Germany.
At June 30, 1998, the company's operations included over 50 locations with 33
showrooms, including seven distribution centers in the United States, one in the
United Kingdom and one in Germany, and provided Full Service Supply programs to
approximately 115 customers covering 194 different facilities.
Sales in the Mining and Construction market increased 5 percent from 1997 as a
result of increased domestic demand, including certain international markets for
highway construction tools. Sales of mining tools were flat due to a modest
increase in coal demand in the United States and from soft economic conditions
in select international markets.
Sales at Greenfield during the year rose 3 percent from the same period of a
year ago. Overall, sales primarily increased as a result of strong economic
conditions in the United States.
COSTS AND EXPENSES. As a percentage of sales, the gross profit margin was 40.7
percent, compared to 42.2 percent last year. Excluding the effects of the
Greenfield acquisition, the gross profit margin would have been 43.5 percent.
The gross profit margin improved significantly as a result of productivity
improvements and cost reductions related to the Focused Factory initiative, from
higher production levels and from a more favorable sales mix. This increase was
partially reduced by unfavorable foreign currency translation effects.
Operating expenses as a percentage of sales were 28.2 percent, compared to 31.0
percent last year. Excluding the effects of the Greenfield acquisition,
operating expenses would have been 30.9 percent. Operating expenses were
controlled despite higher costs related to acquisitions, higher sales volumes
and from the JLK showroom expansion program. The company also had lower research
and development expenses and realized cost-saving benefits as a result of
efficiencies from the completed world headquarters project. Additionally,
amortization of intangibles increased approximately $12.7 million primarily as a
result of increased goodwill related to the Greenfield acquisition.
Interest expense increased $49.1 million as a result of additional borrowings
and included approximately $7.2 million for the amortization of bank financing
fees related to the acquisition of Greenfield.
Other expense primarily increased as a result of the write-off of deferred
financing costs related to a postponed public offering of $450.0 million of
equity and equity-related securities and $450.0 million of debt securities (the
"offerings") that the company had originally intended to offer in connection
with the acquisition of Greenfield. Related to the debt offering, the company
entered into an agreement to hedge its exposure to fluctuations in interest
rates. When the company subsequently postponed the proposed offerings, the
interest rate hedges were terminated resulting in a loss of $3.5 million. The
company also wrote off other offering-related expenses of $1.1 million resulting
in a combined total of $4.6 million or $0.10 per share.
The 1998 effective tax rate was 41.3 percent compared to a tax rate of 38.0
percent in 1997. The increase in the effective tax rate is directly attributable
to higher nondeductible goodwill related to the Greenfield acquisition.
COMPARISON OF FISCAL 1997 AND FISCAL 1996
OVERVIEW. Net income for 1997 was $72.0 million, compared to $69.7 million in
1996. While 1997 revenues and earnings rose to record levels, 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 in the previous 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.
<PAGE> 3
KENNAMETAL INC., 1998 ANNUAL REPORT
(PAGE 31)
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 continued growth of mail-order and Full Service Supply
programs. Sales rose 28 percent primarily because of the expanded product
offering of more than 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. Sales through Full Service Supply increased, to a lesser
extent, from the 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 $36.0 million in their latest fiscal year and provided four
additional locations in the Midwest. Excluding these acquisitions, the
Industrial Supply market sales increased 26 percent. At June 30, 1997, the
company operated 28 showrooms, including six distribution centers in the United
States and one in the United Kingdom, and provided Full Service Supply programs
to approximately 60 customers covering approximately 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 in 1997 was
42.2 percent, compared to 42.1 percent in 1996. 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 in 1996, excluding the effects of the one-time restructuring charge in
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
the new world headquarters.
Interest expense decreased 8 percent because of lower average borrowings coupled
with slightly lower interest rates. The effective tax rate was 38.0 percent in
1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
Kennametal's cash flow from operations is a primary source of financing for
capital expenditures and internal growth. Additionally, in the United States,
the company maintains a revolving credit line with commercial banks totaling
$900.0 million, of which $290.7 million was unused at June 30, 1998. The company
and its subsidiaries generally obtain local financing through credit lines with
commercial banks.
During 1998, the company generated $101.5 million in cash from operations. Cash
provided by operations increased slightly from 1997 and was affected by higher
working capital requirements related to increased sales offset by higher noncash
items, such as depreciation and amortization. Net cash used in investing
activities was $813.1 million and was used primarily for the acquisition of
Greenfield and other companies. Capital expenditures amounted to $104.8 million
and were made to upgrade machinery and equipment, to acquire additional
client-server information systems and to complete the construction of the new
world headquarters in Latrobe, Pa. and a manufacturing facility in China.
<PAGE> 4
KENNAMETAL INC., 1998 ANNUAL REPORT
(PAGE 32)
Net cash flow from financing activities was $710.1 million. The increase in net
cash flow from financing activities resulted from increased borrowings under a
new Bank Credit Agreement related primarily to the acquisition of Greenfield.
The company also sold 3.45 million shares of its common stock and its JLK
subsidiary completed its initial public offering of approximately 20 percent of
its outstanding common stock. The proceeds received from the respective stock
offerings were used to repay outstanding debt. Additionally, the company paid
$18.5 million in dividends during 1998.
On November 17, 1997, the company completed the acquisition of all the
outstanding stock of Greenfield. The total purchase price for the acquisition of
Greenfield was approximately $1.0 billion, including $324.4 million in assumed
Greenfield debt and convertible redeemable preferred securities and transaction
costs. In connection with the acquisition of Greenfield, the company entered
into a $1.4 billion Bank Credit Agreement and borrowed the appropriate funds to
pay for the Greenfield acquisition, including the refinancing of certain
indebtedness of Greenfield and the company. Additionally, on June 26, 1998, the
company sold the Marine Products division of Greenfield which operated as Rule
Industries, Inc. (Rule). The company acquired Rule as part of its acquisition of
Greenfield and, for strategic reasons, chose to divest itself of this business.
Annual sales of the Marine Products division are approximately $25.0 million.
Proceeds received from the sale were used to reduce a portion of the company's
long-term debt incurred in connection with the acquisition of Greenfield.
On March 20, 1998, the company sold 3.45 million shares of common stock
resulting in net proceeds of $171.4 million. The proceeds were used to reduce a
portion of the company's long-term debt incurred in connection with the
acquisition of Greenfield.
On July 2, 1997, an initial public offering (IPO) of approximately 4.9 million
shares of common stock of JLK was consummated at a price of $20.00 per share.
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 $90.4 million and represented approximately 20 percent of
JLK's common stock. The net proceeds were used by JLK to repay $20.0 million of
indebtedness related to a dividend to the company and $20.0 million related to
intercompany obligations to the company incurred in 1997. The company used these
proceeds to repay short-term debt. JLK used the remaining net proceeds of $50.4
million from the offering during 1998 to make additional acquisitions.
On June 8, 1998, the company's JLK subsidiary initiated a stock repurchase
program to repurchase, from time-to-time, up to a total of 20 percent, or
approximately 1.0 million shares, of its outstanding Class A common stock. In
1998, JLK repurchased 628,700 shares of its Class A common stock at a total cost
of $14.2 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.
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, were 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 $19.0 million to acquire
five small companies throughout 1997. The effects of the acquisitions were not
significant to the company's results.
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 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.
During 1996, the company generated $85.5 million in cash from operations that
was used primarily to finance $57.6 million of capital expenditures and to pay
$16.0 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 1999 are estimated to be $100-$110 million and
will be used primarily to modernize facilities and upgrade machinery and
equipment and to acquire additional client-server information systems.
FINANCIAL CONDITION
At June 30, 1998, Kennametal's total assets were $2.1 billion, compared to
$869.3 million in 1997. Net working capital was $441.8 million, up 151 percent
from the previous year. The ratio of current assets to current liabilities was
2.2 in 1998, compared with 1.6 in 1997.
<PAGE> 5
KENNAMETAL INC., 1998 ANNUAL REPORT
(PAGE 33)
Accounts receivable increased 66 percent to $332.7 million because of increased
sales and from the effects of acquisitions. Inventories rose to $436.5 million
due to the effects of acquisitions and from the growth of sales to the
Industrial Supply market. Inventory turnover was 3.1 in 1998 and 3.2 in 1997.
Total debt (including capital lease obligations) increased to $967.7 million in
1998, primarily as a result of the Greenfield acquisition. The ratio of total
debt-to-total-capital was 55.4 percent in 1998 as compared with 27.1 percent in
1997. To maintain financial flexibility and to optimize the cost of capital,
Kennametal's financial objective is to maintain a total debt-to-total-capital
ratio of 40 to 45 percent or less over the long term through cash flow from
operations, sale of non-productive assets and other cash sources. Cash from
operations and the company's debt capacity are expected to continue to be
sufficient to fund capital expenditures, debt service obligations, dividend
payments, and operating requirements. In the future, the company may consider
refinancing a portion of its variable-rate long-term debt to reduce the exposure
to fluctuating interest rates.
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 one Superfund site 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 15 to the consolidated financial statements.
YEAR 2000
Management believes that the company has substantially mitigated its exposure
relative to year 2000 issues for both information and non-information technology
systems. The company initiated a program beginning in 1996 to prepare its
computer systems, computer applications and other systems for the year 2000. A
management committee actively monitors the status of the readiness program of
each of the company's business units. The company estimates the total year 2000
expenditures to be approximately $45.0 million, half of which are for computer
hardware, to replace non-compliant computer systems, and the other half to
replace non-compliant computer software, including software implementation and
employee training. The majority of these costs were incurred in 1997 and 1996.
Expenditures to rectify non-compliant personal computers and various
non-information technology items are estimated to be an additional $5.0 million.
Total expenditures expected to be incurred in fiscal 1999 are estimated to be
approximately $12.0 million related to the year 2000 issues. These costs include
both internal and external personnel costs related to the assessment process, as
well as the cost of purchasing certain hardware and software. There can be no
guarantee that these estimates will be achieved and actual results could differ
from those planned. The company has currently completed more than 70 percent of
the tasks identified to remediate the year 2000 exposure, with the remaining
tasks to be completed by June 1999.
Management currently believes the most significant impact of the year 2000 issue
could be an interrupted supply of goods and services from the company's vendors.
The company has an ongoing effort to gain assurances and certifications of
suppliers' readiness programs. Contingency plans include the search for
alternate certified vendors and the increase of safety stock of critical
materials and supplies.
NEW ACCOUNTING STANDARDS
The company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," issued in February 1997. This statement requires the
disclosure of basic and diluted earnings per share and revises the method
required to calculate these amounts. The adoption of this standard did not have
a material impact on previously reported earnings per share amounts. The company
also adopted SFAS No. 129, "Disclosure of Information about Capital Structure,"
issued in February 1997. This statement requires specific disclosure
requirements related to a company's capital structure. The adoption of this
standard did not have a material impact on the company.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information," were
issued by the Financial Accounting Standards Board requiring implementation for
years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The company will adopt SFAS No. 130 in fiscal 1999 and does not anticipate that
the statement will have a significant impact on its disclosures.
SFAS No. 131 introduces a new model for segment reporting called the "management
approach." The management approach is based on the way the chief operating
decision-maker organizes segments within a company for making operating
decisions and assessing performance. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The company is in the process of evaluating
the effect of applying this statement.
<PAGE> 6
KENNAMETAL INC., 1998 ANNUAL REPORT
(PAGE 34)
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued. The implementation of SFAS No. 132 will
revise certain footnote disclosure requirements related to pension and other
retiree benefits. The new standard will not have a financial impact on the
company. Implementation is required for fiscal 1999.
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 1999, management expects consolidated sales to increase
from the $1.7 billion achieved this year. The outlook for the upcoming year will
be based in part on stable economic conditions in the United States and from
steadily improving market conditions throughout Europe. In addition, future
results could be affected to the extent that the company would make acquisitions
or divestitures.
Sales in the North America Metalworking market should benefit from stable
economic conditions in the United States and Canada. Sales in the Europe
Metalworking market also are expected to benefit from improved economic
conditions in Europe, primarily in Germany. Sales in the Asia Pacific
Metalworking market are expected to remain weak due to poor economic conditions
in most countries in this region.
Sales in the Industrial Supply market should continue to benefit from recent
acquisitions, the expansion of new showroom locations, an expanded product
offering in the new J&L master catalog and from new Full Service Supply
programs. Lastly, sales of mining and highway construction tools should benefit
from increased infrastructure spending in the United States and from increased
demand in developing markets.
This annual report, including the letter to shareholders and the business
discussion on pages 5-34, contains "forward-looking statements" as defined by
Section 21E of the Securities Exchange Act of 1934. Actual results can
materially 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 and the effect of third party or company failures to
achieve timely remediation of year 2000 issues, change from the company's
expectations. The company undertakes no obligation to publicly release any
revisions to forward-looking statements to reflect events or circumstances
occurring after the date hereof.
<PAGE> 7
KENNAMETAL INC., 1998 ANNUAL REPORT
(PAGE 35)
Financial graphs contained on Page 35 are not included. All graph data is
contained in the ten-year financial highlights on Pages 52 and 53.
<PAGE> 8
KENNAMETAL INC., 1998 ANNUAL REPORT
(PAGE 36)
CONSOLIDATED STATEMENTS OF INCOME . . .
<TABLE>
<CAPTION>
Year ended June 30 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
OPERATIONS
Net sales $ 1,678,388 $1,156,343 $1,079,963
Cost of goods sold 994,481 668,415 625,473
----------- ---------- ----------
Gross profit 683,907 487,928 454,490
Research and development expenses 20,397 24,105 20,585
Selling, marketing and distribution expenses 339,772 263,980 242,375
General and administrative expenses 112,519 69,911 65,417
Amortization of intangibles 15,648 2,907 1,596
Restructuring charge -- -- 2,666
----------- ---------- ----------
Operating income 195,571 127,025 121,851
Interest expense 59,536 10,393 11,296
Other income (expense) (5,459) 1,531 4,821
----------- ---------- ----------
Income before income taxes and minority interest 130,576 118,163 115,376
Provision for income taxes 53,900 44,900 43,900
Minority interest 5,479 1,231 1,744
----------- ---------- ----------
Net income $ 71,197 $ 72,032 $ 69,732
=========== ========== ==========
PER SHARE DATA
Basic earnings per share $ 2.61 $ 2.71 $ 2.62
=========== ========== ==========
Diluted earnings per share $ 2.58 $ 2.69 $ 2.60
=========== ========== ==========
Dividends per share $ 0.68 $ 0.66 $ 0.60
=========== ========== ==========
Weighted average shares outstanding 27,263 26,575 26,635
=========== ========== ==========
Diluted average shares outstanding 27,567 26,786 26,825
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 9
KENNAMETAL INC., 1998 ANNUAL REPORT
(PAGE 37)
CONSOLIDATED BALANCE SHEETS . . .
<TABLE>
<CAPTION>
As of June 30 1998 1997
- -----------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 18,366 $ 21,869
Accounts receivable, less allowance for doubtful accounts
of $11,974 and $7,325 332,677 200,515
Inventories 436,472 210,111
Deferred income taxes 31,316 25,384
----------- ---------
Total current assets 818,831 457,879
----------- ---------
Property, plant and equipment:
Land and buildings 241,482 156,292
Machinery and equipment 671,087 473,850
Less accumulated depreciation (386,642) (329,756)
----------- ---------
Net property, plant and equipment 525,927 300,386
----------- ---------
Other assets:
Investments in affiliated companies 13,740 11,736
Intangible assets, less accumulated amortization of $39,408 and $23,960 706,619 49,915
Deferred income taxes 39,426 34,307
Other 34,450 15,086
----------- ---------
Total other assets 794,235 111,044
----------- ---------
Total assets $ 2,138,993 $ 869,309
=========== =========
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases $ 78,632 $ 13,853
Notes payable to banks 48,103 120,166
Accounts payable 115,373 60,322
Accrued payroll 30,600 3,311
Accrued vacation pay 21,523 18,176
Other current liabilities 82,838 66,174
----------- ---------
Total current liabilities 377,069 282,002
----------- ---------
Long-term debt and capital leases, less current maturities 840,932 40,445
Deferred income taxes 45,253 21,055
Other liabilities 98,073 57,060
----------- ---------
Total liabilities 1,361,327 400,562
----------- ---------
Minority interest in consolidated subsidiaries 42,206 9,139
----------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, 5,000 shares authorized; none issued -- --
Capital stock, $1.25 par value; 70,000 shares authorized;
32,820 and 29,370 shares issued 41,025 36,712
Additional paid-in capital 320,645 91,049
Retained earnings 458,805 406,083
Treasury shares, at cost; 2,991 and 3,263 shares held (59,131) (62,400)
Cumulative translation adjustments (25,884) (11,836)
----------- ---------
Total shareholders' equity 735,460 459,608
----------- ---------
Total liabilities and shareholders' equity $ 2,138,993 $ 869,309
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 10
KENNAMETAL INC., 1998 ANNUAL REPORT
(PAGE 38)
CONSOLIDATED STATEMENTS OF CASH FLOWS . . .
<TABLE>
<CAPTION>
Year ended June 30 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 71,197 $ 72,032 $ 69,732
Adjustments for noncash items:
Depreciation and amortization 67,311 41,399 40,240
Other 29,705 5,356 9,000
Changes in certain assets and liabilities,
net of effects from acquisitions and divestiture:
Accounts receivable (17,006) (8,032) (20,359)
Inventories (37,231) 1,379 (9,758)
Accounts payable and accrued liabilities (8,791) (600) (1,342)
Other (3,661) (11,684) (2,034)
--------- -------- --------
Net cash flow from operating activities 101,524 99,850 85,479
--------- -------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (104,774) (73,779) (57,556)
Disposals of property, plant and equipment 5,132 1,063 6,348
Acquisitions, net of cash (755,338) (18,995) (1,441)
Divestiture, net of cash 62,052 -- --
Purchase of subsidiary stock (14,197) -- --
Other (5,992) 907 2,614
--------- -------- --------
Net cash flow used for investing activities (813,117) (90,804) (50,035)
--------- -------- --------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt (71,537) 55,689 5,019
Increase in long-term debt 803,400 943 7,780
Reduction in long-term debt (270,455) (19,359) (28,278)
Net proceeds from issuance and sale of common stock 171,439 -- --
Net proceeds from issuance and sale of subsidiary stock 90,430 -- --
Purchase of treasury stock -- (28,657) --
Dividend reinvestment and employee stock plans 10,764 5,623 2,652
Cash dividends paid to shareholders (18,475) (17,543) (15,976)
Other (5,511) -- --
--------- -------- --------
Net cash flow from (used for) financing activities 710,055 (3,304) (28,803)
--------- -------- --------
Effect of exchange rate changes on cash (1,965) (963) (378)
--------- -------- --------
CASH AND EQUIVALENTS
Net increase (decrease) in cash and equivalents (3,503) 4,779 6,263
Cash and equivalents, beginning 21,869 17,090 10,827
--------- -------- --------
Cash and equivalents, ending $ 18,366 $ 21,869 $ 17,090
========= ======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 61,692 $ 10,563 $ 11,436
Income taxes paid 47,052 45,307 39,521
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 11
KENNAMETAL INC., 1998 ANNUAL REPORT
(PAGE 39)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY . . .
<TABLE>
<CAPTION>
Year ended June 30 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CAPITAL STOCK
Balance at beginning of year $ 36,712 $ 36,712 $ 36,712
Issuance of common stock 4,313 -- --
--------- --------- ---------
Balance at end of year 41,025 36,712 36,712
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 91,049 87,417 85,768
Dividend reinvestment and stock purchase plan 819 1,132 882
Employee stock plans 6,676 2,500 767
Issuance of common stock 167,126 -- --
Issuance of subsidiary stock 54,975 -- --
--------- --------- ---------
Balance at end of year 320,645 91,049 87,417
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of year 406,083 351,594 297,838
Net income 71,197 72,032 69,732
Cash dividends (18,475) (17,543) (15,976)
--------- --------- ---------
Balance at end of year 458,805 406,083 351,594
--------- --------- ---------
TREASURY SHARES
Balance at beginning of year (62,400) (35,734) (36,737)
Purchase of treasury stock -- (28,657) --
Dividend reinvestment and stock purchase plan 292 708 537
Employee stock plans 2,977 1,283 466
--------- --------- ---------
Balance at end of year (59,131) (62,400) (35,734)
--------- --------- ---------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance at beginning of year (11,836) (1,040) 8,304
Current year translation adjustments (14,048) (10,796) (9,344)
--------- --------- ---------
Balance at end of year (25,884) (11,836) (1,040)
--------- --------- ---------
Total shareholders' equity, June 30 $ 735,460 $ 459,608 $ 438,949
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 12
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 40)
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, industrial supplies and
services primarily for the metalworking, mining and highway construction
industries, including wear-resistant parts used in various 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 $15.1 million and $12.8 million of receivables from
affiliates at June 30, 1998 and 1997, 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. The net book value of goodwill amounted to $690.6 million and
$42.5 million at June 30, 1998 and 1997, respectively.
DEFERRED FINANCING COSTS incurred in connection with new borrowings are
capitalized and amortized to interest expense over the life of the related
obligation.
EARNINGS PER SHARE. Basic earnings per share is computed using the weighted
average number of shares outstanding during the period, while diluted earnings
per share is calculated to reflect the potential dilution that occurs related to
issuance of common stock under stock option grants. The difference between basic
and diluted earnings per share relates solely to the effect of common stock
options.
For purposes of determining the number of dilutive shares outstanding, weighted
average shares outstanding for basic earnings per share calculations were
increased from the dilutive effect of unexercised stock options by 303,539,
210,706 and 189,444 shares in 1998, 1997 and 1996, respectively.
ISSUANCE OF SUBSIDIARY STOCK. The company accounts for sales of subsidiary stock
as capital transactions in the consolidated financial statements.
REVENUE RECOGNITION. The company recognizes revenue from product
sales upon transfer of title to the customer.
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.
<PAGE> 13
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 41)
PENSION PLANS cover the majority of 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.
NEW ACCOUNTING STANDARDS. The company adopted SFAS No. 128, "Earnings per
Share," issued in February 1997. This statement requires the disclosure of basic
and diluted earnings per share and revises the method required to calculate
these amounts. The adoption of this standard did not have a material impact on
previously reported earnings per share amounts. The company also adopted SFAS
No. 129, "Disclosure of Information about Capital Structure," issued in February
1997. This statement requires specific disclosure requirements related to a
company's capital structure. The adoption of this standard did not have a
material impact on the company.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information," were
issued by the Financial Accounting Standards Board requiring implementation for
years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The company will adopt SFAS No. 130 in fiscal 1999 and does not anticipate that
the statement will have a significant impact on its disclosures.
SFAS No. 131 introduces a new model for segment reporting called the "management
approach." The management approach is based on the way the chief operating
decision-maker organizes segments within a company for making operating
decisions and assessing performance. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The company is in the process of evaluating
the effect of applying this statement.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was issued. The implementation of SFAS No. 132 will
revise certain footnote disclosure requirements related to pension and other
retiree benefits. The new standard will not have a financial impact on the
company. Implementation is required for fiscal 1999.
RECLASSIFICATIONS. Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform with the current year presentation.
NOTE 3
- ------
ACQUISITIONS
On November 17, 1997, the company completed the acquisition of Greenfield
Industries, Inc. (Greenfield) for approximately $1.0 billion, including $324.4
million in assumed Greenfield debt and convertible redeemable preferred
securities and transaction costs.
The Greenfield acquisition was recorded using the purchase method of accounting
and, accordingly, the results of operations of Greenfield have been included in
the company's results from the date of acquisition. The purchase price was
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition. The excess of purchase price over the
fair value of the net assets acquired has been recorded as goodwill and is being
amortized over forty years.
Additionally, the company also has made several other acquisitions in 1998 and
1997 to expand its product offering and distribution channels. These
acquisitions were accounted for using the purchase method of accounting and
their results have been included in the company's results from the respective
dates of acquisition. Except for Greenfield, the pro forma effects, individually
and collectively, of the acquisitions in the company's consolidated financial
statements would not materially impact the reported results.
The allocation of the purchase price to assets acquired and liabilities assumed
of Greenfield is as follows:
<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
<S> <C>
Working capital, other than cash $171,710
Property, plant and equipment 167,798
Other assets 9,246
Other liabilities (28,510)
Long-term debt (318,146)
Goodwill 654,117
--------
Net purchase price $656,215
========
</TABLE>
Pro forma results of operations for the acquisition of Greenfield, but excluding
the effects of all other acquisitions, are based on the historical financial
statements of the company and Greenfield adjusted to give effect to the
acquisition of Greenfield. The pro forma results of operations assume that the
acquisition of Greenfield occurred as of the first day of the company's 1997
fiscal year (July 1, 1996).
<TABLE>
<CAPTION>
(in thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,913,190 $1,683,362
Net income 63,623 51,036
Basic earnings per share 2.33 1.92
Diluted earnings per share 2.31 1.91
</TABLE>
<PAGE> 14
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 42)
The pro forma financial information does not purport to present what the
company's results of operations would actually have been if the acquisition of
Greenfield had occurred on the assumed date, as specified above, or to project
the company's financial condition or results of operations for any future
period.
On June 26, 1998, the company sold the Marine Products division of
Greenfield which operated as Rule Industries, Inc. (Rule). The company acquired
Rule as part of its acquisition of Greenfield and, for strategic reasons, chose
to divest itself of this part of the business. Rule's Marine Products division
is a worldwide market leader in accessory products for the recreational and
small commercial boat markets. Annual sales of the Marine Products division are
approximately $25.0 million. Cash proceeds from the sale were used to reduce a
portion of the company's long-term debt incurred in connection with the
acquisition of Greenfield. No gain on sale was recorded as the difference
between the cash proceeds and the net book value of Rule's assets was recorded
as a reduction of previously recorded goodwill associated with the acquisition
of Greenfield, as specified by accounting rules.
NOTE 4
- ------
STOCK ISSUANCES
On March 20, 1998, the Company sold 3.45 million shares of common stock
resulting in net proceeds of $171.4 million. The proceeds were used to reduce a
portion of the Company's long-term debt incurred in connection with the
acquisition of Greenfield.
On July 2, 1997, an initial public offering (IPO) of approximately 4.9 million
shares of common stock of JLK Direct Distribution Inc. (JLK), a subsidiary of
the company, was consummated at a price of $20.00 per share. 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 $90.4 million and represented approximately 20
percent of JLK's common stock. The transaction has been accounted for as a
capital transaction in the consolidated financial statements. The net proceeds
were used by JLK to repay $20.0 million of indebtedness related to a dividend to
the company and $20.0 million related to intercompany obligations to the company
incurred in 1997. The company used these proceeds to repay short-term debt.
Pending such uses, the 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 cost. Additional net
proceeds of $50.4 million have been used to make acquisitions in 1998. The
company currently owns approximately 83 percent of the outstanding common stock
of JLK.
NOTE 5
- ------
INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $302,374 $183,961
Work in process and
powder blends 117,428 50,351
Raw materials and supplies 53,449 16,494
-------- --------
Inventories at current cost 473,251 250,806
Less LIFO valuation (36,779) (40,695)
-------- --------
Total inventories $436,472 $210,111
======== ========
</TABLE>
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 45 and 56 percent of total inventories at June 30, 1998 and 1997,
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 6
- ------
OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Payroll, state and local taxes $13,973 $ 6,098
Accrued benefits 8,578 6,894
Accrued employee programs 7,227 5,211
Accrued interest expense 4,894 766
Accrued product warranty costs 4,266 4,621
Federal and state income taxes -- 17,563
Other accrued expenses 43,900 25,021
------- -------
Total other current liabilities $82,838 $66,174
======= =======
</TABLE>
<PAGE> 15
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 43)
NOTE 7
- ------
LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital lease obligations consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Bank Credit Agreement:
Revolving credit loans,
6.785% to 6.815%, due 2003 $609,300 $ --
Term loan, 6.785%, due in
installments through 2003 266,250 --
Senior notes, 9.64%, due in
installments through 2000 -- 30,000
Borrowings outside the U.S.,
varying from 6.25% to 10.25%
in 1998 and 6.60% to 10.25%
in 1997, due in installments
through 2013 18,462 6,750
Leases, primarily office facilities,
with terms expiring through
2008 at 6.75% to 7.55% 11,004 11,068
Other 14,548 6,480
-------- --------
Total debt and capital leases 919,564 54,298
-------- --------
Less current maturities:
Long-term debt (77,522) (12,287)
Capital leases (1,110) (1,566)
-------- --------
Total current maturities (78,632) (13,853)
-------- --------
Long-term debt and capital leases $840,932 $ 40,445
======== ========
</TABLE>
In connection with the acquisition of Greenfield, the company entered into a new
$1.4 billion Bank Credit Agreement (Agreement). Subject to certain conditions,
the Agreement permits term loans of up to $500.0 million and revolving credit
loans of up to $900.0 million for working capital, capital expenditures and
general corporate purposes. Interest payable under the term loan and revolving
credit loans are currently based on LIBOR plus 1.125%. The Agreement also
includes a commitment fee on the revolving credit loans of 0.25% of the unused
balance.
The Agreement also contains various restrictive and affirmative covenants
requiring the maintenance of certain financial ratios. The term loan under the
Agreement is subject to mandatory amortization commencing on November 30, 1998,
and matures on August 31, 2002. The revolving credit loans also mature on August
31, 2002. During fiscal 1998, the term loan was permanently reduced with the net
proceeds received in connection with the issuance of company stock and from the
sale of certain assets (see Notes 3 and 4).
Future principal maturities of long-term debt are $77.5 million, $124.2 million,
$75.9 million, $2.8 million and $611.6 million, respectively, in fiscal years
1999 through 2003.
Future minimum lease payments under capital leases for the next five years and
in total are as follows:
<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------------------------------------------
<S> <C>
Year ending June 30:
1999 $ 1,979
2000 1,993
2001 1,383
2002 1,296
2003 1,099
After 2003 8,131
-------
Total future minimum lease payments 15,881
Less amount representing interest (4,877)
-------
Present value of minimum lease payments $11,004
=======
</TABLE>
Future minimum lease payments under operating leases with noncancelable terms
beyond one year were not significant at June 30, 1998.
NOTE 8
- ------
NOTES PAYABLE TO BANKS
Notes payable to banks of $48.1 million and $120.2 million at June 30, 1998 and
1997, respectively, represent short-term borrowings under U.S. and international
credit lines with commercial banks. These credit lines totaled approximately
$134.9 million at June 30, 1998, of which $86.8 million was unused. The weighted
average interest rate for short-term borrowings was 7.4 percent and 6.3 percent
at June 30, 1998 and 1997, respectively.
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 0.25%. The company guaranteed repayment of the line of credit in the event
of default by J&L. The line of credit was repaid in full and canceled during
July 1997.
<PAGE> 16
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 44)
NOTE 9
- ------
INCOME TAXES
Income before income taxes and the provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes:
United States $ 93,775 $ 95,029 $ 76,020
International 36,801 23,134 39,356
-------- -------- --------
Total income before
income taxes $130,576 $118,163 $115,376
======== ======== ========
Current income taxes:
Federal $ 17,200 $ 30,600 $ 28,100
State 5,700 6,000 5,500
International 10,100 4,400 1,800
-------- -------- --------
Total 33,000 41,000 35,400
Deferred income taxes 20,900 3,900 8,500
-------- -------- --------
Provision for
income taxes $ 53,900 $ 44,900 $ 43,900
======== ======== ========
Effective tax rate 41.3% 38.0% 38.0%
======== ======== ========
</TABLE>
The reconciliation of income taxes computed using the statutory U.S. income tax
rate and the provision for income taxes was as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at U.S.
statutory rate $45,702 $41,357 $40,382
State income taxes,
net of federal
tax benefits 3,684 3,917 3,575
Nondeductible
goodwill 3,944 397 283
Combined tax effects of
international income 2,944 (1,990) (2,942)
International losses with
no related tax benefits 1,562 102 421
Other (3,936) 1,117 2,181
------- ------- -------
Provision for
income taxes $53,900 $44,900 $43,900
======= ======= =======
</TABLE>
Deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards $20,270 $27,160
Other postretirement benefits 18,350 15,153
Inventory valuation and reserves 12,779 7,981
Accrued vacation compensation 4,582 4,316
Other accruals 11,793 7,436
Pension benefits (2,860) (2,133)
Accumulated depreciation (36,557) (17,663)
------- -------
Total 28,357 42,250
Less valuation allowance (2,868) (3,614)
------- -------
Net deferred tax assets $25,489 $38,636
======= =======
</TABLE>
Deferred income taxes have not been provided on cumulative undistributed
earnings of international subsidiaries and affiliates. At June 30, 1998,
unremitted earnings of non-U.S. subsidiaries were determined to be permanently
reinvested. It is not practical to estimate the income tax benefit that might be
incurred if earnings were remitted to the United States.
Included in deferred tax assets at June 30, 1998, are unrealized tax benefits
totaling $20.3 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 $15.6 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
2003. The company established a valuation allowance of $2.9 million to offset
the deferred tax benefits that may not be realized before the expiration of the
carryforward periods.
During the fourth quarter of 1998, the company reached a settlement with the
German tax authorities related to tax uncertainties associated with the
acquisition of Hertel AG in 1994. As a result, the subsidiary increased its net
operating loss carryforwards in Germany by $5.9 million. A portion of this
amount was used to reduce previously recorded goodwill associated with the
acquisition of Hertel AG as specified by accounting rules.
<PAGE> 17
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 45)
NOTE 10
- -------
PENSION BENEFITS
The components of net pension credit for the company's U.S. defined benefit
pension plans were as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 8,284 $ 7,728 $ 6,722
Interest cost 17,075 14,569 13,688
Return on plan assets (47,220) (46,845) (45,888)
Net amortization
and deferral 16,964 22,457 24,682
-------- -------- --------
Net pension credit $ (4,897) $ (2,091) $ (796)
======== ======== ========
</TABLE>
The funded status of the plans and amounts recognized in the consolidated
balance sheets were as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Plan assets, at fair value $ 395,930 $318,229
--------- --------
Present value of accumulated
benefit obligations:
Vested benefits 221,736 161,160
Nonvested benefits 2,433 2,271
--------- --------
Accumulated benefit obligations 224,169 163,431
Effect of future salary increases 48,745 48,054
--------- --------
Projected benefit obligations 272,914 211,485
--------- --------
Plan assets in excess of projected
benefit obligations 123,016 106,744
Amounts not recognized in the
financial statements:
Unrecognized net assets from
July 1, 1986 (10,149) (12,329)
Unrecognized prior service costs 5,719 672
Unrecognized net gains (111,839) (87,118)
--------- --------
Prepaid pension costs $ 6,747 $ 7,969
========= ========
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.00% 7.50%
Rate of future salary increases 4.50% 4.50%
Rate of return on plan assets 9.00% 9.00%
</TABLE>
In connection with the acquisition of Greenfield during 1998, the company
recorded an aggregate net liability of $8.0 million in purchase accounting for
the excess of the estimated projected benefit obligation over the fair value of
plan assets. This plan was frozen in 1995 and benefits were frozen at 1995
levels.
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:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 3,526 $ 877 $ 735
Interest cost 2,571 1,480 1,573
Return on plan assets (1,931) (709) (661)
Net amortization
and deferral 30 (45) (45)
------- ------ ------
Net pension cost $ 4,196 $1,603 $1,602
======= ====== ======
</TABLE>
The funded status of the international plans and amounts recognized in the
consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------
Assets ABO Assets ABO
Exceed Exceed Exceed Exceed
ABO Assets ABO Assets
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan assets, at fair value $ 26,250 $ -- $ 9,417 $ --
-------- -------- ------- --------
Present value of accumulated
benefit obligations (ABO):
Vested benefits 22,111 12,455 5,643 11,863
Nonvested benefits 391 1,576 13 1,465
-------- -------- ------- --------
Accumulated benefit obligations 22,502 14,031 5,656 13,328
Effect of future salary increases 2,742 205 1,393 210
-------- -------- ------- --------
Projected benefit obligations 25,244 14,236 7,049 13,538
-------- -------- ------- --------
Plan assets greater (less)
than projected benefit
obligations 1,006 (14,236) 2,368 (13,538)
Amounts not recognized in the
financial statements:
Unrecognized net assets 470 -- (850) --
Unrecognized net gains (1,449) 11 (1,550) --
-------- -------- ------- --------
Net pension asset (liability) $ 27 $(14,225) $ (32) $(13,538)
======== ======== ======= ========
</TABLE>
<PAGE> 18
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 46)
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:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.00%-6.00% 8.00%-7.00%
Rate of future
salary increases 4.50%-4.00% 5.50%-4.00%
Rate of return on
plan assets 8.00%-7.00% 9.00%
</TABLE>
Total pension cost for U.S. and international plans amounted to $13.1 million,
$8.7 million and $2.1 million in 1998, 1997 and 1996, respectively.
NOTE 11
- -------
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:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $1,080 $1,220 $1,100
Interest cost 2,646 2,427 2,661
Net amortization
and deferral (60) (70) --
------ ------ ------
Other postretirement
benefit costs $3,666 $3,577 $3,761
====== ====== ======
</TABLE>
Accumulated postretirement benefit obligations and amounts recognized in the
consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Present value of accumulated benefit obligations:
Retirees $24,720 $17,446
Fully eligible active participants 8,372 2,742
Other active participants 7,535 14,392
------- -------
Accumulated benefit obligations 40,627 34,580
Plan assets, at fair value -- --
------- -------
Accumulated benefit obligations
in excess of plan assets 40,627 34,580
Unrecognized net gains 2,896 4,340
------- -------
Accrued postretirement benefits $43,523 $38,920
======= =======
</TABLE>
Included in other noncurrent liabilities were accrued postretirement benefits of
$40.2 million and $36.0 million at June 30, 1998 and 1997, respectively.
The significant actuarial assumptions used to determine the present value of
accumulated postretirement benefit obligations were as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.00% 7.50%
Rate of increase in health care costs:
Initial rate 7.50% 8.00%
Ultimate rate in 2003 and after 5.00% 5.00%
</TABLE>
A 1 percent increase in the health care cost trend rate would have increased
other postretirement benefit costs by $0.1 million in 1998 and the accumulated
benefit obligation by $1.0 million at June 30, 1998.
In connection with the acquisition of Greenfield during 1998, the company
recorded an aggregate net liability of $4.8 million in purchase accounting for
the estimated accumulated benefit obligation. This plan was frozen in 1995 and
benefits were frozen at 1995 levels.
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 1998, 1997 and 1996, respectively.
<PAGE> 19
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 47)
NOTE 12
- -------
RESTRUCTURING CHARGE
In 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 constructed a new world
headquarters at a cost of approximately $20.0 million. The relocation was made
to globalize key functions and to provide a more efficient corporate structure.
As a result, a pretax charge of $2.0 million was recorded in the fourth quarter
of fiscal 1996 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 are included in operating expenses as incurred. The company also
recorded a one-time pretax charge of $0.7 million related to the closure of a
manufacturing facility in Canada. The restructuring was completed in 1998.
NOTE 13
- -------
FINANCIAL INSTRUMENTS
FAIR VALUE. The company had $18.4 million in cash and equivalents at June 30,
1998, which approximates fair value because of the short maturity of these
investments.
The estimated fair value of long-term debt was $909.1 million at June 30, 1998.
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. These financial instruments are not used for trading purposes. There
were no financial instruments with significant off-balance-sheet risk at June
30, 1998.
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, 1998, the company had no significant concentrations of
credit risk.
NOTE 14
- -------
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 $0.2 million (3,961 shares),
$0.5 million (11,684 shares) and $0.9 million (22,740 shares) were delivered in
1998, 1997 and 1996, respectively.
Under the 1996, 1992 and 1988 plans, shares may be awarded to eligible employees
without payment. The respective plans specify that 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 1998,
1997 and 1996.
The company measures 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 1998,
1997 and 1996, consistent with the methodology in SFAS No. 123, "Accounting for
Stock-Based Compensation," the effect on the company's 1998, 1997 and 1996 net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $71,197 $72,032 $69,732
Pro forma 65,671 70,140 65,610
Basic earnings per share:
As reported $ 2.61 $ 2.71 $ 2.62
Pro forma 2.41 2.64 2.46
Diluted earnings per share:
As reported $ 2.58 $ 2.69 $ 2.60
Pro forma 2.38 2.62 2.45
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.12% 6.64% 6.28%
Expected life (years) 5 5 5
Expected volatility 23.8% 27.9% 30.2%
Expected dividend yield 1.6% 2.0% 1.9%
</TABLE>
<PAGE> 20
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 48)
Stock option activity for 1998, 1997 and 1996 is set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
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 1,169,367 $30.85 994,244 $30.41 521,148 $20.55
Granted 727,900 49.82 327,000 31.42 580,500 36.86
Exercised (224,061) 33.05 (116,877) 22.65 (105,904) 17.16
Lapsed and forfeited (53,000) 50.76 (35,000) 36.45 (1,500) 37.06
--------- ------ --------- ------ ------- ------
Options outstanding, end of year 1,620,206 $38.40 1,169,367 $30.85 994,244 $30.41
--------- ------ --------- ------ ------- ------
Options exercisable, end of year 1,592,854 $38.64 1,132,111 $31.16 960,970 $30.88
--------- ------ --------- ------ ------- ------
Weighted average fair value of
options granted during the year $13.90 $ 9.48 $11.56
====== ====== ======
</TABLE>
Stock options outstanding at June 30, 1998:
<TABLE>
<CAPTION>
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>
$16.13-$20.53 179,706 3.73 $18.92 158,354 $19.19
24.75 135,862 6.15 24.75 135,862 24.75
30.81 177,700 8.09 30.81 177,700 30.81
31.06- 36.38 83,000 8.10 33.40 83,000 33.40
37.06 363,038 7.08 37.06 363,038 37.06
48.56 491,400 9.08 48.56 491,400 48.56
49.25- 52.09 88,000 9.52 50.08 82,000 50.02
53.97 101,500 9.46 53.97 101,500 53.97
--------- ---- ------ --------- ------
1,620,206 7.68 $38.40 1,592,854 $38.64
========= ==== ====== ========= ======
</TABLE>
NOTE 15
- -------
ENVIRONMENTAL MATTERS
The company has been involved in various environmental cleanup and remediation
activities at several of its manufacturing facilities. In addition, the company
has been named as a potentially responsible party at one Superfund site in the
United States. However, it is management's opinion, based on its evaluations and
discussions with outside counsel and independent consultants, that the ultimate
resolution of these environmental matters will not have a material adverse
effect on the results of operations, financial position or cash flows of the
company.
The company maintains a Corporate Environmental, Health and Safety (EH&S)
Department as well as an EH&S Policy Committee to ensure compliance with
environmental regulations and to monitor and oversee remediation activities. In
addition, the company has established an EH&S administrator at each of its
domestic manufacturing facilities. The company's financial management team
periodically meets with members of the Corporate EH&S Department and the
Corporate Legal Department to review and evaluate the status of environmental
projects and contingencies. On a quarterly and annual basis, management
establishes or adjusts financial provisions and reserves for environmental
contingencies in accordance with SFAS No. 5, "Accounting for Contingencies."
NOTE 16
- -------
SHAREHOLDER RIGHTS PLAN
Pursuant to the company's Shareholder Rights Plan, one-half of a right is
associated with each share of capital stock. Each right entitles a shareholder
to buy 1/100th of a share of a new series of preferred stock at a price of $105
(subject to adjustment).
The rights will be exercisable only if a person or group of persons acquires or
intends to make a tender offer for 20 percent or more of the company's capital
stock. If any person acquires 20 percent of the capital stock, each right will
entitle the 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.
<PAGE> 21
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 49)
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:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales:
United States $1,304,149 $ 867,321 $ 784,295
Europe 390,700 306,065 328,732
Other
international 157,054 125,856 114,432
---------- ---------- ----------
Total 1,851,903 1,299,242 1,227,459
---------- ---------- ----------
Intersegment
transfers:
United States 126,713 100,000 97,343
Europe 38,823 33,629 38,452
Other
international 7,979 9,270 11,701
---------- ---------- ----------
Total 173,515 142,899 147,496
---------- ---------- ----------
Net sales $1,678,388 $1,156,343 $1,079,963
========== ========== ==========
Operating income:
United States $ 144,043 $ 90,421 $ 79,517
Europe 36,743 18,876 27,614
Other
international 17,512 15,949 15,247
Eliminations (2,727) 1,779 (527)
---------- ---------- ----------
Total operating
income 195,571 127,025 121,851
---------- ---------- ----------
Interest expense 59,536 10,393 11,296
Other income
(expense) (5,459) 1,531 4,821
---------- ---------- ----------
Income before
income taxes and
minority interest $ 130,576 $ 118,163 $ 115,376
========== ========== ==========
Identifiable assets:
United States $1,676,436 $ 560,631 $ 495,452
Europe 328,933 210,711 239,594
Other
international 156,388 79,477 83,130
Eliminations (43,335) (10,390) (37,884)
Corporate 20,571 28,880 19,199
---------- ---------- ----------
Total assets $2,138,993 $ 869,309 $ 799,491
========== ========== ==========
</TABLE>
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 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 $64.7 million,
$15.1 million and $21.4 million in 1998, 1997 and 1996, respectively.
NOTE 18
- -------
OTHER INCOME (EXPENSE)
Other expense includes approximately $4.6 million as a result of the write-off
of deferred financing costs related to a postponed public offering of $450.0
million of equity and equity-related securities and $450.0 million of debt
securities (the "offerings") that the company had originally intended to offer
in connection with the acquisition of Greenfield. Related to the debt offering,
the company also entered into an agreement to hedge its exposure to fluctuations
in interest rates. The company subsequently postponed the proposed offerings and
terminated the interest rate hedges resulting in a loss of $3.5 million. The
company also wrote-off other related offering expenses of $1.1 million resulting
in a combined total of $4.6 million.
<PAGE> 22
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 50)
QUARTERLY FINANCIAL INFORMATION . . .
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
- ----------------------------------------------------------
(in thousands, except
per share data) Sep. 30 Dec. 31 Mar. 31 Jun. 30
- ----------------------------------------------------------
FISCAL 1998:
<S> <C> <C> <C> <C>
Net sales $310,792 $370,048 $496,585 $500,963
Gross profit 132,223 150,502 200,269 200,913
Net income 17,548 9,574 20,741 23,334
Basic
earnings
per share 0.67 0.36 0.77 0.78
Diluted
earnings
per share 0.66 0.36 0.76 0.78
======== ======== ======== ========
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
Basic
earnings
per share 0.57 0.54 0.75 0.85
Diluted
earnings
per share 0.57 0.54 0.74 0.84
======== ======== ======== ========
</TABLE>
Earnings per share amounts for each quarter are required to be computed
independently and, therefore, may not equal the amount computed for the year.
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 10, 1998, was 2,884.
Stock price ranges and dividends declared and paid were as follows:
<TABLE>
<CAPTION>
Quarter Ended
- ------------------------------------------------------------------
Sep. 30 Dec. 31 Mar. 31 Jun. 30
- ------------------------------------------------------------------
FISCAL 1998:
<S> <C> <C> <C> <C>
High $49 1/2 $55 11/16 $53 3/8 $54 3/4
Low 41 1/4 47 43 13/16 41 3/4
Dividends 0.17 0.17 0.17 0.17
======= ========= ========= =======
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
======= ========= ========= =======
</TABLE>
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> 23
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 51)
REPORT OF AUDIT COMMITTEE . . .
TO THE SHAREHOLDERS OF KENNAMETAL INC.
The Audit Committee of the Board of Directors, composed of four independent
directors, met four times during fiscal year 1998.
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/ LARRY YOST
- -------------------------
Larry Yost
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, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended June 30, 1998. 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, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
- -------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 21, 1998
<PAGE> 24
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 52)
TEN-YEAR FINANCIAL HIGHLIGHTS . . .
<TABLE>
<CAPTION>
10-YR
(dollars in thousands, except per share data) Notes CAGR 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS
Net sales 14.9% $1,678,388 $1,156,343 $1,079,963
Cost of goods sold 15.1 994,481 668,415 625,473
Research and development expenses 7.7 20,397 24,105 20,585
Selling, marketing and distribution expenses 14.9 339,772 263,980 242,375
General and administrative expenses 14.3 112,519 69,911 65,417
Interest expense 21.3 59,536 10,393 11,296
Unusual or nonrecurring items (1) n.m. 4,595 -- 2,666
Income taxes 10.9 53,900 44,900 43,900
Accounting changes, net of tax (2) n.m. -- -- --
Net income (loss) (3) 11.3 71,197 72,032 69,732
---- ---------- ---------- ----------
FINANCIAL POSITION
Net working capital 16.1% $ 441,762 $ 175,877 $ 217,651
Inventories 16.3 436,472 210,111 204,934
Property, plant and equipment, net 12.5 525,927 300,386 267,107
Total assets 19.5 2,138,993 869,309 799,491
Long-term debt, including capital leases 27.4 840,932 40,445 56,059
Total debt, including capital leases 25.0 967,667 174,464 131,151
Total shareholders' equity (4) 14.7 735,460 459,608 438,949
---- ---------- ---------- ----------
PER SHARE DATA
Basic earnings (loss) (3) 8.2% $ 2.61 $ 2.71 $ 2.62
Diluted earnings (loss) 8.2 2.58 2.69 2.60
Dividends 2.7 0.68 0.66 0.60
Book value (at year-end) 10.6 24.66 17.61 16.44
Market price (at year-end) 8.6 41.75 43.00 34.00
---- ---------- ---------- ----------
OTHER DATA
Capital expenditures 8.5% $ 104,774 $ 73,779 $ 57,556
Number of employees (at year-end) 11.2 14,380 7,550 7,260
Average sales per employee 6.0 $ 152 $ 159 $ 152
Weighted average shares
outstanding (in thousands) (4) 2.9 27,263 26,575 26,635
Diluted average shares outstanding
(in thousands) (4) 2.9 27,567 26,786 26,825
---- ---------- ---------- ----------
KEY RATIOS
Sales growth 45.1% 7.1% 9.8%
Gross profit margin 40.7 42.2 42.1
Operating profit margin (5) 11.7 11.0 11.5
Return on sales (3) 4.2 6.2 6.5
Return on equity (3) 12.2 15.8 17.0
Total debt to total capital 55.4 27.1 22.5
Dividend payout (6) 25.7 25.0 35.8
Inventory turnover 3.1x 3.2x 3.0x
========== ========= ==========
</TABLE>
n.m.--Not meaningful CAGR--Compound annual growth rate
Notes
1. Unusual charges (credits) reflect deferred financing costs related to a
postponed public offering intended to have been offered in connection with
the acquisition of Greenfield in 1998, 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 1998, net income was $73,894; basic earnings
per share were $2.71; return on sales was 4.4 percent; and return on equity
was 12.6 percent. Excluding unusual charges in 1996, net income was
$71,369; basic 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; basic earnings per
share were $1.29; return on sales was 3.9 percent; and return on equity was
11.4 percent.
4. In 1998, the company issued 3.45 million shares of capital stock for net
proceeds of $171.4 million. In 1994, the company issued approximately 4
million shares of capital stock for net proceeds of $73.6 million.
5. Excludes unusual or nonrecurring items.
6. Uses a trailing three-year average earnings.
<PAGE> 25
KENNAMETAL INC. ANNUAL REPORT 1998
(PAGE 53)
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) Notes 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $983,873 $802,513 $598,496 $594,533
Cost of goods sold 560,867 472,533 352,773 362,967
Research and development expenses 18,744 15,201 14,714 13,656
Selling, marketing and distribution expenses 219,271 189,487 144,850 137,494
General and administrative expenses 55,853 58,612 41,348 45,842
Interest expense 12,793 13,811 9,549 10,083
Unusual or nonrecurring items (1) -- 24,749 (1,738) --
Income taxes 45,000 15,500 14,000 8,100
Accounting changes, net of tax (2) -- 15,003 -- --
Net income (loss) (3) 68,294 (4,088) 20,094 12,872
-------- -------- -------- --------
FINANCIAL POSITION
Net working capital $184,072 $130,777 $120,877 $108,104
Inventories 200,680 158,179 115,230 118,248
Property, plant and equipment, net 260,342 243,098 192,305 200,502
Total assets 781,609 697,532 448,263 472,167
Long-term debt, including capital leases 78,700 90,178 87,891 95,271
Total debt, including capital leases 149,730 147,295 110,628 127,954
Total shareholders' equity (4) 391,885 322,836 255,141 251,511
-------- -------- -------- --------
PER SHARE DATA
Basic earnings (loss) (3) $ 2.58 $ (0.17) $ 0.93 $ 0.60
Diluted earnings (loss) 2.56 (0.17) 0.92 0.60
Dividends 0.60 0.58 0.58 0.58
Book value (at year-end) 14.75 12.25 11.64 11.64
Market price (at year-end) 34.50 24.63 16.75 17.13
-------- -------- -------- --------
OTHER DATA
Capital expenditures $ 43,371 $ 27,313 $ 23,099 $ 36,555
Number of employees (at year-end) 7,030 6,600 4,850 4,980
Average sales per employee $ 146 $ 125 $ 122 $ 116
Weighted average shares
outstanding (in thousands) (4) 26,486 24,304 21,712 21,452
Diluted average shares outstanding
(in thousands) (4) 26,640 24,449 21,753 21,551
-------- -------- -------- --------
KEY RATIOS
Sales growth 22.6% 34.1% 0.7% (3.8)%
Gross profit margin 43.0 41.1 41.1 38.9
Operating profit margin (5) 12.9 7.8 6.9 5.2
Return on sales (3) 6.9 n.m. 3.4 2.2
Return on equity (3) 19.3 n.m. 8.1 5.2
Total debt to total capital 27.0 30.6 30.2 33.7
Dividend payout (6) 53.9 127.9 68.8 55.4
Inventory turnover 3.1x 3.1x 3.1x 3.0x
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) Notes 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING RESULTS
Net sales $617,833 $589,023 $472,200
Cost of goods sold 358,529 342,434 274,929
Research and development expenses 14,750 13,325 11,969
Selling, marketing and distribution expenses 136,319 123,286 94,934
General and administrative expenses 49,219 42,648 31,443
Interest expense 11,832 10,538 8,960
Unusual or nonrecurring items (1) 6,350 -- --
Income taxes 17,300 23,000 20,900
Accounting changes, net of tax (2) -- -- --
Net income (loss) (3) 21,086 32,113 29,994
-------- -------- --------
FINANCIAL POSITION
Net working capital $ 88,431 $108,954 $ 91,032
Inventories 119,767 114,593 105,033
Property, plant and equipment, net 193,830 175,523 166,390
Total assets 476,194 451,379 383,252
Long-term debt, including capital leases 73,113 81,314 57,127
Total debt, including capital leases 130,710 116,212 95,860
Total shareholders' equity (4) 243,535 231,598 204,465
-------- -------- --------
PER SHARE DATA
Basic earnings (loss) (3) $ 1.00 $ 1.54 $ 1.45
Diluted earnings (loss) 0.99 1.52 1.43
Dividends 0.58 0.58 0.56
Book value (at year-end) 11.42 11.02 9.84
Market price (at year-end) 17.81 17.25 15.88
-------- -------- --------
OTHER DATA
Capital expenditures $ 55,323 $ 35,998 $ 28,491
Number of employees (at year-end) 5,360 5,580 5,420
Average sales per employee $ 113 $ 107 $ 94
Weighted average shares
outstanding (in thousands) (4) 21,094 20,872 20,696
Diluted average shares outstanding
(in thousands) (4) 21,237 21,065 20,915
-------- -------- --------
KEY RATIOS
Sales growth 4.9% 24.7% 12.5%
Gross profit margin 42.0 41.9 41.8
Operating profit margin (5) 8.9 10.9 12.3
Return on sales (3) 3.4 5.5 6.4
Return on equity (3) 8.7 14.9 15.4
Total debt to total capital 34.9 33.4 31.9
Dividend payout (6) 43.6 41.6 48.1
Inventory turnover 3.0x 3.1x 2.9x
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 21
PRINCIPAL SUBSIDIARIES
<TABLE>
<CAPTION>
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
Presto Cutting Tools Canada Limited Canada
Kennametal (China) Limited China
Kennametal (Shanghai) Ltd. China
Shanxi-Kennametal Mining Cutting Systems
Manufacturing Company Limited China
Xuzhou-Kennametal Mining Cutting Systems
Manufacturing Company Limited China
Kennametal Hertel AG Germany
Kennametal Hardpoint H.K. Ltd. Hong Kong
Kennametal Hertel Japan Ltd. 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
Greenfield Industries, 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 Limited England
Kennametal Hertel France S.A. France
Materiels de Precision et de Production S.A. France
Kennametal Hertel G.m.b.H. Germany
Kennametal Hertel Korea G.m.b.H. Korea Branch South Korea
Rubig G.m.b.H. Germany
Kennametal Hertel Nederland B.V. Netherlands
Nederlandse Hardmetaal Fabrieken B.V. Netherlands
</TABLE>
<PAGE> 2
EXHIBIT 21
PRINCIPAL SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
Jurisdiction in Which
Name of Subsidiary Organized or Incorporated
- ------------------ -------------------------
<S> <C>
Consolidated Subsidiaries of JLK Direct Distribution Inc.:
J&L America, Inc. Michigan, United States
Consolidated Subsidiaries of J&L America, Inc.:
J & L Industrial Supply UK (branch) England
J & L Werkeuge Und Industriebedarf G.m.b.H. Germany
ATS Industrial Supply Company Arizona, United States
GRS Industrial Supply Company Michigan, United States
Strong Tool Co. Ohio, United States
Dalworth Tool & Supply, Inc. Texas, United States
Production Tools Sales, Inc. Texas, United States
Abrasive & Tool Specialties Company Utah, United States
Consolidated Subsidiaries of Greenfield Industries, Inc.:
Greenfield Industries Foreign Sales Corporation Barbados
Greenfield Industries, Inc. Canada Canada
Cirbo Limited England
Presto Engineers Cutting Tools Ltd. England
Hanita Metal Works G.m.b.H. Germany
Kemmer Hartmetallwerkzeuge G.m.b.H. Germany
Kemmer Prazision G.m.b.H. Germany
Hanita Metal Works, Ltd. Israel
Kemmer - Cirbo - S.r.L. Italy
Cleveland Twist Drill de Mexico, S.A. de C.V. Mexico
Herramientas Cleveland, S.A. de C.V. Mexico
Greenfield Tools de Mexico, S.A. de C.V. Mexico
Cleveland Europe Limited Scotland
Kemmer AG Switzerland
Carbidie Corporation Delaware, United States
Kemmer International, Inc. Delaware, United States
Rogers Tool Works, Inc. Delaware, United States
TCM Europe, Inc. Delaware, United States
Bassett Rotary Tool Company Indiana, United States
Remgrit Abrasive Tools, Inc. Massachusetts, United States
Rule Cutting Tools, Inc. Massachusetts, United States
Rule Paint and Chemical, Inc. Massachusetts, United States
Hanita Cutting Tools, Inc. New Jersey, United States
The Cleveland Twist Drill Co. Ohio, United States
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports, included or incorporated by reference in this Form 10-K, into the
Company's previously filed registration statements on Form S-8, Registration No.
2-80182, Form S-8, Registration No. 33-25331, Form S-8, Registration No.
33-55768, Form S-8, Registration No. 33-55766, Form S-3, Registration No.
33-61854, 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, 1998 or performed any audit procedures subsequent
to the date of our report.
/s/ ARTHUR ANDERSEN LLP
------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
September 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 CONSOLIDATED FINANCIAL STATEMENTS, AND THE JUNE 30, 1997 AND 1996
CONSOLIDATED FINANCIAL STATEMENTS, AS RESTATED, FOR THE ADOPTION OF STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE," AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1997 JUN-30-1996
<PERIOD-START> JUL-01-1997 JUL-01-1996 JUL-01-1995
<PERIOD-END> JUN-30-1998 JUN-30-1997 JUN-30-1996
<CASH> 18,366 21,869 17,090
<SECURITIES> 0 0 0
<RECEIVABLES> 344,651 207,840 199,116
<ALLOWANCES> 11,974 7,325 9,296
<INVENTORY> 436,472 210,111 204,934
<CURRENT-ASSETS> 818,831 457,879 436,464
<PP&E> 912,569 630,142 571,507
<DEPRECIATION> 386,642 329,756 304,400
<TOTAL-ASSETS> 2,138,993 869,309 799,491
<CURRENT-LIABILITIES> 377,069 282,002 218,813
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 41,025 36,712 36,712
<OTHER-SE> 694,435 422,896 402,237
<TOTAL-LIABILITY-AND-EQUITY> 2,138,993 869,309 799,491
<SALES> 1,678,388 1,156,343 1,079,963
<TOTAL-REVENUES> 1,678,388 1,156,343 1,079,963
<CGS> 994,481 668,415 625,473
<TOTAL-COSTS> 994,481 668,415 625,473
<OTHER-EXPENSES> 36,045 27,012 22,181
<LOSS-PROVISION> 2,453 1,979 1,810
<INTEREST-EXPENSE> 59,536 10,393 11,296
<INCOME-PRETAX> 130,576 118,163 115,376
<INCOME-TAX> 53,900 44,900 43,900
<INCOME-CONTINUING> 71,197 72,032 69,732
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 71,197 72,032 69,732
<EPS-PRIMARY> 2.61 2.71 2.62
<EPS-DILUTED> 2.58 2.69 2.60
</TABLE>
