EXHIBIT 13
1994 KENNAMETAL INC. ANNUAL REPORT
[Photograph]
(Front Cover)
PROFILE Kennametal is a manufacturer, marketer and distributor
of a broad range of tools for the metalworking, mining and
highway construction industries. Kennametal is one of the
world's leading producers of cutting tools and wear resistant
parts made of cemented carbides and other hard materials.
METALWORKING PRODUCTS Kennametal provides a full line of
products and services for the metalworking industry. The company
provides cutting tools and accessories for metalcutting
applications, including turning, milling and drilling.
MINING AND CONSTRUCTION PRODUCTS Kennametal is the world's
leading producer of mining and construction tools. Mining tools
include drums, blocks, bits, compacts and accessories.
Construction tools include blocks, bits, grader blades and
snowplow blades.
METALLURGICAL PRODUCTS Kennametal produces proprietary
metallurgical powders for use in its metalworking, mining and
construction products. In addition, the company produces a
variety of powders for specialized markets.
MISSION STATEMENT Kennametal is a global, customer-needs-driven
provider of tools, tooling systems, supplies and services to the
metalworking industry. In addition, Kennametal operates
businesses having a technical commonality with core businesses,
given they meet minimum financial goals.
CONTENTS
1 Financial Highlights
2 Letter to Shareholders
7 Kennametal Overview
15 Financial Graphs
16 Management's Discussion and Analysis
20 Consolidated Statements of Income
21 Consolidated Balance Sheets
22 Consolidated Statements of Shareholders' Equity
23 Consolidated Statements of Cash Flows
24 Notes to Consolidated Financial Statements
32 Quarterly Financial Data
33 Report of Audit Committee
33 Report of Independent Public Accountants
34 Eleven Year Summary
36 Board of Directors
37 Corporate Officers
38 Corporate and Worldwide Data
ABOUT THE REPORT Kennametal continues to make significant
progress in its efforts to be the world's premier provider of
tools, tooling systems, supplies and services to the metalworking
industry. This year's report highlights significant changes
which have affected that progress.
(Inside Front Cover)
FINANCIAL HIGHLIGHTS
Percent
Year ended June 30 1994 1993 Change
(dollars in thousands,
except per share data)
- - - -------------------------------------------------------------------------
OPERATING HIGHLIGHTS
Net sales $802,513 $598,496 +34
Net income (loss) (4,088) 20,094 n.m.
Earnings (loss) per share (1) (0.17) 0.93 n.m.
Return on equity (2) (1.5)% 8.1% n.m.
Cash flow from operations 30,249 42,018 -28
BALANCE SHEET HIGHLIGHTS
Total assets $697,532 $448,263 +56
Total debt 147,295 110,628 +33
Shareholders' equity 322,836 255,141 +27
Debt to capital ratio 31.3% 30.2% n.m.
INVESTMENT SPENDING
Capital expenditures $ 27,313 $ 23,099 +18
Research and development expenses 15,201 14,714 +3
STOCK DATA (1)
Stock price - high $ 29 9/16 $ 19 7/8
Stock price - low 15 3/8 12 15/16
Stock price - year-end 24 5/8 16 3/4
Dividends per share 0.58 0.58
<FN>
n.m. - not meaningful.
1 Reflects the increased number of shares resulting from a 2-for-1 stock
split in the form of a 100 percent stock dividend in
August 1994.
2 Without the restructuring charge and accounting changes, the return on
equity was 11.4 percent in 1994.
</FN>
[Graphs]
(Page 1)
TO OUR SHAREHOLDERS
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CAPTION: Our expanded global presence enables us to participate
fully in the recovery of the world's economies and to build our
competitive leadership by providing the highest level of service
to customers anywhere in the world.
ROBERT L. MCGEEHAN
President and Chief Executive Officer
IN 1994, KENNAMETAL NAVIGATED A COMPLEX DOMESTIC AND GLOBAL
MARKETPLACE IN WHICH WE WERE ABLE TO CREATE OPPORTUNITIES, AS
WELL AS WEATHER DISAPPOINTMENTS.
Revenues for the year rose to a record $803 million, up 34
percent from 1993. A significant portion of this growth resulted
from the alliance with Hertel AG, a German toolmaker in which we
acquired an 81 percent interest in August 1993. Excluding
Hertel, sales were up nine percent over the preceding year.
The slow but steady economic recovery in the United States
resulted in an increase in domestic revenues, despite the
negative impact of decreased sales of metalworking and highway
construction tools due to widespread floods in the Midwest, an
unusually severe winter and the Los Angeles earthquake.
In spite of these unusual events during the year, sales of
highway construction tools increased 15 percent as the pace of
road construction and rehabilitation projects intensified in many
parts of the U.S. Mining tool sales, however, were flat in the
midst of a United Mineworkers strike in the U.S. and weak demand
internationally.
Strong growth in production among our customers in the
automotive, heavy construction equipment and agricultural
equipment industries led the U.S. economic recovery and created
increased demand for Kennametal tools. We also saw sales
improvements to aircraft engine and oil and gas producers, who
began to emerge in 1994 after a long period of contraction.
Sales of our traditional product lines, metalcutting inserts
and toolholding devices, rose 11 percent in the U.S. Strong
demand for hardfacing products produced a 19 percent gain in
sales of metallurgical products, and growth in our full-service
supply programs and our expanding mail-order catalog business
drove sales of industrial supply products to a 22 percent gain.
Outside the United States, we faced a varied and challenging
economic landscape. Asia-Pacific markets, struggling through a
deep and widespread economic downturn, remained weak. Notable
exceptions were Australia and South Korea, where we achieved
significant gains in sales in 1994.
(Page 2)
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CAPTION: Our customers' paramount concern is to increase the
productivity of their capital-intensive production processes.
Our challenge is to meet this need through not only our products,
but also our people, our technology and our commitment to be not
just a supplier, but a partner.
QUENTIN C. MCKENNA
Chairman of the Board
Sales in Canada also increased 16 percent as that economy
began to recover. But the European market posed difficult
challenges, and, without the acquisition of Hertel, international
sales of metalworking products would have remained flat.
As a result of the acquisition of Hertel, we were able to
achieve a 78 percent increase in international sales. Economic
conditions in most of Europe remained weak, though we now see
indications that an economic recovery could, after several years
of contraction, be at hand.
WE STRENGTHENED KENNAMETAL'S RESOURCES FOR THE LONG-TERM BY
RAISING NEW CAPITAL, REDUCING DEBT AND PUTTING BEHIND US CHARGES
ASSOCIATED WITH OUR ACQUISITION, RESTRUCTURING ACTIVITIES AND
REQUIRED NEW ACCOUNTING STANDARDS.
In anticipation of solid earnings performance in 1994, we
made a decision that it was the right time to take one-time
charges against earnings rather than defer them and at the same
time to strengthen Kennametal's asset base and capital structure
for the future.
Prior to these one-time charges, Kennametal had net income
of $31.3 million. Against this, we took a restructuring charge
of $20.4 million after taxes plus the adoption of new accounting
standards had a negative impact of $15 million, net of income tax
effect.
As a result, Kennametal recorded a net loss of $4.1 million,
or $0.17 per share, compared with net income of $20.1 million, or
$0.93 per share in 1993. The average number of shares
outstanding in 1994 was 2.6 million greater than those
outstanding in the prior year.
In December 1993, we moved to strengthen our company's long-
term financial position through an offering of new shares of
Kennametal common stock. This sale was received enthusiastically
by investors, providing net proceeds to the company of
approximately $74 million in new equity capital.
We undertook this offering primarily to finance the
acquisition of Hertel and to maintain the company's capital
structure within our previously established guidelines.
Kennametal's
(Page 3)
inherent financial strength and cash flows would have enabled us
to finance the acquisition with debt, but we concluded that the
resulting debt-service burden would have limited our ability to
capture future opportunities.
Since the market awarded Kennametal a strong share price, we
determined that an equity offering would be a timely step that
would provide the company with increased financial flexibility
and resources for investment in our future.
Beyond raising capital, the share offering enabled us to
convey the Kennametal story to a wider audience in the investment
community at an exciting time in the history of our company. We
attracted new domestic and international investors, increased
investor interest in our stock, as well as liquidity in the
market for our shares. The result has been record share prices.
WE ARE POSITIONING KENNAMETAL AS A BORDERLESS GLOBAL COMPANY,
PREPARED TO PURSUE OPPORTUNITIES AND MEET CUSTOMER DEMANDS
WHEREVER WE CAN IDENTIFY THEM IN THE WORLD MARKETPLACE.
The ability to win and serve customers anywhere in the
global marketplace is the foundation on which we are building not
only increased growth and profitability, but stability in cash
flow and earnings.
The acquisition of Hertel gives Kennametal the engineering,
manufacturing and logistical infrastructure we need to become a
more viable competitor in Europe and to strengthen our position
in the markets in Eastern Europe and the Asia-Pacific region that
we believe offer superior long-term growth opportunities.
Both Kennametal and Hertel possess resources and skills
unique to each partner, from manufacturing and marketing
expertise to excellence in specific product lines. The
integration of these strengths enables our merged companies to
provide a comprehensive response to the needs of our metalworking
customers worldwide, and, in addition, while the two companies
are being integrated operationally, both will retain their own
brand name identities in the marketplace -- valuable assets we
will use to maximize market penetration and return on our
investment.
We are currently in the process of integrating Kennametal's
business with that of Hertel. As part of this integration, we
closed the Kennametal manufacturing facility in Neunkirchen,
Germany.
(Page 4)
We also developed a restructuring plan for Hertel
operations, which is improving profitability by reducing working
capital requirements and overall expenses, as well as improving
capacity utilization.
Some 20 integration teams made up of Kennametal and Hertel
employees are currently dedicated to realizing the benefits of
combining the two companies. These teams are empowered to manage
the wide variety of issues involved in the integration, from
manufacturing changes and consolidations to marketing and legal
concerns, research and development, information systems and
communication.
The pace of integration is progressing ahead of our
expectations, enabling us to realize more immediate value from
the synergies created by the alliance and to accelerate our
advance toward the goal of being the low-cost, highest-quality
producer of metalworking tooling in the world.
OUR FOCUS IS ON MAKING IT EASIER TO DO BUSINESS WITH KENNAMETAL.
Today, manufacturers seek to reduce the number of suppliers
they deal with, while forging closer and more productive working
ties with those who can add value to the relationship. Because
companies which can meet this challenge will uncover important
new opportunities for growth, we are taking the initiative to
explore and develop new and more productive ways of meeting our
customers' needs.
Our customers' paramount concern is to increase the
productivity of their capital-intensive production processes.
Our challenge is to meet this need through not only our products,
but also our people, our technology and our commitment to be not
just a supplier, but a partner.
Our investment in the Corporate Technology Center continues
to pay dividends with an ongoing stream of new and improved
products developed in response to the changing needs of our
customers in all manufacturing industries.
We also expanded and enhanced our worldwide management
information system network, a vital competitive asset, to
increase our control of the many marketing channels for
Kennametal's expanding product range.
The Metalworking Systems Division undertook a thorough
reengineering of its marketing and sales organization in 1994 to
improve the speed and quality of response to our customers. The
process created integrated sales teams made up of employees from
direct sales,
(Page 5)
telemarketing, order entry, application support and sales
management. Through a new customer contact model, customers are
now connected directly with the team member who possesses the
specific skill or knowledge needed and who can provide an
immediate and thorough response.
KENNAMETAL'S STRATEGIES ARE WORKING BECAUSE EMPLOYEES SUPPORT
THEM TIRELESSLY.
Through a tough economic downturn, and now amid the
challenges of integrating Hertel, Kennametal employees have shown
that they understand and support the company's strategies and
goals. Their efforts have been reinforced by the Hertel
employees who have joined us, whose tradition of dedication and
hard work matches our own. Now numbering 6,600 worldwide,
Kennametal's employees are the foundation of the company and will
continue to be the key to our success.
THE ACTIONS TAKEN OVER THE PAST YEAR POSITION KENNAMETAL FOR
SUSTAINED GROWTH.
The success of our efforts to control costs and rationalize
our operations has resulted in a structure that today provides
Kennametal with significant earnings leverage. Our expanded
global presence enables us to participate fully in the recovery
of the world's economies and to build our competitive leadership
by providing the highest level of service to customers anywhere
in the world.
Today, we are in an excellent position to take advantage of
global economic and manufacturing trends. New and exciting
partnerships will enable Kennametal to expand mutually beneficial
relationships with a growing number of customers.
We are confident that the successes achieved in 1994 will
serve as a model for our future growth.
QUENTIN C. MCKENNA ROBERT L. MCGEEHAN
- - - --------------------- -----------------------------
Quentin C. McKenna Robert L. McGeehan
Chairman of the Board President and Chief Executive
Officer
Latrobe, Pennsylvania
August 1, 1994
(Page 6)
KENNAMETAL OVERVIEW
For Kennametal, 1994 was a year of careful investment and
untiring effort that produced solid signs of growth. A wide
variety of factors contributed to the year's successes:
Teamwork as well as outstanding individual efforts by Kennametal
employees -- New relationships with customers -- Continuing
research and development efforts that reinforce Kennametal's
technological leadership -- Aggressive pursuit of emerging markets
- - - -- Ongoing evolution of products to meet changing customer needs
- - - -- Integration efforts building on Kennametal and Hertel
manufacturing, marketing and product strengths -- Execution of
our channel marketing strategy -- Continued development of
global logistics systems
The following selection of photos are representative of some of
the key factors contributive to Kennametal's present and future
prosperity.
(Page 7)
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The KM-LOC (TM) clamping device is the most recent addition to
Kennametal's proven KM (TM) modular quick-change tooling system.
The new device employs a cam and a preloaded disc spring pack to
provide positive stop-to-stop locking and unlocking with less
than half a turn of a wrench, making the KM (TM) system even more
user-friendly. Kennametal products continually evolve to meet
ever-changing customer demands.
(Page 8)
Global manufacturers require world-class tooling. Kennametal
tools, including KM (TM) quick-change toolholders and carbide
turning and milling inserts, machined these six-cylinder engine
crankshafts for Ford Motor Company's new "world car."
Successfully launched last year in Europe as the Mondeo, the car
is coming to the U.S. in the fall of 1994 as the Ford Contour and
Mercury Mystique. Kennametal tools meet Ford's legendary
standards for performance and quality, and three of Kennametal's
manufacturing facilities have earned the Ford Q1 status as
preferred suppliers to Ford Motor Company.
Globalization of industry has produced new business relationships
between Kennametal and its customers. In addition to its
traditional role as a tooling supplier, Kennametal now offers
tooling application and purchasing and management services in a
variety of forms. Typical of these partnerships and "win-win"
arrangements is the Full Service Supply program in which
Kennametal stocks and maintains the customer's tool crib,
supplying all the cutting tool requirements of a metalworking
operation.
[Photograph]
(Page 9)
Teamwork propels Kennametal's success. Throughout the company,
employees from various functional areas work in units that are
dedicated to getting the job done faster and better. For
example, some 20 integration teams, consisting of both Kennametal
and Hertel employees, are expediting the progress of the Hertel
integration. Pictured here are some members of one of those
groups, the Business Systems team. Including employees from
customer service, metalworking manufacturing, finance and
management information systems, the team defined the needs of the
business systems of the combined operations and implemented such
systems to enable both companies to eliminate quickly unnecessary
redundancies and better serve our customers.
[Photograph]
Kennametal and Hertel are combining their technological and
manufacturing strengths to provide customers with the best
product available in the marketplace. Prime examples are
Kennametal's new general-use KC9010 (TM) and KC9025 (TM) coated
carbide metalcutting insert grades, which benefit from
Kennametal's expertise in tungsten carbide manufacturing at the
Orwell, Ohio, plant. The substrates are then coated at the
Hertel facility in Ebermannstadt, Germany, to take advantage of
Hertel's advanced coating and manufacturing automation
technologies, including the coating operations shown here.
(Page 10)
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[Photograph]
Kennametal's new KCD25 (TM) thin-film diamond-coated insert grade
is engineered to machine new energy-efficient manufacturing
materials, such as abrasive aluminum alloys and nonmetallics.
Kennametal Corporate Technology developed a chemical vapor
deposition process for diamond coatings that produces inserts
combining the outstanding wear resistance of diamonds with a
carbide substrate's economy and ability to support complex chip
control geometries. This sequence shows a chip-control KCD25
(TM) insert poised to begin a cut; amidst a flow of metalcutting
coolant; then beginning to machine an aluminum workpiece.
(Page 11)
[Photograph]
These tungsten carbide tips for mining roof drill bits, arranged
for sintering at the Mining and Construction Division
manufacturing plant in Bedford, Pennsylvania, are destined for
customers around the world. Following a year of record sales,
the Division is moving to take advantage of promising
opportunities for global growth by aggressively pursuing emerging
markets, such as Eastern Europe and China.
One clear benefit of the acquisition of Hertel is a synergy of
product expertise. Hertel is known for leadership in rotating
tooling, including solid carbide drills and milling cutters, as
shown here. These tools complement Kennametal's traditional
strength in tools for lathe applications, enabling the combined
companies to offer customers a comprehensive selection of the
world's most productive cutting tools.
(Page 12)
A growing number of customers are reaching for J&L Industrial
Supply catalogs. The company continues its record of growth and
profitability by effectively serving the needs of smaller
customers. Through mail order catalogs and retail outlets, J&L
provides one-stop shopping for a comprehensive selection of
metalworking tools and supplies, including selected Kennametal
products. J&L has grown to a total of eight U.S. locations,
stocking more than six million tools and serving customers in all
50 states, as well as Canada, Mexico, and Puerto Rico.
[Photograph]
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(Page 13)
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This year's Alex G. McKenna award winners, Jack Taylor (left) and
Rolf Chudzick, work on separate continents, but share the high
standards and limitless enthusiasm displayed by Alex G. McKenna,
former Kennametal board chairman and the first recipient of this
award. Jack Taylor joined Kennametal in 1959 in the engineering
department and moved to the Mining Tool Division (now Mining and
Construction Division) in 1975. Since then, his efforts in
marketing and sales management for highway construction products
have helped to make Kennametal the world-market leader in highway
and construction tooling. Rolf Chudzick's work in sales and
manufacturing management at Kennametal G.m.b.H. in Germany has
spanned more than twenty-five years and has demonstrated his
unique ability to motivate people from varied cultures to work
together.
Global logistics is the foundation for global competitiveness.
Through its Kennametal Distribution Services group, Kennametal
coordinates manufacturing, inventories and delivery on a
worldwide basis. Kennametal has consolidated its worldwide
warehouse capacity to include nine U.S. locations and three
outside the U.S., resulting in efficiencies that produce same-day
shipping performance exceeding 98 percent.
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(Page 14)
FINANCIAL GRAPHS
[Graphs]
(Page 15)
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS: 1994 COMPARED WITH 1993
OVERVIEW. For the fiscal year ended June 30, 1994, Kennametal
recorded a net loss of $4.1 million, or $0.17 per share, as
compared with net income of $20.1 million, or $0.93 per share in
1993. All share and per share data (except where noted) reflect
the retroactive effect of a 2-for-1 stock split in the form of a
100 percent stock dividend declared for holders of record as of
August 10, 1994.
The net loss for the fiscal year ended June 30, 1994, includes
the unfavorable cumulative noncash effect of adopting Statement
of Financial Accounting Standards (SFAS) No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions"
($20.1 million net of income tax effect) and the favorable
cumulative noncash effect of adopting SFAS No. 109 "Accounting
for Income Taxes" ($5.1 million). In addition, the results
include a restructuring charge ($20.4 million after taxes) and
the impact of additional operating costs resulting from the
adoption of SFAS No. 106 ($1.2 million). Sales were $803
million, as compared with $598 million last year. The increase
in sales resulted primarily from the acquisition of an 81 percent
interest in Hertel AG (Hertel). Excluding Hertel, sales were
$652 million.
The Hertel acquisition increased the net loss for fiscal year
1994 by $2.6 million. Excluding the cumulative effect of
accounting changes, the restructuring charge and the acquisition
impacts, the company had net income of $33.9 million as compared
with $20.1 million last year.
SALES AND MARKETS. Excluding the effects of the acquisition of
Hertel, worldwide sales of metalworking products increased 11
percent from last year as a result of strong domestic demand for
metalcutting tools. Excluding price increases and negative
foreign currency translation effects, worldwide metalworking
volume increased 12 percent.
In the United States, excluding the effects of the acquisition of
Hertel, sales of metalcutting inserts and toolholding devices
increased 11 percent while sales of industrial supply products
increased 22 percent.
Worldwide sales of mining and construction tools increased two
percent from last year as a result of comparatively weak
international demand for highway construction and mining tools.
However, domestic sales of mining and construction tools
increased seven percent because of strong demand for highway
construction tools. Worldwide sales of metallurgical products
increased 19 percent as a result of strong domestic demand for
hardfacing products.
Foreign and export sales increased 78 percent from last year. A
significant portion of the increase relates to the acquisition of
Hertel.
Management expects higher sales of metalworking products in
fiscal 1995 as the U.S. economy continues to expand and the
European economy continues to emerge from the recession.
Metalworking sales in the U.S. should continue to benefit from
catalog sales. Mining and construction tool sales should
continue to increase primarily because of greater domestic coal
production.
COSTS AND EXPENSES. As a percentage of sales, the gross margin
was 41.1 percent, the same as last year. The gross margin was
unfavorably affected by the inclusion of Hertel's financial
results.
Operating expenses, consisting of research and development,
marketing and general and administrative expenses, increased 31
percent. The increase primarily relates to the impact of the
Hertel acquisition. As a percentage of sales, operating expenses
were 32.8 percent, down from 33.6 percent, mostly because of
higher sales in the U.S.
Average total employment increased 31 percent from last year.
The increase in average total employment relates principally to
the acquisition of Hertel.
(Page 16)
Interest expense increased 45 percent from 1993. The increase
was primarily due to debt incurred and assumed in connection with
the Hertel acquisition. Average debt outstanding was $164
million in 1994 as compared with $125 million in 1993.
Approximately 35 and 44 percent of the company's total debt was
subject to variable interest rates at June 30, 1994 and 1993,
respectively.
The effective tax rate was 59.7 percent in 1994, up from 41.1
percent in 1993. Excluding the effects of the restructuring
charge, the adjusted effective tax rate was 39.1 percent in 1994.
The adjusted effective tax rate for 1994 benefited from the use
of greater foreign tax credits when compared to the effective tax
rate for 1993.
SALES BY PRODUCT CLASS AND GEOGRAPHIC AREA
Year ended June 30 1994 1993 1992
- - - --------------------------------------------------------------------------------------------------
Percent Percent Percent
(Dollars in thousands) of Total Amount Change Amount Change Amount
- - - --------------------------------------------------------------------------------------------------
By Product Class:
Metalworking products 84% $676,355 +41% $478,137 -1% $482,058
Mining and construction
products 13 101,575 +2 99,614 +12 89,257
Metallurgical products 3 24,583 +19 20,745 +4 19,852
Other products - - - - - 3,366
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Net sales 100% $802,513 +34% $598,496 +1% $594,533
=========================================================================
By Geographic Area:
Within the U.S. 65% $517,856 +18% $438,910 +1% $434,195
Foreign and export 35 284,657 +78 159,586 - 160,338
-------------------------------------------------------------------------
Net sales 100% $802,513 +34% $598,496 +1% $594,533
=========================================================================
RESULTS OF OPERATIONS: 1993 COMPARED WITH 1992
OVERVIEW. Net income for 1993 was $20.1 million, up 56 percent
from $12.9 million in 1992. The 1993 results include a
nonrecurring after-tax gain of $1.0 million ($0.05 per share)
related to the settlement of a patent infringement suit.
Excluding the nonrecurring gain, net income for 1993 was up 48
percent.
Earnings for 1993 increased primarily because of increased sales
of metalcutting inserts and toolholding devices in the United
States. In addition, earnings were favorably affected by lower
manufacturing costs associated with higher production levels in
the company's metalworking operations. However, operating
expenses increased slightly from 1992 because of increased
selling and marketing efforts.
SALES AND MARKETS. Worldwide sales of metalworking products
decreased one percent from 1992 because of lower sales volume in
Europe and lower overall sales of industrial supply products.
Excluding price increases and negative foreign currency
translation effects, worldwide metalworking volume declined one
percent from 1992.
In the United States, metalworking sales were flat compared with
those of 1992. Sales of metalcutting inserts and toolholding
devices increased two percent while sales of industrial supply
products decreased three percent as a result of product
rationalization efforts. Sales of industrial supply products
through full service supply programs and mail-order catalogs
continued to experience growth.
Sales of mining and construction tools increased 12 percent from
1992 because of higher volume and greater demand for highway
construction and mining tools.
(Page 17)
Foreign and export sales declined one percent from 1992 because
of lower sales volume in Europe and negative foreign currency
translation effects. However, sales continued to grow in Asia-
Pacific markets. Excluding foreign currency translation effects,
foreign and export sales increased one percent from 1992.
COSTS AND EXPENSES. As a percentage of sales, the gross margin
was 41.1 percent for 1993, up from 38.9 percent in 1992. The
gross margin for 1993 was favorably affected by higher production
levels, more favorable sales mix, cost containment and
productivity efforts. However, the gross margin for 1993 was
adversely affected by negative foreign currency translation
effects.
Operating expenses, consisting of research and development,
marketing and general and administrative expenses, increased two
percent from 1992 because of increased selling and marketing
efforts, higher salaries, wages and employee benefit costs,
additional depreciation charges related to the new Corporate
Technology Center and the start-up of a catalog sales branch in
Los Angeles, California, in August 1992. As a percentage of
sales, operating expenses were 33.6 percent for 1993, up from
33.1 percent in 1992.
Payroll and related expenses totaled $221 million in 1993, up
slightly from $216 million in 1992. Average total employment
decreased three percent from 1992 because of cost reduction
programs.
Interest expense decreased five percent from 1992 because of
lower average borrowings and slightly lower interest rates.
Average debt outstanding was $125 million in 1993, down five
percent from $132 million in 1992. Approximately 44 and 50
percent of the company's total debt was subject to variable
interest rates at June 30, 1993 and 1992, respectively.
The effective tax rate was 41.1 percent in 1993, up from 38.6
percent in 1992. Excluding the effects of certain nonrecurring
items in 1992, the adjusted effective tax rate was 42.5 percent.
The effective tax rate for 1993 benefited from the use of greater
foreign tax credits when compared to the adjusted effective tax
rate for 1992.
LIQUIDITY AND CAPITAL RESOURCES
Kennametal generates sufficient cash from operations to meet most
of its financing needs. In addition, at June 30, 1994, the
company had global lines of credit with banks totaling $225
million, of which $172 million was unused. Non-U.S. subsidiaries
generally obtain financing through revolving credit agreements
with local banks.
During 1994, the company generated $30 million in cash from
operations. Cash provided from operations decreased from last
year primarily because of spending in connection with
restructuring and integration related activities. Capital
expenditures, totaling $27 million, were utilized to upgrade
machinery and equipment and to modernize facilities. The company
paid $14 million of cash dividends.
On August 4, 1993, the company completed the acquisition of an 81
percent interest in Hertel. In connection with the acquisition,
the company obtained a new $130 million credit agreement dated as
of July 29, 1993 (the "credit agreement"). The credit agreement
provided a $40 million bridge loan facility earmarked to purchase
Hertel shares ($38.7 million of which was borrowed) and $90
million of revolving credit lines in two equal tranches. The
bridge loan was repaid on December 24, 1993, and, therefore,
expired. The Tranche A line of credit matured on July 27, 1994,
while the Tranche B line of credit matures on July 27, 1996.
(Page 18)
On December 23, 1993, the company completed the sale of 1,972,250
shares of common stock (exclusive of the 2-for-1 stock split
impact), resulting in net proceeds of $73,594,000. The company
used $38,700,000 of the proceeds from the offering to repay the
bridge loan and $34,894,000 to reduce borrowings under the
revolving credit lines.
During 1993, the company generated $42 million in cash from
operations which was used primarily to finance $23 million of
capital expenditures and pay $13 million of cash dividends.
Capital expenditures were utilized to upgrade machinery and
equipment, to upgrade management information systems and to
relocate and expand the J&L Industrial Supply facility in
Charlotte, North Carolina.
During 1992, the company generated $47 million in cash from
operations which was used primarily to finance $37 million of
capital expenditures and pay $12 million of cash dividends.
Capital expenditures were used to complete construction of the
new $27 million Corporate Technology Center, to expand and
modernize facilities, to upgrade machinery and equipment and to
acquire management information systems.
Capital expenditures for fiscal 1995, which have been estimated
at approximately $50-55 million, will be employed to modernize
facilities and upgrade machinery and equipment. The company
plans to finance these expenditures with cash from operations and
borrowings under existing revolving credit agreements.
FINANCIAL POSITION
Kennametal maintained its strong financial position through
fiscal 1994. Working capital was $131 million and $121 million
as of June 30, 1994 and 1993, respectively. Total debt was $147
million and $111 million as of June 30, 1994 and 1993,
respectively. The ratio of total debt to capital was 31.3
percent and 30.2 percent as of June 30, 1994 and 1993,
respectively. Over the long-term, the company's financial
objective is to maintain a debt to capital ratio of not more than
40 percent.
In the first quarter of fiscal year 1994, the company recorded
cumulative effect charges aggregating $15 million after taxes for
the adoption of SFAS No. 106 and SFAS No. 109. While these
charges did not involve the use of cash, they significantly
affected various components of the company's consolidated
financial position at June 30, 1994.
NEW ACCOUNTING STANDARD
In November 1992, the Financial Accounting Standards Board issued
SFAS No. 112 "Employers' Accounting for Postemployment Benefits,"
which requires companies to recognize the obligation to provide
benefits to their former or inactive employees after employment,
but before retirement. The company will adopt this new standard
in fiscal 1995. The company does not expect the new accounting
requirement to have a material effect on its financial
statements.
INFLATION
Despite modest inflation in recent years, rising costs continue
to affect the company's businesses throughout the world.
Kennametal strives to minimize the effects of inflation through
cost containment, productivity efforts and price increases under
competitive conditions.
(Page 19)
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Year ended June 30 1994 1993 1992
- - - ---------------------------------------------------------------------------
OPERATIONS
Net sales $802,513 $598,496 $594,533
-------- -------- --------
Costs and expenses:
Cost of goods sold 472,533 352,773 362,967
Research and development 15,201 14,714 13,656
Marketing 189,487 144,850 137,494
General and administrative 58,612 41,348 45,842
Interest expense 13,811 9,549 10,083
Amortization of intangibles 3,996 3,425 3,479
Restructuring charge 24,749 - -
Patent litigation income - (1,738) -
-------- -------- --------
Total costs and expenses 778,389 564,921 573,521
-------- -------- --------
Other income (expense) 1,860 519 (40)
Income before taxes on income,
minority interest and cumulative
effect of accounting changes 25,984 34,094 20,972
Provisions for income taxes:
Current 17,200 11,100 10,300
Deferred (1,700) 2,900 (2,200)
-------- -------- --------
Total provisions for income taxes 15,500 14,000 8,100
Minority interest in losses of
Hertel AG 431 - -
-------- -------- --------
Income before cumulative
effect of accounting changes 10,915 20,094 12,872
Cumulative effect of accounting
changes, net of income taxes:
Postretirement benefits (20,060) - -
Income taxes 5,057 - -
-------- -------- --------
Net income (loss) $ (4,088) $ 20,094 $ 12,872
======== ======== ========
PER SHARE DATA
Earnings before cumulative
effect of accounting changes $ 0.45 $ 0.93 $ 0.60
Cumulative effect of accounting
changes:
Postretirement benefits (0.83) - -
Income taxes 0.21 - -
-------- -------- --------
Earnings (loss) per share $ (0.17) $ 0.93 $ 0.60
======== ======== ========
Dividends per share $ 0.58 $ 0.58 $ 0.58
======== ======== ========
The accompanying notes are an integral part of these statements.
(Page 20)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
As of June 30 1994 1993
- - - ------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and equivalents $ 17,190 $ 4,149
Accounts receivable, less allowance for
doubtful accounts of $9,328 and $2,062 143,691 89,496
Inventories 158,179 115,230
Deferred income taxes 13,744 -
-------- --------
Total current assets 332,804 208,875
-------- --------
Property, Plant and Equipment:
Land and buildings 138,956 114,951
Machinery and equipment 328,696 287,477
Less accumulated depreciation (224,554) (210,123)
-------- --------
Net property, plant and equipment 243,098 192,305
-------- --------
Other Assets:
Investments in affiliated companies 6,393 4,819
Intangible assets, less accumulated
amortization of $16,540 and $12,368 32,141 29,766
Deferred income taxes 65,606 -
Other 17,490 12,498
-------- --------
Total other assets 121,630 47,083
-------- --------
Total assets $697,532 $448,263
======== ========
LIABILITIES
Current Liabilities:
Current maturities of term debt and
capital leases $ 4,364 $ 2,184
Notes payable to banks 52,753 20,553
Accounts payable 52,148 32,492
Accrued vacation pay 15,569 12,233
Other 77,193 20,536
-------- --------
Total current liabilities 202,027 87,998
-------- --------
Term Debt and Capital Leases,
Less Current Maturities 90,178 87,891
Deferred Income Taxes 19,279 10,744
Other Liabilities 51,800 6,489
-------- --------
Total liabilities 363,284 193,122
-------- --------
Minority Interest in Hertel AG 11,412 -
SHAREHOLDERS' EQUITY
Shareholders' Equity:
Capital stock, $1.25 par value; 30,000,000 shares
authorized; 29,369,658 and 12,712,579
shares issued 36,712 15,891
Preferred stock, 5,000,000 shares authorized;
none issued - -
Additional paid-in capital 83,839 28,135
Retained earnings 245,428 263,531
Treasury shares, at cost (3,015,466 and
1,754,744 shares) (39,247) (44,974)
Pension liability adjustment (536) -
Cumulative translation adjustments (3,360) (7,442)
-------- --------
Total shareholders' equity 322,836 255,141
-------- --------
Total liabilities and shareholders' equity $697,532 $448,263
======== ========
The accompanying notes are an integral part of these statements.
(Page 21)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Year ended June 30 1994 1993 1992
- - - ------------------------------------------------------------------------
Capital Stock
Balance at beginning of year $ 15,891 $ 15,891 $ 15,891
Issuance of common stock 2,465 - -
Two-for-one stock split 18,356 - -
-------- -------- --------
Balance at end of year 36,712 15,891 15,891
-------- -------- --------
Additional Paid-in Capital
Balance at beginning of year 28,135 27,594 27,274
Dividend reinvestment and
stock purchase plan 424 144 340
Employee stock plans 2,507 397 (20)
Issuance of common stock 71,129 - -
Two-for-one stock split (18,356) - -
-------- -------- --------
Balance at end of year 83,839 28,135 27,594
-------- -------- --------
Retained Earnings
Balance at beginning of year 263,531 256,016 255,584
Net income (loss) (4,088) 20,094 12,872
Cash dividends (14,015) (12,579) (12,440)
-------- -------- --------
Balance at end of year 245,428 263,531 256,016
-------- -------- --------
Treasury Shares
Balance at beginning of year (44,974) (48,734) (52,080)
Dividend reinvestment and
stock purchase plan 590 1,567 1,516
Employee stock plans 5,137 2,193 1,830
-------- -------- --------
Balance at end of year (39,247) (44,974) (48,734)
-------- -------- --------
Pension Liability Adjustment
Additional minimum pension liability (536) - -
-------- -------- --------
Cumulative Translation Adjustments
Balance at beginning of year (7,442) 744 (3,134)
Current year translation
adjustments 4,082 (8,186) 3,878
-------- -------- --------
Balance at end of year (3,360) (7,442) 744
-------- -------- --------
Total shareholders' equity,
June 30 $322,836 $255,141 $251,511
======== ======== ========
The accompanying notes are an integral part of these statements.
(Page 22)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended June 30 1994 1993 1992
- - - -----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (4,088) $ 20,094 $ 12,872
Adjustments for non-cash items:
Depreciation and amortization 43,232 30,927 31,328
Other 14,984 3,202 (958)
Changes in certain assets and liabilities,
net of effects from acquisitions:
Accounts receivable (11,352) (1,644) 8,562
Inventories 9,638 (1,524) 5,493
Accounts payable and accrued liabilities (18,007) (1,422) (9,929)
Other (4,158) (7,615) (98)
-------- -------- --------
Net cash flow from operating activities 30,249 42,018 47,270
-------- -------- --------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (27,313) (23,099) (36,555)
Disposals of property, plant and equipment 6,716 1,460 3,968
Purchase of Hertel AG, net of cash (19,595) - -
Other (2,344) (2,373) (2,503)
-------- -------- --------
Net cash flow used for investing activities (42,536) (24,012) (35,090)
-------- -------- --------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt 11,246 (7,310) (1,536)
Increase in term debt 5,715 1,000 700
Reduction in term debt (64,098) (9,266) (4,473)
Net proceeds from issuance of common stock 73,594 - -
Dividend reinvestment and employee stock
plans 8,658 4,301 3,666
Cash dividends paid to shareholders (14,015) (12,579) (12,440)
Other 2,731 1,180 (371)
-------- -------- --------
Net cash flow from (used for)
financing activities 23,831 (22,674) (14,454)
-------- -------- --------
Effect of exchange rate changes on cash 1,497 (190) (7)
-------- -------- --------
CASH AND EQUIVALENTS
Net increase (decrease) in cash and
equivalents 13,041 (4,858) (2,281)
Cash and equivalents, beginning 4,149 9,007 11,288
-------- -------- --------
Cash and equivalents, ending $ 17,190 $ 4,149 $ 9,007
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 12,403 $ 9,617 $ 10,564
Income taxes paid 16,296 13,232 9,221
The accompanying notes are an integral part of these statements.
(Page 23)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management has prepared the accompanying consolidated financial
statements in accordance with generally accepted accounting
principles. The summary of significant accounting policies
within these principles is presented below to assist in
evaluating the company's financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial
statements include the accounts of the company and its majority-
owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
CASH EQUIVALENTS. Temporary cash investments having original
maturities of three months or less are considered cash
equivalents. Cash equivalents consist principally of investments
in money market funds and certificates of deposit.
ACCOUNTS RECEIVABLE include $6,293,000 and $3,786,000 of
receivables from affiliates at June 30, 1994 and 1993,
respectively.
INVENTORIES are carried at the lower of cost or market. The
company uses the last-in, first-out (LIFO) method for determining
the cost of a significant portion of its domestic inventories.
The remainder of inventories are determined under the first-in,
first-out (FIFO) or average cost methods.
PROPERTY, PLANT AND EQUIPMENT are carried at cost. Major
additions and betterments are capitalized, while maintenance and
repairs which do not improve or extend the lives of the
respective assets are 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 construction of major facilities. Capitalized
interest, which is included in the asset's cost, is amortized
over the estimated useful life of the asset.
DEPRECIATION, for financial reporting purposes, is computed using
the straight-line method over the estimated useful lives of the
assets ranging from 4 to 40 years. Assets recorded under capital
leases are amortized over the term of the related leases by use
of the straight-line method.
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 5 to 40 years.
RESEARCH AND DEVELOPMENT costs are expensed as incurred.
INCOME TAXES. Effective July 1, 1993, the company adopted
Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes." The statement requires the use of
an asset and liability approach for financial accounting and
reporting for income taxes. If it is more likely than not that
some portion or all of a deferred tax asset will not be realized,
a valuation allowance is recognized.
The company does not provide for federal income taxes on
unremitted earnings of non-U.S. subsidiaries and unconsolidated
affiliates. Any federal income taxes on such earnings, if
remitted, would generally be offset by available foreign tax
credits. There were no significant unremitted earnings from
unconsolidated affiliates at June 30, 1994.
FOREIGN CURRENCY TRANSLATION. For the most part, assets and
liabilities of non-U.S. operations are translated into U.S.
dollars using year-end exchange rates, while revenues and
expenses are translated at average exchange rates throughout the
year. The resulting net translation adjustments are recorded as
a separate component of shareholders' equity.
EARNINGS PER SHARE is computed using the weighted average number
of shares outstanding during the year. Weighted average shares
outstanding were 24,304,000, 21,712,000 and 21,452,000 in 1994,
1993 and 1992, respectively.
PENSION PLANS cover substantially all employees. Pension
benefits are based on years of service and, for certain plans, on
average compensation immediately preceding retirement. Pension
costs are determined in accordance with 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.
2 ACQUISITION AND RESTRUCTURING
On August 4, 1993, the company completed the acquisition of an 81
percent interest in Hertel AG (Hertel) for $43 million in cash
and $55 million of assumed debt. Hertel is a manufacturer of
cemented carbide tools and tooling systems based in Furth,
Germany.
The Hertel acquisition was recorded under the purchase method of
accounting and, accordingly, the results of operations of Hertel
for the period beginning as of August 4, 1993, forward are
included in the accompanying consolidated financial statements.
The purchase price has been allocated to assets acquired and
liabilities assumed based on fair market value at the date of
acquisition. The excess of the purchase price over the fair
market value of the net assets acquired has been recorded as
goodwill and is being amortized over twenty years.
(Page 24)
The fair values (as adjusted) of assets acquired and liabilities
assumed are summarized below:
(Dollars in thousands)
- - - --------------------------------------------------------
Current assets $114,800
Property, plant and equipment 70,200
Intangible assets (goodwill) 5,300
Deferred tax asset (Note 7) 40,600
Other noncurrent assets 10,500
Current liabilities 104,100
Long-term liabilities 89,400
As presented above, current liabilities includes a reserve of
approximately $36.0 million (pretax) for the restructuring of
Hertel. The restructuring costs primarily include amounts for
severance, phaseout and relocation. The charges to the
restructuring reserve were $16.1 million, leaving a balance of
$20.3 million at June 30, 1994. It is expected that the
restructuring, which began in fiscal 1994, will be substantially
completed during fiscal year 1995.
In connection with the acquisition of Hertel, the company
recognized a special charge in the September 1993 quarter of
approximately $20.4 million after taxes in connection with the
closure of its manufacturing facility in Neunkirchen, Germany,
and other integration related actions. The charges to the
related reserve were $18.5 million, a significant portion of
which was cash charges, leaving a balance of $6.2 million at June
30, 1994. It is expected that the spending related to this
charge will be substantially completed during fiscal year 1995.
The effect of the purchase on the company's operations, assuming
the transaction had occurred on July 1, 1992, would be as
follows:
PRO FORMA (UNAUDITED)
(Dollars in thousands, except per share data) 1994 1993
- - - -----------------------------------------------------------------------
Net sales $815,195 $808,711
======== ========
Income before cumulative
effect of accounting changes $ 9,136 $ 15,156
======== ========
Net income (loss) $ (5,867) $ 15,156
======== ========
Per share data:
Earnings before cumulative
effect of accounting changes $ 0.38 $ 0.70
Cumulative effect of accounting changes:
Postretirement benefits (0.83) -
Income taxes 0.21 -
-------- --------
Earnings (loss) per share $ (0.24) $ 0.70
======== ========
The pro forma financial information presented above does not
purport to present what the company's results of operations would
actually have been if the acquisition of Hertel had occurred on
July 1, 1992, or to project the company's results of operations
for any future period.
3 INVENTORIES
Inventories consisted of the following:
(Dollars in thousands) 1994 1993
- - - -----------------------------------------------------------------------
Finished goods $112,202 $ 97,365
Work in process and powder blends 54,831 38,177
Raw materials and supplies 20,571 8,803
-------- --------
Inventories at current cost 187,604 144,345
Less LIFO valuation (29,425) (29,115)
-------- --------
Total inventories $158,179 $115,230
======== ========
Inventories are stated at lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for a
significant portion of domestic inventories and the first-in,
first-out (FIFO) method or average cost for other inventories.
The company used the LIFO method of valuing its inventories for
approximately 55 percent and 70 percent of total inventories at
June 30, 1994 and 1993, respectively. The company uses the LIFO
method for valuing the majority of its inventories in order to
match more closely current costs with current revenues, thereby
reducing the effects of inflation on earnings.
4 CURRENT LIABILITIES
Included in other current liabilities at June 30 were the
following:
(Dollars in thousands) 1994 1993
- - - --------------------------------------------------------------------
Accrued liabilities related to restructuring $ 25,631 $ -
Accrued compensation 11,961 4,299
Payroll, state and local taxes 8,172 3,289
Federal and state income taxes 5,546 4,633
Accrued warranty 4,651 -
Postretirement benefits other than pensions 2,074 -
Accrued interest 1,114 1,303
Other accrued expenses 18,044 7,012
-------- --------
Total other current liabilities $ 77,193 $ 20,536
======== ========
(Page 25)
5 TERM DEBT AND CAPITAL LEASES
Term debt and capital lease obligations consisted of the
following:
(Dollars in thousands) 1994 1993
- - - --------------------------------------------------------------------------
Senior notes, 9.64%, due in installments
through 2000 $ 50,000 $ 50,000
Notes payable under domestic revolving
credit agreements, varying from 3.70%
to 3.75% (1993) - 20,000
Industrial Revenue Notes, 8.05% tax exempt,
due in installments through 1996 1,667 6,000
Foreign borrowings, varying
from 5.0%-10.25% (1994) and
5.0%-8.4% (1993), due in
installments through 2006 20,291 6,116
Lease of office facilities with
lease periods expiring through 2010
at 6.75% - 7.55% 13,182 -
Other 9,402 7,959
-------- --------
Total term debt and capital leases 94,542 90,075
Less current maturities:
Term debt (2,811) (2,184)
Capital leases (1,553) -
-------- --------
(4,364) (2,184)
-------- --------
Long-term debt and capital leases $ 90,178 $ 87,891
======== ========
Future principal maturities of term debt are $2.8 million, $15.2
million, $17.4 million, $12.5 million and $12.3 million,
respectively, in fiscal years 1995 through 1999.
Certain of the term debt agreements contain various restrictions
relating to, among other things, net worth, incurrence of
additional debt, transactions in the company's own stock and
dividends.
Minimum lease payments under capital leases expiring subsequent
to June 30, 1994, are (in thousands):
YEARS ENDED
1995 $ 1,553
1996 1,553
1997 1,553
1998 1,553
1999 1,553
Thereafter 14,449
---------
Total minimum lease payments 22,214
Less amount representing interest (9,032)
---------
Present value of net minimum lease payments $ 13,182
=========
The company has no significant obligations under operating lease
agreements.
6 NOTES PAYABLE AND LINES OF CREDIT
Notes payable to banks of $52.8 million at June 30, 1994, and
$20.6 million at June 30, 1993, represent short-term borrowings
under domestic and foreign credit lines with banks.
Domestic and foreign credit lines totaled approximately
$225 million of which $172 million was unused at June 30, 1994.
Domestic credit lines are covered by one revolving credit
agreement totaling $90 million. Borrowings under this agreement
are available at fixed or variable interest rates. The credit
lines expire during fiscal 1995 and 1996 and require the company
to pay a facility fee on the total line or a commitment fee on
unborrowed amounts under one of the lines. The company has the
option to terminate this agreement in whole or in part at any
time.
7 INCOME TAXES
Effective July 1, 1993, the company adopted SFAS No. 109
"Accounting for Income Taxes." The company previously accounted
for income taxes pursuant to the provisions of APB No. 11. The
new standard requires the use of the liability method to
recognize deferred income tax assets and liabilities using
enacted tax rates. Financial statements for prior years have not
been restated to apply the provisions of SFAS No. 109. As a
result of implementing the change in accounting principle, a net
deferred tax liability of $5.6 million was recognized relating to
net operating loss carryforwards and other tax attributes
existing as of July 1, 1993. In addition, the income tax effect
of the new method of accounting related to the company's adoption
of SFAS No. 106 as of July 1, 1993, was the recognition of
additional deferred tax assets of $13.9 million. The combined
effect of these items resulted in the recognition of an $8.3
million net deferred tax asset and a net income tax benefit of
$5.1 million.
The current provisions for income taxes, excluding the effects of
accounting changes, consisted of the following:
(Dollars in thousands) 1994 1993 1992
- - - ------------------------------------------------------------
Federal $15,000 $ 7,100 $ 6,000
State 3,100 2,000 800
Foreign (900) 2,000 3,500
------- ------- -------
Total $17,200 $11,100 $10,300
======= ======= =======
(Page 26)
The components of income before taxes on income were as follows:
(Dollars in thousands) 1994 1993 1992
- - - -------------------------------------------------------------
Domestic $39,095 $33,655 $19,920
Foreign (13,111) 439 1,052
------- ------- -------
Total $25,984 $34,094 $20,972
======= ======= =======
The reconciliation of the difference between income taxes
computed using the statutory U.S. income tax rate and the
provision for income taxes is as follows:
(Dollars in thousands) 1994 1993 1992
- - - --------------------------------------------------------------
Income taxes at U.S.
statutory rate $ 9,094 $11,592 $ 7,130
State taxes, net of federal
income tax benefit 2,018 1,331 540
Foreign tax effects 2,883 (255) 1,674
Foreign losses not
currently benefited 2,325 540 249
Divestiture of subsidiary - - (921)
Other (820) 792 (572)
------- ------- -------
Total provision
for income taxes $15,500 $14,000 $ 8,100
======= ======= =======
Deferred tax assets and liabilities as of June 30, 1994, and
July 1, 1993, were comprised of the following:
June 30, July 1,
(Dollars in Thousands) 1994 1993
- - - -------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $50,839 $ 1,086
Deductible temporary differences:
Inventories 8,071 6,375
Property, plant and equipment 3,889 1,902
Vacation pay 3,471 3,287
Pensions and other long-term liabilities 1,630 2,288
Postretirement benefits other than pensions 13,972 13,940
Other deductible temporary differences 4,575 2,424
------- -------
Total deferred tax assets 86,447 31,302
Valuation allowance (5,760) (1,086)
------- -------
Net deferred tax asset $80,687 $30,216
======= =======
Deferred tax liabilities:
Accumulated depreciation $20,617 $21,953
======= =======
The sources of deferred income taxes in 1993 and 1992 were as
follows:
(Dollars in thousands) 1993 1992
- - - --------------------------------------------------------------------------
Depreciation $ 200 $ 200
Inventory 400 (600)
Patent litigation 2,200 -
Vacation pay 200 (1,000)
Other timing differences (100) (800)
------- -------
Total $ 2,900 $(2,200)
======= =======
As a component of its cumulative adjustment from implementing
SFAS No. 109, the company recognized a charge of $1.1 million to
establish a valuation reserve related to certain tax attributes
comprising its net deferred tax asset. As of July 1, 1993,
deferred tax liabilities associated with existing taxable
temporary differences exceeded deferred tax assets from future
deductible temporary differences, excluding those attributable to
SFAS No. 106, by approximately $5.7 million. The recognition by
the company as of July 1, 1993, of the entire transition
obligation related to adopting the provisions of SFAS No. 106
resulted in the recognition of a $13.9 million deferred tax
asset. Future operating costs under SFAS No. 106 are expected to
exceed deductible amounts for income tax purposes for many years.
In addition, under current federal tax regulations, should the
company incur tax losses in future periods, such losses may be
carried forward to offset taxable income for a period of up to 15
years. Based upon the length of the period during which the SFAS
No. 106-generated deferred tax asset can be utilized, the company
believes that it is more likely than not that future taxable
income will be sufficient to offset fully these future deductions
and a valuation allowance for this deferred tax asset is not
necessary.
At June 30, 1994, the company had unused tax benefits of $50.8
million related to non-U.S. net operating loss (NOL)
carryforwards for income tax purposes, of which $46.7 million can
be carried forward indefinitely with the balance expiring at
various dates through 2001. A significant portion ($46.7
million) of the unused tax benefits relate to the Federal
Republic of Germany (Germany).
The net change in the valuation allowance for deferred tax assets
was an increase of $4.7 million in fiscal 1994 and relates to the
acquired NOL carryforwards generated by Hertel subsidiaries prior
to the date of acquisition and losses generated by foreign
subsidiaries in fiscal 1994. A valuation allowance has been
established for those tax credits which are not expected to be
realized. No net benefit has been given to the non-German NOL
carryforwards because of the limited carryforward periods and/or
the uncertain business conditions relating to the operations
giving rise to such carryforwards.
The company believes that it is more likely than not that $45.1
million of NOL carryforwards will be utilized in future periods.
The recorded tax benefits are expected to be realized by
achieving future profitable operations in Germany. The German
NOL carryforwards can be carried forward indefinitely.
(Page 27)
The $45.1 million of NOL carryforwards relate principally to
those generated by Hertel in Germany prior to the date of
acquisition. Based on average exchange rates in effect during
the respective periods, Hertel had sales of approximately $229
million, $201 million and $136 million for calendar 1991, 1992
and the first six months of 1993 and sustained net losses for
those periods of approximately $44.2 million, $60.5 million and
$13.5 million, respectively. While Hertel recorded significant
tax losses in Germany in the periods immediately preceding the
acquisition, prior to those periods the company had a history of
profitability. The company was founded in Germany in 1947 and
has operated continuously since that time. Prior to the
acquisition, Hertel had undertaken a major restructuring program
to improve performance by implementing a cost reduction program
and enhancing asset utilization. Additionally, subsequent to the
acquisition, Kennametal implemented a plan of integration and
restructuring at Hertel which was designed to improve Hertel's
profitability by lowering working capital requirements, reducing
overall expenses and improving capacity utilization.
In addition, Kennametal has a history of profitability in
Germany. Kennametal G.m.b.H., Kennametal's wholly-owned
subsidiary in Germany, has operated profitably in Germany since
its inception in 1964. Kennametal is currently in the process of
integrating and rationalizing its businesses with that of Hertel.
As part of this rationalization, Kennametal has closed its German
manufacturing facility and consolidated other operations.
Based upon the above described facts and circumstances and the
improved financial results of Hertel since the date of
acquisition, Kennametal believes that it will continue to gain
substantial efficiencies and cost savings through rationalizing
the combined Kennametal/Hertel German operations and thereby
achieve future profitable operations sufficient to realize the
recorded tax benefits.
8 PENSION BENEFITS
The following table sets forth the funded status of the company's
U.S. pension plans and the amounts recognized in the consolidated
balance sheets at June 30, 1994 and 1993:
(Dollars in thousands) 1994 1993
- - - ---------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $119,025 $113,041
Nonvested benefits 2,881 4,129
-------- --------
Accumulated benefit obligation 121,906 117,170
Value of future salary projections 39,442 35,866
-------- --------
Projected benefit obligation 161,348 153,036
Fair value of plan assets 203,715 201,622
-------- --------
Plan assets in excess of projected
benefit obligation 42,367 48,586
Amounts not recognized in
the financial statements:
Unrecognized net asset from July 1, 1986 (18,868) (21,048)
Unrecognized prior service cost 1,299 1,609
Unrecognized net gain (21,959) (28,657)
Adjustment to recognize minimum liability (1,624) -
-------- --------
Prepaid pension asset at June 30 $ 1,215 $ 490
======== ========
Plan assets consist principally of common stocks, corporate bonds
and U.S. government securities. The discount rate used in
determining the actuarial present value of benefit obligations
was 8.25 percent for 1994 and 1993, and the rate of increase in
future compensation levels was 5 percent for 1994 and 5.25
percent for 1993. The expected long-term rate of return on
assets was 9 percent for 1994 and 1993.
The components of net pension expense (credit) for the company's
U.S. pension plans were as follows:
(Dollars in thousands) 1994 1993 1992
- - - ------------------------------------------------------------------------
Service cost-benefits earned
during the period $ 5,777 $ 6,338 $ 6,355
Interest cost on projected
benefit obligation 12,345 12,644 11,601
Return on plan assets (8,885) (27,814) (24,873)
Net amortization and deferral (11,099) 9,946 8,011
-------- -------- --------
Net pension expense (credit) $ (1,862) $ 1,114 $ 1,094
======== ======== ========
Pension plans of certain non-U.S. subsidiaries are not required
to report to U.S. government agencies pursuant to ERISA. In
connection with the acquisition of Hertel, the company assumed
the unfunded vested benefit obligations of Hertel. The unfunded
vested benefit obligation at June 30, 1994, was $12.4 million and
is included in other noncurrent liabilities on the consolidated
balance sheet. There were no significant unfunded vested
benefits for the company's non-U.S. pension plans at June 30,
1993.
(Page 28)
Total pension expense (credit) for U.S. and non-U.S. plans
amounted to $(1,196,000), $1,799,000 and $2,446,000 in 1994, 1993
and 1992, respectively.
9 OTHER POSTRETIREMENT BENEFITS
The company provides varying levels of postretirement health care
and life insurance benefits to most U.S. employees who retire
from active service after having attained age 55 and 10 years of
service. This plan remains in effect for all current retirees
and employees who will retire prior to January 1, 1997. However,
for those employees retiring on or after January 1, 1997, the
following plan amendments will be effective. The company's
retiree health care payments will be capped at 1996 levels. To
qualify for medical benefits at normal retirement (age 65 or
later), employees must have a minimum of 5 years of service after
age 40. Medical benefits will be available for only those
retirements that begin on or after the normal retirement age of
65.
Effective July 1, 1993, the company adopted SFAS No. 106
"Employers' Accounting for Postretirement Benefits Other Than
Pensions." These benefits are now accrued over the period the
employee provides services to the company (accrual basis). Prior
to the change, costs were charged to expense as incurred (cash
basis). The accounting change resulted in a one-time charge to
earnings of $20.1 million, net of taxes of $13.9 million.
Postretirement benefit expense was $3.9 million in 1994
(including $2.1 million due to the application of the new rule),
$1.9 million in 1993 and $1.6 million in 1992.
The following table presents the components of the company's
liability for future retiree health care and life insurance
benefits as of June 30, 1994, and July 1, 1993:
June 30, July 1,
(Dollars in thousands) 1994 1993
- - - ------------------------------------------------------------------------
Accumulated postretirement benefit obligations:
Retirees $(14,800) $(15,100)
Fully eligible active participants (8,000) (7,600)
Other active participants (13,000) (11,300)
-------- --------
Total obligation (35,800) (34,000)
Assets at fair value - -
-------- --------
Accrued postretirement benefit liability $(35,800) $(34,000)
======== ========
As of June 30, 1994, the company's accrued postretirement benefit
liability was $35.8 million. The long-term portion of the
accrued liability, $33.8 million, is included in other noncurrent
liabilities on the consolidated balance sheet.
The components of retiree health care expense for 1994 were as
follows:
(Dollars in thousands) 1994
- - - -------------------------------------
Service cost $1,080
Interest cost 2,820
------
Total cost $3,900
======
The discount rate used in calculating the accumulated
postretirement benefit obligations was 8.5 percent. In
determining the accumulated postretirement benefit obligations at
July 1, 1993 and June 30, 1994, the assumed rates of increase in
health care costs were 15 percent for retirees under age 65 and
10 percent for persons age 65 and older. These rates are assumed
to decrease in varying degrees annually to 6 percent for years
2002 and thereafter. A 1 percent increase in the trend rate
would increase both the accumulated postretirement benefit
obligation at June 30, 1994, and the total cost of the plan for
fiscal year 1994 by approximately 8 percent. The accumulated
postretirement benefit obligation is unfunded.
In November 1992, the Financial Accounting Standards Board issued
Statement No. 112 "Employers' Accounting for Postemployment
Benefits." Under the new standard, the company must recognize
the obligation to provide benefits to former or inactive
employees after employment, but before retirement. The company
must adopt this new standard no later than fiscal 1995.
Management does not expect that the implementation of the new
standard will have a significant effect on the results of
operations or financial position of the company.
10 FINANCIAL INSTRUMENTS
FAIR VALUE. The company had $17.2 million in cash and cash
equivalents at June 30, 1994, which approximates fair value
because of the short maturity of these investments.
The estimated fair value of the company's term debt was $84.1
million at June 30, 1994. The fair value of the company's term
debt was estimated using discounted cash flow analyses, based on
the company's incremental borrowing rates for similar types of
borrowing arrangements.
(Page 29)
OFF-BALANCE-SHEET RISK. The company is a party to financial
instruments with off-balance-sheet risk in the normal course of
business to reduce its own exposure to fluctuations in currency
exchange rates. These financial instruments include forward
currency contracts which involve credit risk in excess of the
amount recognized in the financial statements. The company
believes that the actual exposure to loss is minimal and
immaterial. As of June 30, 1994, the company had no financial
instruments with significant off-balance-sheet risk.
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 places its temporary cash
investments with high credit quality financial institutions.
Concentrations of credit risks with respect to trade receivables
are limited because there are a large number of customers in the
company's customer base spread across many industries and
geographic areas. As of June 30, 1994, the company had no
significant concentrations of credit risk.
11 SHAREHOLDERS' EQUITY
On August 1, 1994, the company's Board of Directors authorized a
2-for-1 stock split in the form of a stock dividend payable on
August 22, 1994, to shareholders of record August 10, 1994. The
split resulted in the issuance of 14,684,829 additional shares of
common stock from authorized but unissued shares. The stated par
value of each share was not changed from $1.25. The issuance of
authorized but unissued shares resulted in the transfer of $18.4
million from additional paid-in capital to capital stock,
representing the par value of the shares issued. All references
in the financial statements to average number of shares
outstanding and related prices, per share amounts and stock
option plan data have been restated to reflect the split.
12 STOCK OPTIONS
Under stock option plans approved by shareholders in 1992 and
1988, stock options are granted to eligible employees at a price
not less than fair market value at the date of grant. Options
are exercisable under specified conditions for up to ten years
from the date of grant. No options may be granted under the 1988
plan after October 1998 and no options may be granted under the
1992 plan after October 2002. No charges to income have resulted
from the operation of the plans.
Under provisions of the plans, participants may deliver
Kennametal stock in payment of the option price and receive
credit for the fair market value of the shares on the date of
delivery. Shares valued at $1,246,000 (62,934 shares), $328,000
(20,668 shares) and $307,000 (18,668 shares) were delivered in
1994, 1993 and 1992, respectively.
Under the 1992 and 1988 plans, shares may be awarded to eligible
employees without payment. The respective plans specify such
shares are awarded in the name of the employee, who has all the
rights of a shareholder, subject to certain restrictions or
forfeitures. To date, no such awards have been made.
Transactions under the company's stock option plans were as
follows:
Number of Shares 1994 Option
--------------------------------- Prices
1994 1993 1992 Per Share
-------- ---------- -------- ------------
Options outstanding,
beginning of year 914,616 1,115,384 940,760 $17.32-11.41
Granted 100,000 42,000 348,500 20.53
Exercised (508,966) (201,196) (170,676) 17.32-11.41
Lapsed and forfeited (30,000) (41,572) (3,200) 16.94-14.50
------- --------- --------- ------------
Options outstanding,
end of year 475,650 914,616 1,115,384 $20.53-14.06
======= ========= ========= ============
Exercisable at year-end 235,504 741,710 917,182 $16.94-14.06
======= ========= ========= ============
Available for
future grant 961,290 1,031,290 40,894
======= ========= =========
13 SHAREHOLDER RIGHTS PLAN
During fiscal 1991, the company adopted a Shareholder Rights Plan
to protect shareholders against abusive takeover tactics and to
preserve the company's long-range strategic plans from
disruption. The Board of Directors declared a distribution of
one preferred stock purchase right for each outstanding share of
capital stock of the company. Each right will entitle a
shareholder to buy one one-hundredth 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 company's capital stock, each right will
entitle the shareholder to receive that number of shares of the
company's capital stock having a market value of two times the
exercise price. If the company is acquired in a merger or other
business combination, each right will entitle the shareholder to
purchase at the exercise price, that number of shares of the
acquiring company having a market value of two times the exercise
price.
(Page 30)
The rights will expire on November 2, 2000, and are subject to
redemption by the company at $0.01 per right.
14 SEGMENT DATA
The company operates predominantly as a tooling supplier
specializing in powder metallurgy. The following is information
about the company's operations by geographic area:
(Dollars in thousands) 1994 1993 1992
- - - --------------------------------------------------------------------------
Sales:
Gross sales:
United States $610,320 $512,748 $500,141
Europe and other 296,702 156,183 159,637
-------- -------- --------
Total 907,022 668,931 659,778
-------- -------- --------
Less intersegment transfers:
United States 70,005 52,492 49,718
Europe and other 34,504 17,943 15,527
-------- -------- --------
Total 104,509 70,435 65,245
-------- -------- --------
Net sales $802,513 $598,496 $594,533
======== ======== ========
Operating income:
United States $ 47,560 $ 39,452 $ 28,876
Europe and other (8,263) 1,483 1,710
-------- -------- --------
Total operating income 39,297 40,935 30,586
-------- -------- --------
Eliminations (1,362) 451 509
Interest expense (13,811) ( 9,549) (10,083)
Patent litigation income - 1,738 -
Other income (expense) 1,860 519 (40)
-------- -------- --------
Income before taxes on income $ 25,984 $ 34,094 $ 20,972
======== ======== ========
Identifiable assets:
United States $422,517 $359,996 $370,250
Europe and other 279,558 94,730 100,417
Eliminations (26,455) (18,316) (14,382)
Corporate 21,912 11,853 15,882
-------- -------- --------
Total assets $697,532 $448,263 $472,167
======== ======== ========
Intersegment transfers are accounted for at arm's-length prices
reflecting prevailing market conditions within the various
geographic areas. Such sales and associated costs are eliminated
in the consolidated financial statements. Operating income is
defined as net sales less costs and expenses, except interest
expense, patent litigation income and other income (expense).
Identifiable assets are those assets that are identified with the
operations in each geographic area. Corporate assets consist
mainly of cash equivalents, investments in unconsolidated
affiliates and the cash surrender value of life insurance.
Sales to a single customer did not aggregate ten percent or more
of total sales. Export sales from U.S. operations to
unaffiliated customers were $22.7 million, $21.7 million and
$16.2 million in 1994, 1993 and 1992, respectively.
15 PATENT LITIGATION
During 1991, a trial court awarded $7.1 million in damages, plus
attorneys' fees, to GTE Products Corporation (GTE) in a patent
infringement suit filed against the company in the Federal
District Court for the Western District of Virginia. The suit
involved an infringement of a GTE patent on certain styles of
carbide cutter bits used in the road planing industry.
In connection with this litigation, the company recorded a pretax
charge to earnings in fiscal 1991 totaling $6.4 million ($0.18
per share). Kennametal settled this suit with GTE for $5.8
million in cash which resulted in a one-time gain of $1.0 million
(after-tax), or $0.05 per share in fiscal 1993.
16 PENDING LITIGATION
The company has been involved in various environmental clean-up
and remediation activities at several of its manufacturing
facilities. In addition, the company has been named as a
potentially responsible party at four Superfund sites in the
United States. However, it is management's opinion, based on its
evaluations and discussions with outside counsel and independent
consultants, that the ultimate resolution of these environmental
matters will not have a material adverse effect on the results of
operations or financial position of the company.
The company maintains a Corporate Environmental, Health and
Safety (EH&S) Department to effect compliance with all
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."
(Page 31)
QUARTERLY FINANCIAL DATA (UNAUDITED)
SELECTED QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share data)
NET EARNINGS
NET GROSS INCOME (LOSS)
SALES PROFIT (LOSS) PER SHARE
-------- -------- ---------
Year ended
June 30, 1994
First quarter $175,665 $ 70,018 $(33,057) $ (1.51)
Second quarter 195,167 76,913 4,088 $ 0.18
Third quarter 211,809 88,429 11,090 $ 0.43
Fourth quarter 219,872 94,620 13,791 $ 0.52
-------- -------- --------
Fiscal year $802,513 $329,980 $ (4,088) $ (0.17)
======== ======== ========
Year ended
June 30, 1993
First quarter $148,830 $ 58,976 $ 3,025 $ 0.14
Second quarter 140,697 54,574 2,078 $ 0.10
Third quarter 153,691 64,943 7,333 $ 0.34
Fourth quarter 155,278 67,230 7,658 $ 0.35
-------- -------- --------
Fiscal year $598,496 $245,723 $ 20,094 $ 0.93
======== ======== ========
Earnings (loss) per share amounts for each quarter are required
to be computed independently and, therefore, may not equal the
amount computed for the year.
The net loss for the first quarter of fiscal 1994 included the
unfavorable cumulative noncash effect of adopting SFAS No. 106
($20.1 million net of income tax effect) and the favorable
cumulative noncash effect of adopting SFAS No. 109 ($5.1
million). In addition to the cumulative effect of changes in
accounting principles, first quarter 1994 results included a
restructuring charge of $20.4 million (after taxes) relating to
the acquisition of an 81 percent interest in Hertel.
In the second quarter of fiscal 1993, the company recorded an
after-tax gain of $1.0 million ($0.05 per share) relating to the
settlement of the GTE patent litigation.
STOCK PRICE RANGES AND DIVIDENDS PAID (UNAUDITED)
Kennametal's capital stock is traded on the New York Stock
Exchange (symbol KMT).
The approximate number of shareholders of record as of August 10,
1994, was 2,828.
Stock price ranges and dividends paid during each quarter were as
follows:
1994 1993 Dividends Paid
--------------------- -------------------- ------------------------
Quarter High Low High Low 1994 1993
- - - ------- -------- -------- --------- ------- --------- ----------
First quarter $19 1/16 $15 3/8 $17 1/4 $13 $0.145 $0.145
Second quarter 23 18 3/16 14 11/16 12 15/16 0.145 0.145
Third quarter 29 9/16 21 1/16 16 3/4 14 0.145 0.145
Fourth quarter 29 9/16 23 1/8 19 7/8 15 13/16 0.145 0.145
-------- -------- --------- --------- ------ ------
Fiscal year $29 9/16 $15 3/8 $19 7/8 $12 15/16 $ 0.58 $ 0.58
======== ======== ========= ========= ====== ======
REPORT OF MANAGEMENT
TO THE SHAREHOLDERS OF KENNAMETAL INC.
The management of Kennametal Inc. is responsible for the
integrity of all information contained in this report. The
financial statements and related information were prepared by
management in accordance with generally accepted accounting
principles and, as such, contain amounts that are based on
management's best judgment and estimates.
Management maintains a system of policies, procedures and
controls designed to provide reasonable, but not absolute,
assurance that the financial data and records are reliable in all
material respects and that assets are safeguarded from improper
or unauthorized use. The company maintains an active internal
audit department which 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 conduct, and management employees
are required annually to submit certificates of compliance with
this code.
ROBERT L. MCGEEHAN
- - - ------------------------------------------
Robert L. McGeehan
President and Chief Executive Officer
RICHARD J. ORWIG
- - - ------------------------------------------
Richard J. Orwig
Vice President
Chief Financial and Administrative Officer
(Page 32)
REPORT OF AUDIT COMMITTEE
The Audit Committee of the Board of Directors is composed of
three independent directors and met four times during fiscal year
1994.
The Audit Committee's charter is to monitor Kennametal'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 & Co. as the company's independent public accountants.
The Audit Committee reviewed with the internal auditors and the
independent 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 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.
DICK ALBERDING
- - - -------------------------
Richard C. Alberding
Chairman, Audit Committee
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF KENNAMETAL INC.
We have audited the accompanying consolidated balance sheets of
Kennametal Inc. and subsidiaries as of June 30, 1994 and 1993,
and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period
ended June 30, 1994. These financial statements are the
responsibility of the company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Kennametal Inc. and subsidiaries as of June 30, 1994
and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1994, in
conformity with generally accepted accounting principles.
As discussed in Notes 7 and 9, to the consolidated financial
statements, effective July 1, 1993, the Company changed its
methods of accounting for income taxes and postretirement
benefits other than pensions.
ARTHUR ANDERSEN & CO.
- - - ------------------------
Arthur Andersen & Co.
Pittsburgh, Pennsylvania
August 1, 1994
(Page 33)
ELEVEN YEAR SUMMARY
(Dollars in thousands, except per share data)
Fiscal year ended June 30
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
- - - -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA: (1)
Earnings (loss) $ (0.17) $ 0.93 $ 0.60 $ 1.00 $ 1.54 $ 1.45 $ 1.19 $ 0.85 $ 0.03 $ 0.76 $ 0.48
Dividends 0.58 0.58 0.58 0.58 0.58 0.56 0.52 0.485 0.43 0.39 0.36
Book value 12.25 11.64 11.64 11.42 11.02 9.84 9.04 8.15 7.58 8.67 8.40
- - - ------------------------------------------------------------------------------------------------------------------------------------
RESULTS OF
OPERATIONS:
Net sales $802,513 $598,496 $594,533 $617,833 $589,023 $472,200 $419,900 $354,450 $355,377 $341,342 $319,343
Cost of goods sold 472,533 352,773 362,967 358,529 342,434 274,929 244,026 205,682 217,999 196,593 197,527
Operating
expenses (2) 263,300 200,912 196,992 200,288 179,259 138,346 124,074 112,432 111,167 107,923 96,611
Unusual charges
(credits) (3) 24,749 (1,738) - 6,350 - - - - 20,402 - -
Pretax income 25,984 34,094 20,972 38,386 55,113 50,894 43,419 31,600 771 34,312 22,860
Income taxes 15,500 14,000 8,100 17,300 23,000 20,900 19,100 14,400 200 15,289 10,900
Minority interest in
losses of Hertel AG 431 - - - - - - - - - -
Accounting
changes (4) (15,003) - - - - - - - - - -
Net income (loss) (4,088) 20,094 12,872 21,086 32,113 29,994 24,319 17,200 571 19,023 11,960
- - - ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION:
Working capital $130,777 $120,877 $108,104 $ 88,431 $108,954 $ 91,032 $ 99,565 $102,271 $101,442 $125,822 $125,449
Plant and equipment
(net) 243,098 192,305 200,502 193,830 175,523 166,390 161,788 139,815 126,734 129,202 123,287
Total assets 697,532 448,263 472,167 476,194 451,379 383,252 359,258 326,994 300,024 327,456 322,333
Long-term debt
and capital leases 90,178 87,891 95,271 73,113 81,314 57,127 74,405 72,085 69,286 34,053 35,234
Shareholders'
equity (5) 322,836 255,141 251,511 243,535 231,598 204,465 186,238 166,190 153,325 216,122 211,027
- - - ------------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Capital expenditures $ 27,313 $ 23,099 $ 36,555 $ 55,323 $ 35,998 $ 28,491 $ 46,336 $ 34,111 $ 24,083 $ 24,276 $ 15,536
Depreciation 39,236 27,502 27,849 28,642 27,043 25,161 23,134 19,684 17,538 16,438 15,274
Number of employees
(at year-end) 6,598 4,850 4,980 5,360 5,580 5,420 4,990 4,760 4,800 5,470 5,540
Average shares out-
standing (in
thousands) (1) 24,304 21,712 21,452 21,094 20,872 20,696 20,526 20,322 20,582 25,138 24,958
- - - ------------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL
RATIOS:
Sales growth 34.1% 0.7% (3.8)% 4.9% 24.7% 12.5% 18.5% (0.3)% 4.1% 6.9% 18.0%
Gross margin (6) 41.1 41.1 38.9 42.0 41.9 41.8 41.9 42.0 38.7 42.4 38.1
Operating margin (7) 8.3 7.5 5.8 9.6 11.4 12.5 12.3 10.3 7.4 10.8 7.9
Pretax margin 3.2 5.7 3.5 6.2 9.4 10.8 10.3 8.9 0.2 10.1 7.2
Effective tax rate 59.7 41.1 38.6 45.1 41.7 41.1 44.0 45.6 25.9 44.6 47.7
Net margin (8) (0.5) 3.4 2.2 3.4 5.5 6.4 5.8 4.9 0.2 5.6 3.7
Return on average
equity (9) (1.5) 8.1 5.2 8.7 14.9 15.4 13.9 10.9 0.4 8.9 5.8
Total debt to
capital ratio 31.3 30.2 33.7 34.9 33.4 31.9 35.8 36.0 34.3 17.6 18.1
Current ratio 1.6x 2.4x 2.0x 1.6x 2.0x 1.9x 2.3x 2.6x 2.8x 3.3x 3.2x
<FN>
1 Adjusted to reflect the increased number of shares resulting
from a 2-for-1 stock split in the form of a 100 percent stock
dividend in August 1994.
2 Operating expenses include research and development, marketing
and general and administrative expenses.
3 Unusual charges for 1994 reflect a special charge of $24.7
million related to the closing of the Neunkirchen manufacturing
facility and other Hertel integration related activities.
Unusual credits for 1993 reflect a favorable settlement in patent
litigation partially reversing the 1991 charges. Unusual
charges for 1991 reflect an adverse decision in patent litigation.
Unusual charges for 1986 include the disposition of certain assets,
the rationalization of production facilities and other items.
4 Accounting changes for 1994 reflect a charge of $20.1 million
(net of income tax effect) for the adoption of SFAS No. 106 and a
credit of $5.1 million for the adoption of SFAS No. 109.
5 During the second quarter of fiscal 1994 the company completed
the sale of approximately 2.0 million shares of common stock
(presplit basis) resulting in net proceeds of $73.6 million.
During the first quarter of fiscal 1986, the company purchased
approximately 2.4 million shares of Kennametal stock at a
total cost of approximately $60 million.
6 Gross margin equals net sales less cost of goods sold, as a
percentage of sales.
7 Operating margin equals gross profit less operating expenses,
as a percentage of sales.
8 Net margin equals net income (loss) as a percentage of sales.
9 Without the restructuring charge and accounting changes, the
return on average equity was 11.4 percent in 1994.
</FN>
(Pages 34 and 35)
BOARD OF DIRECTORS
QUENTIN C. MCKENNA, 67, is Chairman of the Board of Directors and
its longest-serving member. He joined the board in 1971 when he
was an executive with Hughes Aircraft Corporation. Mr. McKenna
joined Kennametal and became President in 1978. He became Chief
Executive Officer in 1979 and remained CEO until he retired in
1991. He was elected Chairman of the Board in 1986.
QUENTIN C. MCKENNA
ROBERT L. MCGEEHAN is President and Chief Executive Officer of
Kennametal. He was elected President in 1989 and CEO in 1991,
succeeding Mr. McKenna. He became a member of the Board of
Directors in 1989 and is chairman of the board's Nominating
Committee. Prior to that, he was a Vice President from 1984 to
1989 and Director of the Metalworking Systems Division from 1988
to 1989. Mr. McGeehan is 57.
ROBERT L. MCGEEHAN
RICHARD C. ALBERDING joined the Board of Directors in 1982 and is
chairman of the Audit Committee and a member of the Executive
Committee. He is retired Executive Vice President of Marketing
and International for Hewlett-Packard Company, which designs and
manufactures electronic products for measurement and computation.
He is 63 years old.
DICK ALBERDING
PETER B. BARTLETT has been a member of the Board of Directors
since 1975. He presently serves on the Executive Committee and
the Audit Committee. Mr. Bartlett, 60, is a General Partner of
Brown Brothers Harriman & Co., a private banking firm.
P. B. BARTLETT
ROBERT N. ESLYN, 71, retired, having served as Senior Vice
President of Kennametal from 1986 to 1988 and as Vice President
and Group General Manager of the Metalworking Products Group
until 1986. He became a director in 1988 and is a member of the
board's Nominating Committee.
ROBERT N. ESLYN
WARREN H. HOLLINSHEAD, the newest member of Kennametal's board,
was elected in 1990 and serves on the Committee on Executive
Compensation. He retired on July 1, 1994, having served as Chief
Financial Officer and as Executive Vice President of Westinghouse
Electric Corporation, a technology-based manufacturing and
services company. He is 58 years old.
W. H. HOLLINSHEAD
ALOYSIUS T. MCLAUGHLIN, Jr., 59, is Vice Chairman of Dick
Corporation, a general contractor. A member of the board since
1986, he chairs the Committee on Executive Compensation and also
serves on the Executive Committee.
A. T. MCLAUGHLIN
WILLIAM R. NEWLIN, a member of the board since 1982, is chairman
of the Executive Committee. He is Managing Director of Buchanan
Ingersoll Professional Corporation, attorneys-at-law. Mr. Newlin
is 53 years old.
WILLIAM R. NEWLIN
EUGENE R. YOST joined the board in 1990 and currently serves as a
member of the Committee on Executive Compensation. Mr. Yost, 66,
was co-founder and, until 1991, Chairman of the Board of Black
Box Corporation, a catalog distributor of data communication
devices.
E. R. YOST
LARRY YOST has been a director since 1987 and is a member of the
board's Audit and Nominating Committees. Mr. Yost, 56, is Senior
Vice President, Operations Group of Allen-Bradley Company, a
manufacturer and marketer of industrial automation controls,
communications systems and electronic products.
LARRY YOST
(Page 36)
CORPORATE OFFICERS
ROBERT L. MCGEEHAN is President and Chief Executive Officer. He
was elected President in 1989 and CEO in 1991. He was a Vice
President from 1984 to 1989. He was Director of the Metalworking
Systems Division from 1988 to 1989 and General Manager from 1985
to 1988. He is 57 years old.
ROBERT L. MCGEEHAN
DAVID B. ARNOLD, 55, has been a Vice President since 1979 and
became Chief Technical Officer in 1988. He was Director of
Kennametal International from 1983 to 1988.
DAVID B. ARNOLD
JAMES R. BREISINGER, 44, was named Controller in 1994. He was
Managing Director of Europe from 1991 to 1994. A Vice President
since 1990, he was Controller from 1983 to 1991.
JAMES R. BREISINGER
DAVID T. COFER has been Secretary and General Counsel since 1982.
Elected a Vice President in 1986, he is 49 years old.
DAVID T. COFER
RICHARD P. GIBSON, Director of Taxes since 1980, was named
Assistant Treasurer in 1985. He is 59.
R. P. GIBSON
MICHAEL E. GODFREY, 61, was named Director of Financial Projects
in 1994. He was Controller from 1991 to 1994 and was Manager of
Division Accounting from 1985 to 1991.
MICHAEL E. GODFREY
JAMES W. HEATON was named Senior Vice President and Director of
Customer Satisfaction in 1990. He was Director of Engineering
for the Metalworking Systems Division from 1978 to 1990. He is
62.
JAMES W. HEATON
RICHARD C. HENDRICKS, 55, is Director of Corporate Business
Development and has been a Vice President since 1982. He was
General Manager of the Mining and Metallurgical Division from
1990 to 1992 and was General Manager of the Advanced Materials
Division from 1986 to 1990.
RICHARD C. HENDRICKS
TIMOTHY D. HUDSON, 48, has served as Director of Human Resources
since 1992 and was elected a Vice President in 1994. He was
Corporate Manager of Human Resources from 1978 to 1992, and
Manager of Human Resources, Mining and Construction Division from
1974 to 1978.
TIMOTHY D. HUDSON
H. PATRICK MAHANES, Jr., 51, is Director of Operations. He was
Director of the Metalworking Manufacturing Division from 1988 to
1991 and has been a Vice President since 1987. He directed
Corporate Technology from 1987 to 1988 and Manufacturing
Technology from 1985 to 1987.
H. P. MAHANES
RICHARD V. MINNS has been Director of Sales for the Metalworking
Systems Division since 1985. Fifty-six years old, he was elected
a Vice President in 1990.
R. V. MINNS
JAMES E. MORRISON was named a Vice President in 1994. He served
as Manager of Treasury Services from 1985 until he was elected
Treasurer in 1987. He is 43 years old.
JAMES E. MORRISON
KEVIN G. NOWE, 42, was elected Assistant Secretary in 1993. He
has also served as Assistant General Counsel since 1992.
Previously, he was Senior Counsel & Corporate Secretary of Emro
Marketing Company in Enon, Ohio.
KEVIN G. NOWE
RICHARD J. ORWIG, 53, has been a Vice President since 1987. He
was named Chief Financial and Administrative Officer in 1994. He
was Director of Administration from 1991 to 1994 and Director of
Human Resources from 1989 to 1991. He was Director of Corporate
Planning from 1984 to 1989.
RICHARD J. ORWIG
ALAN G. RINGLER, 44, was elected a Vice President in 1989. Now
Director of Metalworking Systems Division, he was Director of
Metalworking, North America, from 1991 to 1992, Managing
Director, Europe, from 1990 to 1991 and Director of Marketing and
Customer Service for the Metalworking Systems Division from 1989
to 1990.
ALAN G. RINGLER
MICHAEL W. RUPRICH was named President of J&L America Inc. and
elected a Kennametal Vice President in 1994. He was General
Manager of J&L from 1993 to 1994, National Sales and Marketing
Manager from 1992 to 1993 and General Manager - East Coast Region
from 1990 to 1992. He is 38 years old.
MICHAEL W. RUPRICH
P. MARK SCHILLER, 46, is Director of Kennametal Distribution
Services. Mr. Schiller was elected a Vice President in 1992. He
was Director of Materials Management from 1988 to 1990.
P. MARK SCHILLER
(Page 37)
CORPORATE AND WORLDWIDE DATA
LOCATIONS, SUBSIDIARIES AND AFFILIATES (as of June 30, 1994)
CORPORATE HEADQUARTERS
Route 981 at Westmoreland County Airport
P.O. Box 231
Latrobe, PA 15650
Phone (412)539-5000
PLANT LOCATIONS-UNITED STATES
Fallon, Nevada
Henderson, North Carolina
Roanoke Rapids, North Carolina
Orwell, Ohio
Solon (Cleveland), Ohio
Bedford, Pennsylvania
Latrobe, Pennsylvania
Johnson City, Tennessee
New Market, Virginia
PLANT LOCATIONS-INTERNATIONAL
Arnhem, Netherlands
Victoria, Canada
Port Coquitlam, Canada
Kingswinford, England
Ris Orangis (Paris), France
Ebermannstadt, Germany
Mistelgau, Germany
Nabburg, Germany
Vohenstrauss, Germany
CONSOLIDATED SUBSIDIARIES
Hertel Cutting Technologies Inc., United States
Kennametal Australia Pty. Ltd., Australia
Kennametal Foreign Sales Corporation, Barbados
Kennametal Hertel AG, Germany (82%)
Kennametal Ltd., Canada
Kennametal GTS Pte. Ltd., Singapore
J&L America Inc., United States
Kennametal Hertel G.m.b.H., Germany
CONSOLIDATED SUBSIDIARIES of Kennametal Hertel AG
Kennametal Hertel France S.A., France
Kennametal Hertel Belgium S.A., Belgium
Kennametal Hertel Nederland B.V., Netherlands
Nederlandse Hardmetaal Fabrieken B.V., Netherlands
Karl Hertel G.m.b.H., Austria
Hertel Iberica S.A., Spain
Hertel Japan Limited, Japan
OTHER LOCATIONS
Bangkok, Thailand
Bombay, India
Raleigh, North Carolina
Seoul, Korea
AFFILIATED COMPANIES
(% ownership indicated)
Kennametal Ca.Me.S., S.p.A., Milan, Italy (51%)
Kennametal Hertel S.p.A., Milan, Italy (20%)
Kobe Kennametal K.K., Tokyo, Japan (49%)
Kennametal - Idemitsu Corporation, Latrobe, PA (50%)
CORPORATE DATA
TRANSFER AGENT REGISTRAR OF STOCK AND DIVIDEND DISBURSING AGENT
Mellon Bank N.A.
c/o Securities Transfer Service
P.O. Box 444
Pittsburgh, PA 15230
STOCK LISTING
New York Stock Exchange, Symbol KMT
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen & Co.
ANNUAL REPORT ON FORM 10-K
Form 10-K, as filed with the Securities and Exchange Commission,
will be available in September 1994. A copy may be obtained
without charge by contacting the investor relations department at
(412)539-5137.
INFORMATION
Securities analysts, shareholders, news media and others seeking
financial information should contact Mr. Michael J. Mussog,
Manager of External Reporting, at (412)539-4617. News media and
others seeking general information should contact Mr. William P.
Kennedy, Manager of Product Publicity, at (412)539-5765.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
This plan provides shareholders with a convenient way to acquire
additional shares of Kennametal capital stock without paying
brokerage fees or service charges. Participants may reinvest
their dividends, plus optional cash if desired, to acquire these
additional shares. Mellon Bank N.A. administers the plan and
acts as the agent for the participants. For more information,
contact the company's secretary at (412)539-5204.
EQUAL OPPORTUNITY EMPLOYER
Kennametal is an equal opportunity employer. All matters
regarding recruiting, hiring, training, compensation, benefits,
promotions, transfers and all other personnel policies will
continue to be free from all discriminatory practices.
ANNUAL MEETING
The annual meeting of shareholders is scheduled for Monday,
October 31, 1994, at the Corporate Technology Center in Latrobe,
PA. Notice of the meeting will be mailed on or about September
23, 1994, to shareholders of record on September 6, 1994. All
shareholders are cordially invited to attend. Proxies will be
solicited by the Board of Directors.
(Page 38)
The following are trademarks of Kennametal Inc. and are used as
such herein: block style K, Kennametal, KCD25, KM-LOC, KM, KC,
KCD, KC9010, KC9025, Finding Better Ways, J&L and Kennametal
Hertel. Hertel is a trademark of Hertel AG and is used as such
herein.
Copyright 1994, Kennametal Inc., all rights reserved.
CF94-28(25)H4 Printed in U.S.A.
[Symbol]
Printed on recycled paper.
(Inside Back Cover)
[Logo]
Kennametal Inc.
Latrobe, PA 15650
(412) 539-5000
(Back Cover)
APPENDIX TO EXHIBIT 13
FURNISHED IN ACCORDANCE WITH RULE 309 OF REGULATION S-T
NARRATIVE DESCRIPTION OF GRAPHIC AND IMAGE
INFORMATION IN REGISTRANT'S
1994 ANNUAL REPORT TO SHAREHOLDERS
Page of
Annual Report Description of Graphic or Image Information
- - - ------------- --------------------------------------------------
- - - ----------
Front Cover Photograph of KC990 (TM) in action.
Page 1 Graphs containing the following information appear
on bottom of page:
NET SALES
YEAR (MILLIONS OF DOLLARS)
1990 589.0
1991 617.8
1992 594.5
1993 598.5
1994 802.5
EARNINGS (LOSS) PER SHARE
YEAR (DOLLARS)
1990 1.54
1991 1.00
1992 0.60
1993 0.93
1994 (0.17)
DIVIDENDS PER SHARE
YEAR (DOLLARS)
1990 0.58
1991 0.58
1992 0.58
1993 0.58
1994 0.58
Page 2 Illustration of Robert L. McGeehan, President and
Chief Executive Officer appears on left side of
page.
Page 3 Illustration of Quentin C. McKenna, Chairman of the
Board appears on right side of page.
Page 8 Photograph of Ford Mondeo crankshafts on production
line appears on top of page.
Page 8 Photograph of the KM-LOC (TM) clamping device
appears on bottom right of page.
Page 9 Photograph of three people at tool crib counter
appears on bottom right of page.
Page 10 Photograph of automated coating tray appears on
bottom right of page.
Page 11 Photograph of Management Information Systems team in
computer control room appears on top of page.
Page 11 Photographs of KCD25 (TM) insert grade in action
appear on bottom left of page.
Page 12 Photograph of mining roof drill bits appears on top
left of page.
Page 13 Photograph of customer ordering from a J&L catalog
appears on top right of page.
Page 13 Photograph of selected Hertel products including
solid carbide drill bits and milling products
appears on bottom of page.
Page 14 Photograph of 1994 McKenna award winners appears on
top left of page.
Page 14 Photograph of Kennametal truck at loading dock
appears on bottom right of page.
Page 15 Graphs containing the following information appear
on page:
SALES PER EMPLOYEE
YEAR (THOUSANDS OF DOLLARS)
1990 106.7
1991 113.5
1992 116.4
1993 121.8
1994 125.2
RESEARCH AND DEVELOPMENT
EXPENSES
YEAR (MILLIONS OF DOLLARS)
1990 13.3
1991 14.8
1992 13.7
1993 14.7
1994 15.2
CASH FLOW FROM OPERATIONS
YEAR (MILLIONS OF DOLLARS)
1990 68.0
1991 43.4
1992 47.3
1993 42.0
1994 30.2
RETURN ON EQUITY
YEAR (PERCENTAGE)
1990 14.9
1991 8.7
1992 5.2
1993 8.1
1994 (1.5)
DEBT TO CAPITAL
YEAR (PERCENTAGE)
1990 33.4
1991 34.9
1992 33.7
1993 30.2
1994 31.3
CAPITAL INVESTMENT
CAPITAL EXPENDITURES
YEAR (MILLIONS OF DOLLARS)
1990 36.0
1991 55.3
1992 36.6
1993 23.1
1994 27.3
CAPITAL INVESTMENT
DEPRECIATION
YEAR (MILLIONS OF DOLLARS)
1990 27.0
1991 28.6
1992 27.8
1993 27.5
1994 39.2
Inside
Back Cover The symbol for use of recycled paper appears in the
lower right corner.
Outside
Back Cover The Kennametal logo appears in the middle of the
page on the left side.