SEC Filing | Kennametal Inc.

1 ================================================================================ FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2000 Commission File Number 1-5318 KENNAMETAL INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0900168 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) WORLD HEADQUARTERS 1600 TECHNOLOGY WAY P. O. BOX 231 LATROBE, PENNSYLVANIA 15650-0231 (Address of principal executive offices) Registrant's telephone number, including area code: 724-539-5000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Common Stock, par value $1.25 New York Stock Exchange per share New York Stock Exchange Preferred Stock Purchase Rights Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of September 5, 2000, the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant, estimated solely for the purposes of this Form 10-K, was approximately $609,200,000. For purposes of the foregoing calculation only, all directors and executive officers of the registrant and each person who may be deemed to own beneficially more than 5% of the registrant's Common Stock have been deemed affiliates. As of September 5, 2000, there were 30,782,894 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2000 Annual Report to Shareowners are incorporated by reference into Parts I, II and IV. Portions of the Proxy Statement for the 2000 Annual Meeting of Shareowners are incorporated by reference into Parts III and IV. ================================================================================

2 TABLE OF CONTENTS Item No. Page - -------- ---- PART I 1. Business......................................................... 1 2. Properties....................................................... 7 3. Legal Proceedings................................................ 8 4. Submission of Matters to a Vote of Security Holders.............. 9 Officers of the Registrant....................................... 10 PART II 5. Market for the Registrant's Common Stock and Related Shareowner Matters......................................................... 12 6. Selected Financial Data......................................... 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 12 7a. Quantitative and Qualitative Disclosure About Market Risk....... 12 8. Financial Statements and Supplementary Data..................... 12 9. Changes in and Disagreements on Accounting and Financial Disclosure...................................................... 12 PART III 10. Directors and Executive Officers of the Registrant.............. 13 11. Executive Compensation.......................................... 13 12. Security Ownership of Certain Beneficial Owners and Management.. 13 13. Certain Relationships and Related Transactions.................. 13 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................................ 14

3 PART I ITEM 1. BUSINESS OVERVIEW Kennametal Inc. was incorporated in Pennsylvania in 1943. Kennametal Inc. (Kennametal or the company) is a global leader engaged in the manufacture, purchase and distribution of a broad range of tools, tooling systems, and solutions to the metalworking, mining, oil and energy industries, and wear-resistant parts for a wide range of industries. Unless otherwise specified, any reference to a "year" is to a fiscal year ended June 30. Kennametal specializes in developing and manufacturing metalworking tools and wear-resistant parts using a specialized type of powder metallurgy. Kennametal's metalworking tools are made of cemented tungsten carbides, ceramics, cermets, high-speed steel and other hard materials. Kennametal also manufactures and markets a complete line of toolholders, toolholding systems and rotary cutting tools by machining and fabricating steel bars and other metal alloys. The company, through its 83 percent-owned subsidiary JLK Direct Distribution Inc. (JLK), also is one of the largest suppliers of metalworking consumables and related products in the United States. Kennametal also manufactures tungsten carbide products used in engineered applications, mining and highway construction, and other similar applications, including circuit board drills, compacts and metallurgical powders. During 1998, the company expanded its metalworking focus by acquiring Greenfield Industries, Inc. (Greenfield), a leading worldwide manufacturer of consumable cutting tools and related products used in a variety of industrial, electronics, energy and construction, engineered and consumer markets. Greenfield manufactures a complete line of high-speed steel and tungsten carbide products, including drills; endmills; taps and dies and fixed limit gages; products used in oil and gas drilling; carbide drills, endmills and routers used to make printed circuit boards for the electronics industry; and "made-to-order" tungsten carbide parts for demanding wear applications such as plastics processing, tool and die manufacturing and petroleum flow control. The company also manufactures cutting tools, drill bits, saw blades and other tools for builders, contractors, mechanics and "do-it-yourselfers." This Form 10-K contains "forward-looking statements" as defined by Section 21E of the Securities Exchange Act of 1934. Actual results may differ materially from those expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, the extent that the economic conditions in the United States and Europe, and to a lesser extent, Asia Pacific are not sustained, risks associated with integrating businesses, demands on management resources, risks associated with international markets such as currency exchange rates, competition, and risks associated with the implementation of restructuring actions and environmental remediation. The company undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or circumstances occurring after the date hereof. BUSINESS SEGMENT REVIEW The company reports global business units consisting of Metalworking, Engineered Products, Mining & Construction and JLK/Industrial Supply. Segment selection was based upon internal organizational structure, the manner in which management organizes segments for making operating decisions and assessing performance, the availability of separate financial results, and materiality considerations. The company's sales and operating income by segment are presented on pages 13 through 15 of the 2000 Annual Report to Shareowners, and such information is incorporated herein by reference. Additional information about the company's operations and assets by segment and geographic area is presented on pages 43 through 45 of the 2000 Annual Report to Shareowners, and such information is incorporated herein by reference. METALWORKING In the metalworking segment, the company provides consumable metalcutting tools and tooling systems to manufacturing companies in a wide range of industries throughout the world. Metalcutting operations include turning, boring, threading, grooving, milling and drilling. The company's tooling systems consists of a steel toolholder and an indexable cutting tool such as an insert or drill made from cemented tungsten carbides, ceramics, cermets, high-speed steel and other hard materials. Other cutting tools include end mills, reamers and taps. The company provides application support and simultaneous engineering services. The company also manufactures cutting tools, drill bits, saw blades and other tools for the consumer market which are marketed under private label and other proprietary brands. -1-

4 During a metalworking operation, the toolholder is positioned in a machine tool that provides the turning power. While the workpiece or toolholder is rapidly rotating, the cutting tool insert or drill contacts the workpiece and cuts or shapes the workpiece. The cutting tool insert or drill is consumed during use and must be replaced periodically. The company serves a wide variety of industries that cut and shape metal parts including manufacturers of automobiles, trucks, aerospace components, farm equipment, oil and gas drilling and processing equipment, railroad, marine and power generation equipment, machinery, appliances, factory equipment and metal components, as well as the job shops and maintenance operations. Products are delivered to customers through a direct field sales force, distribution, integrated supply programs, mail-order and e-commerce. With a global marketing organization and operations worldwide, the company believes it is the largest North American and the second largest global provider of consumable metalcutting tools and supplies. ENGINEERED PRODUCTS This segment's principal business is the production and sale of cemented tungsten carbide products used in engineered applications, including circuit board drills, compacts, punches, dies molds, seal rings and a wide variety of other parts. The company also provides application specific component design services. These products have technical commonality to the company's core metalworking products. These products are used by manufacturers or in operations where extremes of abrasion, corrosion or impact require combinations of hardness or other toughness afforded by cemented tungsten carbides or other hard materials. These products are sold through a direct field sales force and distribution. The company believes that it is the largest independent supplier of oil field compacts in the world. Compacts are the cutting edges of oil well drilling bits, which are commonly referred to as "rock bits." MINING & CONSTRUCTION This segment's principal business is the production and sale of cemented tungsten carbide products used in mining and highway construction and other similar applications. These products also have technical commonality to the company's core metalworking products. The company also sells metallurgical powders to manufacturers of cemented tungsten carbide products. These tools are fabricated from steel parts and tipped with cemented carbide. Mining tools, used primarily in the coal industry, include longwall shearer and continuous miner drums, blocks, conical bits, drills, pinning rods, augers and a wide range of mining tool accessories. Highway construction cutting tools include carbide-tipped bits for ditching, trenching and road planing, grader blades for site preparation and routine roadbed control, and snowplow blades and shoes for winter road plowing. The company also provides on-site application support services. The company produces these products for mine operators and suppliers, highway construction companies, municipal governments and manufacturers of mining equipment. Products are distributed through a direct field sales force and distribution. The company believes it is the world market leader in mining and highway construction tooling. JLK/INDUSTRIAL SUPPLY This segment's operations include the distribution of industrial supply products through JLK. JLK distributes a broad range of metalcutting tools, abrasives, drills, machine tool accessories, precision measuring tools, gages, hand tools and other supplies used in metalcutting operations. The majority of industrial supplies distributed by JLK are purchased from other manufacturers, although the product offering does include Kennametal-manufactured items. The markets served include convenience-oriented users of metalcutting tools and supplies and large commercially-oriented customers seeking a single source of metalcutting supplies. Sales of metalworking consumable products are distributed through mail-order catalogs, retail showrooms, integrated supply or Full Service Supply (FSS) programs, a distributor-based direct field sales force and e-commerce. The company markets to the needs of the small-and medium-sized customers through its direct marketing catalog and showroom programs and serves medium- and large-sized industrial manufacturers through FSS programs and distributor-based direct field sales. Through FSS programs, the industrial manufacturers engage JLK to carry out all aspects of complex metalworking supply processes, including needs assessment, cost analysis, procurement planning, supplier selection, "just-in-time" -2-

5 restocking of supplies and ongoing technical support. JLK also distributes through mail-order catalogs to small- and medium-sized customers in the United Kingdom and Germany. INTERNATIONAL OPERATIONS The company's principal international operations are conducted in Western Europe, Canada, the Asia Pacific region, South Africa and Mexico. In addition, the company has joint ventures in China, Poland and Russia, manufacturing and/or distribution in Israel and South America, and sales agents and distributors in Eastern Europe and other areas of the world. The company's international operations are subject to the usual risks of doing business in those countries, including currency fluctuations and changes in social, political and economic environments. In management's opinion, the company's business is not materially dependent upon any one international location involving significant risk. The company's international assets and sales are presented on page 45 of the 2000 Annual Report to Shareowners, and such information is incorporated herein by reference. Information pertaining to the effects of foreign currency fluctuations is contained under the caption "Market Risk" in Management's Discussion and Analysis on pages 22 and 23 of the 2000 Annual Report to Shareowners and under the captions "Foreign Currency Translation" and "Derivative Financial Instruments" in the notes to the consolidated financial statements on page 31 of the 2000 Annual Report to Shareowners. Such information is incorporated herein by reference. MARKETING AND DISTRIBUTION The company's manufactured products are sold primarily through the following distinct sales channels: (i) a direct sales force; (ii) integrated supply and FSS programs; (iii) retail showrooms; (iv) mail-order catalogs; (v) a network of independent distributors and sales agents in the United States and certain international markets; and (vi) the Internet. Service engineers and technicians directly assist customers with product design, selection and application. In addition, purchased products are sold through FSS programs, retail showrooms, mail-order catalogs and the Internet. The company's products are marketed under various trademarks and tradenames, such as Kennametal*, Hertel*, the letter K combined with other identifying letters and/or numbers*, Block Style K*, Kendex*, Kenloc*, KennaMAX*, Top Notch*, Erickson*, Kyon*, KM*, Drill-Fix*, Fix-Perfect*, Disston*, Chicago Latrobe*, Putnam*, Greenfield*, RTW* and Cleveland*. The company also sells products to customers who resell such products under the customers' names or private labels. RAW MATERIALS AND SUPPLIES Major metallurgical raw materials consist of ore concentrates, compounds and secondary materials containing tungsten, tantalum, titanium, niobium and cobalt. Although these raw materials are in relatively adequate supply, major sources are located abroad and prices at times have been volatile. For these reasons, the company exercises great care in the selection, purchase and inventory availability of these materials. The company also purchases steel bars and forgings for making toolholders, high-speed steel and other tool parts, rotary cutting tools and accessories. Products purchased for use in manufacturing processes and for resale are obtained from thousands of suppliers located in the United States and abroad. RESEARCH AND DEVELOPMENT The company's product development efforts are focused on providing solutions to customers' manufacturing problems and productivity requirements. The company has implemented a program, ACE or Achieving a Competitive Edge, that provides discipline and focus for the product development process. ACE speeds and streamlines development into a series of actions and decision points, combining effort and resources to produce new and enhanced products, faster. ACE assures a strong link between customer needs and corporate strategy, and enables the company to gain full benefit from its investment in new product development. Research and development expenses totaled $19.2 million, $18.8 million and $20.4 million in 2000, 1999 and 1998, respectively. Additionally, certain costs associated with improving manufacturing processes are included in cost of goods sold. The company holds a number of patents and licenses, which, in the aggregate, are not material to the operation of the business. - ------------------------------------------------------------- * Trademark owned by Kennametal Inc. or a subsidiary of Kennametal Inc. -3-

6 SEASONALITY Seasonal variations do not have a major effect on the company's business. However, to varying degrees, traditional summer vacation shutdowns of metalworking customers' plants and holiday shutdowns often affect the company's sales levels during the first and second quarters of its fiscal year. BACKLOG The company's backlog of orders generally is not significant to its operations. Approximately 90 percent of all orders are filled from stock, and the balance generally is filled within short lead times. COMPETITION Kennametal is one of the world's leading producers of cemented carbide tools and high-speed steel tools, and maintains a strong competitive position, especially in North America and Europe. There is active competition in the sale of all products made by the company, with approximately 30 companies engaged in the cemented tungsten carbide business in the United States and many more outside the United States. Several competitors are divisions of larger corporations. In addition, several hundred fabricators and toolmakers, many of whom operate out of relatively small shops, produce tools similar to those made by the company and buy the cemented tungsten carbide components for such tools from cemented tungsten carbide producers, including the company. Major competition exists from both U.S.-based and international-based concerns. In addition, the company competes with thousands of industrial supply distributors. The principal elements of competition in the company's business are service, product innovation, quality, availability and price. The company believes that its competitive strength rests on its customer service capabilities, including its multiple distribution channels, its global presence, its state-of-the-art manufacturing capabilities, its ability to develop solutions to customer needs through new and improved tools, and the consistent high quality of its products. These factors frequently permit the company to sell such products based on the value added for the customer rather than strictly on competitive prices. REGULATION Compliance with government laws and regulations pertaining to the discharge of materials or pollutants into the environment or otherwise relating to the protection of the environment did not have a material effect on the company's capital expenditures or competitive position for the years covered by this report, nor is such compliance expected to have a material effect in the future. The company has been involved in various environmental cleanup and remediation activities at several of its manufacturing facilities. In addition, the company is currently named as a potentially responsible party (PRP) at several Superfund sites in the United States. In the December 1999 quarter, the company recorded a remediation reserve of $3.0 million with respect to its involvement in these matters, which is recorded as a component of operating expense. This represents management's best estimate of its undiscounted future obligation based on its evaluations and discussions with outside counsel and independent consultants, and the current facts and circumstances related to these matters. The company recorded this liability in the December quarter because certain events occurred, including sufficient progress made by the government and the PRPs in the identification of other PRPs and review of potential remediation solutions, that clarified the level of involvement in these matters by the company and its relationship to other PRPs. This led the company to conclude that it was probable that a liability had been incurred. In addition to the amount currently reserved, the company may be subject to loss contingencies related to these matters estimated to be up to an additional $3.3 million. The company believes that such undiscounted unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. The reserved and unreserved liabilities may change substantially in the near term due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs and the identification of new PRPs. The company maintains a Corporate Environmental, Health and Safety (EH&S) Department, as well as an EH&S Policy Committee, to ensure compliance with environmental regulations and to monitor and oversee remediation activities. In addition, the company has established an EH&S administrator at each of its domestic manufacturing facilities. The company's financial management team periodically meets with members of the Corporate EH&S Department and the Corporate Legal Department to review and evaluate the status of environmental projects and -4-

7 contingencies. On a quarterly basis, management establishes or adjusts financial provisions and reserves for environmental contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies." STOCK ISSUANCES On March 20, 1998, the company sold 3.45 million shares of common stock resulting in net proceeds of $171.4 million. The proceeds were used to reduce a portion of the company's long-term debt. On July 2, 1997, an initial public offering (IPO) of approximately 4.9 million shares of Class A Common Stock of JLK was consummated at a price of $20.00 per share. JLK operates the industrial supply operations consisting of the company's wholly owned J&L America, Inc. subsidiary and its FSS programs. The net proceeds from the offering were $90.4 million and represented the sale of approximately 20 percent of JLK's common stock. The net proceeds were used by JLK to repay $20.0 million of indebtedness related to a dividend to the company and $20.0 million related to intercompany obligations to the company incurred in 1997. The company used these proceeds to repay short-term debt. JLK used the remaining net proceeds of $50.4 million from the offering during 1998 to make acquisitions. The company's ownership in JLK increased to approximately 83 percent due to treasury stock purchases made by JLK since the IPO. ACQUISITIONS In November 1997, the company completed the acquisition of Greenfield for $1.0 billion. The company acquired all of Greenfield's outstanding common stock for $38.00 per share, and assumed outstanding debt and convertible securities of $320.0 million. Greenfield is a manufacturer of consumable cutting tools and related products used in a variety of industrial, electronics, energy and construction, engineered and consumer markets. The acquisition of Greenfield increased the company's market share in the high-speed rotary steel product markets. Additionally, the company also has made several other acquisitions in 1999 and 1998 to expand its product offering and distribution channels. All acquisitions were accounted for using the purchase method of accounting. The company will continue to evaluate new opportunities that allow for the expansion of existing product lines into new market areas, either directly or indirectly through joint ventures, where appropriate. EMPLOYEES The company employed approximately 13,200 persons at June 30, 2000, of which approximately 8,800 were located in the United States and 4,400 in other parts of the world, principally Europe and Asia Pacific. Approximately 2,600 employees were represented by labor unions, of which approximately 800 were hourly-rated employees located at five plants in the United States. The remaining 1,800 employees represented by labor unions were employed at twelve locations outside of the United States. The company considers its labor relations to be generally good. CORPORATE DIRECTORY The following is a summary of the company's consolidated subsidiaries and affiliated companies as of June 30, 2000: CONSOLIDATED SUBSIDIARIES (% OWNERSHIP, IF LESS THAN 100%) Kennametal Hertel de Argentina S.A., Argentina Kennametal Australia Pty. Ltd., Australia Kennametal Foreign Sales Corporation, Barbados Kennametal Hertel do Brasil Ltda., Brazil Kennametal Ltd., Canada Kennametal Hertel Chile Ltda., Chile Kennametal (China) Limited, China Kennametal (Shanghai) Ltd., China Kennametal Hardpoint (Shanghai) Ltd., China (90%) Shanxi-Kennametal Mining Cutting Systems Manufacturing Company Limited, China (70%) Xuzhou-Kennametal Mining Cutting Systems Manufacturing Company Limited, China (70%) -5-

8 CONSOLIDATED SUBSIDIARIES (% OWNERSHIP, IF LESS THAN 100%) (CONTINUED) Kennametal Hertel AG, Germany (96%) Kennametal Hardpoint H.K. Ltd., Hong Kong (90%) Kennametal Hertel Japan, Ltd., Japan Kennametal Hertel (Malaysia) Sdn. Bhd., Malaysia Kennametal de Mexico, S.A. de C.V., Mexico Kennametal/Becker-Warkop Ltd., Poland (84%) Kennametal Hertel (Singapore) Pte. Ltd., Singapore Kennametal South Africa (Proprietary) Limited, South Africa Kennametal Hertel Korea Ltd., South Korea Kennametal Hardpoint (Taiwan) Inc., Taiwan (90%) Kennametal Hertel Co., Ltd., Thailand (75%) Adaptive Technologies Corp., United States Circle Machine Company, United States Greenfield Industries, Inc., United States JLK Direct Distribution Inc., United States (83%) Kennametal Financing II, United States Kennametal PC Inc., United States Kennametal Receivables Corporation, United States Kennametal TC Inc., United States CONSOLIDATED SUBSIDIARIES OF KENNAMETAL HERTEL AG (% OWNERSHIP, IF LESS THAN 100%) Kennametal Hertel Belgium S.A., Belgium Kennametal Hertel EDG Limited, England Kennametal Hertel Limited, England Kennametal Hertel France S.A., France Kennametal Hertel G.m.b.H., Germany Kennametal Hertel Korea G.m.b.H., Germany Rubig G.m.b.H. & Co. K.G., Germany Kennametal Hertel S.p.A., Italy (55%) Kennametal Hertel Nederland B.V., Netherlands Nederlandse Hardmetaal Fabrieken B.V., Netherlands Kennametal Hertel Kesici Takimlar ve Sistemler Anonim Sirketi, Turkey (55%) CONSOLIDATED SUBSIDIARIES OF JLK DIRECT DISTRIBUTION INC. J&L America, Inc., United States CONSOLIDATED SUBSIDIARIES OF J&L AMERICA, INC. J&L Industrial Supply Ltd., Canada J&L Industrial Supply U.K., England (branch) J&L Werkzeuge und Industriebedarf G.m.b.H., Germany Abrasive & Tool Specialties Company, United States GRS Industrial Supply Company, United States Production Tools Sales, Inc., United States Strong Tool Co., United States CONSOLIDATED SUBSIDIARIES OF GREENFIELD INDUSTRIES, INC. Greenfield Industries, Incorporated Canada, Canada Cirbo Limited, England Kemmer Hartmetallwerkzeuge G.m.b.H., Germany Kemmer Prazision G.m.b.H., Germany Hanita Metal Works, Ltd., Israel Kemmer-Cirbo S.r.L., Italy Cleveland Twist Drill de Mexico, S.A. de C.V., Mexico Greenfield Tools de Mexico, S.A. de C.V., Mexico -6-

9 CONSOLIDATED SUBSIDIARIES OF GREENFIELD INDUSTRIES, INC. (CONTINUED) Herramientas Cleveland, S.A. de C.V., Mexico Bassett Rotary Tool Company, United States Carbidie Corporation, United States Hanita Cutting Tools, Inc., United States Kemmer International, Inc., United States Rogers Tool Works, Inc., United States South Deerfield Industrial, Inc., United States TCM Europe, Inc., United States AFFILIATED COMPANIES (% OWNERSHIP) Kennametal Hertel G. Beisteiner G.m.b.H., Austria (26%) ISIS Informatics Limited, England (20%) Birla Kennametal Ltd., India (44%) Kemmer Japan, Japan (29%) Wilke Carbide B.V., Netherlands (50%) PIGMA-Kennametal Joint Venture, Russia (49%) Carbidie Asia Pacific Pte. Ltd., Singapore (40%) Kenci, S.A., Spain (20%) ITEM 2. PROPERTIES The company's principal executive offices are located at 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania, 15650. Presented below is a summary of principal manufacturing facilities used by the company. Location Owned/Leased Principal Products -------- ------------ ------------------ United States: Bentonville, Arkansas Owned Carbide Round Tools Pine Bluff, Arkansas Leased High Speed Steel Drills Rogers, Arkansas Owned Carbide Products Monrovia, California Leased Boring Bars Placentia, California Leased Wear Parts Evans, Georgia Owned High Speed Steel Drills Chicago, Illinois Leased Circuit Board Drills Elk Grove Village, Illinois Leased Fixed Limited Gages Rockford, Illinois Owned Indexable Tooling Monticello, Indiana Owned Carbide Round Tools Framingham, Massachusetts Leased Fixed Limited Gages Greenfield, Massachusetts Owned High Speed Taps South Deerfield, Massachusetts Leased Consumer Products Traverse City, Michigan Owned Ceramic Wear Parts Troy, Michigan Leased Metalworking Toolholders Fallon, Nevada Owned Metallurgical Powders Asheboro, North Carolina Owned High Speed End Mills Henderson, North Carolina Owned Metallurgical Powders Roanoke Rapids, North Carolina Owned Metalworking Inserts Orwell, Ohio Owned Metalworking Inserts Solon, Ohio Owned Metalworking Toolholders Bedford, Pennsylvania Owned Mining and Construction Tools and Wear Parts Irwin, Pennsylvania Owned Carbide Wear Parts Latrobe, Pennsylvania Owned Metallurgical Powders and Wear Parts Hendersonville, Tennessee Leased Fixed Limited Gages -7-

10 Location Owned/Leased Principal Products -------- ------------ ------------------ United States (continued): Johnson City, Tennessee Owned Metalworking Inserts Whitehouse, Tennessee Leased Fixed Limited Gages Clemson, South Carolina Owned High Speed Steel Drills Lyndonville, Vermont Leased High Speed Taps Chilhowee, Virginia Owned Mining and Construction Tools and Wear Parts New Market, Virginia Owned Metalworking Toolholders International: Victoria, Canada Owned Wear Parts Shanghai, China Owned Metalworking Inserts Shanxi, China Owned Mining Tools Xuzhou, China Owned Mining Tools Bodmin, England Owned Circuit Board Drills and Routers Kingswinford, England Leased Metalworking Toolholders Sheffield, England Leased High Speed Steel Drills, Taps and End Mills Bordeaux, France Leased Metalworking Cutting Tools Ebermannstadt, Germany Owned Metalworking Inserts Mistelgau, Germany Owned Metallurgical Powders, Metalworking Inserts and Wear Parts Nabburg, Germany Owned Metalworking Toolholders Schwabisch Gmund, Germany Leased Circuit Board Drills Vohenstrauss, Germany Owned Metalworking Carbide Drills Schlomi, Israel Owned High Speed Endmills Milan, Italy Owned Metalworking Cutting Tools Pachuca, Mexico Owned High Speed Steel Drills Arnhem, Netherlands Owned Wear Products The company also has a network of warehouses and customer service centers located throughout North America, Western Europe, Asia, South America and Australia, a significant portion of which are leased. The majority of the company's research and development efforts are conducted in a corporate technology center located adjacent to world headquarters in Latrobe, Pennsylvania and in Furth, Germany. All significant properties are used in the company's business of powder metallurgy, tools, tooling systems and industrial supply. The company's production capacity is adequate for its present needs. The company believes that its properties have been adequately maintained, are generally in good condition and are suitable for the company's business as presently conducted. ITEM 3. LEGAL PROCEEDINGS In July 2000, the company, JLK and the JLK directors (including one former director) were named as defendants in several putative class action lawsuits. The lawsuits seek an injunction, rescission, damages, costs and attorney fees in connection with the company's proposal to acquire the outstanding stock of JLK not owned by the company. The company believes the actions lack merit and will defend them vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time. Management believes that any losses derived from the final outcome of these actions and proceedings will not be material in the aggregate to the company's financial condition. -8-

11 Other than noted above, there are no material pending legal proceedings, other than litigation incidental to the ordinary course of business, to which the company or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 2000, there were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise. -9-

12 OFFICERS OF THE REGISTRANT Name, Age, and Position Experience During Past Five Years (2) ----------------------- ------------------------------------- Markos I. Tambakeras, 49 (1) President and Chief Executive Officer since July 1, President and Chief Executive Officer 1999. Formerly, employed by Honeywell Inc. as Director President of Industrial Controls Business from 1997 to 1999 and President, Industrial Automation and Control from 1995 to 1996. William R. Newlin, 59 (1) Chairman of the Board since October 1996. Director Chairman of the Board since 1982. David B. Arnold, 61 (1) Vice President since 1979. Chief Technical Officer Vice President since 1988. Chief Technical Officer James R. Breisinger, 50 (1) Vice President since 1990. Named Chief Operating Vice President Officer, Advanced Materials Solutions Group in August Chief Operating Officer, 2000. Chief Financial Officer from September 1998 to Advanced Materials Solutions Group August 2000. Chief Operating Officer, Greenfield Industries, Inc. from March through September 1998. Corporate Controller from 1994 to 1998. M. Rizwan Chand, 37 (1) Vice President since May 2000. Previously, Vice Vice President President, Human Resources for Aetna International in Human Resources 1999. Previously, with Mary Kay Inc. as Senior Vice President, Global Human Resources from 1996 to 1999 and Vice President - International Human Resources from 1995 to 1996. David T. Cofer, 55 (1) Vice President since 1986. Secretary and General Vice President Counsel since 1982. Secretary and General Counsel Stanley R. Duzy, Jr., 53 (1) Vice President since November 1999. Formerly, employed Vice President by Honeywell Inc. as Vice President of Industrial Business Development and Administration Controls Business from 1998 to 1999 and Vice President and Controller, Asia Pacific from 1992 to 1997. Derwin R. Gilbreath, 52 (1) Vice President since January 1997. Named Chief Vice President, Operating Officer, Metalworking Solutions and Services Chief Operating Officer, Group in August 2000. Chief Operating Officer, Metalworking Solutions and Services Group Greenfield Industries Inc. from September 1998 to August 2000. Director of Global Manufacturing from 1995 to 1998. F. Nicholas Grasberger, III, 36 (1) Elected Vice President and Chief Financial Officer in Vice President August 2000. Formerly, Corporate Treasurer, H.J. Heinz Chief Financial Officer Company from 1997 to 2000 and General Manager of Business Planning from 1994 to 1997. Richard C. Hendricks, 61 (1) Vice President since 1982. Director of Corporate Vice President Development since 1992. Corporate Development -10-

13 Name, Age, and Position Experience During Past Five Years (2) ----------------------- ------------------------------------- Brian E. Kelly, 37 Elected Assistant Treasurer and named Director of Tax Assistant Treasurer in September 1998. Manager of Corporate Tax from 1996 Director of Tax to 1998. Formerly, Tax Consultant with Westinghouse Electric Corporation from 1995 to 1996. Lawrence J. Lanza, 51 Elected Assistant Treasurer and named Director of Assistant Treasurer Treasury Services in April 1999. Previously, Director, Director of Treasury Services Global Capital Markets for CBS Corporation, formerly Westinghouse Electric Corporation, from 1972 to 1998. H. Patrick Mahanes, Jr., 57 (1) Vice President since 1987. Named Executive Vice Executive Vice President President, Global Strategic Initiatives in 2000. Chief Global Strategic Initiatives Operating Officer from 1995 to August 2000. James E. Morrison, 49 Vice President since 1994. Treasurer since 1987. Vice President Treasurer Wayne D. Moser, 47 Vice President since 1998. General Manager, Mining & Vice President Construction since 1997. Chief Financial Officer of General Manager, Mining & Construction Kennametal Hertel AG from 1993 to 1997. Ralph G. Niederst, 49 (1) Elected Vice President in May 2000. Formerly, Director Vice President of Management Information Technology at Harsco Chief Information Officer Corporation's Heckett Multiserv from 1995 to 2000. Kevin G. Nowe, 48 Joined the company as Assistant General Counsel in 1992 Assistant Secretary and was elected Assistant Secretary in 1993. Assistant General Counsel Ajita G. Rajendra, 48 Elected Kennametal Vice President in 1998. General Vice President Manager of Industrial Products Group since 1997. Vice General Manager, Industrial Products Group President of Greenfield's Electronic Products Group from 1996 to 1997. Previously, in various positions with Corning, Inc. from 1978 to 1996. P. Mark Schiller, 52 Vice President since 1992. Director of Kennametal Vice President Distribution Services since 1990. Director of Kennametal Distribution Services Frank P. Simpkins, 37 (1) Named Corporate Controller and Chief Accounting Officer Corporate Controller and Chief in October 1998. Manager, External Reporting and Accounting Officer Investor Relations from 1995 to 1998. A. David Tilstone, 46 (1) Vice President since July 1997. Named Director of Vice President Global Marketing in April 1997. Director of Asia Director of Global Marketing and Sales Pacific Operations from 1995 to 1997. Notes: - ------ (1) Executive officer of the Registrant. (2) Each officer has been elected by the Board of Directors to serve until removed or until a successor is elected and qualified, and has served continuously as an officer since first elected. -11-

14 PART II The information required under Items 5 through 8 is included in the 2000 Annual Report to Shareowners and such information is incorporated herein by reference as indicated below. ITEM 5. MARKET FOR THE REGISTRANT COMMON STOCK AND RELATED SHAREOWNER MATTERS Incorporated by reference is the Quarterly Financial Information (Unaudited) set forth on pages 45 and 46 and the information under Stock Issuances set forth pages 32 and 33 of the 2000 Annual Report to Shareowners. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference is information with respect to the years 1996 to 2000 contained in the Eleven-Year Financial Highlights set forth on pages 48 and 49 of the 2000 Annual Report to Shareowners. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference is Management's Discussion & Analysis set forth on pages 13 to 24 of the 2000 Annual Report to Shareowners. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Incorporated by reference is the Management's Discussion & Analysis set forth on pages 22 and 23 and the information under Financial Instruments on pages 40 and 41 of the 2000 Annual Report to Shareowners. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference is Item 14(a) 1 of this Form 10K and the Quarterly Financial Information (Unaudited) set forth on pages 45 and 46 of the 2000 Annual Report to Shareowners. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -12-

15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference is the information set forth in Part I under the caption "Officers of the Registrant" and the information set forth under the caption "Election of Directors" in the company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after June 30, 2000 ("2000 Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference is the information set forth under the caption "Compensation of Executive Officers" and certain information regarding directors' fees under the caption "Board of Directors and Board Committees" in the 2000 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference is the information set forth under the caption "Ownership of Capital Stock by Directors, Nominees and Executive Officers" with respect to the directors' and officers' shareholdings and under the caption "Principal Holders of Voting Securities" with respect to other beneficial owners in the 2000 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference is certain information set forth in the notes to the tables under the captions "Election of Directors" and "Compensation of Executive Officers" in the 2000 Proxy Statement. -13-

16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Form 10-K report. 1. Financial Statements The consolidated balance sheets as of June 30, 2000 and 1999, the consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended June 30, 2000 and the notes to consolidated financial statements, together with the report thereon of Arthur Andersen LLP dated July 24, 2000 (except with respect to the matter discussed in Note 3, as to which the date is September 1, 2000), presented in the company's 2000 Annual Report to Shareowners, are incorporated herein by reference. 2. Financial Statement Schedule The financial statement schedule shown below should be read in conjunction with the consolidated financial statements contained in the 2000 Annual Report to Shareowners. Other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Separate financial statements of the company are omitted because the company is primarily an operating company, and all significant subsidiaries included in the consolidated financial statements are wholly owned, with the exception of Kennametal Hertel AG, in which the company has a 96 percent interest, and JLK Direct Distribution Inc., in which the company has an 83 percent interest. Financial Statement Schedule: Page ---------------------------- ---- Report of Independent Public Accountants 20 Schedule II - Valuation and Qualifying Accounts for the Three Years Ended June 30, 2000 21 3. Exhibits (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession (2.1) Agreement and Plan of merger by Exhibit (c)(1) of the company's Schedule and among Kennametal Inc., 14D-1 (SEC file no. reference no. 1-5318; Kennametal Acquisition Corp. docket entry date - October 17, 1997) is (formerly, Palmer Acquisition incorporated herein by reference. Corp.) and Greenfield Industries, Inc. dated as of October 10, 1997 (3) Articles of Incorporation and Bylaws (3.1) Amended and Restated Articles Exhibit 3.1 of the company's September 30, of Incorporation as Amended 1994 Form 10-Q is incorporated herein by reference. (3.2) Bylaws Exhibit 3.1 of the company's March 31, 1991 Form 10-Q (SEC file no. reference 1-5318; docket entry date - May 14, 1991) is incorporated herein by reference. -14-

17 (4) Instruments Defining the Rights of Security Holders, Including Indentures (4.1) Rights Agreement dated Exhibit 4 of the company's Form 8-K dated October 25, 1990 October 23, 1990 (SEC file no. reference 1-5318; docket entry date - November 1, 1990) is incorporated herein by reference. (10) Material Contracts (10.1)* Prime Bonus Plan The discussion regarding the Prime Bonus Plan under the caption "Report of the Board of Directors Committee on Executive Compensation" contained in the company's 2000 Proxy Statement is incorporated herein by reference. (10.2)* Stock Option and Exhibit 10.1 of the company's December 31, Incentive Plan of 1988 1988 Form 10-Q (SEC file no. reference 1-5318; docket entry date - February 9, 1989) is incorporated herein by reference. (10.3)* Deferred Fee Plan Exhibit 10.4 of the company's June 30, 1988 for Outside Directors Form 10-K (SEC file no. reference 1-5318; docket entry date - September 23, 1988) is incorporated herein by reference. (10.4)* Executive Deferred Exhibit 10.5 of the company's June 30, 1988 Compensation Trust Agreement Form 10-K (SEC file no. reference 1-5318; docket entry date - September 23, 1988) is incorporated herein by reference. (10.5)* Directors Stock Incentive Exhibit 10.5 of the company's June 30, 1999 Plan, as amended Form 10-K is incorporated herein by reference. (10.6)* Performance Bonus Stock Exhibit 10.6 of the company's June 30, 1999 Plan of 1995, as amended Form 10-K is incorporated herein by reference (10.7)* Stock Option and Incentive Exhibit 10.14 of the company's September Plan of 1996 30, 1996 Form 10-Q is incorporated herein by reference. (10.8)* Stock Option and Incentive Plan Exhibit 10.8 of the company's December 31, of 1992, as amended 1996 Form 10-Q is incorporated herein by reference. (10.9)* Form of Employment Agreement with Filed herewith. Named Executive Officers (other than Mr. Tambakeras) (10.10)* Supplemental Executive Exhibit 10.10 of the company's June 30, 1999 Retirement Plan, as amended Form 10-K is incorporated herein by reference. - --------------------------------------------------------- * Denotes management contract or compensatory plan or arrangement. -15-

18 (10.11) Credit Agreement with Mellon Bank, Exhibit 10.2 of the company's December 31, N.A. and various creditors dated as of 1997 Form 10-Q is incorporated herein November 17, 1997 by reference. (10.12) Guaranty and Suretyship Agreement Exhibit 10.3 of the company's December 31, with Mellon Bank, N.A. dated 1997 Form 10-Q is incorporated herein November 17, 1997 by reference. (10.13) Amendment to Credit Agreement with Exhibit 10.18 of the company's June 30, Mellon Bank, N.A. and various creditors 1998 Form 10-K is incorporated herein dated as of November 26, 1997 by reference. (10.14) Amendment to Credit Agreement with Exhibit 10.19 of the company's June 30, Mellon Bank, N.A. and various creditors 1998 Form 10-K is incorporated herein dated as of December 19, 1997 by reference. (10.15) Amendment to Credit Agreement with Exhibit 10.20 of the company's June 30, Mellon Bank, N.A. and various creditors 1998 Form 10-K is incorporated herein dated as of March 19, 1998 by reference. (10.16) Amendment to Credit Agreement with Exhibit 10.1 of the company's December 31, Mellon Bank, N.A. and various creditors 1998 Form 10-Q is incorporated herein dated as of December 15, 1998 by reference. (10.17) Amendment to Credit Agreement with Exhibit 10.1 of the company's March 31, Mellon Bank, N.A. and various creditors 1999 Form 10-Q is incorporated herein dated as of March 31, 1999 by reference. (10.18)* Executive Employment Agreement Exhibit 10.1 of the company's June 11, dated May 4, 1999 between Kennametal 1999 Form 8-K is incorporated herein Inc. and Markos I. Tambakeras by reference. (10.19)* Kennametal Inc. 1999 Stock Plan Exhibit 10.5 of the company's June 11, 1999 Form 8-K is incorporated herein by reference. (10.20) Amendment to Credit Agreement with Exhibit 10.1 of the company's September Mellon Bank, N.A. and various creditors 30,1999 Form 10-Q is incorporated herein dated as of October 1, 1999 by reference. (10.21)* Kennametal Inc. Stock Option and Exhibit A of the company's 1999 Proxy Incentive Plan of 1999 Statement is incorporated herein by reference. (10.22)* Amendment to Executive Employment Exhibit 10.1 of the company's March 31, Agreement between Kennametal Inc. 2000 Form 10-Q is incorporated herein and Markos I. Tambakeras dated by reference. March 3, 2000 (10.23)* Employment Agreement dated January Filed herewith. 21, 2000 between JLK Direct Distribution Inc. and Richard J. Orwig - --------------------------------------------------------- * Denotes management contract or compensatory plan or arrangement. -16-

19 (10.24)* Severance Agreement dated May 2, 2000 Filed herewith. with Richard J. Orwig (13) Annual Report to Shareowners Portions of the 2000 Annual Report are filed herewith. (21) Subsidiaries of the Registrant Filed herewith. (23) Consent of Independent Public Accountants Filed herewith. (27) Financial Data Schedule Filed herewith. (b) Reports on Form 8-K. A report on Form 8-K was filed on May 9, 2000 regarding the announcement of the resignation of Mr. Richard J. Orwig as President and CEO of JLK Direct Distribution Inc., an 83 percent-owned subsidiary of Kennametal Inc. A report on Form 8-K was filed on July 21, 2000 regarding the announcement of a proposal by Kennametal Inc. to acquire the outstanding shares of JLK Direct Distribution Inc., an 83 percent-owned subsidiary of Kennametal Inc., that it does not already own for $6.70 per share in cash. A report on Form 8-K was filed on July 25, 2000 regarding the announcements that the Board of Directors adopted a new shareowner rights plan to replace its existing plan which has been in effect since 1990, that Robert L. McGeehan resigned as a member of the Board of Directors effective July 24, 2000, and that Kennametal and all the directors of JLK Direct Distribution Inc., an 83 percent-owned subsidiary of Kennametal Inc., were named in civil action No. GD00-12565, filed in the Court of Common Pleas in Allegheny County, Pennsylvania. A report on Form 8-K was filed on September 11, 2000 regarding the announcement that Kennametal Inc. and JLK Direct Distribution Inc., an 83 percent-owned subsidiary of Kennametal Inc., have entered into a definitive merger agreement for Kennametal to acquire the outstanding shares of JLK that Kennametal does not already own. A report on Form 8-K was filed on September 12, 2000 regarding the announcement that JLK Direct Distribution Inc., an 83 percent-owned subsidiary of Kennametal Inc., expects to recognize special charges of $15 - $20 million associated with its business improvement plan. - ------------------------------------------------------- * Denotes management contract or compensatory plan or arrangement. -17-

20 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KENNAMETAL INC. By: /s/ Frank P. Simpkins ----------------------------- Frank P. Simpkins Corporate Controller and Chief Accounting Officer Date: September 22, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ William R. Newlin ----------------------------- Chairman of the Board September 22, 2000 William R. Newlin /s/ Markos I. Tambakeras ----------------------------- President, Chief Executive September 22, 2000 Markos I. Tambakeras Officer and Director /s/ F. Nicholas Grasberger, III ----------------------------- Vice President and September 22, 2000 F. Nicholas Grasberger, III Chief Financial Officer -18-

21 SIGNATURE TITLE DATE --------- ----- ---- /s/ Richard C. Alberding ----------------------------- Director September 22, 2000 Richard C. Alberding /s/ Peter B. Bartlett ----------------------------- Director September 22, 2000 Peter B. Bartlett /s/ A. Peter Held ----------------------------- Director September 22, 2000 A. Peter Held /s/ Kathleen J. Hempel ----------------------------- Director September 22, 2000 Kathleen J. Hempel /s/ Timothy S. Lucas ----------------------------- Director September 22, 2000 Timothy S. Lucas /s/ Aloysius T. McLaughlin, Jr. ----------------------------- Director September 22, 2000 Aloysius T. McLaughlin, Jr. /s/ Larry Yost ----------------------------- Director September 22, 2000 Larry Yost -19-

22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareowners of Kennametal Inc. We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in Kennametal Inc.'s annual report to shareowners incorporated by reference in this Form 10-K, and have issued our report thereon dated July 24, 2000. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index in Item 14-(a)2 of this Form 10-K is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP ------------------------------- Arthur Andersen LLP Pittsburgh, Pennsylvania July 24, 2000 -20-

23 KENNAMETAL INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED JUNE 30, 2000 - -------------------------------------------------------------------------------- (dollars in thousands) Additions -------------------------------------- Balance at Charged to Deductions Balance at Beginning of Costs and Other from End of Description Year Expenses Recoveries Adjustments Reserves Year - ----------- ------------ ---------- ---------- ----------- ---------- ---------- 2000 Allowance for doubtful accounts $15,269 $ 4,177 $ 596 $ (307)(a) $ 7,521(b) $12,214 ======= ======= ===== ====== ======= ======= Restructuring and asset impairment charges $ 3,567 $18,626 $ -- $ 595 (c) $15,223(d) $ 7,565 ======= ======= ===== ====== ======= ======= 1999 Allowance for doubtful accounts $11,974 $ 8,230 $ 365 $ (398)(a) $ 4,902(b) $15,269 ======= ======= ===== ====== ======= ======= Restructuring and asset impairment charges $ -- $20,837 $ -- $ -- $17,270(d) $ 3,567 ======= ======= ===== ====== ======= ======= 1998 Allowance for doubtful accounts $ 7,325 $ 2,453 $ 336 $5,061(a) $ 3,201(b) $11,974 ======= ======= ===== ====== ======= ======= (a) Represents foreign currency translation adjustment and reserves acquired through business combinations. (b) Represents uncollected accounts charged against the allowance. (c) Represents adjustment for company receiving more value upon disposition of property than initially anticipated. (d) Represents asset write-downs, non-cash adjustments and cash expenditures charged against the accrual. -21-

1 EXHIBIT 10.9 OFFICER'S EMPLOYMENT AGREEMENT Amended and Restated THIS AGREEMENT, is made and entered into as of this ___ day of ________, by and between KENNAMETAL INC., a corporation organized under the laws of the Commonwealth of Pennsylvania (hereinafter referred to as "Kennametal" or the "Corporation"), for and on behalf of itself and on behalf of its subsidiary companies, and _________________ an individual (hereinafter referred to as "Employee"). WITNESSETH: WHEREAS, Employee acknowledges that by reason of employment by Kennametal, it is anticipated that Employee will work with, add to, create, have access to and be entrusted with trade secrets and confidential information belonging to Kennametal which are of a technical nature or business nature or pertain to future developments, the disclosure of which trade secrets or confidential information would be highly detrimental to the interests of Kennametal; and WHEREAS, in order to have the benefit of Employee's assistance, Kennametal is desirous of employing or continuing the employment of Employee; and WHEREAS, Kennametal and Employee have heretofore entered into and executed an Officer Employment Agreement, as amended (the "Employment Agreement"); and WHEREAS, Kennametal and Employee desire to amend and restate the Employment Agreement on the terms and conditions hereinafter expressed. NOW, THEREFORE, Kennametal and Employee, each intending to be legally bound hereby, do mutually covenant and agree as follows: 1. (a) Subject to the terms and conditions set forth herein, Kennametal hereby agrees to employ Employee as of the date hereof, and Employee hereby accepts such employment and agrees to devote his full time and attention to the business and affairs of Kennametal, in such capacity or capacities and to perform to the best of his ability such services as shall be determined from time to time by the Chief Executive Officer and the Board of Directors of Kennametal until the termination of his employment hereunder. (b) Employee's base salary, the size of bonus awards, if any, granted to him and other emoluments for his services, if any, shall be determined by the Board of Directors or its Committee on Executive Compensation, as appropriate, from time to time in their sole discretion. 2. In addition to the compensation set forth or contemplated elsewhere herein, Employee, subject to the terms and conditions of this agreement, shall be entitled to participate in all group insurance programs, retirement income (pension) plans, thrift plans and vacation and holiday programs normally provided for other executives of Kennametal. Nothing herein contained shall be deemed to limit or prevent Employee, during his employment hereunder, from being reimbursed by Kennametal for out-of-pocket expenditures incurred for travel, lodging, meals, entertainment expenses or any other expenses in accordance with the policies of Kennametal applicable to the executives of Kennametal. 3. Employee's employment may be terminated with or without any reason for termination by either party hereto at any time by giving the other party prior written notice thereof, provided, however, that any termination on the part of Kennametal shall occur only if specifically authorized by its Board of Directors; provided, further, that termination by Kennametal for Cause (as hereinafter defined) shall be made by written notice which states that it is a termination for Cause; and provided, further, that termination by Employee, other than termination for Good Reason (as hereafter defined) following a Change-in-Control (as hereafter defined), shall be on not less than 30 days prior written notice to Kennametal. 4. (a) In the event that Employee's employment is terminated by Kennametal prior to a Change-in-Control (as hereinafter defined) and other than for Cause, Employee will receive as severance pay, in

2 addition to all amounts due him at the Date of Termination (as hereinafter defined), an amount, payable promptly after the Date of Termination, equal to three months' base salary at the annual rate in effect on the Date of termination. (b) In the event that Employee's employment is terminated (i) due to the death of the Employee or (ii) by Employee following a Change-in-Control (as hereafter defined) without Good Reason (as such term in defined in paragraph 4(h)) or prior to a Change-in-Control (as hereinafter defined), Employee will not be entitled to receive any severance pay in addition to the amounts, if any, due him at the Date of Termination (as hereinafter defined). (c) In the event at or after a Change-in-Control and prior to the third anniversary of the date of the Change-in-Control that Employee's employment is terminated by Employee for Good Reason or by Kennametal other than for Cause or Disability pursuant to paragraph 5, Employee will receive as severance pay (in addition to all other amounts due him at the Date of Termination) an amount equal to the product of: (i) the lesser of (x) two and eight tenths (2.8), (y) a number equal to the number of calendar months remaining from the Date of Termination to the Employee's Retirement Date (as such term is hereafter defined) divided by twelve (12), or (z) a number equal to the product obtained by multiplying thirty- six (36) less the number of completed months after the date of the Change-in-Control during which the Employee was employed and did not have Good Reason for termination times one-twelfth (1/12); times (ii) the sum of (x) Employee's base salary at the annual rate in effect on the Date of Termination (or, at Employee's election, at the annual rate in effect on the first day of the calendar month immediately prior to the Change-in-Control), plus (y) the average of any bonuses which Employee was entitled to or paid during the three most recent fiscal years ending prior to the Date of Termination. Such severance pay shall be paid by delivery of a cashier's or certified check to the Employee at Kennametal's executive offices on a date which is no later than five business days following the Date of Termination. In addition to the severance payments provided for in this paragraph 4(c), Employee also will receive the same or equivalent medical, dental, disability and group insurance benefits as were provided to the Employee at the Date of Termination, which benefits shall be provided to Employee for a three year period commencing on the Date of Termination. The Employee shall also be deemed and shall be credited for computing benefits, for vesting and for all other purposes under any pension or retirement income plan of Kennametal and under the Supplemental Executive Retirement Plan to have continuously remained in the employment of Kennametal for the three year period (or, if clause (i)(y) or clause (i)(z) above of this paragraph 4(c) is applicable to determine the severance payments to be made, the lesser period measured in years equal to clause (i)(y) or clause (i)(z) above, whichever is applicable) following the Date of Termination at an annual compensation equal to the sum of the base salary and bonus which were used to compute the payment due the Employee under the first paragraph of this Paragraph 4(c). (d) If for any reason, whether by law or provisions of Kennametal's employee medical, dental or group insurance, pension or retirement plan or other benefit plans, any benefits which the Employee would be entitled to under the foregoing subparagraph (c) of this Paragraph 4 cannot be paid pursuant to such employee benefit plans, then Kennametal hereby contractually agrees to pay to the Employee the difference between the benefits which the Employee would have received in accordance with the foregoing subparagraphs of this paragraph 4 if the relevant employee medical, dental or group insurance or pension or retirement plan or other benefit plan could have paid such benefit and the amount of -2-

3 benefits, if any, actually paid by such employee medical, dental or group insurance or pension or retirement plan or other benefit plan. Kennametal shall not be required to fund its obligation to pay the foregoing difference. (e) In the event of a termination of employment under the circumstances above described in Paragraph 4(c), Employee shall have no duty to seek any other employment after termination of Employee's employment with Kennametal and Kennametal hereby waives and agrees not to raise or use any defense based on the position that Employee had a duty to mitigate or reduce the amounts due him hereunder by seeking other employment whether suitable or unsuitable and should Employee obtain other employment, then the only effect of such on the obligations of Kennametal hereunder shall be that Kennametal shall be entitled to credit against any payments which would otherwise be made for medical, dental or group insurance or similar benefits (excluding, however, any credit against Kennametal payments relating to pension or retirement benefits or the Supplemental Executive Retirement Plan) pursuant to the benefit provisions set forth in the second paragraph of Paragraph 4(c) hereof, any comparable payments to which Employee is entitled under the employee benefit plans maintained by Employee's other employer or employers in connection with services to such employer or employers after termination of his employment with Kennametal. (f) The term "Change-in-Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934 as in effect on the date hereof ("1934 Act"), or if Item 6(e) is no longer in effect, any regulations issued by the Securities and Exchange Commission pursuant to the 1934 Act which serve similar purposes; provided that, without limitation, such a change in control shall be deemed to have occurred if (A) Kennametal shall be merged or consolidated with any corporation or other entity other than a merger or consolidation with a corporation or other entity all of whose equity interests are owned by Kennametal immediately prior to the merger or consolidation, or (B) Kennametal shall sell all or substantially all of its operating properties and assets to another person, group of associated persons or corporation, or (C) any "person" (as such term is used in Sections 13(d) and 14(d) of the 1934 Act), is or becomes a beneficial owner, directly or indirectly, of securities of Kennametal representing 25% or more of the combined voting power of Kennametal's then outstanding securities coupled with or followed by the existence of a majority of the board of directors of Kennametal consisting of persons other than persons who either were directors of Kennametal immediately prior to or were nominated by those persons who were directors of Kennametal immediately prior to such person becoming a beneficial owner, directly or indirectly, of securities of Kennametal representing 25% or more of the combined voting power of Kennametal's then outstanding securities. (g) For purposes of this agreement "Date of Termination" shall mean: (i) if Employee's employment is terminated due to his death or retirement, the date of death or retirement, respectively; or (ii) if Employee's employment is terminated for any other reason, the date on which the termination becomes effective as stated in the written notice of termination given to or by the Employee. (h) The term "Good Reason" for termination by the Employee shall mean the occurrence of any of the following at or after a Change-in-Control: (i) without the Employee's express written consent, the assignment to the Employee of any duties materially and substantially inconsistent with his positions, duties, responsibilities and status with Kennametal immediately prior to a Change-in-Control, or a material change in his reporting responsibilities, titles or offices as in effect immediately prior to a Change-in-Control, or any removal of the Employee from or any failure to re-elect the Employee to any of such positions, except in connection with the termination of the Employee's employment due to Cause (as hereinafter defined) or as a result of the Employee's death; (ii) a reduction by Kennametal in the Employee's base salary as in effect immediately prior to any Change-in-Control; -3-

4 (iii) a failure by Kennametal to continue to provide incentive compensation, under the rules by which incentives are provided, comparable to that provided by Kennametal immediately prior to any Change-in-Control; (iv) the failure by Kennametal to continue in effect any benefit or compensation plan, stock option plan, pension plan, life insurance plan, health and accident plan or disability plan in which Employee is participating immediately prior to a Change-in-Control (provided, however, that there shall not be deemed to be any such failure if Kennametal substitutes for the discontinued plan, a plan providing Employee with substantially similar benefits) or the taking of any action by Kennametal which would adversely affect Employee's participation in or materially reduce Employee's benefits under any of such plans or deprive Employee of any material fringe benefit enjoyed by Employee immediately prior to a Change-in-Control; (v) the failure of Kennametal to obtain the assumption of this Agreement by any successor as contemplated in paragraph 11 hereof; (vi) the relocation of the Employee to a facility or a location more than 50 miles from the Employee's then present location, without the Employee's prior written consent; or (vii) any purported termination of the employment of Employee by Kennametal which is not for Cause as provided in paragraph 5. 5. In the event that Employee (a) shall be guilty of malfeasance, willful misconduct or gross negligence in the performance of the services contemplated by this agreement, or (b) shall not make his services available to Kennametal on a full time basis in accordance with paragraph 1 hereof for any reason (including Disability) other than arising from Employee's incapacity due to physical or mental illness or injury which does not constitute Disability and other than by reason of the fact Employee's employment has been terminated under the circumstances described in paragraph 4(a), or (c) shall breach the provisions of paragraph 8 hereof (the matters described in subparagraphs (a), (b) and (c) are collectively referred to as "Cause"), Kennametal shall have the right, exercised by resolution adopted by a majority of its Board of Directors, to terminate Employee's employment for Cause by giving prior written notice to Employee of its election so to do. In that event, Employee's employment shall be deemed terminated for Cause, Employee shall not be entitled to the benefits set forth in paragraph 4 which shall not be paid or payable and Kennametal only shall have the obligation to pay Employee the unpaid portion of Employee's base salary for the period from the last period from which Employee was paid to the Date of Termination; provided, however, that if Employee's employment is terminated as a result of the Disability of Employee, the benefits set forth in paragraph 4 shall not be paid or payable but Employee shall be entitled to receive the annual supplement under the Supplemental Executive Retirement Plan and Employee's employment by Kennametal shall not be deemed terminated for purposes of the Long-Term Disability Plan, Retirement Income Plan for US Salaried Employees or any other benefit plan which so provides. For purposes of this agreement "Disability" shall mean such incapacity due to physical or mental illness or injury which results in the Employee's being absent from his principal office at Kennametal's offices for the entire portion of 180 consecutive business days. Prior to a Change-in-Control, a decision by the Board of Directors of Kennametal that "Cause" exists shall be in the discretion of the Board of Directors and shall be final and binding upon the Employee and his rights hereunder. After a Change-in-Control, "Cause" shall not be deemed to include opposition by Employee to such a Change-in-Control or any matter incidental thereto and any determination by the Board of Directors that "Cause" existed shall not be final or binding upon the Employee or his rights hereunder or entitled to any deference in any court or other tribunal. 6. Employee understands and agrees that, except to the extent Employee is entitled to the benefits provided in paragraph 4(c) hereof, in the event Employee resigns or his employment is terminated for any reason other than death or Disability prior to his "Retirement Date" (as hereinafter defined), he will forfeit any interest he may have in any Kennametal retirement income plan (except to the extent vested by actual service to date of separation as per the plan provisions), and all other benefits dependent upon continuing service. The term "Retirement Date" shall mean the first day of the month following the day on which Employee attains his sixty-fifth birthday, or at Employee's request, any other day that Kennametal's Board of Directors may approve in writing. 7. Nothing herein contained shall affect the right of Employee to participate in and receive benefits under and in accordance with the then current provisions of any retirement income, profit-sharing, additional year-end or periodic remuneration or bonus, incentive compensation, insurance or any other employee welfare plan or -4-

5 program of Kennametal and all payments hereunder shall be in addition to any benefits received thereunder (including long term disability payments). 8. During the period of employment of Employee by Kennametal and for three years thereafter, (provided, however, that this paragraph 8 shall not apply to the Employee following a termination of Employee's employment (x) if a Change-in-Control, shall have occurred prior to the Date of Termination or (y) if Employee's employment is terminated by Kennametal other than for Cause), he will not, in any geographic area in which Kennametal is offering its services and products, without the prior written consent of Kennametal: (a) directly or indirectly engage in, or (b) assist or have an active interest in (whether as proprietor, partner, investor, shareholder, officer, director or any type of principal whatsoever), or (c) enter the employ of, or act as agent for, or advisor or consultant to, any person, firm, partnership, association, corporation or business organization, entity or enterprise which is or is about to become directly or indirectly engaged in, any business which is competitive with any business of Kennametal or any subsidiary or affiliate thereof in which Employee is or was engaged; provided, however, that the foregoing provisions of this paragraph 8 are not intended to prohibit and shall not prohibit Employee from purchasing, for investment, not in excess of 1% of any class of stock or other corporate security of any company which is registered pursuant to Section 12 of the Securities Exchange Act of 1934. Employee acknowledges that the breach by him of the provisions of this paragraph 8 would cause irreparable injury to Kennametal, acknowledges and agrees that remedies at law for any such breach will be inadequate and consents and agrees that Kennametal shall be entitled, without the necessity of proof of actual damage, to injunctive relief in any proceedings which may be brought to enforce the provisions of this paragraph 8. Employee acknowledges and warrants that he will be fully able to earn an adequate livelihood for himself and his dependents if this paragraph 8 should be specifically enforced against him and that such enforcement will not impair his ability to obtain employment commensurate with his abilities and fully acceptable to him. If the scope of any restriction contained in this paragraph 8 is too broad to permit enforcement of such restriction to its full extent, then such restriction shall be enforced to the maximum extent permitted by law and Employee and Kennametal hereby consent and agree that such scope may be judicially modified in any proceeding brought to enforce such restriction. 9. (a) Employee acknowledges and agrees that in the course of his employment by Kennametal, Employee may work with, add to, create or acquire trade secrets and confidential information ("Confidential Information") which could include, in whole or in part, information: (i) of a technical nature such as, but not limited to, Kennametal's manuals, methods, know-how, formulae, shapes, designs, compositions, processes, applications, ideas, improvements, discoveries, inventions, research and development projects, equipment, apparatus, appliances, computer programs, software, systems documentation, special hardware, software development and similar items; or (ii) of a business nature such as, but not limited to, information about business plans, sources of supply, cost, purchasing, profits, markets, sales, sales volume, sales methods, sales proposals, identity of customers and prospective customers, identity of customers' key purchasing personnel, amount or kind of customers' purchases and other information about customers; or (iii) pertaining to future developments such as, but not limited to, research and development or future marketing or merchandising. Employee further acknowledges and agrees that (i) all Confidential Information is the property of Kennametal; (ii) the unauthorized use, misappropriation or disclosure of any Confidential Information would constitute a breach of trust and could cause irreparable injury to Kennametal; and (iii) it is essential to the protection of Kennametal's goodwill and to the maintenance of its competitive position that all Confidential Information be kept secret and that Employee not disclose any Confidential Information to others or use any Confidential Information to the detriment of Kennametal. -5-

6 Employee agrees to hold and safeguard all Confidential Information in trust for Kennametal, its successors and assigns and Employee shall not (except as required in the performance of Employee's duties), use or disclose or make available to anyone for use outside Kennametal's organization at any time, either during employment with Kennametal or subsequent thereto, any of the Confidential Information, whether or not developed by Employee, without the prior written consent of Kennametal. (b) Employee agrees that: (i) he will promptly and fully disclose to Kennametal or such officer or other agent as may be designated by Kennametal any and all inventions made or conceived by Employee (whether made solely by Employee or jointly with others) during employment with Kennametal (1) which are along the line of the business, work or investigations of Kennametal, or (2) which result from or are suggested by any work which Employee may do for or on behalf of Kennametal; and (ii) he will assist Kennametal and its nominees during and subsequent to such employment in every proper way (entirely at its or their expense) to obtain for its or their own benefit patents for such inventions in any and all countries; the said inventions, without further consideration other than such salary as from time to time may be paid to him by Kennametal as compensation for his services in any capacity, shall be and remain the sole and exclusive property of Kennametal or its nominee whether patented or not; and (iii) he will keep and maintain adequate and current written records of all such inventions, in the form of but not necessarily limited to notes, sketches, drawings, or reports relating thereto, which records shall be and remain the property of and available to Kennametal at all times. (c) Employee agrees that, promptly upon termination of his employment, he will disclose to Kennametal, or to such officer or other agent as may be designated by Kennametal, all inventions which have been partly or wholly conceived, invented or developed by him for which applications for patents have not been made and shall thereafter execute all such instruments of the character hereinbefore referred to, and will take such steps as may be necessary to secure and assign to Kennametal the exclusive rights in and to such inventions and any patents that may be issued thereon any expense therefor to be borne by Kennametal. (d) Employee agrees that he will not at any time aid in attacking the patentability, scope, or validity of any invention to which the provisions of subparagraphs (b) and (c), above, apply. 10. In the event that (a) Employee institutes any legal action to enforce his rights under, or to recover damages for breach of this agreement, or (b) Kennametal institutes any action to avoid making any payments due to Employee under this agreement, Employee, if he is the prevailing party, shall be entitled to recover from Kennametal any actual expenses for attorney's fees and other disbursements incurred by him in relation thereto. 11. The terms and provisions of this agreement shall be binding upon, and shall inure to the benefit of, Employee and Kennametal, it subsidiaries and affiliates and their respective successors and assigns. 12. This agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements and understandings, whether oral or written, among the parties with respect to the subject matter hereof. This agreement may not be amended orally, but only by an instrument in writing signed by each of the parties to this agreement. 13. The invalidity or unenforceability of any provision of this agreement shall not affect the other provisions hereof, and this agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. 14. Any pronoun and any variation thereof used in this agreement shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the parties hereto may require. 15. Kennametal shall be entitled as a condition to paying any severance pay or providing any benefits hereunder upon a termination of the Employee's employment to require the Employee to deliver on or before the making of any severance payment or providing of any benefit a release in the form of Exhibit A attached hereto. -6-

7 16. (a) At the time of making payment to an Employee entitled to receive the severance payment computed in accordance subsection 4(c)(i) and 4(c)(ii) of this agreement, the Corporation shall determine whether the Employee is expected to be subject to the tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to any payment or benefit received, or to be received, by Employee under this agreement or in connection with a change in control of the Corporation, or the termination of the Employees' employment (whether pursuant to the terms of this agreement or any other plan, arrangement or agreement with the Corporation, any person whose actions result in a change in control or any person affiliated with the Corporation or such person) (collectively, the "Total Payments"). If the Corporation determines that the Employee will be subject to the Excise Tax, the Corporation shall immediately send a written notice to the Employee which sets forth that the Employee will be subject to the Excise Tax and the Corporation's computation of the Total Payments, of the amount of Total Payments which constitute "parachute payments" as defined in section 28OG(b)(2) of the Code ("parachute payments") resulting in the imposition of the Excise Tax, and of the amount of Total Payments which the Employee would retain after giving effect to the Employee's receipt of the Excise Tax Payment (as hereafter defined) and payment of applicable taxes. Employee shall have five (5) business days after receipt of the foregoing notice and computation to deliver a written waiver to the Corporation irrevocable waiving the Employee's right to receive an amount of Total Payments equal to the "parachute payments" from any specified type of the Total Payments. If the Corporation had already withheld any Contract Payments due to the Excise Tax prior to receipt of such waiver, the Corporation upon receipt of such waiver shall immediately pay to Employee any withheld Contract Payments which would have been paid had the Corporation had the Employee's written waiver prior to the date the Corporation withheld any such payments. (b) If (i) after giving effect to any waiver by the Employee pursuant to subsection (a) above, the Employee will be subject to the Excise Tax with respect to any portion of the Total Payments and (ii) the Employee After Tax Net (as hereafter defined) would be less than the Minimum Amount (as hereafter defined), then the Corporation shall pay to Employee an additional amount (the "Excise Tax Payment") such that the Employee After Tax Net shall be equal to the Minimum Amount. The Excise Tax Payment, if any, under this subsection shall be made to Employee within fifteen (15) business days of Employee's Date of Termination. (c) The "Employee After Tax Net" is the portion of the Total Payments which the Employee retains or would retain after payment of all federal and any state and local income taxes on the Total Payments and of the Excise Tax. The "Minimum Amount" is an amount equal to the severance pay computed in accordance with subsection 4(c)(i) and 4(c)(ii) of this agreement less the federal, state and/or local income taxes which would be owing by the Employee on such severance pay (ignoring any Excise Tax Payment). For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all Total Payments shall be treated as parachute payments and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Board of Directors, such Total Payments (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (ii) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Total Payments or (B) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying clause (i), above) of the Code, and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Corporation's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of determining the Minimum Amount and the Excise Tax Payment, Employee shall be deemed to pay federal income taxes at Employee's highest -7-

8 marginal rate of federal income taxation in the calendar year in which the Excise Tax Payment is to be made and state and local income taxes at Employee's highest marginal rate of taxation in the state and locality of Employee's residence on the Date of Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (d) In the event that the Excise Tax is subsequently determined to be less than the amount taken into account in arriving at any payment made pursuant to subsection (b) above, Employee shall repay to the Corporation at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Excise Tax Payment attributable to such reduction (plus the portion of the Excise Tax Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Excise Tax Payment being repaid by Employee if such repayment results in a reduction in Excise Tax and/or a federal and state and local income tax deduction) plus interest on the amount of such repayment from the date the Excise Tax Payment was initially made to the date of repayment at the rate provided in Section 1274(b)(2)(B) of the Code (the "Applicable Rate"). In the event that the Excise Tax is determined to exist although the Corporation did not believe it existed in arriving at its determination in subsection (a) above or although the Corporation believed it existed but the actual amount exceeds the amount taken into account in arriving at any payment made pursuant to subsection (b) above (including by reason of any payment the existence or amount of which cannot be determined at the time of the Excise Tax Payment), the Corporation shall make an additional Excise Tax Payment in respect of such amount or such excess (plus any interest or penalties payable with respect thereto) at the time that the amount of such excess is finally determined. 17. This agreement shall be governed by the laws of the Commonwealth of Pennsylvania. WITNESS the due execution hereto as of the day and year first above written. ATTEST: KENNAMETAL INC. ________________________________ By:_________________________________ WITNESS: Employee: ________________________________ By:_________________________________(Seal) -8-

9 Exhibit A RELEASE KNOW ALL MEN BY THESE PRESENTS that the undersigned for good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound, hereby releases, remises, quitclaims and discharges completely and forever Kennametal Inc. and its directors, officers, employees, subsidiaries and affiliates from any and all claims, causes of action or rights which the undersigned has or may have, whether arising by virtue of contract or of applicable state laws or federal laws, and whether such claims, causes of action or rights are known or unknown; provided, however, that this Release shall not release, remise, quitclaim or discharge any claims, causes of action or rights which the undersigned may have (i) under that certain Amended and Restated Employment Agreement dated as of __________, ____, between the undersigned and Kennametal Inc., (ii) to any unreimbursed expense account or similar out-of-pocket reimbursement amounts owing the undersigned, or (iii) under the bylaws of Kennametal Inc. or the applicable state corporate statutes to indemnification for having served as an officer and/or employee of Kennametal Inc. and/or its subsidiaries. DATE:____________________________ ___________________________

1 EXHIBIT 10.23 AGREEMENT THIS AGREEMENT, is made and entered into this 21st day of January, 2000, by and between JLK DIRECT DISTRIBUTION INC., a corporation organized under the laws of the Commonwealth of Pennsylvania (hereinafter referred to as "JLK" or the "Corporation"), and RICHARD J. ORWIG, an individual (hereinafter referred to as "Employee"). WITNESSETH: WHEREAS, Employee acknowledges that by reason of employment by JLK, it is anticipated that Employee will work with, add to, create, have access to and be entrusted with trade secrets and confidential information belonging to JLK and Kennametal Inc. ("Kennametal") which are of a technical nature or business nature or pertain to future developments, the disclosure of which trade secrets or confidential information would be highly detrimental to the interests of JLK and Kennametal; and WHEREAS, in order to have the benefit of Employee's assistance, JLK is desirous of continuing to employ Employee. NOW, THEREFORE, JLK and Employee, each intending to be legally bound hereby, do mutually covenant and agree as follows: 1. (a) Subject to the terms and conditions set forth herein, JLK hereby agrees to continue to employ Employee and Employee hereby accepts such continued employment and agrees to devote his full time and attention to the business and affairs of JLK, in such capacity or capacities and to perform to the best of his ability such services as shall be determined from time to time by the Board of Directors of JLK until the termination of his employment hereunder. (b) Employee's base salary, the size of bonus awards, if any, granted to him and other emoluments for his services, if any, shall be determined by the Board of Directors of JLK or its Executive Compensation Committee, as appropriate, from time to time in their sole discretion. 2. In addition to the compensation set forth or contemplated elsewhere herein, Employee, subject to the terms and conditions of this Agreement, shall be entitled to continue to participate in all group insurance programs, retirement income (pension) plans, thrift plans and vacation and holiday programs normally provided for other executives of Kennametal and its subsidiaries for so long as JLK remains a subsidiary of Kennametal. Nothing herein contained shall be deemed to limit or prevent Employee, during his employment hereunder, from being reimbursed by JLK for out-of-pocket expenditures incurred for travel, lodging, meals, entertainment expenses or any other expenses in accordance with the policies of JLK applicable to the executives of JLK. 3. Employee's employment may be terminated with or without any reason for termination by JLK or Employee at any time by giving the other party prior written notice thereof; provided, however, that any termination on the part of JLK shall occur only if specifically authorized by its Board of Directors; provided, further, that termination by JLK for Cause (as hereinafter defined) shall be made by written notice which states that it is a termination for Cause; and provided, further, that termination by Employee, other than termination for Good Reason (as hereafter defined) following a Change-in-Control (as hereafter defined), shall be on not less than 30 days prior written notice to JLK. 4. (a) In the event that Employee's employment is terminated by JLK prior to a Change-in-Control and other than for Cause, Employee will receive as severance pay from JLK, in addition to all amounts due him at the Date of Termination (as hereinafter defined), an amount, payable promptly after the Date of Termination, equal to three months' base salary at the annual rate in effect on the Date of Termination. (b) In the event that Employee's employment is terminated (i) due to the death of the Employee or (ii) by Employee following a Change-in-Control without Good Reason or (iii) by Employee prior to a Change-in-Control, Employee will not be entitled to receive any severance pay in addition to the amounts, if any, due him at the Date of Termination.

2 (c) In the event that at or after a Change-in-Control and prior to the third anniversary of the date of the Change-in-Control Employee's employment is terminated by Employee for Good Reason or by JLK other than for Cause or Disability pursuant to paragraph 5, Employee will receive as severance pay (in addition to all other amounts due him at the Date of Termination) from JLK an amount equal to the product of (i) the lesser of (x) two and eight tenths (2.8), (y) a number equal to the number of calendar months remaining from the Date of Termination to the Employee's Retirement Date (as such term is hereafter defined) divided by twelve (12), or (z) a number equal to the product, if positive, obtained by multiplying (AA) thirty-six (36) less the number of completed months after the date of the Change-in-Control during which the Employee was employed and did not have Good Reason for termination times (BB) one-twelfth (1/12); times (ii) the sum of (x) Employee's base salary at the annual rate in effect on the Date of Termination (or, at Employee's election, at the annual rate in effect on the first day of the calendar month immediately prior to the Change-in-Control), plus (y) the average of any bonuses which Employee was entitled to or paid during the three most recent fiscal years ending prior to the Date of Termination (or, at Employee's election, the average of any bonuses which Employee was entitled to or paid for the three fiscal years preceding the fiscal year in which the Change-in-Control occurred). Such severance pay shall be paid by delivery of a cashier's or certified check to the Employee at JLK's executive offices on a date which is no later than five business days following the Date of Termination. (d) If Employee is entitled to receive the severance payment set forth in paragraph 4(c), Employee also will receive from JLK the same or equivalent medical, dental, disability and group insurance benefits as were provided to the Employee by JLK at the Date of Termination, which benefits shall be provided by JLK to Employee for a three year period commencing on the Date of Termination. Pursuant to the terms of Kennametal's various benefit plans, Employee will not following a Change-in-Control have any rights to receive from Kennametal or from any medical, dental, disability, group insurance, retirement or pension plan or other benefit plan maintained or sponsored by Kennametal any benefits or other sums other than (i) to receive from the Kennametal Inc. Retirement Income Plan and Kennametal's Supplemental Executive Retirement Plan any vested benefits to the extent and at the times payable under the terms of the Kennametal Inc. Retirement Income Plan and Kennametal's Supplemental Executive Retirement Plan, (ii) to receive from the Kennametal Inc. Thrift Plan any vested benefits to the extent and at the times payable under the terms of the Kennametal Inc. Thrift Plan and (iii) to exercise any stock options held under Kennametal's stock option plans to the extent, if any, exerciseable and in accordance with the terms of Kennametal's stock option plans. If for any reason, whether by law or provisions of any employee medical, dental or group insurance, or other benefit plan of JLK in which the Employee is eligible to participate, any benefits which the Employee would be entitled to under the foregoing paragraph of this subparagraph (d) cannot be paid pursuant to such employee benefit plans, then JLK hereby contractually agrees to pay to the Employee the difference between the benefits which the Employee would have received in accordance with the foregoing paragraph of this subparagraph (d) if the relevant employee medical, dental or group insurance or pension or retirement plan or other benefit plan could have paid such benefit and the amount of benefits, if any, actually paid by such employee medical, dental or group insurance or pension or retirement plan or other benefit plan. JLK shall not be required to fund its obligation to pay the foregoing difference. If Employee is entitled to receive the severance payment set forth in paragraph 4(c), JLK shall also make -2-

3 supplemental pension payments to Employee equal in amount to the difference between the pension payable to Employee pursuant to the terms of the Kennametal Inc. Retirement Income Plan and Kennametal's Supplemental Executive Retirement Plan (as both plans are in existence on the date of the Change-in-Control) and any increased pension which would have been payable to Employee under the terms of the Kennametal Inc. Retirement Income Plan and Kennametal's Supplemental Executive Retirement Plan (as both plans are in existence on the date of the Change-in-Control) assuming (i) JLK had remained a subsidiary of Kennametal and (ii) Employee had remained continuously in the employment of JLK for the three year period (or, if clause (i)(y) or clause (i)(z) of paragraph 4(c) is applicable to determine the severance payment to be made, the lesser period measured in years and fractions thereof rounded to the nearest one-twelfth which equals the number determined by clause (i)(y) or clause (i)(z) above, whichever is applicable) following the Date of Termination at an annual compensation equal to the sum of the base salary and bonus which were used to compute the severance payment due the Employee under the first paragraph of paragraph 4(c) and had attained the age of 60 at the end of such period. Such supplemental pension payments shall be paid by JLK to Employee ratably at the times when pension payments are made under the Kennametal Inc. Retirement Income Plan and Kennametal's Supplemental Executive Retirement Plan. JLK shall not be required to fund its obligation to pay the foregoing difference. (e) In the event of a termination of employment under the circumstances above described in paragraph 4(c), Employee shall have no duty to seek any other employment after termination of Employee's employment with JLK and JLK hereby waives and agrees not to raise or use any defense based on the position that Employee had a duty to mitigate or reduce the amounts due him hereunder by seeking other employment whether suitable or unsuitable and should Employee obtain other employment, then the only effect of such on the obligations of shall be that JLK shall be entitled to credit against any payments which would otherwise be made for medical, dental or group insurance or similar benefits (excluding, however, any credit against payments relating to pension or retirement benefits) pursuant to the benefit provisions set forth in paragraph 4(e) hereof, any comparable payments to which Employee is entitled under the employee benefit plans maintained by Employee's other employer or employers in connection with services to such employer or employers after termination of his employment with JLK. (f) The term "Change-in-Control" shall mean that all of the following conditions shall have occurred: (i) JLK is no longer a direct or indirect subsidiary of Kennametal, (ii) Kennametal and its affiliates no longer own any shares of Class B Common Stock of JLK and (iii) one or more persons (other than Kennametal or its subsidiaries) have acquired control of a nature that would be required to be reported by JLK in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934 as in effect on the date hereof (the "1934 Act"), or if Item 6(e) is no longer in effect, any regulations issued by the Securities and Exchange Commission pursuant to the 1934 Act which serve similar purposes; provided that, without limitation, the third condition set forth in subclause (iii) of this sentence shall be deemed to have occurred if (A) JLK shall be merged or consolidated with any corporation or other entity other than a merger or consolidation with a corporation or other entity all of whose equity interests are owned (1) by JLK immediately prior to the merger or consolidation or (2) by Kennametal and/or its subsidiaries if JLK is at the time of such merger or consolidation a direct or indirect subsidiary of Kennametal or if Kennametal and its affiliates at the time of such merger or consolidation own shares of Class B Common Stock of JLK, or (B) JLK shall sell all or substantially all of its operating properties and assets to another person, group of associated persons or corporation other than Kennametal or its subsidiaries. (g) For purposes of this Agreement "Date of Termination" shall mean: (i) if Employee's employment is terminated due to his death or retirement, the date of death or retirement, respectively; or (ii) if Employee's employment is terminated for any other reason, the date on which the termination becomes effective as stated in the written notice of termination given to or by the Employee. (h) The term "Good Reason" for termination by the Employee shall mean the occurrence of any of the following at or after a Change-in-Control: (i) without the Employee's express written consent, the assignment to the Employee of any duties materially and substantially inconsistent with his positions, duties, responsibilities and status with JLK immediately prior to a Change-in-Control, or a material change in his reporting responsibilities, titles or offices as in effect immediately prior to a Change-in-Control, or any removal of the Employee from or any -3-

4 failure to re-elect the Employee to any of such positions, except in connection with the termination of the Employee`s employment due to Cause or as a result of the Employee's death; (ii) a reduction by JLK in the Employee's base salary as in effect immediately prior to any Change-in-Control; (iii) a failure by JLK to continue to provide incentive compensation comparable to that provided by JLK immediately prior to any Change-in-Control; (iv) in the event of a Change-in-Control, the failure to continue in effect any benefit or compensation plan, stock option plan, pension plan, life insurance plan, health and accident plan or disability plan of JLK in which Employee is participating immediately prior to a Change-in-Control (provided, however, that there shall not be deemed to be any such failure (x) due to Employee's no longer participating in any plan of Kennametal or (y) if JLK substitutes for the discontinued plan, a plan providing Employee with substantially similar benefits) or the taking of any action by JLK which would adversely affect Employee's participation in or materially reduce Employee's benefits under any of such plans or deprive Employee of any material fringe benefit enjoyed by Employee immediately prior to a Change-in-Control; (v) the failure of JLK to obtain the assumption of this Agreement by any successor as contemplated in paragraph 11 hereof; (vi) the relocation of the Employee to a facility or a location more than 50 miles from the Employee's then present location, without the Employee's prior written consent; or (vii) any purported termination of the employment of Employee by JLK which is not for Cause as provided in paragraph 5. (i) Employee shall not be entitled to receive any severance payment from Kennametal and Kennametal shall have no obligation to pay any severance to Employee upon a termination of Employee's employment. 5. In the event that Employee (a) shall be guilty of malfeasance, willful misconduct or gross negligence in the performance of the services contemplated by this Agreement; or (b) shall not make his services available to JLK on a full time basis in accordance with paragraph 1 hereof for any reason (including Disability) other than arising from Employee's incapacity due to physical or mental illness or injury which does not constitute Disability and other than by reason of the fact Employee's employment has been terminated under the circumstances described in paragraph 4(a); or (c) shall breach the provisions of paragraph 8 hereof (each of the matters described in subparagraphs (a), (b) and (c) shall be "Cause"), JLK shall have the right, exercised by resolution adopted by a majority of its Board of Directors, to terminate Employee's employment for Cause by giving written notice to Employee of its election so to do. In that event, Employee's employment shall be deemed terminated for Cause, Employee shall not be entitled to the benefits set forth in paragraph 4 which shall not be paid or payable and JLK only shall have the obligation to pay Employee the unpaid portion of Employee's base salary for the period from the last period from which Employee was paid to the Date of Termination; provided, however, that if Employee's employment is terminated as a result of the Disability of Employee, the benefits set forth in paragraph 4 shall not be paid or payable but Employee's employment by JLK shall not be deemed terminated for purposes of any benefit plan of JLK. For purposes of this Agreement "Disability" shall mean such incapacity due to physical or mental illness or injury which results in the Employee's being absent from his principal office at JLK's offices for the entire portion of 180 consecutive business days. Prior to a Change-in-Control, a decision by the Board of Directors of JLK that "Cause" exists shall be in the discretion of the Board of Directors and shall be final and binding upon the Employee and his rights hereunder. After a Change-in-Control, "Cause" shall not be deemed to include opposition by Employee to such a Change-in-Control or any matter incidental thereto and any determination by the Board of Directors that "Cause" existed shall not be final or binding upon the Employee or his rights hereunder or entitled to any deference in any court or other tribunal. 6. Employee understands and agrees that, except to the extent Employee is entitled to the benefits provided in paragraph 4(d) hereof, in the event Employee resigns or his employment is terminated for any reason other than death or Disability prior to his "Retirement Date" (as hereinafter defined), he will forfeit any interest he may have in any retirement income plan (except to the extent vested by actual service to date of separation as per the plan provisions), and all other benefits dependent upon continuing service. The term "Retirement Date" shall mean the first day of the month following the day on which Employee attains his sixty-fifth birthday, or at Employee's request, any other day that JLK's Board of Directors may approve in writing. -4-

5 7. Nothing herein contained shall affect the right of Employee to participate in and receive benefits under and in accordance with and to the extent provided for in the then current terms and provisions of any retirement income, profit-sharing, additional year-end or periodic remuneration or bonus, incentive compensation, insurance or any other employee welfare plan or program of JLK applicable to Employee and all payments hereunder shall be in addition to any benefits received thereunder (including long term disability payments). 8. During the period of employment of Employee by JLK and for three years thereafter, (provided, however, that this paragraph 8 shall not apply to the Employee following a termination of Employee's employment (x) after a Change-in-Control shall have occurred or (y) if Employee's employment is terminated by JLK other than for Cause), he will not, in any geographic area in which JLK (or Kennametal, if JLK on the Date of Termination is a subsidiary of Kennametal) is offering its services and products, without the prior written consent of JLK: (a) directly or indirectly engage in, or (b) assist or have an active interest in (whether as proprietor, partner, investor, shareholder, officer, director or any type of principal whatsoever), or (c) enter the employ of, or act as agent for, or advisor or consultant to, any person, firm, partnership, association, corporation or business organization, entity or enterprise which is or is about to become directly or indirectly engaged in, any business which is competitive with any business of JLK (or Kennametal, if JLK on the Date of Termination is a subsidiary of Kennametal) or any subsidiary or affiliate thereof in which Employee is or was engaged; provided, however, that the foregoing provisions of this paragraph 8 are not intended to prohibit and shall not prohibit Employee from purchasing, for investment, not in excess of 1% of any class of stock or other corporate security of any company which is registered pursuant to Section 12 of the 1934 Act. Employee acknowledges that the breach by him of the provisions of this paragraph 8 would cause irreparable injury to JLK (or Kennametal, if JLK on the Date of Termination is a subsidiary of Kennametal), acknowledges and agrees that remedies at law for any such breach will be inadequate and consents and agrees that JLK (or Kennametal, if JLK on the Date of Termination is a subsidiary of Kennametal) shall be entitled, without the necessity of proof of actual damage, to injunctive relief in any proceedings which may be brought to enforce the provisions of this paragraph 8. Employee acknowledges and warrants that he will be fully able to earn an adequate livelihood for himself and his dependents if this paragraph 8 should be specifically enforced against him and that such enforcement will not impair his ability to obtain employment commensurate with his abilities and fully acceptable to him. If the scope of any restriction contained in this paragraph 8 is too broad to permit enforcement of such restriction to its full extent, then such restriction shall be enforced to the maximum extent permitted by law and Employee and JLK (and Kennametal, if JLK on the Date of Termination is a subsidiary of Kennametal) hereby consent and agree that such scope may be judicially modified in any proceeding brought to enforce such restriction. 9. (a) Employee acknowledges and agrees that in the course of his employment by JLK, Employee may work with, add to, create or acquire trade secrets and confidential information of JLK or Kennametal ("Confidential Information") which could include, in whole or in part, information: (i) of a technical nature such as, but not limited to, JLK's or Kennametal's manuals, methods, know-how, formulae, shapes, designs, compositions, processes, applications, ideas, improvements, discoveries, inventions, research and development projects, equipment, apparatus, appliances, computer programs, software, systems documentation, special hardware, software development and similar items; or (ii) of a business nature such as, but not limited to, information about JLK's or Kennametal's business plans, sources of supply, cost, purchasing, profits, markets, sales, sales volume, sales methods, sales proposals, identity of customers and prospective customers, identity of customers' key purchasing personnel, amount or kind of customers' purchases and other information about customers; or (iii) pertaining to future developments of JLK or Kennametal such as, but not limited to, research and development or future marketing or merchandising. Employee further acknowledges and agrees that (i) all Confidential Information is the property of JLK and/or Kennametal; (ii) the unauthorized use, misappropriation or disclosure of any Confidential Information would constitute a breach of trust and could cause irreparable injury to JLK and/or Kennametal; and (iii) it is essential to the protection of JLK's and/or Kennametal's good will and to the maintenance of its competitive position that all Confidential Information be kept -5-

6 secret and that Employee not disclose any Confidential Information to others or use any Confidential Information to the detriment of JLK or Kennametal. Employee agrees to hold and safeguard all Confidential Information in trust for JLK and Kennametal, each of their successors and assigns and Employee shall not (except as required in the performance of Employee's duties), use or disclose or make available to anyone for use outside JLK's or Kennametal's organization at any time, either during employment with JLK or subsequent thereto, any of the Confidential Information, whether or not developed by Employee, without the prior written consent of JLK and Kennametal. (b) Employee agrees that: (i) he will promptly and fully disclose to JLK or such officer or other agent as may be designated by JLK any and all inventions made or conceived by Employee (whether made solely by Employee or jointly with others) during employment with JLK (1) which are along the line of the business, work or investigations of JLK or Kennametal, or (2) which result from or are suggested by any work which Employee may do for or on behalf of JLK or Kennametal; and (ii) he will assist JLK (and Kennametal, if JLK on the Date of Termination is a subsidiary of Kennametal) and its nominees during and subsequent to such employment in every proper way (entirely at its or their expense) to obtain for its or their own benefit patents for such inventions in any and all countries; the said inventions, without further consideration other than such salary as from time to time may be paid to him by JLK as compensation for his services in any capacity, shall be and remain the sole and exclusive property of JLK (and Kennametal, if JLK on the Date of Termination is a subsidiary of Kennametal) or its nominee whether patented or not; and (iii) he will keep and maintain adequate and current written records of all such inventions, in the form of but not necessarily limited to notes, sketches, drawings, or reports relating thereto, which records shall be and remain the property of and available to JLK (and Kennametal, if JLK on the Date of Termination is a subsidiary of Kennametal) at all times. (c) Employee agrees that, promptly upon termination of his employment, he will disclose to JLK (or Kennametal, if JLK on the Date of Termination is a subsidiary of Kennametal), or to such officer or other agent as may be designated by JLK (or Kennametal, if JLK on the Date of Termination is a subsidiary of Kennametal), all inventions which have been partly or wholly conceived, invented or developed by him for which applications for patents have not been made and will thereafter execute all such instruments of the character hereinbefore referred to, and will take such steps as may be necessary to secure and assign to JLK (or Kennametal, if JLK on the Date of Termination is a subsidiary of Kennametal) the exclusive rights in and to such inventions and any patents that may be issued thereon any expense therefor to be borne by JLK. (d) Employee agrees that he will not at any time aid in attacking the patentability, scope, or validity of any invention to which the provisions of subparagraphs (b) and (c), above, apply. 10. In the event that (a) Employee institutes any legal action to enforce his rights under, or to recover damages for breach of this Agreement, or (b) JLK institutes any action to avoid making any payments due to Employee under this Agreement, Employee, if he is the prevailing party, shall be entitled to recover from JLK any actual expenses for attorney's fees and other disbursements incurred by him in relation thereto. 11. The terms and provisions of this Agreement shall be binding upon Employee and JLK, and shall inure to the benefit of, Employee, JLK and Kennametal (which shall be deemed an express third party beneficiary of this Agreement) and their subsidiaries and affiliates, and the parties respective successors and assigns. The Employee's employment shall not be deemed terminated for purposes of this Agreement if the Employee is employed by a successor to JLK, which successor shall be deemed to be JLK for purposes of this Agreement. 12. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements and understandings, whether oral or written, among the parties with respect to the subject matter hereof. Any prior employment agreement between the Employee and Kennametal is hereby terminated and Employee shall not be entitled to any severance or other benefits under any prior employment agreement with Kennametal. This Agreement may not be amended orally, but only by an instrument in writing signed by each of the parties to this Agreement and consented to in writing by Kennametal. This Agreement does not create any right to continued employment by JLK and the Employee shall remain an "at will" employee of JLK. -6-

7 13. The invalidity or enforceability of any provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. 14. Any pronoun and any variation thereof used in this Agreement shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the parties hereto may require. 15. A condition to Employee's right to receive or receipt of any severance pay or any benefits hereunder upon a termination of the Employee's employment shall be for the Employee to execute and to deliver to JLK and Kennametal on or before the making of any severance payment or providing of any benefit a release in the form of Exhibit A attached hereto. 16. Not withstanding any other provision of this Agreement, in the event that any payment or benefit received or to be received by Employee in connection with a change in control of the Corporation or the termination of the Employee's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Corporation, or any person whose actions result in a change in control or any person affiliated with the Corporation or such person) (collectively, the "Total Payments") would not be deductible, in whole or part, as a result of section 280G of the Internal Revenue Code of 1986 (the "Code") by the Corporation, an affiliate or other person making such payment or providing such benefit, the payments due under this Agreement (the "Contract Payments") shall be reduced until no portion of the Total Payments is not deductible, or the Contract Payments are reduced to zero. In the event that the Corporation or the affiliate or other person making such payment or providing such benefit determines that the Total Payments would not be deductible, in whole or part, as a result of section 280G of the Code, the Corporation or the affiliate or other person making such payment or providing such benefit shall immediately notify Employee of this determination and the amount which would not be so deductible as well as a computation of Total Payments. Employee shall have five (5) business days after receipt of the foregoing notice and computation to waive in writing all or any portion of any of the Total Payments and any portion of the Total Payments the receipt or enjoyment of which Employee shall have effectively waived in writing shall not be taken into account (and, if the Corporation had already withheld any Contract Payments prior to receipt of such waiver, the Corporation upon receipt of such waiver shall immediately pay to Employee any withheld Contract Payments which would have been paid had the Corporation had the Employee's written waiver prior to the date the Corporation withheld any such payments). For purposes of this limitation (i) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Corporation's independent auditors and acceptable to Employee does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, (ii) the Contract Payments shall be reduced only to the extent necessary so that the Total Payments (other than those Contract Payments which are waived in writing by the Employee or referred to in clause (i)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (i); and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Corporation's independent auditors in accordance with the principles of section 280G(d)(3) and (4) of the Code. 17. This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania without regard to its conflicts or choice of law provisions. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -7-

8 WITNESS the due execution hereto the day and year first above written. ATTEST: JLK DIRECT DISTRIBUTION INC. /s/ Kevin G. Nowe By: /s/ Diana L. Scott - ------------------------ --------------------------------------------- Name: Diana L. Scott -------------------------------------------- Title: Vice President and Chief Financial Officer ------------------------------------------ WITNESS: RICHARD J. ORWIG, EMPLOYEE: /s/ John Beaudoin /s/ Richard J. Orwig (SEAL) - ------------------------ ------------------------------------------------- -8-

9 Exhibit A RELEASE KNOW ALL MEN BY THESE PRESENTS that the undersigned for good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound, hereby releases, remises, quitclaims and discharges completely and forever JLK Direct Distribution Inc. and Kennametal Inc. and each of their respective directors, officers, employees, subsidiaries and affiliates from any and all claims, causes of action or rights which the undersigned has or may have, whether arising by virtue of contract or of applicable state laws or federal laws, and whether such claims, causes of action or rights are known or unknown; provided, however, that this Release shall not release, remise, quitclaim or discharge any claims, causes of action or rights which the undersigned may have (i) under that certain Employment Agreement dated January 21, 2000 between the undersigned and JLK Direct Distribution Inc., (ii) to any unreimbursed expense account or similar out-of-pocket reimbursement amounts owing the undersigned, or (iii) under the bylaws of JLK Direct Distribution Inc. or Kennametal Inc. or the applicable state corporate statutes to indemnification for having served as an officer and/or employee of Kennametal Inc. and/or its subsidiaries or JLK Direct Distribution Inc., and/or its subsidiaries. DATE: January 21, 2000 /s/ Richard J. Orwig -------------------------- -------------------- -9-

1 EXHIBIT 10.24 AGREEMENT THIS AGREEMENT is made and entered into by and among Richard J. Orwig ("Orwig"), JLK Direct Distribution Inc., and Kennametal, Inc. WHEREAS, effective May 2, 2000, Orwig resigned from his position as President and Chief Executive Officer of JLK Direct Distribution Inc., his position on the Board of Directors of JLK Direct Distribution Inc., his employment with JLK Direct Distribution Inc., his position(s) as officer and director of any JLK subsidiaries, and any and all positions he held with JLK or Kennametal or their affiliates or subsidiary companies; WHEREAS, Orwig, JLK Direct Distribution Inc. and Kennametal, Inc. desire to enter into a full and complete agreement in an amicable manner; NOW THEREFORE, in consideration of the mutual promises contained herein, and intending to be legally bound hereby, the parties to this Agreement agree as follows: 1. Definitions (a) "JLK," as used herein, shall at all times mean JLK Direct Distribution Inc., its parent, subsidiaries, successors and assigns, its affiliated and predecessor companies or corporations, its divisions, their successors and assigns, their affiliated and predecessor companies or corporations and the present and/or former directors, officers, shareholders, employees, attorneys and agents of any of them, including but not limited to Kennametal, Inc., J&L Industrial Supply, and Full Service Supply, whether in their individual or official capacities, and the current and former trustees or administrators of any pension or other benefit plan applicable to the employees or former employees of JLK in their official and individual capacities. (b) "Kennametal," as used herein, shall at all times mean Kennametal, Inc., its parent, subsidiaries, successors and assigns, its affiliated and predecessor companies or corporations, its divisions, their successors and assigns, their affiliated and predecessor companies or corporations and the present or former directors, officers, shareholders, employees, attorneys and agents of any of them, including but not limited to JLK Direct Distribution Inc., whether in their individual or official capacities, and the current and former trustees or administrators of any pension or other benefit plan applicable to the employees or former employees of Kennametal in their official and individual capacities. 2. Employment Status (a) Orwig represents and agrees that effective May 2, 2000, he resigned from his position as President and Chief Executive Officer of JLK Direct Distribution Inc., his position on the Board of Directors of JLK Direct Distribution Inc., his employment with JLK Direct Distribution Inc., his position(s) as officer and director of any JLK subsidiaries, and any and all positions he held with JLK or Kennametal or their affiliates or subsidiary companies. (b) Orwig, JLK and Kennametal agree that Orwig: (a) has not been required to perform any services for JLK or Kennametal since May 2, 2000; and (b) shall not be required to provide any further services to JLK or Kennametal except as provided in paragraph 13 of this Agreement. (c) Orwig waives any and all rights or claim of right to be reinstated to his former or any other position with JLK or Kennametal and agrees that he shall not at any time seek or accept future employment with JLK or Kennametal. A breach of this subparagraph 2(c) by Orwig will constitute lawful and just cause to refuse to employ Orwig, and he shall have no cause of action against JLK or Kennametal for such refusal. 3. Severance, Benefits, and Stock Options (a) JLK shall continue to pay Orwig his current base salary, less applicable withholdings and deductions, through November 2, 2001, as severance pay. (b) JLK will provide Orwig with health, dental, vision, life insurance, and accidental death and dismemberment insurance coverage substantially similar to the coverage now in force pursuant to Orwig's 2000 Enrollment Elections under JLK's Flex Benefits Program, as well as life insurance coverage substantially similar to Orwig's coverage under the

2 $500,000.00 executive officer's term life insurance policy, through November 2, 2001. The foregoing insurance coverages provided to Orwig may be subject to change in a manner consistent with future changes to the substantially similar coverages made available to JLK employees under the JLK Flex Benefits Program. These insurance coverages shall be provided to Orwig as a former employee at no premium expense to him; Orwig shall not be eligible for continued participation (as such) under the JLK Flex Benefits Program. For any period during which Orwig is entitled to, eligible for, or receiving group health, dental, vision, life insurance, accidental death and dismemberment insurance, and/or executive officer's term life insurance benefits from or through an employer or former employer other than JLK or Kennametal, JLK will not be required to provide the corresponding benefit coverage described in this subparagraph 3(b). (c) JLK will extend the option period during which Orwig can vest in JLK stock options, outstanding as of May 2, 2000, through November 2, 2001; any JLK stock options in which Orwig is or becomes vested may be exercised at any time through February 2, 2002. Orwig will exercise any and all of his Kennametal stock options, outstanding and vested as of May 2, 2000, on or before August 2, 2000; any Kennametal stock options not exercised by August 2, 2000 shall be forfeited and surrendered. (d) JLK will pay Orwig a Fiscal Year 2000 bonus of $40,000.00, less applicable withholdings and deductions, in August 2000. (e) If each of the following conditions are satisfied, JLK will pay a realtor designated by Orwig and/or Orwig's mover up to $25,000.00, on an after-tax basis, for moving expenses and/or real estate commissions actually incurred by Orwig: (A) Orwig moves his primary residence more than one hundred (100) miles away from his current primary residence on or before November 2, 2000; (B) the above move is Orwig's first move following the date of this Agreement; (C) the above move is not for the purposes of accepting or furthering employment or consulting opportunities with a competitor, as that term is defined in subparagraph 3(f) of this Agreement; (D) Orwig is not moving for the purposes of accepting or furthering employment or consulting opportunities with an entity which ordinarily pays all or a portion of moving expenses incurred by a person similarly situated to Orwig; (E) Orwig incurs moving expenses and/or real estate commissions as a result of the above move; and (F) Orwig submits written invoices to David T. Cofer, Esquire, indicating the amount of expenses and/or commissions incurred as a result of the above move and the specific purpose for which the expense was incurred. JLK's total payments to the realtor and/or mover pursuant to this subparagraph 3(e) shall not exceed $25,000.00 on an after-tax basis. (f) If Orwig becomes employed by or provides consultation to a competitor on or before November 2, 2001, the salary continuation and benefits coverage extension as described in subparagraphs 3(a) and 3(b) above shall terminate and be discontinued immediately. For the purposes of this subparagraph 3(f), "competitor" shall mean MSC Industrial Direct Co., Industrial Distribution Group, Inc., Sandvik AB and Sandvik Coromant, SECO Tools AB, Iscar Ltd. and Iscar Metals Inc., Milacron Inc., Carboloy Inc. and Valenite Inc., Airgas, Inc., W.W. Grainger, Inc., Mitsubishi Materials Corp. and Mitsubishi Carbide, Sumitomo Electric Carbide, Inc., Toshiba Tungaloy America, Inc. and Toshiba Tungaloy Co. Ltd., Allegheny Technologies Inc., and/or any of their parents, subsidiaries, successors, assigns, affiliated and predecessor companies or corporations, and divisions. Orwig agrees to immediately notify David T. Cofer, Esquire orally and in writing of any employment, consulting arrangement, or comparable business opportunity he undertakes with any of those entities on or before November 2, 2001. (g) Orwig will receive credit for employment service under the Supplemental Early Retirement Plan throughout the period that JLK continues to pay Orwig his current base salary pursuant to paragraph 3(a) of this Agreement. For informational purposes only, JLK projects that if Orwig receives credit for employment service through November 2, 2001, Orwig will receive annual Supplemental Early Retirement Benefits in the amount of $151,600.00 commencing on Orwig's sixtieth (60th) birthday. (h) JLK will extend Orwig's AYCO Financial Services benefit through April 15, 2002. (i) In August 2000, JLK will pay Orwig for four (4) weeks worth of accrued but unused vacation time, totaling $26,923.00, less applicable withholdings and deductions. (j) JLK's entire obligation to provide salary, incentive compensation, severance, bonus, stock options, pension, 401(k), medical, dental, life, or disability insurance, vacation, compensation, emoluments or benefits of any kind to Orwig is set forth in this Agreement and any other obligation of JLK or Kennametal to provide any of the foregoing to Orwig is hereby canceled except that Orwig shall retain the vested benefits he may be entitled to receive pursuant to the Kennametal, Inc. Retirement Income Plan, Supplemental Executive Retirement Plan and Thrift Plan. 4. No Actions -2-

3 (a) Orwig affirms that there are no charges, complaints, grievances or actions by or concerning Orwig against JLK or Kennametal currently pending in or before any court, administrative agency, arbitrator or other entity. (b) Orwig agrees not to file, pursue, participate in, induce, aid or abet any claim or cause of action against JLK or Kennametal, and Orwig confirms that he has not done so at any time prior to signing this Agreement. This provision does not prohibit Orwig from testifying in any cause of action relating to JLK or Kennametal when required to do so by process of law, or from communicating with, or participating in any proceedings before, the EEOC. In the event that Orwig is required by process of law to testify in any cause of action relating in any way to JLK or Kennametal, Orwig shall immediately notify David T. Cofer, Esquire orally and in writing, and shall use his best lawful efforts not to testify until JLK and/or Kennametal has a reasonable opportunity to oppose such testimony, if JLK and/or Kennametal desires to do so. Orwig agrees not to accept the proceeds from any cause of action or proceeding against JLK or Kennametal. (c) Orwig agrees to pay for any legal fees or costs incurred by JLK or Kennametal as a result of any breach of his promises in this paragraph 4. 5. Release and Waiver (a) As a material inducement to JLK and Kennametal to enter into this Agreement and for and in consideration of the terms expressed herein, Orwig, for himself, his successors and assigns, does hereby irrevocably and unconditionally release and forever discharge JLK and Kennametal of and from any and all claims, charges, demands, liabilities, obligations, promises, controversies, damages, rights, actions and causes of action of whatever nature, kind or character, in law or equity, whether known or unknown ("Claims"), which Orwig now has, may have or claims to have or which he at any time heretofore may have, had or claimed to have against JLK and/or Kennametal. This release includes, but is not limited to, those Claims arising from or during Orwig's employment, related to his employment, as a result of his termination of or separation from employment with JLK or Kennametal, his receipt of stock options, or his ownership in securities, and Orwig agrees not to assert any such Claims or causes of action. This release and waiver includes, but is not limited to, Claims arising under federal, state or local statutes, ordinances or common laws, specifically including, but not limited to, the Civil Rights Act of 1866, the Civil Rights Act of 1871, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Rehabilitation Act of 1973, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Employee Retirement Income Security Act of 1974, Executive Order 11246, the Veterans Reemployment Statutes, the Family and Medical Leave Act, the Securities Exchange Act of 1934 (or any state securities laws), Securities and Exchange Commission Rule 10b-5, the Pennsylvania Wage Payment and Collection Law, the Michigan Act Regulating Payment of Wages and Fringe Benefits, the Pennsylvania Human Relations Act, the Michigan Elliott-Larsen Civil Rights Act, or the Michigan Handicappers' Civil Rights Act, all as amended, and Claims pertaining to unlawful discrimination or harassment, any common law or statutory Claims for breach of contract, detrimental reliance, wrongful discharge, defamation, interference with current or prospective contractual relations, fraud, consumer fraud or otherwise, and/or Claims for attorneys' fees and/or costs. (b) Orwig agrees to release and discharge JLK and Kennametal not only from any and all claims which he could make on his own behalf, but also those which may or could be brought by any person or organization in his behalf, and he specifically waives any right to become, and promises not to become, a member of any class in any proceeding or case in which a claim against JLK or Kennametal may arise, in whole or in part, from any event which occurred prior to or as of the date of this Agreement. (c) Orwig agrees not to file any lawsuit or demand for arbitration against JLK or Kennametal for or relating to any event that occurred prior to the date of signing this Agreement, except that, pursuant to paragraph 12 of this Agreement, Orwig may file a demand for arbitration for a breach of any promises contained in this Agreement. In the event Orwig files such a demand, but JLK and/or Kennametal are deemed not to have breached any of their promises in this Agreement, Orwig will pay the reasonable fees and costs incurred by JLK and/or Kennametal in defending against the claim. In the event Orwig files such a demand, and JLK and/or Kennametal are deemed to have breached a provision in this Agreement, JLK and/or Kennametal's obligation to pay the reasonable legal fees and costs incurred by Orwig in prosecuting the claim, if any, shall be governed by Pennsylvania law. (d) Orwig agrees to pay for any legal fees or costs incurred by JLK or Kennametal as a result of any breach of his promises in this paragraph 5. 6. Orwig confirms that he is not presently aware of any facts which would support a claim by anyone against JLK or Kennametal under any federal, state or local statute, ordinance or common law, including but not limited to claims for unlawful discrimination or harassment, defamation, breach of contract, common law fraud, violation of state consumer fraud -3-

4 statutes, securities fraud (including violation of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5, or similar state laws), or intentional interference with current or prospective contractual relations. 7. Confidentiality (a) Orwig recognizes and acknowledges JLK's and Kennametal's interest in the confidentiality of this Agreement, and agrees that he shall keep the fact and the terms of this Agreement and the negotiations leading to this Agreement completely confidential. (b) Orwig further recognizes and acknowledges that his positions at JLK and Kennametal were positions of trust and confidence and that by virtue of his employment in such positions, Orwig possesses confidential information and trade secrets regarding JLK and Kennametal, including, but not limited to information concerning JLK's and Kennametal's sales, customers, clients, business, personal data, sources of supply or distribution, business plans, technical secrets, methodologies, know-how, or the compensation, skills, abilities, training or qualifications of JLK and Kennametal employees, officers and directors, or other information not generally known to the public, and any tangible embodiments of said confidential information and trade secrets (collectively "Confidential Information"). Orwig recognizes and acknowledges JLK's and Kennametal's interest in the confidentiality of such Confidential Information. (c) Orwig promises and agrees not to disclose, either directly or indirectly, in any manner whatsoever, any Confidential Information of any kind whatsoever acquired in the course of his employment at JLK or Kennametal, unless compelled by subpoena to give sworn testimony or to produce documents or other things regarding said Confidential Information. Orwig further promises and agrees that if he is compelled by subpoena to give sworn testimony or produce documents or things regarding said Confidential Information or to give sworn testimony or produce documents or things which may include said Confidential Information, Orwig shall notify David T. Cofer, Esquire orally and in writing immediately upon being served the subpoena or immediately upon being informed of the possibility that he may be compelled to testify or produce documents or things regarding said Confidential Information, whichever occurs first. Orwig shall use his best lawful efforts not to testify or produce documents or things until JLK and/or Kennametal has a reasonable opportunity to oppose such testimony or production, if JLK and/or Kennametal desires to do so. (d) Notwithstanding anything in paragraph 17 of this Agreement to the contrary, Paragraph 9 of Orwig's January 21, 2000 employment agreement with JLK is hereby incorporated into this Agreement as if set forth in full herein. Orwig reaffirms his continuing obligations regarding trade secrets and confidential information as set forth in paragraph 9 of that employment agreement. (e) This paragraph 7 shall not prohibit Orwig from (i) disclosing the fact and terms of this Agreement to immediate family members and/or such professional legal and tax advisors as he may from time to time engage, and/or government officials or judicial officers for income or tax-reporting purposes in the event Orwig is legally required or professionally advised to do so, or (ii) stating in response to any other inquiry that the terms of his separation from JLK are confidential. To the extent that Orwig does disclose the terms of this Agreement to persons identified in subparagraph 7(e)(i), Orwig shall advise said persons that they must not disclose the fact and terms of the Agreement. (f) Orwig promises and agrees that within ten (10) days of signing this Agreement, he shall surrender to JLK any and all Confidential Information and any and all books, records, files, documents, disks and other items relating to JLK or Kennametal obtained or generated by Orwig in the course of his employment by JLK or Kennametal. (g) If Orwig discloses any information in breach of paragraph 7 of this Agreement, then: (i) Orwig shall repay to JLK any payment he received under subparagraphs 3(a), 3(d), and 3(e) of this Agreement; (ii) JLK shall not be required to make any further payments under subparagraphs 3(a), 3(d), and 3(e) of this Agreement; (iii) the period during which JLK agreed to provide benefits as described in subparagraph 3(b) of this Agreement, shall terminate and be discontinued immediately; and (iv) the period during which Orwig could exercise JLK stock options, as described in subparagraph 3(c) of this Agreement, shall terminate ninety (90) days after the date payments are discontinued pursuant to subparagraph (7)(g)(ii) above. (h) Orwig agrees to pay for any legal fees or costs incurred by JLK or Kennametal as a result of any breach of his promises in this paragraph 7. (i) In the event that JLK and/or Kennametal take steps to seek relief from an alleged breach of the foregoing terms of paragraph 7, all of the remaining provisions of this Agreement shall remain in full force and effect. 8. No Solicitation. Orwig agrees that, for two (2) years following his separation from JLK, Orwig will not, directly or indirectly, solicit or induce or participate in recruiting, or attempt to solicit, induce, or recruit any employee, current or future, -4-

5 of JLK or Kennametal, to leave JLK or Kennametal for any reason whatsoever, or to hire, cause to be hired or assist in the hiring of any current or future employee of JLK or Kennametal, or to provide information to any third party to suggest, encourage, aid or facilitate such solicitation, inducement, recruitment or hiring. The foregoing terms of this paragraph 8 do not apply to any individual who has not been employed by JLK or Kennametal for at least six (6) months immediately prior to the solicitation, inducement or recruitment, if Orwig has not, directly or indirectly, encouraged that individual to terminate employment with JLK or Kennametal and has not, directly or indirectly, provided or promised any compensation or benefits to that individual during, or as a result of, that six (6) month period. 9. Nondisparagement (a) Orwig promises and agrees that he has not made any, and shall make no, negative or derogatory comments, oral or written, directly or by innuendo, about JLK and/or Kennametal, including, but not limited to, their management, affiliates, present and former officers, directors and employees, policies, procedures, management-employee relations, community relations, products, services, and business decisions. Orwig's promise that he will not make, and his agreement that he has not made, negative or derogatory comments about JLK and/or Kennametal includes, but is not limited to, comments to the media and comments in any social, business or other setting. (b) Orwig agrees that he will not make any statements to or respond to any inquiries from shareholders of either JLK or Kennametal, or from investment analysts, newspapers, magazines, industry trade publications, or similar media entities, regarding JLK and/or Kennametal. Instead, Orwig will refer the inquiring person or entity to the appropriate individual or department at JLK or Kennametal. Orwig will immediately notify David T. Cofer, Esquire orally and in writing if he receives such an inquiry and from whom the inquiry was received. 10. Orwig represents that he has not heretofore assigned or transferred, or purported to assign or transfer, to any person or entity any Claim or any portion thereof or interest therein. 11. Orwig represents and acknowledges that in executing this Agreement he does not rely, and has not relied, upon any representation or statement made by JLK or Kennametal, or any of their agents, representatives or attorneys with regard to the subject matter, basis or effect of this Agreement or otherwise. 12. Arbitration (a) With the exception stated in paragraph 12(b) of this Agreement, the parties agree that in the event of any future dispute between Orwig and JLK or Kennametal, including any claims, counterclaims, cross claims or third-party claims, whether referring or relating to any term of this Agreement, disputes about whether or not the dispute is arbitrable, or any other matter which the parties are unable to resolve between themselves, the dispute must be submitted to arbitration and must not be filed in any court. Within ten (10) days after submission of a dispute to arbitration, Orwig shall choose one arbitrator, and JLK and/or Kennametal shall choose a second arbitrator. Within ten (10) days thereafter, the American Arbitration Association shall be requested to supply a third arbitrator and this request shall be made by either party. In the event any party does not choose an arbitrator within ten (10) days, as set forth above, the American Arbitration Association shall also supply that arbitrator in addition to the third arbitrator. The arbitration shall be held in Pittsburgh, Pennsylvania, and shall commence and be completed as soon as possible under the Commercial Arbitration Rules of the American Arbitration Association then in effect. In the event of any dispute of any procedural, evidentiary, or substantive matter, including the arbitrability of the dispute presented, the decision of the majority of the arbitrators shall be final and conclusive upon the parties on the matter of dispute. (b) Paragraph 12(a) of this Agreement does not apply to efforts by JLK and/or Kennametal to obtain an injunction or restraining order from a court of competent jurisdiction to restrain a breach or threatened breach of paragraphs 7 or 8 of this Agreement by Orwig or any persons or entities acting for or with Orwig, or to restrain the misappropriation, disclosure or threatened disclosure of any trade secrets of JLK and/or Kennametal. 13. Orwig promises and agrees that if JLK or Kennametal shall, in the future, require Orwig's assistance or cooperation in preparation for, or the conduct of, litigation or any proceeding, or for periodic consultation generally, involving matters or events which occurred during Orwig's employment by JLK or Kennametal, or as to which Orwig's knowledge or testimony may be important to JLK or Kennametal, Orwig shall furnish such assistance, cooperation, and consultation to JLK or Kennametal as they shall reasonably request, as does not unreasonably interfere with Orwig's efforts to obtain alternative employment, and as is within Orwig's capability, provided that JLK or Kennametal shall reimburse Orwig for any expense Orwig incurs in furnishing such assistance and shall provide reasonable compensation for time expended on the matter by Orwig, except that: (a) JLK and Kennametal will not provide compensation to Orwig for time spent by Orwig providing the assistance, cooperation or consultation discussed in this paragraph 13 during the period in which Orwig is receiving payments -5-

6 under subparagraph 3(a) of this Agreement; and (b) no compensation shall be paid for testimony in any litigation or proceeding. 14. Should any provision of this Agreement be declared or determined by any court or arbitration panel to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and said illegal or invalid part, term or provision shall be deemed not to be a part of this Agreement. If a court or arbitration panel determines paragraph 4 or paragraph 5 of this Agreement (or any subpart thereof) to be illegal or invalid, then: (i) Orwig shall repay to JLK the payments he received under subparagraphs 3(a), 3(d), and 3(e) of this Agreement; (ii) JLK shall not be required to make any further payments under subparagraphs 3(a), 3(d), and 3(e) of this Agreement; (iii) the period during which JLK agreed to provide benefits as described in subparagraph 3(b) of this Agreement, shall terminate and be discontinued immediately; and (iv) the period during which Orwig could exercise JLK stock options, as described in subparagraph 3(c) of this Agreement, shall terminate ninety (90) days after the date payments are discontinued pursuant to subparagraph 14(ii) above. 15. Orwig agrees that he has been advised by JLK and Kennametal to consult with an attorney of his choice and that he has done that, consulting with his attorney concerning his lawful remedies and rights as well as the meaning and significance of this Agreement. Further, Orwig confirms that he has carefully read and fully understands the provisions of this Agreement, including the release and waiver of claims of any nature, and that he has been given twenty-one (21) days to consider the terms of this Agreement before signing the Agreement. Orwig may revoke acceptance of the release and waiver of Claims arising under the Age Discrimination in Employment Act and the Older Workers Benefit Protection Act contained in subparagraph 5(a) of this Agreement by delivering a written revocation to David T. Cofer, Esquire, of Kennametal, Inc., P.O. Box 231, Latrobe, Pennsylvania 15650, within seven (7) days after executing the Agreement. JLK's obligation to render payments under subparagraphs 3(a), 3(d) and 3(e) shall not commence until the seven (7) day period set forth herein has expired without Orwig's revocation. Orwig acknowledges that his execution of this Agreement is knowing and voluntary. 16. As used in this Agreement, the singular or plural number shall be deemed to include the other whenever the context so indicates or requires. Whenever a provision is stated in the disjunctive, it shall also be taken in the conjunctive and vice versa. The use of any tense of any verb shall be considered to include within its meaning all other tenses of the verbs so used. 17. The parties agree that this Agreement is the entire agreement between them, supersedes all previous agreements between them, and represents their full and complete understanding. No prior or contemporaneous oral agreements may be offered to alter the terms of this Agreement. This Agreement shall be binding upon the parties hereto and the parties' heirs, successors and assigns. This Agreement may not be modified except in writing signed by both parties. 18. This Agreement may be executed in counterparts, and when each party has signed and delivered at least one such counterpart, each counterpart shall be deemed an original, and, when taken together with other signed counterparts, shall constitute one Agreement, which shall be binding upon and effective as to all parties. For the purposes of this paragraph 18, a counterpart may be delivered by facsimile. 19. This Agreement shall be governed by and interpreted in accordance with the laws of the Commonwealth of Pennsylvania. PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS WITNESS: /s/ Carol J. Orwig /s/ Richard J. Orwig ---------------------------- -------------------------------- Richard J. Orwig Date: June 21, 2000 ---------------------------- JLK DIRECT DISTRIBUTION INC. Date: July 12, 2000 By: /s/ William R. Newlin ---------------------------- ----------------------------- KENNAMETAL, INC. Date: 12 July, 2000 By: /s/ Markos I. Tambakeras ---------------------------- ----------------------------- -6-

1 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS The following discussion should be read in connection with the consolidated financial statements of Kennametal Inc. (the company or Kennametal) and the related footnotes. Unless otherwise specified, any reference to a "year" is to a fiscal year ended June 30. OVERVIEW Sales for 2000 were $1,853.7 million, flat compared to sales of $1,902.9 million in 1999, excluding unfavorable foreign exchange effects and the effects of a divestiture of two and one percent, respectively. Market conditions were soft in many of the company's served markets in the first half of 2000. Market conditions began to improve in the second half of the year, led by North America, followed by Europe, while Asia Pacific showed steady growth throughout the year. Net income for 2000 was $51.7 million, or $1.70 per share, compared to $39.1 million, or $1.31 per share, in 1999. Excluding special charges in both years, earnings per share were $2.13 in 2000 compared to $1.82 in 1999. The increase in earnings in 2000 is attributable to improved operational effectiveness, lean techniques and continued cost discipline. Special charges in 2000 were $22.9 million, or $0.43 per share, and were primarily related to operational improvement programs. In 1999, special charges were $24.6 million, or $0.51 per share, related to operational improvement programs, including a one-time charge incurred in the acquisition of 4.9 percent of Toshiba Tungaloy. Sales of $1,902.9 million in 1999 increased 13 percent compared to sales of $1,678.4 million in 1998. The increase in sales was primarily attributable to the inclusion of five additional months of sales related to the acquisition of Greenfield Industries, Inc. (Greenfield) that occurred on November 17, 1997. Excluding acquisitions, sales declined seven percent in 1999 due to lower sales of metalworking products and industrial supplies in North America due to weak market conditions. Net income for 1999 was $39.1 million, or $1.31 per share, compared to $71.2 million, or $2.58 per share, in 1998. Excluding special charges in both years, earnings per share were $1.82 in 1999 compared to $3.23 in 1998. The decline in earnings for 1999 was primarily due to lower sales levels and higher interest and amortization expense related to acquisitions. Cost-reduction and significant cost-control measures, coupled with stronger demand in the European metalworking market, partially offset this decline. The Greenfield acquisition reduced 1998 earnings by approximately $17.5 million, or $0.65 per share, including one-time costs of $0.28 per share. The results for 1999 and a portion of 1998 include an additional 3.45 million shares of common stock issued on March 20, 1998. BUSINESS SEGMENT REVIEW In November 1999, management reorganized the financial reporting of its operations to focus on global business units consisting of Metalworking, Engineered Products, Mining & Construction and JLK/Industrial Supply, and corporate functional shared services. The results for all periods presented have been restated to conform to the new reporting structure. The presentation of segment information reflects the manner in which management organizes segments for making operating decisions and assessing performance. METALWORKING In the metalworking segment, the company provides consumable metalcutting tools and tooling systems to manufacturing companies in a wide range of industries throughout the world. Metalcutting operations include turning, boring, threading, grooving, milling and drilling. The company's tooling systems consist of a steel toolholder and an indexable cutting tool such as an insert or drill made from cemented tungsten carbides, high-speed steel or other hard materials. (in thousands) 2000 1999 1998 ====================================================================== External sales $1,020,914 $1,038,205 $939,290 Intersegment sales 134,398 108,994 76,376 Operating income 128,283 116,306 138,799 - ---------------------------------------------------------------------- External sales in the Metalworking segment in 2000 increased one percent compared to a year ago, excluding unfavorable foreign currency effects of three percent. Sales in North America were up two percent in local currency compared to last year due predominately to strong demand in the automotive and truck markets and, to a lesser extent, increased demand in the oil field services and machine tool end markets, especially in the second half of 2000. Sales in the European metalworking market declined two percent compared to 1999, excluding unfavorable foreign currency translation effects of nine percent. The decline in sales was due to weakness in most served markets, however, sales in automotive and machine tool builder markets were stronger in the second half of 2000. Sales in the Asia Pacific region continued to grow and were up 18 percent, in local currency, compared to the prior year. Operating income in 2000 of $128.3 million was reduced by restructuring and asset impairment charges of $11.0 million and period costs of $2.4 million. Excluding special charges and period costs in each period, operating income increased $10.1 million, or eight percent, compared to 1999 due to strong cost controls and improved manufacturing performance due to lean techniques, despite lower production levels. Restructuring and asset impairment charges in 2000 resulted from employee severance packages for 135 people, the downsizing of the Kingswinford, United Kingdom plant, closure of a German warehouse facility 13

2 MANAGEMENT'S DISCUSSION AND ANALYSIS cont. and several offices in Asia Pacific and South America, and asset impairment charges. Operating income for 1999 included restructuring costs associated with the Solon, Ohio high-speed steel drill plant closure and product rationalization charges of $11.1 million, and a $3.8 million charge recorded on the purchase of Toshiba Tungaloy stock. Period costs associated with the Solon plant closing were $2.1 million and $0.4 million in 2000 and 1999, respectively. In 1999, sales of metalworking products declined seven percent compared to 1998 excluding the impact of the Greenfield acquisition of 19 percent and unfavorable foreign exchange of one percent. Sales in North America were down 11 percent excluding acquisitions due to weak industrial demand by customers across a variety of industries in North America, except for the automotive market. Demand for metalworking products continued to show strong gains in the European market, primarily Germany, with particular strength coming from export-oriented businesses such as the automotive and truck industries, and to a lesser extent, aerospace and machine tool builder industries. European metalworking sales declined one percent in 1999, excluding acquisitions and favorable foreign currency translation effects of 13 percent and one percent, respectively. Sales in the Asia Pacific region increased one percent, excluding unfavorable foreign exchange effects of four percent. Operating income in 1999 declined to $116.3 million and was affected by restructuring and product rationalization charges of $11.1 million, a $3.8 million charge recorded on the purchase of Toshiba Tungaloy stock, and period costs of $0.4 million. Excluding these charges, operating income declined five percent due to lower sales levels and higher goodwill amortization. This was partially offset as operating expenses were contained through cost-reduction and significant cost-control measures implemented in November 1998. These cost-reduction measures involved selected work force reductions, facility consolidations and closings and other measures. Additionally, amortization of intangibles increased due to a full year of amortization related to the acquisition of Greenfield and other companies in the prior year. In 1999, the company incurred a $6.9 million charge related to the implementation of a new program to streamline and optimize the global metalworking product offering and a $4.2 million charge related to the closure of the Solon plant. ENGINEERED PRODUCTS This segment's principal business is the production and sale of cemented tungsten carbide products used in engineered applications including circuit board drills and compacts. These products have technical commonality to the company's core metalworking products. (in thousands) 2000 1999 1998 ================================================================== External sales $176,469 $173,171 $155,496 Intersegment sales 19,978 23,752 15,300 Operating income 23,711 24,473 29,090 - ------------------------------------------------------------------ Compared to 1999, external sales in the Engineered Products market in 2000 increased five percent, excluding unfavorable foreign exchange effects of three percent, due primarily to strong demand for electronic circuit board drills. Sales to the oil field services end market were soft in the first half of 2000, but showed renewed demand in the second half. Operating income in 2000 of $23.7 million increased five percent, excluding restructuring charges and period costs, due primarily to higher sales levels, lower manufacturing variances, continued cost controls and lean manufacturing techniques. Restructuring charges of $1.4 million were incurred in 2000 related to the rationalization of the Janesville, Wisc. circuit board drill plant, employee severance, and asset impairment charges. Period costs of $0.5 million were incurred related to the plant closure. Sales in 1999 increased 11 percent from 1998 due to the inclusion of five additional months of sales related to the Greenfield acquisition. Included in the 1998 results were the sales of the Marine Products division of Greenfield, which, for strategic reasons, was divested by the company in June 1998. Annual sales of the Marine Products division were approximately $25 million. Excluding the acquisition-related effects, sales declined 20 percent. The sales decline was due to weak demand for engineered products and compacts used in the oil field services industry due to reduced exploration activity. Operating income declined to $24.5 million in 1999 due to lower sales levels, an unfavorable sales mix, lower production levels, plant rearrangement costs and the Marine divestiture. This was partially offset by cost-reduction actions implemented in November 1998 and continued cost controls. MINING & CONSTRUCTION This segment represents the sales of cemented tungsten carbide products used in mining and highway construction and other similar applications. These products also have technical commonality to the company's core metalworking products. The company also sells metallurgical powders to manufacturers of cemented tungsten carbide products. (in thousands) 2000 1999 1998 ================================================================== External sales $165,899 $173,028 $168,837 Intersegment sales 7,041 5,635 6,851 Operating income 17,483 14,203 21,408 - ------------------------------------------------------------------ 14

3 External sales in 2000 declined three percent compared to 1999, excluding one percent unfavorable foreign exchange effects. Depressed demand for mining tools in North America, construction tools in Europe and metallurgical powders as a result of weakness in the underground coal and oil and gas exploration end markets resulted in overall sales declines of three, two and one percent, respectively. This was partially offset by strong demand for construction tools in North America, which increased sales by two percent compared to 1999. Operating income for 2000 increased to $20.9 million from $20.0 million due to continued strong cost controls, despite the decline in sales, excluding restructuring charges in each year. Restructuring charges of $3.4 million were incurred in 2000 associated with the closure of a manufacturing operation in China and the exit of the related joint venture. In 1999, restructuring costs of $5.8 million were recorded related to the write-down of an investment in, and net receivables from, other international operations in emerging markets as a result of changing market conditions in the regions these operations serve. In 1999, sales increased four percent excluding two percent unfavorable foreign exchange effects. This increase includes incremental sales of seven percent due to five additional months of sales related to the Greenfield acquisition in 1998. Sales benefited from increased domestic demand for highway construction tools due to a higher level of highway construction in North America in 1999, particularly in the second half of the year. However, this was offset by weaker demand for metallurgical powders used in the oil field services industry and mining tools due to reduced underground coal production. Operating income for 1999, excluding restructuring costs of $5.8 million, declined to $20.0 million due to an unfavorable sales mix and lower production levels. This was partially offset by cost-reduction actions implemented in November 1998 and continued cost controls. JLK/INDUSTRIAL SUPPLY This segment represents the sales of industrial supply products through Kennametal's 83-percent owned subsidiary, JLK Direct Distribution Inc. (JLK). Sales of metalworking consumable products are derived through a direct-marketing program, including mail-order catalogs and showrooms, a direct field sales force, and integrated supply or Full Service Supply (FSS) programs. (in thousands) 2000 1999 1998 ================================================================== External sales $490,381 $518,512 $414,765 Intersegment sales 8,912 13,130 10,583 Operating income 28,174 34,532 41,308 - ------------------------------------------------------------------ Sales declined three percent in 2000, excluding the effects of the March 1999 divestiture of the Strong Tool Company steel mill business unit. JLK added new FSS programs which contributed overall sales growth of two percent. However, this growth was offset by continued weakness in the catalog business end markets and in acquired distributors end markets, predominately oil field services. At June 30, 2000, the company operated 30 showrooms,including seven distribution centers, and 12 other locations, and provided FSS programs to 188 customers covering 283 different facilities. Operating income in 2000 declined to $28.2 million due to lower sales, partially offset by continued operating cost controls. Lower sales levels affected operating income by $10.4 million, which was partially offset by a decline in operating expense of $4.6 million due primarily to the implementation of several cost-reduction initiatives since March 1999. Operating expense for 2000 included special charges of $0.6 million for employee separation costs and $0.2 million of costs related to the evaluation of strategic alternatives. In 1999, sales in this segment increased 25 percent primarily due to acquisitions. Excluding the effects of acquisitions, sales of industrial supply products declined three percent. Sales benefited from the addition of new FSS programs, growth in Europe and an increased product offering, offset by weak industrial demand across North America and the General Electric (GE) FSS contract disengagement. The company decided not to accede to certain price concessions requested by GE during renegotiations of the FSS program with GE in 1997. Sales to these GE manufacturing sites were $22.9 million in 1998. In 2000 and 1999, JLK did not have any sales to GE for those manufacturing sites that were discontinued. At June 30, 1999, the company operated 31 showrooms, including eight distribution centers and 13 other locations acquired in 1998 through acquisitions, and provided FSS programs to 150 customers covering 231 different facilities. Operating income in 1999 of $34.5 million declined from 1998 due to lower gross profit margins and an increase in operating expense levels. The gross profit margin was affected by lower-margin sales from prior year acquisitions, growth in the FSS business and softer-than-expected economic conditions that resulted in weaker demand in the higher-margin mail-order business. Cost-reduction actions implemented in November 1998 contained operating expenses. However, the increase in operating expense was attributable to increased costs from acquisitions, including higher levels of amortization expense, relocation of the office and warehouse in the United Kingdom, and higher direct-mail costs. 15

4 MANAGEMENT'S DISCUSSION AND ANALYSIS CONT. COSTS AND EXPENSES GROSS PROFIT MARGIN In 2000, the gross profit margin was 38.1 percent compared to 37.0 percent in 1999. The increase in gross margin is predominately due to improved manufacturing variances across most business units as a result of lean manufacturing techniques and strong cost controls, despite lower production levels. The gross margin in 1999 was affected by a $6.9 million charge related to the implementation of a new program to streamline and optimize the global metalworking product offering. Excluding this charge, the 1999 gross margin would have been 37.4 percent. In 1999, the gross profit margin declined from 40.7 percent in 1998 due to lower production levels, lower-margin sales from acquired companies, an unfavorable sales mix, and period costs associated with plant consolidations and rearrangements. OPERATING EXPENSE Operating expense as a percentage of sales declined to 27.1 percent in 2000, down from 27.2 percent in 1999 despite the decline in sales. The improvement is due to management's resolve to control costs through ongoing cost and productivity improvement programs. Operating expense for 2000 includes a $3.0 million charge for environmental remediation costs and $0.8 million for costs incurred and expensed for the evaluation of strategic alternatives related to JLK. Operating expense for 1999 includes a charge of $3.8 million recorded on the purchase of 4.9 percent of Toshiba Tungaloy stock due to the difference between the cost and the fair market value of the securities on the date the securities were purchased. In 1999, operating expense as a percentage of sales declined to 27.2 percent from 28.2 percent in 1998. Excluding the effects of the Toshiba Tungaloy charge, operating expense as a percentage of sales would have been 27.0 percent in 1999. Operating expense was controlled through cost-reduction actions implemented in November 1998 that involved salaried work force reductions, salary reductions, closure of several JLK-acquired locations and other measures. However, operating expense increased due to acquisitions, the JLK expansion program, the charge recorded on the purchase of Toshiba Tungaloy stock, facility rationalizations and other programs. Additionally, amortization of intangibles increased $10.1 million due to a full year of amortization related to the acquisition of Greenfield and other companies. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES In November 1999, the company announced plans to close, consolidate or downsize several plants, warehouses and offices, and associated work force reductions as part of its overall plan to increase asset utilization and financial performance, and to reposition the company to become the premier tooling solutions supplier. These actions are expected to have a favorable impact on future performance. Management implemented these programs throughout 2000. The costs accrued for the implemented programs were based upon management estimates using the latest information available at the time that the accrual was established. The components of the charges are as follows: Incremental Initial Total Asset Pension Restructuring (in thousands) Charge Write-Downs Obligation Liability ============================================================================== Asset impairment charges $ 4,808 $(4,808) $ -- $ -- Employee severance 7,396 -- (787) 6,609 Product rationalization 100 (100) -- -- Facility rationalizations 6,322 (1,470) (205) 4,647 - ------------------------------------------------------------------------------ Total $18,626 $(6,378) $(992) $11,256 ============================================================================== In conjunction with the company's ongoing review of underperforming businesses, certain assets are reviewed for impairment pursuant to the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." An asset impairment charge of $1.7 million was recorded, related to a metalworking manufacturing operation in Shanghai, China. This operation became fully operational in 1998 and to date, has not generated the performance that was expected at the time the company entered into this market. Management performed an in-depth review of the operations, capacity utilization and the local management team, and engaged a consultant to perform an independent review of the same. These reviews enabled management to determine that the market served by this operation is not expected to develop to the extent originally anticipated, but that the operations were in good working order and utilized modern technology, and that the management team in place was competent. Management also determined that this facility had excess capacity given the level of market demand. 16

5 Accordingly, management updated its operating forecast to reflect the current market demand. In comparing the undiscounted projected cash flows of the updated forecast to the net book value of the assets of this operation, management determined that the full value of these assets would not be recoverable. Accordingly, a charge was recorded to adjust the carrying value of the long-lived assets of this operation to fair value. The estimated fair value of these assets was based on various methodologies, including a discounted value of estimated future cash flows. The product rationalization charge of $0.1 million represents the write-down of certain discontinued product lines manufactured in these operations. The company manufactured these products specifically for the market served by these operations and management has determined that these products are no longer salable. This charge has been recorded as a component of cost of goods sold. The company recorded an asset impairment charge of $2.8 million related to the write-down of equipment in its North American metalworking operations and $0.3 million in its engineered products operations. In connection with the repositioning of the company, management completed an assessment of the assets currently being used in these operations and determined that these assets were not going to be further utilized in conducting these operations. This amount represents the write-down of the book value of the assets, net of salvage value. The charge for facility rationalizations relates to employee severance for 153 employees and other exit costs associated with the closure or downsizing of a metalworking manufacturing operation in Kingswinford, United Kingdom, a circuit board drill plant in Janesville, Wisc., a German warehouse facility, and several offices in the Asia Pacific region and South America. Included in this charge is incremental pension obligation of $0.2 million due to a plan curtailment. This amount is included in the pension obligation and is presented as a component of other liabilities. The charge also includes $3.4 million for employee severance for 41 employees and other exit costs associated with the closure of a mining and construction manufacturing operation in China and the exit of the related joint venture. The company accrued $7.4 million related to severance packages provided to 171 hourly and salaried employees terminated in connection with a global work force reduction. Included in this charge is incremental pension obligation of $0.8 million, incurred by the company as a result of the severance packages provided. This amount is included in the pension obligation and is presented as a component of other liabilities. The costs related to the asset impairment charges, employee severance and facility rationalizations of $18.5 million are recorded as restructuring and asset impairment charges. The costs charged against the restructuring accrual as of June 30, 2000 were as follows: Beginning Cash June 30, (in thousands) Accrual Expenditures Adjustments 2000 ============================================================================ Employee severance $ 6,609 $(4,076) $-- $2,533 Facility rationalizations 4,647 (1,129) -- 3,518 - ---------------------------------------------------------------------------- Total $11,256 $(5,205) $-- $6,051 ============================================================================ In 2000, the company incurred period costs of $0.8 million related to these initiatives, and costs of $1.7 million associated with the implementation of lean manufacturing techniques, both of which were included in cost of goods sold as incurred. Benefits realized in 2000 approximated this level of cost. By the second half of 2001, the company expects to realize annual benefits of approximately $15 to $17 million associated with these initiatives. Additional period costs are estimated to be $2 to $3 million and are expected to be incurred in 2001. The company continues to review its business strategies and pursue other cost-reduction activities, some of which could result in future charges. In March 1999, the company's management completed restructuring plans, including several programs to reduce costs, improve operations and enhance customer satisfaction. The costs accrued for these plans were based on management estimates using the latest information available at the time that the accrual was established. The components of the charges are as follows: Asset Write- Downs & Other Initial Total Non-Cash Restructuring (in thousands) Charge Adjustments Liability ========================================================================== Product rationalization $ 6,900 $ (6,900) $ -- Plant closure 4,200 (2,000) 2,200 Impairment of international operations 5,800 (5,800) -- Voluntary early retirement program 3,937 (2,419) 1,518 - -------------------------------------------------------------------------- Total $20,837 $(17,119) $3,718 ========================================================================== The product rationalization charge represents a write-down of certain product lines that were discontinued as part of a program to streamline and optimize the company's global metalworking product offering. This charge is net of salvage value and was recorded as a component of cost of goods sold. Estimated salvage values were based on estimates of proceeds to be realized through the sale of this inventory outside the normal course of business. 17

6 MANAGEMENT'S DISCUSSION AND ANALYSIS CONT. The program resulted in a reduction in the number of products offered from an estimated 58,000 to 38,000 and was an extension of the company's initiative to reduce the number of its North American warehouses. By streamlining the product offering, the company has improved customer service and inventory turnover, allowed for more efficient operations, thereby reducing costs and improving capacity utilization, and eliminated redundancy in its product offering. Sales of these products represent less than five percent of global metalworking sales. The company proactively converted customers from these older products to newer products. The company also initiated plans to close a drill manufacturing plant in Solon, Ohio. The manufacturing of products made at this plant was relocated to other existing plants in the United States. The closure eliminated excess capacity at other plant locations. The company decommissioned the existing plant and expects to sell the property in the near future. The charge consists of employee termination benefits for 155 hourly and salaried employees, which is substantially all employees at this plant, and the write-down of assets included in property, plant and equipment, net of salvage value. The costs resulting from the relocation of employees, hiring and training new employees and other costs resulting from the temporary duplication of certain operations incurred in 2000 and 1999 were $2.1 million and $0.4 million, respectively, and were included in cost of goods sold as incurred. The company does not anticipate incurring additional period costs associated with this action. An asset impairment charge was recorded to write-down, to fair market value, an investment in and net receivables from certain mining and construction international operations in emerging markets as a result of changing market conditions in the regions these operations serve. In the March 1999 quarter, the company completed a study of these operations, the markets for these products, and the current economic situation in these regions, to provide recommendations for solving operational concerns. As a result of this study and continued economic deterioration in these regions, the company determined that the carrying amount of its investment in and net receivables from these operations would not be recoverable. A voluntary early retirement benefit program was offered to and accepted by 34 domestic employees. In exchange for their retirement, the company will provide those employees pension and health benefits that would have been earned by the employees through their normal retirement date. As a result of providing these additional pension benefits, $2.4 million of the total cost was funded through the company's pension plan. There are no tax benefits associated with this cost as the company may only deduct actual cash payments made to the pension plan. The charges for the plant closure, the write-down of the investment in and net receivables from certain international operations, and the voluntary early retirement benefit program are recorded as restructuring and asset impairment charges. The costs charged against the restructuring accrual as of June 30, 2000 and 1999 were as follows: Beginning Cash June 30, (in thousands) Accrual Expenditures Adjustments 1999 ======================================================================== Plant closure $2,200 $ -- $-- $2,200 Voluntary early retirement program 1,518 (151) -- 1,367 - ------------------------------------------------------------------------ Total $3,718 $(151) $-- $3,567 ======================================================================== June 30, Cash June 30, (in thousands) 1999 Expenditures Adjustments 2000 - ------------------------------------------------------------------------ Plant closure $2,200 $(2,046) $595 $ 749 Voluntary early retirement program 1,367 (602) -- 765 - ------------------------------------------------------------------------ Total $3,567 $(2,648) $595 $1,514 ======================================================================== The adjustment to the accrual for the plant closure is due to the company receiving more value for property upon disposition than initially anticipated. This adjustment was not included in the determination of net income for 2000. INTEREST EXPENSE In 2000, interest expense declined to $55.1 million due to reduced debt levels, partially offset by higher borrowing rates. Average borrowing rates under the company's revolving credit line with commercial banks (Bank Credit Agreement) of 6.72 percent were 34 basis points higher compared to a year ago due to the rising interest rate environment, partially offset by improved pricing due to improved financial condition. In 1999, interest expense increased $9.1 million as a result of higher average borrowings, partially offset by lower borrowing rates. Interest expense in 1998 included one-time costs of $7.2 million for the amortization of deferred bank financing fees related to the acquisition of Greenfield. OTHER EXPENSE, NET Other expense for 2000 included fees of $5.2 million incurred in connection with the accounts receivable securitization program initiated in June 1999. This was partially offset by gains of $1.4 million from the sale of miscellaneous underutilized assets. 18

7 Other expense for 1998 included the write-off of deferred financing costs related to a cancelled public offering of debt and equity securities that the company originally intended to offer in connection with the acquisition of Greenfield. Related to the debt offering, the company entered into an agreement to hedge its exposure to fluctuations in interest rates. When the company subsequently postponed the proposed offerings, the interest rate hedges were terminated resulting in a loss of $3.5 million. The company also wrote-off other offering-related expenses of $1.1 million resulting in a combined total of $4.6 million or $0.10 per share. INCOME TAXES The 2000 effective tax rate was 43.5 percent compared to a tax rate of 42.0 percent in 1999, and 41.3 percent in 1998. The increase in the effective tax rate for both years is directly attributable to higher nondeductible goodwill related to the Greenfield acquisition, partially offset in 1999 by tax benefits from costs to repay senior debt. EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT In November 1999, the company repaid its term loan under the Bank Credit Agreement. This resulted in an acceleration of the amortization of deferred financing fees of $0.4 million, which has been recorded as an extraordinary loss of $0.3 million, net of tax. LIQUIDITY AND CAPITAL RESOURCES Kennametal's cash flow from operations is the primary source of financing for capital expenditures and internal growth. Additionally, in the United States, the company maintains a revolving credit line under the Bank Credit Agreement totaling $900.0 million, of which $247.5 million was available for use at June 30, 2000. The company and its subsidiaries generally obtain local financing through credit lines with commercial banks. The company believes that cash flow from operations and the availability under its revolving credit lines will be sufficient to meet its cash requirements over the next 12 months. During 2000, the company generated $221.2 million in cash flow from operations, a decrease of $5.3 million from 1999. Working capital improved $57.5 million and net income increased by $12.6 million in 2000, however 1999 benefited from additional proceeds from the securitization of accounts receivable of $75.5 million. The working capital improvement reflects management's initiatives to reduce working capital and consistently generate strong cash flow. Net cash used for investing activities was $43.1 million in 2000. Compared to the prior year, net cash used for investing activities declined by $58.9 million due to a reduction in capital expenditures of $44.3 million and the purchase of the shares of Toshiba Tungaloy for $12.2 million in 1999. The reduction in capital expenditures reflects management's more stringent capital expenditure approval process. Management believes the level of capital spending in 2000 was sufficient to improve productivity and make necessary capital improvements to remain competitive. Net cash used for financing activities was $173.3 million in 2000, an increase of $49.0 million compared to 1999, due principally to the reduction in debt of $163.0 million in 2000, compared to $106.3 million in 1999. The reduction in debt is attributable to strong cash flow generation through continued focus on reducing working capital, controlled capital expenditures and improved earnings. Effective October 1, 1999, company contributions to U.S. defined contribution pension plans are made primarily in the company's common stock, resulting in the issuance of 268,964 shares during 2000. During 1999, the company generated $226.6 million in cash from operations. Cash provided by operations increased from 1998 due to the proceeds from the securitization of accounts receivable of $82.0 million and a reduction of working capital requirements of $52.4 million. Net cash used for investing activities was $102.0 million in 1999. Compared to the prior year, the decrease in net cash used for investing activities was due to a net reduction of $689.7 million of cash outflows from acquisitions and divestiture activity, a reduction of $13.9 million in subsidiary stock repurchases, and $9.8 million of reduced capital expenditures. This was offset by the purchase of the Toshiba Tungaloy shares in 1999. Net cash flow used for financing activities was $124.4 million in 1999, which compares to cash from financing activities of $710.1 million in 1998. The change is due to the repayment of debt of $106.3 million in 1999, compared to borrowings of $461.4 million and proceeds from the issuance and sale of common and subsidiary stock of $261.8 million in 1998. The borrowings and proceeds from stock issuances were primarily used to finance the Greenfield acquisition. Through a new management incentive program, management is reinforcing the focus on cash flow and working capital improvement. Management believes free operating cash flow (FOCF) is an appropriate measure of the company's cash flow. The company generated FOCF of $183.8 million and $120.6 million, and used FOCF of $204.9 million in 2000, 1999 and 1998, respectively. The improvements in FOCF for all periods are primarily due to improved working capital and lower capital expenditures. Higher levels of net income contributed to the increase in FOCF in 2000, while lower levels of net income in 1999, compared to 1998, partially offset some of the improvements. 19

8 MANAGEMENT'S DISCUSSION AND ANALYSIS CONT. FOCF is defined as funds from operations minus capital expenditures, plus the change in working capital (excluding changes in cash, marketable securities and short-term debt). Funds from operations is defined as net income from continuing operations plus depreciation, amortization, deferred income taxes and other non-cash items. Cash flows from operating activities, as defined by accounting principles generally accepted in the United States (GAAP), is used to measure cash flow generation. While FOCF is not a GAAP alternative measure of cash flow and may not be comparable to other similarly titled measures of other companies, the company's management believes FOCF is a meaningful measure of the company's cash flow. On January 18, 1999, the company entered into a business cooperation agreement with Toshiba Tungaloy Co., Ltd. (TT), a leading Japanese manufacturer of consumable, cemented tungsten carbide metalcutting products, to enhance the global business prospects for metalcutting tools of both companies. The agreement includes various joint activities in areas such as product research and development, private labeling, cross-licensing, and sales and marketing. The company purchased approximately 4.9 percent of the outstanding shares of TT for $15.9 million, including the costs of the transaction. This transaction was financed through the borrowing of Japanese yen under a new credit line. The intentions of the companies are to make the business cooperation agreement successful and to develop a strong working relationship that will benefit both companies in the future. The company will periodically evaluate the progress made under this agreement and its current ownership position in TT to ensure both are aligned with the company's operational and financial goals. See Note 5 to the consolidated financial statements for additional information. On June 18, 1999, the company entered into an agreement with a financial institution whereby the company securitizes, on a continuous basis, an undivided interest in a specific pool of the company's domestic trade accounts receivable. The company is permitted to securitize up to $100.0 million of accounts receivable under this agreement. The financial institution charges the company fees based on the level of accounts receivable securitized under this agreement and the commercial paper market rates plus the financial institution's cost to administer the program. The costs incurred by the company under this program, $5.2 million and $0.2 million in 2000 and 1999, respectively, are accounted for as a component of other expense, net. At June 30, 2000 and 1999, the company securitized accounts receivable of $88.5 million and $82.0 million, respectively, under this program. In 1999, the proceeds from the securitization were used to permanently reduce a portion of the company's long-term debt. On December 16, 1999, the company determined that certain performance measurements in the accounts receivable securitization program agreement were not met due to an increase in the aging of the accounts receivable of one of the participating subsidiaries as a result of a system implementation at that subsidiary. The program sponsor waived this condition and the agreement was amended to temporarily revise the performance measurements until May 2000, at which time these performance measurements reverted to the original terms of the agreement. The company is in compliance with the provisions of this agreement at June 30, 2000. See Note 6 to the consolidated financial statements for additional information. During 1998, the company generated $101.5 million in cash from operations, a $1.7 million increase from 1997 due to higher working capital requirements of $47.8 million related to increased sales offset by $50.2 million of higher noncash items, such as depreciation and amortization. Net cash used in investing activities was $813.1 million, a significant increase compared to 1997 due to the acquisition of Greenfield and other companies. Capital expenditures of $104.8 million, an increase of $31.0 million compared to 1997, were made to upgrade machinery and equipment, to acquire additional client-server information systems and to complete the construction of the new world headquarters in Latrobe, Pa. and a manufacturing facility in China. Additionally, the company repurchased subsidiary stock of $14.2 million in 1998. Net cash flow from financing activities was $710.1 million in 1998. The increase of $713.4 million resulted from $424.1 million of increased borrowings under the Bank Credit Agreement that was used primarily to fund the acquisition of Greenfield and the $261.8 million of proceeds from the issuance of stock. On July 2, 1997, an initial public offering (IPO) of 4.9 million shares of common stock of JLK was consummated at a price of $20.00 per share. The net proceeds from the offering were $90.4 million and represented approximately 20 percent of JLK's common stock. The net proceeds were used by JLK to repay $20.0 million of indebtedness related to a dividend to the company and $20.0 million related to intercompany obligations to the company incurred in 1997. The company used these proceeds to repay short-term debt. JLK used the remaining net proceeds of $50.4 million to make acquisitions in 1998. The company's ownership in JLK increased to approximately 83 percent due to treasury stock purchases made by JLK since the IPO. 20

9 On November 17, 1997, the company completed the acquisition of all the outstanding stock of Greenfield. The total purchase price for the acquisition of Greenfield was $1.0 billion, including $324.4 million in assumed Greenfield debt and convertible redeemable preferred securities and transaction costs. In connection with the acquisition of Greenfield, the company entered into a $1.4 billion Bank Credit Agreement and borrowed the appropriate funds to pay for the Greenfield acquisition, including the refinancing of certain indebtedness of Greenfield and the company. Additionally, on June 26, 1998, the company sold the Marine Products division of Greenfield, which operated as Rule Industries, Inc. (Rule). The company acquired Rule as part of its acquisition of Greenfield and, for strategic reasons, chose to divest itself of this business. Annual sales of the Marine Products division were approximately $25 million. Proceeds received from the sale were used to reduce a portion of the company's long-term debt. On March 20, 1998, the company sold 3.45 million shares of common stock resulting in net proceeds of $171.4 million. The proceeds were used to reduce a portion of the company's long-term debt. On June 8, 1998, JLK initiated a stock repurchase program to repurchase, from time-to-time, up to a total of 20 percent, or approximately 1.0 million shares, of its outstanding Class A Common Stock. In 1999 and 1998, JLK repurchased 15,000 and 628,700 shares, respectively, of its Class A Common Stock at a total cost of $0.3 million and $14.2 million, respectively. The repurchases were made in the open market or in negotiated or other permissible transactions. These repurchases were financed principally by cash from operations and short-term borrowings. There were no repurchases in 2000. Capital expenditures for 2001 are estimated to be $60 to $70 million and will be used primarily to support new products and to upgrade machinery and equipment. FINANCIAL CONDITION At June 30, 2000, the company's total assets were $1,982.9 million, a decline of three percent from June 30, 1999. Net working capital was $397.4 million, an increase of six percent from $373.6 million for the previous year due primarily to the repayment of short-term debt. The ratio of current assets to current liabilities was 2.1 in 2000, compared with 2.0 in 1999. Accounts receivable remained flat at $231.9 million, while inventories declined $23.6 million to $410.9 million at June 30, 2000. Inventory turnover was 2.7 in 2000 and 2.6 in 1999. The reduction in inventory is due to management's efforts to reduce overall inventory levels to generate cash flow. Total debt (including capital lease obligations) decreased 19 percent to $699.2 million in 2000, as a result of strong FOCF generated in 2000. The ratio of total debt-to-total capital was 45.6 percent in 2000, compared with 51.9 percent in 1999. Cash from operations and the company's debt capacity are expected to continue to be sufficient to fund capital expenditures, debt service obligations, dividend payments and operating requirements. In the future, the company may consider refinancing a portion of its variable-rate long-term debt to further reduce the exposure to fluctuating interest rates. One of the features of the new management incentive program is the focus on the more efficient use of working capital to generate sales. Management believes the ratio of primary working capital as a percentage of sales (PWC%) is appropriate for measuring the company's efficiency in utilizing working capital to generate sales. The company's PWC% was 29.4 percent and 34.9 percent at June 30, 2000 and 1999, respectively. The improvement in PWC% is due to lower primary working capital, partially offset by lower sales levels. Primary working capital (PWC) is defined as inventory plus accounts receivable, less accounts payable. PWC% is calculated by averaging beginning of the year and quarter-end balances for PWC, divided by sales for the most recent 12-month period. While PWC% is not a GAAP alternative measure of asset utilization efficiency and may not be comparable to other similarly titled measures of other companies, the company's management believes PWC% is a meaningful measure of the company's efficiency in utilizing working capital to generate sales. STRATEGIC ALTERNATIVES In the December 1999 quarter, the company engaged an investment bank to explore strategic alternatives regarding JLK, including a possible divestiture. At that time, management believed a divestiture might enhance growth prospects for both the company and JLK by allowing each company to focus on its core competencies. The company completed a thorough and disciplined process of evaluating strategic alternatives and on May 2, 2000, decided to terminate consideration of a possible divestiture at that time, although management continues to believe there may be better owners for JLK. The company incurred and expensed $0.8 million in costs associated with this evaluation in 2000. 21

10 MANAGEMENT'S DISCUSSION AND ANALYSIS CONT. On July 20, 2000, the company proposed to the JLK Board of Directors to acquire the outstanding shares of JLK it does not already own. As of September 1, 2000, no agreement to acquire these minority shares has been reached with JLK, and the company may or may not acquire these minority shares. In the event the company were to acquire this minority interest of approximately 4.3 million shares, it is not expected to have a material effect on the company's financial condition. The proposal is not conditioned on financing. The company reserved the right to amend or withdraw this proposal at any time at its sole discretion. In July 2000, the company, JLK and the JLK directors (including one former director) were named as defendants in several putative class action lawsuits. The lawsuits seek an injunction, rescission, damages, costs and attorney fees in connection with the company's proposal to acquire the outstanding stock of JLK not owned by the company. The company believes the actions lack merit and will defend them vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time. Management believes that any losses derived from the final outcome of these actions and proceedings will not be material in the aggregate to the company's financial condition. ENVIRONMENTAL MATTERS The company has been involved in various environmental cleanup and remediation activities at several of its manufacturing facilities. In addition, the company is currently named as a potentially responsible party (PRP) at several Superfund sites in the United States. In the December 1999 quarter, the company recorded a remediation reserve of $3.0 million with respect to its involvement in these matters, which is recorded as a component of operating expense. This represents management's best estimate of its undiscounted future obligation based on its evaluations and discussions with outside counsel and independent consultants, and the current facts and circumstances related to these matters. The company recorded this liability in the December quarter because certain events occurred, including sufficient progress made by the government and the PRPs in the identification of other PRPs and review of potential remediation solutions, that clarified the level of involvement in these matters by the company and its relationship to other PRPs. This led the company to conclude that it was probable that a liability had been incurred. In addition to the amount currently reserved, the company may be subject to loss contingencies related to these matters estimated to be up to an additional $3.3 million. The company believes that such undiscounted unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. The reserved and unreserved liabilities could change substantially in the near term due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs and the identification of new PRPs. The company maintains a Corporate Environmental, Health and Safety (EH&S) Department, as well as an EH&S Policy Committee, to ensure compliance with environmental regulations and to monitor and oversee remediation activities. In addition, the company has established an EH&S administrator at 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 basis, management establishes or adjusts financial provisions and reserves for environmental contingencies in accordance with SFAS No. 5, "Accounting for Contingencies." MARKET RISK The company is exposed to certain market risks arising from transactions that are entered into in the normal course of business. The company seeks to minimize these risks through its normal operating and financing activities and, when considered appropriate, through the use of derivative financial instruments. The company does not enter into derivative transactions for speculative purposes and therefore holds no derivative instruments for trading purposes. The company's objective in managing these exposures is to reduce both earnings and cash flow volatility to allow management to focus its attention on its core business operations. The company hedges its foreign currency and interest rate exposures in a manner that dampens the effect of changes in foreign currency and interest rates on consolidated net income. See Notes 2 and 15 to the consolidated financial statements for additional information. A portion of the company's operations consists of investments in foreign subsidiaries. The company's exposure to market risk for changes in foreign currency exchange rates arises from intercompany loans utilized to finance foreign subsidiaries, trade receivables and payables, and firm commitments arising from international transactions. The company manages its foreign currency transaction risk to reduce the volatility of cash flows caused by currency fluctuations through internal natural offsets, to the fullest extent possible, and foreign exchange contracts. These contracts are designated as hedges of transactions, which will settle in future periods, that otherwise would expose the company to foreign currency risk. 22

11 In April 2000, the company implemented a foreign exchange hedging program to protect a portion of the company's currency exposure from unfavorable exchange rate movements. This exposure arises from anticipated cash collections from foreign subsidiaries on transactions between domestic and foreign subsidiaries during 2001. This program utilizes purchased options, range forwards and forward contracts. The cost of this program was $1.9 million, of which, $0.3 million was amortized to other expense, net based on the life of the contracts,until SFAS 133,"Accounting for Derivative Instruments and Hedging Activities," is adopted on July 1, 2000; thereafter, the contracts will be accounted for and reported under this new Statement. At June 30, 2000, the unamortized cost of the options of $1.6 million and unrealized gains on the forward contracts of $0.4 million are recorded in other current assets and approximate the fair value of the contracts then outstanding. The notional amounts of the contracts translated into U.S. dollars at June 30, 2000 rates is $121.7 million. At June 30, 2000, a hypothetical 10 percent strengthening of the U.S. dollar would result in an increase in pretax income of $7.8 million, while a 10 percent weakening of the U.S. dollar would result in a decrease in pretax income of $3.2 million related to these positions. In February 2000, the company completed a short-term foreign exchange hedging program to protect a portion of the company's currency exposure from unfavorable exchange rate movements. The exposure arose from anticipated cash collections from foreign subsidiaries on sales between domestic and foreign subsidiaries through June 30, 2000. This program involved the purchase of a series of options that gave the company the right to sell foreign currency at specific rates contained in the contracts. The cost of this program, $0.6 million, was amortized to other expense, net over the life of the options. In addition, the company may enter into forward contracts to hedge transaction exposures or significant cross-border intercompany loans by either purchasing or selling specified amounts of foreign currency at a specified date. At June 30, 2000, the company had several outstanding forward contracts to sell foreign currency. The notional amounts of these forward contracts translated into U.S. dollars at June 30, 2000 rates is $26.7 million. A hypothetical 10 percent change in the applicable 2000 year-end exchange rates would result in an increase or decrease in pretax income of $0.8 million related to these positions. The company's exposure to market risk for changes in interest rates relates primarily to the company's long-term debt obligations. The company seeks to manage its interest rate risk in order to balance its exposure between fixed and floating rates while attempting to minimize its borrowing costs. To achieve these objectives, the company primarily uses interest rate swap agreements to manage net exposure to interest rate changes related to its borrowings. At June 30, 2000, the company had interest rate swap agreements outstanding that effectively convert a notional amount of $300.0 million of debt from floating to fixed interest rates. These agreements mature at various times between June 2001 and June 2003. At June 30, 2000 and 1999, the company had $699.2 million and $861.3 million of debt outstanding at effective interest rates of 7.11 percent and 6.11 percent, respectively, after the impact of interest rate swaps is taken into account. A hypothetical change of 10 percent in the company's effective interest rate from year-end 2000 levels would increase or decrease interest expense by approximately $3.0 million. The company is exposed to counterparty credit risk for non-performance and, in the unlikely event of nonperformance, to market risk for changes in interest and currency rates. The company manages exposure to counterparty credit risk through credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. The company does not anticipate nonperformance by any of the counterparties. The company's investment in Toshiba Tungaloy is classified as an available-for-sale security and, therefore, is carried at its quoted market value, adjusted for changes in currency exchange rates. At June 30, 2000, the carrying and fair value of this investment was $27.6 million. A 10 percent change in the quoted market value of TT common stock at June 30, 2000 would result in a $2.8 million increase or decrease in fair value. YEAR 2000 Management believes that the company substantially mitigated its exposure relative to year 2000 issues for both information and non-information technology systems. The company's non-compliant systems were either replaced or modified to become year 2000 compliant prior to December 31, 1999. The transition into the year 2000 resulted in no significant impact to the financial position or operations of the company. To date, the company's suppliers continue to provide the company with sufficient goods and services in the year 2000. Expenditures incurred in 2000 and 1999 approximate $3.5 million and $13.5 million, respectively. Cash flows from operations provided funding for these expenditures. The company does not anticipate incurring additional expenditures related to year 2000 issues. 23

12 MANAGEMENT'S DISCUSSION AND ANALYSIS CONT. EFFECTS OF INFLATION Despite modest inflation in recent years, rising costs continue to affect the company's operations throughout the world. The company strives to minimize the effects of inflation through cost containment, productivity improvements and price increases under highly competitive conditions. NEW ACCOUNTING STANDARDS In June 1998, SFAS No. 133 was issued, which establishes accounting and reporting standards requiring all derivative instruments (including certain derivative instruments imbedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at their fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 was adopted on July 1, 2000 resulting in the recording of current assets of $1.6 million, long-term assets of $1.4 million, current liabilities of $1.3 million, long-term liabilities of $0.7 million, a decrease in other comprehensive loss of $1.6 million, net of tax, and a loss from the cumulative effect from the change in accounting principle of $0.6 million, net of tax. Forward contracts hedging significant cross-border intercompany loans are considered other derivatives and therefore, not eligible for hedge accounting. The remainder of the derivative contracts are accounted for as cash flow hedges. The company expects to recognize net current assets of $0.5 million into earnings in the next 12 months. In December 1999, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 explains the SEC staff's general framework for revenue recognition, however, it does not change existing accounting pronouncements on revenue recognition, but rather clarifies the SEC's position on preexisting rules. SAB No. 101 did not require the company to change existing revenue recognition policies and, therefore, had no impact on the company's financial condition at June 30, 2000. FORWARD-LOOKING STATEMENTS This annual report contains "forward-looking statements" as defined by Section 21E of the Securities Exchange Act of 1934. Actual results may differ materially from those expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, the extent that the economic conditions in the United States and Europe, and to a lesser extent,Asia Pacific are not sustained, risks associated with integrating businesses, demands on management resources, risks associated with international markets such as currency exchange rates, competition, and risks associated with the implementation of restructuring actions and environmental remediation. The company undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or circumstances occurring after the date hereof. 24

13 CONSOLIDATED STATEMENTS OF INCOME Year ended June 30 2000 1999 1998 ==================================================================================================================== (in thousands, except per share data) OPERATIONS Net sales $1,853,663 $1,902,916 $1,678,388 Cost of goods sold 1,147,287 1,198,651 994,481 - -------------------------------------------------------------------------------------------------------------------- Gross profit 706,376 704,265 683,907 Research and development expense 19,246 18,797 20,397 Selling, marketing and distribution expense 364,971 394,204 339,772 General and administrative expense 118,184 104,043 112,519 Restructuring and asset impairment charges 18,526 13,937 -- Amortization of intangibles 26,452 25,788 15,648 - -------------------------------------------------------------------------------------------------------------------- Operating income 158,997 147,496 195,571 Interest expense 55,079 68,594 59,536 Other expense, net 3,507 492 5,459 - -------------------------------------------------------------------------------------------------------------------- Income before provision for income taxes and minority interest 100,411 78,410 130,576 Provision for income taxes 43,700 32,900 53,900 Minority interest 4,734 6,394 5,479 - -------------------------------------------------------------------------------------------------------------------- Income before extraordinary loss 51,977 39,116 71,197 Extraordinary loss on early extinguishment of debt, net of tax of $178 (267) -- -- - -------------------------------------------------------------------------------------------------------------------- Net income $ 51,710 $ 39,116 $ 71,197 ==================================================================================================================== PER SHARE DATA Basic earnings per share before extraordinary loss $ 1.72 $ 1.31 $ 2.61 Extraordinary loss per share (0.01) -- -- - -------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 1.71 $ 1.31 $ 2.61 ==================================================================================================================== Diluted earnings per share before extraordinary loss $ 1.71 $ 1.31 $ 2.58 Extraordinary loss per share (0.01) -- -- - -------------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 1.70 $ 1.31 $ 2.58 ==================================================================================================================== Dividends per share $ 0.68 $ 0.68 $ 0.68 ==================================================================================================================== Basic weighted average shares outstanding 30,263 29,917 27,263 ==================================================================================================================== Diluted weighted average shares outstanding 30,364 29,960 27,567 ==================================================================================================================== The accompanying notes are an integral part of these statements. 26

14 CONSOLIDATED BALANCE SHEETS As of June 30 2000 1999 ======================================================================================================================== (in thousands) ASSETS Current assets: Cash and equivalents $ 22,323 $ 17,408 Marketable equity securities available-for-sale 27,614 13,436 Accounts receivable, less allowance for doubtful accounts of $12,214 and $15,269 231,917 231,287 Inventories 410,885 434,462 Deferred income taxes 52,754 44,182 Other current assets 13,065 9,673 - ------------------------------------------------------------------------------------------------------------------------ Total current assets 758,558 750,448 - ------------------------------------------------------------------------------------------------------------------------ Property, plant and equipment: Land and buildings 230,448 235,375 Machinery and equipment 720,556 756,917 Less accumulated depreciation (452,220) (452,492) - ------------------------------------------------------------------------------------------------------------------------ Net property, plant and equipment 498,784 539,800 - ------------------------------------------------------------------------------------------------------------------------ Other assets: Investments in affiliated companies 2,571 844 Intangible assets, less accumulated amortization of $88,458 and $64,096 661,172 685,695 Deferred income taxes 23,228 33,996 Other 38,629 32,865 - ------------------------------------------------------------------------------------------------------------------------ Total other assets 725,600 753,400 - ------------------------------------------------------------------------------------------------------------------------ Total assets $1,982,942 $2,043,648 ======================================================================================================================== LIABILITIES Current liabilities: Current maturities of long-term debt and capital leases $ 3,855 $ 117,217 Notes payable to banks 57,701 26,222 Accounts payable 118,908 89,339 Accrued income taxes 30,226 9,487 Accrued vacation pay 28,217 27,323 Accrued payroll 20,605 19,730 Other current liabilities 101,643 87,548 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 361,155 376,866 - ------------------------------------------------------------------------------------------------------------------------ Long-term debt and capital leases, less current maturities 637,686 717,852 Deferred income taxes 54,955 53,108 Other liabilities 93,786 97,186 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,147,582 1,245,012 - ------------------------------------------------------------------------------------------------------------------------ Minority interest in consolidated subsidiaries 55,106 53,505 - ------------------------------------------------------------------------------------------------------------------------ SHAREOWNERS' EQUITY Preferred stock, no par value; 5,000 shares authorized; none issued -- -- Common stock, $1.25 par value; 70,000 shares authorized; 33,200 and 32,903 shares issued 41,500 41,128 Additional paid-in capital 335,314 325,382 Retained earnings 508,733 477,593 Treasury stock, at cost; 2,677 and 2,836 shares held (55,236) (57,199) Unearned compensation (2,814) (3,330) Accumulated other comprehensive loss (47,243) (38,443) - ------------------------------------------------------------------------------------------------------------------------ Total shareowners' equity 780,254 745,131 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareowners' equity $1,982,942 $2,043,648 ======================================================================================================================== The accompanying notes are an integral part of these statements. 27

15 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30 2000 1999 1998 ================================================================================================================ (in thousands) OPERATING ACTIVITIES Net income $ 51,710 $ 39,116 $ 71,197 Adjustments for noncash items: Depreciation 75,194 70,203 51,663 Amortization 26,452 25,788 15,648 Restructuring and asset impairment charges 6,378 17,119 -- Loss on early extinguishment of debt, net of tax 267 -- -- Other 11,472 6,583 29,705 Changes in certain assets and liabilities, net of effects of acquisitions and divestitures: Accounts receivable (17,257) 25,973 (17,006) Proceeds from accounts receivable securitization 6,500 82,000 -- Inventories 14,331 (3,867) (37,231) Accounts payable and accrued liabilities 44,968 (32,701) (8,791) Other 1,192 (3,662) (3,661) - ---------------------------------------------------------------------------------------------------------------- Net cash flow from operating activities 221,207 226,552 101,524 - ---------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of property, plant and equipment (50,663) (94,993) (104,774) Disposals of property, plant and equipment 8,109 9,555 5,132 Purchase of marketable equity securities -- (12,162) -- Acquisitions, net of cash -- (5,164) (755,338) Divestitures, net of cash -- 1,617 62,052 Purchase of subsidiary stock -- (332) (14,197) Other (531) (503) (5,992) - ---------------------------------------------------------------------------------------------------------------- Net cash flow used for investing activities (43,085) (101,982) (813,117) - ---------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net decrease in notes payable (18,491) (23,328) (1,968) Net increase (decrease) in revolver and other lines of credit (15,100) 61,800 237,794 Term debt borrowings 378 25,285 269,487 Term debt repayments (129,810) (170,040) (43,905) Net proceeds from issuance and sale of common stock -- -- 171,439 Net proceeds from issuance and sale of subsidiary stock -- -- 90,430 Dividend reinvestment and employee benefit and stock plans 11,276 3,299 10,764 Cash dividends paid to shareowners (20,570) (20,328) (18,475) Other (1,018) (1,045) (5,511) - ---------------------------------------------------------------------------------------------------------------- Net cash flow from (used for) financing activities (173,335) (124,357) 710,055 - ---------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash 128 (1,171) (1,965) - ---------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS Net increase (decrease) in cash and equivalents 4,915 (958) (3,503) Cash and equivalents, beginning of year 17,408 18,366 21,869 - ---------------------------------------------------------------------------------------------------------------- Cash and equivalents, end of year $ 22,323 $ 17,408 $ 18,366 ================================================================================================================ SUPPLEMENTAL DISCLOSURES Interest paid $ 55,000 $ 67,065 $ 61,692 Income taxes paid 17,092 21,738 47,052 ================================================================================================================ The accompanying notes are an integral part of these statements. 28

16 CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY Year ended June 30 2000 1999 1998 ============================================================================================================== (in thousands) COMMON STOCK Balance at beginning of year $ 41,128 $ 41,025 $ 36,712 Issuance of common stock under employee benefit and stock plans 372 103 -- Issuance of common stock -- -- 4,313 - -------------------------------------------------------------------------------------------------------------- Balance at end of year 41,500 41,128 41,025 - -------------------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL Balance at beginning of year 325,382 320,645 91,049 Dividend reinvestment 1,250 340 819 Issuance of common stock under employee benefit and stock plans 8,682 4,397 6,676 Issuance of common stock -- -- 167,126 Issuance of subsidiary stock -- -- 54,975 - -------------------------------------------------------------------------------------------------------------- Balance at end of year 335,314 325,382 320,645 - -------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance at beginning of year 477,593 458,805 406,083 Net income 51,710 39,116 71,197 Cash dividends (20,570) (20,328) (18,475) - -------------------------------------------------------------------------------------------------------------- Balance at end of year 508,733 477,593 458,805 - -------------------------------------------------------------------------------------------------------------- TREASURY STOCK Balance at beginning of year (57,199) (59,131) (62,400) Dividend reinvestment 1,236 392 292 Issuance of common stock under employee benefit and stock plans 727 1,540 2,977 - -------------------------------------------------------------------------------------------------------------- Balance at end of year (55,236) (57,199) (59,131) - -------------------------------------------------------------------------------------------------------------- UNEARNED COMPENSATION Balance at beginning of year (3,330) -- -- Issuance of common stock under employee benefit and stock plans (1,094) (3,473) -- Amortization of unearned compensation 1,610 143 -- - -------------------------------------------------------------------------------------------------------------- Balance at end of year (2,814) (3,330) -- - -------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE LOSS Balance at beginning of year (38,443) (25,884) (11,836) Unrealized gain on marketable equity securities available-for-sale, net of tax 7,503 1,160 -- Minimum pension liability adjustment, net of tax 415 (1,265) -- Foreign currency translation adjustments (16,718) (12,454) (14,048) - -------------------------------------------------------------------------------------------------------------- Other comprehensive loss (8,800) (12,559) (14,048) - -------------------------------------------------------------------------------------------------------------- Balance at end of year (47,243) (38,443) (25,884) - -------------------------------------------------------------------------------------------------------------- Total shareowners' equity, June 30 $780,254 $745,131 $735,460 ============================================================================================================== COMPREHENSIVE INCOME Net income $ 51,710 $ 39,116 $ 71,197 Other comprehensive loss (8,800) (12,559) (14,048) - -------------------------------------------------------------------------------------------------------------- Comprehensive income $ 42,910 $ 26,557 $ 57,149 ============================================================================================================== The accompanying notes are an integral part of these statements. 29

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 NATURE OF OPERATIONS Kennametal Inc. (the company or Kennametal) is a global leader engaged in the manufacture, purchase and distribution of a broad range of tools, tooling systems, and solutions to the metalworking, mining, oil and energy industries, and wear-resistant parts for a wide range of industries. Unless otherwise specified, any reference to a "year" is to a fiscal year ended June 30. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The summary of significant accounting policies is presented below to assist in evaluating the company's consolidated financial statements. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the company and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS Temporary cash investments having original maturities of three months or less are considered cash equivalents. Cash equivalents consist principally of investments in money market funds and certificates of deposit. MARKETABLE EQUITY SECURITIES AVAILABLE-FOR-SALE The company's investment in marketable equity securities is accounted for as an available-for-sale security under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This investment is reported at fair value, as determined through quoted market sources. The unrealized gain on this investment is recorded as a component of accumulated other comprehensive loss, net of tax. ACCOUNTS RECEIVABLE Accounts receivable included $2.4 million and $5.3 million of receivables from affiliates at June 30, 2000 and 1999, respectively. INVENTORIES Inventories are carried at the lower of cost or market. The company uses the last-in, first-out (LIFO) method for determining the cost of a significant portion of its U.S. inventories. The cost of the remainder of inventories is determined under the first-in, first-out (FIFO) or average cost methods. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Major improvements are capitalized, while maintenance and repairs are expensed as incurred. Retirements and disposals are removed from cost and accumulated depreciation accounts, with the gain or loss reflected in income. Interest is capitalized during the construction of major facilities. Capitalized interest is included in the cost of the constructed asset and is amortized over its estimated useful life. Depreciation for financial reporting purposes is computed using the straight-line method over the estimated useful lives of the assets ranging from three to 40 years. Leased property and equipment under capital leases are amortized using the straight-line method over the terms of the related leases. INTANGIBLE ASSETS Intangible assets, which include the excess of cost over net assets of acquired companies, are amortized using the straight-line method over periods ranging from two to 40 years. The company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired entities. The carrying value of goodwill would be adjusted to the present value of the future operating cash flows if the asset cannot be recovered over its remaining life. The net book value of goodwill amounted to $647.9 million and $671.4 million at June 30, 2000 and 1999, respectively. DEFERRED FINANCING FEES Fees incurred in connection with new borrowings are capitalized and amortized to interest expense over the life of the related obligation. EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of shares outstanding during the period, while diluted earnings per share is calculated to reflect the potential dilution that occurs related to issuance of common stock under stock option grants. The difference between basic and diluted earnings per share relates solely to the effect of common stock options. For purposes of determining the number of dilutive shares outstanding, weighted average shares outstanding for basic earnings per share calculations were increased for the dilutive effect of unexercised stock options by 100,653; 43,453; and 303,539 shares in 2000, 1999 and 1998, respectively. 30

18 ISSUANCE OF SUBSIDIARY STOCK The company accounts for sales of subsidiary stock as capital transactions in the consolidated financial statements. REVENUE RECOGNITION The company recognizes revenue from product sales upon shipment to the customer. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. INCOME TAXES Deferred income taxes are recognized based on the future income tax effects (using enacted tax laws and rates) of differences in the carrying amounts of assets and liabilities for financial reporting and tax purposes. A valuation allowance is recognized if it is "more likely than not" that some or all of a deferred tax asset will not be realized. FOREIGN CURRENCY TRANSLATION Assets and liabilities of international operations are translated into U.S. dollars using year-end exchange rates, while revenues and expenses are translated at average exchange rates throughout the year. The resulting net translation adjustments are recorded as a component of accumulated other comprehensive loss. DERIVATIVE FINANCIAL INSTRUMENTS From time to time, the company uses derivative financial instruments to hedge a portion of the exposures to fluctuations in foreign currency exchange rates and interest rates. The company accounts for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction when designated as a hedge of such items. The company does not enter into derivative transactions for speculative purposes and therefore holds no derivative instruments for trading purposes. Premiums paid on option contracts are amortized over the lives of the contracts. Unrealized gains and losses from option and range forward contracts that hedge foreign currency exposures of anticipated transactions are deferred and recognized in the same period as the hedged transaction. Unrealized gains and losses on forward contracts used to hedge foreign currency exposures of underlying receivables and payables and anticipated transactions are not deferred and are recognized in other expense, net. Changes in the amount to be received or paid under interest rate swap agreements used to manage net exposure to interest rate changes related to borrowings are recognized in interest expense. NEW ACCOUNTING STANDARDS In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued, which establishes accounting and reporting standards requiring all derivative instruments (including certain derivative instruments imbedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at their fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 was adopted on July 1, 2000 resulting in the recording of current assets of $1.6 million, long-term assets of $1.4 million, current liabilities of $1.3 million, long-term liabilities of $0.7 million, a decrease in other comprehensive loss of $1.6 million, net of tax, and a loss from the cumulative effect from the change in accounting principle of $0.6 million, net of tax. Forward contracts hedging significant cross-border intercompany loans are considered other derivatives and therefore, not eligible for hedge accounting. The remainder of the derivative contracts are accounted for as cash flow hedges. The company expects to recognize net current assets of $0.5 million into earnings in the next 12 months. In December 1999, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 explains the SEC staff's general framework for revenue recognition, however, it does not change existing accounting pronouncements on revenue recognition, but rather clarifies the SEC's position on pre-existing rules. SAB No. 101 did not require the company to change existing revenue recognition policies and, therefore, had no impact on the company's financial condition at June 30, 2000. RECLASSIFICATIONS Certain amounts in the prior years' consolidated financial statements have been reclassified to conform with the current-year presentation. NOTE 3 ACQUISITIONS AND DIVESTITURES In the December 1999 quarter, the company engaged an investment bank to explore strategic alternatives regarding its 83 percent-owned subsidiary, JLK Direct Distribution Inc. (JLK), including a possible divestiture. At that time, management believed a divestiture might enhance growth prospects for both the company and JLK by allowing each company to focus on its core competencies. The company completed a thorough and disciplined process of evaluating strategic alternatives and on May 2, 2000, decided to terminate consideration of a possible divestiture at that time, 31

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT. although management continues to believe there may be better owners for JLK. The company incurred and expensed $0.8 million in costs associated with this evaluation in 2000. On July 20, 2000, the company proposed to the JLK Board of Directors to acquire the outstanding shares of JLK it does not already own. As of September 1, 2000, no agreement to acquire these minority shares has been reached with JLK, and the company may or may not acquire these minority shares. In the event the company were to acquire this minority interest of approximately 4.3 million shares, it is not expected to have a material effect on the company's financial condition. The proposal is not conditioned on financing. The company reserved the right to amend or withdraw this proposal at any time at its sole discretion. In July 2000, the company, JLK and the JLK directors (including one former director) were named as defendants in several putative class action lawsuits. The lawsuits seek an injunction, rescission, damages, costs and attorney fees in connection with the company's proposal to acquire the outstanding stock of JLK not owned by the company. The company believes the actions lack merit and will defend them vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time. Management believes that any losses derived from the final outcome of these actions and proceedings will not be material in the aggregate to the company's financial condition. On November 17, 1997, the company completed the acquisition of Greenfield Industries, Inc. (Greenfield) for $1.0 billion, including $324.4 million in assumed Greenfield debt and convertible redeemable preferred securities and transaction costs. The Greenfield acquisition was recorded using the purchase method of accounting and, accordingly, the results of operations of Greenfield have been included in the company's results from the date of acquisition. The purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair values at date of acquisition. The excess of purchase price over the fair value of the net assets acquired has been recorded as goodwill and is being amortized over 40 years. Additionally, the company also made several other acquisitions in 1999 and 1998, primarily through JLK, to expand its product offering and distribution channels. These acquisitions were accounted for using the purchase method of accounting and their results have been included in the company's results from the respective dates of acquisition. Except for Greenfield, the pro forma effects, individually and collectively, of the acquisitions in the company's consolidated financial statements did not materially impact the reported results. The allocation of the purchase price to assets acquired and liabilities assumed of Greenfield is as follows: (in thousands) ================================================= Working capital, other than cash $ 171,710 Property, plant and equipment 167,798 Other assets 9,246 Other liabilities (28,510) Long-term debt (318,146) Goodwill 654,117 - ------------------------------------------------- Net purchase price $ 656,215 ================================================= Pro forma results of operations for the acquisition of Greenfield, but excluding the effects of all other acquisitions, are based on the historical financial statements of the company and Greenfield adjusted to give effect to the acquisition of Greenfield. The pro forma results of operations assume that the acquisition of Greenfield occurred as of the first day of 1998 (July 1, 1997): (in thousands, except per share data) =============================================== Net sales $1,913,190 Net income 63,623 Basic earnings per share 2.33 Diluted earnings per share 2.31 - ----------------------------------------------- The pro forma financial information does not purport to present what the company's results of operations would actually have been if the acquisition of Greenfield had occurred on the assumed date, as specified above, or to project the company's financial condition or results of operations for any future period. On June 26, 1998, the company sold the Marine Products division of Greenfield, which operated as Rule Industries, Inc. (Rule). The company acquired Rule as part of its acquisition of Greenfield and, for strategic reasons, chose to divest itself of this business. Annual sales of the Marine Products division were approximately $25 million. Proceeds received from the sale were used to reduce a portion of the company's long-term debt. No gain on sale was recorded as the difference between the cash proceeds and the net book value of Rule's assets was recorded as a reduction of previously recorded goodwill associated with the acquisition of Greenfield. NOTE 4 STOCK ISSUANCES On March 20, 1998, the Company sold 3.45 million shares of common stock resulting in net proceeds of $171.4 million. The proceeds were used to reduce a portion of the company's long-term debt. On July 2, 1997, an initial public offering (IPO) of 4.9 million shares of common stock of JLK was consummated at a price of $20.00 per share. JLK operates the industrial supply 32

20 operations consisting of the company's wholly owned J&L Industrial Supply (J&L) subsidiary and its Full Service Supply programs. The net proceeds from the offering were $90.4 million and represented the sale of approximately 20 percent of JLK's common stock. The net proceeds were used by JLK to repay $20.0 million of indebtedness related to a dividend to the company and $20.0 million related to intercompany obligations to the company incurred in 1997. The company used these proceeds to repay short-term debt. JLK used the remaining net proceeds of $50.4 million to make acquisitions in 1998. The company's ownership in JLK increased to approximately 83 percent due to treasury stock purchases made by JLK since the IPO. NOTE 5 MARKETABLE EQUITY SECURITIES AVAILABLE-FOR-SALE On January 18, 1999, the company entered into a business cooperation agreement with Toshiba Tungaloy Co., Ltd. (TT), a leading Japanese manufacturer of consumable metalcutting products, to enhance the global business prospects for metalcutting tools of both companies. The agreement includes various joint activities in areas such as product research and development, private labeling, cross-licensing, and sales and marketing. As part of the agreement, the company purchased approximately 4.9 percent of the outstanding shares of TT in a private transaction from TT's largest shareholder, Toshiba Corporation, for approximately $15.9 million, including the costs of the transaction. In order to enter into this agreement, the company purchased the shares at a predetermined price. In accordance with accounting rules, the company realized a one-time charge of approximately $3.8 million due to the difference between the cost ($15.9 million) and the fair market value of the securities on the date the securities were purchased ($12.1 million). Due to the provisions of this agreement, the company was not able to record this difference as an asset. This charge has been recorded as a component of selling, marketing and distribution expense. The gross unrealized gain on this investment is $14.2 million and $1.9 million at June 30, 2000 and 1999, respectively. NOTE 6 ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM On June 18, 1999, the company entered into an agreement with a financial institution whereby the company securitizes, on a continuous basis, an undivided interest in a specific pool of the company's domestic trade accounts receivable. Pursuant to this agreement, the company and several of its domestic subsidiaries, sell their domestic accounts receivable to Kennametal Receivables Corporation, a wholly-owned, bankruptcy-remote subsidiary (KRC). KRC was formed to purchase these accounts receivable and sell participating interests in such accounts receivable to the financial institution which, in turn, purchases and receives ownership and security interests in those assets. As collections reduce the amount of accounts receivable included in the pool, the company and the participating domestic subsidiaries sell new accounts receivable to KRC which, in turn, securitizes these new accounts receivable with the financial institution. The company is permitted to securitize up to $100.0 million of accounts receivable under this agreement. The financial institution charges the company fees based on the level of accounts receivable securitized under this agreement and the commercial paper market rates plus the financial institution's cost to administer the program. The costs incurred by the company under this program, $5.2 million and $0.2 million in 2000 and 1999, respectively, are accounted for as a component of other expense, net. At June 30,2000 and 1999, the company securitized accounts receivable of $88.5 million and $82.0 million, respectively, under this program. In 1999, the proceeds from the securitization were used to permanently reduce a portion of the company's long-term debt (see Note 9). On December 16, 1999, the company determined that certain performance measurements in the accounts receivable securitization program agreement were not met due to an increase in the aging of the accounts receivable of one of the participating subsidiaries as a result of a system implementation at that subsidiary. The program sponsor waived this condition and the agreement was amended to temporarily revise the performance measurements until May 2000, at which time these performance measurements reverted to the original terms of the agreement. The company is in compliance with the provisions of this agreement at June 30, 2000. NOTE 7 INVENTORIES Inventories consisted of the following: (in thousands) 2000 1999 ==================================================================== Finished goods $306,334 $318,736 Work in process and powder blends 96,101 117,987 Raw materials and supplies 35,707 32,619 - -------------------------------------------------------------------- Inventories at current cost 438,142 469,342 Less LIFO valuation (27,257) (34,880) - -------------------------------------------------------------------- Total inventories $410,885 $434,462 ==================================================================== The company used the LIFO method of valuing its inventories for approximately 45 and 49 percent of total inventories at June 30, 2000 and 1999, respectively. The company uses the LIFO method in order to more closely match current costs with current revenues, thereby reducing the effects of inflation on earnings. 33

21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT. In 1999, the company recognized a $6.9 million charge which represents a write-down of certain product lines that are being discontinued as part of a program to streamline and optimize the company's global metalworking product offering (see Note 14). NOTE 8 OTHER CURRENT LIABILITIES Other current liabilities consisted of the following: (in thousands) 2000 1999 ============================================================== Accrued benefits $ 17,607 $12,881 Deferred income taxes 9,843 1,802 Accrued employee programs 8,180 10,041 Payroll, state and local taxes 8,255 7,552 Accrued interest expense 5,123 6,422 Other accrued expenses 52,635 48,850 - -------------------------------------------------------------- Total other current liabilities $101,643 $87,548 ============================================================== NOTE 9 LONG-TERM DEBT AND CAPITAL LEASES Long-term debt and capital lease obligations consisted of the following: (in thousands) 2000 1999 ====================================================================== Bank Credit Agreement: Revolving credit loans, 7.030% to 7.530% in 2000 and 6.125% to 6.476% in 1999, due in 2003 $606,000 $ 671,100 Term loan, 6.179% in 1999, repaid in full in 2000 -- 109,250 Borrowings outside the U.S., varying from 1.00% to 14.50% in 2000 and 1.62% to 9.20% in 1999, due in installments through 2013 18,798 33,131 Lease of office facilities with terms expiring through 2008 at 4.45% to 4.73% 7,815 9,654 Other 8,928 11,934 - ---------------------------------------------------------------------- Total debt and capital leases 641,541 835,069 - ---------------------------------------------------------------------- Less current maturities: Long-term debt (2,918) (116,036) Capital leases (937) (1,181) - ---------------------------------------------------------------------- Total current maturities (3,855) (117,217) - ---------------------------------------------------------------------- Long-term debt and capital leases $637,686 $ 717,852 ====================================================================== In 1998, the company entered into a $1.4 billion Bank Credit Agreement (Agreement). Subject to certain conditions, the Agreement permitted term loans of up to $500.0 million and revolving credit loans of up to $900.0 million for working capital, capital expenditures and general corporate purposes. At June 30, 2000, interest payable under revolving credit loans is based on LIBOR plus 0.75%. The Agreement also includes a commitment fee on the revolving credit loans of 0.20% of the unused balance. The Agreement also contains various restrictive and affirmative covenants requiring the maintenance of certain financial ratios. The term loan was subject to mandatory amortization, and was repaid in November 1999. This resulted in an acceleration of the write-off of deferred financing fees of $0.4 million, which was recorded as an extraordinary loss of $0.3 million, net of tax. The revolving credit loans mature on August 31, 2002. In 1999, the term loan was permanently reduced with the net proceeds received from the accounts receivable securitization program (see Note 6). In 1998, the term loan was permanently reduced with the net proceeds received in connection with the issuance of company stock and from the sale of certain assets (see Notes 3 and 4). Future principal maturities of long-term debt are $2.9 million, $16.3 million, $606.3 million, $0.2 million and $0.2 million, respectively, in 2001 through 2005. Future minimum lease payments under capital leases for the next five years and in total are as follows: (in thousands) ======================================================== Year ending June 30: 2001 $ 1,277 2002 1,116 2003 1,051 2004 957 2005 957 After 2005 3,918 - -------------------------------------------------------- Total future minimum lease payments 9,276 Less amount representing interest (1,461) - -------------------------------------------------------- Present value of minimum lease payments $ 7,815 ======================================================== Future minimum lease payments under operating leases for the next five years and thereafter are as follows: (in thousands) ======================================================== Year ending June 30: 2001 $14,727 2002 10,911 2003 7,911 2004 5,701 2005 4,160 After 2005 15,572 - -------------------------------------------------------- 34

22 NOTE 10 NOTES PAYABLE AND LINES OF CREDIT Notes payable to banks of $57.7 million and $26.2 million at June 30, 2000 and 1999, respectively, represent short-term borrowings under U.S. and international credit lines with commercial banks. These credit lines, translated into U.S. dollars at June 30, 2000 rates, totaled $188.5 million at June 30, 2000, of which $130.8 million was unused. The weighted average interest rate for short-term borrowings was 7.3 percent and 6.1 percent at June 30, 2000 and 1999, respectively. NOTE 11 INCOME TAXES Income before income taxes and the provision for income taxes consisted of the following: (in thousands) 2000 1999 1998 ============================================================================= Income before provision for income taxes: United States $ 59,679 $36,858 $ 93,775 International 40,732 41,552 36,801 - ----------------------------------------------------------------------------- Total income before provision for income taxes $100,411 $78,410 $130,576 ============================================================================= Current income taxes: Federal $ 16,053 $18,300 $ 17,200 State 1,729 3,300 5,700 International 19,861 11,900 10,100 - ----------------------------------------------------------------------------- Total 37,643 33,500 33,000 Deferred income taxes 6,057 (600) 20,900 - ----------------------------------------------------------------------------- Provision for income taxes $ 43,700 $32,900 $ 53,900 ============================================================================= Effective tax rate 43.5% 42.0% 41.3% ============================================================================= The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for income taxes was as follows: (in thousands) 2000 1999 1998 ============================================================================ Income taxes at U.S. statutory rate $35,144 $27,444 $45,702 State income taxes, net of federal tax benefits 528 2,397 3,684 Nondeductible goodwill 5,605 5,630 3,944 Combined tax effects of international income (123) 203 2,944 International losses with no related tax benefits 2,527 1,915 1,562 Tax benefits from costs to repay senior debt -- (3,607) -- Other 19 (1,082) (3,936) - ---------------------------------------------------------------------------- Provision for income taxes $43,700 $32,900 $53,900 ============================================================================ Deferred tax assets and liabilities consisted of the following: (in thousands) 2000 1999 =================================================================== Deferred tax assets (liabilities): Other postretirement benefits $ 20,658 $ 19,817 Inventory valuation and reserves 19,956 18,515 Accrued employee benefits 14,323 12,945 Net operating loss carryforwards 10,694 10,176 Other accruals 8,865 14,111 Marketable equity securities (4,500) (742) Pension benefits (9,709) (6,898) Accumulated depreciation (44,995) (39,799) - ------------------------------------------------------------------- Total 15,292 28,125 Less valuation allowance (4,108) (4,857) - ------------------------------------------------------------------- Net deferred tax assets $ 11,184 $ 23,268 =================================================================== Deferred income taxes have not been provided on cumulative undistributed earnings of international subsidiaries and affiliates. At June 30, 2000, unremitted earnings of non-U.S. subsidiaries were determined to be permanently reinvested. It is not practical to estimate the income tax benefit that might be incurred if earnings were remitted to the United States. Included in deferred tax assets at June 30, 2000, are unrealized tax benefits totaling $10.7 million related to net operating loss carryforwards. The realization of these tax benefits is contingent on future taxable income in certain international operations. Of this amount, $6.3 million relates to net operating loss carryforwards in the United Kingdom and Germany, which can be carried forward indefinitely. The remaining unrealized tax benefits relate to net operating loss carryforwards in certain other international operations. The company established a valuation allowance of $4.1 million to offset the deferred tax benefits that may not be realized in the foreseeable future. NOTE 12 PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS The company sponsors several retirement plans that cover substantially all employees. Pension benefits under defined benefit pension plans are based on years of service and, for certain plans, on average compensation immediately preceding retirement. Pension costs are determined in accordance with SFAS No. 87, "Employers' Accounting for Pensions." The company funds pension costs in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974, as amended, for U.S. plans and in accordance with local regulations or customs for non-U.S. plans. In 2000, the company made a qualified transfer of pension assets of $2.2 million from a U.S. pension plan to pay for medical benefit claims and administrative expenses incurred by the company for postretirement health care benefits. 35

23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT. The company presently provides varying levels of post-retirement health care and life insurance benefits to most U.S. employees. Postretirement health care benefits are available to employees and their spouses retiring on or after age 55 with ten or more years of service after age 40. Beginning with retirements on or after January 1, 1998, Kennametal's portion of the costs of postretirement health care benefits will be capped at 1996 levels. The funded status of these plans and amounts recognized in the consolidated balance sheets were as follows: Pension Benefits Other Postretirement Benefits -------------------------------- ----------------------------- (in thousands) 2000 1999 2000 1999 ================================================================================================================================ Change in benefit obligation: Benefit obligation, beginning of year $ 357,102 $ 312,394 $ 37,922 $ 40,627 Service cost 13,414 12,126 1,168 1,196 Interest cost 25,187 18,268 2,536 2,633 Participant contributions 857 864 -- -- Plan amendments -- -- -- 2,153 Actuarial (gains) losses (21,754) 12,406 (2,219) (5,329) Benefits paid (17,818) (16,965) (3,343) (3,358) Effect of acquired businesses -- 16,651 -- -- Special termination benefits -- 2,731 -- -- Effect of curtailment and other 937 -- -- -- Foreign currency translation adjustments (3,611) (1,373) -- -- - -------------------------------------------------------------------------------------------------------------------------------- Benefit obligation, end of year $ 354,314 $ 357,102 $ 36,064 $ 37,922 ================================================================================================================================ Change in plan assets: Fair value of plan assets, beginning of year $ 460,957 $ 422,180 $ -- $ -- Actual return on plan assets 29,242 39,458 -- -- Company contributions 1,709 1,763 -- -- Participant contributions 857 864 -- -- Pension asset transfer (2,250) -- -- -- Benefits paid (17,818) (16,965) -- -- Effect of acquired businesses -- 14,114 -- -- Other 1,266 -- -- -- Foreign currency translation adjustments (1,755) (457) -- -- - -------------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets, end of year $ 472,208 $ 460,957 $ -- $ -- ================================================================================================================================ Funded status of plans $ 117,894 $ 103,855 $(36,064) $(37,922) Unrecognized transition obligation (3,109) (4,826) -- -- Unrecognized prior service cost 4,654 5,168 1,890 2,296 Unrecognized actuarial gains (117,220) (106,919) (10,242) (8,488) Minimum pension liability (4,206) (1,265) -- -- - -------------------------------------------------------------------------------------------------------------------------------- Net accrued obligation $ (1,987) $ (3,987) $(44,416) $(44,114) ================================================================================================================================ Amounts recognized in the balance sheet consist of: Prepaid benefit $ 27,096 $ 12,241 $ -- $ -- Accrued benefit obligation (29,083) (16,228) (44,416) (44,114) - -------------------------------------------------------------------------------------------------------------------------------- Net accrued obligation $ (1,987) $ (3,987) $(44,416) $(44,114) ================================================================================================================================ Prepaid pension benefits are included in other long-term assets. Accrued pension benefit obligations are included in other long-term liabilities. Accrued postretirement benefit obligations of $41.1 million and $40.8 million at June 30, 2000 and 1999, respectively are included in other long-term liabilities. Included in the above information are international pension plans with accumulated benefit obligations exceeding the fair value of plan assets as follows: (in thousands) 2000 1999 ========================================================== Projected benefit obligation $52,860 $55,069 Accumulated benefit obligation 51,960 53,364 Fair value of plan assets 31,136 33,581 ========================================================== 36

24 The components of net pension benefit and other postretirement cost include the following: Pension Benefits Other Postretirement Benefits -------------------------------------- -------------------------------- (in thousands) 2000 1999 1998 2000 1999 1998 ========================================================================================================================== Service cost $ 13,414 $ 12,126 $ 11,810 $1,168 $1,196 $1,080 Interest cost 25,187 18,268 19,646 2,536 2,633 2,646 Expected return on plan assets (39,388) (30,505) (49,151) -- -- -- Amortization of transition obligation (2,030) (2,140) (2,150) -- -- -- Amortization of prior service cost 514 551 551 406 406 47 Recognition of actuarial (gains) losses (1,662) (2,709) 18,593 (465) (286) (107) - -------------------------------------------------------------------------------------------------------------------------- Net (benefit) cost $ (3,965) $ (4,409) $ (701) $3,645 $3,949 $3,666 ========================================================================================================================== The significant actuarial assumptions used to determine the present value of the net pension and other postretirement benefit obligations were as follows: Pension Benefits Other Postretirement Benefits ------------------------------------ ----------------------------------- 2000 1999 1998 2000 1999 1998 ===================================================================================================================== Discount rate: U.S. plans 8.0% 7.5% 7.0% 8.0% 7.5% 7.0% International plans 5.5-7.0% 5.5-6.5% 6.0-7.0% -- -- -- Rate of future salary increases: U.S. plans 4.5% 4.5% 4.5% -- -- -- International plans 3.5-4.3% 3.0-4.3% 4.0-4.5% -- -- -- Rate of return on plan assets: U.S. plans 10.0% 9.5% 9.0% -- -- -- International plans 6.5-8.0% 6.5-7.0% 7.0-8.0% -- -- -- ===================================================================================================================== The annual assumed rate of increase in the per capita cost of covered benefits (the health care cost trend rate) for health care plans was 7.5% in 2000 and was assumed to decrease gradually to 5.5% in 2002 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A change of one percentage point in the assumed health care cost trend rates would have the following effects on the total service and interest cost components of other postretirement cost and the other postretirement benefit obligation at June 30, 2000: (in thousands) 1% Increase 1% Decrease =============================================================== Effect on total of service and interest cost components $ 140 $ (130) Effect on other postretirement benefit obligation 1,470 (1,350) - --------------------------------------------------------------- U.S. defined benefit pension plan assets consist principally of common stocks, corporate bonds and U.S. government securities. International defined benefit pension plan assets consist principally of common stocks, corporate bonds and government securities. The company also sponsors several defined contribution pension plans. Pension costs for defined contribution plans were $9.8 million, $9.5 million and $9.0 million in 2000, 1999 and 1998, respectively. Effective October 1, 1999, company contributions to U.S. defined contribution pension plans are made primarily in the company's common stock, resulting in the issuance of 268,964 shares during 2000. The company provides for postemployment benefits pursuant to SFAS No. 112, "Employers' Accounting for Postemployment Benefits." The company accrues the cost of separation and other benefits provided to former or inactive employees after employment but before retirement. Postemployment benefit costs were not significant in 2000, 1999 and 1998. 37

25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT. NOTE 13 ACCUMULATED OTHER COMPREHENSIVE LOSS The components of accumulated other comprehensive loss consist of the following: (in thousands) 2000 1999 ============================================================================ Unrealized gain on marketable equity securities available-for-sale, net of tax $ 8,663 $ 1,160 Minimum pension liability adjustment (850) (1,265) Foreign currency translation adjustments (55,056) (38,338) - ---------------------------------------------------------------------------- Total accumulated other comprehensive loss $(47,243) $(38,443) ============================================================================ NOTE 14 RESTRUCTURING AND ASSET IMPAIRMENT CHARGES In November 1999, the company announced plans to close, consolidate or downsize several plants, warehouses and offices, and associated work force reductions as part of its overall plan to increase asset utilization and financial performance, and to reposition the company to become the premier tooling solutions supplier. Management implemented these programs throughout 2000. The costs accrued for the implemented programs were based upon management estimates using the latest information available at the time that the accrual was established. The components of the charges are as follows: Incremental Initial Total Asset Pension Restructuring (in thousands) Charge Write-Downs Obligation Liability ============================================================================== Asset impairment charges $ 4,808 $(4,808) $ -- $ -- Employee severance 7,396 -- (787) 6,609 Product rationalization 100 (100) -- -- Facility rationalizations 6,322 (1,470) (205) 4,647 - ------------------------------------------------------------------------------ Total $18,626 $(6,378) $(992) $11,256 ============================================================================== In conjunction with the company's ongoing review of underperforming businesses, certain assets are reviewed for impairment pursuant to the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." An asset impairment charge of $1.7 million was recorded, related to a metalworking manufacturing operation in Shanghai, China. This operation became fully operational in 1998 and to date, has not generated the performance that was expected at the time the company entered into this market. Management performed an in-depth review of the operations, capacity utilization and the local management team, and engaged a consultant to perform an independent review of the same. These reviews enabled management to determine that the market served by this operation is not expected to develop to the extent originally anticipated, but that the operations were in good working order and utilized modern technology, and that the management team in place was competent. Management also determined that this facility had excess capacity given the level of market demand. Accordingly, management updated its operating forecast to reflect the current market demand. In comparing the undiscounted projected cash flows of the updated forecast to the net book value of the assets of this operation, management determined that the full value of these assets would not be recoverable. Accordingly, a charge was recorded to adjust the carrying value of the long-lived assets of this operation to fair value. The estimated fair value of these assets was based on various methodologies, including a discounted value of estimated future cash flows. The product rationalization charge of $0.1 million represents the write-down of certain discontinued product lines manufactured in these operations. The company manufactured these products specifically for the market served by these operations and management has determined that these products are no longer salable. This charge has been recorded as a component of cost of goods sold. The company recorded an asset impairment charge of $2.8 million related to the write-down of equipment in its North American metalworking operations and $0.3 million in its engineered products operations. In connection with the repositioning of the company, management completed an assessment of the assets currently being used in these operations and determined that these assets were not going to be further utilized in conducting these operations. This amount represents the write-down of the book value of the assets, net of salvage value. The charge for facility rationalizations relates to employee severance for 153 employees and other exit costs associated with the closure or downsizing of a metalworking manufacturing operation in Kingswinford, United Kingdom, a circuit board drill plant in Janesville, Wisc., a German warehouse facility, and several offices in the Asia Pacific region and South America. Included in this charge is incremental pension obligation of $0.2 million due to a plan curtailment. This amount is included in the pension obligation and is presented as a component of other liabilities. The charge also includes $3.4 million for employee severance for 41 employees and other exit costs associated with the closure of a mining and construction manufacturing operation in China and the exit of the related joint venture. The company accrued $7.4 million related to severance packages provided to 171 hourly and salaried employees terminated in connection with a global work force reduction. Included in this charge is incremental pension obligation of $0.8 million, incurred by the company as a result of the severance packages provided. This amount is included in the pension obligation and is presented as a component of other liabilities. 38

26 The costs related to the asset impairment charges, employee severance and facility rationalizations of $18.5 million have been recorded as a component of restructuring and asset impairment charges. The costs charged against the restructuring accrual as of June 30,2000 were as follows: Beginning Cash June 30, (in thousands) Accrual Expenditures Adjustments 2000 =========================================================================== Employee severance $ 6,609 $(4,076) $-- $2,533 Facility rationalizations 4,647 (1,129) -- 3,518 - --------------------------------------------------------------------------- Total $11,256 $(5,205) $-- $6,051 =========================================================================== In 2000, the company incurred period costs of $0.8 million related to these initiatives, and costs of $1.7 million associated with the implementation of lean manufacturing techniques, both of which were included in cost of goods sold as incurred. The company continues to review its business strategies and pursue other cost-reduction activities, some of which could result in future charges. In March 1999, the company's management completed restructuring plans, including several programs to reduce costs, improve operations and enhance customer satisfaction. The costs accrued for these plans were based on management estimates using the latest information available at the time that the accrual was established. The components of the charges are as follows: Asset Write- Downs & Other Initial Total Non-Cash Restructuring (in thousands) Charge Adjustments Liability ======================================================================== Product rationalization $ 6,900 $ (6,900) $ -- Plant closure 4,200 (2,000) 2,200 Impairment of international operations 5,800 (5,800) -- Voluntary early retirement program 3,937 (2,419) 1,518 - ------------------------------------------------------------------------ Total $20,837 $(17,119) $3,718 ======================================================================== The product rationalization charge represents a write-down of certain product lines that were discontinued as part of a program to streamline and optimize the company's global metalworking product offering. This charge is net of salvage value and was recorded as a component of cost of goods sold. Estimated salvage values were based on estimates of proceeds to be realized through the sale of this inventory outside the normal course of business. The program resulted in a reduction in the number of products offered from an estimated 58,000 to 38,000 and was an extension of the company's initiative to reduce the number of its North American warehouses. By streamlining the product offering, the company has improved customer service and inventory turnover, allowed for more efficient operations, thereby reducing costs and improving capacity utilization, and eliminated redundancy in its product offering. Sales of these products represent less than five percent of global metalworking sales. The company proactively converted customers from these older products to newer products. The company also initiated plans to close a drill manufacturing plant in Solon, Ohio. The manufacturing of products made at this plant was relocated to other existing plants in the United States. The closure eliminated excess capacity at other plant locations. The company decommissioned the existing plant and expects to sell the property in the near future. The charge consists of employee termination benefits for 155 hourly and salaried employees, which is substantially all employees at this plant, and the write-down of assets included in property, plant and equipment, net of salvage value. The costs resulting from the relocation of employees, hiring and training new employees and other costs resulting from the temporary duplication of certain operations incurred in 2000 and 1999 were $2.1 million and $0.4 million, respectively, and were included in cost of goods sold as incurred. The company does not anticipate incurring additional period costs associated with this action. An asset impairment charge was recorded to write-down, to fair market value, an investment in and net receivables from certain mining and construction international operations in emerging markets as a result of changing market conditions in the regions these operations serve. In the March 1999 quarter, the company completed a study of these operations, the markets for these products, and the current economic situation in these regions, to provide recommendations for solving operational concerns. As a result of this study and continued economic deterioration in these regions, the company determined that the carrying amount of its investment in and net receivables from these operations would not be recoverable. A voluntary early retirement benefit program was offered to and accepted by 34 domestic employees. In exchange for their retirement, the company will provide those employees pension and health benefits that would have been earned by the employees through their normal retirement date. As a result of providing these additional pension benefits, $2.4 million of the total cost was funded through the company's pension plan. There are no tax benefits associated with this cost as the company may only deduct actual cash payments made to the pension plan. 39

27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT. The charges for the plant closure, the write-down of the investment in and net receivables from certain international operations, and the voluntary early retirement benefit program are recorded as the restructuring and asset impairment charges. The costs charged against the restructuring accrual as of June 30, 2000 and 1999 were as follows: Beginning Cash June 30, (in thousands) Accrual Expenditures Adjustments 1999 ============================================================================ Plant closure $2,200 $ -- $-- $2,200 Voluntary early retirement program 1,518 (151) -- 1,367 - ---------------------------------------------------------------------------- Total $3,718 $(151) $-- $3,567 ============================================================================ June 30, Cash June 30, (in thousands) 1999 Expenditures Adjustments 2000 ============================================================================ Plant closure $2,200 $(2,046) $595 $ 749 Voluntary early retirement program 1,367 (602) -- 765 - ---------------------------------------------------------------------------- Total $3,567 $(2,648) $595 $1,514 ============================================================================ The adjustment to the accrual for the plant closure is due to the company receiving more value upon disposition than initially anticipated. This adjustment was not included in the determination of net income for 2000. No restructuring or asset impairment charges were recorded in 1998. NOTE 15 FINANCIAL INSTRUMENTS The carrying values and fair values of the company's financial instruments at June 30 are as follows: 2000 1999 ---------------------- ---------------------- Carrying Fair Carrying Fair (in thousands) Value Value Value Value =========================================================================== Cash and equivalents $ 22,323 $ 22,323 $ 17,408 $ 17,408 Marketable equity securities 27,614 27,614 13,436 13,436 Current maturities of long-term debt 2,918 2,918 116,036 116,036 Notes payable to banks 57,701 57,701 26,222 26,222 Long-term debt 630,808 630,808 709,379 710,105 =========================================================================== The methods used to estimate the fair value of the company's financial instruments are as follows: CASH AND EQUIVALENTS, CURRENT MATURITIES OF LONG-TERM DEBT AND NOTES PAYABLE TO BANKS The carrying amounts approximate their fair value because of the short maturity of the instruments. MARKETABLE EQUITY SECURITIES The fair value is estimated based on the quoted market price of this security, as adjusted for the currency exchange rate at June 30. LONG-TERM DEBT Fair value was determined using discounted cash flow analysis and the company's incremental borrowing rates for similar types of arrangements. The notional amounts of the company's derivative financial instruments, translated into U.S. dollars at June 30, 2000 and 1999 rates, are as follows: 2000 1999 Notional Notional (in thousands) Amounts Amounts ============================================================ Foreign currency contracts: Forward contracts $ 55,137 $12,645 Purchased options 66,283 -- Range forward contracts 27,024 -- Interest rate swap agreements 300,000 50,000 ============================================================ Methods used to estimate the fair value of the company's derivative financial instruments are as follows: FOREIGN CURRENCY CONTRACTS The company enters into foreign currency contracts to hedge its significant firm and anticipated purchase and sale commitments denominated in foreign currencies, as well as significant cross-border intercompany loans. The company utilizes written options to offset purchased options in range forward contracts. These contracts mature at various times before August 2001. The unamortized cost of the option premiums of $1.6 million at June 30, 2000 and the unrealized gains on the forward contracts of $0.4 million and $0.1 million at June 30, 2000 and 1999, respectively, approximate the fair value of the contracts then outstanding. Fair value was estimated based on quoted market prices of comparable instruments. 40

28 INTEREST RATE SWAP AGREEMENTS At June 30, 2000, the company has interest rate swap agreements outstanding that effectively convert a notional amount of $300.0 million of debt from floating to fixed interest rates. These agreements mature at various times between June 2001 and June 2003. The company would have received $1.8 million to settle its interest rate swap agreements, representing the excess of fair value over carrying cost of these agreements. Fair value was estimated based on the mark-to-market value of the contracts which closely approximates the amount that the company would receive or pay to terminate the agreements at year end. The net payments or receipts under interest rate swap agreements are recorded as a part of interest expense and are not significant. The effect of interest rate swaps on the company's composite interest rate on long-term debt was not significant at June 30, 2000. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the company to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. By policy, the company makes temporary cash investments with high credit quality financial institutions. With respect to trade receivables, concentrations of credit risk are significantly reduced because the company serves numerous customers in many industries and geographic areas. The company is exposed to counterparty credit risk for non-performance and, in the unlikely event of nonperformance, to market risk for changes in interest and currency rates. The company manages exposure to counterparty credit risk through credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. The company does not anticipate nonperformance by any of the counterparties. As of June 30, 2000 and 1999, the company had no significant concentrations of credit risk. NOTE 16 STOCK OPTIONS AND AWARDS Stock options generally are granted to eligible employees at fair market value at the date of grant. Options are exercisable under specified conditions for up to ten years from the date of grant. The company has four plans under which options may be granted: the 1992 plan, the 1996 plan and two 1999 plans. No options may be granted under the 1992 plan after October 2002, no options may be granted under the 1996 plan after October 2006 and no options may be granted under the 1999 plans after April and October 2009. No charges to income have resulted from grants under the 1992 and 1996 plans. Under provisions of the plans, participants may deliver Kennametal stock in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. Shares delivered in 2000, 1999 and 1998 were not significant. Under the plans, shares may be awarded to eligible employees without payment. The respective plans specify that such shares are awarded in the name of the employee, who has all the rights of a shareowner, subject to certain restrictions or forfeitures. Awards in 2000, 1999 and 1998 were not significant. The company measures compensation expense in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, at the time options are granted, no compensation expense was recognized in the accompanying consolidated financial statements. If compensation expense had been determined based on the estimated fair value of options granted in 2000, 1999 and 1998, consistent with the methodology in SFAS No. 123, "Accounting for Stock Based Compensation," the effect on the company's 2000, 1999 and 1998 net income and earnings per share would have been reduced to the pro forma amounts indicated below: (in thousands, except per share data) 2000 1999 1998 ============================================================================ Net income: As reported $51,710 $39,116 $71,197 Pro forma 50,287 37,489 65,671 Basic earnings per share: As reported $ 1.71 $ 1.31 $ 2.61 Pro forma 1.66 1.25 2.41 Diluted earnings per share: As reported $ 1.70 $ 1.31 $ 2.58 Pro forma 1.66 1.25 2.38 ============================================================================ The fair values of the options granted were estimated on the date of their grant using the Black-Scholes option-pricing model based on the following weighted average assumptions: 2000 1999 1998 ========================================================================= Risk-free interest rate 6.64% 5.10% 6.12% Expected life (years) 5 5 5 Expected volatility 31.1% 24.4% 23.8% Expected dividend yield 2.5% 2.6% 1.6% ========================================================================= 41

29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT. Stock option activity for 2000, 1999 and 1998 is set forth below: 2000 1999 1998 -------------------------- --------------------------- --------------------------- Weighted Average Weighted Average Weighted Average (number of options) Options Exercise Price Options Exercise Price Options Exercise Price ==================================================================================================================================== Options outstanding, beginning of year 2,635,256 $33.84 1,620,206 $38.40 1,169,367 $30.85 Granted 317,600 27.01 1,127,750 26.78 727,900 49.82 Exercised (20,808) 19.81 (52,950) 23.72 (224,061) 33.05 Lapsed and forfeited (75,750) 38.86 (59,750) 39.47 (53,000) 50.76 - ------------------------------------------------------------------------------------------------------------------------------------ Options outstanding, end of year 2,856,298 $33.05 2,635,256 $33.84 1,620,206 $38.40 ==================================================================================================================================== Options exercisable, end of year 2,025,723 $35.30 1,808,308 $36.54 1,592,854 $38.64 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average fair value of options granted during the year $ 8.30 $ 6.02 $13.90 - ------------------------------------------------------------------------------------------------------------------------------------ Stock options outstanding at June 30, 2000: Options Outstanding Options Exercisable - -------------------------------------------------------------------------------------- ----------------------------------- Weighted Average Range of Remaining Contractual Weighted Average Weighted Average Exercise Prices Options Life (years) Exercise Price Options Exercise Price ================================================================================================================================ $16.94-$21.75 359,698 6.83 $20.87 216,994 $20.87 22.97- 24.75 406,362 7.23 24.16 393,062 24.20 26.00- 26.41 350,100 9.34 26.23 50,000 26.00 26.53- 31.06 287,200 7.44 29.66 204,700 30.49 31.69 385,000 8.08 31.69 128,362 31.69 31.84- 38.00 438,538 5.66 36.62 405,205 36.66 48.56 469,400 7.08 48.56 469,400 48.56 49.25- 53.97 160,000 7.49 51.96 158,000 51.98 - -------------------------------------------------------------------------------------------------------------------------------- 2,856,298 7.32 $33.05 2,025,723 $35.30 ================================================================================================================================ In addition to stock option grants, the 1999 plans permit the award of restricted stock to directors, officers and key employees of the company. During 2000 and 1999, restricted stock awards of 34,800 and 113,000 shares, respectively, were granted to certain officers and employees of the company. These awards vest over periods of two to three years from the grant date, and accordingly, a portion of the total compensation expense associated with these awards of $1.1 million and $3.1 million for 2000 and 1999, respectively, is considered unearned compensation. In 1999, additional unearned compensation of $0.4 million was recognized related to the difference in the stock price between the date of an option grant and the date the employee commenced employment. This option award vests over a three-year period from the grant date. Unearned compensation is amortized to expense over the vesting period. Compensation expense related to these awards was $1.6 million and $0.1 million in 2000 and 1999, respectively. NOTE 17 ENVIRONMENTAL MATTERS The company has been involved in various environmental cleanup and remediation activities at several of its manufacturing facilities. In addition, the company is currently named as a potentially responsible party (PRP) at several Superfund sites in the United States. In the December 1999 quarter, the company recorded a remediation reserve of $3.0 million with respect to its involvement in these matters, which is recorded as a component of operating expense. This represents management's best estimate of its undiscounted future obligation based on its evaluations and discussions with outside counsel and independent consultants, and the current facts and circumstances related to these matters. The company recorded this liability in the December quarter because certain events occurred, including sufficient progress made by the government and the PRPs in the identification of other PRPs and review of potential remediation solutions, that clarified the level of involvement in these matters by the company and its relationship to other PRPs. This led the company to conclude that it was probable that a liability had been incurred. 42

30 In addition to the amount currently reserved, the company may be subject to loss contingencies related to these matters estimated to be up to an additional $3.3 million. The company believes that such undiscounted unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. The reserved and unreserved liabilities could change substantially in the near term due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs and the identification of new PRPs. The company maintains a Corporate Environmental, Health and Safety (EH&S) Department, as well as an EH&S Policy Committee, to ensure compliance with environmental regulations and to monitor and oversee remediation activities. In addition, the company has established an EH&S administrator at 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 basis, management establishes or adjusts financial provisions and reserves for environmental contingencies in accordance with SFAS No. 5, "Accounting for Contingencies." NOTE 18 SHAREHOLDER RIGHTS PLAN Pursuant to the company's Shareholder Rights Plan, one-half of a right is associated with each share of common stock. Each right entitles a shareowner to buy 1/100th of a share of a new series of preferred stock at a price of $105 (subject to adjustment). The rights will be exercisable only if a person or group of persons acquires or intends to make a tender offer for 20 percent or more of the company's common stock. If any person acquires 20 percent of the common stock, each right will entitle the shareowner to receive that number of shares of common stock having a market value of two times the exercise price. If the company is acquired in a merger or other business combination, each right will entitle the shareowner to purchase at the exercise price that number of shares of the acquiring company having a market value of two times the exercise price. The rights will expire on November 2,2000 and are subject to redemption by the company at $0.01 per right. On July 24, 2000, the company's Board of Directors adopted a new shareowner rights plan to replace its existing plan, which has been in effect since 1990. The new plan will become effective upon the expiration of the existing plan on November 2, 2000 and provides for the distribution to shareowners of one stock purchase right for each share of common stock held as of September 5, 2000. The principal modification effected by the new plan is the establishment of a new exercise price of $120. NOTE 19 SEGMENT DATA In November 1999, management reorganized the financial reporting of its operations to focus on global business units consisting of Metalworking, Engineered Products, Mining & Construction and JLK/Industrial Supply, and corporate functional shared services. The results for all periods presented have been restated to conform to the new reporting structure. Segment selection was based upon internal organizational structure, the way in which management organizes segments for making operating decisions and assessing performance, the availability of separate financial results, and materiality considerations. Intersegment sales are accounted for at arm's-length prices, reflecting prevailing market conditions within the various geographic areas. Such sales and associated costs are eliminated in the consolidated financial statements. Sales to a single customer did not aggregate 10 percent or more of total sales in 2000, 1999 or 1998. Export sales from U.S. operations to unaffiliated customers were $75.8 million, $69.9 million and $64.7 million in 2000, 1999 and 1998, respectively. METALWORKING In the metalworking segment, the company provides consumable metalcutting tools and tooling systems to manufacturing companies in a wide range of industries throughout the world. Metalcutting operations include turning, boring, threading, grooving, milling and drilling. The company's tooling systems consist of a steel toolholder and an indexable cutting tool such as an insert or drill made from cemented tungsten carbides, high-speed steel and other hard materials. ENGINEERED PRODUCTS This segment's principal business is the production and sale of cemented tungsten carbide products used in engineered applications, including circuit board drills and compacts. These products have technical commonality to the company's core metalworking products. MINING & CONSTRUCTION This segment represents the sales of cemented tungsten carbide products used in mining and highway construction and other similar applications. These products also have technical commonality to the company's core metalworking products. The company also sells metallurgical powders to manufacturers of cemented tungsten carbide products. JLK/INDUSTRIAL SUPPLY This segment represents the sales of industrial supply products through JLK. Sales of metalworking consumable products are derived through a direct-marketing program, including mail-order catalogs and showrooms, a direct field sales force, and integrated supply or Full Service Supply (FSS) programs. 43

31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONT. Segment detail is summarized as follows: (in thousands) 2000 1999 1998 ============================================================================ External sales: Metalworking $1,020,914 $1,038,205 $ 939,290 Engineered Products 176,469 173,171 155,496 Mining & Construction 165,899 173,028 168,837 JLK/Industrial Supply 490,381 518,512 414,765 - ---------------------------------------------------------------------------- Total external sales $1,853,663 $1,902,916 $1,678,388 ============================================================================ Intersegment sales: Metalworking $ 134,398 $ 108,994 $ 76,376 Engineered Products 19,978 23,752 15,300 Mining & Construction 7,041 5,635 6,851 JLK/Industrial Supply 8,912 13,130 10,583 - ---------------------------------------------------------------------------- Total intersegment sales $ 170,329 $ 151,511 $ 109,110 ============================================================================ Total sales: Metalworking $1,155,312 $1,147,199 $1,015,666 Engineered Products 196,447 196,923 170,796 Mining & Construction 172,940 178,663 175,688 JLK/Industrial Supply 499,293 531,642 425,348 - ---------------------------------------------------------------------------- Total sales $2,023,992 $2,054,427 $1,787,498 ============================================================================ Operating income: Metalworking $ 128,283 $ 116,306 $ 138,799 Engineered Products 23,711 24,473 29,090 Mining & Construction 17,483 14,203 21,408 JLK/Industrial Supply 28,174 34,532 41,308 Corporate (38,654) (42,018) (35,034) - ---------------------------------------------------------------------------- Total operating income 158,997 147,496 195,571 - ---------------------------------------------------------------------------- Interest expense 55,079 68,594 59,536 Other expense, net 3,507 492 5,459 - ---------------------------------------------------------------------------- Income before income taxes and minority interest $ 100,411 $ 78,410 $ 130,576 ============================================================================ Depreciation and amortization: Metalworking $ 64,727 $ 63,822 $ 46,807 Engineered Products 16,361 14,278 8,785 Mining & Construction 5,531 5,208 3,792 JLK/Industrial Supply 9,386 8,749 5,185 Corporate 5,641 3,934 2,742 - ---------------------------------------------------------------------------- Total depreciation and amortization $ 101,646 $ 95,991 $ 67,311 ============================================================================ Equity income (loss): Metalworking $ 615 $ 650 $ 812 Engineered Products 23 17 43 Mining & Construction (41) (794) (1,103) JLK/Industrial Supply -- -- -- Corporate -- -- -- - ---------------------------------------------------------------------------- Total equity income (loss) $ 597 $ (127) $ (248) ============================================================================ (in thousands) 2000 1999 1998 ============================================================================ Total assets: Metalworking $ 978,188 $1,039,854 $1,171,697 Engineered Products 343,139 363,739 374,081 Mining & Construction 132,602 146,295 137,242 JLK/Industrial Supply 290,277 274,989 275,586 Corporate 238,736 218,771 180,387 - ---------------------------------------------------------------------------- Total assets $1,982,942 $2,043,648 $2,138,993 ============================================================================ Capital expenditures: Metalworking $ 35,125 $ 63,722 $ 65,026 Engineered Products 5,161 12,120 6,343 Mining & Construction 2,074 3,996 6,346 JLK/Industrial Supply 7,699 9,681 12,286 Corporate 604 5,474 14,773 - ---------------------------------------------------------------------------- Total capital expenditures $ 50,663 $ 94,993 $ 104,774 ============================================================================ Investment in affiliated companies: Metalworking $ 3,006 $ 2,821 $ 11,218 Engineered Products 435 340 416 Mining & Construction (870) (2,317) 2,106 JLK/Industrial Supply -- -- -- Corporate -- -- -- - ---------------------------------------------------------------------------- Total investments in affiliated companies $ 2,571 $ 844 $ 13,740 ============================================================================ Metalworking operating income for 2000 was reduced by $11.0 million related to asset impairment charges and costs associated with facility and product rationalizations, and employee severance (see Note 14). Engineered Products operating income for 2000 was reduced by $1.4 million related to costs associated with a facility rationalization, employee severance, and asset impairment charges (see Note 14). Mining & Construction operating income for 2000 was reduced by $3.4 million related to asset impairment charges and costs associated with a facility rationalization, including costs to exit the related joint venture, and employee severance (see Note 14). JLK/Industrial Supply operating income for 2000 was reduced by $0.6 million related to employee severance costs (see Note 14) and $0.2 million related to the evaluation of strategic alternatives (see Note 3). Corporate operating income for 2000 was reduced by $3.0 million related to environmental remediation costs (see Note 17), $2.2 million related to employee severance costs (see Note 14), and $0.6 million related to the evaluation of strategic alternatives (see Note 3). 44

32 Metalworking operating income for 1999 was reduced by $11.1 million related to the product rationalization program and to close a drill manufacturing plant in Solon, Ohio (see Note 14) and a $3.8 million one-time charge incurred in the acquisition of 4.9 percent of Toshiba Tungaloy (see Note 5). Mining & Construction operating income for 1999 was reduced by $5.8 million related to a write-down of an investment in and net receivables from certain international operations in emerging markets (see Note 14). Corporate operating income for 1999 was reduced by $3.9 million related to a voluntary early retirement benefit program (see Note 14). Geographic information for sales, based on country of origin, and assets is as follows: (in thousands) 2000 1999 1998 ========================================================================== External sales: United States $1,307,472 $1,346,195 $1,190,021 Germany 195,868 208,490 199,002 United Kingdom 95,457 106,676 99,129 Canada 60,756 52,877 52,195 Other 194,110 188,678 138,041 - -------------------------------------------------------------------------- Total external sales $1,853,663 $1,902,916 $1,678,388 ========================================================================== Total assets: United States $1,522,911 $1,593,747 $1,654,026 Germany 157,126 163,750 192,186 United Kingdom 93,465 85,363 104,597 Canada 28,203 29,854 30,710 Other 181,237 170,934 157,474 - -------------------------------------------------------------------------- Total assets $1,982,942 $2,043,648 $2,138,993 ========================================================================== NOTE 20 OTHER EXPENSE, NET Other expense, net for 2000 included fees of $5.2 million incurred in connection with the accounts receivable securitization program initiated in June 1999. This was partially offset by gains of $1.4 million from the sale of miscellaneous underutilized assets. Other expense, net for 1998 included the write-off of deferred financing costs related to the cancelled public offering of debt and equity securities that the company originally intended to offer in connection with the acquisition of Greenfield. Related to the debt offering, the company also entered into an agreement to hedge its exposure to fluctuations in interest rates. When the company subsequently postponed the proposed offerings, the interest rate hedges were terminated resulting in a loss of $3.5 million. The company also wrote-off other offering-related expenses of $1.1 million resulting in a combined total of $4.6 million. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) SELECTED QUARTERLY FINANCIAL DATA Quarter Ended - -------------------------------------------------------------------------------- (in thousands, except per share) Sep. 30 Dec. 31 Mar. 31 Jun. 30 ================================================================================ 2000: Net sales $442,943 $453,928 $483,019 $473,773 Gross profit 163,329 168,867 188,452 185,728 Net income 9,913 8,244 14,097 19,456 Basic earnings per share 0.33 0.27 0.46 0.64 Diluted earnings per share 0.33 0.27 0.46 0.64 - -------------------------------------------------------------------------------- 1999: Net sales $480,922 $484,318 $479,051 $458,625 Gross profit 179,016 181,062 173,397 170,790 Net income 7,394 14,036 2,180 15,506 Basic earnings per share 0.25 0.47 0.07 0.52 Diluted earnings per share 0.25 0.47 0.07 0.52 ================================================================================ Earnings per share amounts for each quarter are required to be computed independently and, therefore, may not equal the amount computed for the year. In the December 1999 quarter, the company recorded pretax charges of $7.5 million ($0.14 per share), including $4.1 million ($0.07 per share) related to restructuring and asset impairment charges, $3.0 million ($0.06 per share) related to environmental remediation, and $0.4 million ($0.01 per share) related to an extraordinary loss related to the early extinguishment of debt. In the March 2000 quarter, the company recorded pretax charges of $13.3 million ($0.25 per share) related to restructuring and asset impairment charges. In the June 2000 quarter, the company recorded pretax charges of $1.3 million ($0.02 per share) related to restructuring and asset impairment charges and $0.8 million ($0.02 per share) related to the evaluation of strategic alternatives. In the March 1999 quarter, the company recorded pretax charges of $24.6 million ($0.51 per share), including $20.8 million ($0.44 per share) related to special charges for operational improvement programs and $3.8 million ($0.07 per share) related to a one-time charge incurred in the acquisition of 4.9 percent of Toshiba Tungaloy. 45

33 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) CONT. STOCK PRICE RANGES AND DIVIDENDS PAID The company's common stock is traded on the New York Stock Exchange (symbol KMT). The number of shareowners of record as of August 24, 2000, was 2,920. Stock price ranges and dividends declared and paid were as follows: Quarter Ended - ------------------------------------------------------------ Sep. 30 Dec. 31 Mar. 31 Jun. 30 ============================================================ 2000: High $30 $33 7/8 $33 13/16 $30 1/2 Low 23 23 1/2 22 5/8 19 1/8 Dividends 0.17 0.17 0.17 0.17 - ------------------------------------------------------------ 1999: High $43 13/16 $25 5/8 $26 $31 5/16 Low 25 3/8 15 5/8 16 3/8 16 5/8 Dividends 0.17 0.17 0.17 0.17 ============================================================ REPORT OF MANAGEMENT TO THE SHAREOWNERS OF KENNAMETAL INC. The management of Kennametal Inc. is responsible for the integrity of all information contained in this report. The financial statements and related information were prepared by management in accordance with accounting principles generally accepted in the United States and, as such, contain amounts that are based on management's best judgment and estimates. Management maintains a system of policies, procedures and controls designed to provide reasonable, but not absolute, assurance that the financial data and records are reliable in all material respects and that assets are safeguarded from improper or unauthorized use. The company maintains an active internal audit department that monitors compliance with this system. The Board of Directors, acting through its Audit Committee, is ultimately responsible for determining that management fulfills its responsibilities in the preparation of the financial statements. The Audit Committee meets periodically with management, the internal auditors and the independent public accountants to discuss auditing and financial reporting matters. The internal auditors and independent public accountants have full access to the Audit Committee without the presence of management. Kennametal has always placed the utmost importance on conducting its business activities in accordance with the spirit and letter of the law and the highest ethical standards. This philosophy is embodied in a code of business ethics and conduct that is distributed to all employees. /s/ MARKOS I. TAMBAKERAS - ------------------------------------------ Markos I. Tambakeras President and Chief Executive Officer Shareowner /s/ JAMES R. BREISINGER - ------------------------------------------ James R. Breisinger Vice President and Chief Financial Officer Shareowner July 24, 2000 46

34 REPORT OF AUDIT COMMITTEE TO THE SHAREOWNERS OF KENNAMETAL INC. The Audit Committee of the Board of Directors, composed of three independent directors, met four times during 2000. The Audit Committee monitors the company's financial reporting process for accuracy, completeness and timeliness. In fulfilling its responsibility, the committee recommended to the Board of Directors the reappointment of Arthur Andersen LLP as the company's independent public accountants. The Audit Committee reviewed with management, the internal auditors and the independent public accountants the overall scope and specific plans for their respective audits. The committee evaluated with management Kennametal's annual and quarterly reporting process and the adequacy of the company's internal controls. The committee met with the internal auditors and independent public accountants, with and without management present, to review the results of their examinations, their evaluations of the company's internal controls and the overall quality of Kennametal's financial reporting. The Audit Committee participates in a self-assessment program whereby the composition, activities and interactions of the committee are periodically evaluated by the committee. The purpose of the program is to provide guidance with regard to the continual fulfillment of the committee's responsibilities. /s/ LARRY YOST - ------------------------------------------ Larry Yost Chairman, Audit Committee Shareowner July 24, 2000 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREOWNERS OF KENNAMETAL INC. We have audited the accompanying consolidated balance sheets of Kennametal Inc. (a Pennsylvania corporation) and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of income, shareowners' equity and cash flows for each of the three years in the period ended June 30, 2000. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kennametal Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP - ------------------------------------------ Arthur Andersen LLP Pittsburgh, Pennsylvania July 24, 2000 (except with respect to the matter discussed in Note 3, as to which the date is September 1, 2000) 47

35 ELEVEN-YEAR FINANCIAL HIGHLIGHTS (dollars in thousands, except per share data) Notes 2000 1999 1998 1997 =================================================================================================================================== OPERATING RESULTS Net sales $1,853,663 $1,902,916 $1,678,388 $1,156,343 Cost of goods sold 1,147,287 1,198,651 994,481 668,415 Research and development expense 19,246 18,797 20,397 24,105 Selling, marketing and distribution expense 364,971 394,204 339,772 263,980 General and administrative expense 118,184 104,043 112,519 69,911 Interest expense 55,079 68,594 59,536 10,393 Unusual or nonrecurring items (1) 22,412 24,617 4,595 -- Income taxes 43,700 32,900 53,900 44,900 Accounting changes, net of tax (2) -- -- -- -- Net income (loss) (3) 51,710 39,116 71,197 72,032 - ----------------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION Net working capital $ 397,403 $ 373,582 $ 447,992 $ 175,877 Inventories 410,885 434,462 436,472 210,111 Property, plant and equipment, net 498,784 539,800 525,927 300,386 Total assets 1,982,942 2,043,648 2,138,993 869,309 Long-term debt, including capital leases 637,686 717,852 840,932 40,445 Total debt, including capital leases 699,242 861,291 967,667 174,464 Total shareowners' equity (4) 780,254 745,131 735,460 459,608 - ----------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Basic earnings (loss) (3) $ 1.71 $ 1.31 $ 2.61 $ 2.71 Diluted earnings (loss) 1.70 1.31 2.58 2.69 Dividends 0.68 0.68 0.68 0.66 Book value (at June 30) 25.56 24.78 24.66 17.61 Market price (at June 30) 21.44 31.00 41.75 43.00 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER DATA Capital expenditures $ 50,663 $ 94,993 $ 104,774 $ 73,779 Number of employees (at June 30) 13,200 13,640 14,380 7,550 Average sales per employee $ 139 $ 136 $ 152 $ 159 Weighted average shares outstanding (000) (4) 30,263 29,917 27,263 26,575 Diluted weighted average shares outstanding (000) (4) 30,364 29,960 27,567 26,786 - ----------------------------------------------------------------------------------------------------------------------------------- KEY RATIOS Sales growth (2.6)% 13.4% 45.1% 7.1% Gross profit margin 38.1 37.0 40.7 42.2 Operating profit margin (5) 9.8 9.0 11.7 11.0 Return on sales (3) 2.8 2.1 4.2 6.2 Return on average shareowners' equity (3) 6.9 5.3 12.2 15.8 Total debt to total capital 45.6 51.9 55.4 27.1 Inventory turnover 2.7x 2.6x 3.1x 3.2x =================================================================================================================================== n.m.--Not meaningful NOTES 1. Unusual or nonrecurring items reflect cost associated with environmental remediation, strategic alternatives, and restructuring costs and asset impairment charges related to operational improvement programs initiated in 2000, cost associated with the acquisitions of shares of Toshiba Tungaloy and restructuring costs and asset impairment charges related to operational improvement programs initiated in 1999, deferred financing costs related to a postponed public offering intended to have been offered in connection with the acquisition of Greenfield in 1998, restructuring costs for the relocation of the North America Metalworking Headquarters from Raleigh, N.C. to Latrobe, Pa., and to close a manufacturing facility in 1996, restructuring and integration costs associated with the acquisition of Hertel AG in 1994, settlement and partial reversal of accrued patent litigation costs in 1993 and accrued patent litigation costs in 1991. 2. Accounting changes in 1994 reflect changes in the methods of accounting for postretirement health care and life insurance benefits (SFAS No. 106) and income taxes (SFAS No. 109). 48

36 1996 1995 1994 1993 1992 1991 1990 ======================================================================================================= $1,079,963 $983,873 $802,513 $598,496 $594,533 $617,833 $589,023 625,473 560,867 472,533 352,773 362,967 358,529 342,434 20,585 18,744 15,201 14,714 13,656 14,750 13,325 242,375 219,271 189,487 144,850 137,494 136,319 123,286 65,417 55,853 58,612 41,348 45,842 49,219 42,648 11,296 12,793 13,811 9,549 10,083 11,832 10,538 2,666 -- 24,749 (1,738) -- 6,350 -- 43,900 45,000 15,500 14,000 8,100 17,300 23,000 -- -- 15,003 -- -- -- -- 69,732 68,294 (4,088) 20,094 12,872 21,086 32,113 - ------------------------------------------------------------------------------------------------------- $ 217,651 $184,072 $130,777 $120,877 $108,104 $ 88,431 $108,954 204,934 200,680 158,179 115,230 118,248 119,767 114,593 267,107 260,342 243,098 192,305 200,502 193,830 175,523 799,491 781,609 697,532 448,263 472,167 476,194 451,379 56,059 78,700 90,178 87,891 95,271 73,113 81,314 131,151 149,730 147,295 110,628 127,954 130,710 116,212 438,949 391,885 322,836 255,141 251,511 243,535 231,598 - ------------------------------------------------------------------------------------------------------- $ 2.62 $ 2.58 $ (0.17) $ 0.93 $ 0.60 $ 1.00 $ 1.54 2.60 2.56 (0.17) 0.92 0.60 0.99 1.52 0.60 0.60 0.58 0.58 0.58 0.58 0.58 16.44 14.75 12.25 11.64 11.64 11.42 11.02 34.00 34.50 24.63 16.75 17.13 17.81 17.25 - ------------------------------------------------------------------------------------------------------- $ 57,556 $ 43,371 $ 27,313 $ 23,099 $ 36,555 $ 55,323 $ 35,998 7,260 7,030 6,600 4,850 4,980 5,360 5,580 $ 152 $ 146 $ 125 $ 122 $ 116 $ 113 $ 107 26,635 26,486 24,304 21,712 21,452 21,094 20,872 26,825 26,640 24,449 21,753 21,551 21,237 21,065 - ------------------------------------------------------------------------------------------------------- 9.8% 22.6% 34.1% 0.7% (3.8)% 4.9% 24.7% 42.1 43.0 41.1 41.1 38.9 42.0 41.9 11.5 12.9 7.8 6.9 5.2 8.9 10.9 6.5 6.9 n.m. 3.4 2.2 3.4 5.5 17.0 19.3 n.m. 8.1 5.2 8.7 14.9 22.5 27.0 30.6 30.2 33.7 34.9 33.4 3.0x 3.1x 3.1x 3.1x 3.0x 3.0x 3.1x ======================================================================================================= 3. Excluding unusual or nonrecurring items in 2000 and an extraordinary loss of $0.3 million, net of tax, net income was $64,689; diluted earnings per share were $2.13; return on sales was 3.5 percent; and return on average shareowners' equity was 8.6 percent. Excluding unusual or nonrecurring items in 1999, net income was $54,299; diluted earnings per share were $1.82; return on sales was 2.9 percent; and return on average shareowners' equity was 7.3 percent. Excluding unusual or nonrecurring items in 1998 and the effects of the Greenfield acquisition, net income was $88,697; diluted earnings per share were $3.23; return on sales was 5.3 percent; and return on average shareowners' equity was 15.2 percent. Excluding unusual or nonrecurring items in 1996, net income was $71,369; diluted earnings per share were $2.66; return on sales was 6.6 percent; and return on average shareowners' equity was 17.4 percent. 4. In 1998, the company issued 3.45 million shares of capital stock for net proceeds of $171.4 million. 5. Excludes unusual or nonrecurring items. 49

1 EXHIBIT 21 PRINCIPAL SUBSIDIARIES Jurisdiction in Which Name of Subsidiary Organized or Incorporated - ------------------ ------------------------- Consolidated Subsidiaries Kennametal Hertel Argentina S.A. Argentina Kennametal Australia Pty. Ltd. Australia Kennametal Foreign Sales Corporation Barbados Kennametal Hertel do Brasil Ltda. Brazil Kennametal Ltd. Canada Kennametal Hertel Chile Ltda. Chile Kennametal (China) Limited China Kennametal Hardpoint (Shanghai) Ltd. China Kennametal (Shanghai) Ltd. China Shanxi-Kennametal Mining Cutting Systems Manufacturing Company Limited China Xuzhou-Kennametal Mining Cutting Systems Manufacturing Company Limited China Kennametal Hertel AG Germany Kennametal Hardpoint H.K. Ltd. Hong Kong Kennametal Hertel Japan Ltd. Japan Kennametal Hertel (Malaysia) Sdn. Bhd. Malaysia Kennametal de Mexico, S.A. de C.V. Mexico Kennametal/Becker-Warkop Ltd. Poland Kennametal Hertel (Singapore) Pte. Ltd. Singapore Kennametal South Africa (Proprietary) Limited South Africa Kennametal Hertel Korea Ltd. South Korea Kennametal Hardpoint (Taiwan) Inc. Taiwan Kennametal Hertel Co., Ltd. Thailand Circle Machine Company California, United States Kennametal Financing II California, United States Kennametal PC Inc. California, United States Kennametal TC Inc. California, United States Greenfield Industries, Inc. Delaware, United States Kennametal Receivables Corporation Delaware, United States Adaptive Technologies Corp. Michigan, United States JLK Direct Distribution Inc. Pennsylvania, United States Consolidated Subsidiaries of JLK Direct Distribution Inc. J&L America, Inc. Michigan, United States Consolidated Subsidiaries of J&L America, Inc. J & L Industrial Supply Limited Canada J & L Industrial Supply UK (branch) England J & L Werkzeuge und Industriebedarf G.m.b.H. Germany GRS Industrial Supply Company Michigan, United States Strong Tool Co. Ohio, United States Production Tools Sales, Inc. Texas, United States Abrasive & Tool Specialties Company Utah, United States

2 PRINCIPAL SUBSIDIARIES (CONTINUED) Jurisdiction in Which Name of Subsidiary Organized or Incorporated - ------------------ ------------------------- Consolidated Subsidiaries of Kennametal Hertel AG Kennametal Hertel Belgium S.A. Belgium Kennametal Hertel EDG Limited England Kennametal Hertel Limited England Kennametal Hertel France S.A. France Kennametal Hertel G.m.b.H. Germany Kennametal Hertel Korea G.m.b.H. Germany Rubig G.m.b.H. & Co. KG Germany Kennametal Hertel S.p.A. Italy Kennametal Hertel Nederland B.V. Netherlands Nederlandse Hardmetaal Fabrieken B.V. Netherlands Kennametal Hertel Kesici Takimlar ve Sistemler Anonim Sirketi Turkey Consolidated Subsidiaries of Greenfield Industries, Inc. Greenfield Industries, Incorporated Canada Canada Cirbo Limited England Kemmer Hartmetallwerkzeuge G.m.b.H. Germany Kemmer Prazision G.m.b.H. Germany Hanita Metal Works, Ltd. Israel Kemmer - Cirbo S.r.L. Italy Cleveland Twist Drill de Mexico, S.A. de C.V. Mexico Herramientas Cleveland, S.A. de C.V. Mexico Greenfield Tools de Mexico, S.A. de C.V. Mexico Carbidie Corporation Delaware, United States Kemmer International, Inc. Delaware, United States Rogers Tool Works, Inc. Delaware, United States TCM Europe, Inc. Delaware, United States Bassett Rotary Tool Company Indiana, United States South Deerfield Industrial, Inc. Massachusetts, United States Hanita Cutting Tools, Inc. New Jersey, United States -2-

1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion or the incorporation reference in this Form 10-K, into Kennametal Inc.'s previously filed registration statements on Form S-8, Registration No. 2-80182, Form S-8, Registration No. 33-25331, Form S-8, Registration No. 33-55768, Form S-8, Registration No. 33-55766, Form S-3, Registration No. 33-61854, Form S-8, Registration No. 33-65023, Form S-8, Registration No. 333-18423, Form S-8, Registration No. 333-18429, Form S-8, Registration No. 333-18437, Form S-3, Registration No. 333-40809, Form S-8, Registration No. 333-77411, Form S-8, Registration No. 333-88049, Form S-8, Registration No. 333-30454, and Form S-8, Registration No. 333-30448, including the prospectuses therein, relating to the Kennametal Inc. Stock Option Plan of 1982, Stock Option and Incentive Plan of 1988, Stock Option and Incentive Plan of 1992, Directors Stock Incentive Plan, Dividend Reinvestment and Stock Purchase Plan (as amended), Performance Bonus Stock Plan of 1995, Thrift Plan, Stock Option and Incentive Plan of 1992 (as amended), Stock Option and Incentive Plan of 1996, Omnibus Shelf Registration Statement, 1999 Stock Plan, Kennametal Thrift Plan and Greenfield Retirement Income Savings Plan, Stock Option and Incentive Plan of 1999, and Directors Stock Incentive Plan (as amended). It should be noted that we have not audited any financial statements of Kennametal Inc. subsequent to June 30, 2000 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP -------------------------- Arthur Andersen LLP Pittsburgh, Pennsylvania September 21, 2000

5 This schedule contains summary financial information extracted from the June 30, 2000 Consolidated Financial Statements and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JUN-30-2000 JUL-01-1999 JUN-30-2000 22,323 27,614 244,131 12,214 410,885 758,558 951,004 452,220 1,982,942 361,155 0 0 0 41,500 738,754 1,982,942 1,853,663 1,853,663 706,376 706,376 45,698 4,177 55,079 100,411 43,700 51,977 0 267 0 51,710 1.71 1.70