ITEM 1. BUSINESS
Overview - - - --------
Kennametal Inc. was incorporated in Pennsylvania in 1943. Kennametal Inc. and subsidiaries ("Kennametal" or the "company") manufacture, purchase and distribute a broad range of tools, tooling systems, supplies and services for the metalworking, mining and highway construction industries. Kennametal specializes in developing and manufacturing metalcutting tools and wear-resistant parts using a specialized type of powder metallurgy. Kennametal's metalcutting tools are made of cemented carbides, ceramics, cermets and other hard materials. The company manufactures a complete line of toolholders and toolholding systems by machining and fabricating steel bars and other metal alloys. Kennametal's mining and construction cutting tools are tipped with cemented carbide and are used for underground coal mining and highway construction, repair and maintenance. Metallurgical products consist of powders made from ore concentrates, compounds and secondary materials.
Business Segment and Product Classes - - - ------------------------------------
The company operates predominantly as a tooling supplier specializing in powder metallurgy, which represents a single business segment. While many of the company's products are similar in composition, sales are classified into three major categories: metalworking products, mining and construction products and metallurgical products. The company's sales by product class are presented on page 17 of the 1994 Annual Report to Shareholders and such information is incorporated herein by reference. Information about the company's operations by geographic area is presented on page 31 of the 1994 Annual Report to Shareholders and such information is incorporated herein by reference.
Metalworking Products - - - ---------------------
Kennametal manufactures, markets and distributes a full-line of products and services for the metalworking industry. The company provides metalcutting tools, abrasives, precision measuring devices, power tools, hand tools and machine tool accessories to manufacturing companies in a wide range of industries.
A Kennametal tooling system usually consists of a steel toolholder and an indexable cutting tool called an insert. During a metalworking operation, the toolholder is positioned in a machine tool which provides the turning power. While the workpiece or toolholder is rapidly rotating, the cutting tool insert contacts the workpiece and cuts or shapes the workpiece. The cutting tool insert is consumed during use and must be replaced periodically. Metalcutting operations include turning, boring, threading, grooving, milling and drilling. The company also makes wear-resistant parts for use in abrasive environments and specialty applications.
Mining and Construction Products - - - --------------------------------
Mining and construction cutting tools are fabricated from steel parts and tipped with cemented carbide. Mining tools, used primarily in the coal industry, include longwall shearer and continuous miner drums, blocks, bits, pinning rods, augers and a wide range of mining tool accessories. The company also supplies compacts for mining, quarrying, water well drilling and oil and gas exploration.
Construction cutting tools include carbide-tipped bits for ditching, trenching and road planing; grader blades for site preparation and routine roadbed control and snowplow blades and shoes for winter road plowing.
Metallurgical Products - - - ----------------------
The company makes proprietary metallurgical powders for use as a basic material in many of its metalworking, mining and construction products. In addition, the company produces a variety of metallurgical powders and related materials for specialized markets. These products include intermediate carbide powders, hardfacing materials and matrix powders which are sold to manufacturers of cemented carbide products, oil and gas drilling equipment and diamond drill bits.
Recent Acquisition - - - -------------------
In August 1993, the company acquired an 81 percent interest in Hertel AG ("Hertel") for $43 million in cash and $55 million of assumed debt. Hertel, based in Furth, Germany, is a manufacturer and marketer of cemented carbide tools and tooling systems which are similar to the metalcutting tools and tooling systems produced by the company. The acquisition of Hertel has not materially changed the product lines offered by the company. While the company's primary market is the United States, however, Hertel's primary market is Germany and Western Europe. The acquisition of Hertel significantly increased the company's market share in these markets. Hertel had consolidated sales of approximately $201 million for the year ended December 31, 1992.
Non-U.S. Operations - - - -------------------
The company's principal non-U.S. operations are conducted in Western Europe and Canada. In addition, the company has joint ventures in Japan, India and Italy, sales offices and sales agents in Asia-Pacific and sales agents in eastern Europe and other areas of the world. The company's non-U.S. 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 non- U.S. location involving significant risk.
The company's foreign and export sales are presented on page 17 of the 1994 Annual Report to Shareholders, and such information is incorporated herein by reference. Information pertaining to the effects of foreign currency fluctuations is contained under the caption "Foreign Currency Translation" in the notes to the consolidated financial statements on page 24 of the 1994 Annual Report to Shareholders, and such information is incorporated herein by reference.
Marketing and Distribution - - - --------------------------
The company's products are sold through three distinct channels: direct sales, full-service supply and mail order catalogs. The company's manufactured products are sold to end-users primarily through a direct sales force. Service engineers and technicians directly assist customers with product design, selection and application. In addition, Kennametal-manufactured products, together with a broad range of purchased products, are sold through full-service supply programs and mail order catalogs. The company also uses independent distributors and sales agents in foreign markets and in selected manufacturing regions of the United States.
The company's products are marketed under various trademarks and tradenames, such as Kennametal*, the letter K combined with other identifying letters and/or numbers, Block Style K*, Kendex*, Kenloc*, Top Notch*, Erickson*, Kyon* and KM*. Purchased products are sold under the manufacturer's name or a private label.
Competition - - - -----------
Kennametal is one of the world's leading producers of cemented carbide tools and maintains a strong competitive position, especially in the United States and Canada. There is active competition in the sale of all products made by the company, with approximately 30 companies engaged in the cemented carbide business in the United States and many more outside the U.S. Several competitors are divisions of larger corporations. In addition, several hundred fabricators and toolmakers in the United States, many of whom operate out of relatively small shops, produce tools similar to those made by the company and buy the cemented carbide components for such tools from cemented carbide producers, including the company. Major domestic competition exists from both U.S.-based and foreign-based concerns. In addition, the company competes with thousands of industrial supply companies in the United States.
The principal methods of competition in the company's business are service, product innovation, technical product performance, quality, availability and price. The company believes that its competitive strength rests on its customer service capabilities including its multiple distribution channels, its ability to develop new and improved tools responsive to the needs of its customers and the consistent high quality of its products. These factors frequently permit the company to sell such products based on the value added for the customer rather than strictly on price.
Seasonality - - - -----------
Seasonal variations do not have a major effect on the company's business. However, to varying degrees, traditional summer vacation shutdowns of metalworking customers' plants and holiday shutdowns often affect the company's sales levels during the first and second quarters of its fiscal year.
Backlog - - - -------
The company's backlog of orders is generally not significant to its operations. Approximately 80 percent of all orders are filled from stock and the balance is generally filled within short lead-times.
Research and Development - - - ------------------------
The company is involved in research and development of new products and processes. Research and development expenses totaled $15.2 million, $14.7 million and $13.7 million in 1994, 1993 and 1992, respectively. Additionally, certain costs associated with improving manufacturing processes are included in cost of goods sold. The company holds a number of patents and licenses which, in the aggregate, are not material to the operation of the business.
The company has brought a number of new or improved products to market during the past few years. These include metalcutting inserts that incorporate innovative tool geometries for improved chip control and productivity; improved stationary toolholders and quick-change tooling systems including KM* tooling; KC9010* and KC9025* multi-coated metalcutting inserts for turning applications; and KCD25* diamond-coated metalcutting inserts.
Raw Materials and Supplies - - - --------------------------
Major metallurgical raw materials consist of ore concentrates, compounds and secondary materials containing tungsten, tantalum, titanium, niobium and cobalt. Although these raw materials are in relatively adequate supply, major sources are located abroad and prices at times have been volatile. For these reasons, the company exercises great care in the selection, purchase and inventory availability of these materials. The company also purchases substantial quantities of steel bars and forgings for making toolholders and other tool parts and accessories. Products purchased for resale are obtained from hundreds of suppliers located in the U.S. and abroad.
Employees - - - ---------
The company employed approximately 6,600 persons at June 30, 1994, of which 4,000 were located in the United States and 2,600 in other parts of the world, principally Europe and Canada. Approximately 1,200 employees were represented by labor unions, of which 130 were hourly-rated employees located at plants in the Latrobe, Pennsylvania area. The remaining 1,070 employees represented by labor unions were employed at eight plants located outside of the United States. The company considers its labor relations to be generally good.
Regulation - - - ----------
Compliance with government laws and regulations pertaining to the discharge of materials or pollutants into the environment or otherwise relating to the protection of the environment, did not have a material effect on the company's capital expenditures, earnings or competitive position for the year covered by this report, nor is such compliance expected to have a material effect in the future.
- - - ------------------------------------- * Trademark owned by Kennametal Inc.
ITEM 2.
ITEM 2. PROPERTIES
Presented below is a summary of principal plants and other significant real property used by the company and its majority- owned subsidiaries as of June 30, 1994. Further information pertaining to the company's corporate headquarters and principal plants is presented under the caption "Locations, Subsidiaries and Affiliates" on page 38 of the company's 1994 Annual Report to Shareholders, and such information is incorporated herein by reference.
United States - - - -------------
The company owns and operates nine principal manufacturing locations within the United States, including two each in North Carolina, Ohio and Pennsylvania, and one each in Virginia, Tennessee and Nevada. Refining and other metallurgical operations occur at three of these locations (Fallon, Nevada; Latrobe (Kingston), Pennsylvania and Henderson, North Carolina).
Marketing activities are supported by a network of warehouses and customer service centers strategically located throughout the United States. A significant portion of this space is leased. The majority of the company's research and development efforts are conducted in a corporate technology center located adjacent to corporate headquarters in Latrobe, Pennsylvania. The new facility, completed in fiscal 1992, consolidated the research and development activities previously performed at six locations in the Latrobe area.
Hertel Cutting Technologies Inc. leases office facilities in Knoxville, Tennessee.
Canada - - - ------
The company owns and operates two manufacturing plants in British Columbia, including a metallurgical plant in Port Coquitlam, British Columbia. Canadian marketing activities are supported by a network of leased warehouses and customer service centers.
Europe - - - ------
Kennametal Hertel G.m.b.H. owns office property in Friedrichsdorf, Germany and warehousing facilities in Neunkirchen, Germany.
Kennametal Hertel U.K., a branch of Kennametal Inc. (U.S.), leases a facility in Kingswinford (Birmingham), England, which is used for manufacturing, warehousing and offices.
Kennametal Hertel Belgium S.A. leases a facility in Herstal (Liege), Belgium, which is used for offices and warehousing.
Kennametal Hertel France S.A. leases a facility in Ris Orangis (Paris), France, which is used for warehousing, offices and a limited amount of manufacturing.
Kennametal Hertel AG ("Hertel") owns manufacturing facilities in Ebermannstadt, Mistelgau and Nabburg, Germany. In addition, Hertel leases a manufacturing facility in Vohenstrauss, Germany and warehousing and office facilities in Furth, Germany. Nederlandse Hardmetaal Fabrieken B.V., a wholly-owned subsidiary of Hertel owns property in Arnhem, Netherlands which is used for manufacturing and offices.
Other Non-U.S. Locations - - - ------------------------
Kennametal Australia Pty. Ltd. owns property in Sydney, Australia, which is used for offices and warehousing.
Office and warehouse facilities are leased in Korea and Singapore.
Present Condition of Properties - - - -------------------------------
All significant properties are used in the company's dominant business of powder metallurgy, tools, tooling systems and supplies. The company's production capacity is adequate for its present needs. The company believes that its properties have been adequately maintained, are generally in good condition and are suitable for the company's business as presently conducted.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
(a) On August 13, 1993, the company was served with a Notice of Violation dated August 9, 1993, issued by the United States Environmental Protection Agency ("EPA"). The EPA alleges violations concerning visible emissions from the company's Fallon, Nevada facility. On October 6, 1993, the EPA issued an interim compliance order with respect to this matter. On April 26, 1994, the company was served with a second Notice of Violation dated April 19, 1994, which relates to the first Notice of Violation. The EPA alleges in the second but related notice the violation of a regulation concerning the allowable particulate emission rate. The company anticipates that the EPA will impose a penalty in excess of $100,000 with respect to these violations; however, it is management's opinion, based on its evaluation and discussions with outside counsel, that the ultimate resolution of this matter will not have a material adverse effect on the results of operations or financial position of the company.
(b) At the annual meeting of shareholders of Hertel held on December 6, 1993, two minority shareholders of Hertel (Dr. Bernard Appel and Christa Gotz), one of whom purported to own or control 2,500 shares and the other of whom purported to own 5 shares, filed protests with respect to the resolution adopted by the Hertel shareholders which authorized and approved Hertel entering into the Domination Contract with the company which permits the company to direct Hertel's operations. The filing of a protest is a prerequisite to a shareholder's filing a formal complaint which must be filed within an applicable time period. Only Mrs. Gotz filed a formal complaint within the applicable time period. Her complaint was filed in the District Court at Nuremberg, Bavaria, Germany, and sought to declare null and void the shareholder resolution by arguing that it should not have been considered at the annual meeting because the requisite prior notice period for presenting a resolution to approve a domination contract (30 days) had not expired, even though Hertel had published notice of the proposed Domination Contract more than 30 days prior to the date of the annual meeting, due to Hertel's having also subsequently published, within 30 days prior to the date of the annual meeting, a clarification of certain terms of the Domination Contract relating to payment of German taxes on future minimum dividend payments to minority shareholders. The complaint also asserted that the tax treatment specified in the clarifications is improper under German law which renders the resolution void. On July 14, 1994, the Court in Nuremberg issued its decision. The Court ruled that the tax treatment of payments to Hertel minority shareholders was not correct and voided the clarification regarding the tax treatment of future dividends. However, the Court refused to void the shareholder approval of the Domination Contract which therefore remains in effect. Neither party appealed this decision which has become final. It is management's opinion that the change in tax treatment will not have a material adverse effect on the results of operations or financial position of the company.
Under German law, the company is required to offer to minority shareholders to purchase their shares for a reasonable compensation and to guarantee dividends during the term of the Domination Contract (ending June 30, 1996, subject to annual renewals) and to pay to Hertel any net cumulative losses it sustains during the term and has liability to Hertel creditors as if Hertel merged with the company. Apart from the complaint challenging the validity of the resolution approving and authorizing the Domination Contract, minority shareholders are contesting the reasonableness of the purchase price for minority shares and the minimum dividend on minority shares offered by the company in connection with the Domination Contract. It is management's opinion that Hertel has viable defenses to the contest of the reasonableness of the minority share purchase price and minimum dividend and, in any event, that the ultimate outcome of this matter will not have a material adverse effect on the results of operations or financial position of the company.
(c) There are no other material pending legal proceedings, other than litigation incidental to the ordinary course of business, to which the company or any of its subsidiaries is a party or of which any of their property is the subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1994, there were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise.
PART II
The information required under Items 5 through 8 is included in the 1994 Annual Report to Shareholders and such information is incorporated herein by reference as indicated by the following table.
PART III
ITEM 10.
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, 1994 (1994 Proxy Statement).
ITEM 11.
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 1994 Proxy Statement.
ITEM 12.
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 1994 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is certain information set forth in the notes to the table under the caption "Election of Directors" and under the caption "Certain Transactions" in the 1994 Proxy Statement.
PART IV
ITEM 14.
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, 1994 and 1993, the consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1994,and the notes to consolidated financial statements, together with the report thereon of Arthur Andersen & Co. dated August 1, 1994, presented in the company's 1994 Annual Report to Shareholders, are incorporated herein by reference.
2. Financial Statement Schedules
The financial statement schedules shown below should be read in conjunction with the financial statements contained in the 1994 Annual Report to Shareholders. Other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Separate financial statements of the company are omitted because the company is primarily an operating company and all subsidiaries included in the consolidated financial statements are wholly-owned, with the exception of Kennametal Hertel AG, in which the company has an 82 percent interest.
Financial Statement Schedules:
Report of Independent Public Accountants
V - Property, Plant and Equipment for the Three Years Ended June 30, 1994
VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment for the Three Years Ended June 30, 1994
VIII - Valuation and Qualifying Accounts for the Three Years Ended June 30, 1994
IX - Short-Term Borrowings for the Three Years Ended June 30, 1994
X - Supplementary Income Statement Information for the Three Years Ended June 30, 1994
3. Exhibits
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1994.
- - - ---------------- * Denotes management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KENNAMETAL INC.
By RICHARD J. ORWIG -------------------------- Richard J. Orwig Vice President, Chief Financial and Administrative Officer
Date: September 21, 1994
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders of Kennametal Inc.
We have audited, in accordance with generally accepted auditing standards, the financial statements included in Kennametal Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated August 1, 1994. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the index in Item 14(a)2 of this Form 10-K are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania August 1, 1994