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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, 1999
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:
Name of each exchange
Title of each class 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
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, 1999, 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 $599,500,000. 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, 1999, there were 30,116,071 shares of Capital Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Annual Report to Shareowners are incorporated by reference
into Parts I, II and IV.
Portions of the Proxy Statement for the 1999 Annual Meeting of Shareowners 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.................................................................................... 9
3. Legal Proceedings............................................................................. 10
4. Submission of Matters to a Vote of Security Holders........................................... 10
Officers of the Registrant.................................................................... 11
PART II
5. Market for the Registrant's Capital Stock and Related Shareowner Matters...................... 14
6. Selected Financial Data....................................................................... 14
7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 14
7a. Quantitative and Qualitative Disclosure About Market Risk..................................... 14
8. Financial Statements and Supplementary Data................................................... 14
9. Changes in and Disagreements on Accounting and Financial Disclosure........................... 14
PART III
10. Directors and Executive Officers of the Registrant............................................ 15
11. Executive Compensation........................................................................ 15
12. Security Ownership of Certain Beneficial Owners and Management................................ 15
13. Certain Relationships and Related Transactions................................................ 15
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 16
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PART I
ITEM 1. BUSINESS
Overview
Kennametal Inc. was incorporated in Pennsylvania in 1943. Kennametal Inc. and
subsidiaries (Kennametal or the company) is a vertically integrated manufacturer
and marketer of consumable tools and related supplies for the metalworking,
mining and highway construction industries, as well as specially engineered
products for a variety of other 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 tungsten carbides, ceramics, cermets, high-speed steel and other
hard materials. Kennametal also manufactures and markets a complete line of
toolholders, toolholding systems and rotary cutting tools by machining and
fabricating steel bars and other metal alloys. The company, through its
subsidiary JLK Direct Distribution Inc., also is one of the largest suppliers of
metalworking consumables and related products in the United States. Kennametal
also manufactures tungsten carbide products used in engineered applications,
mining and highway construction, and other similar applications, including
circuit board drills, compacts and metallurgical powders.
During 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 drills; endmills; taps and dies and fixed limit gages; products used
in oil and gas drilling; 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."
This Form 10-K contains "forward-looking statements" as defined by Section 21E
of the Securities Exchange Act of 1934. Actual results may materially differ
from those expressed or implied in the forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
the extent that the economic conditions in the United States, Europe and, to a
lesser extent, Asia Pacific are not sustained, risks associated with integrating
businesses, demands on management resources, risks associated with international
markets such as currency exchange rates and competition, risks associated with
environmental remediation, the effect of third party or company failures to
achieve timely remediation of year 2000 issues, and the effect of the conversion
to the Euro on the company's operations. 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 Review
The company reports three worldwide segments consisting of Metalworking;
Industrial Supply; and Engineered Products, Mining & Construction and Other
(EM&O). Segment selection was based upon the internal organizational structure,
the way in which management organizes segments for making operating decisions
and assessing performance, the availability of separate financial results, and
materiality considerations. The company's sales and operating income by segment
are presented on pages 11 through 14 of the 1999 Annual Report to Shareowners,
and such information is incorporated herein by reference. Additional information
about the company's operations and assets by segment and geographic area is
presented on pages 39 through 41 of the 1999 Annual Report to Shareowners, and
such information is incorporated herein by reference.
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Metalworking
In the Metalworking segment, Kennametal markets, manufactures and distributes a
full line of products and services for the metalworking industry. The company
provides consumable metalcutting tools and tooling systems to manufacturing
companies in a wide range of industries throughout the world. Metalcutting
operations include turning, boring, threading, grooving, milling and drilling.
A Kennametal tooling system consists of a steel toolholder and an indexable
cutting tool such as an insert or drill made from cemented tungsten 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.
With a multi-channel, global marketing organization and operations worldwide,
the company 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.
Industrial Supply
This segment represents the sales of industrial supply products through
Kennametal's subsidiary, JLK Direct Distribution Inc. (JLK). JLK distributes a
broad range of metalworking consumables and related products to customers in the
United States, offering a full line of metalcutting tools, abrasives, drills,
machine tool accessories, hand tools and other supplies used in metalcutting
operations. 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 needs of small-, medium- and large-sized customers, sales of
metalworking consumable products are derived through a direct-marketing program,
including mail-order catalogs and retail showrooms, a direct field sales force,
and integrated supply programs or Full Service Supply (FSS) programs. The
direct-marketing program and the direct field sales force serve customers of any
size. Through FSS programs, medium- and large-sized 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.
JLK also conducts its direct-marketing program for small- and medium-sized
customers in the United Kingdom and Germany.
Engineered Products, Mining & Construction and Other
This segment's principal business is the production and sale of tungsten carbide
products used in engineered applications, mining and highway construction and
other similar applications, including circuit board drills, compacts and
metallurgical powders. These products have technical commonality to the
company's core metalworking products.
The company is 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.
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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, conical
bits, drills, pinning rods, augers and a wide range of mining tool accessories.
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 manufactures and distributes 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."
The company produces proprietary tungsten carbide 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.
International Operations
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, Poland and Russia, manufacturing and/or sales subsidiaries in
Israel, South America 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 assets and sales are presented on page 41 of the
1999 Annual Report to Shareowners, and such information is incorporated herein
by reference. Information pertaining to the effects of foreign currency
fluctuations is contained under the caption "Market Risk" in Management's
Discussion and Analysis on pages 18 and 19 of the 1999 Annual Report to
Shareowners and under the caption "Foreign Currency Translation" in the notes to
the consolidated financial statements on page 28 of the 1999 Annual Report to
Shareowners. Such information is incorporated herein by reference.
Information pertaining to the effects of the conversion to the European Union's
common currency, the Euro, is contained under the caption "Conversion to the
Euro Currency" in Management's Discussion and Analysis on page 20 of the 1999
Annual Report to Shareowners, and such information is incorporated herein by
reference.
Marketing and Distribution
The company's products are sold primarily through the following distinct sales
channels: (i) a direct sales force, (ii) JLK's FSS programs, (iii) retail
showrooms, (iv) mail-order catalogs, (v) a network of independent distributors
and sales agents in the United States and certain international markets, and
(vi) the Internet. 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 FSS
programs, retail showrooms, mail-order catalogs and the Internet.
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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*, KennaMAX*, Top
Notch*, Erickson*, Kyon*, KM*, Drill-Fix*, Fix-Perfect*, Disston*, Chicago
Latrobe*, Putnam*, Greenfield*, RTW* and Cleveland*. The company also sells
products to customers who resell such products under the customers' names or
private labels.
Raw Materials and Supplies
Major metallurgical raw materials consist of ore concentrates, compounds and
secondary materials containing tungsten, tantalum, titanium, niobium and cobalt.
Although 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 steel bars and
forgings for making toolholders, high-speed steel and other tool parts, rotary
cutting tools and accessories. Products purchased for use in manufacturing
processes and for resale are obtained from thousands of suppliers located in
the United States and abroad.
Research and Development
The company is involved in research and development of new products and
processes. Research and development expenses totaled $18.8 million, $20.4
million and $24.1 million in 1999, 1998 and 1997, respectively. Additionally,
certain costs associated with improving manufacturing processes are included in
cost of goods sold. The company holds a number of patents and licenses, which,
in the aggregate, are not material to the operation of the business.
The company has brought a number of new products to market during the past few
years. These include metalcutting inserts 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. In 1999, the
company introduced five new turning geometry families, representing over 150
specific insert sizes and shapes for the machining of low carbon, alloy, and
stainless steels along with various high temp alloys. These inserts carry unique
features indicating application ranges and size designations making selection of
the proper insert customer friendly. New compositions introduced in the past
year include KC5410*, an aluminum and magnesium alloy turning insert, KC9315*, a
cast and ductile iron turning insert, and KC9215*, a turning insert used for
finishing stainless steels.
Other metalworking products introduced by Kennametal include new grooving
systems, zero-degree milling cutters and associated inserts, roughing and
finishing carbide endmills for faster machining of steel, titanium and aluminum,
and airframe milling cutters designed to improve machining dynamics and increase
metalcutting rates for machining aluminum and titanium. In 1999, mining and
construction introduced a quick-change toolholding system, which increases
customer productivity by reducing part replacement while mining or asphalt
milling.
* Trademark owned by Kennametal Inc. or a subsidiary of Kennametal Inc.
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Seasonality
Seasonal variations do not have a major effect on the company's business.
However, to varying degrees, traditional summer vacation shutdowns of
metalworking customers' plants and holiday shutdowns often affect the company's
sales levels during the first and second quarters of its fiscal year.
Backlog
The company's backlog of orders generally is not significant to its operations.
Approximately 90 percent of all orders are filled from stock, and the balance
generally is filled within short lead times.
Competition
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 tungsten 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 tungsten carbide components for such tools from cemented
tungsten 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
Compliance with government laws and regulations pertaining to the discharge of
materials or pollutants into the environment or otherwise relating to the
protection of the environment did not have a material effect on the company's
capital expenditures, earnings or competitive position for the years 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
is currently named as a potentially responsible party at two Superfund sites in
the United States. However, it is management's opinion, based on its evaluations
and discussions with outside counsel and independent consultants, that the
ultimate resolution of these environmental matters will not have a material
adverse effect on the results of operations, financial position or cash flows of
the company.
The company maintains a Corporate Environmental, Health and Safety (EH&S)
Department as well as an EH&S Policy Committee to ensure compliance with
environmental regulations and to monitor and oversee remediation activities. In
addition, the company has established an EH&S administrator at each of its
domestic manufacturing facilities. The company's financial management team
periodically meets with members of the Corporate EH&S Department and the
Corporate Legal Department to review and evaluate the status of environmental
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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
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 Class A 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. subsidiary and its FSS programs. The net proceeds
from the offering were $90.4 million and represented the sale of 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 acquisitions.
The company's ownership in JLK increased to approximately 83 percent due to
treasury stock purchases made by JLK since the IPO. The company currently
intends to retain a majority of both the economic and voting interests of JLK.
Acquisitions
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, and assumed 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 1999 and
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.
Employees
The company employed approximately 13,640 persons at June 30, 1999, of which
9,310 were located in the United States and 4,330 in other parts of the world,
principally Europe and Asia Pacific. Approximately 2,520 employees were
represented by labor unions, of which 830 were hourly-rated employees located at
six plants in the United States. The remaining 1,690 employees represented by
labor unions were employed at twelve plants located outside of the United
States. The company considers its labor relations to be generally good.
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Corporate Directory
The following is a summary of the company's consolidated subsidiaries and
affiliated companies as of June 30, 1999:
CONSOLIDATED SUBSIDIARIES (% OWNERSHIP, IF LESS THAN 100%)
Project Corporation de Argentina S.A., Argentina
Kennametal Australia Pty. Ltd., Australia
Kennametal Foreign Sales Corporation, Barbados
Kennametal Hertel do Brasil Ltda., Brazil
Kennametal Ltd., Canada
Kennametal Hertel Chile Ltda., Chile
Kennametal (China) Limited, China
Kennametal (Shanghai) Ltd., China
Kennametal Hardpoint (Shanghai) Ltd., China (90%)
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 Ca.Me.S., S.p.A., Italy (61%)
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 Hertel Korea Ltd., South Korea
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%)
Kennametal Financing II Corp., United States
Kennametal Receivables Corporation, United States
CONSOLIDATED SUBSIDIARIES OF KENNAMETAL HERTEL AG (% OWNERSHIP, IF LESS
THAN 100%)
Kennametal Hertel Belgium S.A., Belgium
Kennametal Hertel EDG Limited, England
Kennametal Hertel Limited, England
Kennametal Hertel France S.A., France
Kennametal Hertel G.m.b.H., Germany
Kennametal Hertel Korea G.m.b.H., Germany
Rubig G.m.b.H. & Co. K.G., Germany
Kennametal Hertel S.p.A., Italy (52%)
Kennametal Hertel Nederland B.V., Netherlands
Nederlandse Hardmetaal Fabrieken B.V., Netherlands
Kennametal Hertel Kesici Takimlar ve Sistemler Anonim Sirketi, Turkey (55%)
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CONSOLIDATED SUBSIDIARIES OF JLK DIRECT DISTRIBUTION INC.
J&L America, Inc., United States
CONSOLIDATED SUBSIDIARIES OF J&L AMERICA, INC.
J&L Industrial Supply U.K., England (branch)
J&L Werkzeuge und Industriebedarf G.m.b.H., Germany
Abrasive & Tool Specialties Company, United States
GRS Industrial Supply Company, United States
Production Tools Sales, Inc., United States
Strong Tool Company, United States
CONSOLIDATED SUBSIDIARIES OF GREENFIELD INDUSTRIES, INC.
Greenfield Industries, Incorporated Canada, Canada
Cirbo Limited, 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
Bassett Rotary Tool Company, United States
Carbidie Corporation, United States
Hanita Cutting Tools, Inc., United States
Kemmer International, Inc., United States
Rogers Tool Works, Inc., United States
South Deerfield Industrial, Inc., United States
TCM Europe, Inc., United States
AFFILIATED COMPANIES (% OWNERSHIP)
Kennametal Hertel G. Beisteiner G.m.b.H., Austria (26%)
Birla Kennametal Ltd., India (44%)
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%)
ISIS Informatics Limited, United Kingdom (20%)
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ITEM 2. PROPERTIES
The company's principal executive offices are located at 1600 Technology Way,
P.O. Box 231, Latrobe, Pennsylvania, 15650. 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 Leased 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
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
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
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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
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
Schlomi, Israel Owned High Speed Endmills
Milan, Italy Owned Metalworking Cutting Tools
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, South America 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 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
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 1999, 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
<TABLE>
<CAPTION>
Name, Age, and Position Experience During Past Five Years (2)
----------------------- -------------------------------------
<S> <C>
Markos I. Tambakeras, 48 (1) President and Chief Executive Officer since July 1, 1999.
President and Chief Executive Officer Formerly, employed by Honeywell Inc. as President of Industrial
Director Controls Business from 1997 to 1999 and President, Industrial
Automation and Control from 1995 to 1996.
William R. Newlin, 58 (1) Chairman of the Board since October 1996. Director
Chairman of the Board since 1982.
David B. Arnold, 60 (1) Vice President since 1979. Chief Technical Officer
Vice President since 1988.
Chief Technical Officer
James R. Breisinger, 49 (1) Vice President since 1990. Named Chief Financial
Vice President Officer in September 1998. Chief Operating Officer,
Chief Financial Officer Greenfield Industries, Inc. from March through
September 1998. Corporate Controller from 1994 to 1998.
David T. Cofer, 54 (1) Vice President since 1986. Secretary and General
Vice President Counsel since 1982.
Secretary and General Counsel
Derwin R. Gilbreath, 51 (1) Vice President since January 1997. Elected
Vice President, Kennametal Inc. Chief Operating Officer, Greenfield Industries
Chief Operating Officer, Greenfield in September 1998. Director of Global Manufacturing
Industries, Inc. from 1995 to 1998. Director of North America
Metalworking Manufacturing from 1994 to 1995.
Richard C. Hendricks, 60 (1) Vice President since 1982. Director of Corporate
Vice President Business Development since 1992.
Director of Corporate Business Development
Timothy D. Hudson, 53 Vice President since 1994. Director of Human Resources
Vice President since 1992.
Director of Human Resources
Brian E. Kelly, 36 Elected Assistant Treasurer and named Director of Tax
Assistant Treasurer in September 1998. Manager of Corporate Tax from 1996
Director of Tax to 1998. Formerly, Tax Consultant with Westinghouse
Electric Corp. from 1995 to 1996.
Lawrence J. Lanza, 50 Elected Assistant Treasurer and named Director of
Assistant Treasurer Treasury Services in April 1999. Previously, Director,
Director of Treasury Services Global Capital Markets for CBS Corporation, formerly
Westinghouse Electric Corporation, from 1972 to 1998.
</TABLE>
-11-
<PAGE> 14
<TABLE>
<CAPTION>
Name, Age, and Position Experience During Past Five Years (2)
----------------------- -------------------------------------
<S> <C>
H. Patrick Mahanes, Jr., 56 (1) Vice President since 1987. Named Chief Operating
Vice President Officer in 1995. Director of Operations from 1991 to
Chief Operating Officer 1995.
James E. Morrison, 48 Vice President since 1994. Treasurer since 1987.
Vice President
Treasurer
Wayne D. Moser, 46 Vice President since 1998. Director of Mining and
Vice President Construction since 1997. Chief Financial Officer of
Director of Mining and Construction Division Kennametal Hertel AG from 1993 to 1997.
Kevin G. Nowe, 47 Joined the company as Assistant General Counsel in 1992
Assistant Secretary and was elected Assistant Secretary in 1993.
Assistant General Counsel
Richard J. Orwig, 58 (1) Named President and Chief Executive Officer of JLK
President and Chief Executive Officer, Direct Distribution Inc. in September 1998. Elected a
JLK Direct Distribution Inc. Vice President of Kennametal Inc. in 1987 and was Chief
Financial and Administrative Officer of Kennametal Inc.
from 1994 to 1998.
Ajita G. Rajendra, 47 Elected Kennametal Vice President in 1998. Vice
Vice President, Kennametal Inc. President of Greenfield's Industrial Products Group
Senior Vice President, Industrial Products since 1997. Vice President of Greenfield's Electronic
Group, Greenfield Industries, Inc. Products Group from 1996 to 1997. Previously, in
various positions with Corning, Inc. from 1978 to 1996.
P. Mark Schiller, 51 Vice President since 1992. Director of Kennametal
Vice President Distribution Services since 1990.
Director of Kennametal Distribution Services
Lawrence L. Shrum, 58 Vice President since January 1997. Named Director of
Vice President Global Management Information Systems in 1994.
Director of Global Management
Information Systems
</TABLE>
-12-
<PAGE> 15
<TABLE>
<CAPTION>
Name, Age, and Position Experience During Past Five Years (2)
----------------------- -------------------------------------
<S> <C>
Frank P. Simpkins, 36 Named Corporate Controller and Chief Accounting Officer
Corporate Controller and Chief in October 1998. Manager, External Reporting and
Accounting Officer Investor Relations from 1995 to 1998. Formerly, Senior
Audit Manager with Coopers & Lybrand LLP from 1986 to 1995.
A. David Tilstone, 45 (1) Vice President since July 1997. Named Director of
Vice President Global Marketing in April 1997. Director of Asia
Director of Global Marketing 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.
-13-
<PAGE> 16
PART II
The information required under Items 5 through 8 is included in the 1999 Annual
Report to Shareowners 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 1999 Annual Report
-----------------------------------
<S> <C> <C>
ITEM 5. Market for the Registrant's Quarterly Financial Information
Capital Stock and Related (Unaudited) on page 42.
Shareowner Matters Stock Issuances on page 29.
ITEM 6. Selected Financial Data Eleven-Year Financial Highlights
(information with respect to the years
1995 to 1999) on pages 44 and 45.
ITEM 7. Management's Discussion and Management's Discussion & Analysis on
Analysis of Financial Condition pages 11 to 21.
and Results of Operations
ITEM 7a. Quantitative and Qualitative Management's Discussion & Analysis on
Disclosure About Market Risk pages 18 and 19, and Financial Instruments
on pages 36 and 37.
ITEM 8. Financial Statements and Item 14(a) 1 herein and Quarterly
Supplementary Data Financial Information (Unaudited) on
page 42.
ITEM 9. Changes in and Disagreements Not applicable.
on Accounting and Financial
Disclosure
</TABLE>
-14-
<PAGE> 17
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, 1999 ("1999 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 1999 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 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is certain information set forth in the notes
to the tables under the captions "Election of Directors" and "Compensation of
Executive Officers" in the 1999 Proxy Statement.
-15-
<PAGE> 18
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, 1999 and 1998, the
consolidated statements of income, shareowners' equity, and cash flows
for each of the three years in the period ended June 30, 1999, and the
notes to consolidated financial statements, together with the report
thereon of Arthur Andersen LLP dated July 20, 1999, presented in the
company's 1999 Annual Report to Shareowners, 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 1999 Annual Report to Shareowners. 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.
<TABLE>
<CAPTION>
Financial Statement Schedule: Page
----------------------------- ----
<S> <C>
Report of Independent Public Accountants 22
Schedule II - Valuation and Qualifying Accounts for the
Three Years Ended June 30, 1999 23
</TABLE>
<TABLE>
<CAPTION>
3. Exhibits
<S> <C> <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 Schedule
and among Kennametal Inc., Kennametal 14D-1 (SEC file no. reference no. 1-5318;
Acquisition Corp. (formerly, Palmer docket entry date - October 17, 1997) is
Acquisition Corp.) and Greenfield incorporated herein by reference.
Industries, Inc. dated as of October
10, 1997
(3) Articles of Incorporation and Bylaws
(3.1) Amended and Restated Articles of Exhibit 3.1 of the company's September 30,
Incorporation as Amended 1994 Form 10-Q is incorporated herein by
reference.
</TABLE>
-16-
<PAGE> 19
<TABLE>
<S> <C> <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 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) Material Contracts
(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 1999 Proxy Statement is
incorporated herein by reference.
(10.2)* Stock Option and Exhibit 10.1 of the company's December 31,
Incentive Plan of 1988 1988 Form 10-Q (SEC file no. reference
1-5318; docket entry date - February 9,
1989) is incorporated herein by reference.
(10.3)* Deferred Fee Plan for Exhibit 10.4 of the company's 1988 Form 10-K
Outside Directors (SEC file no. reference 1-5318; docket entry
date - September 23, 1988) is incorporated
herein by reference.
(10.4)* Executive Deferred Exhibit 10.5 of the company's 1988 Form 10-K
Compensation Trust (SEC file no. reference 1-5318; docket entry
Agreement date - September 23, 1988) is incorporated
herein by reference.
(10.5)* Directors Stock Incentive Filed herewith.
Plan, as amended
(10.6)* Performance Bonus Stock Filed herewith.
Plan of 1995, as amended
(10.7)* Stock Option and Incentive Exhibit 10.14 of the company's September 30,
Plan of 1996 1996 Form 10-Q is incorporated herein by
reference.
</TABLE>
- ---------------------------------------------------------
* Denotes management contract or compensatory plan or arrangement.
-17-
<PAGE> 20
<TABLE>
<S> <C> <C>
(10.8)* 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.
(10.9)* Form of Employment Exhibit 10.1 of the company's
Agreement with March 31, 1997 Form 10-Q is
Named Executive Officers incorporated herein by reference.
(other than Mr. McGeehan)
(10.10)* Supplemental Executive Filed herewith.
Retirement Plan, as amended
(10.11) 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.
(10.12) 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.
(10.13) Amendment to Credit Agreement Exhibit 10.18 of the company's
with Mellon Bank, N.A. and June 30, 1998 Form 10-K is
various creditors dated as of incorporated herein by reference.
November 26, 1997
(10.14) Amendment to Credit Agreement Exhibit 10.19 of the company's
with Mellon Bank, N.A. and June 30, 1998 Form 10-K is
various creditors dated as of incorporated herein by reference.
December 19, 1997
(10.15) Amendment to Credit Agreement Exhibit 10.20 of the company's
with Mellon Bank, N.A. and June 30, 1998 Form 10-K is
various creditors dated as of incorporated herein by reference.
March 19, 1998
(10.16) Amendment to Credit Agreement Exhibit 10.1 of the company's
with Mellon Bank, N.A. and December 31, 1998 Form 10-Q is
various creditors dated as of incorporated herein by reference.
December 15, 1998
(10.17) Amendment to Credit Agreement Exhibit 10.1 of the company's
with Mellon Bank, N.A. and March 31, 1999 Form 10-Q is
various creditors dated as of incorporated herein by reference.
March 31, 1999
(10.18)* Executive Employment Agreement Exhibit 10.1 of the company's
dated May 4, 1999 between June 11, 1999 Form 8-K is
Kennametal Inc. and Markos I. incorporated herein by reference.
Tambakeras
(10.19)* Kennametal Inc. 1999 Stock Exhibit 10.5 of the company's
Plan June 11, 1999 Form 8-K is
incorporated herein by reference.
</TABLE>
- ---------------------------------------------------------
* Denotes management contract or compensatory plan or arrangement.
-18-
<PAGE> 21
<TABLE>
<S> <C> <C>
(13) Annual Report to Shareowners Portions of the 1999 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.
A report on Form 8-K, containing Items 5 and 7, was filed on June 11, 1999
regarding an Executive Employment Agreement, and other related agreements,
with Markos I. Tambakeras, pursuant to which Mr. Tambakeras will serve as
President and Chief Executive Officer of Kennametal Inc. and a member of
the Board of Directors, effective July 1, 1999.
-19-
<PAGE> 22
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/ Frank P. Simpkins
------------------------
Frank P. Simpkins
Corporate Controller and
Chief Accounting Officer
Date: September 21, 1999
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 Chairman of the Board September 21, 1999
- -------------------------
William R. Newlin
/s/ Markos I. Tambakeras President, Chief Executive September 21, 1999
- ------------------------- Officer and Director
Markos I. Tambakeras
/s/ James R. Breisinger Vice President and September 21, 1999
- ------------------------- Chief Financial Officer
James R. Breisinger
</TABLE>
-20-
<PAGE> 23
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard C. Alberding Director September 21, 1999
- --------------------------------
Richard C. Alberding
/s/ Peter B. Bartlett Director September 21, 1999
- --------------------------------
Peter B. Bartlett
/s/ A. Peter Held Director September 21, 1999
- --------------------------------
A. Peter Held
/s/ Warren H. Hollinshead Director September 21, 1999
- --------------------------------
Warren H. Hollinshead
/s/ Timothy S. Lucas Director September 21, 1999
- --------------------------------
Timothy S. Lucas
/s/ Robert L. McGeehan Director September 21, 1999
- --------------------------------
Robert L. McGeehan
/s/ Aloysius T. McLaughlin, Jr. Director September 21, 1999
- --------------------------------
Aloysius T. McLaughlin, Jr.
/s/ Larry Yost Director September 21, 1999
- --------------------------------
Larry Yost
</TABLE>
-21-
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareowners 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
shareowners incorporated by reference in this Form 10-K, and have issued our
report thereon dated July 20, 1999. Our audits were 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 part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audits 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 20, 1999
-22-
<PAGE> 25
KENNAMETAL INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions
-------------------------------------------
Balance at Charged to Deductions Balance at
Beginning of Costs and Other from End of
Description Year Expenses Recoveries Adjustments(a) Reserves Year
- ----------- ------------ ---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1999
Allowance for doubtful accounts $ 11,974 $ 8,230 $ 365 $ (398) $ 4,902 (b) $15,269
======== ======= ===== ======= ======= =======
Restructuring and asset impairment charges $ -- $20,837 $ -- $ -- $17,270 (c) $ 3,567
======== ======= ===== ======= ======= =======
1998
Allowance for doubtful accounts $ 7,325 $ 2,453 $ 336 $ 5,061 $ 3,201 (b) $11,974
======== ======= ===== ======= ======= =======
1997
Allowance for doubtful accounts $ 9,296 $ 1,979 $ 136 $ (546) $ 3,540 (b) $ 7,325
======== ======= ===== ======= ======= =======
</TABLE>
(a) Represents foreign currency translation adjustment and reserves
acquired through business combinations.
(b) Represents uncollected accounts charged against the allowance.
(c) Represents asset write-downs, non-cash adjustments and cash
expenditures charged against the accrual.
-23-
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Reference
- ------- --------------------------------------------------
<C> <S> <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 1999 Proxy Statement is
incorporated herein by reference.
10.2 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.
10.3 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.
10.4 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.
10.5 Directors Stock Incentive Plan, Filed herewith.
as amended
10.6 Performance Bonus Stock Filed herewith.
Plan of 1995, as amended
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
Exhibit
No. Reference
- ------- --------------------------------------------------
<C> <S> <C>
10.7 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.
10.8 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.
10.9 Form of Employment Agreement Exhibit 10.1 of the company's March 31, 1997
with Named Executive Officers Form 10-Q is incorporated herein by reference.
(other than Mr. McGeehan)
10.10 Supplemental Executive Filed herewith.
Retirement Plan, as amended
10.11 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
10.12 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
10.13 Amendment to Credit Agreement Exhibit 10.18 of the company's June 30, 1998
with Mellon Bank, N.A. and various Form 10-K is incorporated herein by reference.
creditors dated as of November 26, 1997
10.14 Amendment to Credit Agreement Exhibit 10.19 of the company's June 30, 1998
with Mellon Bank, N.A. and various Form 10-K is incorporated herein by reference.
creditors dated as of December 19, 1997
10.15 Amendment to Credit Agreement Exhibit 10.20 of the company's June 30, 1998
with Mellon Bank, N.A. and various Form 10-K is incorporated herein by reference.
creditors dated as of March 19, 1998
10.16 Amendment to Credit Agreement Exhibit 10.1 of the company's December 31, 1998
with Mellon Bank, N.A. and various Form 10-Q is incorporated herein by reference.
creditors dated as of December 15, 1998
10.17 Amendment to Credit Agreement Exhibit 10.1 of the company's March 31, 1999
with Mellon Bank, N.A. and various Form 10-Q is incorporated herein by reference.
creditors dated as of March 31, 1999
10.18 Executive Employment Agreement Exhibit 10.1 of the company's June 11, 1999
dated May 4, 1999 between Kennametal Form 8-K is incorporated herein by reference.
Inc. and Markos I. Tambakeras
10.19 Kennametal Inc. 1999 Stock Plan Exhibit 10.5 of the company's June 11, 1999
Form 8-K is incorporated herein by reference.
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit
No. Reference
- ------- --------------------------------------------------
<C> <S> <C>
13 Annual Report to Shareowners Portions of the 1999 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 10.5
KENNAMETAL INC.
DIRECTORS STOCK INCENTIVE PLAN
(AS AMENDED THROUGH JULY 26, 1999)
ARTICLE I
GENERAL PROVISIONS
SECTION 1.1. ESTABLISHMENT AND PURPOSE. There is hereby established the
Kennametal Inc. Directors Stock Incentive Plan (the "Plan") pursuant to which
each director of Kennametal Inc. (the "Company") or of a Qualifying Subsidiary
(as hereinafter defined) who is not an employee of the Company or any of its
subsidiaries (a "Non-Employee Director") shall be eligible: (a) to elect to
receive shares of the Company's capital stock, par value $1.25 per share (the
"Capital Stock"), in lieu of cash compensation; and (b) through an election to
defer receipt of any compensation to be earned by such Non-Employee Director
made under the Kennametal Inc. Deferred Fee Plan for Outside Directors or the
deferred compensation plan of such Qualifying Subsidiary (the "Deferred
Compensation Plan"), to have Kennametal Stock Credits or JLK Stock Credits (as
hereinafter defined) credited to an account established for such Non-Employee
Director by the Company. The purpose of the Plan is to assist the Company in
attracting, retaining and motivating highly qualified Non-Employee Directors and
to promote identification of, and align Non-Employee Directors' interests more
closely with, the interests of the stockholders of the Company.
SECTION 1.2. DEFINITIONS. In addition to the terms previously or
hereafter defined herein, the following terms when used herein shall have the
meanings set forth below:
"Board" shall mean the Board of Directors of the Company.
"Committee" shall mean the committee of the Board appointed by the
Board to administer the Plan. Unless otherwise determined by the Board, the
Committee shall be the Committee on Executive Compensation of the Board.
"Company Stock Credit" shall mean a credit that is equivalent to one
share of Capital Stock.
"Compensation" shall mean all remuneration paid to a Non-Employee
Director for service as such that is not deferred pursuant to the Deferred
Compensation Plan.
"Deferred Compensation" shall mean all remuneration paid to a
Non-Employee Director for service as such that is deferred pursuant to the
Deferred Compensation Plan.
"Fair Market Value" shall mean: (a) with respect to Capital Stock, as
of any date, the mean of the highest and lowest sales prices for the Capital
Stock as reported in the New York Stock Exchange--Composite Transactions
reporting system for the date in question or, if no sales were effected on such
date, on the next preceding date on which sales were effected; and (b)
<PAGE> 2
with respect to Class A Common Stock of JLK Direct Distribution Inc. ("JLK"), as
of any date, the mean of the highest and lowest sales prices for the Class A
Common Stock of JLK as reported in the New York Stock Exchange--Composite
Transactions reporting system for the date in question or, if no sales were
effected on such date, on the next preceding date on which sales were effected.
"JLK Stock Credit" shall mean a credit that is equivalent to one share
of Class A Common Stock of JLK.
"Plan Year" shall mean the twelve-month period beginning January 1 and
ending December 31 in any particular year.
"Qualifying Subsidiary" shall mean JLK and any other direct or indirect
subsidiary of the Company which has been designated as being eligible to
participate in the Plan by the Committee.
"Stock Credit" shall mean either a Company Stock Credit or a JLK Stock
Credit, as the case may be.
SECTION 1.3. ADMINISTRATION. The Plan shall be administered by the
Committee. The Committee shall serve at the pleasure of the Board of Directors.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members of the Committee present at any meeting at which a
quorum is present, or acts approved in writing by a majority of the members of
the Committee, shall be deemed the acts of the Committee. The Committee is
authorized to interpret and construe the Plan, to make all determinations and
take all other actions necessary or advisable for the administration of the
Plan, and to delegate to employees of the Company or any subsidiary the
authority to perform administrative functions under the Plan; provided, however,
that the Committee shall have no authority to determine the persons entitled to
receive Capital Stock or Stock Credits under the Plan nor the timing, amount or
price of Capital Stock or Stock Credits issued under the Plan.
SECTION 1.4. ELIGIBILITY. An individual who is a Non-Employee Director
shall be eligible to participate in the Plan.
SECTION 1.5. CAPITAL STOCK SUBJECT TO THE PLAN. The maximum number of
shares of Capital Stock that may be issued pursuant to the Plan is 75,000.
Capital Stock to be issued under the Plan may be either authorized and unissued
shares of Capital Stock or shares of Capital Stock held in treasury by the
Company.
ARTICLE II
ELECTIONS AND DISTRIBUTIONS
SECTION 2.1. ELECTIONS TO RECEIVE CAPITAL STOCK FROM COMPENSATION. Any
Non-Employee Director may elect to receive Capital Stock under this Plan in lieu
of all or a portion of the Compensation otherwise payable to such Non-Employee
Director in any Plan Year beginning
-2-
<PAGE> 3
with the Plan Year commencing January 1, 1993 (a "Stock Acquisition Election").
If a Non-Employee Director makes a Stock Acquisition Election, the Non-Employee
Director shall receive, on the date that the Compensation otherwise would have
been paid, the number of shares of Capital Stock that could have been purchased
on that date based on the amount of Compensation subject to the Stock
Acquisition Election and the Fair Market Value of the Capital Stock on that
date, rounded up to the nearest whole share. In the absence of a Stock
Acquisition Election, all Compensation shall be paid to the Non-Employee
Director in cash in accordance with the Company's policies and procedures.
Certificates for Capital Stock acquired by the Non-Employee Director pursuant to
a Stock Acquisition Election shall be issued quarterly following the period
during which such Capital Stock is acquired, as provided above.
SECTION 2.2. ELECTIONS TO RECEIVE COMPANY STOCK CREDITS FROM DEFERRED
COMPENSATION. Any Non-Employee Director may elect to receive Company Stock
Credits under this Plan in any Plan Year with respect to all or a portion of the
Deferred Compensation credited to the Non-Employee Director in that Plan Year,
beginning with the Plan Year commencing January 1, 1993 (a "Company Stock Credit
Election"). If a Non-Employee Director makes a Company Stock Credit Election, an
account established for the Non-Employee Director and maintained by the Company
shall be credited with that number of Company Stock Credits equal to the number
of shares of Capital Stock (including fractions of a share to four decimal
places) that could have been purchased with the amount of Deferred Compensation
subject to a Company Stock Credit Election based on the Fair Market Value of the
Capital Stock on the day that the Deferred Compensation is credited under the
Deferred Compensation Plan. A Company Stock Credit Election shall be valid in
any period only if the Non-Employee Director has elected to participate in the
Deferred Compensation Plan for such period.
SECTION 2.3. ELECTIONS TO RECEIVE JLK STOCK CREDITS FROM DEFERRED
COMPENSATION. Any Non-Employee Director may elect to receive JLK Stock Credits
under this Plan in any Plan Year with respect to all or a portion of the
Deferred Compensation credited to the Non-Employee Director in that Plan Year (a
"JLK Stock Credit Election"). If a Non-Employee Director makes a JLK Stock
Credit Election, an account established for the Non-Employee Director and
maintained by the Company shall be credited with that number of JLK Stock
Credits equal to the number of shares of Class A Common Stock of JLK (including
fractions of a share to four decimal places) that could have been purchased with
the amount of Deferred Compensation subject to a JLK Stock Credit Election based
on the Fair Market Value of the Class A Common Stock of JLK on the day that the
Deferred Compensation is credited under the Deferred Compensation Plan. A JLK
Stock Credit Election shall be valid in any period only if the Non-Employee
Director has elected to participate in the Deferred Compensation Plan for such
period.
SECTION 2.4. TERMS AND CONDITIONS OF ELECTIONS. A Stock Acquisition
Election, Company Stock Credit Election or a JLK Stock Credit Election (an
"Election") shall be subject to the following terms and conditions:
(a) An Election shall be in writing and shall be irrevocable;
and
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(b) An Election may be made on or before December 31, 1992, to
take effect on January 1, 1993; thereafter, an Election shall be
effective for any Plan Year only if made on or prior to the June 30
immediately preceding the commencement of such Plan Year, provided,
however, that with respect to any JLK Stock Credit Election by a
director of JLK with respect to the Plan Year ending December 31, 1997,
an Election may be made prior to the time that the Director is entitled
to payment of compensation for such period and shall be effective when
made; and
(c) An Election shall remain in effect for all future Plan
Years unless terminated or changed pursuant to an Election made on or
prior to June 30 to take effect for the next Plan Year.
SECTION 2.5. ADJUSTMENT OF STOCK CREDIT ACCOUNTS.
(a) Cash Dividends--As of the date that any cash dividend is
paid to stockholders of the Company or JLK, the applicable Stock Credit
account of the Non-Employee Director shall be credited with additional
Stock Credits equal to the number of shares of stock underlying such
Stock Credit (including fractions of a share to four decimal places)
that could have been purchased on that date with the dividends paid on
the underlying shares based on the Fair Market Value of the Capital
Stock or JLK Class A Common Stock, as the case may be, on that date.
(b) Stock Dividends--In the event that a stock dividend shall
be paid upon the stock underlying the Stock Credit Account, the number
of Stock Credits in the Non-Employee Director's applicable Stock Credit
account shall be adjusted by adding thereto additional Stock Credits
equal to the number of shares of the underlying stock which would have
been distributable on such stock represented by Stock Credits if such
shares had been outstanding on the date fixed for determining the
stockholders entitled to receive such stock dividend.
(c) Other Adjustments--In the event that the outstanding
shares of Capital Stock or Class A Common Stock of JLK, as the case may
be, shall be changed into or exchanged for a different number or kind
of shares of stock or other securities whether through reorganization,
recapitalization, stock split-up, combination of shares, merger or
consolidation, then there shall be substituted, for the shares of stock
underlying the Stock Credits, the number and kind of shares of stock or
other securities which would have been substituted therefor if the
underlying shares had been outstanding on the date fixed for
determining the stockholders entitled to receive such changed or
substituted stock or other securities.
In the event there shall be any change, other than
specified in this Section 2.5, in the number or kind of outstanding
shares of stock underlying the Stock Credits or of any stock or other
securities into which such underlying capital stock shall be changed or
for which it shall have been exchanged, then, if the Board of Directors
shall determine, in its discretion, that such change equitably requires
an adjustment in the number of Stock Credits,
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such adjustment shall be made by the Board of Directors and shall be
effective and binding for all purposes of the Plan and on each
outstanding Stock Credit account.
SECTION 2.6. CHANGE IN CONTROL. In the event of any threatened or
actual change in control of the Company, issued and outstanding shares of
Capital Stock shall be substituted for the Company Stock Credits in each
Non-Employee Director's Stock Credit account, and such Capital Stock shall be
transferred and delivered to such Non-Employee Director and the value of JLK
Stock Credits in each Non-Employee Director's Stock Credit account shall be paid
to such Non-Employee Director in cash.
SECTION 2.7. DISTRIBUTION OF COMPANY STOCK CREDITS. Unless a
Non-Employee Director has selected a different payment option as set forth
below, as soon as practicable following the date that such Non-Employee Director
ceases (other than by reason of such Non-Employee Director's death) to be a
Non-Employee Director (hereinafter, "retirement"), the Company shall issue to
such Non-Employee Director that number of shares of Capital Stock equal to the
whole number of Company Stock Credits in such Non-Employee Director's Company
Stock Credit account and cash equal to the fractional Company Stock Credits in
such account multiplied by the Fair Market Value of the Capital Stock as of the
date of retirement. A Non-Employee Director may elect to receive the Capital
Stock represented by the Company Stock Credits in such Non-Employee Director's
Company Stock Credit account in monthly or annual installments beginning after
retirement from the Board by written notification to the Company of such elected
payment option and may modify any such election by a subsequent written
notification to the Company; provided, however, that the Company shall be
required to effect any such written notification only if submitted to the
Company no fewer than twelve months prior to such Non-Employee Director's
retirement from the Board. Notwithstanding the foregoing, the Committee, in its
sole discretion, shall have the right to pay a Non-Employee Director a cash
amount equal to the value of the Company Stock Credits, in lieu of distributing
Capital Stock.
SECTION 2.8. DISTRIBUTION OF JLK STOCK CREDITS. Unless a Non-Employee
Director has selected a different payment option as set forth below, as soon as
practicable following the retirement of such Non-Employee Director, the Company
shall pay the Non-Employee Director a cash amount equal to the value of JLK
Stock Credits in such Non-Employee Director's account. A Non-Employee Director
may elect to receive the Capital Stock represented by the JLK Stock Credits in
such Non-Employee Director's JLK Stock Credit account in monthly or annual
installments beginning after retirement from the Board by written notification
to the Company of such elected payment option and may modify any such election
by a subsequent written notification to the Company; provided, however, that the
Company shall be required to effect any such written notification only if
submitted to the Company no fewer than twelve months prior to such Non-Employee
Director's retirement from the Board.
SECTION 2.9. DISTRIBUTIONS ON DEATH. In the event of the death of a
Non-Employee Director, whether before or after cessation of service as a
Non-Employee Director, the Stock Credit account to which he or she was entitled
shall be converted to cash and distributed in a lump sum to such person or
persons or the survivors thereof, including corporations, unincorporated
associates or trusts, as the Non-Employee Director may have designated. All
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such designations shall be made in writing, signed by the Non-Employee Director
and delivered to the Company. A Non-Employee Director may from time to time
revoke or change any such designation by written notice to the Company. If there
is no unrevoked designation on file with the Company at the time of the
Non-Employee Director's death, or if the person or persons designated therein
shall have all predeceased the Non-Employee Director or otherwise ceased to
exist, such distributions shall be made to the Non-Employee Director's estate.
Any distribution under this Section 2.9 shall be made as soon as practicable
following notification to the Company of the Non-Employee Director's death. In
any case in which the Non-Employee Director's Stock Credit account is to be
converted to cash pursuant to this Section 2.9, such cash amount shall be
determined by multiplying the number of whole and fractional shares of Capital
Stock or Class A Common Stock of JLK, as the case may be, to which the
Non-Employee Director's Stock Credit account is equivalent by the Fair Market
Value of the shares underlying such account on the date of death.
SECTION 2.10. CONVERSION OF DEFERRED COMPENSATION TO STOCK CREDITS. The
Committee may, in its discretion, permit a Non-Employee Director to convert
Deferred Compensation already credited to such Non-Employee Director's cash
account to Stock Credits (a "Conversion Election"). Any such election and the
related conversion shall occur only during specified periods designated by the
Committee and shall become effective on the date such election is delivered to
the Company. If a Non-Employee Director makes a Conversion Election, such
Non-Employee Director's Stock Credit account will be credited with that number
of Stock Credits equal to the number of shares of Capital Stock or JLK Class A
Common Stock, as the case may be, underlying the Stock Credit Account (including
fractions of a share to four decimal places) that could have been purchased with
the amount of Deferred Compensation subject to the Conversion Election based on
the Fair Market Value of the underlying stock on the day that the Conversion
Election is made.
ARTICLE III
MISCELLANEOUS PROVISIONS
SECTION 3.1. AMENDMENT AND DISCONTINUANCE. The Board of Directors may
alter, amend, suspend or discontinue the Plan, provided that no such action
shall deprive any person without such person's consent of any rights theretofore
granted pursuant hereto. The Board of Directors may, in its discretion, submit
any proposed amendment to the Plan to the stockholders of the Company for
approval and shall submit proposed amendments to the Plan to the stockholders of
the Company for approval if such approval is required in order for the Plan to
comply with Rule 16b-3 of the Exchange Act (or any successor rule).
SECTION 3.2. COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Notwithstanding
any provision of the Plan or the terms of any agreement entered into pursuant to
the Plan, the Company shall not be required to issue any shares hereunder prior
to registration of the shares subject to the Plan under the Securities Act of
1933 or the Exchange Act, if such registration shall be necessary, or before
compliance by the Company or any participant with any other provisions of either
of those acts or of regulations or rulings of the Securities and Exchange
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Commission thereunder, or before compliance with other federal and state laws
and regulations and rulings thereunder, including the rules of the New York
Stock Exchange, Inc. The Company shall use its best efforts to effect such
registrations and to comply with such laws, regulations and rulings forthwith
upon advice by its counsel that any such registration or compliance is
necessary.
SECTION 3.3. COMPLIANCE WITH SECTION 16. With respect to persons
subject to Section 16 of the Exchange Act in relation to the Company,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 (or its successor rule). To the extent that any
provision of the Plan or any action by the Board of Directors or the Committee
fails to so comply, it shall be deemed null and void to the extent permitted by
law and to the extent deemed advisable by the Committee.
SECTION 3.4. NON-ALIENATION OF BENEFITS. No right or interest of a
Non-Employee Director in a Stock Credit account under the Plan may be sold,
assigned, transferred, pledged, encumbered or otherwise disposed of except as
expressly provided in the Plan; and no interest or benefit of any Non-Employee
Director under the Plan shall be subject to the claims of creditors of the
Non-Employee Director.
SECTION 3.5. WITHHOLDING TAXES. To the extent required by applicable
law or regulation, each Non-Employee Director must arrange with the Company for
the payment of any federal, state or local income or other tax applicable to the
receipt of Capital Stock or Stock Credits under the Plan before the Company
shall be required to deliver to the Non-Employee Director cash or a certificate
for Capital Stock free and clear of all restrictions under the Plan, as the case
may be.
SECTION 3.6. FUNDING. Except as provided in Section 2.6 hereof, no
obligation of the Company under the Plan shall be secured by any specific assets
of the Company, nor shall any assets of the Company be designated as
attributable or allocated to the satisfaction of any such obligation. To the
extent that any person acquires a right to receive payments from the Company
under the Plan, such right shall be no greater than the right of any unsecured
creditor of the Company.
SECTION 3.7. GOVERNING LAW. The Plan shall be governed by and construed
and interpreted in accordance with the internal laws of the Commonwealth of
Pennsylvania.
SECTION 3.8. EFFECTIVE DATE OF PLAN. The Plan became effective upon
approval and adoption of the Plan by the holders of a majority of the
outstanding shares of Capital Stock of the Company at the 1992 annual meeting of
stockholders.
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EXHIBIT 10.6
KENNAMETAL INC.
PERFORMANCE BONUS STOCK PLAN OF 1995
(AS AMENDED ON JULY 26, 1999)
ARTICLE I
GENERAL PROVISIONS
SECTION 1.1. ESTABLISHMENT AND PURPOSE. There is hereby established the
Kennametal Inc. (the "Corporation") Performance Bonus Stock Plan of 1995 (the
"Plan") pursuant to which each participant in a Management Performance Bonus
Plan (as defined herein) or a recipient of any other bonus award designated by
the Committee (as defined herein) shall be eligible: (a) to elect to receive
shares of the Corporation's capital stock, par value $1.25 per share (the
"Capital Stock"), in lieu of cash bonus compensation; and/or (b) through an
election to defer receipt of compensation to be earned by such participant made
under any Corporation deferred compensation plan or arrangement ("Deferred
Compensation Plan"), to have Stock Credits (as hereinafter defined) credited to
an account ("Stock Credit Account") established for such participant by the
Corporation. The purposes of the Plan are to provide an incentive to Corporation
executives to increase their ownership of Capital Stock and to promote this goal
by establishing stock as an alternative method by which managers and/or senior
executives may elect to be compensated.
SECTION 1.2. DEFINITIONS. In addition to the terms previously or
hereafter defined herein, the following terms when used herein shall have the
meaning set forth below:
"BOARD" shall mean the Board of Directors of the Corporation.
"BONUS COMPENSATION" shall mean all remuneration designated as bonus
compensation that is earned by a Participant (as defined below) pursuant to a
Management Performance Bonus Plan or any other bonus award designated by the
Committee.
"COMMITTEE" shall mean the committee of the Board appointed by the
Board to administer the Plan. Unless otherwise determined by the Board, the
Committee shall be the Committee on Executive Compensation of the Board.
"DEFERRED BONUS COMPENSATION" shall mean all Bonus Compensation that is
deferred by a Participant pursuant to a Deferred Compensation Plan.
"FAIR MARKET VALUE" shall mean, as of any date, the average of the
highest and lowest sales prices for the Capital Stock as reported in the New
York Stock Exchange - Composite Transactions reporting system for the date in
question or, if no sales were effected on such date, on the next preceding date
on which sales were effected.
"MANAGEMENT PERFORMANCE BONUS PLAN" shall mean any performance-based
bonus compensation plan for management and/or senior executives of the
Corporation or its subsidiaries which the Committee has determined to be then
eligible for participation in the Plan.
"NON-DEFERRED BONUS COMPENSATION" shall mean all Bonus Compensation
that is not deferred by a Participant pursuant to a Deferred Compensation Plan.
<PAGE> 2
"PARTICIPANT" shall mean any employee of the Corporation or any of its
subsidiaries who is eligible to participate in a Management Performance Bonus
Plan.
"PLAN YEAR" shall mean the Corporation's fiscal year.
"STOCK CREDIT" shall mean a credit that is equivalent to one share of
Capital Stock.
SECTION 1.3. ADMINISTRATION. The Plan shall be administered by the
Committee. The Committee shall serve at the pleasure of the Board. A majority of
the Committee shall constitute a quorum, and the acts of a majority of the
members of the Committee present at any meeting at which a quorum is present, or
acts approved in writing by a majority of the members of the Committee, shall be
deemed the acts of the Committee. The Committee is authorized to interpret and
construe the Plan, to make all determinations and take all other actions
necessary or advisable for the administration of the Plan, and to delegate to
employees of the Corporation or any subsidiary the authority to perform
administrative functions under the Plan.
SECTION 1.4. ELIGIBILITY. An individual who is a participant in a
Management Performance Bonus Plan or who receives any other bonus award
designated by the Committee shall be eligible to participate in the Plan.
Notwithstanding the foregoing, in the event that the Bonus Compensation payable
with respect to a Plan Year is less than One Thousand U.S. Dollars ($1,000), or
the equivalent if payable in another currency, then such individual shall not be
eligible to participate in the Plan for such Plan Year and any Bonus
Compensation shall be paid in cash.
SECTION 1.5. CAPITAL STOCK SUBJECT TO THE PLAN. The maximum number of
shares of Capital Stock that may be issued pursuant to the Plan is 750,000.
Capital Stock to be issued under the Plan may be either authorized and unissued
shares of Capital Stock or shares of Capital Stock held in treasury by the
Corporation.
ARTICLE II
ELECTIONS AND DISTRIBUTIONS
SECTION 2.1. ELECTIONS TO RECEIVE CAPITAL STOCK FROM COMPENSATION. Any
Participant may elect to receive Capital Stock under this Plan in lieu of all or
a portion of the Non-Deferred Bonus Compensation otherwise payable to such
Participant in any Plan Year beginning with the Plan Year commencing July 1,
1995 (a "Stock Acquisition Election"); provided, however, that the percentage
amount of Bonus Compensation subject to such an election must be in increments
of ten percent (10%) and may not be less than ten percent (10%) of the Bonus
Compensation earned by the Participant with respect to the Plan Year or other
bonus award designated by the Committee, or relate to Bonus Compensation below
One Thousand U.S. Dollars ($1,000), or the equivalent if payable in another
currency. If a Participant makes a Stock Acquisition Election, the Participant
shall receive, as of the date that the Bonus Compensation otherwise would have
been paid: (i) the number of shares of Capital Stock that could have been
purchased on that date based on the amount of Bonus Compensation subject to the
Stock Acquisition Election and the Fair Market Value of the Capital Stock on
that date, rounded to the nearest whole share; and (ii) a number of shares of
Capital Stock equal to the product of the number of shares awarded pursuant to
Section 2.1(i) above multiplied by a percentage amount to be determined by the
Committee (the "Stock Premium Percentage") rounded to the nearest whole share.
The Stock Premium Percentage shall not exceed twenty-five percent (25%). In the
absence of a Stock Acquisition Election, all Bonus Compensation not deferred as
Stock Credits pursuant to Section 2.2 hereof or otherwise deferred pursuant to a
Deferred Compensation Plan shall be paid to the Participant in cash in
accordance with the Corporation's policies and procedures. Certificates for
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<PAGE> 3
Capital Stock acquired by the Participant pursuant to a Stock Acquisition
Election shall be issued as soon as practicable following the award of
Bonus Compensation.
SECTION 2.2. ELECTIONS TO RECEIVE STOCK CREDITS FROM DEFERRED
COMPENSATION. Any Participant may elect to receive Stock Credits under this Plan
with respect to all or a portion of the Deferred Bonus Compensation credited to
the Participant in any Plan Year beginning with the Plan Year commencing July 1,
1995 (a "Stock Credit Election"); provided, however, that the percentage amount
of Bonus Compensation subject to such an election must be in increments of ten
percent (10%) and may not be less than 10% of the total Bonus Compensation
earned by the Participant with respect to a Plan Year or other bonus award
designated by the Committee, or relate to Bonus Compensation below One Thousand
U.S. Dollars ($1,000), or the equivalent if payable in another currency. If a
Participant makes a Stock Credit Election, a Stock Credit Account established
for the Participant and maintained by the Corporation shall be credited with:
(i) that number of Stock Credits equal to the number of shares of Capital Stock
(including fractions of a share to four decimal places) that could have been
purchased with the amount of Deferred Bonus Compensation subject to a Stock
Credit Election based on the Fair Market Value of the Capital Stock on the date
that the Bonus Compensation would otherwise have been paid if it had not been
deferred; and (ii) that number of Stock Credits equal to the product of the
number of Stock Credits awarded pursuant to Section 2.2(i) above multiplied by a
percentage amount to be determined annually by the Committee, which percentage
may be different from the Stock Premium Percentage (the "Stock Credit Premium
Percentage"). The Stock Credit Premium Percentage shall not exceed twenty-five
percent (25%).
SECTION 2.3 RESTRICTED PERIOD. The Committee may, in its sole
discretion, establish a period of time (the "Restricted Period") that all or any
portion of the shares of Capital Stock issued pursuant to a Stock Acquisition
Election or shares of Capital Stock distributed with respect to Stock Credits
pursuant to Section 2.7 hereof may not be sold, assigned, transferred, pledged
or otherwise disposed of. Shares of Capital Stock subject to a Restricted Period
("Restricted Stock") shall be represented by a stock certificate registered in
the name of the Participant which, in the discretion of the Committee, could be
either held in the custody of the Corporation until the end of the Restricted
Period applicable to such shares or bear a restrictive legend. Except for the
limitations described above, a Participant shall have all the rights of a
stockholder of the Corporation with respect to Restricted Stock, including the
right to vote such shares.
SECTION 2.4. TERMS AND CONDITIONS OF ELECTION. A Stock Acquisition
Election or Stock Credit Election (an "Election") shall be subject to the
following terms and conditions.
(a) An Election shall be in writing and shall be irrevocable; and
(b) An Election may be made on or before December 31, 1995, to
take effect for the Plan Year ending on June 30, 1996;
thereafter an Election shall be effective for any Plan Year
only if made at such time as the Committee in its discretion
shall determine; provided, however that an election to defer
payment must occur at least six (6) months prior to the date
that Bonus Compensation would be paid or otherwise would
become payable if it had not been deferred by the Participant.
(c) An Election shall remain in effect only for the Plan Year to
which it applies.
SECTION 2.5. ADJUSTMENT OF STOCK CREDIT ACCOUNTS.
(a) Cash Dividends -- As of the date that any cash dividend is
paid to stockholders of the Corporation, the Participant's
Stock Credit Account shall be credited with additional Stock
Credits equal to the number of shares of Capital Stock
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(including fractions of a share to four decimal places) that
could have been purchased on that date with the dividends paid
on the number of shares of Capital Stock equal to the number
of Stock Credits in such Participant's Stock Credit Account
based on the Fair Market Value of the Capital Stock on that
date.
(b) Stock Dividends -- In the event that a stock dividend shall be
paid upon the Capital Stock, the number of Stock Credits in
each Participant's Stock Credit Account shall be adjusted by
adding thereto additional Stock Credits equal to the number of
shares of Capital Stock which would have been distributable on
the Capital Stock represented by Stock Credits if such shares
of Capital Stock had been outstanding on the date fixed for
determining the stockholders entitled to receive such stock
dividend.
(c) Other Adjustments -- In the event that the outstanding shares
of Capital Stock of the Corporation shall be changed into or
exchanged for a different number or kind of shares of stock or
other securities of the Corporation or of another corporation,
whether through reorganization, recapitalization, stock
split-up, combination of shares, merger or consolidation, then
there shall be substituted, for the shares of Capital Stock
represented by Stock Credits, the number and kind of shares of
stock or other securities which would have been substituted
therefor if such shares of Capital Stock had been outstanding
on the date fixed for determining the stockholders entitled to
receive such changed or substituted stock or other securities.
In the event there shall be any change, other than specified
in this Section 2.5, in the number or kind of outstanding
shares of Capital Stock of the Corporation or of any stock or
other securities into which such Capital Stock shall be
changed or for which it shall have been exchanged, then, if
the Board shall determine, in its discretion, that such change
equitably requires an adjustment in the number of Stock
Credits or the Capital Stock represented by such Stock
Credits, such adjustment shall be made by the Board and shall
be effective and binding for all purposes of the Plan and on
each outstanding Stock Credit Account.
SECTION 2.6. CHANGE IN CONTROL. In the event of any threatened or
actual change in control of the Corporation (as set forth in any Deferred
Compensation Plan to which the Stock Credits relate), issued and outstanding
shares of Capital Stock shall be substituted for the Stock Credits in each
Participant's Stock Credit Account and such Capital Stock shall be transferred
to the deferred compensation trust established under the Deferred Compensation
Plan to which the Stock Credits relate.
SECTION 2.7. DISTRIBUTION OF STOCK CREDITS. As soon as practicable
following the date on which the Participant has elected to have the Deferred
Bonus Compensation paid pursuant to the applicable Deferred Compensation Plan
(the "Distribution Date"), the Corporation shall issue to such Participant that
number of shares of Capital Stock equal to the whole number of Stock Credits in
such Participant's Stock Credit Account to be distributed and cash equal to the
fractional Stock Credits in such account to be distributed multiplied by the
Fair Market Value of the Capital Stock as of the Distribution Date provided,
however, that the Committee, in its sole discretion, shall have the right to pay
the Participant a cash amount equal to the aggregate value of the whole shares
of Capital Stock otherwise distributable with respect to the Stock Credits, in
lieu of distributing such shares.
SECTION 2.8. DISTRIBUTIONS ON DEATH. Upon the death of a Participant,
any and all restrictions on transferability of Restricted Stock held by or on
behalf of such Participant shall lapse and such shares
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shall become immediately transferable. In the event of the death of a
Participant prior to the Distribution Date, the Stock Credit Account to which he
or she was entitled shall be converted to cash and distributed in a lump sum to
such person or persons or the survivors thereof, including corporations,
unincorporated associates or trusts, as the Participant may have designated. All
such designations shall be made in writing, signed by the Participant and
delivered to the Corporation. A Participant may from time to time revoke or
change any such designation by written notice to the Corporation. If there is no
unrevoked designation on file with the Corporation at the time of the
Participant's death, or if the person or persons designated therein shall have
all predeceased the Participant or otherwise ceased to exist, such distributions
shall be made to the estate of the Participant. Such distributions shall be made
as soon as practicable following notification to the Corporation of the
Participant's death. In this case, the Participant's Stock Credit Account shall
be converted to cash by multiplying the number of whole and fractional shares of
Capital Stock to which the Participant's Stock Credit Account is equivalent by
the Fair Market Value of the Capital Stock on the date of death.
ARTICLE III
MISCELLANEOUS PROVISIONS
SECTION 3.1. AMENDMENT AND DISCONTINUANCE. The Board may alter, amend,
suspend or discontinue the Plan, provided that no such action shall deprive any
person without such person's consent of any rights theretofore granted pursuant
hereto. The Board may, in its discretion, submit any proposed amendment to the
Plan to the stockholders of the Corporation for approval and shall submit
proposed amendments to the Plan to the stockholders of the Corporation for
approval if such approval is required in order for the Plan to comply with Rule
16b-3 of the Securities Exchange Act of 1934 (the "Exchange Act") (or any
successor rule).
SECTION 3.2. COMPLIANCE WITH GOVERNMENTAL REGULATIONS. Notwithstanding
any provision of the Plan or the terms of any agreement entered into pursuant to
the Plan, the Corporation shall not be required to issue any Capital Stock or
Stock Credits hereunder prior to registration of the shares subject to the Plan
under the Securities Act of 1933 or the Exchange Act, if such registration shall
be necessary, or before compliance by the Corporation or any Participant with
any other provisions of either of those acts or of regulations or rulings of the
Securities and Exchange Commission thereunder, or before compliance with other
federal and state laws and regulations and rulings thereunder, including the
rules of the New York Stock Exchange, Inc. The Corporation shall use its best
efforts to effect such registrations and to comply with such laws, regulations
and rulings forthwith upon advice by its counsel that any such registration or
compliance is necessary.
SECTION 3.3. COMPLIANCE WITH SECTION 16. With respect to persons
subject to Section 16(a) of the Exchange Act, transactions under this Plan are
intended to comply with all applicable conditions of Rule 16b-3 (or its
successor rule). To the extent that any provision of the Plan or any action by
the Board or the Committee fails to so comply, it shall be deemed null and void
to the extent permitted by law and to the extent deemed advisable by the
Committee.
SECTION 3.4. NON-ALIENATION OF BENEFITS. No right or interest of a
Participant in a Stock Credit Account under the Plan may be sold, assigned,
transferred, pledged, encumbered or otherwise disposed of except as expressly
provided in the Plan; and no interest or benefit of any Participant under the
Plan shall be subject to the claims of creditors of the Participant.
SECTION 3.5. WITHHOLDING TAXES. To the extent required by applicable
law or regulation, each Participant must arrange with the Corporation for the
payment of any federal, state or local income or other tax applicable to the
receipt of Capital Stock or Stock Credits under the Plan before the
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Corporation shall be required to deliver to the Participant a certificate for
Capital Stock or distribute cash with respect to a Stock Credit Account.
At the discretion of the Committee, share tax withholding may be
permitted. Share tax withholding shall entitle the Participant to elect to
satisfy, in whole or in part, any tax withholding obligations in connection with
the issuance of shares of Capital Stock pursuant to the Plan by either (i)
withholding shares of Capital Stock otherwise issuable to the Participant; or
(ii) accepting delivery of previously owned shares of Capital Stock.
Notwithstanding the foregoing, in the case of a Participant subject to Section
16(a) of the Exchange Act, no such election shall be effective unless made in
compliance with any applicable requirements of Rule 16b-3 (or any successor
rule) that must be satisfied in order to exempt the withholding transaction(s)
from Section 16(b) of the Exchange Act.
SECTION 3.6. FUNDING. Except as provided in Section 2.6 hereof, no
obligation of the Corporation under the Plan shall be secured by any specific
assets of the Corporation, nor shall any assets of the Corporation be designated
as attributable or allocated to the satisfaction of any such obligation. To the
extent that any person acquires a right to receive payments from the Corporation
under the Plan, such right shall be no greater than the right of any unsecured
creditor of the Corporation.
SECTION 3.7. GOVERNING LAW. The Plan shall be governed by and construed
and interpreted in accordance with the internal laws of the Commonwealth of
Pennsylvania.
SECTION 3.8. EFFECTIVE DATE OF THE PLAN. The Plan shall become
effective upon approval and adoption of the Plan by the holders of a majority of
the shares of Capital Stock present at the 1995 annual meeting of stockholders.
-6-
<PAGE> 1
EXHIBIT 10.10
KENNAMETAL INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(as amended on July 26, 1999)
SECTION 1. PURPOSE AND EFFECTIVE DATE.
1.1 The purpose of this Supplemental Executive Retirement Plan is to ensure
the payment of a competitive level of retirement income, in order to
attract, retain, and motivate selected executives. The Plan is also
intended to provide eligible executives with a retirement benefit that
cannot be paid from the Company's qualified Retirement Income Plan, due
to various limitations of the United States Internal Revenue Code.
1.2 This Plan was previously amended and adopted, effective April 21, 1995,
and was most recently amended and adopted, effective July 26, 1999. It
will be effective for each participant on the date he or she is
designated as a Participant and executes an Employment Agreement.
1.3 The terms of this Plan are applicable only to eligible executives who
are employed by the Company on or after April 21, 1995. Any executive
who retired or otherwise terminated employment prior to such date,
shall not be eligible to be designated a Participant under this Plan
unless he or she returns to service with the Company on or after April
21, 1995.
SECTION II. DEFINITIONS.
2.1 BOARD OF DIRECTORS means the Directors of the Company.
2.2 BONUS AWARD means the annual cash award under the provisions of the
Kennametal Inc. Management Performance Bonus Plan of any given fiscal
year. Only an award generated by successful attainment of the Bonus
Plan's business objectives shall be considered a "Bonus Award" for the
purposes of this Plan. No other bonus award will qualify.
2.3 CHANGE IN CONTROL shall mean a change in control of a nature that would
be required to be reported in response to Item 6(e) of Schedule 14A
promulgated under the Securities Exchange Act of 1934 as in effect on
the date hereof ("1934 Act"), or if Item 6(e) is no longer in effect,
any regulations issued by the Securities and Exchange Commission
pursuant to the 1934 Act which serve similar purposes; provided that,
without limitation, such a change in control shall be deemed to have
occurred if (i) Kennametal shall be merged or consolidated with any
corporation or other entity other than a merger or consolidation with a
corporation or other entity all of whose equity interests are owned by
Kennametal immediately prior to the merger or consolidation, or (ii)
Kennametal shall sell all or substantially all of its operating
properties and assets to another person, group of associated persons,
or corporation; or (iii) any "person" (as such term is used in Sections
13(d) and 14(d) of the 1934 Act), is or becomes a beneficial owner,
directly or indirectly, of securities of Kennametal representing 25% or
more of the combined voting power of Kennametal's then outstanding
securities coupled with or followed by the existence of a majority of
the board of directors of Kennametal consisting of persons other than
persons who either were directors of Kennametal immediately prior to or
were nominated by those persons who were directors of Kennametal
immediately prior to such person becoming a
<PAGE> 2
beneficial owner, directly or indirectly, of securities of Kennametal
representing 25% or more of the combined voting power of Kennametal's
then outstanding securities.
2.4 CODE means the Internal Revenue Code of 1986, as amended from time to
time. References in the Plan to a Code Section shall be deemed to refer
to any successor provision of the Code, as appropriate.
2.5 COMMITTEE means the Board of Directors Committee on Executive
Compensation, designated by the Board of Directors to administer the
plan, pursuant to Section 7 of the Code.
2.6 COMPANY means Kennametal Inc., a Pennsylvania corporation, or any
successor bound by this Plan pursuant to Section 8.5.
2.7 DISABILITY means such incapacity due to physical or mental illness or
injury, as causes the Participant to be absent from his principal
office at Kennametal's offices for the entire portion of 180
consecutive business days.
2.8 EMPLOYEE means an employee of the Employer.
2.9 EMPLOYER means the Company and any subsidiary or affiliate of the
Company whose employees participate in the Plan.
2.10 EMPLOYMENT AGREEMENT means an agreement between an Employer and an
Employee which sets forth terms and conditions of employment and
specifically refers to this Plan.
2.11 FINAL BASE SALARY means the Participant's monthly base salary rate,
before any pre-tax reductions pursuant to the Participant's elections
under IRC Section 125 or 402(e)(3), for the calendar month in which
Participant's Termination of Employment occurs, without regard to any
limitations on compensation under the Code, including those under IRC
Section 401(a)(17) , multiplied by twelve (12).
2.12 IRC means the Code.
2.13 NORMAL RETIREMENT means the first day of the month following the day on
which the Employee reaches the age of sixty-five (65).
2.14 PARTICIPANT means any Employee of an Employer who is entitled to
participate in the Plan in accordance with Section III. Where the
context so indicates, "Participant" shall also include a retired or
deceased Participant with respect to whom a SERP Benefit is payable.
2.15 PLAN means the Company's Supplemental Executive Retirement Plan (SERP),
as set forth herein and as amended and restated from time to time.
2.16 RETIREMENT INCOME PLAN means the Company's qualified Retirement Income
Plan, as it may be amended and restated, from time to time.
2.17 SERP BENEFIT means the benefit, calculated pursuant to Section V, that
is payable to a Participant under the Plan.
-2-
<PAGE> 3
2.18 TARGET RETIREMENT INCOME means the total of the estimated benefit under
the Company's qualified Retirement Income Plan, plus the estimated
benefit under Social Security, plus the amount of SERP Benefit, under
Section V of the Plan.
2.19 YEAR OF SERVICE means each full twelve-month period beyond Employee's
most recent hire date, as determined pursuant to the Company's regular
personnel records and policies.
SECTION III. ELIGIBILITY.
3.1 Each officer or key executive Employee of the Company approved by the
Committee, in its sole discretion, shall be eligible to participate in
the Plan, upon prompt execution of an Employment Agreement.
3.2 Any officer or key executive who becomes a Participant shall continue
to be a Participant until his or her termination of employment, or
until a date prior to such time, as determined by the Committee, in its
sole discretion.
SECTION IV. VESTING.
4.1 A Participant shall become vested and entitled to receive a benefit
under the Plan, determined in accordance with Section V, only in
accordance with the following schedule:
<TABLE>
<CAPTION>
======================================================
AGE OF PARTICIPANT AT CUMULATIVE VESTED PLAN
TERMINATION BENEFIT
------------------------------------------------------
<S> <C>
Less than age 56 0%
------------------------------------------------------
56 20%
------------------------------------------------------
57 40%
------------------------------------------------------
58 60%
------------------------------------------------------
59 80%
------------------------------------------------------
60 or older 100%
======================================================
</TABLE>
Notwithstanding the foregoing, a Participant who voluntarily leaves
employment, without Employer's permission, or is involuntarily
terminated, with cause, prior to entitlement to receive a benefit
pursuant to Section 6.1, shall forfeit any entitlement to a benefit
under the Plan. In the event that Participant shall voluntarily or
involuntarily leave the employ of the Company before his or her
retirement date, and the Participant is not vested as to any portion of
the SERP Benefit, the obligations of the Company under Section 6 and 7
of the Plan shall be null and void, and neither the Participant nor any
other person shall in any way be entitled to any payments hereunder.
4.2 Notwithstanding Section 4.1, each Participant's Plan benefit
automatically shall become 100% vested upon a Change in Control of the
Company.
SECTION V. AMOUNT OF BENEFIT
5.1 The Target Retirement Income shall be calculated as a percent of the
total of Final Base Salary and an average of the last three Bonus
Awards. The Target Retirement Income percentage shall be 60% at 30
Years of Service, plus or minus 1% for each Year of Service greater
than or less than thirty.
-3-
<PAGE> 4
5.2 The amount of each Participant's SERP Benefit shall initially be
calculated as the excess of the Target Retirement Income amount over
the sum of the monthly benefit that would be payable as a single life
annuity under the Company's Retirement Income Plan commencing upon a
retirement at age 65, based on credited service and average earnings
under the Retirement Income Plan as of the Participant's termination of
employment, plus the Participant's Social Security benefit, as defined
under the Retirement Income Plan, that would be payable commencing at
age 65 assuming the Participant had no further FICA wages or SECA
earnings after termination of employment.
5.3 The Target Retirement Income amount, the Retirement Income Plan benefit
estimate, and the Social Security benefit estimate shall be calculated
according to the methodology described in Appendix A.
5.4 The Committee shall cause the formula calculation described in Sections
5.1 and 5.2 to be done annually, or as otherwise required, for each
Participant. The Committee shall then be advised of the SERP Benefit
amount for each Participant, and shall direct that an official list of
Participants and their accrued SERP Benefit be prepared, which shall
govern the payment of a benefit under the Plan until the next annual
review and predetermination of a SERP Benefit amount.
SECTION VI. PAYMENT OF BENEFIT.
6.1 Payment of the Participant's SERP Benefit shall commence on the first
day of the month following the month in which the Participant's
employment with the Company terminates due to (1) Normal Retirement
from employment with the Company, (2) retirement from employment with
the Company on any date prior to Normal Retirement that has the prior
approval of the Company's Board of Directors, (3) termination of
employment prior to Normal Retirement as a result of Disability, or (4)
retirement from employment with the Company following a Change In
Control, unless the Participant requests a later payment commencement
date.
6.2 A Participant's Plan benefit shall be paid in equal monthly
installments, in the form of a single life annuity with no death or
other survivor benefit other than those described in Section VII.
SECTION VII. SURVIVING SPOUSE AND OTHER DEATH BENEFIT.
7.1. In the event of the death of a Participant prior to the commencement of
payment of a Plan benefit to the Participant, an amount equal to 50% of
the amount of the benefit calculated in accordance with the vesting
provisions of Section IV and the amount of the benefit of Section V
which would otherwise have been payable to the Participant, will
instead be payable to the Participant's surviving spouse. Payments to
such spouse shall be made from the month following the month in which
the death of the Participant occurred until the death of the surviving
spouse.
7.2. In the event of the death of a Participant after the commencement of
payment of a Plan benefit to the Participant, an amount equal to 50% of
the amount of the Plan benefit then being paid to the Participant will
instead be payable to the Participant's surviving spouse. Payments to
such spouse shall be made from the month following the month in which
the death of the Participant occurred, until the death of the surviving
spouse.
-4-
<PAGE> 5
7.3. If the surviving spouse is five (5) or more years younger than the
Participant, the monthly payment to the surviving spouse pursuant to
paragraphs 7.1 and 7.2 shall be actuarially adjusted, so that it has
the same present actuarial value as the full 50% payment to a
hypothetical surviving spouse who is less than five (5) years younger
than the Participant. For this purpose, the Committee shall use a life
expectancy factor derived from the most recent group annuity mortality
table published by the Society of Actuaries, as shown in Appendix B of
the Plan. The foregoing actuarial adjustment shall be effected by
dividing the life expectancy factor set forth on the most recent group
annuity mortality table for the hypothetical surviving spouse by the
life expectancy factor set forth on the same table for the surviving
spouse (calculated to four decimals). The quotient obtained shall be
multiplied by the surviving spouse's 50% benefit pursuant to paragraphs
7.1 and 7.2. An example of the method of actuarial adjustment is shown
in Appendix C of the Plan.
7.4. In the event that the Participant and/or his or her surviving spouse
shall have been entitled to payments under Sections 6 and 7 of the
Plan, and upon the death of the surviving spouse, the aggregate amount
of the cumulative payments of the SERP Benefit shall have been less
than $50,000, the Company shall pay to the estate of the Participant or
to such other person as the Participant shall designate by written
notice, a lump sum amount equal to $50,000 less the aggregate amount of
the cumulative payments of the SERP Benefit already made.
SECTION VIII. MISCELLANEOUS PROVISIONS.
8.1 ADMINISTRATION. The Committee shall be responsible for all facets of
interpretation and administration of the Plan. The Committee may adopt
rules and regulations to assist it in the administration of the Plan.
The Board of Directors has also delegated to the Committee the right to
modify provisions of the Plan in individual cases.
8.2 NON-COMPETITION. Receipt of the SERP Benefit is expressly conditioned
upon the non-competition of the retired Participant with the Company,
for so long as any payments are being made hereunder. Accordingly,
unless the Participant first secures the written consent of the Board
of Directors or the Committee, he shall not directly or indirectly, as
an officer, director, employee, consultant, agent, partner, joint
venturer, proprietor, or other, engage in or assist any business which
is or may become in direct or indirect competition with the Company or
any of its subsidiaries, other than as a mere investor holding not more
than one percent of the equity interest of any such competing
enterprise. In the event that the Committee makes a good-faith
determination that a Participant receiving a SERP Benefit is or may be
violating the non-competition provisions hereof, it shall immediately
notify him or her of such finding in writing and afford him or her a
reasonable opportunity (a period of not less than sixty days) to rebut
such finding, or to desist from such competitive activity. In the event
that the Committee believes that a violation of the non-competition
provision continues uncorrected following the sixty-day period, it may
then cease making SERP Benefit payments, and the retired Participant
(and any Spouse or other beneficiary claiming through the Participant)
shall forfeit any right to future payment of a SERP Benefit under the
Plan.
8.3 SOURCE OF BENEFIT PAYMENTS. This Plan is intended to be an unfunded
plan of deferred compensation for a select group of management or
highly compensated individuals, and it is intended that a SERP Benefit
payable hereunder will be paid from the general assets of the Company.
However, in the event of a Change in Control, amounts payable to a
Participant or the surviving spouse or estate, under Sections 6 and 7
of the Plan, may be provided for in accordance
-5-
<PAGE> 6
with an Executive Deferred Compensation Trust (a so-called "Rabbi"
trust) between the Company and a trustee. The Company shall inform the
Participant of the identity of the trustee upon the Participant's
request.
8.4 NON-ASSIGNMENT, ALIENATION. Nothing in this Plan gives a Participant or
any person claiming payments for or through him or her, any right,
title, or interest in any asset held in the Company, prior to the
payment thereof, and that the right of a Participant to any payment
hereunder is strictly contractual and unsecured, unless a Change in
Control causes the funding of the Plan in the Company's Executive
Deferred Compensation Trust. In addition, the benefit to be paid
hereunder may not be voluntarily or involuntarily sold, transferred,
assigned, alienated, or encumbered, and any such attempt shall be void.
8.5 OBLIGATION OF SUCCESSORS. This Plan shall be binding upon the Company
or any successor (whether direct or indirect, by purchase, merger,
consolidation, or otherwise), to all or substantially all of the
business and/or assets of the Company, or to any assignee thereof. To
the extent that the Company must take additional contractual or other
steps to make the Plan an enforceable contractual obligation of a
successor (e.g., a purchaser of assets), the Company shall take such
steps. This Plan and all rights of the Participant hereunder shall
inure to the benefit of and be enforceable by the Participant or the
Participant's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and
legatees.
8.6 AMENDMENT, TERMINATION. This Plan may be amended or terminated at any
time, provided that no such amendment or termination shall reduce or
eliminate the right of a Participant to the payment of a Plan benefit
earned prior to such amendment or termination.
8.7 WITHHOLDING. The Company may provide for the withholding, from any
benefit payable under this Plan, all Federal, state, city, or other
taxes as shall be appropriate pursuant to any law or governmental
regulation or ruling, and may delay the payment of any benefit until
the Participant or beneficiary provides payment to the Company of all
applicable withholding taxes.
8.8 MISCELLANEOUS. This Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, to the
extent not governed by federal law. Section headings are for
convenience of reference only, and shall not affect the construction or
interpretation of any of the provisions hereof.
-6-
<PAGE> 7
APPENDIX A, SERP BENEFIT CALCULATION METHOD
o Calculation begins with current base salary and years of service, up to
the present date.
o Target Retirement Income equals a percent of Final Base Salary plus the
average of the last three Bonus Awards. The percentage is calculated as
60% for 30 years of service, plus or minus 1% for each year of service
greater than or less than thirty. For example:
<TABLE>
<CAPTION>
-------------------------------------
Years of Retirement
Service Target
-------------------------------------
<S> <C>
Newly hired 30%
-------------------------------------
5 35%
-------------------------------------
10 40%
-------------------------------------
15 45%
-------------------------------------
20 50%
-------------------------------------
25 55%
-------------------------------------
30 60%
-------------------------------------
35 65%
-------------------------------------
40 70%
-------------------------------------
45 75%
-------------------------------------
</TABLE>
o Calculate income from Kennametal Retirement Income Plan, based on
current years of service and pensionable earnings, to date, and
including current statutory limitations (IRC Sections 415 and
401A(17)), but not actuarially reduced for age less than 65.
o Calculate income from Social Security, based on earnings to date, but
not reduced for age less than 65.
o Retirement Income Plan plus Social Security equals Total Funded
Retirement Income from qualified plans.
o SERP Benefit equals Target Retirement Income (above) minus Total Funded
Retirement Income from qualified plans.
o However, minimum SERP Benefit is 10% of current base salary.
o If the prior SERP benefit (as last calculated under the above described
method and posted to the official list of Participants and their SERP
Benefit) is greater than the new SERP Benefit, use the prior SERP
Benefit.
o Therefore, SERP Benefit is the greatest of:
- Target Retirement minus Total Funded Retirement Income,
- 10% of Current Base Salary, or
- Prior SERP Benefit.
-7-
<PAGE> 8
APPENDIX B
LIFE EXPECTANCIES FROM THE 1994 UP MORTALITY TABLE
<TABLE>
<CAPTION>
==============================================================================================
AGE MALE FEMALE Age MALE FEMALE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
20 58.689676 63.439521 65 17.301673 20.733104
- ----------------------------------------------------------------------------------------------
21 57.721384 62.458711 66 16.567774 19.922360
- ----------------------------------------------------------------------------------------------
22 56.753995 61.477787 67 15.852596 19.126492
- ----------------------------------------------------------------------------------------------
23 55.787630 60.496744 68 15.155361 18.344112
- ----------------------------------------------------------------------------------------------
24 54.822623 59.515516 69 14.474231 17.572161
- ----------------------------------------------------------------------------------------------
25 53.859070 58.533981 70 13.807539 16.808107
- ----------------------------------------------------------------------------------------------
26 52.897006 57.552138 71 13.154894 16.051847
- ----------------------------------------------------------------------------------------------
27 51.936249 56.570159 72 12.516970 15.305311
- ----------------------------------------------------------------------------------------------
28 50.976471 55.588318 70 11.895300 14.572070
- ----------------------------------------------------------------------------------------------
29 50.017407 54.606930 74 11.289425 13.854374
- ----------------------------------------------------------------------------------------------
30 49.058903 53.626184 75 10.697900 13.152659
- ----------------------------------------------------------------------------------------------
31 48.100761 52.646205 76 10.121208 12.467970
- ----------------------------------------------------------------------------------------------
32 47.142792 51.667107 77 9.561406 11.801827
- ----------------------------------------------------------------------------------------------
33 46.184865 50.688947 78 9.021858 11.156078
- ----------------------------------------------------------------------------------------------
34 45.226529 49.711724 79 8.505843 10.530978
- ----------------------------------------------------------------------------------------------
35 44.267364 48.735436 80 8.014790 9.925826
- ----------------------------------------------------------------------------------------------
36 43.307409 47.760220 81 7-548836 9.340932
- ----------------------------------------------------------------------------------------------
37 42.347090 46.786204 82 7.107007 8.777414
- ----------------------------------------------------------------------------------------------
38 41.387178 45.813644 83 6.687359 8.236987
- ----------------------------------------------------------------------------------------------
39 40.428474 44.842772 84 6.285696 7.719357
- ----------------------------------------------------------------------------------------------
40 39.471398 43.873849 85 5.898198 7.223015
- ----------------------------------------------------------------------------------------------
41 38.516336 42.906937 86 5.523671 6.747887
- ----------------------------------------------------------------------------------------------
42 37.563597 41.941959 87 5.163141 6.295031
- ----------------------------------------------------------------------------------------------
43 36.613496 40.978756 88 4.819594 5.866464
- ----------------------------------------------------------------------------------------------
44 35.666021 40.016924 89 4.496051 5.463912
- ----------------------------------------------------------------------------------------------
45 34.721182 39.056122 90 4.193604 5.087653
- ----------------------------------------------------------------------------------------------
46 33.779283 38.096450 91 3.912324 4.737174
- ----------------------------------------------------------------------------------------------
47 32.840954 37.138220 92 3.651468 4.411342
- ----------------------------------------------------------------------------------------------
48 31.907044 36.182042 93 3.409583 4.108517
- ----------------------------------------------------------------------------------------------
49 30.978090 35.228328 94 3.0187285 3.827037
- ----------------------------------------------------------------------------------------------
50 30.054402 34.277235 95 2.986195 3.565508
- ----------------------------------------------------------------------------------------------
51 29.136469 33.329133 96 2.806213 3.322551
- ----------------------------------------------------------------------------------------------
52 28.225043 32.384506 97 2.645659 3.096798
- ----------------------------------------------------------------------------------------------
53 27.321021 31.443972 98 2.501069 2.886902
- ----------------------------------------------------------------------------------------------
54 26.424628 30.507483 99 2.368067 2.692192
- ----------------------------------------------------------------------------------------------
55 25.535831 29.574787 100 2.243346 2.512150
- ----------------------------------------------------------------------------------------------
56 24.655321 28.646560 101 2.124336 2.345559
- ----------------------------------------------------------------------------------------------
57 23.784341 27.724202 102 2.009036 2.190383
- ----------------------------------------------------------------------------------------------
58 22.924662 26.809797 103 1.895858 2.043361
- ----------------------------------------------------------------------------------------------
59 22.077319 25.905022 104 1.786991 1.904998
- ----------------------------------------------------------------------------------------------
60 21.242746 25.010822 105 1.684548 1.776622
- ----------------------------------------------------------------------------------------------
61 20.421814 24.128172 106 1.584660 1.653351
- ----------------------------------------------------------------------------------------------
62 19.615791 23.258043 107 1.473289 1.520196
- ----------------------------------------------------------------------------------------------
63 18.826204 22.401396 108 1.316861 1.343162
- ----------------------------------------------------------------------------------------------
64 18.054561 21.559462 109 1.048860 1.058194
- ----------------------------------------------------------------------------------------------
110 .541667 .541667
==============================================================================================
HEWITT Associates
</TABLE>
-8-
<PAGE> 9
APPENDIX C
Example:
A PARTICIPANT RECEIVING A SERP BENEFIT IN THE AMOUNT OF $10,000 DIES AT AGE 74.
HIS SURVIVING SPOUSE IS AGE 65. THE BENEFIT PAYABLE TO HIS SURVIVING SPOUSE
WOULD BE CALCULATED AS FOLLOWS.
1. Life expectancy set forth on the Group Annuity Mortality Table of a
hypothetical surviving spouse (female) who is age 69 = 17.572161
2. Life expectancy set forth on the Group Annuity Mortality Table of the
surviving spouse (female) who is age 65 = 20.733104
3. Quotient obtained by dividing 1 above by 2 above (17.572161 /
20.733104) = 0.8475
4. Yearly benefit payable to surviving spouse = $10,000 x 50% x 0.8475 =
$4,237.50
-9-
<PAGE> 1
EXHIBIT 13
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.
OVERVIEW
Net income for 1999 was $39.1 million, compared to $71.2 million in 1998. The
1999 results were reduced by approximately $24.6 million, or $0.51 per share,
including $20.8 million, or $0.44 per share, related to special charges for
operational improvement programs, and $3.8 million, or $0.07 per share, related
to a one-time charge incurred in the acquisition of 4.9 percent of Toshiba
Tungaloy. Excluding these charges, net income for 1999 would have been $1.82 per
share.
The decline in earnings for 1999 was primarily due to lower sales of
metalworking products and industrial supplies in North America as a result of
weak industrial demand and higher interest and amortization expense related to
acquisitions. Cost-reduction and significant cost-control measures implemented
in November 1998, coupled with stronger demand in the European metalworking
market, partially offset this decline.
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, earnings per share for 1998 would have been $3.23 per
share. The results for 1998 also include an additional 3.45 million shares of
common stock issued on March 20, 1998.
Net income for 1998 was $71.2 million, compared to $72.0 million in 1997.
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.
BUSINESS SEGMENT REVIEW
Sales for the year ended June 30, 1999 were $1.9 billion, up 13 percent from
$1.7 billion last year. The increase in sales was primarily attributable to the
inclusion of five additional months of sales related to the acquisition of
Greenfield, offset by lower sales of metalworking products and industrial
supplies in North America due to weak industrial demand. Excluding acquisitions,
sales declined 7 percent in 1999.
Sales were $1.7 billion for the year ended June 30, 1998, up 45 percent from
$1.2 billion in 1997. 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.
Effective in 1999, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosure about Segments of an Enterprise and
Related Information." The presentation of segment information reflects the
manner in which management organizes segments for making operating decisions and
assessing performance. Prior-year amounts have been restated to conform with
current-year presentation.
METALWORKING
In the Metalworking segment, the company provides consumable metalcutting tools
and tooling systems to manufacturing companies in a wide range of industries
throughout the world. Metalcutting operations include turning, boring,
threading, grooving, milling and drilling. The company's tooling systems consist
of a steel toolholder and an indexable cutting tool such as an insert or drill
made from cemented tungsten carbides, high-speed steel or other hard materials.
(in thousands) 1999 1998 1997
===========================================================
External sales $1,038,205 $938,589 $670,932
Intersegment sales 68,538 52,060 29,402
Operating income 132,060 165,762 131,903
- -----------------------------------------------------------
In 1999, sales of metalworking products increased due to the inclusion of five
additional months of sales related to the acquisition of Greenfield and strong
European demand. This was offset by weak industrial demand by customers across a
variety of industries in North America, except for the automotive market.
Excluding acquisitions, Metalworking sales declined 8 percent in 1999.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Sales in North America declined 11 percent excluding acquisitions and were
further affected by the General Motors strike in the first quarter of 1999,
which was partially offset by increased demand for high-speed steel drills sold
in consumer markets as a result of new sales programs.
Sales in Europe increased 14 percent due to an acquisition, stronger demand and
favorable foreign currency translation effects. Demand for metalworking products
continued to show strong gains in the European market, primarily Germany, with
particular strength coming from export-oriented businesses such as the
automotive and truck industries, and to a lesser extent, aerospace and machine
tool builder industries. Favorable foreign currency translation effects were 1
percent due primarily to the strength of the German mark during 1999. Excluding
acquisitions and foreign currency translation effects, European Metalworking
sales declined 2 percent in 1999.
Operating income declined to $132.1 million and was affected by lower sales
levels, higher goodwill amortization and special changes. The gross profit
margin in 1999 was affected by a $6.9 million charge related to the
implementation of a new program to streamline and optimize the global
metalworking product offering, lower production levels, an unfavorable sales
mix, and costs associated with plant consolidations and rearrangements. The
plant consolidations and rearrangements are expected to have a favorable impact
on future performance.
Operating expenses were contained through cost-reduction and significant
cost-control measures implemented in November 1998. These cost-reduction
measures involved selected work force reductions, facility consolidations and
closings and other measures. Operating expenses include a $4.2 million charge
related to the closure of the Solon, Ohio high-speed steel manufacturing plant.
Additionally, amortization of intangibles increased due to a full year of
amortization related to the acquisition of Greenfield and other companies in the
prior year.
In 1998, sales of metalworking products increased 40 percent over 1997,
primarily due to the Greenfield acquisition. Excluding acquisitions, sales
increased 4 percent over 1997. Sales benefited from increased industrial demand
in North America and Europe.
Sales in North America increased 7 percent excluding acquisitions, and 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 in Europe increased 27 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 in 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, European Metalworking
sales increased 12 percent in 1998.
Operating income increased 26 percent due to the Greenfield acquisition and
improvement in the gross profit margin, partially offset by increased operating
expense levels. 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 partly reduced by unfavorable foreign currency translation
effects.
Operating expenses were controlled despite higher costs related to acquisitions
and to support higher sales volumes. Additionally, amortization of intangibles
increased primarily as a result of increased goodwill related to the Greenfield
acquisition.
INDUSTRIAL SUPPLY
This segment represents the sales of industrial supply products through
Kennametal subsidiary, JLK. Sales of metalworking consumable products are
derived through a direct-marketing program, including mail-order catalogs and
showrooms, a direct field sales force, and integrated supply programs or Full
Service Supply (FSS) programs.
(in thousands) 1999 1998 1997
=========================================================
External sales $518,512 $414,765 $303,828
Intersegment sales 13,130 10,583 12,361
Operating income 34,532 41,308 32,193
- ---------------------------------------------------------
Sales in this segment increased 25 percent in 1999 primarily due to
acquisitions. Excluding the effects of acquisitions, sales of industrial supply
products
<PAGE> 3
declined 3 percent. Sales benefited from the addition of new FSS programs,
growth in Europe and an increased product offering, offset by weak industrial
demand across North America and the General Electric (GE) FSS contract
disengagement.
The company decided not to accede to certain price concessions requested by GE
during renegotiations of the FSS program with GE in 1997. GE served notice to
the company that the FSS program would not be renewed for a significant portion
of the manufacturing sites served by the company. Sales to these GE
manufacturing sites were $22.9 million in 1998. In 1999, JLK did not have any
sales to GE for those manufacturing sites that were discontinued.
Operating income was $34.5 million and was affected by a decline in gross profit
margin and an increase in operating expense levels. The gross profit margin was
affected by lower-margin sales from prior year acquisitions, growth in the FSS
business and softer-than-expected economic conditions that resulted in weaker
demand in the higher-margin mail-order business. Cost-reduction actions
implemented in November 1998 contained operating expenses. However, the increase
in operating expenses is attributable to increased costs from acquisitions,
including higher levels of amortization expense, relocation of the office and
warehouse in the United Kingdom, and higher direct-mail costs.
At June 30, 1999, the company operated 31 showrooms, including eight
distribution centers and 13 other locations acquired in 1998 through
acquisitions. The company also provided FSS programs to 150 customers covering
231 different facilities.
In 1998, sales in the Industrial Supply segment increased 37 percent. Excluding
the effects of acquisitions, sales of industrial supply products increased 10
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 GE FSS contract
disengagement. Sales to these GE manufacturing sites were $54.7 million in
1997. During 1998, JLK acquired six metalworking distribution companies with
combined annual sales of approximately $137.0 million. Additionally, during
1998, JLK opened nine new showroom locations, including a distribution center
in the United States and a distribution center in Germany.
Operating income increased 28 percent due to an increase in gross profit margin,
partially offset by an increase in operating expense levels. The gross profit
margin gains were a result of a more favorable sales mix as well as improved
contract pricing on new FSS programs and the positive impact of the GE contract
disengagement, partially offset by lower-margin sales from acquisitions.
Operating expenses rose primarily as a result of increased costs from
acquisitions, including higher levels of amortization expense, from higher costs
associated with the opening of new showrooms and new distribution centers, and
new FSS programs for customers covering more than 70 new facilities.
At June 30, 1998, the company operated more than 50 locations with 33 showrooms,
including nine distribution centers, and provided FSS programs to 115 customers
covering 194 different facilities.
ENGINEERED PRODUCTS, MINING AND CONSTRUCTION AND OTHER
This segment's principal business is the production and sale of tungsten carbide
products used in engineered applications, mining and highway construction and
other similar applications, including circuit board drills, compacts and
metallurgical powders. These products have technical commonality to the
company's core metalworking products. The company also sells metallurgical
powders to manufacturers of cemented tungsten carbide products and oil and gas
drilling equipment.
(in thousands) 1999 1998 1997
=========================================================
External sales $346,199 $325,034 $181,583
Intersegment sales 29,281 12,882 12,540
Operating income 39,182 52,039 27,471
- ---------------------------------------------------------
Sales in this segment for 1999 increased 7 percent from 1998 due to the
inclusion of five additional months of sales related to the Greenfield
acquisition. Included in the 1998 results were the sales of the Marine Products
division of Greenfield, which, for strategic reasons, was divested by the
company in June 1998. Annual sales of the Marine Products division were
approximately $25.0 million. Excluding the acquisition-related effects, sales
declined 12 percent. Sales benefited from increased domestic demand for highway
construction tools due to a higher level of highway construction in North
America in 1999, particularly in the second half of the fiscal year. However,
this was offset by weaker demand for metallurgical powders, engineered products
and compacts used in the oil field services industry and mining tools due to
reduced underground coal production.
Operating income declined to $39.2 million in 1999 due to an unfavorable sales
mix, lower production levels, plant rearrangement costs and the Marine
divestiture. Operating expenses included a $5.8 million charge related to the
write-down of an investment in and net receivables from certain international
operations in emerging
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
markets as a result of changing market conditions in the regions these
operations serve. This was partially offset by cost-reduction actions
implemented in November 1998 and continued cost controls.
In 1998, sales in this segment increased 2 percent, excluding the effect of the
Greenfield acquisition, due to increased domestic demand 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. Overall, sales primarily increased as a result of strong
economic conditions in the United States.
Operating income increased to $52.0 million in 1998 due to higher gross profit,
partially offset by higher operating expenses as a result of the Greenfield
acquisition. Increased demand of these products and higher production levels had
a favorable impact on the gross profit margin.
COSTS AND EXPENSES
GROSS PROFIT MARGIN
The gross profit margin was 37.0 percent in 1999 compared to 40.7 percent in
1998. The 1999 gross profit margin was affected by a $6.9 million charge related
to the implementation of a new program to streamline and optimize the global
metalworking product offering. Excluding this charge, the gross profit margin
would have been 37.4 percent. Lower production levels, lower-margin sales from
acquired companies, an unfavorable sales mix, and costs associated with plant
consolidations and rearrangements affected the gross profit margin. The plant
consolidations and rearrangements are expected to have a favorable impact on
future performance.
In 1998, the gross profit margin was 40.7 percent compared to 42.2 percent in
1997. Excluding the effects of the acquisition of Greenfield and other
companies, 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
Operating expenses as a percentage of sales were 27.2 percent in 1999 compared
to 28.2 percent in 1998. The operating expenses for 1999 include a charge of
$3.8 million that the company recorded on its purchase of 4.9 percent of Toshiba
Tungaloy stock due to the difference between the cost and the fair market value
of the securities on the date the securities were purchased. Excluding the
effects of this charge, operating expenses as a percentage of sales would have
been 27.0 percent.
Operating expenses were controlled through cost-reduction actions implemented in
November 1998 that involved salaried work force reductions, salary reductions,
closure of several JLK-acquired locations and other measures. However, operating
expenses increased due to acquisitions, the JLK expansion program, the charge
recorded on the purchase of Toshiba Tungaloy stock, facility rationalizations
and other programs. Additionally, amortization of intangibles increased
approximately $10.1 million due to a full year of amortization related to the
acquisition of Greenfield and other companies.
In 1998, operating expenses as a percentage of sales were 28.2 percent compared
to 31.0 percent in 1997. 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.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In March 1999, the company's management completed restructuring plans, including
several programs to reduce costs, improve operations and enhance customer
satisfaction. The costs accrued for these plans were based on management
estimates using the latest information available at the time that the accrual
was established. The components of the charges are as follows:
Asset
Write-Downs
& Other Initial
Total Non-Cash Restructuring
(in thousands) Charge Adjustments Liability
==============================================================================
Product rationalization $ 6,900 $ (6,900) $ --
Plant closure 4,200 (2,000) 2,200
Impairment of
international operations 5,800 (5,800) --
Voluntary early
retirement program 3,937 (2,419) 1,518
- ------------------------------------------------------------------------------
Total $20,837 $(17,119) $3,718
==============================================================================
<PAGE> 5
The product rationalization charge represents a write-down of certain product
lines that are being discontinued as part of a program to streamline and
optimize the company's global metalworking product offering. This charge is net
of salvage value and has been recorded as a component of cost of goods sold.
Estimated salvage values were based on estimates of proceeds to be realized
through the sale of this inventory outside the normal course of business.
The program will result in a reduction in the number of products offered from an
estimated 58,000 to 38,000 and is an extension of the company's initiative to
reduce the number of its North American warehouses. By streamlining the product
offering, the company anticipates it will improve customer service and inventory
turnover, allow for more efficient operations, thereby reducing costs and
improving capacity utilization, and eliminate redundancy in its product
offering. Sales of these products represent less than 5 percent of global
metalworking sales. The company is proactively converting customers from these
older products to newer products.
The company also initiated plans to close a drill manufacturing plant in Solon,
Ohio. The manufacturing of products made at this plant will be relocated to
other existing plants in the United States. The closure will eliminate excess
capacity at other plant locations. The company will decommission the existing
plant and sell the property in the near future. The charge consists of employee
termination benefits for 155 hourly and salaried employees, which is
substantially all employees at this plant, and the write-down of assets included
in property, plant and equipment, net of salvage value.
The costs resulting from the relocation of employees, hiring and training new
employees and other costs resulting from the temporary duplication of certain
operations have not been included in this charge and will be included in
operating expenses as incurred. The costs related to these items are estimated
to be approximately $2.7 million and will be incurred through fiscal 2000.
An asset impairment charge was recorded to write-down, to fair market value, an
investment in and net receivables from certain mining and construction
international operations in emerging markets as a result of changing market
conditions in the regions these operations serve. In the March 1999 quarter, the
company completed a study of these operations, the markets for these products,
and the current economic situation in these regions, and to provide
recommendations for solving operational concerns. As a result of this study and
continued economic deterioration in these regions, the company determined that
the carrying amount of its investment in and net receivables from these
operations would not be recoverable.
A voluntary early retirement benefit program was offered to and accepted by 34
domestic employees. In exchange for their retirement, the company will provide
those employees pension and health benefits that would have been earned by the
employees through their normal retirement date. As a result of providing these
additional pension benefits, approximately $2.4 million of the total cost was
funded through the company's pension plan. There are no tax benefits associated
with this cost as the company may only deduct actual cash payments made to the
pension plan.
These charges were recorded as restructuring and asset impairment charges. The
costs charged against the restructuring cost accrual as of June 30, 1999 were as
follows:
Beginning Cash Ending
(in thousands) Accrual Expenditures Adjustments Accrual
==============================================================================
Plant closure $2,200 $ -- $ -- $2,200
Voluntary early
retirement program 1,518 (151) -- 1,367
- ------------------------------------------------------------------------------
Total $3,718 $(151) $ -- $3,567
==============================================================================
INTEREST EXPENSE
Interest expense increased $9.1 million as a result of higher average borrowings
in 1999, partly offset by lower borrowing rates. Interest expense in 1998
included one-time costs of $7.2 million for the amortization of deferred bank
financing fees related to the acquisition of Greenfield.
In 1998, interest expense increased $49.1 million as a result of additional
borrowings and the one-time costs associated with the amortization of bank
financing fees related to the acquisition of Greenfield.
OTHER EXPENSE
Other expense for 1998 included the write-off of deferred financing costs
related to a cancelled public offering of debt and equity securities 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
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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.
INCOME TAXES
The 1999 effective tax rate was 42.0 percent compared to a tax rate of 41.3
percent in 1998, and 38.0 percent in 1997. The increase in the effective tax
rate for both years is directly attributable to higher nondeductible goodwill
related to the Greenfield acquisition, partially offset in 1999 due to tax
benefits from costs to repay senior debt.
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 (Bank Credit
Agreement) totaling $900.0 million, of which $228.9 million was unused at June
30, 1999. The company and its subsidiaries generally obtain local financing
through credit lines with commercial banks. The company believes that cash flow
from operations and the availability under its revolving credit lines will be
sufficient to meet its cash requirements over the next 12 months.
During 1999, the company generated $226.6 million in cash from operations. Cash
provided by operations increased from 1998 primarily because of the proceeds
from the securitization of accounts receivable, higher noncash items and lower
working capital requirements, offset in part by lower net income.
Net cash used for investing activities was $102.0 million. Compared to the prior
year, the decrease in net cash used for investing activities was due to reduced
acquisition activity, lower levels of JLK share repurchases, and reduced levels
of expenditures to upgrade machinery and equipment and to acquire additional
client-server information systems. The company also purchased approximately 4.9
percent of the outstanding shares of Toshiba Tungaloy in 1999.
Net cash flow used for financing activities was $124.4 million. The decrease in
net cash flow from financing activities was a result of lower borrowings
compared to 1998, which included the financing of the Greenfield acquisition.
Additionally, the company paid $20.3 million in dividends during 1999.
On January 18, 1999, the company entered into a business cooperation agreement
with Toshiba Tungaloy Co., Ltd. (TT), a leading Japanese manufacturer of
consumable, cemented tungsten carbide metalcutting products, to enhance the
global business prospects for metalcutting tools of both companies. The
agreement includes various joint activities in areas such as product research
and development, private labeling, cross-licensing, and sales and marketing. The
company purchased approximately 4.9 percent of the outstanding shares of TT for
approximately $15.9 million, including the costs of the transaction. This
transaction was financed through the borrowing of Japanese yen under a new
credit line.
The intentions of the companies are to make the business cooperation agreement
successful and to develop a strong working relationship that will benefit both
companies in the future. The company will periodically evaluate the progress
made under this agreement and its current ownership position in TT to ensure
both are aligned with the company's operational and financial goals. See Note 5
to the consolidated financial statements for additional information.
On June 18, 1999, the company entered into an agreement with a financial
institution whereby the company securitizes, on a continuous basis, an undivided
interest in a specific pool of the company's domestic trade accounts receivable.
The company is permitted to receive proceeds of up to $100.0 million from the
securitization of accounts receivable under this agreement. The financial
institution charges the company based on the level of accounts receivable
securitized under this agreement and the commercial paper market rates plus the
financial institution's cost to administer the program. The costs incurred by
the company under this program were $0.2 million in 1999 and are accounted for
as a component of Other Expense (Income). At June 30, 1999, the company received
proceeds of $82.0 million under this program. The proceeds from the
securitization were used to permanently reduce a portion of the company's
long-term debt under the Bank Credit Agreement. See Note 6 to the consolidated
financial statements for additional information.
During 1998, the company generated $101.5 million in cash from operations. Cash
provided by operations increased 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 amounting to $104.8 million 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> 7
Net cash flow from financing activities was $710.1 million. The increase in net
cash flow from financing activities resulted from increased borrowings under its
Bank Credit Agreement that were used primarily to fund the acquisition of
Greenfield. Additionally, the company paid $18.5 million of cash dividends
during 1998.
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.
The net proceeds from the offering were $90.4 million and represented the sale
of 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
acquisitions. The company's ownership in JLK increased to approximately 83
percent due to treasury stock purchases made by JLK since the IPO.
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 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 for 1998 were 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 June 8, 1998, JLK 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 1999 and 1998, JLK repurchased
15,000 and 628,700 shares, respectively, of its Class A Common Stock at a total
cost of $0.3 million and $14.2 million, respectively. The repurchases were made
in the open market or in negotiated or other permissible transactions. These
repurchases were 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.
Capital expenditures for fiscal 2000 are estimated to be $65.0 to $75.0 million
and will be used primarily for new business systems at JLK, equipment to support
new products and to upgrade machinery and equipment.
FINANCIAL CONDITION
At June 30, 1999, Kennametal's total assets were $2.0 billion, a decline of 4
percent from $2.1 billion at June 30, 1998. Net working capital was $373.6
million, a decrease of 17 percent from $448.0 million for the previous year due
primarily to the securitization of accounts receivable in June 1999. The ratio
of current assets to current liabilities was 2.0 in 1999, compared with 2.2 in
1998.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Accounts receivable declined 30 percent to $231.3 million because of the $82.0
million securitization of accounts receivable in June 1999, partially offset by
increased sales levels. Inventories declined to $434.5 million due to the
reduction in the number of products offered as a result of the product pruning
initiative partially offset by the effects of acquisitions and from additional
Full Service Supply programs. Inventory turnover was 2.6 in 1999 and 3.1 in
1998.
Total debt (including capital lease obligations) decreased 11 percent to $861.3
million in 1999, as a result of the use of the proceeds from the securitization
of accounts receivable to repay term debt and reduced capital spending in the
second half of the year. The ratio of total debt-to-total capital was 51.9
percent in 1999 as compared with 55.4 percent in 1998. 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 further 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
is currently named as a potentially responsible party at two Superfund sites in
the United States. However, it is management's opinion, based on its evaluations
and discussions with outside counsel and independent consultants, that the
ultimate resolution of these environmental matters will not have a material
adverse effect on the results of operations, financial position or cash flow of
the company. See Note 16 to the consolidated financial statements for additional
information.
MARKET RISK
The company is exposed to certain market risks arising from transactions that
are entered into in the normal course of business. The company seeks to minimize
these risks through its normal operating and financing activities and, when
considered appropriate, through the use of derivative financial instruments. The
company does not enter into derivative transactions for speculative purposes and
therefore holds no derivative instruments for trading purposes. The company's
objective in managing these exposures is to reduce both earnings and cash flow
volatility to allow management to focus its attention on its core business
operations. The company does not hedge its foreign currency or interest rate
exposures in a manner that completely eliminates the effect of changes in
foreign currency or interest rates on consolidated net income.
A portion of the company's operations consists of investments in foreign
subsidiaries. The company's exposure to market risk for changes in foreign
currency exchange rates arises from intercompany loans utilized to finance
foreign subsidiaries, trade receivables and payables, and firm commitments
arising from international transactions. The company manages its foreign
currency transaction risk to minimize the volatility of cash flows caused by
currency fluctuations through internal natural offsets to the fullest extent
possible and forward contracts. These contracts are designated as hedges of
transactions, which will settle in future periods, that otherwise would expose
the company to foreign currency risk.
The company typically enters into forward contracts, with a duration of less
than 90 days, to hedge these transaction exposures by either purchasing or
selling specified amounts of foreign currency at a specified date. The company's
principal foreign currency exposures relate to the German mark, British pound,
Canadian dollar and Japanese yen.
By borrowing in local currency, the company reduces its exposure to translation
gains or losses. The average interest rate to service this foreign debt is
comparable to current U.S. interest rates.
At June 30, 1999, the company had six outstanding foreign exchange forward
contracts to sell foreign currency. A hypothetical 10 percent change in the
applicable 1999 year-end forward rates would result in an increase or decrease
in pretax income of approximately $1.0 million related to these positions.
The company's exposure to market risk for changes in interest rates relates
primarily to the company's long-term debt obligations. The company seeks to
manage its interest rate risk in order to balance its exposure between fixed and
floating rates while attempting to minimize its borrowing costs. To achieve
these objectives, the company primarily uses interest rate swap agreements to
manage net exposure to interest rate changes related to its borrowings.
<PAGE> 9
At June 30, 1999, the company had two interest rate swap agreements outstanding
that effectively convert a notional amount of $50.0 million from floating rates
to fixed rates. These agreements mature in April 2002. There were no outstanding
interest rate swap agreements at June 30, 1998.
At June 30, 1999 and 1998, the company had $861.3 million and $967.7 million of
debt outstanding at effective interest rates of 6.11 percent and 6.82 percent,
respectively, after the impact of interest rate swaps is taken into account. A
hypothetical change of 10 percent in the company's effective interest rate from
year-end 1999 levels would increase or decrease annual interest expense by
approximately $5.0 million.
The company is exposed to counterparty credit risk for nonperformance and, in
the unlikely event of nonperformance, to market risk for changes in interest and
currency rates. The company manages exposure to counterparty credit risk though
minimum credit standards, diversification of counterparties and procedures to
monitor concentrations of credit risk. The company does not anticipate
nonperformance by any of the counterparties.
The company's investment in Toshiba Tungaloy is classified as an
available-for-sale security and, therefore, is carried at its quoted market
value, as adjusted for currency exchange rates. At June 30, 1999, the carrying
and fair value of this investment was $13.4 million. A 10 percent change in the
quoted market value of TT common stock at June 30, 1999 would result in a $1.3
million increase or decrease in fair value.
See Note 14 to the consolidated financial statements for additional information.
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 assess the
exposure to the year 2000 issue, and 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 has currently completed more than 90 percent of the
tasks identified to remediate the year 2000 exposure, with the majority of the
remaining tasks targeted for September 1999 completion. The information systems
being utilized by the company that were not year 2000 compliant have been
replaced with compliant systems, or are in the process of being modified to
become compliant. Year 2000 exposure related to information systems has been
substantially mitigated throughout key metalworking and mining and construction
operations through the implementation of SAP R3 for most business processes.
The company is in the process of modifying existing non-compliant business
systems in the former Greenfield industrial product and engineered product
operations to ensure these operations are supported by a year 2000 compliant
information system. These modifications are expected to be completed and tested
by September 1999.
At JLK, HK Systems' Enterprise Information System currently is being implemented
in two phases and will address the year 2000 issue. The initial phase of this
implementation was tested and completed in August 1999. The second phase is
expected to be implemented in late 1999 and completed thereafter. Due to the
timing of the completion of the second phase, the company currently is modifying
the existing non-compliant systems to ensure the remainder of these operations
are supported by a year 2000 compliant information system. These modifications
are expected to be completed by September 1999. Management has determined that
sufficient internal resources are available and adequate time exists to
implement these procedures.
The company also has completed an assessment of the impact of this issue on its
non-information technology systems, including the company's personal computers,
embedded technology in manufacturing and processing equipment, and other
non-information technology items, and has determined that the majority of these
systems are year 2000 compliant. The company identified a few non-information
systems, critical to the manufacturing operations, as not being year 2000
compliant and remediated these systems. The company is currently taking action
to remedy these other non-compliant systems through replacement of or
modification to the existing systems. Such remedies will be tested for year 2000
compliance prior to September 1999. Other systems that have been identified as
not year 2000 compliant are not considered "mission critical" systems to the
overall manufacturing operations, however, management expects to remedy these
systems by September 1999. Contingency plans include shifting production
processes to year 2000 compliant manufacturing operations. The company does not
anticipate employing this contingency plan.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The company estimates total year 2000 expenditures to be approximately $48.0 to
$50.0 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. Expenditures to rectify
non-compliant personal computers and various non-information technology items
are estimated to be an additional $5.0 million. These costs include both
internal and external personnel costs related to the assessment and remediation
processes, 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 majority of these costs were incurred in 1997 and 1996. Total expenditures
expected to be incurred in 2000 are estimated to be approximately $5.0 million
related to the year 2000 issues. Expenditures incurred in 1999 approximated
$13.5 million, over half of which related to computer hardware and software
licenses. Cash flows from operations have provided, and should continue to
provide, funding for these expenditures.
Management 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. To date, the results of this effort indicate that
the company's suppliers should be able to provide the company with sufficient
goods and services in the year 2000. To mitigate this risk, the company is
modestly increasing safety stock of critical materials and supplies. The company
will continue to expand its efforts to ensure that major third-party businesses
and public and private providers of infrastructure services, such as utilities,
communications services and transportation, also will be prepared for the year
2000, and will address any failures on their part to become year 2000 compliant.
Contingency plans may include purchasing raw materials and supplies from
alternate certified vendors and a further increase of safety stock of critical
materials and supplies. The company does not anticipate employing this
contingency plan.
There can be no guarantee that the efforts of the company or of third parties,
whose systems the company relies upon, will completely mitigate a year 2000
problem that could have a material adverse affect on the company's operations or
financial results. While such problems could affect important operations of the
company and its subsidiaries, either directly or indirectly, in a significant
manner, the company cannot at present estimate either the likelihood or the
potential cost of such failures. However, the company will continue to
aggressively pursue all the year 2000 remediation activities discussed herein.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency, the Euro. The company conducts business in member countries.
The transition period for the introduction of the Euro is January 1, 1999 to
June 30, 2002. The company has been addressing the issues involved with the
introduction of the Euro. The company's current business systems have the
ability to perform transactions denominated in the Euro. Other than the costs
associated with the new systems as part of the year 2000 remediation, there were
no additional costs incurred by the company as a result of this conversion.
Currently, the company has different price structures for goods being sold in
the member countries due to, among other things, historical differences in the
volatility of the currencies of those individual countries. Price structure
harmonization has occurred over the past several years and is expected to
continue as these member countries become a unified common market. This
harmonization has not significantly affected the past financial results of the
company nor is it expected to have a significant impact in the future on the
company's financial results.
Further, the company's competitors will have to address the Euro conversion as
those companies currently have manufacturing facilities and distribution
networks in member countries. Management believes the conversion to the Euro
will not have a significant impact on any existing material contracts, nor
should it have any adverse tax or accounting consequences. Accordingly,
conversion to the Euro is not expected to have a material effect on the
company's operations or financial results.
EFFECTS OF INFLATION
Despite modest inflation in recent years, rising costs continue to affect the
company's operations throughout the world. The company strives to minimize the
effects of inflation through cost containment, productivity improvements and
price increases under highly competitive conditions.
<PAGE> 11
NEW ACCOUNTING STANDARDS
The company adopted SFAS No. 130, "Reporting Comprehensive Income," issued in
June 1997. This statement establishes standards for reporting comprehensive
income and its components in a full set of general-purpose financial statements.
This new standard did not have a financial impact on the company.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued. SFAS No. 131 introduced 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. Accordingly,
the company reports three worldwide segments consisting of Metalworking;
Industrial Supply; and Engineered Products, Mining & Construction and Other.
Segment information for 1998 and 1997 has been restated to meet the requirements
of SFAS No. 131. This new standard did not have a financial impact on the
company. See Note 18 to the consolidated financial statements for additional
information.
In February 1998, SFAS No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits," was issued. The implementation of SFAS No. 132 in 1999
revised certain footnote disclosure requirements related to pension and other
retiree benefits. This new standard did not have a financial impact on the
company. See Note 12 to the consolidated financial statements for the required
disclosures.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. The company must adopt the standard by the beginning of
the first quarter of fiscal 2001. SFAS No. 133 establishes accounting and
reporting standards requiring all derivative instruments (including certain
derivative instruments imbedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at their fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The company currently is evaluating
the effects of SFAS No. 133 and does not believe that the adoption of this
standard will have a material effect on the company's operations or financial
results.
OUTLOOK
At the end of fiscal 1999, conditions in the markets served by the company
appear to have stabilized. The company will remain focused on controlling
costs, reducing working capital, reducing debt and implementing programs to
improve sales.
FORWARD-LOOKING STATEMENTS
This annual report contains "forward-looking statements" as defined by Section
21E of the Securities Exchange Act of 1934. Actual results may materially differ
from those expressed or implied in the forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
the extent that the economic conditions in the United States, Europe and, to a
lesser extent, Asia Pacific are not sustained, risks associated with integrating
businesses, demands on management resources, risks associated with international
markets such as currency exchange rates and competition, risks associated with
environmental remediation, the effect of third party or company failures to
achieve timely remediation of year 2000 issues, and the effect of the conversion
to the Euro on the company's operations. 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> 12
FINANCIAL GRAPHS
Financial graphs contained on Page 22 of the Annual Report are not included.
All graph data is contained in the eleven-year financial highlights on Pages 44
and 45 of the Annual Report.
<PAGE> 13
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30 1999 1998 1997
=================================================================================================
(in thousands, except per share data)
<S> <C> <C> <C>
OPERATIONS
Net sales $1,902,916 $1,678,388 $1,156,343
Cost of goods sold 1,198,651 994,481 668,415
- -------------------------------------------------------------------------------------------------
Gross profit 704,265 683,907 487,928
Research and development expenses 18,797 20,397 24,105
Selling, marketing and distribution expenses 394,204 339,772 263,980
General and administrative expenses 104,043 112,519 69,911
Restructuring and asset impairment charges 13,937 -- --
Amortization of intangibles 25,788 15,648 2,907
- -------------------------------------------------------------------------------------------------
Operating income 147,496 195,571 127,025
Interest expense 68,594 59,536 10,393
Other expense (income) 492 5,459 (1,531)
- -------------------------------------------------------------------------------------------------
Income before provision for income taxes and
minority interest 78,410 130,576 118,163
Provision for income taxes 32,900 53,900 44,900
Minority interest 6,394 5,479 1,231
- -------------------------------------------------------------------------------------------------
Net income $ 39,116 $ 71,197 $ 72,032
=================================================================================================
PER SHARE DATA
Basic earnings per share $ 1.31 $ 2.61 $ 2.71
=================================================================================================
Diluted earnings per share $ 1.31 $ 2.58 $ 2.69
=================================================================================================
Dividends per share $ 0.68 $ 0.68 $ 0.66
=================================================================================================
Weighted average shares outstanding 29,917 27,263 26,575
=================================================================================================
Diluted weighted average shares outstanding 29,960 27,567 26,786
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 14
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30 1999 1998
==============================================================================================
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 17,408 $ 18,366
Marketable equity securities available-for-sale 13,436 --
Accounts receivable, less allowance for doubtful
accounts of $15,269 and $11,974 231,287 332,677
Inventories 434,462 436,472
Deferred income taxes 44,182 31,316
Other current assets 9,673 6,230
- ----------------------------------------------------------------------------------------------
Total current assets 750,448 825,061
- ----------------------------------------------------------------------------------------------
Property, plant and equipment:
Land and buildings 235,375 222,426
Machinery and equipment 756,917 690,143
Less accumulated depreciation (452,492) (386,642)
- ----------------------------------------------------------------------------------------------
Net property, plant and equipment 539,800 525,927
- ----------------------------------------------------------------------------------------------
Other assets:
Investments in affiliated companies 844 13,740
Intangible assets, less accumulated amortization
of $64,096 and $39,408 685,695 706,619
Deferred income taxes 33,996 39,426
Other 32,865 28,220
- ----------------------------------------------------------------------------------------------
Total other assets 753,400 788,005
- ----------------------------------------------------------------------------------------------
Total assets $2,043,648 $2,138,993
==============================================================================================
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases $ 117,217 $ 78,632
Notes payable to banks 26,222 48,103
Accounts payable 89,339 115,373
Accrued vacation pay 27,323 21,523
Accrued payroll 19,730 30,600
Other current liabilities 97,035 82,838
- ----------------------------------------------------------------------------------------------
Total current liabilities 376,866 377,069
- ----------------------------------------------------------------------------------------------
Long-term debt and capital leases, less current maturities 717,852 840,932
Deferred income taxes 53,108 45,253
Other liabilities 97,186 98,073
- ----------------------------------------------------------------------------------------------
Total liabilities 1,245,012 1,361,327
- ----------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 53,505 42,206
- ----------------------------------------------------------------------------------------------
SHAREOWNERS' EQUITY
Preferred stock, 5,000 shares authorized; none issued -- --
Capital stock, $1.25 par value; 70,000 shares
authorized; 32,903 and 32,820 shares issued 41,128 41,025
Additional paid-in capital 325,382 320,645
Retained earnings 477,593 458,805
Treasury shares, at cost; 2,836 and 2,991 shares held (57,199) (59,131)
Unearned compensation (3,330) --
Accumulated other comprehensive loss (38,443) (25,884)
- ----------------------------------------------------------------------------------------------
Total shareowners' equity 745,131 735,460
- ----------------------------------------------------------------------------------------------
Total liabilities and shareowners' equity $2,043,648 $2,138,993
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30 1999 1998 1997
==========================================================================================================
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 39,116 $ 71,197 $ 72,032
Adjustments for noncash items:
Depreciation 70,203 51,663 38,492
Amortization 25,788 15,648 2,907
Restructuring and asset impairment charges 17,119 -- --
Other 6,583 29,705 5,356
Changes in certain assets and liabilities, net of effects from
acquisitions and divestitures:
Accounts receivable 25,973 (17,006) (8,032)
Proceeds from accounts receivable securitization 82,000 -- --
Inventories (3,867) (37,231) 1,379
Accounts payable and accrued liabilities (32,701) (8,791) (600)
Other (3,662) (3,661) (11,684)
- ----------------------------------------------------------------------------------------------------------
Net cash flow from operating activities 226,552 101,524 99,850
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (94,993) (104,774) (73,779)
Disposals of property, plant and equipment 9,555 5,132 1,063
Purchase of marketable equity securities (12,162) -- --
Acquisitions, net of cash (5,164) (755,338) (18,995)
Divestitures, net of cash 1,617 62,052 --
Purchase of subsidiary stock (332) (14,197) --
Other (503) (5,992) 907
- ----------------------------------------------------------------------------------------------------------
Net cash flow used for investing activities (101,982) (813,117) (90,804)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt (23,328) (71,537) 55,689
Increase in long-term debt 159,285 803,400 943
Decrease in long-term debt (242,240) (270,455) (19,359)
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 3,299 10,764 5,623
Cash dividends paid to shareowners (20,328) (18,475) (17,543)
Other (1,045) (5,511) --
- ----------------------------------------------------------------------------------------------------------
Net cash flow from (used for) financing activities (124,357) 710,055 (3,304)
- ----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,171) (1,965) (963)
- ----------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS
Net increase (decrease) in cash and equivalents (958) (3,503) 4,779
Cash and equivalents, beginning 18,366 21,869 17,090
- ----------------------------------------------------------------------------------------------------------
Cash and equivalents, ending $ 17,408 $ 18,366 $ 21,869
==========================================================================================================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 67,065 $ 61,692 $ 10,563
Income taxes paid 21,738 47,052 45,307
==========================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 16
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
Year ended June 30 1999 1998 1997
===========================================================================================
(in thousands)
<S> <C> <C> <C>
CAPITAL STOCK
Balance at beginning of year $ 41,025 $ 36,712 $ 36,712
Issuance of common stock -- 4,313 --
Issuance of restricted stock 103 -- --
- -------------------------------------------------------------------------------------------
Balance at end of year 41,128 41,025 36,712
- -------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 320,645 91,049 87,417
Dividend reinvestment and stock purchase plan 340 819 1,132
Employee stock plans 1,403 6,676 2,500
Issuance of common stock -- 167,126 --
Issuance of subsidiary stock -- 54,975 --
Issuance of restricted stock 2,994 -- --
- -------------------------------------------------------------------------------------------
Balance at end of year 325,382 320,645 91,049
- -------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 458,805 406,083 351,594
Net income 39,116 71,197 72,032
Cash dividends (20,328) (18,475) (17,543)
- -------------------------------------------------------------------------------------------
Balance at end of year 477,593 458,805 406,083
- -------------------------------------------------------------------------------------------
TREASURY SHARES
Balance at beginning of year (59,131) (62,400) (35,734)
Purchase of treasury stock -- -- (28,657)
Dividend reinvestment and stock purchase plan 392 292 708
Issuance of restricted stock 376 -- --
Employee stock plans 1,164 2,977 1,283
- -------------------------------------------------------------------------------------------
Balance at end of year (57,199) (59,131) (62,400)
- -------------------------------------------------------------------------------------------
UNEARNED COMPENSATION
Balance at beginning of year -- -- --
Issuance of restricted stock (3,473) -- --
Amortization of unearned compensation 143 -- --
- -------------------------------------------------------------------------------------------
Balance at end of year (3,330) -- --
- -------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year (25,884) (11,836) (1,040)
Unrealized gain on marketable equity securities
available-for-sale, net of tax 1,160 -- --
Minimum pension liability adjustment (1,265) -- --
Foreign currency translation adjustments (12,454) (14,048) (10,796)
- -------------------------------------------------------------------------------------------
Other comprehensive loss (12,559) (14,048) (10,796)
- -------------------------------------------------------------------------------------------
Balance at end of year (38,443) (25,884) (11,836)
- -------------------------------------------------------------------------------------------
Total shareowners' equity, June 30 $ 745,131 $ 735,460 $ 459,608
===========================================================================================
COMPREHENSIVE INCOME
Net income $ 39,116 $ 71,197 $ 72,032
Other comprehensive loss (12,559) (14,048) (10,796)
- -------------------------------------------------------------------------------------------
Comprehensive income $ 26,557 $ 57,149 $ 61,236
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 17
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,
wear-resistant parts and services primarily for the metalworking, mining and
highway construction and a wide variety of other 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.
MARKETABLE EQUITY SECURITIES AVAILABLE-FOR-SALE
The company's investment in marketable equity securities is accounted for as an
available-for-sale security under Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This investment is reported at fair value, as determined through
quoted market sources. The unrealized gain on this investment is recorded as a
component of accumulated other comprehensive loss, net of tax.
ACCOUNTS RECEIVABLE
Accounts receivable included $5.3 million and $15.1 million of receivables from
affiliates at June 30, 1999 and 1998, respectively.
INVENTORIES
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 cost of the remainder of inventories is
determined under the first-in, first-out (FIFO) or average cost methods.
PROPERTY, PLANT AND EQUIPMENT
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
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 2 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 $671.4 million and
$690.6 million at June 30, 1999 and 1998, respectively.
DEFERRED FINANCING FEES
Fees 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 43,453;
303,539; and 210,706 shares in 1999, 1998 and 1997, respectively.
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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 component of accumulated
other comprehensive loss.
DERIVATIVE FINANCIAL INSTRUMENTS
From time to time, the company uses derivative financial instruments to hedge a
portion of the exposures to fluctuations in foreign currency exchange rates and
interest rates. The company accounts for derivative instruments as a hedge of
the related asset, liability, firm commitment or anticipated transaction when
designated as a hedge of such items. The company does not enter into derivative
transactions for speculative purposes and therefore holds no derivative
instruments for trading purposes. Gains and losses on foreign currency forward
contracts used to hedge foreign currency exposures of underlying receivables and
payables are recognized in Other Expense (Income). Changes in the amount to be
received or paid under interest rate swap agreements used to manage net exposure
to interest rate changes related to its borrowings are recognized in Interest
Expense.
NEW ACCOUNTING STANDARDS
The company adopted SFAS No. 130, "Reporting Comprehensive Income," issued in
June 1997. This statement establishes standards for reporting comprehensive
income and its components in a full set of general-purpose financial statements.
This new standard did not have a financial impact on the company.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" was issued. SFAS No. 131 introduced 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. Accordingly, the
company reports three worldwide segments consisting of Metalworking; Industrial
Supply; and Engineered Products, Mining & Construction and Other. Segment
information for 1998 and 1997 has been restated to meet the requirements of SFAS
No. 131. This new standard did not have a financial impact on the company.
In February 1998, SFAS No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits," was issued. The implementation of SFAS No. 132 in 1999
revised certain footnote disclosure requirements related to pension and other
retiree benefits. This new standard did not have a financial impact on the
company.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. The company must adopt the standard by the beginning of
the first quarter of fiscal 2001. SFAS No. 133 establishes accounting and
reporting standards requiring all derivative instruments (including certain
derivative instruments imbedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at their fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The company currently is evaluating
the effects of SFAS No. 133 and does not believe that the adoption will have a
material effect on the financial statements or results of operations of the
company.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform with the current-year presentation.
<PAGE> 19
NOTE 3
ACQUISITIONS AND DIVESTITURES
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 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 40 years.
Additionally, the company also made several other acquisitions in 1999 and 1998
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 affect the reported results.
The allocation of the purchase price to assets acquired and liabilities assumed
of Greenfield is as follows:
(in thousands)
=============================================================
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
=============================================================
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).
(in thousands, except per share data) 1998 1997
==========================================================================
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
- --------------------------------------------------------------------------
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 were
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 the sale of
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. Additional net proceeds of $50.4 million were used
to make acquisitions in 1998. The company's ownership in JLK increased to
approximately 83 percent due to treasury stock purchases made by JLK since
the IPO.
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5
MARKETABLE EQUITY SECURITIES AVAILABLE-FOR-SALE
On January 18, 1999, the company entered into a business cooperation agreement
with Toshiba Tungaloy Co., Ltd. (TT), a leading Japanese manufacturer of
consumable metalcutting products, to enhance the global business prospects for
metalcutting tools of both companies. The agreement includes various joint
activities in areas such as product research and development, private labeling,
cross-licensing, and sales and marketing. As part of the agreement, the company
purchased approximately 4.9 percent of the outstanding shares of TT in a private
transaction from TT's largest shareholder, Toshiba Corporation, for
approximately $15.9 million, including the costs of the transaction. In order to
enter into this agreement, the company purchased the shares at a predetermined
price. In accordance with accounting rules, the company realized a one-time
charge of approximately $3.8 million due to the difference between the cost
($15.9 million) and the fair market value of the securities on the date the
securities were purchased ($12.1 million). Due to the provisions of this
agreement, the company was not able to record this difference as an asset. This
charge has been recorded as a component of selling, marketing and distribution
expenses. The gross unrealized gain on this investment is $1.9 million at June
30, 1999.
NOTE 6
ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
On June 18, 1999, the company entered into an agreement with a financial
institution whereby the company securitizes, on a continuous basis, an undivided
interest in a specific pool of the company's domestic trade accounts receivable.
Pursuant to this agreement, the company and several of its domestic subsidiaries
sell their domestic accounts receivable to Kennametal Receivables Corporation, a
wholly owned, bankruptcy-remote subsidiary (KRC). KRC was formed to purchase
these accounts receivable and sell participating interests in such accounts
receivable to the financial institution which, in turn, purchases and receives
ownership and security interests in those assets. As collections reduce the
amount of accounts receivable included in the pool, the company and the
participating domestic subsidiaries sell new accounts receivable to KRC which,
in turn, securitizes these new accounts receivable with the financial
institution.
The company is permitted to receive proceeds of up to $100.0 million from the
securitization of accounts receivable under this agreement. The financial
institution charges the company based on the level of accounts receivable
securitized under this agreement and the commercial paper market rates plus the
financial institution's cost to administer the program. The costs incurred by
the company under this program were $0.2 million in 1999 and are accounted for
as a component of Other Expense (Income). At June 30, 1999, the company received
proceeds of $82.0 million under this program. The proceeds from the
securitization were used to permanently reduce outstanding term-debt borrowings
under the Bank Credit Agreement (see Note 9).
NOTE 7
INVENTORIES
Inventories consisted of the following:
(in thousands) 1999 1998
===================================================================
Finished goods $318,736 $302,374
Work in process and powder blends 117,987 117,428
Raw materials and supplies 32,619 53,449
- -------------------------------------------------------------------
Inventories at current cost 469,342 473,251
Less LIFO valuation (34,880) (36,779)
- -------------------------------------------------------------------
Total inventories $434,462 $436,472
===================================================================
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 49 and 45 percent of total inventories at June 30, 1999 and 1998,
respectively. The company uses the LIFO method in order to more closely match
current costs with current revenues, thereby reducing the effects of inflation
on earnings.
In 1999, the company recognized a $6.9 million charge which represents a
write-down of certain product lines that are being discontinued as part of a
program to streamline and optimize the company's global metalworking product
offering (see Note 13).
<PAGE> 21
NOTE 8
OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
(in thousands) 1999 1998
=================================================================
Accrued benefits $11,083 $ 8,578
Accrued employee programs 10,041 7,227
Federal and state income taxes 9,487 1,847
Payroll, state and local taxes 7,552 12,126
Accrued interest expense 6,422 4,894
Accrued product warranty costs 3,765 4,266
Other accrued expenses 48,685 43,900
- -----------------------------------------------------------------
Total other current liabilities $97,035 $82,838
=================================================================
NOTE 9
LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital lease obligations consisted of the following:
(in thousands) 1999 1998
============================================================================
Bank Credit Agreement:
Revolving credit loans,
6.125% to 6.476% in
1999, 6.785% to 6.815%
in 1998, due 2003 $ 671,100 $ 609,300
Term loan, 6.179% in 1999,
6.785% in 1998, due in
installments through 2000 109,250 266,250
Borrowings outside the U.S.,
varying from 1.62% to
9.20% in 1999 and 6.25%
to 10.25% in 1998, due in
installments through 2013 33,131 18,462
Lease of office facilities with
terms expiring through
2008 at 4.45% to 4.73% 9,654 11,004
Other 11,934 14,548
- ----------------------------------------------------------------------------
Total debt and capital leases 835,069 919,564
- ----------------------------------------------------------------------------
Less current maturities:
Long-term debt (116,036) (77,522)
Capital leases (1,181) (1,110)
- ----------------------------------------------------------------------------
Total current maturities (117,217) (78,632)
- ----------------------------------------------------------------------------
Long-term debt and capital leases $ 717,852 $ 840,932
============================================================================
In connection with the acquisition of Greenfield, the company entered into a
$1.4 billion Bank Credit Agreement (Agreement). Subject to certain conditions,
the Agreement permitted 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 is subject
to mandatory amortization, which commenced on November 30, 1998, and was
scheduled to mature on August 31, 2002. As a result of permanent reductions of
the term loan, the term loan will now mature on May 31, 2000. The revolving
credit loans mature on August 31, 2002.
In 1999, the term loan was permanently reduced with the proceeds received from
the accounts receivable securitization program (see Note 6). In 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 $116.0 million, $4.6 million,
$16.6 million, $673.3 million and $1.1 million, respectively, in fiscal years
2000 through 2004. Future minimum lease payments under capital leases for the
next five years and in total are as follows:
(in thousands)
=======================================================
Year ending June 30:
2000 $ 1,719
2001 1,549
2002 1,172
2003 1,126
2004 1,126
After 2004 5,440
- -------------------------------------------------------
Total future minimum lease payments 12,132
Less amount representing interest (2,478)
- -------------------------------------------------------
Present value of minimum lease payments $ 9,654
=======================================================
Future minimum lease payments under operating leases with noncancelable terms
beyond one year were not significant at June 30, 1999.
NOTE 10
NOTES PAYABLE AND LINES OF CREDIT
Notes payable to banks of $26.2 million and $48.1 million at June 30, 1999 and
1998, respectively, represent short-term borrowings under U.S. and international
credit lines with commercial banks. These credit lines totaled approximately
$142.2 million at June 30, 1999, of which $116.0 million was unused. The
weighted average interest rate for short-term borrowings was 6.1 percent and 7.4
percent at June 30, 1999 and 1998, respectively.
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11
INCOME TAXES
Income before provision for income taxes and the provision for income taxes
consisted of the following:
(in thousands) 1999 1998 1997
====================================================================
Income before
provision for
income taxes:
United States $36,858 $ 93,775 $ 95,029
International 41,552 36,801 23,134
- --------------------------------------------------------------------
Total income before
provision for
income taxes $78,410 $130,576 $118,163
====================================================================
Current income taxes:
Federal $18,300 $ 17,200 $ 30,600
State 3,300 5,700 6,000
International 11,900 10,100 4,400
- --------------------------------------------------------------------
Total 33,500 33,000 41,000
Deferred income taxes (600) 20,900 3,900
- --------------------------------------------------------------------
Provision for
income taxes $32,900 $ 53,900 $ 44,900
====================================================================
Effective tax rate 42.0% 41.3% 38.0%
====================================================================
The reconciliation of income taxes computed using the statutory U.S. income tax
rate and the provision for income taxes was as follows:
(in thousands) 1999 1998 1997
====================================================================
Income taxes at U.S.
statutory rate $27,444 $45,702 $41,357
State income taxes,
net of federal
tax benefits 2,397 3,684 3,917
Nondeductible
goodwill 5,630 3,944 397
Combined tax effects
of international
income 203 2,944 (1,990)
International losses
with no related
tax benefits 1,915 1,562 102
Tax benefits from
costs to repay
senior debt (3,607) -- --
Other (1,082) (3,936) 1,117
- --------------------------------------------------------------------
Provision for
income taxes $32,900 $53,900 $44,900
====================================================================
Deferred tax assets and liabilities consisted of the following:
(in thousands) 1999 1998
==============================================================================
Deferred tax assets (liabilities):
Other postretirement benefits $ 19,817 $ 18,350
Inventory valuation and reserves 18,515 12,779
Other accruals 13,369 7,945
Accrued employee benefits 12,945 8,430
Net operating loss carryforwards 10,176 20,270
Pension benefits (6,898) (2,860)
Accumulated depreciation (39,799) (36,557)
- ------------------------------------------------------------------------------
Total 28,125 28,357
Less valuation allowance (4,857) (2,868)
- ------------------------------------------------------------------------------
Net deferred tax assets $ 23,268 $ 25,489
==============================================================================
Deferred income taxes have not been provided on cumulative undistributed
earnings of international subsidiaries and affiliates. At June 30, 1999,
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, 1999, are unrealized tax benefits
totaling $10.2 million related to net operating loss carryforwards. The
realization of these tax benefits is contingent on future taxable income in
certain international operations. Of this amount, approximately $4.9 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. The company established a valuation
allowance of $1.1 million to offset the deferred tax benefits that may not be
realized in the foreseeable future.
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> 23
NOTE 12
PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The company sponsors several retirement plans which cover substantially all
employees. Pension benefits under defined benefit pension plans are based on
years of service and, for certain plans, on average compensation immediately
preceding retirement. Pension costs are determined in accordance with 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.
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 on or after age
55 with ten or more years of service after age 40. 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 funded status of these plans and amounts recognized in the consolidated
balance sheets were as follows:
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
------------------------------------------------------
(in thousands) 1999 1998 1999 1998
==============================================================================================================
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year $ 312,394 $ 232,072 $ 40,627 $ 34,580
Service cost 12,126 11,810 1,196 1,080
Interest cost 18,268 19,646 2,633 2,646
Participant contributions 864 119 -- --
Plan amendments -- -- 2,153 --
Actuarial (gains) losses 12,406 11,624 (5,329) 1,384
Benefits paid (16,965) (11,527) (3,358) (3,881)
Effect of acquired businesses 16,651 49,516 -- 4,818
Special termination benefits 2,731 -- -- --
Foreign currency translation adjustments (1,373) (866) -- --
- --------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year $ 357,102 $ 312,394 $ 37,922 $ 40,627
==============================================================================================================
Change in plan assets:
Fair value of plan assets, beginning of year $ 422,180 $ 327,646 $ -- $ --
Actual return on plan assets 39,458 60,056 -- --
Company contributions 1,763 446 -- --
Participant contributions 864 119 -- --
Benefits paid (16,965) (11,527) -- --
Effect of acquired businesses 14,114 46,019 -- --
Foreign currency translation adjustments (457) (579) -- --
- --------------------------------------------------------------------------------------------------------------
Fair value of plan assets, end of year $ 460,957 $ 422,180 $ -- $ --
==============================================================================================================
Funded status of plans $ 103,855 $ 109,786 $ (37,922) $ (40,627)
Unrecognized transition obligation (4,826) (9,679) -- --
Unrecognized prior service cost 5,168 5,719 2,296 548
Unrecognized actuarial gains (106,919) (113,277) (8,488) (3,444)
Minimum pension liability (1,265) -- -- --
- --------------------------------------------------------------------------------------------------------------
Net accrued obligation $ (3,987) $ (7,451) $ (44,114) $ (43,523)
==============================================================================================================
Amounts recognized in the balance sheet consist of:
Prepaid benefit $ 12,241 $ 6,774 $ -- $ --
Accrued benefit obligation (16,228) (14,225) (44,114) (43,523)
- --------------------------------------------------------------------------------------------------------------
Net accrued obligation $ (3,987) $ (7,451) $ (44,114) $ (43,523)
==============================================================================================================
</TABLE>
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Prepaid pension benefits are included in other noncurrent assets. Accrued
pension benefit obligations are included in other noncurrent liabilities.
Accrued postretirement benefit obligations of $40.8 million and $40.2 million at
June 30, 1999 and 1998, respectively, are included in other noncurrent
liabilities.
Pension plans with accumulated benefit obligations exceeding the fair value of
plan assets are as follows:
Pension Benefits
------------------------
(in thousands) 1999 1998
================================================================
Projected benefit obligation $55,069 $14,236
Accumulated benefit obligation 53,364 14,031
Fair value of plan assets 33,581 --
================================================================
The components of net pension benefit and other postretirement cost include the
following:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
------------------------------------------------------------------------------
(in thousands) 1999 1998 1997 1999 1998 1997
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 12,126 $ 11,810 $ 8,605 $ 1,196 $ 1,080 $ 1,220
Interest cost 18,268 19,646 16,049 2,633 2,646 2,427
Expected return on plan assets (30,505) (49,151) (47,554) -- -- --
Amortization of transition obligation (2,140) (2,150) (2,602) -- -- --
Amortization of prior service cost 551 551 154 406 47 --
Recognition of actuarial (gains) losses (2,709) 18,593 24,860 (286) (107) (70)
- --------------------------------------------------------------------------------------------------------------------------
Net (benefit) cost $ (4,409) $ (701) $ (488) $ 3,949 $ 3,666 $ 3,577
==========================================================================================================================
</TABLE>
The significant actuarial assumptions used to determine the present value of the
net pension and other post retirement benefit obligations were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
--------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Discount rate:
U.S. plans 7.5% 7.0% 7.5% 7.5% 7.0% 7.5%
International plans 5.5 - 6.5% 6.0 - 7.0% 7.0 - 8.0% -- -- --
Rate of future salary increases:
U.S. plans 4.5% 4.5% 4.5% -- -- --
International plans 3.0 - 4.3% 4.0 - 4.5% 4.0 - 5.5% -- -- --
Rate of return on plan assets:
U.S. plans 9.5% 9.0% 9.0% -- -- --
International plans 6.5 - 7.0% 7.0 - 8.0% 9.0% -- -- --
==========================================================================================================================
</TABLE>
<PAGE> 25
The annual assumed rate of increase in the per capita cost of covered benefits
(the health care cost trend rate) for health care plans was 8.5% in 1999 and was
assumed to decrease gradually to 5.5% in 2002 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. A change of one percentage point
in the assumed health care cost trend rates would have the following effects on
the total service and interest cost components of the other postretirement
benefit obligation at June 30, 1999:
(in thousands) 1% Increase 1% Decrease
==============================================================
Effect on total of service and
interest cost components $ 200 $ (100)
Effect on other postretirement
benefit obligation 1,300 (1,200)
- --------------------------------------------------------------
U.S. defined benefit pension plan assets consist principally of common stocks,
corporate bonds and U.S. government securities. International defined benefit
pension plan assets consist principally of common stocks, corporate bonds and
government securities.
In connection with the acquisition of Greenfield during 1998, the company
recorded an aggregate net liability of $12.8 million in purchase accounting for
the excess of the estimated projected benefit obligations over the fair value of
plan assets. These plans were frozen in 1995 and benefits were frozen at 1995
levels.
The company also sponsors several defined contribution pension plans. Pension
costs for defined contribution plans were $9.5 million, $9.0 million and $4.3
million in 1999, 1998 and 1997, respectively.
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 1999, 1998 and 1997.
NOTE 13
RESTRUCTURING CHARGE
In March 1999, the company's management completed restructuring plans, including
several programs to reduce costs, improve operations and enhance customer
satisfaction. The costs accrued for these plans were based on management
estimates using the latest information available at the time that the accrual
was established. The components of the charges are as follows:
Asset
Write-Downs
& Other Initial
Total Non-Cash Restructuring
(in thousands) Charge Adjustments Liability
======================================================================
Product rationalization $ 6,900 $ (6,900) $ --
Plant closure 4,200 (2,000) 2,200
Impairment of
international operations 5,800 (5,800) --
Voluntary early
retirement program 3,937 (2,419) 1,518
- ----------------------------------------------------------------------
Total $20,837 $(17,119) $3,718
======================================================================
The product rationalization charge represents a write-down of certain product
lines that are being discontinued as part of a program to streamline and
optimize the company's global metalworking product offering. This charge is net
of salvage value and has been recorded as a component of cost of goods sold.
Estimated salvage values were based on estimates of proceeds to be realized
through the sale of this inventory outside the normal course of business.
The program will result in a reduction in the number of products offered from an
estimated 58,000 to 38,000 and is an extension of the company's initiative to
reduce the number of its North American warehouses. By streamlining the product
offering, the company anticipates it will improve customer service and inventory
turnover, allow for more efficient operations, thereby reducing costs and
improving capacity utilization, and eliminate redundancy in its product
offering. Sales of these products represent less than 5 percent of global
metalworking sales. The company is proactively converting customers from these
older products to newer products.
The company also initiated plans to close a drill manufacturing plant in Solon,
Ohio. The manufacturing of products made at this plant will be relocated to
other existing plants in the United States. The closure will eliminate excess
capacity at other plant locations. The company will decommission the existing
plant and sell the property in the near future. The charge consists of employee
termination benefits for 155 hourly and salaried employees, which is
substantially all employees at this plant, and the write-down of assets included
in property, plant and equipment, net of salvage value.
The costs resulting from the relocation of employees, hiring and training new
employees and other costs resulting from the temporary duplication of certain
operations have not been included in this charge and will be included in
operating expenses as incurred.
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The costs related to these items are estimated to be approximately $2.7 million
and will be incurred through fiscal 2000.
An asset impairment charge was recorded to write-down, to fair market value, an
investment in and net receivables from certain mining and construction
international operations in emerging markets as a result of changing market
conditions in the regions these operations serve. In the March 1999 quarter, the
company completed a study of these operations, the markets for these products,
and the current economic situation in these regions, and to provide
recommendations for solving operational concerns. As a result of this study and
continued economic deterioration in these regions, the company determined that
the carrying amount of its investment in and net receivables from these
operations would not be recoverable.
A voluntary early retirement benefit program was offered to and accepted by 34
domestic employees. In exchange for their retirement, the company will provide
those employees pension and health benefits that would have been earned by the
employees through their normal retirement date. As a result of providing these
additional pension benefits, approximately $2.4 million of the total cost was
funded through the company's pension plan. There are no tax benefits associated
with this cost as the company may only deduct actual cash payments made to the
pension plan.
The charges for the plant closure, the write-down of the investment in and net
receivables from certain international operations, and the voluntary early
retirement benefit program are recorded as the restructuring and asset
impairment charges. The costs charged against the restructuring cost accrual as
of June 30, 1999 were as follows:
Beginning Cash Ending
(in thousands) Accrual Expenditures Adjustments Accrual
==============================================================================
Plant closure $2,200 $ -- $ -- $2,200
Voluntary early
retirement program 1,518 (151) -- 1,367
- ------------------------------------------------------------------------------
Total $3,718 $(151) $ -- $3,567
==============================================================================
There were no restructuring or asset impairment charges recorded in 1998 or
1997.
NOTE 14
FINANCIAL INSTRUMENTS
The carrying values and fair values of the company's financial instruments at
June 30 are as follows:
1999 1998
--------------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Value Value Value Value
==========================================================================
Cash and equivalents $ 17,408 $ 17,408 $ 18,366 $ 18,366
Marketable
equity securities 13,436 13,436 -- --
Current maturities
of long-term debt 116,036 116,036 77,522 77,522
Notes payable to banks 26,222 26,222 48,103 48,103
Long-term debt 709,379 710,105 831,038 831,537
==========================================================================
The methods used to estimate the fair value of the company's financial
instruments are as follows:
CASH AND EQUIVALENTS, CURRENT MATURITIES OF
LONG-TERM DEBT AND NOTES PAYABLE TO BANKS
The carrying amounts approximate their fair value because of the short maturity
of the instruments.
MARKETABLE EQUITY SECURITIES
The fair value is estimated based on the quoted market price of this security,
as adjusted for the currency exchange rate at June 30.
LONG-TERM DEBT
Fair value was determined using discounted cash flow analysis and the company's
incremental borrowing rates for similar types of arrangements.
The notional amount of the company's derivative financial instruments at June 30
are as follows:
1999 1998
----------------------------------
(in thousands) Notional Amount Notional Amount
=============================================================
Foreign currency
forward contracts $12,645 $5,573
Interest rate
swap agreements 50,000 --
=============================================================
<PAGE> 27
Methods used to estimate the fair value of the company's derivative financial
instruments are as follows:
FOREIGN CURRENCY FORWARD CONTRACTS
At June 30, 1999 and 1998, the company had several outstanding foreign exchange
forward contracts to sell foreign currency. These contracts mature on or before
September 30, 1999. Fair value, which approximates book value, was estimated
based on quoted market prices of comparable instruments.
The net unrealized gain or loss on foreign currency forward contracts was not
significant at June 30, 1999 and 1998.
INTEREST RATE SWAP AGREEMENTS
At June 30, 1999, the company had two interest rate swap agreements outstanding
that effectively convert a notional amount of $50.0 million from floating rates
to fixed rates. These agreements mature in April 2002. The company would have
received $0.8 million to settle its interest rate swap agreements, representing
the excess of fair value over carrying cost of these agreements. Fair value was
estimated based on the mark-to-market value of the contracts which closely
approximates the amount that the company would receive or pay to terminate the
agreements at year end. There were no outstanding interest rate swap agreements
at June 30, 1998.
The net payments or receipts under interest rate swap agreements are recorded as
a part of interest expense and are not significant. The effect of interest rate
swaps on the company's composite interest rate on long-term debt was not
significant at June 30, 1999.
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, 1999 and 1998, the company had no significant concentrations of credit risk.
NOTE 15
STOCK OPTIONS AND AWARDS
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. The company has three plans under which
options may be granted: the 1992 plan, the 1996 plan and the 1999 plan. No
options may be granted under the 1992 plan after October 2002, no options may be
granted under the 1996 plan after October 2006 and no options may be granted
under the 1999 plan after April 2009. No charges to income have resulted from
grants under the 1992 and 1996 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 $0.1 million (566 shares), $0.2
million (3,961 shares) and $0.5 million (11,684 shares) were delivered in 1999,
1998 and 1997, respectively.
Under the 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 shareowner, subject to certain
restrictions or forfeitures. Such awards were not significant in 1999, 1998 and
1997.
The company measures compensation expense in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, at the time options are granted, 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 1999, 1998 and 1997, consistent with the
methodology in SFAS No. 123, "Accounting for Stock Based Compensation," the
effect on the company's 1999, 1998 and 1997 net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
(in thousands,
except per share data) 1999 1998 1997
================================================================
Net income:
As reported $39,116 $71,197 $72,032
Pro forma 37,489 65,671 70,140
Basic earnings per share:
As reported $ 1.31 $ 2.61 $ 2.71
Pro forma 1.25 2.41 2.64
Diluted earnings per share:
As reported $ 1.31 $ 2.58 $ 2.69
Pro forma 1.25 2.38 2.62
================================================================
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:
1999 1998 1997
================================================================
Risk-free interest rate 5.10% 6.12% 6.64%
Expected life (years) 5 5 5
Expected volatility 24.4% 23.8% 27.9%
Expected dividend yield 2.6% 1.6% 2.0%
================================================================
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock option activity for 1999, 1998 and 1997 is set forth below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(number of options) Options Exercise Price Options Exercise Price Options Exercise Price
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 1,620,206 $38.40 1,169,367 $30.85 994,244 $30.41
Granted 1,127,750 26.78 727,900 49.82 327,000 31.42
Exercised (52,950) 23.72 (224,061) 33.05 (116,877) 22.65
Lapsed and forfeited (59,750) 39.47 (53,000) 50.76 (35,000) 36.45
- ---------------------------------------------------------------------------------------------------------------------------------
Options outstanding,
end of year 2,635,256 $33.84 1,620,206 $38.40 1,169,367 $30.85
- ---------------------------------------------------------------------------------------------------------------------------------
Options exercisable,
end of year 1,808,308 $36.54 1,592,854 $38.64 1,132,111 $31.16
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average
fair value of
options granted
during the year $ 6.02 $13.90 $ 9.48
=============================== ====== ====== ======
</TABLE>
Stock options outstanding at June 30, 1999:
<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>
$16.94 - $21.75 376,006 7.69 $20.74 156,308 $20.61
22.97 - 23.94 278,500 9.79 23.87 258,500 23.94
24.75 - 26.00 285,862 7.69 25.41 135,862 24.75
30.81 - 31.06 194,700 7.01 30.84 194,700 30.84
31.69 398,250 9.08 31.69 -- --
34.06 - 38.00 444,538 6.56 36.74 409,538 36.63
48.56 485,900 8.08 48.56 485,900 48.56
49.25 - 53.97 171,500 8.49 51.97 167,500 52.00
- ---------------------------------------------------------------------------------------------------------------
2,635,256 8.01 $33.84 1,808,308 $36.54
===============================================================================================================
</TABLE>
In addition to stock option grants, the 1999 plan permits the award of
restricted stock to directors, officers and key employees of the company. During
1999, 113,000 shares of restricted stock were awarded to certain officers of the
company. These awards vest over periods of two to three years from the grant
date, and accordingly, a portion of the total compensation expense of $3.1
million is considered unearned compensation. Additional unearned compensation of
$0.4 million was recognized related to the difference in the stock price between
the date of an option grant and the date the employee commenced employment. This
option award vests over a three-year period from the grant date. Unearned
compensation is amortized to expense over the vesting period. Compensation
expense related to these awards was $0.1 million in 1999.
NOTE 16
ENVIRONMENTAL MATTERS
The company has been involved in various environmental cleanup and remediation
activities at several of its manufacturing facilities. In addition, the company
is currently named as a potentially responsible party at two Superfund sites in
the United States. However, it is management's opinion, based on its evaluations
and discussions with outside counsel and independent consultants, that the
ultimate resolution of these environmental matters will not have a material
adverse effect on the results of operations, financial position or cash flow of
the company.
<PAGE> 29
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 17
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 shareowner 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 shareowner 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 shareowner to
purchase at the exercise price that number of shares of the acquiring company
having a market value of two times the exercise price. The rights will expire on
November 2, 2000, and are subject to redemption by the company at $0.01 per
right.
NOTE 18
SEGMENT DATA
The company reports three worldwide segments consisting of Metalworking;
Industrial Supply; and Engineered Products, Mining & Construction and Other
(EM&O). Segment selection was based upon internal organizational structure, the
way in which management organizes segments for making operating decisions and
assessing performance, the availability of separate financial results, and
materiality considerations.
Intersegment sales 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.
Sales to a single customer did not aggregate 10 percent or more of total sales
in 1999, 1998 or 1997. Export sales from U.S. operations to unaffiliated
customers were $69.9 million, $64.7 million and $15.1 million in 1999, 1998 and
1997, respectively.
METALWORKING
In the metalworking segment, the company provides consumable metalcutting tools
and tooling systems to manufacturing companies in a wide range of industries
throughout the world. Metalcutting operations include turning, boring,
threading, grooving, milling and drilling. The company's tooling systems consist
of a steel toolholder and an indexable cutting tool such as an insert or drill
made from cemented tungsten carbides, high-speed steel or other hard materials.
INDUSTRIAL SUPPLY
This segment represents the sales of industrial supply products through JLK.
Sales of metalworking consumable products are derived through a direct-marketing
program, including mail-order catalogs and showrooms, a direct field sales
force, and integrated supply programs or Full Service Supply (FSS) programs.
ENGINEERED PRODUCTS, MINING & CONSTRUCTION AND OTHER
This segment's principal business is the production and sale of tungsten carbide
products used in engineered applications, mining and highway construction and
other similar applications, including circuit board drills, compacts and
metallurgical powders. These products have technical commonality to the
company's core metalworking products. The company also sells metallurgical
powders to manufacturers of cemented tungsten carbide products and oil and gas
drilling equipment.
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment detail is summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
==============================================================================================================
<S> <C> <C> <C>
External sales:
Metalworking $1,038,205 $ 938,589 $ 670,932
Industrial Supply 518,512 414,765 303,828
EM&O 346,199 325,034 181,583
- --------------------------------------------------------------------------------------------------------------
Total external sales $1,902,916 $1,678,388 $1,156,343
==============================================================================================================
Intersegment sales:
Metalworking $ 68,538 $ 52,060 $ 29,402
Industrial Supply 13,130 10,583 12,361
EM&O 29,281 12,882 12,540
- --------------------------------------------------------------------------------------------------------------
Total intersegment sales $ 110,949 $ 75,525 $ 54,303
==============================================================================================================
Total sales:
Metalworking $1,106,743 $ 990,649 $ 700,334
Industrial Supply 531,642 425,348 316,189
EM&O 375,480 337,916 194,123
- --------------------------------------------------------------------------------------------------------------
Total sales $2,013,865 $1,753,913 $1,210,646
==============================================================================================================
Operating income:
Metalworking $ 132,060 $ 165,762 $ 131,903
Industrial Supply 34,532 41,308 32,193
EM&O 39,182 52,039 27,471
Corporate (58,278) (63,538) (64,542)
- --------------------------------------------------------------------------------------------------------------
Total operating income $ 147,496 $ 195,571 $ 127,025
==============================================================================================================
Interest expense 68,594 59,536 10,393
Other expense (income) 492 5,459 (1,531)
- --------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest $ 78,410 $ 130,576 $ 118,163
==============================================================================================================
Depreciation and amortization:
Metalworking $ 60,265 $ 43,209 $ 30,704
Industrial Supply 8,749 5,185 1,768
EM&O 19,436 13,032 3,841
Corporate 7,541 5,885 5,086
- --------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 95,991 $ 67,311 $ 41,399
==============================================================================================================
Equity income (loss):
Metalworking $ 650 $ 855 $ 741
Industrial Supply -- -- --
EM&O (777) (1,103) (431)
Corporate -- -- --
- --------------------------------------------------------------------------------------------------------------
Total equity income (loss) $ (127) $ (248) $ 310
==============================================================================================================
Total assets:
Metalworking $1,044,272 $1,175,635 $ 475,072
Industrial Supply 274,989 275,586 165,488
EM&O 538,353 524,702 116,348
Corporate 186,034 163,070 112,401
- --------------------------------------------------------------------------------------------------------------
Total assets $2,043,648 $2,138,993 $ 869,309
==============================================================================================================
Capital expenditures:
Metalworking $ 59,476 $ 69,349 $ 36,234
Industrial Supply 9,681 12,286 2,287
EM&O 16,509 12,730 5,976
Corporate 9,327 10,409 29,282
- --------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 94,993 $ 104,774 $ 73,779
==============================================================================================================
Investment in affiliated companies:
Metalworking $ 3,020 $ 11,634 $ 9,298
Industrial Supply -- -- --
EM&O (2,176) 2,106 2,438
Corporate -- -- --
- --------------------------------------------------------------------------------------------------------------
Total investments in affiliated companies $ 844 $ 13,740 $ 11,736
==============================================================================================================
</TABLE>
<PAGE> 31
Metalworking operating income for 1999 was reduced by $11.1 million related to
the product rationalization program and to close a drill manufacturing plant in
Solon, Ohio (see Note 13). EM&O operating income for 1999 was reduced by $5.8
million related to a write-down of an investment in and net receivables from
certain international operations in emerging markets (see Note 13). Corporate
operating income for 1999 was reduced by $7.7 million related to a voluntary
early retirement benefit program (see Note 13) and a one-time charge incurred in
the acquisition of 4.9 percent of Toshiba Tungaloy (see Note 5).
Geographic information for sales, based on country of origin, and assets is as
follows:
(in thousands) 1999 1998 1997
=================================================================
External sales:
United States $1,346,195 $1,190,021 $ 767,321
Germany 208,490 199,002 165,669
United Kingdom 106,676 99,129 53,629
Canada 52,877 52,195 42,026
Other 188,678 138,041 127,698
- -----------------------------------------------------------------
Total external sales $1,902,916 $1,678,388 $1,156,343
=================================================================
Net assets:
United States $1,593,747 $1,654,026 $ 564,345
Germany 163,750 192,186 159,847
United Kingdom 85,363 104,597 27,024
Canada 29,854 30,710 23,191
Other 170,934 157,474 94,902
- -----------------------------------------------------------------
Total net assets $2,043,648 $2,138,993 $ 869,309
=================================================================
NOTE 19
OTHER EXPENSE (INCOME)
Other expense for 1998 included the write-off of deferred financing costs
related to the cancelled 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. 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.
<PAGE> 32
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
SELECTED QUARTERLY FINANCIAL DATA
Quarter Ended
(in thousands, -----------------------------------------------
except per share) Sep. 30 Dec. 31 Mar. 31 Jun. 30
====================================================================
FISCAL 1999
Net sales $480,922 $484,318 $479,051 $458,625
Gross profit 179,016 181,062 173,397 170,790
Net income 7,394 14,036 2,180 15,506
Basic earnings
per share 0.25 0.47 0.07 0.52
Diluted earnings
per share 0.25 0.47 0.07 0.52
FISCAL 1998
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
====================================================================
Earnings per share amounts for each quarter are required to be computed
independently and, therefore, may not equal the amount computed for the year.
In the third quarter of fiscal 1999, the company recorded pretax charges of
$24.6 million ($0.51 per share), including $20.8 million ($0.44 per share),
related to special charges for operational improvement programs and $3.8 million
($0.07 per share) related to a one-time charge incurred in the acquisition of
4.9 percent of Toshiba Tungaloy.
STOCK PRICE RANGES AND DIVIDENDS PAID
The company's capital stock is traded on the New York Stock Exchange (symbol
KMT). The number of shareowners of record as of August 10, 1999, was 3,026.
Stock price ranges and dividends declared and paid were as follows:
Quarter Ended
-----------------------------------------------
Sep. 30 Dec. 31 Mar. 31 Jun. 30
===============================================
FISCAL 1999
High $43 13/16 $25 5/8 $26 $31 5/16
Low 25 3/8 15 5/8 16 3/8 16 5/8
Dividends 0.17 0.17 0.17 0.17
FISCAL 1998
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
===============================================================
REPORT OF MANAGEMENT
TO THE SHAREOWNERS 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
Shareowner
/s/ JAMES R. BREISINGER
- ------------------------------------------
James R. Breisinger
Vice President and Chief Financial Officer
Shareowner
<PAGE> 33
REPORT OF AUDIT COMMITTEE
TO THE SHAREOWNERS OF KENNAMETAL INC.
The Audit Committee of the Board of Directors, composed of four independent
directors, met four times during fiscal year 1999.
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
Shareowner
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREOWNERS OF KENNAMETAL INC.
We have audited the accompanying consolidated balance sheets of Kennametal Inc.
and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of income, shareowners' equity and cash flows for each of the three
years in the period ended June 30, 1999. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kennametal Inc.
and subsidiaries as of June 30, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
- ------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 20, 1999
<PAGE> 34
ELEVEN-YEAR FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(dollars in thousands, except per share data) Notes 1999 1998 1997 1996
===================================================================================================================
<S> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $1,902,916 $1,678,388 $1,156,343 $1,079,963
Cost of goods sold 1,198,651 994,481 668,415 625,473
Research and development expenses 18,797 20,397 24,105 20,585
Selling, marketing and distribution expenses 394,204 339,772 263,980 242,375
General and administrative expenses 104,043 112,519 69,911 65,417
Interest expense 68,594 59,536 10,393 11,296
Unusual or nonrecurring items (1) 13,937 4,595 -- 2,666
Income taxes 32,900 53,900 44,900 43,900
Accounting changes, net of tax (2) -- -- -- --
Net income (loss) (3) 39,116 71,197 72,032 69,732
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Net working capital $ 373,582 $ 447,992 $ 175,877 $ 217,651
Inventories 434,462 436,472 210,111 204,934
Property, plant and equipment, net 539,800 525,927 300,386 267,107
Total assets 2,043,648 2,138,993 869,309 799,491
Long-term debt, including capital leases 717,852 840,932 40,445 56,059
Total debt, including capital leases 861,291 967,667 174,464 131,151
Total shareowners' equity (4) 745,131 735,460 459,608 438,949
- -------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings (loss) (3) $ 1.31 $ 2.61 $ 2.71 $ 2.62
Diluted earnings (loss) 1.31 2.58 2.69 2.60
Dividends 0.68 0.68 0.66 0.60
Book value (at year-end) 24.78 24.66 17.61 16.44
Market price (at year-end) 31.00 41.75 43.00 34.00
- -------------------------------------------------------------------------------------------------------------------
OTHER DATA
Capital expenditures $ 94,993 $ 104,774 $ 73,779 $ 57,556
Number of employees (at year-end) 13,640 14,380 7,550 7,260
Average sales per employee $ 136 $ 152 $ 159 $ 152
Weighted average shares outstanding
(in thousands) (4) 29,917 27,263 26,575 26,635
Diluted weighted average shares
outstanding (in thousands) (4) 29,960 27,567 26,786 26,825
- -------------------------------------------------------------------------------------------------------------------
KEY RATIOS
Sales growth 13.4% 45.1% 7.1% 9.8%
Gross profit margin 37.0 40.7 42.2 42.1
Operating profit margin (5) 8.5 11.7 11.0 11.5
Return on sales (3) 2.1 4.2 6.2 6.5
Return on equity (3) 5.3 12.2 15.8 17.0
Total debt to total capital 51.9 55.4 27.1 22.5
Dividend payout (6) 30.8 25.7 25.0 35.8
Inventory turnover 2.6x 3.1x 3.2x 3.0x
===================================================================================================================
</TABLE>
NOTES
1. Unusual charges (credits) reflect restructuring costs and asset impairment
charges related to certain operational improvement programs initiated in
1999, 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).
<PAGE> 35
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989
================================================================================================
<S> <C> <C> <C> <C> <C> <C>
$983,873 $802,513 $598,496 $594,533 $617,833 $589,023 $472,200
560,867 472,533 352,773 362,967 358,529 342,434 274,929
18,744 15,201 14,714 13,656 14,750 13,325 11,969
219,271 189,487 144,850 137,494 136,319 123,286 94,934
55,853 58,612 41,348 45,842 49,219 42,648 31,443
12,793 13,811 9,549 10,083 11,832 10,538 8,960
-- 24,749 (1,738) -- 6,350 -- --
45,000 15,500 14,000 8,100 17,300 23,000 20,900
-- 15,003 -- -- -- -- --
68,294 (4,088) 20,094 12,872 21,086 32,113 29,994
- ------------------------------------------------------------------------------------------------
$184,072 $130,777 $120,877 $108,104 $ 88,431 $108,954 $ 91,032
200,680 158,179 115,230 118,248 119,767 114,593 105,033
260,342 243,098 192,305 200,502 193,830 175,523 166,390
781,609 697,532 448,263 472,167 476,194 451,379 383,252
78,700 90,178 87,891 95,271 73,113 81,314 57,127
149,730 147,295 110,628 127,954 130,710 116,212 95,860
391,885 322,836 255,141 251,511 243,535 231,598 204,465
- ------------------------------------------------------------------------------------------------
$ 2.58 $ (0.17) $ 0.93 $ 0.60 $ 1.00 $ 1.54 $ 1.45
2.56 (0.17) 0.92 0.60 0.99 1.52 1.43
0.60 0.58 0.58 0.58 0.58 0.58 0.56
14.75 12.25 11.64 11.64 11.42 11.02 9.84
34.50 24.63 16.75 17.13 17.81 17.25 15.88
- ------------------------------------------------------------------------------------------------
$ 43,371 $ 27,313 $ 23,099 $ 36,555 $ 55,323 $ 35,998 $ 28,491
7,030 6,600 4,850 4,980 5,360 5,580 5,420
$ 146 $ 125 $ 122 $ 116 $ 113 $ 107 $ 94
26,486 24,304 21,712 21,452 21,094 20,872 20,696
26,640 24,449 21,753 21,551 21,237 21,065 20,915
- ------------------------------------------------------------------------------------------------
22.6% 34.1% 0.7% (3.8)% 4.9% 24.7% 12.5%
43.0 41.1 41.1 38.9 42.0 41.9 41.8
12.9 7.8 6.9 5.2 8.9 10.9 12.3
6.9 n.m. 3.4 2.2 3.4 5.5 6.4
19.3 n.m. 8.1 5.2 8.7 14.9 15.4
27.0 30.6 30.2 33.7 34.9 33.4 31.9
53.9 127.9 68.8 55.4 43.6 41.6 48.1
3.1x 3.1x 3.1x 3.0x 3.0x 3.1x 2.9x
================================================================================================
</TABLE>
3. Excluding unusual charges in 1999, net income was $54,299; basic earnings
per share were $1.82; return on sales was 2.9 percent; and return on equity
was 7.3 percent. 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> 1
EXHIBIT 21
PRINCIPAL SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction in Which
Name of Subsidiary Organized or Incorporated
- ------------------ -------------------------
<S> <C>
Consolidated Subsidiaries
Project Corporation de Argentina S.A. Argentina
Kennametal Australia Pty. Ltd. Australia
Kennametal Foreign Sales Corporation Barbados
Kennametal Hertel do Brasil Ltda. Brazil
Kennametal Ltd. Canada
Kennametal Hertel Chile Ltda. Chile
Kennametal (China) Limited China
Kennametal Hardpoint (Shanghai) Ltd. 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 Ca.Me.S., S.p.A. Italy
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 Hertel Korea Ltd. South Korea
Kennametal Hardpoint (Taiwan) Inc. Taiwan
Kennametal Hertel Co., Ltd. Thailand
Circle Machine Company California, United States
Kennametal Financing II California, United States
Greenfield Industries, Inc. Delaware, United States
Kennametal Receivables Corporation Delaware, United States
Adaptive Technologies Corp. Michigan, United States
JLK Direct Distribution Inc. Pennsylvania, United States
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 Werkzeuge und Industriebedarf G.m.b.H. Germany
GRS Industrial Supply Company Michigan, United States
Strong Tool Company Ohio, United States
Production Tools Sales, Inc. Texas, United States
Abrasive & Tool Specialties Company Utah, United States
</TABLE>
<PAGE> 2
PRINCIPAL SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
Jurisdiction in Which
Name of Subsidiary Organized or Incorporated
- ------------------ -------------------------
<S> <C>
Consolidated Subsidiaries of Kennametal Hertel AG
Kennametal Hertel Belgium S.A. Belgium
Kennametal Hertel EDG Limited England
Kennametal Hertel Limited England
Kennametal Hertel France S.A. France
Kennametal Hertel G.m.b.H. Germany
Kennametal Hertel Korea G.m.b.H. Germany
Rubig G.m.b.H. & Co. KG Germany
Kennametal Hertel S.p.A. Italy
Kennametal Hertel Nederland B.V. Netherlands
Nederlandse Hardmetaal Fabrieken B.V. Netherlands
Kennametal Hertel Kesici Takimlar ve Sistemler Anonim Sirketi Turkey
Consolidated Subsidiaries of Greenfield Industries, Inc.
Greenfield Industries, Incorporated Canada Canada
Cirbo Limited 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
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
South Deerfield Industrial, Inc. Massachusetts, United States
Hanita Cutting Tools, Inc. New Jersey, 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
Kennametal Inc.'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, Form S-8,
Registration No. 333-18437, Form S-3, Registration No. 333-40809, and Form S-8,
Registration No. 333-77411, including the prospectuses therein, relating to the
Kennametal Inc. 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, Thrift Plan, Stock Option and Incentive Plan of 1992 (as
amended), Stock Option and Incentive Plan of 1996, Omnibus Shelf Registration
Statement and 1999 Stock Plan.
/s/ Arthur Andersen LLP
------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
September 20, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the June 30,
1999 Consolidated Financial Statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> JUN-30-1999
<CASH> 17,408
<SECURITIES> 13,436
<RECEIVABLES> 246,556
<ALLOWANCES> 15,269
<INVENTORY> 434,462
<CURRENT-ASSETS> 750,448
<PP&E> 992,292
<DEPRECIATION> 452,492
<TOTAL-ASSETS> 2,043,648
<CURRENT-LIABILITIES> 376,866
<BONDS> 0
0
0
<COMMON> 41,128
<OTHER-SE> 704,003
<TOTAL-LIABILITY-AND-EQUITY> 2,043,648
<SALES> 1,902,916
<TOTAL-REVENUES> 1,902,916
<CGS> 1,198,651
<TOTAL-COSTS> 1,198,651
<OTHER-EXPENSES> 44,585
<LOSS-PROVISION> 8,230
<INTEREST-EXPENSE> 68,594
<INCOME-PRETAX> 78,410
<INCOME-TAX> 32,900
<INCOME-CONTINUING> 39,116
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,116
<EPS-BASIC> 1.31
<EPS-DILUTED> 1.31
</TABLE>
