Kennametal Inc. 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2005
Commission
File Number 1-5318
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
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Pennsylvania
(State or other jurisdiction of
incorporation or organization)
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25-0900168
(I.R.S. Employer
Identification No.) |
World Headquarters
1600 TECHNOLOGY WAY
P.O. BOX 231
Latrobe, Pennsylvania 15650-0231
(Address of principal executive offices)
Registrants telephone number, including area code: 724-539-5000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
Capital Stock, par value $1.25 per share
Preferred Stock Purchase Rights
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Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days. YES þ NO o
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 registrants 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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of
the Exchange Act). YES þ NO o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). YES o NO þ
As of December 31, 2004, the aggregate market value of the registrants Capital Stock held by
non-affiliates of the registrant, estimated solely for the purposes of this Form 10-K, was
approximately $1,514,800,000. 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 registrants Capital Stock have been deemed affiliates.
As of
August 31, 2005, there were 38,388,400 shares of the Registrants Capital Stock outstanding.
Documents Incorporated by Reference
Portions of the Proxy Statement for the 2005 Annual Meeting of Shareowners are incorporated by
reference into Parts II, III and IV.
Table of Contents
Item No.
FORWARD-LOOKING INFORMATION
This Form 10-K contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they
use words such as should, anticipate, estimate, approximate, expect, may, will,
project, intend, plan, believe and other words of similar meaning and expression in
connection with any discussion of future operating or financial performance. One can also identify
forward-looking statements by the fact that they do not relate strictly to historical or current
facts. These statements are likely to relate to, among other things, our goals, plans and
projections regarding our financial position, results of operations, cash flows, raw material costs
and availability, market position and product development, which are based on current expectations
that involve inherent risks and uncertainties, including factors that could delay, divert or change
any of them in the next several years. Although it is not possible to predict or identify all
factors, they may include the following: global economic conditions; future terrorist attacks;
epidemics; risks associated with integrating and divesting businesses and achieving the expected
savings and synergies; demands on management resources; risks associated with international markets
such as currency exchange rates and social and political environments; competition; labor
relations; commodity prices; demand for and market acceptance of new and existing products; and
risks associated with the implementation of restructuring plans and environmental remediation
matters. We can give no assurance that any goal or plan set forth in forward-looking statements can
be achieved, and readers are cautioned not to place undue reliance on such statements, which speak
only as of the date made. We undertake no obligation to release publicly any revisions to
forward-looking statements as a result of future events or developments.
PART I
ITEM 1 BUSINESS
OVERVIEW Kennametal Inc. was incorporated in Pennsylvania in 1943. We are a leading global supplier
of tooling, engineered components and advanced materials consumed in production processes. We
believe that our reputation for manufacturing excellence and technological expertise and innovation
in our principal products has helped us achieve a leading market presence in our primary markets.
We believe we are the second largest global provider of metalcutting tools and tooling systems. End
users of our products include metalworking manufacturers and suppliers in the aerospace,
automotive, machine tool and farm machinery industries, as well as manufacturers and suppliers in
the highway construction, coal mining, quarrying and oil and gas exploration industries. Our end
users products include items ranging from airframes to coal, medical implants to oil wells and
turbochargers to motorcycle parts.
We specialize in developing and manufacturing metalworking tools and wear-resistant parts using a
specialized type of powder metallurgy. Our metalworking tools are made of cemented tungsten
carbides, ceramics, cermets, high-speed steel and other hard materials. We also manufacture and
market a complete line of toolholders, toolholding systems and rotary cutting tools by machining
and fabricating steel bars and other metal alloys. We are one of the largest suppliers of
metalworking consumables and related products in the United States and Europe. We also manufacture
tungsten carbide products used in engineered applications, mining and highway construction and
other similar applications, including circuit board drills, compacts and metallurgical powders.
Unless otherwise specified, any reference to a year is to a fiscal year ended June 30.
BUSINESS SEGMENT REVIEW We previously operated four global business units consisting of
Metalworking Solutions & Services Group (MSSG), Advanced Materials Solutions Group (AMSG), J&L
Industrial Supply (J&L) and Full Service Supply (FSS). During fiscal 2005, we divested our FSS
segment. (See Note 3.) Segment selection is based upon internal organizational structure, the
manner in which we organize segments for making operating decisions and assessing performance, the
availability of separate financial results and materiality considerations. Sales and operating
income by segment are presented in Managements Discussion and Analysis set forth in Item 7 of this
annual report on Form 10-K and Note 18 Segment Data of our consolidated financial statements set
forth in Item 8 of this annual report on Form 10-K.
METALWORKING SOLUTIONS & SERVICES GROUP In the MSSG segment, we provide 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.
Our tooling systems consist of a steel toolholder and cutting tool such as an indexable insert or
drill made from cemented tungsten carbides, high-speed steel and other hard materials. We also
provide solutions to our customers metalcutting needs through engineering services aimed at
improving their competitiveness.
During a metalworking operation, the toolholder is positioned in a machine 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.
We serve 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 job shops and maintenance operations. We deliver our
products to customers through a direct field sales force, distribution, integrated supply programs,
mail order and e-business. With a global marketing organization and operations worldwide, we
believe we are the second largest global provider of consumable metalcutting tools and supplies.
ADVANCED MATERIALS SOLUTIONS GROUP In the AMSG segment, the principal business is the production
and sale of cemented tungsten carbide products used in mining, highway construction, engineered
applications requiring wear and corrosion resistance, including circuit board drills, compacts and
other similar applications. These products have technical commonality to our core metalworking
products. Additionally, we manufacture and market engineered components with a proprietary metal
cladding technology. These products include radial bearings used for directional drilling for oil
and gas, extruder barrels used by plastics manufacturers and food processors, and numerous other
engineered components to service a wide variety of industrial markets. We also sell metallurgical
powders to manufacturers of cemented tungsten carbide products, and we provide application-specific
component design services and on-site application support services. Lastly, we provide our
customers with engineered component process technology and materials, which focus on component
deburring, polishing and producing controlled radii.
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Our mining and construction 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. We produce these products for mine operators and
suppliers, highway construction companies, municipal governments and manufacturers of mining
equipment. We believe we are the worldwide market leader in mining and highway construction
tooling.
Our customers use engineered products in manufacturing or other operations where extremes of
abrasion, corrosion or impact require combinations of hardness or other toughness afforded by
cemented tungsten carbides or other hard materials. We sell these products through a direct field
sales force and distribution. We believe we are the largest independent supplier of oil field
compacts in the world. Compacts are the cutting edge of oil well drilling bits, which are commonly
referred to as rock bits.
J&L INDUSTRIAL SUPPLY In this segment, we provide metalworking consumables, related products and
related technical and supply chain-related productivity services to small- and medium-sized
manufacturers in the United States and the United Kingdom. J&L markets products and services
through annual mail-order catalogs and monthly sales flyers, telemarketing, the Internet and field
sales. J&L 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 J&L are purchased from other
manufacturers, although the product offering does include Kennametal-manufactured items.
FULL SERVICE SUPPLY During fiscal 2005, we divested our FSS segment. FSS provided metalworking
consumables and related products to medium- and large-sized manufacturers in the United States and
Canada. FSS offered integrated supply programs that provided inventory management systems and
just-in-time availability as well as programs that focused on total cost savings.
INTERNATIONAL OPERATIONS Our international operations are subject to the usual risks of doing
business in those countries, including foreign currency exchange fluctuations and changes in
social, political and economic environments. Our principal international operations in the MSSG and
AMSG segments are conducted in Western Europe, Canada, the Asia Pacific region, China, South Africa
and Mexico. In addition, we have manufacturing and/or distribution in Israel and South America, and
sales agents and distributors in Eastern Europe and other areas of the world. Our Western European
operations are integral to our U.S. operations; however, the diversification of our overall
operations tends to minimize the impact of changes in demand in any one particular geographic area
on total sales and earnings.
Our international assets and sales are presented under Note 18 Segment Data of our consolidated
financial statements set forth in Item 8 of this annual report on Form 10-K. Information pertaining
to the effects of foreign exchange risk is contained under the caption Quantitative and
Qualitative Disclosure About Market Risk in Managements Discussion and Analysis set forth in Item
7 of this annual report on Form 10-K.
BUSINESS DEVELOPMENTS Effective May 1, 2005, we divested our FSS segment for a selling price of
$39.3 million, subject to post-closing adjustment. The results of operations of FSS are reported in
our continuing operations through the date of divestiture (see Note 3).
Effective March 1, 2005, the Company acquired Extrude Hone Corporation (Extrude Hone) for
approximately $134.1 million, subject to post-closing adjustment. This purchase price includes the
actual purchase price of $143.8 million, plus direct acquisition costs of $0.9 million, less $10.6
million of acquired cash. Extrude Hone supplies market-leading engineered component process
technology to customers in a variety of industries around the world. This process technology
focuses on component deburring, polishing and producing controlled radii. We financed the
acquisition with borrowings under our 2004 Credit Agreement. Extrude Hones operating results have
been included in our consolidated results since March 1, 2005 and are included in the AMSG segment
(see Notes 3 and 18).
We 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.
MARKETING AND DISTRIBUTION We sell our manufactured products through the following distinct sales
channels: (i) a direct sales force; (ii) integrated supply; (iii) mail-order catalogs; (iv) a
network of independent distributors and sales agents in the United States and certain international
markets; and (v) the Internet. Service engineers and technicians directly assist customers with
product design, selection and application.
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We market our products under various trademarks and tradenames, such as Kennametal*, the letter K
combined with other identifying letters and/or numbers*, Block Style K*, Kendex*, Kenloc*,
KennaLOK*, KennaMAX*, JLK*, J&L*, Kennametal Hertel*, Hertel*, KM Micro*, Widia*, Heinlein*,
Widma*, Ecogrind*, Top Notch*, Erickson*, Kyon*, KM*, Drill-Fix*, Fix-Perfect*, Disston*,
Chicago-Latrobe*, Greenfield*, RTW*, Cleveland*, Conforma Clad* and Extrude Hone*. We also sell
products to customers who resell such products under the customers names or private labels.
* Trademark owned by Kennametal Inc. or a subsidiary of Kennametal Inc.
RAW MATERIALS AND SUPPLIES Major metallurgical raw materials consist of ore concentrates,
compounds and secondary materials containing tungsten, tantalum, titanium, niobium and cobalt.
Although adequate supply of these raw materials currently exists, our major sources for raw
materials are located abroad and prices fluctuate at times. In the near term, raw material prices,
particularly tungsten, are expected to rise significantly above the
average fiscal 2005 levels. The Company has entered
into extended raw material supply agreements and has implemented and will continue to implement
product price increases as deemed necessary to mitigate these rising costs. For these reasons, we
exercise great care in the selection, the purchase and managing availability of raw materials. We
also purchase steel bars and forgings for making toolholders, high-speed steel and other tool
parts, rotary cutting tools and accessories. We obtain products purchased for use in manufacturing
processes and for resale from thousands of suppliers located in the United States and abroad.
RESEARCH AND DEVELOPMENT Our product development efforts focus on providing solutions to our
customers manufacturing problems and productivity requirements. Our Achieving a Competitive Edge
(ACE) Program provides discipline and focus for the product development process by establishing
gateways, or sequential tests, during the development process to remove inefficiencies and
accelerate improvements. ACE speeds and streamlines development into a series of actions and
decision points, combining efforts and resources to produce new and enhanced products faster. ACE
is designed to assure a strong link between customer needs and corporate strategy and to enable us
to gain full benefit from our investment in new product development.
Research and development expenses included in operating expense totaled $23.8 million, $22.3
million and $23.6 million in 2005, 2004 and 2003, respectively. We hold a number of patents, which,
in the aggregate, are material to the operation of our businesses.
SEASONALITY Our business is not materially affected by seasonal variations. However, to varying
degrees, traditional summer vacation shutdowns of metalworking customers plants and holiday
shutdowns often affect our sales levels during the first and second quarters of our fiscal year.
BACKLOG Our backlog of orders generally is not significant to our operations.
COMPETITION We are one of the worlds leading producers of cemented carbide products and high-speed
steel tools, and we maintain a strong competitive position in all major markets worldwide. We
actively compete in the sale of all our products with approximately 40 companies engaged in the
cemented tungsten carbide business in the United States and many more outside the United States.
Several of our competitors are divisions of larger corporations. In addition, several hundred
fabricators and toolmakers, many of which operate out of relatively small shops, produce tools
similar to ours and buy the cemented tungsten carbide components for such tools from cemented
tungsten carbide producers, including us. Major competition exists from both U.S. and
internationally-based concerns. In addition, we compete with thousands of industrial supply
distributors.
The principal elements of competition in our businesses are service, product innovation, quality,
availability and price. We believe that our competitive strength rests on our customer service
capabilities, including multiple distribution channels, our global presence, state-of-the-art
manufacturing capabilities, ability to develop solutions to address customer needs through new and
improved tools and the consistent high quality of our products. Based upon our strengths, we are
able to sell products based on the value added to the customer rather than strictly on competitive
prices.
REGULATION We are not currently party to any material legal proceedings; however, we are
periodically subject to legal proceedings and claims that arise in the ordinary course of our
business. While management currently believes the amount of ultimate liability, if any, with
respect to these actions will not materially affect the financial position, results of operations
or liquidity of the Company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, or if protracted litigation were to ensue, the impact could be
material to the Company.
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 our 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.
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We are involved in various environmental cleanup and remediation activities at several of our
manufacturing facilities. In addition, we are currently named as a potentially responsible party
(PRP) at the Li Tungsten Superfund site in Glen Cove, New York. In December 1999, we recorded a
remediation reserve with respect to our involvement in these matters. This reserve represents our
best estimate of the undiscounted future obligation based on our evaluations and discussions with
outside counsel and independent consultants, and the current facts and circumstances related to
these matters. We recorded this liability because certain events occurred, including the
identification of other PRPs, an assessment of potential remediation solutions, and direction from
the government for the remedial action plan, that clarified our level of involvement in these
matters and our relationship to other PRPs. This led us to conclude that it was probable that a
liability had been incurred. At June 30, 2005, we had an accrual of $2.7 million recorded relative
to this environmental issue.
In addition to the amount currently reserved, we may be subject to loss contingencies related to
these matters estimated to be up to an additional $3.0 million. We believe that such undiscounted
unreserved losses are reasonably possible but are not currently considered to be probable of
occurrence. The reserved and unreserved liabilities for all environmental concerns 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, the identification of new PRPs, and the involvement of and
direction taken by the government on these matters.
Additionally, we also maintain reserves for other potential environmental issues associated with
our domestic operations and a location operated by our German subsidiary. At June 30, 2005, the
total of these accruals was $0.9 million, which represents anticipated costs associated with the
remediation of these issues. Cash payments of $0.1 million were made against this reserve during
the year.
As a result of the Widia acquisition, we previously established an environmental reserve used for
environmental cleanup and remediation activities at several Widia manufacturing locations. This
liability represents our estimate of future obligations based on our evaluations and discussions
with independent consultants and the current facts and circumstances related to these matters. At
June 30, 2005, we had an accrual of $5.0 million recorded relative to these environmental
exposures. Cash payments of $0.6 million were made against this reserve during 2005. We have also
recorded unfavorable foreign currency translation adjustments of $0.1 million during 2005.
We maintain 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, we have established an EH&S administrator at all of our global
manufacturing facilities. Our 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, we establish or adjust financial
provisions and reserves for environmental contingencies in accordance with Statement of Financial
Accounting Standards (SFAS) No. 5, Accounting for Contingencies (SFAS 5).
EMPLOYEES We employed approximately 14,000 persons at June 30, 2005, of which approximately 7,000
were located in the United States and 7,000 in other parts of the world, principally Europe, India
and Asia Pacific. At June 30, 2005, approximately 3,300 of the above employees were represented by
labor unions. We consider our labor relations to be generally good.
EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference into this Part I is the information
set forth in Part III, Item 10 under the caption Officers of the Registrant (included herein
pursuant to Item 401 (b) of Regulation S-K).
AVAILABLE INFORMATION Our Internet address is www.kennametal.com. On our Investor Relations page on
our Web site, we post the following filings as soon as reasonably practicable after they are
electronically filed with or furnished to the Securities and Exchange Commission: our annual report
on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934. All such filings on our Investor Relations Web page, which also includes
Forms 3, 4 and 5 filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, are
available to be viewed on this page free of charge. On our Corporate Governance page of our Web
site, we post the following charters and guidelines: Audit Committee Charter, Compensation
Committee Charter, Nominating/Corporate Governance Committee Charter, Kennametal Inc. Corporate
Governance Guidelines, Code of Business Ethics and Conduct and Stock Ownership Guidelines. All such
charters and guidelines on our Corporate Governance Web page are available to be viewed on this
page free of charge. Information contained on our Web site is not part of this annual report on
Form 10-K or our other filings with the Securities and Exchange Commission. We assume no obligation
to update or revise any forward-looking statements in this annual report on Form 10-K, whether as a
result of new information, future events or otherwise. A copy of this annual report on Form 10-K
and those items disclosed on our Corporate Governance Web page are available without charge upon
written request to: Investor Relations, Quynh McGuire, Kennametal Inc., 1600 Technology Way, P.O.
Box 231, Latrobe, Pennsylvania, 15650-0231.
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ITEM 2 -PROPERTIES
Our principal executive offices are located at 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania, 15650.
A summary of our principal manufacturing facilities and other materially important properties is as follows:
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Location |
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Owned/Leased |
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Principal Products |
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Segment |
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United States: |
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Bentonville, Arkansas |
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Owned |
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Carbide Round Tools |
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MSSG/AMSG |
Rogers, Arkansas |
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Owned |
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Carbide Products |
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AMSG |
Placentia, California |
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Leased |
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Wear Parts |
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AMSG |
Evans, Georgia |
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Owned |
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High-Speed Steel Drills |
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MSSG |
Rockford, Illinois |
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Owned |
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Indexable Tooling |
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MSSG |
New Albany, Indiana |
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Leased |
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High Wear Coating for Steel Parts |
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AMSG |
Greenfield, Massachusetts |
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Owned |
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High-Speed Steel Taps |
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MSSG |
South Deerfield,
Massachusetts |
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Leased |
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High-Speed Steel Drills and Saw Blades |
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MSSG |
Woburn, Massachusetts |
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Leased |
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Abrasive Flow Machining |
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AMSG |
Livonia, Michigan |
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Leased |
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Distribution |
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J&L |
Madison Heights, Michigan |
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Leased |
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Thermal Energy and Electrolytic Machining |
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AMSG |
Shelby Township, Michigan |
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Leased |
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Thermal Deburring and High Energy Finishing |
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AMSG |
Traverse City, Michigan |
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Owned |
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Wear Parts |
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AMSG |
Fallon, Nevada |
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Owned |
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Metallurgical Powders |
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MSSG/AMSG |
Asheboro, North Carolina |
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Owned |
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High-Speed Steel and Carbide Round Tools |
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MSSG |
Henderson, North Carolina |
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Owned |
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Metallurgical Powders |
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MSSG |
Roanoke Rapids, North
Carolina |
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Owned |
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Metalworking Inserts |
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MSSG |
Cleveland, Ohio |
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Leased |
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Distribution |
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MSSG |
Orwell, Ohio |
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Owned |
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Metalworking Inserts |
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MSSG |
Solon, Ohio |
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Owned |
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Metalworking Toolholders |
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MSSG |
Bedford, Pennsylvania |
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Owned |
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Mining and Construction Tools and Wear Parts |
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AMSG |
Irwin, Pennsylvania |
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Owned |
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Carbide Wear Parts |
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AMSG |
Irwin, Pennsylvania |
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Leased |
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Abrasive Flow Machining |
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AMSG |
Latrobe, Pennsylvania |
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Owned |
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Metallurgical Powders, Wear Parts and Carbide Drills |
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MSSG/AMSG |
Clemson, South Carolina |
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Owned |
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High-Speed Steel Drills |
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MSSG |
Johnson City, Tennessee |
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Owned |
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Metalworking Inserts |
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MSSG |
Lyndonville, Vermont |
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Owned |
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High-Speed Steel Taps |
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MSSG |
Chilhowie, Virginia |
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Owned |
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Mining and Construction Tools and Wear Parts |
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AMSG |
New Market, Virginia |
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Owned |
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Metalworking Toolholders |
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MSSG |
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International: |
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Mississauga, Canada |
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Leased |
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Saw Blades and Special Tools |
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MSSG |
Victoria, Canada |
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Owned |
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Wear Parts |
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AMSG |
Pudong, China |
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Owned |
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Metalworking Inserts and Circuit Board Drills |
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MSSG/AMSG |
Xuzhou, China |
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Owned |
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Mining Tools |
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AMSG |
Kingswinford, England |
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Leased |
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Metalworking Toolholders |
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MSSG |
Sheffield, England |
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Leased |
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High-Speed Steel Drills |
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MSSG |
Wednesbury, England |
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Leased |
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Distribution |
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J&L |
Bordeaux, France |
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Leased |
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Metalworking Cutting Tools |
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MSSG |
Boutheon Cedex, France |
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Owned |
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Metalworking Inserts |
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MSSG |
Ebermannstadt, Germany |
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Owned |
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Metalworking Inserts |
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MSSG |
Essen, Germany |
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Owned |
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Metallurgical Powders and Wear Parts |
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MSSG |
Koenigsee, Germany |
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Leased |
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Carbide and High-Speed Steel Drills |
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MSSG |
Lichtenau, Germany |
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Owned |
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Metalworking Toolholders |
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MSSG |
Lorch, Germany |
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Leased |
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Circuit Board Drills |
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AMSG |
Mistelgau, Germany |
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Owned |
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Metallurgical Powders, Metalworking Inserts and Wear Parts |
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MSSG/AMSG |
Nabburg, Germany |
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Owned |
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Metalworking Toolholders |
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MSSG |
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Location |
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Owned/Leased |
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Principal Products |
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Segment |
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Nabburg, Germany |
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Owned |
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Metalworking Round Tools, Drills and Mills |
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MSSG |
Nuenkirchen, Germany |
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Owned |
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Distribution |
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MSSG |
Vohenstrauss, Germany |
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Owned |
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Metalworking Carbide Drills |
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MSSG |
Bangalore, India |
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Owned |
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Metalworking Inserts and Toolholders and Wear Parts |
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MSSG/AMSG |
Shlomi, Israel |
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Owned |
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High-Speed Steel and Carbide Round Tools |
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MSSG |
Milan, Italy |
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Owned |
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Metalworking Cutting Tools |
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MSSG |
Pachuca, Mexico |
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Owned |
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High-Speed Steel Drills |
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MSSG |
Arnhem, Netherlands |
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Owned |
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Wear Products |
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AMSG |
Hardenberg, Netherlands |
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Owned |
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Wear Products |
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AMSG |
Vitoria, Spain |
|
Leased |
|
Metalworking Carbide Round Tools |
|
MSSG |
We also have a network of warehouses and customer service centers located throughout North America,
Western Europe, India, Asia, Latin America and Australia, a significant portion of which are
leased. The majority of our research and development efforts are conducted in a corporate
technology center located adjacent to the world headquarters in Latrobe, Pennsylvania, and in
Rogers, Arkansas; Fuerth, Germany and Essen, Germany.
We use all significant properties in the business of powder metallurgy, tools, tooling systems and
industrial supply. Our production capacity is adequate for our present needs. We believe that our
properties have been adequately maintained, generally are in good condition and are suitable for
our business as presently conducted.
ITEM 3 LEGAL PROCEEDINGS
This information is set forth in Part I herein under the caption Regulation. There are no
material pending legal proceedings to which Kennametal or any of our subsidiaries is a party or of
which any of our property is the subject. We are however periodically subject to legal proceedings
and claims that arise in the ordinary course of our business.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2005, there were no matters submitted to a vote of security holders
through the solicitation of proxies or otherwise.
- 6 -
PART II
ITEM 5 MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED SHAREOWNER MATTERS, AND PURCHASES OF
EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange (symbol KMT). The number of shareowners
of record as of August 31, 2005 was 3,407 Stock price ranges and dividends declared and paid were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Sep. 30 |
|
Dec. 31 |
|
Mar. 31 |
|
Jun. 30 |
|
FISCAL 2005
High |
|
$ |
45.92 |
|
|
$ |
52.71 |
|
|
$ |
50.95 |
|
|
$ |
48.05 |
|
Low |
|
|
40.34 |
|
|
|
44.32 |
|
|
|
45.70 |
|
|
|
42.61 |
|
Dividends |
|
|
0.17 |
|
|
|
0.17 |
|
|
|
0.17 |
|
|
|
0.17 |
|
|
|
|
FISCAL 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
40.46 |
|
|
$ |
40.92 |
|
|
$ |
44.37 |
|
|
$ |
46.20 |
|
Low |
|
|
32.85 |
|
|
|
36.60 |
|
|
|
38.28 |
|
|
|
40.24 |
|
Dividends |
|
|
0.17 |
|
|
|
0.17 |
|
|
|
0.17 |
|
|
|
0.17 |
|
The Board of Directors approved a $0.02 per share increase in the quarterly cash dividend to $0.19
per share in the first quarter of 2006.
The information incorporated by reference in Item 12 of this annual report on Form 10-K from the
Companys 2005 Proxy Statement under the heading Compensation Plans Equity Compensation Plan
Information is hereby incorporated by reference into this Item 5.
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
(c) |
|
(d) |
|
|
(a) |
|
Average |
|
Total Number of |
|
Maximum Number of |
|
|
Total |
|
Price |
|
Shares Purchased |
|
Shares that May |
|
|
Number |
|
Paid |
|
as Part of Publicly |
|
Yet Be Purchased |
|
|
of Shares |
|
per |
|
Announced Plans |
|
Under the Plans or |
|
|
Purchased(1) |
|
Share |
|
or Programs (2) |
|
Programs |
Period |
|
|
|
|
|
|
|
|
|
April 1 through April 30, 2005 |
|
4,581 |
|
$ |
44.63 |
|
N/A |
|
1.8 million |
May 1 through May 31, 2005 |
|
297 |
|
$ |
43.93 |
|
N/A |
|
1.8 million |
June 1 through June 30, 2005 |
|
1,034 |
|
$ |
44.97 |
|
N/A |
|
1.8 million |
Total: |
|
5,912 |
|
$ |
44.66 |
|
N/A |
|
1.8 million |
|
|
|
(1) |
|
5,745 shares of restricted stock were delivered by
employees to Kennametal, upon vesting, to satisfy tax
withholding requirements. 167 shares of stock were delivered to
Kennametal by employees as payment for the exercise price of stock
options. |
|
|
|
(2) |
|
Under a share repurchase program most recently reaffirmed
by Kennametals Board of Directors on July 25, 2005, and
implemented effective July 1997, Kennametal is
authorized to repurchase up to 1.8 million shares of its
common stock. The repurchase program does not have a specified
expiration date. |
- 7 -
ITEM 6 SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
OPERATING RESULTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
$ |
2,304,167 |
|
|
$ |
1,971,441 |
|
|
$ |
1,758,957 |
|
Cost of goods sold |
|
|
|
|
|
|
1,513,634 |
|
|
|
1,318,074 |
|
|
|
1,190,053 |
|
Operating expense |
|
|
|
|
|
|
574,495 |
|
|
|
512,621 |
|
|
|
464,861 |
|
Interest expense |
|
|
|
|
|
|
27,277 |
|
|
|
25,884 |
|
|
|
36,166 |
|
Restructuring and asset impairment charges |
|
|
(1 |
) |
|
|
4,707 |
|
|
|
3,670 |
|
|
|
31,954 |
|
Income taxes |
|
|
|
|
|
|
61,394 |
|
|
|
35,500 |
|
|
|
14,300 |
|
Accounting changes, net of tax |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
119,291 |
|
|
|
73,578 |
|
|
|
18,130 |
|
|
FINANCIAL POSITION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
|
|
|
|
$ |
402,404 |
|
|
$ |
310,418 |
|
|
$ |
437,344 |
|
Inventories |
|
|
|
|
|
|
386,674 |
|
|
|
388,077 |
|
|
|
389,613 |
|
Property, plant and equipment, net |
|
|
|
|
|
|
519,301 |
|
|
|
484,475 |
|
|
|
489,828 |
|
Total assets |
|
|
|
|
|
|
2,092,337 |
|
|
|
1,938,663 |
|
|
|
1,822,548 |
|
Long-term debt, including capital leases |
|
|
|
|
|
|
386,485 |
|
|
|
313,400 |
|
|
|
514,842 |
|
Total debt, including capital leases and notes payable |
|
|
|
|
|
|
437,374 |
|
|
|
440,207 |
|
|
|
525,687 |
|
Total shareowners equity |
|
|
(3 |
) |
|
|
972,862 |
|
|
|
887,152 |
|
|
|
721,577 |
|
|
PER SHARE DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) before cumulative effect of
change in accounting principles |
|
|
|
|
|
$ |
3.23 |
|
|
$ |
2.06 |
|
|
$ |
0.52 |
|
Cumulative effect of change in accounting principles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) |
|
|
|
|
|
|
3.23 |
|
|
|
2.06 |
|
|
|
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) before cumulative effect of
change in accounting principles |
|
|
|
|
|
|
3.13 |
|
|
|
2.02 |
|
|
|
0.51 |
|
Cumulative effect of change in accounting principles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) |
|
|
|
|
|
|
3.13 |
|
|
|
2.02 |
|
|
|
0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
0.68 |
|
|
|
0.68 |
|
|
|
0.68 |
|
Book value (at June 30) |
|
|
|
|
|
|
25.52 |
|
|
|
24.22 |
|
|
|
20.34 |
|
Market price (at June 30) |
|
|
|
|
|
|
45.85 |
|
|
|
45.80 |
|
|
|
33.84 |
|
|
OTHER DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
$ |
88,552 |
|
|
$ |
56,962 |
|
|
$ |
49,413 |
|
Number of employees (at June 30) |
|
|
|
|
|
|
13,970 |
|
|
|
13,700 |
|
|
|
13,970 |
|
Average sales per employee |
|
|
|
|
|
$ |
166 |
|
|
$ |
144 |
|
|
$ |
131 |
|
Basic weighted average shares outstanding |
|
|
(3 |
) |
|
|
36,924 |
|
|
|
35,704 |
|
|
|
35,202 |
|
Diluted weighted average shares outstanding |
|
|
(3 |
) |
|
|
38,056 |
|
|
|
36,473 |
|
|
|
35,479 |
|
|
KEY RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales growth |
|
|
|
|
|
|
16.9 |
% |
|
|
12.1 |
% |
|
|
11.1 |
% |
Gross profit margin |
|
|
|
|
|
|
34.3 |
|
|
|
33.1 |
|
|
|
32.3 |
|
Operating profit margin |
|
|
|
|
|
|
9.0 |
|
|
|
6.8 |
|
|
|
3.9 |
|
|
- 8 -
Selected Financial Data (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
2001 |
|
OPERATING RESULTS |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
$ |
1,583,742 |
|
|
$ |
1,807,896 |
|
Cost of goods sold |
|
|
|
|
|
|
1,072,918 |
|
|
|
1,192,176 |
|
Operating expense |
|
|
|
|
|
|
389,396 |
|
|
|
425,641 |
|
Interest expense |
|
|
|
|
|
|
32,627 |
|
|
|
50,381 |
|
Restructuring and asset impairment charges |
|
|
(1 |
) |
|
|
27,307 |
|
|
|
9,545 |
|
Income taxes |
|
|
|
|
|
|
18,900 |
|
|
|
37,300 |
|
Accounting changes, net of tax |
|
|
(2 |
) |
|
|
250,406 |
|
|
|
599 |
|
Net income (loss) |
|
|
|
|
|
|
(211,908 |
) |
|
|
53,288 |
|
|
FINANCIAL POSITION |
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
|
|
|
|
$ |
375,284 |
|
|
$ |
386,711 |
|
Inventories |
|
|
|
|
|
|
345,076 |
|
|
|
373,221 |
|
Property, plant and equipment, net |
|
|
|
|
|
|
435,116 |
|
|
|
472,874 |
|
Total assets |
|
|
|
|
|
|
1,523,611 |
|
|
|
1,825,442 |
|
Long-term debt, including capital leases |
|
|
|
|
|
|
387,887 |
|
|
|
582,585 |
|
Total debt, including capital leases and notes payable |
|
|
|
|
|
|
411,367 |
|
|
|
607,115 |
|
Total shareowners equity |
|
|
(3 |
) |
|
|
713,962 |
|
|
|
796,769 |
|
|
PER SHARE DATA |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) before cumulative effect of
change in accounting principles |
|
|
|
|
|
$ |
1.24 |
|
|
$ |
1.76 |
|
Cumulative effect of change in accounting principles |
|
|
|
|
|
|
(8.04 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) |
|
|
|
|
|
|
(6.80 |
) |
|
|
1.74 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) before cumulative effect of
change in accounting principles |
|
|
|
|
|
|
1.22 |
|
|
|
1.75 |
|
Cumulative effect of change in accounting principles |
|
|
|
|
|
|
(7.92 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) |
|
|
|
|
|
|
(6.70 |
) |
|
|
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
0.68 |
|
|
|
0.68 |
|
Book value (at June 30) |
|
|
|
|
|
|
20.51 |
|
|
|
25.84 |
|
Market price (at June 30) |
|
|
|
|
|
|
36.60 |
|
|
|
36.90 |
|
|
OTHER DATA |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
$ |
44,040 |
|
|
$ |
59,929 |
|
Number of employees (at June 30) |
|
|
|
|
|
|
11,660 |
|
|
|
12,570 |
|
Average sales per employee |
|
|
|
|
|
$ |
131 |
|
|
$ |
139 |
|
Basic weighted average shares outstanding |
|
|
(3 |
) |
|
|
31,169 |
|
|
|
30,560 |
|
Diluted weighted average shares outstanding |
|
|
(3 |
) |
|
|
31,627 |
|
|
|
30,749 |
|
|
KEY RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
Sales growth |
|
|
|
|
|
|
(12.4 |
)% |
|
|
(3.1 |
)% |
Gross profit margin |
|
|
|
|
|
|
32.3 |
|
|
|
34.1 |
|
Operating profit margin |
|
|
|
|
|
|
5.8 |
|
|
|
8.7 |
|
|
Notes
(1) |
|
In 2005, restructuring and asset impairment charges related to a FSS goodwill impairment
charge. |
|
|
|
In 2004, restructuring and asset impairment charges related primarily to the Kennametal
Integration Restructuring Program and the 2003 Facility Consolidation Program. |
|
|
|
In 2003, restructuring and asset impairment charges related to the 2003 Workforce Restructuring
Program, Kennametal Integration Restructuring Program, Electronics impairment and the 2003
Facility Consolidation Program. |
|
|
|
In 2002, restructuring and asset impairment charges related primarily to the MSSG facility
rationalizations and employee severance, J&L business improvement program, electronics facility
rationalization and FSS business improvement program and other operational improvement programs. |
- 9 -
|
|
In 2001, restructuring and asset impairment charges related primarily to the J&L business
improvement program, core business resize program and FSS business improvement program and other
operational improvement programs. |
(2) |
|
Accounting changes in 2002 reflect the charge related to goodwill impairment recorded as a
result of the adoption of SFAS No. 142. In 2001, this charge reflects the change in the method
of accounting for derivative financial instruments. |
(3) |
|
In 2002, we issued 3.5 million shares of capital stock for net
proceeds of $120.6 million. |
- 10 -
ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS The following discussion should be read in connection with the consolidated
financial statements of Kennametal Inc. and the related footnotes. Unless otherwise specified, any
reference to a year is to a fiscal year ended June 30. Additionally, when used in this annual
report on Form 10-K, unless the context requires otherwise, the terms we, our and us refer to
Kennametal Inc. and its subsidiaries.
BUSINESS OVERVIEW We are a leading global supplier of tooling, engineered components and advanced
materials consumed in production processes. We believe that our reputation for manufacturing
excellence and technological expertise and innovation in our principal products has helped us
achieve a leading market presence in our primary markets. We believe we are the second largest
global provider of metalcutting tools and tooling systems. End users of our products include
metalworking manufacturers and suppliers in the aerospace, automotive, machine tool and farm
machinery industries, as well as manufacturers and suppliers in the highway construction, coal
mining, quarrying and oil and gas exploration industries. Our end users products include items
ranging from airframes to coal, medical implants to oil wells and turbochargers to motorcycle
parts.
EXECUTIVE OVERVIEW Sales for the year ended June 30, 2005 were $2,304.2 million, an increase of
$332.8 million, or 16.9 percent, from $1,971.4 million in the prior year. Gross profit for the year
ended June 30, 2005 increased $137.1 million, or 21.0 percent, from $653.4 million in the prior
year to $790.5 million. Net income for the year ended June 30, 2005 was $119.3 million, or $3.13
per diluted share, compared to $73.6 million, or $2.02 per diluted share for the year ended June
30, 2004. Earnings benefited from continued market growth, new product introduction, the effect of
acquisitions, better pricing, increased capacity utilization, operating efficiencies and favorable
foreign currency effects. These benefits were partially offset by increased raw material costs, a
higher effective tax rate, increased employment costs and professional fees related to compliance
with section 404 of the Sarbanes-Oxley Act of 2002. Foreign currency exchange rate fluctuations
have materially impacted earnings in the past two years and may impact future earnings in the short
term and long term.
SALES Sales of $2,304.2 million in 2005 increased 16.9 percent, versus $1,971.4 million in 2004.
The increase in sales is primarily attributed to organic sales growth of $254.5 million, favorable
foreign currency effects of $58.6 million and incremental sales due to acquisitions of $45.6
million offset by decreased sales due to the FSS divestiture of $26.0 million. The increase in
organic sales is primarily attributed to new product introduction, further penetration in several
markets, particularly in North America, Asia, India and Latin America and continued economic
expansion in the manufacturing sector.
Sales of $1,971.4 million in 2004 increased 12.1 percent, versus $1,759.0 million in 2003. The
increase in sales was primarily attributed to organic sales growth of $92.0 million, favorable
foreign currency effects of $83.8 million and incremental sales due to acquisitions of $40.0
million. The increase in organic sales was partly due to the economic recovery of the North
American markets, which benefited the manufacturing sector. In addition, India, China and Latin
America proved to be stronger markets in 2004 compared to 2003. The introduction of a number of new
products by MSSG and AMSG also added to the increase in organic sales for 2004.
GROSS PROFIT Gross profit increased $137.1 million to $790.5 million in 2005 from $653.4 million in
2004. The improvement is primarily attributed to the effect of increased sales volume, which
positively impacted gross profit by $104.4 million. Gross profit benefited from improved price
realization, the effects of acquisitions, favorable foreign currency effects of $27.7 million,
increased capacity utilization, the absence of prior year restructuring and integration charges of
$3.0 million and a reduction in defined benefit plan expense of $2.9 million. Such benefits were partially
offset by increased raw material costs of $46.1 million, increased freight costs of $8.5 million
and increased defined contribution plan expense of $2.1 million.
The gross profit margin for 2005 increased 120 basis points to 34.3 percent from 33.1 percent in
2004. The gross profit margin benefited from improved price realization, the effects of
acquisitions, favorable foreign currency effects of 30 basis points, the absence of restructuring
charges of 20 basis points and a reduction in defined benefit plan expense of 10 basis points. These
benefits were partially offset by raw material price increases of 200 basis points and increased
freight charges of 20 basis points.
Gross profit increased $84.5 million to $653.4 million in 2004 from $568.9 million in 2003. The
improvement was primarily attributed to the effect of increased sales volume, which positively
impacted gross profit by $47.6 million, favorable foreign currency effects of $40.9 million, and
$7.3 million due to improved production efficiencies. In addition, gross profit improved by $17.4
million as a result of a previously announced change in the estimated useful lives of existing
Kennametal machinery and equipment, partially reduced by increased depreciation related to Widia
fixed assets. These benefits were partially offset by $15.8 million in pricing pressures and
unfavorable product mix shifts and $13.9 million in higher raw material costs.
- 11 -
The gross profit margin for 2004 increased 80 basis points to 33.1 percent from 32.3 percent
in 2003. The gross profit margin benefited
60 basis points from favorable foreign currency effects and 170 basis points combined from
efficiency initiatives, cost reductions and increased capacity utilization. These benefits were
partially offset by pricing pressures and unfavorable product mix shifts of 70 basis points and
higher raw material costs of 70 basis points.
OPERATING EXPENSE Operating expense in 2005 was $574.5 million, an increase of $61.9 million,
or 12.1 percent, compared to $512.6 million in 2004. The increase in operating expense is primarily
attributed to $6.8 million related to increased performance-based bonuses, $5.7 million related to
increased defined contribution plan expense, $21.2 million related to increased other employment
costs, unfavorable foreign currency effects of $13.4 million, a $3.8 million increase in
professional fees related to compliance with section 404 of the Sarbanes-Oxley Act, a $7.3 million
increase of other professional fees and $10.8 million related to acquisitions. These increases were
partially offset by reductions in bad debt expense of
$2.5 million and defined benefit plan expense of $1.9
million.
Operating expense in 2004 was $512.6 million, an increase of $47.7 million, or 10.3 percent,
compared to $464.9 million in 2003. The increase in operating expense was primarily attributed to
$23.3 million of unfavorable foreign currency effects, $14.2 million of increased employee benefit
costs, a $2.8 million charge associated with the reorganization of our global marketing function
and a charge of $1.8 million related to a receivable from a previous divestiture of a business.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
Asset Impairment Charges In 2005, we divested our FSS segment. We completed an impairment analysis
in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), as the
estimated selling price was below the fair value of the business absent the sale. We recorded a
pretax impairment charge related to FSS goodwill of $4.7 million as a result of this analysis.
In 2004, we did not incur any impairment charges.
In June 2003, we completed an assessment of the carrying value of certain long-lived assets in the
electronics business. As a result of this assessment, we recorded a pretax charge of $16.1 million
as a component of restructuring and asset impairment charges. The charge was a result of price
declines caused by persistent global overcapacity and low-cost Asia competition. The fixed asset
impairment charge reduced the book value of the electronics business assets to $2.6 million at
June 30, 2003.
Restructuring Charges In 2005 and 2004, we did not initiate any new restructuring programs. No
restructuring expense was recorded in 2005. The restructuring expense recorded in 2004 related to
programs previously initiated.
2003 Facility Consolidation Program In June 2003, we approved a facility consolidation program,
resulting in a total restructuring charge of $2.0 million: $0.3 million recorded in 2004 and $1.7
million recorded in 2003. The plan included the closure of two regional operating centers and the
Framingham manufacturing facility and a workforce reduction. In conjunction with the program, we
recorded an asset write-down in 2003 related to fixed assets that were disposed of as a result of
the restructuring program. All actions pertain to the MSSG segment. Estimated cost savings related
to this program have been approximately $1.5 million annually.
We completed and paid all remaining costs
associated with this program in 2005. Cash expenditures in 2005 were immaterial.
2003 Workforce Restructuring Program In October 2002, we announced a global salaried workforce
reduction of approximately 5 percent. The program resulted in 2003 charges of $2.8 million for
MSSG, $2.6 million for AMSG, $1.3 million for J&L, $0.1 million for FSS and $1.2 million for
Corporate. Estimated cost savings related to this program were approximately $10.0 million in 2003.
We completed and paid all remaining costs associated with this program in 2005. Cash expenditures in 2005
were immaterial.
Widia Integration We implemented two Widia acquisition-related integration programs described below
(Kennametal Integration Restructuring Program and the Widia Integration Plan), which together
resulted in a global headcount reduction of approximately 760 positions (385 in Europe and 375 in
India) during 2003. We completed the integration plan in Europe and India and closed six sales
offices, three manufacturing facilities, and closed or consolidated four warehouses. These programs
were established to develop centers of excellence in functional areas and enable long-term growth
and competitive advantages. Estimated cost savings related to these programs are approximately
$30.0 million annually. All costs associated with the integration have been incurred, and the
remaining cash payments for certain lease costs extend into 2006.
Kennametal Integration Restructuring Program This program includes employee severance costs
associated with existing Kennametal facilities and resulted in total restructuring charges of
$10.5 million: $3.5 million in 2004 and $7.0 million
in 2003. We completed and paid all remaining costs
associated with this program in 2005. Cash expenditures in 2005 were $0.6 million.
- 12 -
Widia Integration Plan This program included facility rationalizations and employee severance
costs associated with acquired Widia facilities. Costs incurred under this plan were accounted for
under EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination.
As a result, these costs were recorded as part of the Widia purchase price allocation. Total
adjustments to goodwill of $31.6 million were recorded: $5.7 million in 2004 and $25.9 million in
2003. Cash expenditures related to this program of $8.9 million, $13.1 million and $9.1 million
were made during 2005, 2004 and 2003, respectively. See Note 12.
AMORTIZATION OF INTANGIBLES Amortization expense increased $1.3 million to $3.5 million in 2005
from $2.2 million in 2004. The increase is primarily attributable to the Conforma Clad Inc.
(Conforma Clad) and Extrude Hone acquisitions.
Amortization expense decreased $2.0 million to $2.2 million in 2004 from $4.2 million in 2003. The
decrease is primarily attributable to a $1.2 million decrease for certain non-compete agreements
being fully amortized in 2003.
INTEREST EXPENSE Interest expense was $27.3 million in 2005 compared with $25.9 million in 2004.
The increase in interest expense is due to higher average borrowing rates in 2005. The weighted
average domestic borrowing rate increased from 4.3 percent in 2004 to 4.7 percent in 2005. The
portion of our debt subject to variable rates of interest remained stable at approximately 60
percent at June 30, 2005 and 2004.
Interest expense was $25.9 million in 2004 compared with $36.2 million in 2003. The decrease in
interest expense was due to total debt, including capital leases and notes payable, declining from
$525.7 million at June 30, 2003 to $440.2 million at June 30, 2004, and lower average borrowing
rates. The weighted average domestic borrowing rate decreased from 5.2 percent in 2003 to 4.3
percent in 2004. In addition, the portion of our debt subject to variable rates of interest
decreased from approximately 69 percent at June 30, 2003 to approximately 60 percent at June 30,
2004.
OTHER INCOME, NET In 2005, other income, net increased by $2.0 million to $3.7 million compared to
$1.7 million in 2004. The increase is primarily attributable to favorable foreign currency effects
of $5.8 million and an increase in interest income of $2.0 million. These benefits were partially
offset by the absence of a non-recurring prior year gain on the sale of an investment of $4.4
million. Other income, net for 2005 and 2004 included fees of $3.2 million and $1.7 million,
respectively, related to the accounts receivable securitization program.
In 2004, other income, net decreased by $0.8 million to $1.7 million compared to $2.5 million in
2003. The decrease was primarily attributable to increases in foreign exchange losses of $3.7
million and decreases in interest income of $1.4 million offset by a $4.4 million pretax gain
related to the sale of our investment in Toshiba Tungaloy. Other income, net for 2004 and 2003
included fees of $1.7 million and $1.9 million, respectively, related to the accounts receivable
securitization program.
INCOME TAXES The effective tax rate for 2005 was 33.3 percent compared to 32.1 percent for 2004.
The increase in the effective rate from 2004 to 2005 was primarily driven by the negative impact of
a German tax law change enacted in December of 2003 and non-deductible goodwill written off in
association with the FSS divestiture, partially offset by changes in valuation allowances in
Europe.
The Company is implementing an enhanced pan-European centralized business model, which will involve
the establishment of a Principal company. In this structure, key management decision-making and
responsibility will be centralized in the Principal company that will have the responsibility to
drive all strategic and operational initiatives of the European business. Current manufacturing and
sales operations will be transformed into contract manufacturers and limited risk distributors. Service
functions will also be organized into separate units. This will allow these functions to intensify
their focus on and increase their efficiency in production, sales growth and supporting services,
following clearly defined and uniform processes as directed by the Principal company. This strategy
is expected to be complete in the first half of fiscal 2006.
On October 22, 2004, the American Jobs Creation Act of 2004 was enacted. The Company is currently
evaluating what effect this legislation will have on its effective tax rate, including the effect
of a provision within the act that provides for a special one-time tax deduction of 85.0 percent of
foreign earnings that are repatriated to the United States, as defined by the act. The Company
expects to complete this evaluation during the second quarter of
fiscal 2006. The Company is considering
repatriating, under the act, an amount between $0.0 and $200.0 million, which would result in an
estimated tax cost between $0.0 and $19.0 million. Until its evaluation is completed, the
unremitted earnings of the Companys foreign investments continue to be considered permanently
reinvested, and accordingly, no deferred tax liability has been established.
- 13 -
The Company expects the effective tax rate to increase slightly in 2006, excluding any effect of
the American Jobs Creation Act of 2004 provision with respect to repatriating foreign earnings to
the United States. The unfavorable impact of the recent tax legislation enacted in Germany is
expected to have a greater impact than the favorable impact from operating within the new European
business model in 2006. In addition, adoption of SFAS 123(R), Share-Based Payment (revised 2004)
(SFAS 123(R)), is expected to have an unfavorable impact on the effective tax rate from expensing
of incentive stock options.
The effective tax rate for 2004 was 32.1 percent compared to 41.7 percent for 2003. The decrease in
the effective rate from 2003 to 2004 was due to the impact of the impairment charge for the
electronics business recorded in 2003, lesser increases in the valuation allowances and changes in
tax contingency reserves in 2004 versus 2003.
NET INCOME We reported net income of $119.3 million, or $3.13 per diluted share, for 2005 compared
to $73.6 million, or $2.02 per diluted share, for 2004. The increase in earnings is primarily
attributable to continued market growth, new product introduction, the effect of acquisitions,
better pricing, increased capacity utilization, a reduction in defined benefit plan expense and favorable
foreign currency effects. These improvements were offset in part by higher raw material costs,
increased employment costs, an increased effective tax rate and increased professional fees in the
current year and a prior year non-recurring gain on the sale of an investment.
We reported net income of $73.6 million, or $2.02 per diluted share, for 2004 compared to $18.1
million, or $0.51 per diluted share, for 2003. The increase was primarily attributable to organic
sales growth, cost containment, a decrease in restructuring cost, favorable foreign currency
translation effects, a decrease in interest expense and the Widia acquisition, which included
efficiencies derived from the integration with Kennametal operations. These improvements were
offset, in part, by increased pricing pressure and unfavorable product mix shifts, higher raw
material costs and increased employee benefit costs in 2004.
BUSINESS SEGMENT REVIEW Prior to the FSS segment divestiture in 2005, our operations were organized
into four global business units consisting of MSSG, AMSG, J&L and FSS, and Corporate. The
presentation of segment information reflects the manner in which we organize segments for making
operating decisions and assessing performance.
METALWORKING SOLUTIONS & SERVICES GROUP In the MSSG segment, we provide 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.
Our tooling systems consist of a steel toolholder and a cutting tool such as an indexable insert or
drill made from cemented tungsten carbides, high-speed steel or other hard materials. Other cutting
tools include end mills, reamers and taps. We provide solutions to our customers metalcutting
needs through engineering services aimed at improving their competitiveness. Engineering services
include field sales engineers identifying products and engineering product designs to meet customer
needs, which are recognized as selling expenses. We also manufacture cutting tools, drill bits, saw
blades and other tools for the consumer market which are marketed under private label and other
proprietary brands.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
2004 |
|
2003 |
|
External sales |
|
$ |
1,378,594 |
|
|
$ |
1,198,505 |
|
|
$ |
1,086,831 |
|
Intersegment sales |
|
|
150,039 |
|
|
|
124,994 |
|
|
|
109,790 |
|
Operating income |
|
|
187,410 |
|
|
|
126,657 |
|
|
|
88,213 |
|
External sales increased by $180.1 million, or 15.0 percent, from 2004. The increase in sales is
due primarily to further market penetration and increased pricing in 2005. This increase was driven
primarily by growth in metalworking North America, Europe and our industrial products group, which
were up 14.7 percent, 13.8 percent and 11.8 percent, respectively. This growth is attributed to new
product introduction, growth in milling and hole-making products, better pricing and accelerated
growth of Widia products in the Americas and Europe. In addition to growth in mature markets, MSSG
also reported emerging market growth in Latin America, India and Asia
of 42.3 percent, 46.0 percent
and 22.1 percent, respectively. MSSG experienced growth across several sectors, such as automotive,
light and general engineering, distribution, energy and aerospace. Favorable foreign currency
effects accounted for $46.9 million of the increase in external sales in 2005.
Operating income increased by $60.8 million, or 48.0 percent, from 2004. Operating margin was 12.3
percent in 2005 compared to 9.6 percent in 2004. Operating income was leveraged as a result of
sales growth, a continued focus on cost containment, a reduction in restructuring and integration
charges of $6.5 million, a reduction in defined benefit plan expense and favorable foreign currency
effects. These benefits were partially offset by an increase in raw material costs and higher
employment costs.
In 2004, MSSG external sales increased by $111.7 million, or 10.3 percent, from 2003. The increase
was primarily attributable to sales growth of $67.3 million in the second half of 2004 and $69.7
million of favorable foreign currency effects. The business leveraged the
- 14 -
market recovery in North
America and capitalized on stronger markets in India, China and Latin America due to marketing and
new products. In metalworking North America, external sales increased 6.8 percent compared to 2003 due
primarily to organic sales growth and favorable foreign currency effects of $4.6 million. MSSG
Europe external sales increased 10.7 percent due to favorable foreign currency effects of $56.3
million partially offset by the overall weakness of the European markets in the automotive and
heavy engineering sectors. Asia Pacific and India experienced external sales growth of 26.8 percent
and 59.9 percent, respectively, attributed to strength across most industrial sectors and favorable
foreign currency effects. Latin America also experienced external sales growth of 46.0 percent due
to favorable economic conditions, market share growth and foreign currency effects.
In 2004, operating income increased by $38.4 million, or 43.6 percent, from 2003. Operating margin
was 9.6 percent and 7.4 percent for 2004 and 2003, respectively. The increase in operating margin
was due to the market leverage discussed above. The increase in operating income was attributable
to sales growth discussed above, a reduction in restructuring and integration costs of $9.0
million, the accretive effect of the Widia Integration Program, reduced depreciation expense
resulting from the extension of useful lives of $14.3 million and favorable foreign currency
effects. These were offset by an increase in raw material costs, pricing pressure, unfavorable
product mix shifts, a $1.8 million charge associated with the reorganization of our global
marketing function and higher benefit costs.
ADVANCED MATERIALS SOLUTIONS GROUP This segments principal business is the production and sale of
cemented tungsten carbide products used in mining, highway construction and engineered applications
including circuit board drills, oil and gas exploration compacts and other similar applications.
These products have technical commonality to our core metalworking products. We also sell
metallurgical powders to manufacturers of cemented tungsten carbide products. In addition, we
provide application-specific component design services and on-site application support services.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
2004 |
|
2003 |
|
External sales |
|
$ |
546,838 |
|
|
$ |
419,073 |
|
|
$ |
353,262 |
|
Intersegment sales |
|
|
33,949 |
|
|
|
34,579 |
|
|
|
29,137 |
|
Operating income |
|
|
80,932 |
|
|
|
53,168 |
|
|
|
19,762 |
|
In 2005, AMSG external sales increased by $127.8 million, or 30.5 percent, from 2004. The increase
in sales is attributed primarily to new product introduction, better
pricing, improved market
conditions and the
accretive effects of acquisitions. The increase in sales was achieved primarily in mining and construction products and
engineered products, which increased 22.6 percent and
20.1 percent, respectively.
The acquisitions of Conforma Clad and Extrude Hone were accretive to sales by $48.1 million.
Operating income increased $27.8 million, or 52.2 percent, from 2004. The increase is primarily
attributed to sales growth, prior year non-recurring restructuring and integration costs of $1.5
million and the additions of Conforma Clad and Extrude Hone. These benefits were partially offset
by an increase in raw material costs, higher employment costs and charges related to a plant
closure.
In 2004, AMSG external sales increased by $65.8 million, or 18.6 percent, from 2003. The increase
in external sales was primarily attributable to overall growth in the mining, construction and
energy products divisions, as well as favorable foreign currency effects of $15.0 million in 2004
and $8.5 million due to the acquisition of Conforma Clad. Mining and construction products external
sales increased 16.6 percent in 2004 due to a continued recovery in mining, market penetration in
construction and favorable foreign currency effects. Energy products experienced strong growth of
24.4 percent from 2003 due to increased activity in oil and gas exploration. Electronics and
engineered products external sales increased 14.3 percent and 11.2 percent, respectively, in 2004.
Operating income increased $33.4 million, or 169.0 percent, from 2003. The increase was
attributable to sales growth discussed above, reduced depreciation expense of $2.7 million due to
the change in estimated lives, favorable foreign currency effects, a reduction in restructuring and
integration costs of $4.1 million, a reduction in impairment charges of $16.1 million and the
effects of cost reduction programs.
J&L INDUSTRIAL SUPPLY In this segment, we provide metalworking consumables, related products, and
related technical and
supply chain-related productivity services to small- and medium-sized durable goods manufacturers
in the United States and the United Kingdom. J&L markets products and services through a number of
channels, including field sales, telesales, wholesalers and direct marketing. All channels are
supported by catalogs, direct mail flyers and the Internet. J&L distributes a broad range of
metalcutting tools, abrasives, machine tool accessories, precision measuring tools, hand and power
tools, and other supplies used in metalcutting operations.
- 15 -
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
2004 |
|
2003 |
|
External sales |
|
$ |
255,840 |
|
|
$ |
218,295 |
|
|
$ |
196,170 |
|
Intersegment sales |
|
|
1,662 |
|
|
|
1,502 |
|
|
|
1,989 |
|
Operating income (loss) |
|
|
27,094 |
|
|
|
19,547 |
|
|
|
6,140 |
|
J&L external sales increased $37.5 million, or 17.2 percent, from 2004. The increase in sales is
attributable to advancing the multi-channel sales approach to the metalworking marketplace.
Operating income increased $7.6 million, or 38.6 percent, from 2004. The increase in operating
income is a result of the improvement in sales growth and continued cost containment.
J&L external sales increased $22.1 million, or 11.3 percent, from 2003. The increase is
attributable to volume growth and favorable foreign currency effects of $2.2 million. Operating
income increased $13.4 million, or 218.4 percent, from 2003. The increase in operating income is a
result of the improvement in sales growth, coupled with cost containment, an absence of
restructuring charges of $1.2 million and favorable foreign currency effects.
FULL SERVICE SUPPLY The Company divested the FSS segment in 2005 as discussed in Note 3. In the
FSS segment, we provided metalworking consumables and related products to medium- and large-sized
manufacturers in the United States and Canada. FSS offered integrated supply programs that provided
inventory management systems and just-in-time availability, and programs that focused on total cost
savings.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
2004 |
|
2003 |
|
External sales |
|
$ |
122,895 |
|
|
$ |
135,568 |
|
|
$ |
122,694 |
|
Intersegment sales |
|
|
2,561 |
|
|
|
2,815 |
|
|
|
3,134 |
|
Operating (loss) income |
|
|
(4,105 |
) |
|
|
818 |
|
|
|
(56 |
) |
FSS external sales decreased $12.7 million, or 9.3 percent, in 2005. The decrease in sales is
primarily associated with the divestiture. Operating income decreased $4.9 million in 2005 to a
loss of $4.1 million driven by a goodwill impairment charge of $4.7 million and a loss on assets
held for sale of $1.5 million recorded as a result of the divestiture.
FSS external sales increased $12.9 million, or 10.5 percent, in 2004. The increase in external
sales was primarily associated with volume growth attributed to new contracts obtained during 2004.
Operating income increased to $0.8 million in 2004. The increase in operating income is primarily a
result of the constant volume growth.
CORPORATE Corporate represents corporate shared service costs, certain employee benefit costs and
eliminations of operating results between segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
2004 |
|
2003 |
|
Operating expense |
|
$ |
(83,460 |
) |
|
$ |
(65,348 |
) |
|
$ |
(46,134 |
) |
In 2005, operating expense increased $18.1 million,
or 27.7 percent, from 2004. The increase is
primarily attributed to increases in performance-based bonuses of $6.8 million, defined
contribution plan expense of $2.1 million, other employment costs of
$11.3 million, professional fees
related to compliance with section 404 of the Sarbanes-Oxley Act of
2002 of $3.8 million and other
professional fees of $6.4 million. These increases were
partially offset by reductions in defined benefit
plan expenses of $3.2 million, non-recurring prior year charges of $1.8 million related to a note
receivable from the divestiture of a company previously owned by Kennametal and $1.3 million
related to a pension curtailment and increased cost allocations to the business units of $2.2
million.
In 2004, operating expense increased $19.2 million, or 41.6 percent from 2003. The increase was
primarily attributable to increases in employee benefit expenses of $13.8 million, a $1.8 million
charge related to a note receivable from the divestiture of a company previously owned by
Kennametal and $1.3 million related to the pension curtailment.
LIQUIDITY AND CAPITAL RESOURCES Our cash flow from operations is the primary source of financing
for capital expenditures and internal growth. The most significant risk associated with our ability
to generate sufficient cash flow from operations is the overall level of demand for our products.
However, we believe we can adequately control costs and manage our working capital to meet our cash
flow needs, throughout changes in the economic cycle.
- 16 -
In October 2004, we entered into a five-year, multi-currency, revolving credit facility with a
group of financial institutions (2004 Credit Agreement), which amended our 2002 Credit Agreement
(discussed below). The 2004 Credit Agreement permits revolving
credit loans of up to $500.0 million for working capital, capital expenditures and general
corporate purposes. The 2004 Credit Agreement allows for borrowings in U.S. dollars, euro, Canadian
dollars, pound sterling and Japanese yen. Interest payable under the 2004 Credit Agreement is based
upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2)
the greater of the prime rate or the Federal Funds effective rate plus 0.5 percent or (3) fixed as
negotiated by the Company.
The 2004 Credit Agreement contains various covenants with which we must be in compliance, including
two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage
ratio (as those terms are defined in the agreement). As of June 30, 2005, outstanding borrowings
under this agreement were $72.9 million. As of June 30, 2005, $38.5 million of these borrowings
were denominated in U.S. dollars and $34.4 million were denominated in euro. We had the ability to
borrow under the agreement, or otherwise incur, additional debt of up to $530.6 million as of June
30, 2005, and be in compliance with the maximum leverage ratio financial covenant. At June 30,
2005, we were in compliance with all debt covenants.
In June 2002, we entered into a three-year, multi-currency, $650 million revolving bank credit
facility with a group of financial institutions (2002 Credit Agreement). Following a review of
anticipated borrowing requirements, in June 2003, we notified the administrative agent of our
decision to permanently reduce the 2002 Credit Agreement from $650 million to $500 million,
resulting in lower facility fees for the remaining two years of the agreement. The 2002 Credit
Agreement allowed for borrowings in U.S. dollars, euro, Canadian dollars, pound sterling or
Japanese yen. The 2002 Credit Agreement contained various covenants with which we must be in
compliance, including three financial covenants: a maximum leverage ratio, a maximum fixed charge
coverage ratio and a minimum consolidated net worth. As of June 30, 2004, outstanding borrowings
under this agreement were $98.1 million. As of June 30, 2004, $25.0 million of these borrowings
were denominated in U.S. dollars and $73.1 million were denominated in euro. The 2002 Credit
Agreement was amended by the 2004 Credit Agreement.
Additionally, we generally obtain local financing through credit lines with commercial banks in the
various countries in which we operate. At June 30, 2005, these borrowings amounted to $43.8 million
for notes payable and $8.7 million for term debt and capital leases. We believe that cash flow from
operations and the availability under our credit lines will be sufficient to meet our cash
requirements over the next 12 months.
Based upon our debt structure at June 30, 2005 and 2004, approximately 60 percent of our debt was
exposed to floating rates of interest, which is consistent with our target range for floating
versus fixed interest rate debt. We periodically review the target range and the strategies
designed to maintain the mix of floating to fixed interest rate debt within that range. In the
future, we may decide to adjust the target range or the strategies to achieve it.
Following is a summary of our contractual obligations and other commercial commitments as of June
30, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations |
|
|
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Long-term debt |
|
|
(1 |
) |
|
$ |
531,036 |
|
|
$ |
96,628 |
|
|
$ |
41,777 |
|
|
$ |
40,729 |
|
|
$ |
351,902 |
|
Notes payable |
|
|
(2 |
) |
|
|
45,541 |
|
|
|
45,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefit payments |
|
|
|
|
|
|
(3) |
|
|
|
26,537 |
|
|
|
56,954 |
|
|
|
64,871 |
|
|
|
(3) |
|
Postretirement
benefit payments |
|
|
|
|
|
|
(3) |
|
|
|
3,142 |
|
|
|
6,064 |
|
|
|
6,565 |
|
|
|
(3) |
|
Capital leases |
|
|
|
|
|
|
7,548 |
|
|
|
3,218 |
|
|
|
2,828 |
|
|
|
262 |
|
|
|
1,240 |
|
Operating leases |
|
|
|
|
|
|
96,874 |
|
|
|
22,480 |
|
|
|
26,335 |
|
|
|
13,851 |
|
|
|
34,208 |
|
Purchase obligations |
|
|
(4 |
) |
|
|
270,320 |
|
|
|
79,612 |
|
|
|
181,408 |
|
|
|
9,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
277,158 |
|
|
$ |
315,366 |
|
|
$ |
135,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt includes interest obligations of $145.0 million. Interest obligations were determined assuming interest rates as of June 30, 2005 remain
constant. |
|
(2) |
|
Notes payable includes interest obligations of $1.7 million. Interest obligations were determined assuming interest rates as of June 30, 2005 remain constant. |
|
(3) |
|
Annual payments are expected to continue into the foreseeable future at the amounts noted in the table. |
|
(4) |
|
Purchase obligations consist of purchase commitments for materials, supplies and machinery and equipment as part of the ordinary conduct of business.
Purchase obligations with variable price provisions were determined assuming current market prices as of June 30, 2005 remain constant. |
- 17 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
More than |
|
Other Commercial Commitments |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Standby letters of credit |
|
$ |
10,011 |
|
|
$ |
4,851 |
|
|
$ |
5,160 |
|
|
$ |
|
|
|
$ |
|
|
Guarantees |
|
|
12,434 |
|
|
|
11,685 |
|
|
|
256 |
|
|
|
65 |
|
|
|
428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,445 |
|
|
$ |
16,536 |
|
|
$ |
5,416 |
|
|
$ |
65 |
|
|
$ |
428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The standby letters of credit relate to insurance and other activities.
During 2005, we generated $202.3 million in cash flow from operations, an increase of $24.5
million, or 13.8 percent, compared to 2004. Net income plus non-cash items improved $71.7 million
to $225.2 million in 2005 compared to $153.5 million in 2004. This improvement was offset by a
$47.2 million reduction in cash flow from changes in operating working capital items. This change
was due to increased accounts receivable and inventory as a result of increased sales and net
repayments of our accounts receivable securitization program resulting from the FSS divestiture.
Net cash used for investing activities was $185.9 million in 2005, an increase of $93.3 million
from $92.6 million in 2004. The change is due primarily to a $70.8 million increase in spending on
acquisitions. This years net cash used for investing activities includes $134.1 million related to
the Extrude Hone acquisition, while last years total includes $65.9 million related to the
Conforma Clad acquisition. The remaining change is due primarily to an increase in capital
expenditures of $31.6 million in 2005, a portion of which supported our growth in China and India,
increased proceeds from divestitures of $25.0 million in 2005 and receiving $17.4 million in
proceeds from the sale of our investment in Toshiba Tungaloy in 2004. We have projected our capital
expenditures for 2006 to be approximately $80 million, which will be used primarily to support new
strategic initiatives, new products and to upgrade machinery and equipment. We believe this level
of capital spending is sufficient to maintain competitiveness and improve productivity.
Net cash used for financing activities was $0.5 million in 2005 compared to $78.0 million in 2004.
This fluctuation was due primarily to reductions in net debt repayments including notes payable of
$68.9 million and increased cash inflows from dividend reinvestment and employee benefit and stock
plans of $10.6 million.
OFF-BALANCE SHEET ARRANGEMENTS Since 1999, we have had an agreement with a financial institution
whereby we securitized, on a continuous basis, an undivided interest in a specific pool of our
domestic trade accounts receivable. We were permitted to securitize up to $100.0 million of
accounts receivable under this agreement. In July 2003, we entered into a new securitization
program (2003 Securitization Program), which also permitted us to securitize up to $100.0 million
of accounts receivable. The 2003 Securitization Program was amended on September 19, 2003,
permitting us to securitize up to $125.0 million of accounts receivable. The 2003 Securitization
Program provides for a co-purchase arrangement, whereby two financial institutions participate in
the purchase of our accounts receivable. Pursuant to this agreement, we, and certain of our
domestic subsidiaries, sell our domestic accounts receivable to Kennametal Receivables Corporation
(KRC), a wholly-owned, bankruptcy-remote subsidiary. A bankruptcy-remote subsidiary is a company
that has been structured to make it highly unlikely that it would be drawn into a bankruptcy of
Kennametal Inc., or any of our other subsidiaries. KRC was formed to purchase these accounts
receivable and sell participating interests in such accounts receivable to the financial
institutions, which in turn purchase and receive ownership and security interests in those assets.
As collections reduce the amount of accounts receivable included in the pool, we sell new accounts
receivable to KRC, which in turn securitizes these new accounts receivable with the financial
institutions. The actual amount of accounts receivable securitized each month is a function of the
net change (new billings less collections) in the specific pool of domestic accounts receivable,
the impact of detailed eligibility requirements in the agreement (e.g., the aging, terms of
payment, quality criteria and customer concentrations), and the application of various reserves
which are typical in trade receivable securitization transactions. A decrease in the amount of
eligible accounts receivable could result in our inability to continue to securitize all or a
portion of our accounts receivable. It is not unusual, however, for the amount of our eligible
accounts receivable to vary by up to $5.0 million to $10.0 million per month.
The financial institutions charge us fees based on the level of accounts receivable securitized
under this agreement and the commercial paper market rates plus the financial institutions cost to
administer the program. The costs incurred under this program, $3.2 million, $1.7 million and $1.9
million in 2005, 2004 and 2003, respectively, are accounted for as a component of other income, net
and represent attractive funding costs compared to existing bank and public debt transactions.
At June 30, 2005 and 2004, we securitized accounts receivable of $109.8 million and $117.5 million,
respectively, under this program. Our subordinated retained interests in accounts receivable
available for securitization and recorded as a component of accounts receivable were $41.2 million
and $41.5 million at June 30, 2005 and 2004, respectively.
- 18 -
The 2003 Securitization Program is a three-year program, which contains certain provisions that
require annual approval. It is our intention to continuously obtain such approval when required.
Non-renewal of this securitization program would result in our requirement to otherwise finance the
amounts securitized. We anticipate that the risk of non-renewal of this securitization program with
the current providers or some other providers is low. In the event of a decrease of our eligible
accounts receivable or non-renewal or non-annual approval of our securitization program, we would
have to utilize alternative sources of capital to fund that portion of our working capital needs.
We anticipate renewing the program in June 2006 and will determine at that time whether the
economics favor an annual or multi-year renewal.
FINANCIAL CONDITION At June 30, 2005, total assets were $2,092.3 million, compared to $1,938.7
million at June 30, 2004. Working capital was $402.4 million at June 30, 2005, an increase of 29.6
percent from $310.4 million for 2004, primarily due to increases in accounts receivable and cash
and reductions in current maturities of long-term debt and capital leases and accrued
restructuring. At June 30, 2005, other assets were $742.0 million, an increase of $84.8 million
from $657.2 million at June 30, 2004. The increase is primarily related to the increase in goodwill
and intangible assets of $110.8 million mainly as a result of the Extrude Hone acquisition.
Total liabilities increased $66.7 million from $1,035.3 million at June 30, 2004 to $1,102.0
million at June 30, 2005. This increase is due primarily to the increase in accrued pension
benefits of $61.3 million due to the increase in our unfunded pension obligations and related
increase in additional minimum pension liability.
Shareowners equity was $972.9 million at June 30, 2005, an increase of $85.7 million from the
prior year. The increase is primarily attributable to net income of $119.3 million and the effect
of employee stock and benefit plan activity of $46.9 million partially offset by a charge to equity
of $68.1 million related to the increase in additional minimum pension liability and cash dividends
of $25.4 million.
ACQUISITIONS AND DIVESTITURES Effective May 1, 2005, we completed the FSS segment divestiture for
$39.3 million, subject to post-closing adjustment. The results of operations of FSS are reported in
our continuing operations through the date of divestiture (see Note 3).
Effective March 1, 2005, the Company acquired Extrude Hone for $134.1 million, subject to
post-closing adjustment. This purchase price includes the actual purchase price of $143.8 million,
plus direct acquisition costs of $0.9 million, less $10.6 million of acquired cash. Extrude Hone
supplies market-leading engineered component process technology to customers in a variety of
industries around the world. This process technology focuses on component deburring, polishing and
producing controlled radii. We financed the acquisition with borrowings under our 2004 Credit
Agreement. Extrude Hones operating results have been included in our consolidated results since
March 1, 2005 and are included in the AMSG segment (see Notes 3 and 18).
We 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.
ENVIRONMENTAL MATTERS We are currently named as a PRP at the Li Tungsten Superfund site in Glen
Cove, New York. In December 1999, we recorded a remediation reserve with respect to our involvement
in these matters. This reserve represents our best estimate of the undiscounted future obligation
based on our evaluations and discussions with outside counsel and independent consultants, and the
current facts and circumstances related to these matters. We recorded this liability because
certain events occurred, including the identification of other PRPs, an assessment of potential
remediation solutions and direction from the government for the remedial action plan, that
clarified our level of involvement in these matters and our relationship to other PRPs. This led us
to conclude that it was probable that a liability had been incurred. At June 30, 2005, we had an
accrual of $2.7 million recorded relative to this environmental issue.
In addition to the amount currently reserved, we may be subject to loss contingencies related to
these matters estimated to be up to an additional $3.0 million. We believe that such undiscounted
unreserved losses are reasonably possible but are not currently considered to be probable of
occurrence. The reserved and unreserved liabilities for all environmental concerns 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, the identification of new PRPs, and the involvement of and
direction taken by the government on these matters.
Additionally, we also maintain reserves for other potential environmental issues associated with
our domestic operations and a location operated by our German subsidiary. At June 30, 2005, the
total of these accruals was $0.9 million and represents anticipated costs associated with the
remediation of these issues. Cash payments of $0.1 million were made against this reserve during
the year.
- 19 -
As a result of the Widia acquisition, we previously established an environmental reserve used for
environmental cleanup and remediation activities at several Widia manufacturing locations. This
liability represents our estimate of the future obligation based on our evaluations and discussions
with independent consultants and the current facts and circumstances related to these matters. At
June 30, 2005, we had an accrual of $5.0 million recorded relative to these environmental
exposures. Cash payments of $0.6 million were made against this reserve during 2005. We also have
recorded unfavorable foreign currency translation adjustments of $0.1 million during 2005.
We maintain a Corporate 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, we
have established an EH&S administrator at each of our global manufacturing facilities. Our
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, we establish or adjust financial provisions and reserves for
environmental contingencies in accordance with SFAS 5.
EFFECTS OF INFLATION Despite modest inflation in recent years, rising costs, in particular the cost
of certain raw materials, continue to affect our operations throughout the world. We strive to
minimize the effects of inflation through cost containment, productivity improvements and price
increases under highly competitive conditions.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES In preparing our financial statements in conformity with
accounting principles generally accepted in the United States of America, we make judgments and
estimates about the amounts reflected in our financial statements. As part of our financial
reporting process, our management collaborates to determine the necessary information on which to
base our judgments and develops estimates used to prepare the financial statements. We use
historical experience and available information to make these judgments and estimates. However,
different amounts could be reported using different assumptions and in light of different facts and
circumstances. Therefore, actual amounts could differ from the estimates reflected in our financial
statements. Our significant accounting policies are described in Note 2 of our consolidated
financial statements. We believe that the following discussion addresses our critical accounting
policies.
Revenue Recognition We recognize revenue upon shipment of our products. Our general conditions of
sale explicitly state that the delivery of our products is F.O.B. shipping point and that title and
all risks of loss and damages pass to the buyer upon delivery of the sold products to the common
carrier.
Our general conditions of sale explicitly state that acceptance of the conditions of shipment is
considered to have occurred unless written notice of objection is received by Kennametal within 10
calendar days of the date specified on the invoice. We do not ship product unless we have
documentation authorizing shipment to our customers. Our products are consumed by our customers in
the manufacture of their products. Historically, we have experienced very low levels of returned
product and do not consider the effect of returned product to be material. We have recorded an
estimated returned goods allowance to provide for any potential product returns.
We warrant that products and services sold are free from defects in material and workmanship under
normal use and service when correctly installed, used and maintained. This warranty terminates 30
days after delivery of the product to the customer, and does not apply to products that have been
subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be
returned to Kennametal only after inspection and approval by Kennametal and upon receipt by
customer of shipping instructions from Kennametal. We have included an estimated allowance for
warranty returns in our returned goods allowance discussed above.
Prior to the divestiture in 2005, FSS management contracts contained two major deliverables:
product procurement and inventory management. Under the fixed fee contracts, we recognized revenue
evenly over the contract term. Revenue was recognized upon shipment for cost plus contracts.
Accounting for Contingencies We accrue for contingencies in accordance with SFAS 5 when it is
probable that a liability or loss has been incurred and the amount can be reasonably estimated.
Contingencies by their nature relate to uncertainties that require the exercise of judgment both in
assessing whether or not a liability or loss has been incurred and estimating the amount of
probable loss. The significant contingencies affecting our financial statements include
environmental, health and safety matters and litigation.
Long-Lived Assets As required under SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we evaluate the recoverability of property, plant and equipment and intangible
assets other than goodwill that are amortized whenever events or changes in circumstances indicate
the carrying amount of any such assets may not be fully recoverable. Changes in circumstances
include technological advances, changes in our business model, capital structure, economic
conditions or operating performance. Our evaluation is based upon, among other things, our
assumptions about the estimated future undiscounted cash flows these assets are
- 20 -
expected to generate. When the sum of the undiscounted cash flows is less than the carrying value,
we will recognize an impairment loss. We continually apply our best judgment when performing these
evaluations to determine the timing of the testing, the undiscounted cash flows used to assess
recoverability and the fair value of the asset.
Goodwill and Other Intangible Assets We evaluate the recoverability of goodwill and other
intangibles of each of our reporting units as required under SFAS 142 by comparing the fair value
of each reporting unit with its carrying value. The fair values of our reporting units are
determined using a combination of a discounted cash flow analysis and market multiples based upon
historical and projected financial information. We apply our best judgment when assessing the
reasonableness of the financial projections used to determine the fair value of each reporting
unit.
Pension and Other Postretirement and Postemployment Benefits We sponsor these types of benefit
plans for a majority of our employees and retirees. We account for these plans as required under
SFAS No. 87, Employers Accounting for Pensions
and SFAS No. 106,
Employers Accounting for
Postretirement Benefits Other than Pensions. Accounting for the cost of these plans requires the estimation of the
cost of the benefits to be provided well into the future and attributing that cost over the
expected work life of employees participating in these plans. This estimation requires our judgment
about the discount rate used to determine these obligations, expected return on plan assets, rate
of future compensation increases, rate of future health care costs, withdrawal and mortality rates
and participant retirement age. Differences between our estimates and actual results may
significantly affect the cost of our obligations under these plans.
In the valuation of our pension and other postretirement and postemployment benefit liabilities,
management utilizes various assumptions. We determine our discount rate based on an investment
grade bond yield curve with a duration that approximates the benefit payment timing of each plan.
This rate can fluctuate based on changes in investment grade bond yields.
The long-term rate of return on plan assets is estimated based on an evaluation of historical
returns for each asset category held by the plans, coupled with the current and short-term mix of
the investment portfolio. The historical returns are adjusted for expected future market and
economic changes. This return will fluctuate based on actual market returns and other economic
factors.
The rate of future health care costs is based on historical claims and enrollment information
projected over the next fiscal year and adjusted for administrative charges. This rate is expected
to decrease until fiscal 2010.
Future compensation rates, withdrawal rates, and participant retirement age are determined based on
historical information. These assumptions are not expected to significantly change. Mortality rates
are determined based on review of published mortality tables.
Allowance for Doubtful Accounts We record allowances for estimated losses resulting from the
inability of our customers to make required payments. We assess the creditworthiness of our
customers based on multiple sources of information and analyze such factors as our historical bad
debt experiences, industry and geographic concentrations of credit risk, current economic trends
and changes in customer payment terms. This assessment requires significant judgment. If the
financial condition of our customers was to worsen, additional allowances may be required,
resulting in future operating losses that are not included in the allowance for doubtful accounts
at June 30, 2005.
Inventories Inventories are stated at the lower of cost or market. We use the last-in, first-out
method for determining the cost of a significant portion of our U.S. inventories. The cost of the
remainder of inventories is determined under the first-in, first-out or average cost methods. When
market conditions indicate an excess of carrying costs over market value, a lower-of-cost-or-market
provision is recorded. Excess and obsolete inventory reserves are established based upon our
evaluation of the quantity of inventory on hand relative to demand.
Income Taxes Realization of our deferred tax assets is primarily dependent on future taxable
income, the timing and amount of which are uncertain in part due to the expected profitability of
certain foreign subsidiaries. As of June 30, 2005, the deferred tax assets net of valuation
allowances are primarily attributable to postretirement benefits, inventory reserves and net
operating loss carryforwards. In the event that we were to determine that we would not be able to
realize our deferred tax assets in the future, an increase in the valuation allowance would be
required.
NEW ACCOUNTING STANDARDS In July 2004, the Company adopted FASB Staff Position (FSP) No. 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (FSP 106-2). FSP 106-2 provides guidance on the accounting for the
effects of the act for employers that sponsor postretirement health care plans that provide
prescription drug benefits and requires those employers to provide certain disclosures regarding
the effect of the federal subsidy. See Note 10 for discussion of the effect of adoption of this FSP
and required disclosures.
- 21 -
In December 2004, the FASB issued SFAS 123(R). SFAS 123(R) is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123), and supersedes Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) eliminates the alternative
to use the intrinsic value method of accounting that was provided in SFAS 123, which generally
resulted in no compensation expense recorded in the financial statements related to the issuance of
stock options under the Companys 2002 Stock and Incentive Plan. SFAS 123(R) requires that the
cost resulting from all share-based payment transactions be recognized in the financial statements.
This standard established fair-value-based measurement method in accounting for generally all
share-based payment transactions with employees.
The Company adopted SFAS 123(R) effective July 1, 2005. The Company is required to record
compensation expense for all awards granted after the date of adoption and for the unvested portion
of previously granted awards that remain outstanding at the date of adoption. Beginning July 1,
2005, the Company recorded stock-based compensation expense for the cost of stock options and
restricted stock issued under the 2002 Stock and Incentive Plan. Pretax stock-based compensation expense
for 2006 related to unvested awards as of July 1, 2005 and awards granted to date in 2006 is
estimated to be approximately $12.0 million.
SFAS 123(R) requires that stock-based compensation expense be recognized over the period from the
date of grant to the date when the award is no longer contingent on the employee providing
additional service (substantive vesting period). The Companys 2002 Stock and Incentive Plan
provides that stock option awards for employees and directors vest up to 2 years after retirement
and restricted stock awards vest immediately upon retirement for employees and directors. In
periods prior to the adoption of SFAS 123(R) (pro forma disclosure only), the Company recorded
stock-based compensation for awards to retirement-eligible employees over the awards stated
vesting period (nominal vesting period). With the adoption of SFAS 123(R), the Company will
continue to follow the nominal vesting period approach for the unvested portion of awards granted
before the adoption of SFAS 123(R) and follow the substantive vesting period approach for awards
granted after the adoption of SFAS 123(R). The transition to the substantive vesting approach did
not have a material impact on pro forma disclosures previously made under SFAS 123.
In December 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4. This standard clarifies the accounting for abnormal amounts of certain manufacturing
costs and was effective for the Company beginning after July 1, 2005. The adoption of this standard
did not have a material impact on the Companys financial statements.
In December 2004, the FASB issued FSP No. 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision with the American Jobs Creation Act of 2004 (FSP 109-2).
FSP 109-2 allows companies evaluating the repatriation provision of the act to apply the SFAS No.
109, Accounting for Income Taxes, provisions as it decides on a plan for reinvestment or
repatriation of its unremitted foreign earnings. This FSP requires certain disclosures for
companies that have not completed evaluation of the repatriation provision of the act. See Note 9
for discussion of the effect of adoption of the act and required disclosures.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK We are exposed to certain market risks arising from transactions that are entered into
in the normal course of business. As part of our financial risk management program, we use certain
derivative financial instruments to manage these risks. We do not enter into derivative
transactions for speculative purposes and therefore hold no derivative instruments for trading
purposes. We use derivative financial instruments to dampen the effects of changes in foreign
exchange rates on our consolidated results and to achieve our targeted mix of fixed and floating
interest rates on outstanding debt. Our objective in managing foreign exchange exposures with
derivative instruments is to reduce both earnings and cash flow volatility, allowing us to focus
our attention on business operations. With respect to interest rate management, these derivative
instruments allow us to achieve our targeted fixed-to-floating interest rate mix as a separate
decision from funding arrangements in the bank and public debt markets. We measure hedge
effectiveness by assessing the changes in the fair value or expected future cash flows of the
hedged item. The ineffective portions are recorded in other income, net in the current period. See
Notes 2 and 13 to our consolidated financial statements for additional information.
We are exposed to counterparty credit risk for nonperformance of derivative contracts and, in the
event of nonperformance, to market risk for changes in interest and
currency rates, as well as settlement risk. We manage
exposure to counterparty credit risk through credit standards, diversification of counterparties
and procedures to monitor concentrations of credit risk. We do not anticipate nonperformance by any
of the counterparties.
The following provides additional information on our use of derivative instruments. Included below
is a sensitivity analysis that is based upon a hypothetical 10 percent weakening or strengthening
in the U.S. dollar compared to the June 30, 2005 foreign currency rates and the effective interest
rates under our current borrowing arrangements. We compared the contractual derivative and
borrowing
- 22 -
arrangements in effect at June 30, 2005 to the hypothetical foreign exchange or interest rates in
the sensitivity analysis to determine the effect on interest expense, pretax income or the
accumulated other comprehensive loss. Our analysis takes into consideration the different types of
derivative instruments and the applicability of hedge accounting.
CASH FLOW HEDGES Currency A portion of our operations consists of investments in foreign
subsidiaries. Our exposure to market risk for changes in foreign exchange rates arises from these
investments, intercompany loans utilized to finance these subsidiaries, trade receivables and
payables, and firm commitments arising from international transactions. We manage our foreign
exchange transaction risk to reduce the volatility of cash flows caused by currency fluctuations
through natural offsets where appropriate and through foreign exchange contracts. These contracts
are designated as hedges of transactions that will settle in future periods and otherwise would
expose us to foreign currency risk.
Our foreign exchange hedging program minimizes our exposure to foreign exchange rate movements.
This exposure arises largely from anticipated cash flows from cross-border intercompany sales of
products and services. This program utilizes purchased options, range forwards and forward
contracts primarily to sell foreign currency. The notional amounts of the contracts translated into
U.S. dollars at June 30, 2005 and 2004 rates are $133.2 million and $78.1 million, respectively. We
would have received $2.4 million and $0.3 million at June 30, 2005 and 2004, respectively, to
settle these contracts, which represents the fair value of these agreements. At June 30, 2005, a
hypothetical 10 percent strengthening or weakening of the U.S. dollar would change accumulated
other comprehensive income (loss), net of tax, by $5.6 million.
In addition, we 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, 2005 and 2004, we had several outstanding forward
contracts to purchase and sell foreign currency, with notional amounts, translated into U.S.
dollars at June 30, 2005 and 2004 rates, of $18.9 million and $6.8 million, respectively. At June
30, 2005, a hypothetical 10 percent change in the year-end exchange rates would result in an
increase or decrease in pretax income of $1.9 million related to these positions.
Interest Rate Our exposure to market risk for changes in interest rates relates primarily to our
long-term debt obligations. We seek to manage our interest rate risk in order to balance our
exposure between fixed and floating rates while attempting to minimize our borrowing costs. To
achieve these objectives, we primarily use interest rate swap agreements to manage exposure to
interest rate changes related to these borrowings. At June 30, 2005 and 2004, we had interest rate
swap agreements outstanding that effectively convert notional amounts of $55.2 million of debt from
floating to fixed interest rates. The outstanding agreements mature in June of 2008. We would have
paid $0.7 million and received $0.3 million at June 30, 2005 and 2004, respectively, to settle
these interest rate swap agreements, which represents the fair value of these agreements.
FAIR VALUE HEDGES Interest Rate As discussed above, our exposure to market risk for changes in
interest rates relates primarily to our long-term debt obligations. We seek to manage this risk
through the use of interest rate swap agreements. At June 30, 2005 and 2004, we had interest rate
swap agreements outstanding that effectively convert a notional amount of $200 million of the
Senior Unsecured Notes from fixed to floating interest rates. These agreements mature in June 2012
but provide for a one-time optional early termination for the bank counterparty in June 2008 at the
then prevailing market value of the swap agreements.
DEBT AND NOTES PAYABLE At June 30, 2005 and 2004, we had $437.4 million and $440.2 million,
respectively, of debt and notes payable outstanding. Effective interest rates as of June 30, 2005
and 2004 were 5.8 percent and 4.9 percent, respectively, including the effect of interest rate
swaps. A hypothetical change of 10 percent in interest rates from June 30, 2005 levels would
increase or decrease interest expense by approximately $1.0 million.
- 23 -
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. Management has conducted an assessment using the criteria in Internal Control
Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We have excluded Extrude Hone Corporation (Extrude Hone) from our assessment of internal control
over financial reporting as of June 30, 2005, because it was acquired by the Company through a
purchase business combination in March 2005. Extrude Hone is a wholly-owned subsidiary whose total
assets and total revenues represent approximately 8% and 1%, respectively, of the related
consolidated financial statement amounts as of and for the year ended June 30, 2005.
Based on its assessment, management has concluded that the Company maintained effective internal
control over financial reporting as of June 30, 2005, based on criteria in Internal Control
Integrated Framework issued by the COSO. Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of June 30, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report, which is included herein.
MANAGEMENTS
CERTIFICATIONS
The certifications of
the Companys Chief Executive Officer and Chief Financial Officer
required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and
31.2 to this report. Additionally, in October 2004, the Companys Chief Executive Officer
filed with the New York Stock Exchange (NYSE) the annual certification required to be
furnished to the NYSE pursuant to Section 303A.12 of the NYSE Listed Company Manual. The
certification confirmed that the Companys Chief Executive Officer was not aware of any
violation by the Company of the NYSEs corporate governance listing standards.
- 24 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREOWNERS OF KENNAMETAL INC.:
We have completed an integrated audit of Kennametal Inc.s 2005 consolidated financial statements
and of its internal control over financial reporting as of June 30, 2005 and audits of its 2004 and
2003 consolidated financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under item
15(a)(1) present fairly, in all material respects, the financial position of Kennametal Inc. and
its subsidiaries (the Company) at June 30, 2005 and 2004, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2005 in conformity with
accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under item 15(a)(2)
presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (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 of financial statements includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in Managements Report on Internal Control
Over Financial Reporting appearing under Item 8, that the Company maintained effective internal
control over financial reporting as of June 30, 2005 based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of June 30, 2005, based on criteria established in Internal
Control Integrated Framework issued by the COSO. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on managements assessment and on the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes obtaining an understanding
of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
- 25 -
As described in Managements Report on Internal Control Over Financial Reporting, management has
excluded Extrude Hone Corporation (Extrude Hone) from its assessment of internal control over
financial reporting as of June 30, 2005 because it was acquired by the Company through a purchase
business combination in March 2005. We have also excluded Extrude Hone from our audit of internal
control over financial reporting. Extrude Hone is a wholly-owned subsidiary whose total assets and
total revenues represent approximately 8% and 1%, respectively, of the related consolidated
financial statement amounts as of and for the year ended June 30, 2005.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
September 6, 2005
- 26 -
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30 (in thousands, except per share data) |
|
2005 |
|
2004 |
|
2003 |
|
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
2,304,167 |
|
|
$ |
1,971,441 |
|
|
$ |
1,758,957 |
|
Cost of goods sold |
|
|
1,513,634 |
|
|
|
1,318,074 |
|
|
|
1,190,053 |
|
|
Gross profit |
|
|
790,533 |
|
|
|
653,367 |
|
|
|
568,904 |
|
Operating expense |
|
|
574,495 |
|
|
|
512,621 |
|
|
|
464,861 |
|
Restructuring and asset impairment charges (Note 12) |
|
|
4,707 |
|
|
|
3,670 |
|
|
|
31,954 |
|
Amortization of intangibles |
|
|
3,460 |
|
|
|
2,234 |
|
|
|
4,164 |
|
|
Operating income |
|
|
207,871 |
|
|
|
134,842 |
|
|
|
67,925 |
|
Interest expense |
|
|
27,277 |
|
|
|
25,884 |
|
|
|
36,166 |
|
Other income, net |
|
|
(3,683 |
) |
|
|
(1,716 |
) |
|
|
(2,531 |
) |
|
Income before provision for income taxes and
minority interest |
|
|
184,277 |
|
|
|
110,674 |
|
|
|
34,290 |
|
Provision for income taxes (Note 9) |
|
|
61,394 |
|
|
|
35,500 |
|
|
|
14,300 |
|
Minority interest |
|
|
3,592 |
|
|
|
1,596 |
|
|
|
1,860 |
|
|
Net income |
|
$ |
119,291 |
|
|
$ |
73,578 |
|
|
$ |
18,130 |
|
|
PER SHARE DATA |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
3.23 |
|
|
$ |
2.06 |
|
|
$ |
0.52 |
|
|
Diluted earnings per share |
|
$ |
3.13 |
|
|
$ |
2.02 |
|
|
$ |
0.51 |
|
|
Dividends per share |
|
$ |
0.68 |
|
|
$ |
0.68 |
|
|
$ |
0.68 |
|
|
Basic weighted average shares outstanding |
|
|
36,924 |
|
|
|
35,704 |
|
|
|
35,202 |
|
|
Diluted weighted average shares outstanding |
|
|
38,056 |
|
|
|
36,473 |
|
|
|
35,479 |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
- 27 -
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
As of June 30 (in thousands, except per share data) |
|
2005 |
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
43,220 |
|
|
$ |
25,940 |
|
Accounts receivable, less allowance for doubtful
accounts of $16,835 and $18,727 (Note 4) |
|
|
293,311 |
|
|
|
247,245 |
|
Inventories (Note 5) |
|
|
386,674 |
|
|
|
388,077 |
|
Deferred income taxes (Note 9) |
|
|
70,391 |
|
|
|
95,240 |
|
Other current assets |
|
|
37,466 |
|
|
|
40,443 |
|
|
Total current assets |
|
|
831,062 |
|
|
|
796,945 |
|
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Land and buildings |
|
|
274,242 |
|
|
|
269,587 |
|
Machinery and equipment |
|
|
1,062,058 |
|
|
|
1,013,090 |
|
Less accumulated depreciation |
|
|
(816,999 |
) |
|
|
(798,202 |
) |
|
Property, plant and equipment, net |
|
|
519,301 |
|
|
|
484,475 |
|
|
Other assets: |
|
|
|
|
|
|
|
|
Investments in affiliated companies |
|
|
15,454 |
|
|
|
15,775 |
|
Goodwill (Note 2) |
|
|
528,013 |
|
|
|
488,715 |
|
Intangible assets, less accumulated amortization
of $10,978 and $8,307 (Note 2) |
|
|
124,778 |
|
|
|
53,299 |
|
Deferred income taxes (Note 9) |
|
|
47,077 |
|
|
|
24,300 |
|
Other |
|
|
26,652 |
|
|
|
75,154 |
|
|
Total other assets |
|
|
741,974 |
|
|
|
657,243 |
|
|
Total assets |
|
$ |
2,092,337 |
|
|
$ |
1,938,663 |
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt and capital leases (Note 7) |
|
$ |
7,092 |
|
|
$ |
100,423 |
|
Notes payable to banks (Note 8) |
|
|
43,797 |
|
|
|
26,384 |
|
Accounts payable |
|
|
154,839 |
|
|
|
148,216 |
|
Accrued income taxes |
|
|
23,022 |
|
|
|
17,800 |
|
Accrued vacation pay |
|
|
32,052 |
|
|
|
31,449 |
|
Accrued payroll |
|
|
43,875 |
|
|
|
39,315 |
|
Accrued restructuring (Note 12) |
|
|
2,451 |
|
|
|
12,695 |
|
Other current liabilities (Note 6) |
|
|
121,530 |
|
|
|
110,245 |
|
|
Total current liabilities |
|
|
428,658 |
|
|
|
486,527 |
|
|
Long-term debt and capital leases, less current maturities (Note
7) |
|
|
386,485 |
|
|
|
313,400 |
|
Deferred income taxes (Note 9) |
|
|
59,551 |
|
|
|
67,426 |
|
Postretirement benefits (Note 10) |
|
|
37,033 |
|
|
|
42,173 |
|
Accrued pension benefits (Note 10) |
|
|
168,089 |
|
|
|
106,800 |
|
Other liabilities |
|
|
22,199 |
|
|
|
18,953 |
|
|
Total liabilities |
|
|
1,102,015 |
|
|
|
1,035,279 |
|
|
Commitments and contingencies (Note 16) |
|
|
|
|
|
|
|
|
|
Minority interest in consolidated subsidiaries |
|
|
17,460 |
|
|
|
16,232 |
|
|
SHAREOWNERS EQUITY |
|
|
|
|
|
|
|
|
Preferred stock, no par value; 5,000 shares authorized; none
issued |
|
|
|
|
|
|
|
|
Capital stock, $1.25 par value; 70,000 shares authorized;
38,242 and 37,912 shares issued |
|
|
47,805 |
|
|
|
47,390 |
|
Additional paid-in capital |
|
|
550,364 |
|
|
|
525,476 |
|
Retained earnings |
|
|
443,869 |
|
|
|
350,012 |
|
Treasury stock, at cost; 115 and 1,279 shares held |
|
|
(5,367 |
) |
|
|
(39,670 |
) |
Unearned compensation |
|
|
(12,687 |
) |
|
|
(9,025 |
) |
Accumulated other comprehensive (loss) income (Note 11) |
|
|
(51,122 |
) |
|
|
12,969 |
|
|
Total shareowners equity |
|
|
972,862 |
|
|
|
887,152 |
|
|
Total liabilities and shareowners equity |
|
$ |
2,092,337 |
|
|
$ |
1,938,663 |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
- 28 -
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30 (in thousands) |
|
2005 |
|
2004 |
|
2003 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
119,291 |
|
|
$ |
73,578 |
|
|
$ |
18,130 |
|
Adjustments for non-cash items: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
63,424 |
|
|
|
63,755 |
|
|
|
79,879 |
|
Amortization |
|
|
3,460 |
|
|
|
2,234 |
|
|
|
4,164 |
|
Loss on divestitures |
|
|
1,546 |
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
14,163 |
|
|
|
12,706 |
|
|
|
9,477 |
|
Restructuring and asset impairment charges |
|
|
4,707 |
|
|
|
|
|
|
|
14,998 |
|
Deferred income tax provision |
|
|
13,600 |
|
|
|
3,920 |
|
|
|
7,349 |
|
Other |
|
|
5,032 |
|
|
|
(2,667 |
) |
|
|
3,632 |
|
Changes in certain assets and liabilities, excluding effects
of acquisition and divestitures: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(46,074 |
) |
|
|
(22,363 |
) |
|
|
8,064 |
|
Proceeds from accounts receivable securitization |
|
|
(7,694 |
) |
|
|
18,164 |
|
|
|
3,416 |
|
Inventories |
|
|
(8,446 |
) |
|
|
10,255 |
|
|
|
38,171 |
|
Accounts payable and accrued liabilities |
|
|
16,940 |
|
|
|
25,469 |
|
|
|
(12,070 |
) |
Deferred
income taxes |
|
|
11,299 |
|
|
|
(1,808 |
) |
|
|
17,282 |
|
Other |
|
|
11,079 |
|
|
|
(5,385 |
) |
|
|
(10,948 |
) |
|
Net cash flow provided by operating activities |
|
|
202,327 |
|
|
|
177,858 |
|
|
|
181,544 |
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(88,552 |
) |
|
|
(56,962 |
) |
|
|
(49,413 |
) |
Disposals of property, plant and equipment |
|
|
3,912 |
|
|
|
4,225 |
|
|
|
1,875 |
|
Acquisition of business assets, net of cash acquired |
|
|
(136,604 |
) |
|
|
(65,846 |
) |
|
|
(166,077 |
) |
Purchase of subsidiary stock |
|
|
(5,161 |
) |
|
|
(5,030 |
) |
|
|
(6,984 |
) |
Proceeds from the sale of marketable equity securities |
|
|
|
|
|
|
17,429 |
|
|
|
|
|
Proceeds from divestiture of assets held for sale |
|
|
37,315 |
|
|
|
12,306 |
|
|
|
|
|
Other |
|
|
3,174 |
|
|
|
1,287 |
|
|
|
1,220 |
|
|
Net cash flow used for investing activities |
|
|
(185,916 |
) |
|
|
(92,591 |
) |
|
|
(219,379 |
) |
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in notes payable |
|
|
17,685 |
|
|
|
18,103 |
|
|
|
(17,324 |
) |
Net increase (decrease) in revolving and other lines of
credit |
|
|
3,500 |
|
|
|
(25,716 |
) |
|
|
(24,000 |
) |
Term debt borrowings |
|
|
617,099 |
|
|
|
424,033 |
|
|
|
351,846 |
|
Term debt repayments |
|
|
(648,218 |
) |
|
|
(495,257 |
) |
|
|
(435,900 |
) |
Borrowings for Widia acquisition, net |
|
|
|
|
|
|
|
|
|
|
165,240 |
|
Proceeds from interest rate swap termination |
|
|
|
|
|
|
|
|
|
|
15,546 |
|
Dividend reinvestment, employee benefit and stock plans |
|
|
37,577 |
|
|
|
27,000 |
|
|
|
7,606 |
|
Cash dividends paid to shareowners |
|
|
(25,434 |
) |
|
|
(24,829 |
) |
|
|
(24,498 |
) |
Other |
|
|
(2,688 |
) |
|
|
(1,325 |
) |
|
|
(1,060 |
) |
|
Net cash flow (used for) provided by financing activities |
|
|
(479 |
) |
|
|
(77,991 |
) |
|
|
37,456 |
|
|
Effect of exchange rate changes on cash and equivalents |
|
|
1,348 |
|
|
|
3,571 |
|
|
|
5,087 |
|
|
CASH AND EQUIVALENTS |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and equivalents |
|
|
17,280 |
|
|
|
10,847 |
|
|
|
4,708 |
|
Cash and equivalents, beginning of year |
|
|
25,940 |
|
|
|
15,093 |
|
|
|
10,385 |
|
|
Cash and equivalents, end of year |
|
$ |
43,220 |
|
|
$ |
25,940 |
|
|
$ |
15,093 |
|
|
SUPPLEMENTAL DISCLOSURES |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
26,083 |
|
|
$ |
24,238 |
|
|
$ |
33,434 |
|
Income taxes paid (refunded) |
|
|
40,526 |
|
|
|
37,422 |
|
|
|
(10,652 |
) |
Contribution of stock to employee defined
contribution benefit plans |
|
|
8,685 |
|
|
|
7,898 |
|
|
|
4,361 |
|
Change in fair value of interest rate swaps |
|
|
(8,452 |
) |
|
|
16,632 |
|
|
|
8,386 |
|
The accompanying notes are an integral part of these consolidated financial statements.
- 29 -
Consolidated Statements of Shareowners Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30 (in thousands) |
|
2005 |
|
2004 |
|
2003 |
|
CAPITAL STOCK |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
47,390 |
|
|
$ |
47,061 |
|
|
$ |
46,729 |
|
Issuance of capital stock under employee
benefit and stock plans |
|
|
415 |
|
|
|
329 |
|
|
|
332 |
|
|
Balance at end of year |
|
|
47,805 |
|
|
|
47,390 |
|
|
|
47,061 |
|
|
ADDITIONAL PAID-IN CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
525,476 |
|
|
|
507,343 |
|
|
|
491,263 |
|
Dividend reinvestment |
|
|
554 |
|
|
|
78 |
|
|
|
1,476 |
|
Issuance of capital stock under employee
benefit and stock plans |
|
|
24,334 |
|
|
|
18,055 |
|
|
|
14,604 |
|
|
Balance at end of year |
|
|
550,364 |
|
|
|
525,476 |
|
|
|
507,343 |
|
|
RETAINED EARNINGS |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
350,012 |
|
|
|
301,263 |
|
|
|
307,631 |
|
Net income |
|
|
119,291 |
|
|
|
73,578 |
|
|
|
18,130 |
|
Cash dividends to shareowners |
|
|
(25,434 |
) |
|
|
(24,829 |
) |
|
|
(24,498 |
) |
|
Balance at end of year |
|
|
443,869 |
|
|
|
350,012 |
|
|
|
301,263 |
|
|
TREASURY STOCK |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(39,670 |
) |
|
|
(67,268 |
) |
|
|
(72,026 |
) |
Dividend reinvestment |
|
|
1,376 |
|
|
|
2,300 |
|
|
|
1,290 |
|
Issuance of capital stock under employee
benefit and stock plans |
|
|
32,927 |
|
|
|
25,298 |
|
|
|
3,468 |
|
|
Balance at end of year |
|
|
(5,367 |
) |
|
|
(39,670 |
) |
|
|
(67,268 |
) |
|
UNEARNED COMPENSATION |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(9,025 |
) |
|
|
(9,109 |
) |
|
|
(4,856 |
) |
Issuance of capital stock under employee
benefit and stock plans |
|
|
(8,954 |
) |
|
|
(4,724 |
) |
|
|
(9,136 |
) |
Amortization of unearned compensation |
|
|
5,292 |
|
|
|
4,808 |
|
|
|
4,883 |
|
|
Balance at end of year |
|
|
(12,687 |
) |
|
|
(9,025 |
) |
|
|
(9,109 |
) |
|
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
12,969 |
|
|
|
(57,713 |
) |
|
|
(54,779 |
) |
Unrealized (loss) gain on investments, net of tax |
|
|
(88 |
) |
|
|
(193 |
) |
|
|
321 |
|
Unrealized loss on derivatives designated
and qualified as cash flow hedges, net of tax |
|
|
(1,836 |
) |
|
|
(2,254 |
) |
|
|
(4,879 |
) |
Reclassification of unrealized gains
on expired derivatives, net of tax |
|
|
2,486 |
|
|
|
6,226 |
|
|
|
5,157 |
|
Minimum pension liability adjustment, net of tax |
|
|
(68,095 |
) |
|
|
43,685 |
|
|
|
(54,696 |
) |
Foreign currency translation adjustments |
|
|
3,442 |
|
|
|
23,218 |
|
|
|
51,163 |
|
|
Other comprehensive (loss) income |
|
|
(64,091 |
) |
|
|
70,682 |
|
|
|
(2,934 |
) |
|
Balance at end of year |
|
|
(51,122 |
) |
|
|
12,969 |
|
|
|
(57,713 |
) |
|
Total shareowners equity, June 30 |
|
$ |
972,862 |
|
|
$ |
887,152 |
|
|
$ |
721,577 |
|
|
COMPREHENSIVE INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
119,291 |
|
|
$ |
73,578 |
|
|
$ |
18,130 |
|
Other comprehensive (loss) income |
|
|
(64,091 |
) |
|
|
70,682 |
|
|
|
(2,934 |
) |
|
Comprehensive income |
|
$ |
55,200 |
|
|
$ |
144,260 |
|
|
$ |
15,196 |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
- 30 -
Notes to Consolidated Financial Statements
NOTE 1 NATURE OF OPERATIONS
Kennametal is a leading global manufacturer and supplier of tooling, engineered components and
advanced materials consumed in production processes. We believe that our reputation for
manufacturing excellence and technological expertise and innovation in our principal products has
helped us achieve a leading market presence in our primary markets. We believe we are the second
largest global provider of metalcutting tools and tooling systems. End users of our products
include metalworking manufacturers and suppliers in the aerospace, automotive, machine tool and
farm machinery industries, as well as manufacturers and suppliers in the highway construction, coal
mining, quarrying and oil and gas exploration industries. Our end users products include items
ranging from airframes to coal, medical implants to oil wells and turbochargers to motorcycle
parts.
Unless otherwise specified, any reference to a year is to a fiscal year ended June 30. When used
in this annual report on Form 10-K, unless the context requires otherwise, the terms we, our
and us refer to Kennametal Inc. and its subsidiaries.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of our significant accounting policies is presented below to assist in evaluating our
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include our accounts and those of
majority-owned subsidiaries. All significant intercompany balances and transactions are eliminated.
Investments in entities of less than 50 percent of the voting stock over which we have significant
influence are accounted for on an equity basis. The factors used to determine significant influence
include, but are not limited to, the Companys management involvement in the investee, such as
hiring and setting compensation for management of the investee, the ability to make operating and
capital decisions of the investee, representation on the investees board of directors and purchase
and supply agreements with the investee. Investments in entities of less than 50 percent of the
voting stock in which we do not have significant influence are accounted for on the cost basis.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS In preparing our financial statements
in conformity with accounting principles generally accepted in the United States of America, we
make judgments and estimates about the amounts reflected in our financial statements. As part of
our financial reporting process, our management collaborates to determine the necessary information
on which to base our judgments and develop estimates used to prepare the financial statements. We
use historical experience and available information to make these judgments and estimates. However,
different amounts could be reported using different assumptions and in light of different facts and
circumstances. Therefore, actual amounts could differ from the estimates reflected in our financial
statements.
CASH AND CASH EQUIVALENTS Cash investments having original maturities of three months or less are
considered cash equivalents. Cash equivalents principally consist of investments in money market
funds.
ACCOUNTS RECEIVABLE Accounts receivable includes $5.0 million and $5.3 million of receivables from
affiliates at June 30, 2005 and 2004, respectively. We market our products to a diverse customer
base throughout the world. Trade credit is extended based upon periodically updated evaluations of
each customers ability to satisfy its obligations. We make judgments as to our ability to collect
outstanding receivables and provide allowances for the portion of receivables when collection
becomes doubtful. Accounts receivable reserves are determined based upon an aging of accounts and a
review of specific accounts.
INVENTORIES Inventories are stated at the lower of cost or market. We use the last-in, first-out
method for determining the cost of a significant portion of our U.S. inventories. The cost of the
remainder of inventories is determined under the first-in, first-out or average cost methods. When
market conditions indicate an excess of carrying costs over market value, a lower-of-cost-or-market
provision is recorded. Excess and obsolete inventory reserves are established based upon our
evaluation of the quantity of inventory on hand relative to demand. The excess and obsolete
inventory reserve at June 30, 2005 and 2004 was $59.4 million and $77.8 million, respectively.
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
operating income. Interest related to the construction of major facilities is capitalized as part
of the construction costs and is amortized over its estimated useful life.
- 31 -
Depreciation for financial reporting purposes is computed using the straight-line method over the
following estimated useful lives:
|
|
|
Building and improvements
|
|
15-40 years |
Machinery and equipment
|
|
4-15 years |
Furniture and fixtures
|
|
5-10 years |
Computer hardware and software
|
|
3-5 years |
Leased property and equipment under capital leases are amortized using the straight-line method
over the terms of the related leases.
In conjunction with the Widia acquisition, we reviewed the estimated useful lives used for then
existing Kennametal assets and determined that the current useful lives should be extended to more
appropriately match the life of the asset. Starting July 1, 2003, our useful lives of machinery and
equipment were extended from a maximum life of 10 years to 15 years. For the fiscal year ended June
30, 2003, the net effect of the change in depreciable lives of machinery and equipment would have
increased net income by $17.5 million and basic and diluted earnings per share by $0.50 and $0.49,
respectively.
LONG-LIVED ASSETS We periodically perform ongoing reviews of underperforming businesses and other
long-lived assets, including amortizable intangible assets, for impairment pursuant to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). These reviews may include an analysis of
the current operations and capacity utilization, in conjunction with the markets in which the
businesses are operating. A comparison is performed of the undiscounted projected cash flows of the
current operating forecasts to the net book value of the related assets. If it is determined that
the full value of the assets may not be recoverable, an appropriate charge to adjust the carrying
value of the long-lived assets to fair value may be required.
As a result of continued price declines caused by persistent global overcapacity and low-cost Asian
competition, we completed an assessment in June 2003 of the carrying value of certain long-lived
assets in the electronics business and recorded a pretax charge of $16.1 million as a component of
restructuring and asset impairment charges. The fixed asset impairment charge reduced the book
value of the electronics business assets to $2.6 million. This remaining value was determined
based on cash flows and estimated realizable value of the assets.
GOODWILL AND INTANGIBLE ASSETS Goodwill represents the excess of cost over the fair value of
acquired companies. Goodwill and intangible assets with indefinite useful lives are tested at least
annually for impairment. On an ongoing basis (absent of any impairment indicators), we perform our
impairment tests during the June quarter, in connection with our planning process.
The carrying amount of goodwill attributable to each segment at June 30, 2005 and 2004 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2004 |
|
Acquisition |
|
Impairment |
|
Adjustments |
|
Translation |
|
June 30, 2005 |
|
MSSG |
|
$ |
223,866 |
|
|
$ |
3,462 |
|
|
$ |
|
|
|
$ |
(13,138 |
) |
|
$ |
1,863 |
|
|
$ |
216,053 |
|
AMSG |
|
|
220,493 |
|
|
|
53,913 |
|
|
|
|
|
|
|
(2,035 |
) |
|
|
(60 |
) |
|
|
272,311 |
|
J&L Industrial
Supply |
|
|
39,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,649 |
|
Full Service Supply |
|
|
4,707 |
|
|
|
|
|
|
|
(4,707 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
488,715 |
|
|
$ |
57,375 |
|
|
$ |
(4,707 |
) |
|
$ |
(15,173 |
) |
|
$ |
1,803 |
|
|
$ |
528,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
June 30, 2003 |
|
Acquisition |
|
Impairment |
|
Adjustments |
|
Translation |
|
June 30, 2004 |
|
MSSG |
|
$ |
210,965 |
|
|
$ |
7,698 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,203 |
|
|
$ |
223,866 |
|
AMSG |
|
|
175,343 |
|
|
|
43,154 |
|
|
|
|
|
|
|
|
|
|
|
1,996 |
|
|
|
220,493 |
|
J&L Industrial
Supply |
|
|
39,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,649 |
|
Full Service Supply |
|
|
4,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,707 |
|
|
Total |
|
$ |
430,664 |
|
|
$ |
50,852 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,199 |
|
|
$ |
488,715 |
|
|
As discussed in Note 3, we completed the acquisitions of Extrude Hone in 2005 and Conforma Clad
Inc. (Conforma Clad) in 2004. These acquisitions resulted in goodwill of $51.6 million in 2005 and
$43.1 million in 2004. In 2005 and 2004, we also completed other individually immaterial
acquisitions of businesses, in which we had prior investment or business relationships, which
resulted in goodwill of $5.8 million and $7.7 million, respectively.
In 2005, we recorded a goodwill impairment charge of $4.7 million related to our Full Service
Supply (FSS) segment (see Note 3).
Adjustments
recorded during 2005 reduced goodwill $15.2 million. The identification of a tax
planning strategy resulted in the reduction of $12.1 million in net operating loss valuation
allowances that were recorded in the purchase accounting for the Widia
- 32 -
acquisition. Adjustments related to the finalization of certain restructuring accrual estimates and
deferred tax assets recorded in the purchase accounting for the Widia acquisition resulted in a
$1.0 million reduction of goodwill. The remaining adjustment of $2.0 million was the result of a
purchase accounting adjustment related to the Conforma Clad acquisition.
The components of our intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
June 30, 2004 |
|
|
Estimated |
|
Gross Carrying |
|
Accumulated |
|
Gross Carrying |
|
Accumulated |
(in thousands) |
|
Useful Life |
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
Contract-based |
|
4-15 years |
|
$ |
5,191 |
|
|
$ |
(3,703 |
) |
|
$ |
3,799 |
|
|
$ |
(3,393 |
) |
Technology-based and
other |
|
4-15 years |
|
|
44,269 |
|
|
|
(6,964 |
) |
|
|
16,137 |
|
|
|
(4,914 |
) |
Unpatented technology |
|
30 years |
|
|
28,129 |
|
|
|
(311 |
) |
|
|
|
|
|
|
|
|
Trademarks |
|
Indefinite |
|
|
52,393 |
|
|
|
|
|
|
|
37,150 |
|
|
|
|
|
Intangible pension assets |
|
N/A |
|
|
5,774 |
|
|
|
|
|
|
|
4,520 |
|
|
|
|
|
|
Total |
|
|
|
$ |
135,756 |
|
|
$ |
(10,978 |
) |
|
$ |
61,606 |
|
|
$ |
(8,307 |
) |
|
As a result of the Extrude Hone acquisition in 2005, we recorded $74.9 million of identifiable
intangible assets as follows: contract-based of $1.3 million, technology-based and other of $30.2
million, unpatented technology of $28.1 million and trademarks of $15.2 million. As a result of the
Conforma Clad acquisition in 2004, we recorded $14.2 million of identifiable intangible assets as
follows: technology-based and other of $2.6 million and trademarks of $11.5 million.
Amortization expense for intangible assets was $3.5 million, $2.2 million and $4.2 million for
2005, 2004 and 2003, respectively. Estimated amortization expense for those intangible assets for
2006 through 2010 is $5.2 million, $5.1 million, $5.0 million, $4.1 million and $3.7 million,
respectively.
PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS In the valuation of our pension and
other postretirement and postemployment benefit liabilities, management utilizes various
assumptions. We determine our discount rate based on an investment grade bond yield curve with a
duration that approximates the benefit payment timing of each plan. This rate can fluctuate based
on changes in investment grade bond yields.
The long-term rate of return on plan assets is estimated based on an evaluation of historical
returns for each asset category held by the plans, coupled with the current and short-term mix of
the investment portfolio. The historical returns are adjusted for expected future market and
economic changes. This return will fluctuate based on actual market returns and other economic
factors.
The rate of future health care costs is based on historical claims and enrollment information
projected over the next fiscal year and adjusted for administrative charges. This rate is expected
to decrease until fiscal 2010.
Future compensation rates, withdrawal rates, and participant retirement age are determined based on
historical information. These assumptions are not expected to significantly change. Mortality rates
are determined based on review of published mortality tables.
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 capital stock under stock option grants and
restricted stock awards. The difference between basic and diluted earnings per share relates solely
to the effect of capital stock options and restricted stock awards.
For purposes of determining the number of dilutive shares outstanding, weighted average shares
outstanding for basic earnings per share calculations were increased due solely to the dilutive
effect of unexercised capital stock options and restricted stock awards by 1.1 million, 0.8 million
and 0.3 million shares in 2005, 2004 and 2003, respectively. Unexercised stock options to purchase
our capital stock of 0.3 million, 0.6 million and 1.7 million shares at June 30, 2005, 2004 and
2003, respectively, are not included in the computation of diluted earnings per share because the
option exercise price was greater than the average market price.
REVENUE RECOGNITION We recognize revenue upon shipment of our products. Our general conditions of
sale explicitly state that the delivery of our products is F.O.B. shipping point and that title and
all risks of loss and damages pass to the buyer upon delivery of the sold products to the common
carrier.
- 33 -
Our general conditions of sale explicitly state that acceptance of the conditions of shipment are
considered to have occurred unless written notice of objection is received by Kennametal within 10
calendar days of the date specified on the invoice. We do not ship
product unless we have documentation authorizing shipment to our customers. Our products are
consumed by our customers in the manufacture of their products. Historically, we have experienced
very low levels of returned product and do not consider the effect of returned product to be
material. We have recorded an estimated returned goods allowance to provide for any potential
product returns.
We warrant that products and services sold are free from defects in material and workmanship under
normal use and service when correctly installed, used and maintained. This warranty terminates 30
days after delivery of the product to the customer, and does not apply to products that have been
subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be
returned to Kennametal, only after inspection and approval by Kennametal and upon receipt by
customer of shipping instructions from Kennametal. We have included an estimated allowance for
warranty returns in our returned goods allowance discussed above.
Prior to the divestiture in 2005, FSS management contracts contained two major deliverables,
product procurement and inventory management. Under the fixed fee contracts, we recognized revenue
evenly over the contract term. Revenue was recognized upon shipment for cost plus contracts.
STOCK-BASED COMPENSATION Stock options generally are granted to eligible employees with a stock
price equal to fair market value at the date of grant. Options are exercisable under specific
conditions for up to 10 years from the date of grant. As permitted under SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS 123), we have elected to measure compensation expense related
to stock options in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) and related interpretations, which uses the intrinsic value
method. In addition to stock option grants, the 2002 Stock and Incentive Plan permits the award of
restricted stock to directors, officers and key employees. Expense associated with restricted stock
grants is amortized over the vesting period. The expense for these awards is the same under the
fair value method or intrinsic value method. The Company follows a nominal vesting approach for
both options and restricted stock. If compensation expense was determined based on the estimated
fair value of options granted in 2005, 2004 and 2003, consistent with
the methodology in SFAS 123,
our 2005, 2004 and 2003 net income and earnings per share would be reduced to the pro forma amounts
indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net income, as reported |
|
$ |
119,291 |
|
|
$ |
73,578 |
|
|
$ |
18,130 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects |
|
|
(8,867 |
) |
|
|
(8,918 |
) |
|
|
(9,009 |
) |
Add: Total stock-based employee compensation expense
determined under intrinsic value based method for all
awards, net of related tax effects |
|
|
3,697 |
|
|
|
3,269 |
|
|
|
3,576 |
|
|
Total incremental pro forma stock-based compensation |
|
|
(5,170 |
) |
|
|
(5,649 |
) |
|
|
(5,433 |
) |
|
Pro forma net income |
|
$ |
114,121 |
|
|
$ |
67,929 |
|
|
$ |
12,697 |
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
3.23 |
|
|
$ |
2.06 |
|
|
$ |
0.52 |
|
|
Basic pro forma |
|
$ |
3.09 |
|
|
$ |
1.90 |
|
|
$ |
0.36 |
|
|
Diluted as reported |
|
$ |
3.13 |
|
|
$ |
2.02 |
|
|
$ |
0.51 |
|
|
Diluted pro forma |
|
$ |
3.00 |
|
|
$ |
1.86 |
|
|
$ |
0.36 |
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Risk-free interest rate |
|
|
3.7 |
% |
|
|
3.0 |
% |
|
|
3.1 |
% |
Expected life (years) |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
Expected volatility |
|
|
28.4 |
% |
|
|
35.1 |
% |
|
|
34.2 |
% |
Expected dividend yield |
|
|
1.6 |
% |
|
|
1.7 |
% |
|
|
2.1 |
% |
|
RESEARCH AND DEVELOPMENT COSTS Research and development costs of $23.8 million, $22.3 million and
$23.6 million in 2005, 2004 and 2003, respectively, were expensed as incurred. These costs are
included in operating expense in the consolidated statements of income.
- 34 -
SHIPPING AND HANDLING FEES AND COSTS All fees billed to customers for shipping and handling are
classified as a component of net sales. All costs associated with shipping and handling are
classified as a component of cost of goods sold.
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. The valuation allowance
was $37.4 million and $53.1 million at June 30, 2005 and 2004, respectively (see Note 9).
FINANCIAL INSTRUMENTS AND DERIVATIVES As part of our financial risk management program, we use
certain derivative financial instruments. We do not enter into derivative transactions for
speculative purposes and therefore hold no derivative instruments for trading purposes. We use
derivative financial instruments to dampen the effects of changes in foreign exchange rates on our
consolidated results and to achieve our targeted mix of fixed and floating interest rates on
outstanding debt. We account for derivative instruments as a hedge of the related asset, liability,
firm commitment or anticipated transaction when the derivative is specifically designated as a
hedge of such items. Our objective in managing foreign exchange exposures with derivative
instruments is to reduce both earnings and cash flow volatility, allowing us to focus our attention
on business operations. With respect to interest rate management, these derivative instruments
allow us to achieve our targeted fixed-to-floating interest rate mix as a separate decision from
funding arrangements in the bank and public debt markets. We measure hedge effectiveness by
assessing the changes in the fair value or expected future cash flows of the hedged item. The
ineffective portions are recorded in other income or expense in the current period. In addition,
other forward contracts hedging significant cross-border intercompany loans are considered other
derivatives and therefore do not qualify for hedge accounting. These contracts are recorded at fair
value in the balance sheet, with the offset to other income, net.
CASH FLOW HEDGES Currencies Forward contracts, purchased options and range forward contracts (a
transaction where both a put option is purchased and a call option is sold), designated as cash
flow hedges, hedge anticipated cash flows from cross-border intercompany sales of products and
services. Gains and losses realized on these contracts at maturity are recorded in accumulated
other comprehensive loss, net of tax, and are recognized as a component of other income, net when
the underlying sale of products or services are recognized into earnings. We recognized expense of
$0.1 million, $0.2 million and $0.7 million as a component of other income, net, in 2005, 2004 and
2003, respectively, related to hedge ineffectiveness. The time value component of the fair value of
purchased options and range forwards is excluded from the assessment of hedge effectiveness.
Assuming market rates remain constant with the rates at June 30, 2005, we expect to recognize into
earnings in the next 12 months gains on outstanding derivatives of $1.3 million.
Interest Rates Floating-to-fixed interest rate swap agreements, designated as cash flow hedges,
hedge our exposure to interest rate changes on a portion of our floating rate debt. The interest
rate swap converts a portion of our floating rate debt to fixed rate debt. We record the fair value
of these contracts in the balance sheet, with the offset to accumulated other comprehensive loss,
net of tax. During 2003, we entered into interest rate swap agreements to convert $53.5 million of
our floating rate debt to fixed rate debt. As of June 30, 2005 and 2004, we recorded a loss of $0.5
million and a gain of $0.2 million, respectively, on these contracts, which has been recorded in
other comprehensive loss. The contracts require periodic settlement; the difference between the
amounts to be received and paid under interest rate swap agreements is recognized in interest
expense. Assuming market rates remain constant with rates at June 30, 2005, we would expect to
recognize into earnings in the next 12 months losses on outstanding derivatives of $0.2 million.
FAIR VALUE HEDGES Interest Rates Fixed-to-floating interest rate swap agreements, designated as
fair value hedges, hedge our exposure to fair value fluctuations on a portion of our fixed rate
10-year Senior Unsecured Notes due to changes in the overall interest rate environment. These
interest rate swap agreements convert a portion of our fixed rate debt to floating rate debt.
During 2002, we entered into interest rate swap agreements, which mature in 2012 to convert $200
million of our fixed rate debt to floating rate debt. These contracts require periodic settlement;
the difference between amounts to be received and paid under the interest rate swap agreements is
recognized in interest expense. In April 2003, we terminated these contracts and received a cash
payment of $15.5 million. This gain is amortized as a component of interest expense over the life
of the debt using the effective interest rate method. Upon termination of the contracts in April
2003, we entered into a new interest rate swap agreement with a notional amount of $200 million and
a maturity date of June 2012. As of June 30, 2005 and 2004, we recorded a gain of $0.2 million and
a loss of $8.3 million, respectively, related to these contracts. We record the gain or loss of
these contracts in the balance sheet, with the offset to the carrying value of the Senior Unsecured
Notes. Any gain or loss resulting from changes in the fair value of these contracts offset the
corresponding gains or losses from changes in the fair values of the Senior Unsecured Notes. As a
result, changes in the fair value of these contracts had no net impact on current year earnings.
- 35 -
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. The local currency is the functional currency of
most of our locations.
NEW ACCOUNTING STANDARDS
In July 2004, the Company adopted FASB Staff Position (FSP) No. 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(FSP 106-2). FSP 106-2 provides guidance on the accounting for the effects of the act for employers
that sponsor postretirement health care plans that provide prescription drug benefits and requires
those employers to provide certain disclosures regarding the effect of the federal subsidy provided
by the act. See Note 10 for discussion of the effect of adoption of this FSP and required
disclosures.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment (revised 2004) (SFAS
123(R)). SFAS 123(R) is a revision of SFAS 123, and supersedes APB 25. SFAS 123(R) eliminates the
alternative to use the intrinsic value method of accounting that was provided in SFAS 123, which
generally resulted in no compensation expense recorded in the financial statements related to the
issuance of stock options under the Companys 2002 Stock and Incentive Plan. SFAS 123(R) requires
that the cost resulting from all share-based payment transactions be recognized in the financial
statements. This standard established fair-value-based measurement method in accounting for
generally all share-based payment transactions with employees.
The Company adopted SFAS 123(R) effective July 1, 2005. The Company is required to record
compensation expense for all awards granted after the date of adoption and for the unvested portion
of previously granted awards that remain outstanding at the date of adoption. Beginning July 1,
2005, the Company recorded stock-based compensation expense for the cost of stock options and
restricted stock issued under the 2002 Stock and Incentive Plan.
Pretax stock-based compensation expense
for 2006 related to unvested awards as of July 1, 2005 and awards granted to date in 2006 is
estimated to be approximately $12.0 million.
SFAS 123(R) requires that stock-based compensation expense be recognized over the period from the
date of grant to the date when the award is no longer contingent on the employee providing
additional service (substantive vesting period). The Companys 2002 Stock and Incentive Plan
provides that stock option awards for employees and directors vest up to 2 years after retirement
and restricted stock awards vest immediately upon retirement for employees and directors. In
periods prior to the adoption of SFAS 123(R) (pro forma disclosure only), the Company recorded
stock-based compensation for awards to retirement-eligible employees over the awards stated
vesting period (nominal vesting period). With the adoption of SFAS 123(R), the Company will
continue to follow the nominal vesting period approach for the unvested portion of awards granted
before the adoption of SFAS 123(R) and follow the substantive vesting period approach for awards
granted after the adoption of SFAS 123(R). The transition to the substantive vesting approach did
not have a material impact on pro forma disclosures previously made under SFAS 123.
In December 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4. This standard clarifies the accounting for abnormal amounts of certain manufacturing
costs and was effective for the Company beginning after July 1, 2005.The adoption of this standard
did not have a material impact on the Companys financial statements.
In December 2004, the FASB issued FSP No. 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision with the American Jobs Creation Act of 2004 (FSP 109-2).
FSP 109-2 allows companies evaluating the repatriation provision of the act to apply the SFAS No.
109, Accounting for Income Taxes, provisions as it decides on a plan for reinvestment or
repatriation of its unremitted foreign earnings. This FSP requires certain disclosures for
companies that have not completed evaluation of the repatriation provision of the act. See Note 9
for discussion of the effect of adoption of the act and required disclosures.
RECLASSIFICATIONS Certain amounts in the prior years consolidated financial statements have been
reclassified to conform with the current-year presentation. A reclassification adjustment of $2.9
million was made between current and long-term deferred tax liabilities as of June 30, 2004 in the
condensed consolidated balance sheet. Long-term revolver borrowings and repayments have been
presented on a gross basis in the condensed consolidated statement of cash flows for the years
ended June 30, 2004 and 2003.
- 36 -
NOTE 3 ACQUISITIONS AND DIVESTITURES
Effective May 1, 2005, we divested our FSS segment for a selling price of $39.3 million, subject to
post-closing adjustment. This agreement includes a four-year supply agreement that management deems
to be both quantitatively and qualitatively material to the overall operations of the disposed
component and constitutes significant continuing involvement as defined in SFAS 144. As such, the
results of operations of FSS prior to the divestiture are reported in continuing operations. The
Company completed an impairment analysis in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), as the estimated selling price was below the fair value of the
business absent the sale. We recorded an impairment charge related to FSS goodwill of $4.7 million
as a result of this analysis. During the quarter ended March 31, 2005, we recorded a charge of $1.5
million to record the assets of this business at their estimated fair market value less cost to
sell. This charge is included in operating expense.
Effective March 1, 2005, we acquired Extrude Hone for $134.1 million, subject to post-closing
adjustment. This purchase price includes the actual purchase price of $143.8 million, plus direct
acquisition costs of $0.9 million, less $10.6 million of acquired cash. The Company acquired
Extrude Hone to expand its product and solutions offerings in the area of engineered components.
Extrude Hone supplies market-leading engineered component process technology to customers in a
variety of industries around the world. This process technology focuses on component deburring,
polishing and producing controlled radii. We financed the acquisition with borrowings under our
2004 Credit Agreement. Management does not consider this to be a material acquisition. We accounted
for the acquisition in accordance with SFAS No. 141, Business Combinations (SFAS 141). Management
has estimated the fair value of tangible and intangible assets acquired by considering a number of
factors, including valuations or appraisals. Based on these fair values, we have recorded $51.6
million of goodwill and $74.9 million of other intangible assets. None of this goodwill is
deductible for tax purposes. Of the $74.9 million of identifiable intangible assets, $59.7 million
have a definite life and therefore will be amortized over their remaining useful lives. The
weighted average useful life of the amortizable intangible assets is 21.5 years as of the
acquisition date. The preliminary purchase price allocations are subject to adjustment and may be
modified within one year from the acquisition. Subsequent changes are not expected to have a
material effect on our consolidated financial position. Extrude Hones operating results have been
included in our consolidated results since March 1, 2005 and are included in the Advanced Materails
Solutions Group (AMSG) segment (see Note 18).
The Company acquired all of the outstanding common stock of Conforma Clad for $65.9 million,
including a post-closing purchase price adjustment of $1.2 million and direct acquisition costs of
$0.1 million, effective March 1, 2004. The Company acquired
Conforma Clad to expand its product and
solutions offerings in the area of extreme wear environments involving corrosion, erosion and
abrasion. We financed the acquisition with borrowings under our 2002 Credit Agreement. Conforma
Clads operating results have been included in our consolidated results since March 1, 2004 and are
included in the AMSG segment (see Note 18). In accordance with SFAS 141, we accounted for the
acquisition using the purchase method of accounting. Accordingly, the purchase price allocations
have been made based upon managements estimate of fair value of net assets acquired, resulting in
the recognition of approximately $43.1 million of goodwill and $14.2 million of other intangibles.
None of this goodwill is deductible for tax purposes. Of the $14.2 million of identifiable
intangible assets, approximately $1.2 million have a definite life and therefore will be amortized
over their remaining useful lives. The weighted average useful life of the amortizable intangible
assets is 7.7 years as of the acquisition date.
During fiscal 2004, we completed the sale of the mining and construction business of Kennametal
Widia India Limited, which was a part of the AMSG segment, for approximately $14.3 million. The
Company received $12.3 million in net proceeds related to the sale of this business. The Company
satisfied certain conditions related to the property sold and received the remaining $2.0 million
due under the sale agreement during the March 2005 quarter. Under the working capital adjustment
provision of the agreement, the purchaser claimed that a reduction of the purchase price was
required. The Company settled this adjustment for an immaterial amount during the March 2005
quarter. This agreement includes a five-year supply agreement that management deems to be both
quantitatively and qualitatively material to the overall operations of the disposed component and
constitutes significant continuing involvement as defined in SFAS No. 144. As such, the results of
its operations prior to the divestiture are reported in continuing operations. This transaction
did not have a material impact on our results of operations.
On August 30, 2002, we purchased the Widia Group (Widia) in Europe and India from Milacron Inc. for
EUR 188 million ($185.3 million) subject to a purchase price adjustment. On February 12, 2003,
Milacron Inc. and Kennametal signed a settlement agreement with respect to the calculation of the
post-closing purchase price adjustment for the Widia acquisition pursuant to which Milacron paid
Kennametal EUR 18.8 million ($20.1 million) in cash. The net cash purchase price of $167.1 million
includes the actual purchase price of $185.3 million less the settlement of $20.1 million plus $6.2
million of direct acquisition costs ($1.1 million paid in 2002 and $5.1 million paid in 2003) less
$4.3 million of acquired cash. We financed the acquisition with funds borrowed under the 2002
Credit Agreement. The acquisition of Widia improves our global competitiveness, strengthens our
European position and represents a strong platform for increased penetration in Asia. Widias
operating results have been included in our consolidated results since August 30, 2002.
- 37 -
The unaudited pro forma consolidated financial data presented below gives effect to the Widia
acquisition as if it had occurred as of the beginning of the period presented. The pro forma
adjustments are based upon available information and certain assumptions that we believe are
reasonable, including additional interest expense and amortization that resulted from the
transaction, net of any applicable income tax effects. The unaudited pro forma consolidated
financial data is not necessarily indicative of the operating results that would have occurred had
the acquisition been consummated on the date indicated, nor are they indicative of future operating
results. Except for actions actually taken as of and since the close of the transaction and for
which any related impact would be included in the actual results through the period end,
anticipated cost savings have not been reflected in this pro forma presentation. The unaudited pro
forma consolidated financial data should be read in conjunction with the historical consolidated
financial statements and accompanying notes.
|
|
|
|
|
Twelve months ended June 30 (in thousands, except per share data) |
|
2003 |
|
PRO FORMA CONSOLIDATED FINANCIAL DATA
|
|
|
|
|
Sales |
|
$ |
1,794,351 |
|
Net income |
|
|
13,489 |
|
Basic earnings per share |
|
|
0.38 |
|
Diluted earnings per share |
|
|
0.38 |
|
NOTE 4 ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
Since 1999, we have had an agreement with a financial institution whereby we securitized, on a
continuous basis, an undivided interest in a specific pool of our domestic trade accounts
receivable. We were permitted to securitize up to $100.0 million of accounts receivable under this
agreement. In July 2003, we entered into a new securitization program (2003 Securitization
Program), which also permitted us to securitize up to $100.0 million of accounts receivable. The
2003 Securitization Program was amended on September 19, 2003, permitting us to securitize up to
$125.0 million of accounts receivable. The 2003 Securitization Program provides for a co-purchase
arrangement, whereby two financial institutions participate in the purchase of our accounts
receivable. Pursuant to this agreement, we, and certain of our domestic subsidiaries, sell our
domestic accounts receivable to Kennametal Receivables Corporation (KRC), a wholly-owned,
bankruptcy-remote subsidiary. A bankruptcy-remote subsidiary is a company that has been structured
to make it highly unlikely that it would be drawn into a bankruptcy of Kennametal Inc., or any of
our other subsidiaries. KRC was formed to purchase these accounts receivable and sell participating
interests in such accounts receivable to the financial institutions, which in turn purchase and
receive ownership and security interests in those assets. As collections reduce the amount of
accounts receivable included in the pool, we sell new accounts receivable to KRC, which in turn
securitizes these new accounts receivable with the financial institutions. The actual amount of
accounts receivable securitized each month is a function of the net change (new billings less
collections) in the specific pool of domestic accounts receivable, the impact of detailed
eligibility requirements in the agreement (e.g., the aging, terms of payment, quality criteria and
customer concentrations), and the application of various reserves which are typically in trade
receivable securitization transactions. A decrease in the amount of eligible accounts receivable
could result in our inability to continue to securitize all or a portion of our accounts
receivable. It is not unusual, however, for the amount of our eligible accounts receivable to vary
by up to $5.0 million to $10.0 million per month.
The financial institutions charge us fees based on the level of accounts receivable securitized
under this agreement and the commercial paper market rates plus the financial institutions cost to
administer the program. The costs incurred under this program, $3.2 million, $1.7 million and $1.9
million in 2005, 2004 and 2003, respectively, are accounted for as a component of other income,
net.
At June 30, 2005 and 2004, we securitized accounts receivable of $109.8 million and $117.5 million,
respectively, under this program. Our subordinated retained interests in accounts receivable
available for securitization and recorded as a component of accounts receivable were $41.2 million
and $41.5 million at June 30, 2005 and 2004, respectively. We estimate the fair value of our
retained interests using a discounted cash flow analysis. As of June 30, 2005, key economic
assumptions applied in the discounted cash flow analysis were a discount rate of 2.99 percent and
an assumed life of the receivables of 30 days. Fair value of our retained interests approximates
carrying value. A hypothetical change of 20 percent in the discount rate or the estimated life of
the receivables securitized does not have a material effect on the fair value of our retained
interests. The Company continues to service the sold receivables and is compensated at what we
believe to be market rates. Accordingly, no servicing asset or liability has been recorded.
Delinquencies and write-offs related to these receivables were not material for the years ended
June 30, 2005, 2004 and 2003.
Cash flows related to our securitization program represent collections of previously securitized
receivables and proceeds from the securitization of new receivables. Collections and sales occur on
a daily basis. As a result, net cash flows vary based on the ending balance of receivables
securitized. The net (repayments) proceeds from accounts receivable securitization for the years
ended June 30, 2005, 2004 and 2003 were ($7.7) million, $18.2 million and $3.4 million,
respectively. In 2005, we recorded net repayments due to
- 38 -
the repayment of approximately $20.0 million of accounts receivable previously included in the
securitization program and sold in the divestiture of FSS.
The 2003 Securitization Program is a three-year program, which contains certain provisions that
require annual approval. It is our intention to continuously obtain such approval when required.
Non-renewal of this securitization program would result in our requirement to otherwise finance the
amounts securitized. In the event of a decrease of our eligible accounts receivable or non-renewal
or non-annual approval of our securitization program, we would have to utilize alternative sources
of capital to fund that portion of our working capital needs. We anticipate renewing the program in
June 2006 and will determine at that time whether the economics favor an annual or multi-year
renewal.
NOTE 5 INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
Finished goods |
|
$ |
244,562 |
|
|
$ |
264,134 |
|
Work in process and powder blends |
|
|
132,709 |
|
|
|
110,992 |
|
Raw materials and supplies |
|
|
40,992 |
|
|
|
37,322 |
|
|
|
|
|
|
|
|
Inventories at current cost |
|
|
418,263 |
|
|
|
412,448 |
|
Less LIFO valuation |
|
|
(31,589 |
) |
|
|
(24,371 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
386,674 |
|
|
$ |
388,077 |
|
|
|
|
|
|
|
|
We used the LIFO method of valuing our inventories for approximately 43 percent and 41 percent of
total inventories at June 30, 2005 and 2004, respectively.
NOTE 6 OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
Accrued employee benefits |
|
$ |
43,762 |
|
|
$ |
38,085 |
|
Payroll, state and local taxes |
|
|
9,207 |
|
|
|
11,240 |
|
Accrued interest expense |
|
|
1,017 |
|
|
|
1,574 |
|
Environmental reserve |
|
|
4,536 |
|
|
|
4,907 |
|
Other accrued expenses |
|
|
63,008 |
|
|
|
54,439 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
121,530 |
|
|
$ |
110,245 |
|
|
|
|
|
|
|
|
NOTE 7 LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital lease obligations consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
|
|
7.20% Senior Unsecured Notes due 2012 net of discount of $0.8 million and $0.9
million for 2005 and 2004, respectively. Also including interest rate
swap adjustments in 2005 of $12.7 million
and $5.7 million in 2004. |
|
$ |
311,971 |
|
|
$ |
304,818 |
|
|
|
|
Credit Agreement: |
|
|
|
|
|
|
|
|
U.S. Dollar-denominated borrowings, 4.13% to 4.16% in 2005 and 2.57% in 2004, due 2010 |
|
|
38,500 |
|
|
|
25,000 |
|
Euro-denominated borrowings, 2.84% in 2005 and 2.98% to 3.15% in 2004, due 2010 |
|
|
34,416 |
|
|
|
73,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Credit Agreement borrowings |
|
|
72,916 |
|
|
|
98,096 |
|
Lease of office facilities and equipment with terms expiring through 2015 at 3.25% to
12.27% in 2005 and
2004 |
|
|
7,547 |
|
|
|
9,435 |
|
Other |
|
|
1,143 |
|
|
|
1,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and capital leases |
|
|
393,577 |
|
|
|
413,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities: |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
(3,874 |
) |
|
|
(98,477 |
) |
Capital leases |
|
|
(3,218 |
) |
|
|
(1,946 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current maturities |
|
|
(7,092 |
) |
|
|
(100,423 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases |
|
$ |
386,485 |
|
|
$ |
313,400 |
|
|
|
|
- 39 -
Senior Unsecured Notes On June 19, 2002, we issued $300 million of 7.2% Senior Unsecured Notes
due 2012 (Senior Unsecured Notes). These notes were issued at 99.629% of the face amount and
yielded $294.3 million of net proceeds after related financing fees. The proceeds of this debt
issuance were utilized to repay senior bank indebtedness. Interest is payable semi-annually on June
15th and December 15th of each year commencing December 15, 2002. The Senior Unsecured Notes
contain covenants that restrict our ability to create liens, enter into sale-leaseback transactions
or certain consolidations or mergers, or sell all or substantially all of our assets. In April
2003, we terminated interest rate swap agreements that converted the interest rate on $200 million
of the Senior Unsecured Notes from fixed to floating interest rates. This transaction resulted in
cash proceeds of $15.5 million. This gain is being amortized as a component of interest expense
over the life of the debt using the effective interest rate method. During 2003, we entered into
new interest rate swap agreements with a notional amount of $200 million, and a maturity date of
June 2012. As of June 30, 2005 and 2004, we recorded a gain of $0.2 million and a loss of $8.3
million, respectively, related to these contracts. We record the gain or loss on these contracts in
the balance sheet, with the offset to the carrying value of the Senior Unsecured Notes.
2004 Credit Agreement In October 2004, we entered into a five-year, multi-currency, revolving
credit facility with a group of financial institutions (2004 Credit Agreement), which amended our
2002 Credit Agreement discussed below. The 2004 Credit Agreement permits revolving credit loans of
up to $500 million for working capital, capital expenditures and general corporate purposes. The
2004 Credit Agreement allows for borrowings in U.S. dollars, euro, Canadian dollars, pound sterling
and Japanese yen. Interest payable under the 2004 Credit Agreement is based upon the type of
borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the
prime rate or the Federal Funds effective rate plus 0.50 percent or (3) fixed as negotiated by the
Company.
The 2004 Credit Agreement contains various covenants with which we must be in compliance, including
two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage
ratio (as those terms are defined in the agreement). As of June 30, 2005, outstanding borrowings
under this agreement were $72.9 million. We had the ability to borrow under the agreement or
otherwise have additional debt of up to $530.6 million as of June 30, 2005 and be in compliance
with the maximum leverage ratio financial covenant.
Borrowings under the 2004 Credit Agreement are guaranteed by our significant domestic subsidiaries.
Future principal maturities of long-term debt are $3.9 million, $0.3 million, $0.1 million, $0.1
million and $69.5 million, respectively, in 2006 through 2010.
2002 Credit Agreement In June 2002, we entered into a three-year, multi-currency, revolving credit
facility with a group of financial institutions (2002 Credit Agreement). The 2002 Credit Agreement
originally permitted revolving credit loans of up to $650 million for working capital, capital
expenditures and general corporate purposes. The 2002 Credit Agreement allowed for borrowings in
U.S. dollars, euro, Canadian dollars, pound sterling and Japanese yen. In June 2003, we provided
written notice to the administrative agent indicating our decision to reduce the 2002 Credit
Agreement from $650 million to $500 million. This resulted in a write-down of a portion of deferred
financing fees of $0.5 million. Interest payable under the 2002 Credit Agreement was based upon the
type of borrowing under the facility and may be (1) the greater of the prime rate the federal
funds effective rate plus 0.50 percent, (2) Euro-currency rates plus an applicable margin or (3) a
quoted fixed rate offered by one or more lenders at the time of borrowing.
The 2002 Credit Agreement contained various covenants with which we were required to be in
compliance, including three financial covenants: a maximum leverage ratio, a maximum fixed charge
coverage ratio and a minimum consolidated net worth. As of June 30, 2004, outstanding borrowings
under this agreement were $98.1 million; we had the ability to borrow under the agreement or
otherwise have additional debt of up to $273.7 million as of June 30, 2004 and be in compliance
with the maximum leverage ratio financial covenant. The maximum leverage ratio financial covenant
required that we maintain at the end of each fiscal quarter a specified consolidated leverage ratio
(as that term is defined in the agreement).
- 40 -
Future minimum lease payments under capital leases for the next five years and thereafter in total
are as follows:
|
|
|
|
|
(in thousands) |
|
|
|
|
2006 |
|
$ |
3,596 |
|
2007 |
|
|
1,568 |
|
2008 |
|
|
1,539 |
|
2009 |
|
|
183 |
|
2010 |
|
|
184 |
|
After 2010 |
|
|
1,433 |
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments |
|
|
8,503 |
|
Less amount representing interest |
|
|
(956 |
) |
|
|
|
|
|
|
|
|
|
Amount recognized as capital lease obligation |
|
$ |
7,547 |
|
|
|
|
|
Our collateralized debt at June 30, 2005 and 2004 is comprised of industrial revenue bond
obligations of $0.9 million and $1.1 million, respectively, and the capitalized lease obligations
of $7.5 million and $9.4 million, respectively. These obligations are collateralized by the
underlying assets.
NOTE 8 NOTES PAYABLE AND LINES OF CREDIT
Notes payable to banks of $43.8 million and $26.4 million at June 30, 2005 and 2004, respectively,
represent short-term borrowings under credit lines with commercial banks. These credit lines,
translated into U.S. dollars at June 30, 2005 exchange rates, totaled $217.9 million at June 30,
2005, of which $174.1 million was unused. The weighted average interest rate for notes payable and
lines of credit was 3.99 percent and 2.43 percent at June 30, 2005 and 2004, respectively.
NOTE 9 INCOME TAXES
Income before income taxes and the provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Income before provision for income taxes and minority interest: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
68,699 |
|
|
$ |
61,355 |
|
|
$ |
15,954 |
|
International |
|
|
115,578 |
|
|
|
49,319 |
|
|
|
18,336 |
|
|
|
|
|
|
|
|
|
|
|
Total income before provision for income taxes and minority interest |
|
$ |
184,277 |
|
|
$ |
110,674 |
|
|
$ |
34,290 |
|
|
|
|
|
|
|
|
|
|
|
Current income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
19,298 |
|
|
$ |
12,016 |
|
|
$ |
(5,362 |
) |
State |
|
|
2,191 |
|
|
|
(140 |
) |
|
|
55 |
|
International |
|
|
26,305 |
|
|
|
19,704 |
|
|
|
12,258 |
|
|
|
|
|
|
|
|
|
|
|
Total current income taxes |
|
|
47,794 |
|
|
|
31,580 |
|
|
|
6,951 |
|
Deferred income taxes |
|
|
13,600 |
|
|
|
3,920 |
|
|
|
7,349 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
61,394 |
|
|
$ |
35,500 |
|
|
$ |
14,300 |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
33.3 |
% |
|
|
32.1 |
% |
|
|
41.7 |
% |
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) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Income taxes at U.S. statutory rate |
|
$ |
64,497 |
|
|
$ |
38,736 |
|
|
$ |
12,002 |
|
State income taxes, net of federal tax benefits |
|
|
1,162 |
|
|
|
2,321 |
|
|
|
915 |
|
Combined tax effects of international income |
|
|
(2,873 |
) |
|
|
(11,037 |
) |
|
|
(8,334 |
) |
Change in valuation allowance and other tax contingencies |
|
|
(5,470 |
) |
|
|
5,586 |
|
|
|
10,253 |
|
Capital loss utilization |
|
|
|
|
|
|
|
|
|
|
(3,344 |
) |
Impact of asset impairment charge |
|
|
1,004 |
|
|
|
|
|
|
|
4,765 |
|
Other |
|
|
3,074 |
|
|
|
(106 |
) |
|
|
(1,957 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
61,394 |
|
|
$ |
35,500 |
|
|
$ |
14,300 |
|
|
|
|
|
|
|
|
|
|
|
- 41 -
The components of net deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
60,557 |
|
|
$ |
64,999 |
|
Inventory valuation and reserves |
|
|
24,741 |
|
|
|
26,571 |
|
Pension benefits |
|
|
25,917 |
|
|
|
|
|
Other postretirement benefits |
|
|
16,477 |
|
|
|
21,236 |
|
Accrued employee benefits |
|
|
22,822 |
|
|
|
17,736 |
|
Other accrued liabilities |
|
|
15,477 |
|
|
|
19,547 |
|
Intangible assets |
|
|
|
|
|
|
17,105 |
|
Hedging activities |
|
|
8,304 |
|
|
|
11,310 |
|
Marketable equity securities |
|
|
276 |
|
|
|
222 |
|
FTC carryforward |
|
|
|
|
|
|
1,995 |
|
Other |
|
|
2,676 |
|
|
|
5,693 |
|
|
|
|
|
|
|
|
Total |
|
|
177,247 |
|
|
|
186,414 |
|
Valuation allowance |
|
|
(37,377 |
) |
|
|
(53,051 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
139,870 |
|
|
$ |
133,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Tax depreciation in excess of book |
|
$ |
64,386 |
|
|
$ |
59,204 |
|
Pension benefits |
|
|
|
|
|
|
15,578 |
|
Intangible assets |
|
|
11,362 |
|
|
|
|
|
Other |
|
|
7,079 |
|
|
|
7,224 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
$ |
82,827 |
|
|
$ |
82,006 |
|
|
|
|
|
|
|
|
Total net deferred tax assets/liabilities |
|
$ |
57,043 |
|
|
$ |
51,357 |
|
|
|
|
|
|
|
|
Deferred income taxes were not provided on cumulative undistributed earnings of international
subsidiaries and affiliates. At June 30, 2005, unremitted earnings of the Companys non-U.S.
subsidiaries were determined to be permanently reinvested. It is not practical to estimate the
income tax effect that might be incurred if earnings were remitted to the United States. The
Company is currently evaluating what effect the American Jobs Creation Act of 2004 will have on its
effective tax rate, including the effect of a provision within the act that provides for a special
one-time tax deduction of 85.0 percent of foreign earnings that are repatriated to the United
States, as defined by the act. The Company expects to complete this evaluation during the second
quarter of fiscal 2006. The Company is considering repatriating, under the act, an amount between
$0.0 and $200.0 million, which would result in an estimated tax cost between $0.0 and $19.0
million. Until its evaluation is completed, the unremitted earnings of the Companys foreign
investments continue to be considered permanently reinvested, and accordingly, no deferred tax
liability has been established.
Included in deferred tax assets at June 30, 2005 are unrealized tax benefits totaling $60.6 million
related to net operating loss carryforwards for foreign and state income tax purposes. Of that
amount, $1.7 million expires through June 2010, $1.0 million expires through 2015, $4.8 million
expires through 2020, $5.9 million expires through 2025, and the remaining $47.2 million do not
expire. The realization of these tax benefits is contingent on future taxable income in these
jurisdictions. As of June 30, 2005, a valuation allowance of $26.5 million has been placed against
a portion of these assets, resulting in a net deferred tax asset related to net operating loss
carryforwards of $34.1 million. Of this amount, $5.2 million relates to state jurisdictions, $25.9
million relates to Germany, and the remaining $3.0 million is associated with Austria, Brazil,
France, Spain and other jurisdictions. In fiscal 2005, the valuation allowance related to net
operating loss carryforwards decreased $16.8 million, of which $11.8 million was allocated to
goodwill and the remaining $5.0 million to income tax expense. Of the $26.5 million valuation
allowance as of June 2005, $2.2 million would be allocated to goodwill and $24.3 million would be
allocated to income tax expense upon realization of these tax benefits.
As of June 30, 2005, a valuation allowance of approximately $10.9 million has been placed against
other deferred tax assets in China, Germany, Spain, and the United Kingdom. Of this amount, $4.1
million would be allocated to accumulated other comprehensive income and $6.8 million would be
allocated to income tax expense upon realization of these tax benefits. In fiscal 2005, the
valuation allowance related to these deferred tax assets increased $1.1 million, of which $0.2
million was allocated to income tax expense and the remaining $0.9 million to accumulated other
comprehensive income.
- 42 -
NOTE 10 PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
We sponsor several pension 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. We fund pension costs in accordance with the funding
requirements of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, for U.S.
plans and in accordance with local regulations or customs for non-U.S. plans. Additionally, we
maintain a supplemental executive retirement plan for various executives. The liability associated
with this plan is also included in the pension disclosure below.
We presently provide varying levels of postretirement health care and life insurance benefits to
most U.S. employees. Postretirement health care benefits are available to employees and their
spouses retiring on or after age 55 with 10 or more years of service after age 40. Beginning with
retirements on or after January 1, 1998, our portion of the costs of postretirement health care
benefits are capped at 1996 levels.
On November 13, 2003, Kennametal announced modifications to certain employee benefits, including a
plan amendment for selected participants in the Retirement Income Plan (RIP Plan), new employer
contributions to the defined contribution plan (Thrift Plus Plan) and changes to the retiree
medical portion of the Other Postemployment Benefits Plan (OPEB Plan). The RIP Plan previously
covered the majority of the Companys U.S. workforce. Effective January 1, 2004, no new non-union
employees will become eligible to participate in the RIP Plan. Benefits under the RIP Plan
continued to accrue after December 31, 2003 only for certain employees (Grandfathered
Participants). Benefits for all other participants were frozen effective December 31, 2003. All
eligible employees hired on or after January 1, 2004 and all non-Grandfathered Participants in the
RIP Plan will be eligible to participate in the Thrift Plus Plan, which will provide for an
employer fixed contribution equal to 3 percent of the employees compensation and will allow for an
additional variable contribution from 0 percent up to 3 percent depending on the Companys
performance. The modification of the OPEB Plan will eliminate Kennametals obligation to provide a
Company subsidy for employee medical costs for all employees who retire after January 1, 2009. The
RIP Plan amendment resulted in a curtailment under SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
resulted in a pretax charge of $1.3 million in 2004. In connection with the amendments above, the
Company also amended its Supplemental Executive Retirement Plan (SERP), effective January 1, 2004.
Such amendment did not have an impact on the Companys financial statements.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was
signed into law. The act introduces a prescription drug benefit under Medicare (Medicare Part D),
as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. As of July 1, 2004, the Company
has recognized the effects of the act in the measurement of its accumulated postretirement benefit
obligation (APBO) for certain retiree groups in accordance with FSP 106-2. The Company has not
recorded the effects of any potential subsidy benefit as we have not yet determined if any of our
plans are actuarially equivalent to Medicare Part D. The impact of any potential subsidy benefit is
not expected to be material.
The increase in prescription drug benefits under Medicare Part D for certain retiree groups is
recognized as an offset to plan costs. This resulted in a reduction of APBO of $0.8 million at
July 1, 2004. The reduction in APBO is included with other deferred actuarial gains and losses. Net
periodic postretirement benefit costs for fiscal 2005 and beyond will be adjusted to reflect the
lower interest and service costs due to the lower APBO. The Company has not assumed any changes in
participation in the OPEB Plan as a result of the Act.
As a result of the FSS divestiture, we have recorded the impact on our RIP Plan and OPEB Plan
during 2005. The impact of the FSS divestiture is not considered a curtailment of either plan
because the reduction in future service years of plan participants is not material. The result of
this event was a loss of $0.4 million included in the RIP Plan and a benefit of $0.1 million
included in the OPEB Plan. The combined effect of this event is included in operating expense in
2005.
The Company uses a June 30 measurement date for all of its plans.
- 43 -
The funded status of our pension plans and amounts recognized in the consolidated balance sheets as
of June 30 were as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year |
|
$ |
557,829 |
|
|
$ |
562,568 |
|
Service cost |
|
|
9,445 |
|
|
|
13,707 |
|
Interest cost |
|
|
34,245 |
|
|
|
31,305 |
|
Participant contributions |
|
|
982 |
|
|
|
787 |
|
Actuarial losses (gains) |
|
|
114,446 |
|
|
|
(17,940 |
) |
Benefits paid |
|
|
(28,740 |
) |
|
|
(27,378 |
) |
Effect of curtailment and other |
|
|
|
|
|
|
(15,835 |
) |
Effect of divestiture |
|
|
370 |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(158 |
) |
|
|
10,266 |
|
Plan amendments |
|
|
302 |
|
|
|
349 |
|
|
|
|
|
|
|
|
Benefit obligation, end of year |
|
$ |
688,721 |
|
|
$ |
557,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year |
|
$ |
454,094 |
|
|
$ |
405,430 |
|
Actual return on plan assets |
|
|
48,188 |
|
|
|
64,586 |
|
Company contributions |
|
|
8,190 |
|
|
|
6,716 |
|
Participant contributions |
|
|
982 |
|
|
|
787 |
|
Benefits paid |
|
|
(28,740 |
) |
|
|
(27,378 |
) |
Foreign currency translation adjustments |
|
|
945 |
|
|
|
3,953 |
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year |
|
$ |
483,659 |
|
|
$ |
454,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plans |
|
$ |
(205,063 |
) |
|
$ |
(103,734 |
) |
Unrecognized transition obligation |
|
|
2,417 |
|
|
|
2,622 |
|
Unrecognized prior service cost |
|
|
3,452 |
|
|
|
3,883 |
|
Unrecognized actuarial losses |
|
|
175,745 |
|
|
|
73,952 |
|
|
|
|
|
|
|
|
Net accrued liability |
|
$ |
(23,449 |
) |
|
$ |
(23,277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet consist of: |
|
|
|
|
|
|
|
|
Prepaid benefit |
|
$ |
10,648 |
|
|
$ |
58,389 |
|
Intangible assets |
|
|
5,774 |
|
|
|
4,520 |
|
Accumulated other comprehensive income |
|
|
128,426 |
|
|
|
20,614 |
|
Accrued benefit obligation |
|
|
(168,297 |
) |
|
|
(106,800 |
) |
|
|
|
|
|
|
|
Net accrued liability |
|
$ |
(23,449 |
) |
|
$ |
(23,277 |
) |
|
|
|
|
|
|
|
Prepaid pension benefits are included in other long-term assets. Accrued pension benefit
obligations are included in other long-term liabilities. 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.
To the best of our knowledge and belief, the asset portfolios of our defined benefit plans do not
contain our capital stock. We do not issue insurance contracts to cover future annual benefits of
defined benefit plan participants. Transactions between us and our defined benefit plans include
the reimbursement of plan expenditures incurred by us on behalf of the plans. To the best of our
knowledge and belief, the reimbursement of cost is permissible under current ERISA rules or local
government law.
The accumulated benefit obligation for all defined benefit plans was $647.7 million and $532.6
million as of June 30, 2005 and 2004, respectively.
- 44 -
Included in the above information are pension plans with accumulated benefit obligations exceeding
the fair value of plan assets as of June 30 as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
Projected benefit obligation |
|
$ |
647,453 |
|
|
$ |
161,881 |
|
Accumulated benefit obligation |
|
|
609,343 |
|
|
|
150,728 |
|
Fair value of plan assets |
|
|
441,064 |
|
|
|
44,063 |
|
The components of net pension cost (benefit) include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Service cost |
|
$ |
9,445 |
|
|
$ |
13,707 |
|
|
$ |
13,098 |
|
Interest cost |
|
|
34,245 |
|
|
|
31,305 |
|
|
|
30,103 |
|
Expected return on plan assets |
|
|
(37,536 |
) |
|
|
(38,157 |
) |
|
|
(43,166 |
) |
Amortization of transition obligation |
|
|
158 |
|
|
|
141 |
|
|
|
(1,355 |
) |
Amortization of prior service cost |
|
|
707 |
|
|
|
702 |
|
|
|
772 |
|
Effect of curtailment |
|
|
|
|
|
|
1,299 |
|
|
|
|
|
Effect of divestiture |
|
|
386 |
|
|
|
|
|
|
|
|
|
Recognition of actuarial losses (gains) |
|
|
1,216 |
|
|
|
1,606 |
|
|
|
(495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cost (benefit) |
|
$ |
8,621 |
|
|
$ |
10,603 |
|
|
$ |
(1,043 |
) |
|
|
|
|
|
|
|
|
|
|
Net cost decreased $2.0 million to $8.6 million in 2005 from $10.6 million in 2004. The primary
drivers of this change are the decrease in service cost of $4.3 million offset by the increase in
interest cost of $2.9 million. The reduction in service cost is a result of the full-year impact
of the RIP Plan and SERP amendments offset by the effects of the decrease in the discount rates as
noted in the assumptions table included in this footnote. The increase in interest cost is the
result of the decrease in the discount rates.
In 2004, we recognized a net pension cost of $10.6 million as compared to a net pension benefit in
2003 of $1.0 million. The reduction in expected return on plan assets of $5.0 million was the
primary driver of this change. The expected rate of return on plan assets decreased from 9.5
percent in 2003 to 8.5 percent in 2004 as a result of our estimate of long-term market conditions.
In 2004, we recognized amortization of a transition obligation of $0.1 million compared to
recognition of a transition asset of $1.4 million in 2003. This change was a result of the
domestic plans transition asset being fully amortized in 2003. The remaining amortization of
transition obligations related to our foreign plans. In 2004, we recognized actuarial losses of
$1.6 million as compared to the recognition of actuarial gains of $0.5 million in 2003. The
recognition of actuarial losses was a result of the RIP Plan and SERP amendments.
As of June 30, 2005, the projected benefit payments including future service accruals for these
plans are as follows:
|
|
|
|
|
(in thousands) |
|
|
|
|
2006 |
|
$ |
26,537 |
|
2007 |
|
|
27,647 |
|
2008 |
|
|
29,307 |
|
2009 |
|
|
31,111 |
|
2010 |
|
|
33,760 |
|
2011-2015 |
|
|
201,051 |
|
The Companys defined benefit pension plans asset allocations as of June 30, 2005 and 2004 and
target allocations for 2006, by asset class, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets June 30, |
|
|
Target % |
|
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
Equity |
|
|
72 |
% |
|
|
73 |
% |
|
|
69 |
% |
Fixed income |
|
|
28 |
% |
|
|
27 |
% |
|
|
31 |
% |
Other |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
- 45 -
The primary objective of the pension plans investment policies is to ensure that sufficient assets
are available to provide the benefit obligations at the time these obligations come due. Investment
management practices must comply with ERISA and all applicable regulations and rulings thereof.
The overall investment strategy for the defined benefit pension plans assets combines
considerations of preservation of principal and moderate risk-taking. The assumption of an
acceptable level of risk is warranted in order to achieve satisfactory results consistent with the
long-term objectives of the portfolio. Fixed income securities comprise a significant portion of
the portfolio due to their plan-liability-matching characteristics and to address the plans cash
flow requirements. Additionally, diversification of investments within each asset class is utilized
to further reduce the impact of losses in single investments.
The Company expects to contribute $7.7 million to its pension plans in 2006.
The funded status of our other postretirement benefit plans and amounts recognized in the
consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year |
|
$ |
36,129 |
|
|
$ |
45,265 |
|
Service cost |
|
|
670 |
|
|
|
1,009 |
|
Interest cost |
|
|
2,183 |
|
|
|
2,361 |
|
Actuarial (gains) losses |
|
|
(1,049 |
) |
|
|
369 |
|
Plan amendment |
|
|
|
|
|
|
(9,745 |
) |
Effect of divestiture |
|
|
194 |
|
|
|
|
|
Benefits paid |
|
|
(3,342 |
) |
|
|
(3,130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year |
|
$ |
34,785 |
|
|
$ |
36,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plans |
|
$ |
(34,785 |
) |
|
$ |
(36,129 |
) |
Unrecognized prior service cost |
|
|
(3,260 |
) |
|
|
(6,872 |
) |
Unrecognized actuarial gains |
|
|
(1,711 |
) |
|
|
(1,762 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net accrued obligation |
|
$ |
(39,756 |
) |
|
$ |
(44,763 |
) |
|
|
|
|
|
|
|
The components of other postretirement cost include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Service cost |
|
$ |
670 |
|
|
$ |
1,009 |
|
|
$ |
1,259 |
|
Interest cost |
|
|
2,183 |
|
|
|
2,361 |
|
|
|
2,930 |
|
Amortization of prior service cost |
|
|
(3,549 |
) |
|
|
(2,066 |
) |
|
|
406 |
|
Recognition of actuarial gains |
|
|
(906 |
) |
|
|
(189 |
) |
|
|
(108 |
) |
Effect of divestiture |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cost |
|
$ |
(1,665 |
) |
|
$ |
1,115 |
|
|
$ |
4,487 |
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005, the projected benefit payments including future service accruals for our other
postretirement benefit plans are as follows:
|
|
|
|
|
(in thousands) |
|
|
|
|
2006 |
|
$ |
3,142 |
|
2007 |
|
|
2,969 |
|
2008 |
|
|
3,095 |
|
2009 |
|
|
3,244 |
|
2010 |
|
|
3,321 |
|
2011-2015 |
|
|
14,667 |
|
- 46 -
The significant actuarial assumptions used to determine the present value of net benefit
obligations for our pension and other postretirement benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. plans |
|
|
5.3 |
% |
|
|
6.5 |
% |
|
|
6.0 |
% |
International plans |
|
|
4.0-5.3 |
% |
|
|
5.3-6.5 |
% |
|
|
5.0-6.3 |
% |
Rates of future salary increases: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. plans |
|
|
2.5-5.0 |
%* |
|
|
2.5-5.0 |
%* |
|
|
4.5 |
% |
International plans |
|
|
3.0-4.0 |
% |
|
|
3.0-4.5 |
% |
|
|
3.0-4.0 |
% |
|
|
|
* |
|
The rate of future salary increases for the RIP Plan for grandfathered participants utilized
was 2.5 percent to 5.0 percent and was applied on a graded scale based on age. All other U.S. plans
utilized a future salary increase rate of 4.0 percent and 4.5 percent for 2005 and 2004,
respectively. |
The significant assumptions used to determine the net (benefit) costs for our pension and other
postretirement benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Discount rate: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. plans |
|
|
6.5 |
% |
|
|
6.0 |
% |
|
|
7.3 |
% |
International plans |
|
|
5.3-6.5 |
% |
|
|
5.0-6.3 |
% |
|
|
6.0-6.8 |
% |
Rates of future salary increases: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. plans |
|
|
2.5-5.0 |
%* |
|
|
4.5 |
% |
|
|
4.5 |
% |
International plans |
|
|
3.0-4.5 |
% |
|
|
3.0-4.0 |
% |
|
|
3.3-4.0 |
% |
Rates of return on plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. plans |
|
|
8.5 |
% |
|
|
8.5 |
% |
|
|
9.5 |
% |
International plans |
|
|
6.8 |
% |
|
|
6.5-7.3 |
% |
|
|
6.5-7.3 |
% |
|
|
|
* |
|
The rate of future salary increases for the RIP Plan for grandfathered participants utilized
was 2.5 percent to 5.0 percent and was applied on a graded scale based on age. All other U.S. plans
utilized a future salary increase rate of 4.5 percent. |
The rates of return on plan assets are based on historical performance as well as future
expected returns by asset class considering macroeconomic conditions, current portfolio mix,
long-term investment strategy and other available relevant information.
The annual assumed rate of increase in the per capita cost of covered benefits (the health care
cost trend rate) for our postretirement benefit plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Health care cost trend rate
assumed for next year |
|
|
10.0 |
% |
|
|
8.0 |
% |
|
|
9.0 |
% |
Rate to which the cost trend rate
gradually declines |
|
|
5.0 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Year that the rate reaches the rate
at which it is assumed to remain |
|
|
2010 |
|
|
|
2007 |
|
|
|
2007 |
|
Assumed health care cost trend rates have a significant effect on the cost components and
obligation 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, 2005:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
1% increase |
|
|
1% decrease |
|
Effect on total of service and interest cost components |
|
$ |
219 |
|
|
$ |
(184 |
) |
Effect on other postretirement benefit obligation |
|
|
1,673 |
|
|
|
(1,446 |
) |
- 47 -
\
We also sponsor several defined contribution retirement plans. Costs for defined contribution plans
were $26.6 million, $18.8 million and $12.4 million in 2005, 2004 and 2003, respectively. Effective
October 1, 1999, company contributions to U.S. defined contribution plans are made primarily in our
capital stock, resulting in the issuance of 190,121, 148,530 and 146,350 shares during 2005, 2004
and 2003, respectively, with a market value of $8.7 million, $7.9 million and $4.4 million,
respectively. We temporarily suspended all company contributions to certain defined contribution
plans from January 1, 2002 through January 1, 2003.
NOTE 11
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended June 30 (in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
Net income |
|
$ |
119,291 |
|
|
$ |
73,578 |
|
|
$ |
18,130 |
|
Unrealized loss on derivatives designated and qualified as cash flow
hedges, net of tax |
|
|
(1,836 |
) |
|
|
(2,254 |
) |
|
|
(4,879 |
) |
Reclassification of unrealized gain on matured derivatives, net of tax |
|
|
2,486 |
|
|
|
6,226 |
|
|
|
5,157 |
|
Unrealized (loss) gain on investments, net of tax |
|
|
(88 |
) |
|
|
(193 |
) |
|
|
321 |
|
Minimum pension liability adjustment, net of tax |
|
|
(68,095 |
) |
|
|
43,685 |
|
|
|
(54,696 |
) |
Foreign currency translation adjustments |
|
|
3,442 |
|
|
|
23,218 |
|
|
|
51,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
55,200 |
|
|
$ |
144,260 |
|
|
$ |
15,196 |
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income (loss) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 (in thousands) |
|
Pretax |
|
|
Tax |
|
|
After-tax |
|
|
Unrealized loss on securities available-for-sale |
|
$ |
(725 |
) |
|
$ |
275 |
|
|
$ |
(450 |
) |
Unrealized loss on derivatives designated and qualified as cash flow hedges |
|
|
(1,486 |
) |
|
|
590 |
|
|
|
(896 |
) |
Minimum pension liability adjustment |
|
|
(128,426 |
) |
|
|
44,855 |
|
|
|
(83,571 |
) |
Foreign currency translation adjustments |
|
|
258 |
|
|
|
33,537 |
|
|
|
33,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
accumulated other comprehensive loss |
|
$ |
(130,379 |
) |
|
$ |
79,257 |
|
|
$ |
(51,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2004 (in thousands) |
|
Pretax |
|
|
Tax |
|
|
After-tax |
|
|
Unrealized loss on securities available-for-sale |
|
$ |
(584 |
) |
|
$ |
222 |
|
|
$ |
(362 |
) |
Unrealized loss on derivatives designated and qualified as cash flow hedges |
|
|
(2,494 |
) |
|
|
948 |
|
|
|
(1,546 |
) |
Minimum pension liability adjustment |
|
|
(20,614 |
) |
|
|
5,138 |
|
|
|
(15,476 |
) |
Foreign currency translation adjustments |
|
|
(4,852 |
) |
|
|
35,205 |
|
|
|
30,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
$ |
(28,544 |
) |
|
$ |
41,513 |
|
|
$ |
12,969 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 12 RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
Asset Impairment Charges In 2005, we divested our FSS segment. We completed an impairment analysis
in accordance with SFAS 142 as the estimated selling price was below the fair value of the business
absent the sale. We recorded an impairment charge related to FSS goodwill of $4.7 million as a
result of this analysis.
In 2004, the Company did not incur any impairment charges.
In June 2003, we completed an assessment of the carrying value of certain long-lived assets in the
electronics business. As a result of this assessment, we recorded a pretax charge of $16.1 million
as a component of restructuring and asset impairment charges. The charge was a result of price
declines caused by persistent global overcapacity and low-cost Asia competition. The fixed asset
impairment charge reduced the book value of the electronics business assets to $2.6 million at
June 30, 2003.
- 48 -
Restructuring Charges In 2005 and 2004, the Company did not initiate any new restructuring
programs. No restructuring expense was incurred in 2005. The restructuring expense recorded in 2004
related to programs previously initiated.
2003 Facility Consolidation Program In June 2003, we approved a facility consolidation program,
resulting in a total restructuring charge of $2.0 million: $0.3 million recorded in 2004 and $1.7
million recorded in 2003. The plan included the closure of two regional operating centers and the
Framingham manufacturing facility and a workforce reduction. In conjunction with the program, we
recorded an asset write-down in 2003 related to fixed assets that were disposed of as a result of
the restructuring program. All actions pertained to the Metalworking Solutions & Services Group
(MSSG) segment. Estimated cost savings related to this program have been approximately $1.5 million
annually. We completed and paid all remaining costs associated with this program in 2005. Cash expenditures
in 2005 were immaterial. The changes in the restructuring accrual in 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at |
|
|
|
|
|
|
Expense |
|
|
Cash |
|
|
Accrual at |
|
(in thousands) |
|
June 30, 2003 |
|
|
Expense |
|
|
Adjustment |
|
|
Expenditures |
|
|
June 30, 2004 |
|
Employee severance |
|
$ |
1,188 |
|
|
$ |
70 |
|
|
$ |
(165 |
) |
|
$ |
(1,093 |
) |
|
$ |
|
|
Facility rationalization |
|
|
144 |
|
|
|
262 |
|
|
|
|
|
|
|
(272 |
) |
|
|
134 |
|
|
|
|
Total |
|
$ |
1,332 |
|
|
$ |
332 |
|
|
$ |
(165 |
) |
|
$ |
(1,365 |
) |
|
$ |
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Workforce Restructuring Program In October 2002, we announced a global salaried workforce
reduction of approximately 5 percent. The program resulted in 2003 charges of $2.8 million for
MSSG, $2.6 million for AMSG, $1.3 million for J&L Industrial Supply (J&L), $0.1 million for FSS and
$1.2 million for Corporate. Estimated cost savings related to this program were approximately $10.0
million in 2003. We completed and paid all remaining costs associated with this program in 2005. Cash
expenditures in 2005 were immaterial. The changes in the restructuring accrual in 2004 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at |
|
|
|
|
|
|
Expense |
|
|
Cash |
|
|
Accrual at |
|
(in thousands) |
|
June 30, 2003 |
|
|
Expense |
|
|
Adjustment |
|
|
Expenditures |
|
|
June 30, 2004 |
|
Employee severance |
|
$ |
1,835 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,551 |
) |
|
$ |
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Widia Integration We implemented two Widia acquisition-related integration programs described below
(Kennametal Integration Restructuring Program and the Widia Integration Plan), which together
resulted in a global headcount reduction of approximately 760 positions (385 in Europe and 375 in
India). We completed the integration plan in Europe and India and closed six sales offices, three
manufacturing facilities and closed or consolidated four warehouses. These programs were
established to develop centers of excellence in functional areas and enable long-term growth and
competitive advantages. Costs associated with the overall integration that benefited future periods
were expensed as part of the Kennametal Integration Restructuring Program. The costs incurred as
part of the Widia Integration Plan were not incurred to generate future revenue and were recorded
as part of the Widia purchase accounting. Estimated cost savings related to these programs are
approximately $30.0 million annually. All remaining costs associated with the integration have been incurred,
and the remaining cash payments for certain lease costs have extended into 2006.
Kennametal Integration Restructuring Program This program includes employee severance costs
associated with existing Kennametal facilities and resulted in total restructuring charges of
$10.5 million: $3.5 million in 2004 and $7.0 million in 2003. We completed and paid all
remaining costs associated with this program in 2005. Cash expenditures in 2005 were $0.6 million.
The changes in the restructuring accrual in 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at |
|
|
|
|
|
|
Cash |
|
|
Translation |
|
|
Accrual at |
|
(in thousands) |
|
June 30, 2003 |
|
|
Expense |
|
|
Expenditures |
|
|
Adjustment |
|
|
June 30, 2004 |
|
Employee severance |
|
$ |
3,640 |
|
|
$ |
3,522 |
|
|
$ |
(6,680 |
) |
|
$ |
127 |
|
|
$ |
609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 49 -
Widia Integration Plan This program included facility rationalizations and employee severance
costs associated with acquired Widia facilities. Costs incurred under this plan were accounted for
under EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination.
As a result, these costs were recorded as part of the Widia purchase price allocation. The changes
in the restructuring accrual are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at |
|
|
Adjustment |
|
|
Cash |
|
|
Translation |
|
|
Accrual at |
|
(in thousands) |
|
June 30, 2004 |
|
|
to Goodwill |
|
|
Expenditures |
|
|
Adjustment |
|
|
June 30, 2005 |
|
Facility
rationalizations |
|
$ |
3,589 |
|
|
$ |
|
|
|
$ |
(1,709 |
) |
|
$ |
214 |
|
|
$ |
2,094 |
|
Employee severance |
|
|
7,699 |
|
|
|
(649 |
) |
|
|
(7,192 |
) |
|
|
142 |
|
|
|
|
|
|
|
|
Total |
|
$ |
11,288 |
|
|
$ |
(649 |
) |
|
$ |
(8,901 |
) |
|
$ |
356 |
|
|
$ |
2,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at |
|
|
Adjustment |
|
|
Cash |
|
|
Translation |
|
|
Accrual at |
|
(in thousands) |
|
June 30, 2003 |
|
|
to Goodwill |
|
|
Expenditures |
|
|
Adjustment |
|
|
June 30, 2004 |
|
Facility
rationalizations |
|
$ |
1,357 |
|
|
$ |
4,138 |
|
|
$ |
(2,270 |
) |
|
$ |
364 |
|
|
$ |
3,589 |
|
Employee severance |
|
|
14,934 |
|
|
|
1,547 |
|
|
|
(10,356 |
) |
|
|
1,574 |
|
|
|
7,699 |
|
Terminated contracts |
|
|
463 |
|
|
|
|
|
|
|
(493 |
) |
|
|
30 |
|
|
|
|
|
|
|
|
Total |
|
$ |
16,754 |
|
|
$ |
5,685 |
|
|
$ |
(13,119 |
) |
|
$ |
1,968 |
|
|
$ |
11,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13 FINANCIAL INSTRUMENTS
The methods used to estimate the fair value of our 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.
Long-Term Debt Fixed rate debt had a fair market value of $339.5 million and $331.3 million in 2005
and 2004, respectively. The fair value is determined based on quoted market price of this debt as
of June 30.
Foreign Exchange Contracts The notional amount of outstanding foreign exchange contracts,
translated at current exchange rates, was $133.2 million and $78.1 million at June 30, 2005 and
2004, respectively. We would have received $2.4 million and $0.3 million at June 30, 2005 and 2004,
respectively, to settle these contracts, representing the fair value of these agreements. Under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), the
carrying value equals the fair value for these contracts at June 30, 2005 and 2004. Fair value was
estimated based on quoted market prices of comparable instruments.
Interest Rate Swap Agreements At June 30, 2005 and 2004, we had interest rate swap agreements
outstanding that effectively convert notional amounts of $55.2 million of debt from floating to
fixed interest rates. We would have paid $0.7 million and received $0.3 million at June 30, 2005
and 2004, respectively, to settle these interest rate swap agreements, which represents the fair
value of these agreements.
During 2002, we entered into interest rate swap agreements which mature in 2012 to convert $200
million of our fixed rate debt to floating rate debt. These contracts require periodic settlement;
the difference between amounts to be received and paid under the interest rate swap agreements is
recognized in interest expense. In April 2003, we terminated these contracts and received a cash
payment of $15.5 million. This gain is amortized as a component of interest expense over the life
of the debt using the effective interest rate method. Upon termination of the contracts in April
2003, we entered into new interest rate swap agreements with a notional amount of $200 million and
a maturity date of June 2012. As of June 30, 2005 and 2004, we recorded a gain of $0.2 million and
a loss of $8.3 million, respectively, related to these contracts. We record the gain or loss of
these contracts in the balance sheet, with the offset to the carrying value of the Senior Unsecured
Notes. Any gain or loss resulting from changes in the fair value of these contracts offsets the
corresponding gains or losses from changes in the fair values of the Senior Unsecured Notes. As a
result, changes in the fair value of these contracts had no net impact on current year earnings.
Under SFAS 133, the carrying value equals the fair value for the interest rate swap agreements at
June 30, 2005 and 2004. Fair value was estimated based on the mark-to-market value of the
contracts, which closely approximates the amount that we would receive or pay to terminate the
agreements at year end.
Concentrations of Credit Risk Financial instruments that potentially subject us to concentrations
of credit risk consist primarily of temporary cash investments and trade receivables. By policy, we
make temporary cash investments with high credit quality financial
- 50 -
institutions. With respect to
trade receivables, concentrations of credit risk are significantly reduced because we serve
numerous customers in many industries and geographic areas.
We are exposed to counterparty credit risk for nonperformance of derivatives and, in the unlikely
event of nonperformance, to market risk for changes in interest and
currency rates, as well as settlement risk. We manage
exposure to counterparty credit risk through credit standards, diversification of counterparties
and procedures to monitor concentrations of credit risk. We do not anticipate nonperformance by any
of the counterparties. As of June 30, 2005 and 2004, we had no significant concentrations of credit
risk.
NOTE 14 STOCK OPTIONS, AWARDS AND PURCHASE PLAN
Stock options generally are granted to eligible employees at fair market value at the date of
grant. Options are exercisable under specified conditions for up to 10 years from the date of
grant. During 2002, Kennametal established the Kennametal Inc. Stock and Incentive Plan of 2002
(the 2002 Plan), pursuant to which eligible individuals may be granted awards. The 2002 Plan
eliminated further grants or awards under any prior stock option plan. The 2002 Plan was amended on
October 26, 2004 to increase the aggregate number of shares available for issuance under the 2002
Plan from 1,750,000 to 3,750,000.
Under provisions of the 2002 Plan, participants may deliver our stock, owned by the holder for at
least six months, in payment of the option price and receive credit for the fair market value of
the shares on the date of delivery. The fair value of shares delivered in 2005 and 2004 was $0.6
million and $0.3 million, respectively. Shares delivered in 2003 were not significant.
Stock option activity for 2005, 2004 and 2003 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
Number of Options |
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
|
Options |
|
|
Price |
|
|
Options outstanding, beginning
of year |
|
|
3,685,889 |
|
|
$ |
34.28 |
|
|
|
4,025,417 |
|
|
$ |
32.92 |
|
|
|
3,307,854 |
|
|
$ |
32.08 |
|
Granted |
|
|
983,875 |
|
|
|
42.40 |
|
|
|
520,250 |
|
|
|
39.16 |
|
|
|
1,029,975 |
|
|
|
30.57 |
|
Exercised |
|
|
(985,439 |
) |
|
|
32.03 |
|
|
|
(703,216 |
) |
|
|
28.86 |
|
|
|
(63,672 |
) |
|
|
26.49 |
|
Lapsed and forfeited |
|
|
(217,596 |
) |
|
|
42.42 |
|
|
|
(156,562 |
) |
|
|
39.71 |
|
|
|
(248,740 |
) |
|
|
35.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of year |
|
|
3,466,729 |
|
|
$ |
36.70 |
|
|
|
3,685,889 |
|
|
$ |
34.28 |
|
|
|
4,025,417 |
|
|
$ |
32.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of year |
|
|
2,288,168 |
|
|
$ |
34.36 |
|
|
|
2,327,893 |
|
|
$ |
33.75 |
|
|
|
2,276,984 |
|
|
$ |
33.20 |
|
|
|
|
Weighted average fair value of
options granted during the year |
|
|
|
|
|
$ |
11.37 |
|
|
|
|
|
|
$ |
11.82 |
|
|
|
|
|
|
$ |
8.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding at June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Contractual |
|
|
Average |
|
|
|
|
|
|
Average |
|
Range of Exercise Prices |
|
Options |
|
|
Life (years) |
|
|
Exercise Price |
|
|
Options |
|
|
Exercise Price |
|
|
$20.63 - $26.41 |
|
|
520,886 |
|
|
|
4.42 |
|
|
$ |
24.79 |
|
|
|
520,886 |
|
|
$ |
24.79 |
|
27.19 - 29.81 |
|
|
528,642 |
|
|
|
6.98 |
|
|
|
29.56 |
|
|
|
489,010 |
|
|
|
29.55 |
|
29.82 - 38.44 |
|
|
712,155 |
|
|
|
5.51 |
|
|
|
36.42 |
|
|
|
659,411 |
|
|
|
36.54 |
|
38.48 - 40.90 |
|
|
498,971 |
|
|
|
7.75 |
|
|
|
39.35 |
|
|
|
340,526 |
|
|
|
39.59 |
|
40.98 - 40.98 |
|
|
692,925 |
|
|
|
9.07 |
|
|
|
40.98 |
|
|
|
|
|
|
|
|
|
41.08 - 53.97 |
|
|
513,150 |
|
|
|
5.76 |
|
|
|
48.21 |
|
|
|
278,335 |
|
|
|
49.15 |
|
|
|
|
|
|
|
3,466,729 |
|
|
|
6.64 |
|
|
$ |
36.70 |
|
|
|
2,288,168 |
|
|
$ |
34.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 51 -
In addition to stock option grants, the 2002 Plan permits the award of restricted stock to
directors, officers and key employees. During 2005, 2004 and 2003, we granted restricted stock
awards of 253,152, 136,715 and 286,075 shares, respectively, which vest over periods of one to six
years from the grant date. For some grants, vesting may accelerate due to achieving certain
performance goals.
Restricted stock awards are considered unearned compensation until vesting occurs due to the
passage of time or achievement of certain performance goals. As of June 30, 2005 and 2004, unearned
compensation related to restricted stock was $12.7 million and
$9.0 million, respectively. Unearned
compensation is amortized to expense over the vesting period. Compensation expense related to these
awards was $5.3 million, $4.8 million and $4.9 million in 2005, 2004 and 2003, respectively.
As of June 30, 2005, the Employee Stock Purchase Plan (ESPP) provided for the issuance of up to
300,000 shares of capital stock through payroll deductions. Employees who choose to participate in
the ESPP receive an option to purchase capital stock at a discount equal to the lower of 85 percent
of the fair market value of the capital stock on the first or last day of a purchase period.
Employees purchased 24,658, 25,956 and 31,580 shares under the ESPP during 2005, 2004 and 2003,
respectively.
NOTE 15 ENVIRONMENTAL MATTERS
We are involved in various environmental cleanup and remediation activities at several of our
manufacturing facilities. In addition, we are currently named as a potentially responsible party
(PRP) at the Li Tungsten Superfund site in Glen Cove, New York. In December 1999, we recorded a
remediation reserve with respect to our involvement in these matters. This reserve represents our
best estimate of the undiscounted future obligation based on our evaluations and discussions with
outside counsel and independent consultants, and the current facts and circumstances related to
these matters. We recorded this liability because certain events occurred, including the
identification of other PRPs, an assessment of potential remediation solutions and direction from
the government for the remedial action plan, that clarified our level of involvement in these
matters and our relationship to other PRPs. This led us to conclude that it was probable that a
liability had been incurred. At June 30, 2005 and 2004, we had an accrual of $2.7 million and $2.8
million, respectively, recorded relative to this environmental issue.
In addition to the amount currently reserved, we may be subject to loss contingencies related to
these matters estimated to be up to an additional $3.0 million. We believe that such undiscounted
unreserved losses are reasonably possible but are not currently considered to be probable of
occurrence. The reserved and unreserved liabilities for all environmental concerns 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, the identification of new PRPs, and the involvement of and
direction taken by the government on these matters.
Additionally, we also maintain reserves for other potential environmental issues associated with
our domestic operations and a location operated by our German subsidiary. At June 30, 2005 and
2004, the total of these accruals was $0.9 million and $1.0 million, respectively, and represents
anticipated costs associated with the remediation of these issues. Cash payments of $0.1 million
and $0.3 million were made against this reserve during 2005 and 2004, respectively.
As a result of the Widia acquisition, we previously established an environmental reserve used for
environmental cleanup and remediation activities at several Widia manufacturing locations. This
liability represents our estimate of the future obligation based on our evaluations and discussions
with independent consultants and the current facts and circumstances related to these matters. At
June 30, 2005, we had an accrual of $5.0 million recorded relative to these environmental
exposures. Cash payments of $0.6 million were made against this reserve during 2005. We have also
recorded unfavorable foreign currency translation adjustments of $0.1 million during 2005.
We maintain 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, we have established an EH&S administrator at each of our
global manufacturing facilities. Our 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, we establish or adjust financial
provisions and reserves for environmental contingencies in accordance with SFAS No. 5, Accounting
for Contingencies.
NOTE 16 COMMITMENTS AND CONTINGENCIES
Legal Matters Various lawsuits arising during the normal course of business are pending against us.
In our opinion, the ultimate liability, if any, resulting from these matters will have no
significant effect on our consolidated financial positions or results of operations.
Lease Commitments We lease a wide variety of facilities and equipment under operating leases,
primarily for warehouses, production and office facilities, and equipment. Lease expense under
these rentals amounted to $31.5 million, $30.2 million and $26.7 million in
- 52 -
2005, 2004 and 2003,
respectively. Future minimum lease payments for non-cancelable operating leases are $22.5 million,
$15.0 million, $11.3 million, $7.4 million and $6.5 million for the years 2006 through 2010, and
$34.2 million thereafter.
Purchase Commitments We have purchase commitments for materials, supplies, and machinery and
equipment as part of the ordinary conduct of business. A few of these commitments extend beyond one
year and are based on minimum purchase requirements. In the aggregate, we believe these commitments
are not at prices in excess of current market.
Other Contractual Obligations We do not have material financial guarantees or other contractual
commitments that are reasonably likely to adversely affect our liquidity.
Related Party Transactions Sales to affiliated companies were $19.2 million, $18.7 million and
$17.5 million in 2005, 2004 and 2003, respectively. We do not have any other related party
transactions that affect our operations, results of operations, cash flow or financial condition.
NOTE 17 RIGHTS PLAN
On July 24, 2000, our Board of Directors adopted a new shareowner rights plan to replace our
previous plan, which had been in effect since 1990. The new plan became effective upon the
expiration of the previous plan on November 2, 2000 and provided for the distribution to
shareowners of one stock purchase right for each share of capital stock held as of September 5,
2000. Each right entitles a shareowner to buy 1/100th of a share of a new series of preferred stock
at a price of $120 (subject to adjustment).
The rights are exercisable only if a person or group of persons acquires or intends to make a
tender offer for 20 percent or more of our capital stock. If any person acquires 20 percent of the
capital stock, each right will entitle the other shareowners to receive that number of shares of
capital stock having a market value of two times the exercise price. If we are acquired in a merger
or other business combination, each right will entitle the shareowners 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, 2010 and are subject to redemption at $0.01
per right.
NOTE 18 SEGMENT DATA
We previously operated four global business units consisting of MSSG, AMSG, J&L and FSS, and
Corporate. In 2005, we divested our FSS segment. The presentation of segment information reflects
the manner in which we organize segments for making operating decisions and assessing performance.
Intersegment sales are accounted for at arms-length prices, reflecting prevailing market
conditions within the various geographic areas. Such sales and associated costs are eliminated in
our consolidated financial statements.
Sales to a single customer did not aggregate 10 percent or more of total sales in 2005, 2004 or
2003. Export sales from U.S. operations to unaffiliated customers were $102.3 million, $73.1
million and $64.6 million in 2005, 2004 and 2003, respectively.
METALWORKING SOLUTIONS & SERVICES GROUP In the MSSG segment, we provide 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.
Our tooling systems consist of a steel toolholder and a cutting tool such as an indexable insert or
drill made from cemented tungsten carbides, high-speed steel and other hard materials. We also
provide solutions to our customers metalcutting needs through engineering services aimed at
improving their competitiveness. Engineering services include field sales engineers identifying
products and engineering designs of products to meet customer needs, which are recognized as
selling expenses.
ADVANCED MATERIALS SOLUTIONS GROUP In the AMSG segment, the principal business is the production
and sale of cemented tungsten carbide products used in mining, highway construction, engineered
applications requiring wear and corrosion resistance, including circuit board drills, compacts and
other similar applications. These products have technical commonality to our core metalworking
products. Additionally, we manufacture and market engineered components with a proprietary metal
cladding technology. We also sell metallurgical powders to manufacturers of cemented tungsten
carbide products. Lastly, we provide our customers with engineered component process technology and
materials, which focus on component deburring, polishing and producing controlled radii.
J&L INDUSTRIAL SUPPLY In this segment, we provide metalworking consumables, related products and
related technical and supply chain related productivity services to small- and medium-sized durable
goods manufacturers in the United States and the
- 53 -
United Kingdom. J&L markets products and services
through a number of channels, including field sales, telesales, wholesalers and direct marketing.
All channels are supported by catalogs, direct mail flyers and the Internet.
FULL SERVICE SUPPLY During fiscal 2005, we divested our FSS segment as discussed in Note 3. FSS
provided metalworking consumables and related products to medium- and large-sized manufacturers in
the United States and Canada. FSS offered integrated supply programs that provided inventory
management systems and just-in-time availability and programs that focused on total cost savings.
Segment data is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
External sales: |
|
|
|
|
|
|
|
|
|
|
|
|
MSSG |
|
$ |
1,378,594 |
|
|
$ |
1,198,505 |
|
|
$ |
1,086,831 |
|
AMSG |
|
|
546,838 |
|
|
|
419,073 |
|
|
|
353,262 |
|
J&L |
|
|
255,840 |
|
|
|
218,295 |
|
|
|
196,170 |
|
FSS |
|
|
122,895 |
|
|
|
135,568 |
|
|
|
122,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external sales |
|
$ |
2,304,167 |
|
|
$ |
1,971,441 |
|
|
$ |
1,758,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales: |
|
|
|
|
|
|
|
|
|
|
|
|
MSSG |
|
$ |
150,039 |
|
|
$ |
124,994 |
|
|
$ |
109,790 |
|
AMSG |
|
|
33,949 |
|
|
|
34,579 |
|
|
|
29,137 |
|
J&L |
|
|
1,662 |
|
|
|
1,502 |
|
|
|
1,989 |
|
FSS |
|
|
2,561 |
|
|
|
2,815 |
|
|
|
3,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intersegment sales |
|
$ |
188,211 |
|
|
$ |
163,890 |
|
|
$ |
144,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales: |
|
|
|
|
|
|
|
|
|
|
|
|
MSSG |
|
$ |
1,528,633 |
|
|
$ |
1,323,499 |
|
|
$ |
1,196,621 |
|
AMSG |
|
|
580,787 |
|
|
|
453,652 |
|
|
|
382,399 |
|
J&L |
|
|
257,502 |
|
|
|
219,797 |
|
|
|
198,159 |
|
FSS |
|
|
125,456 |
|
|
|
138,383 |
|
|
|
125,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
2,492,378 |
|
|
$ |
2,135,331 |
|
|
$ |
1,903,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
MSSG |
|
$ |
187,410 |
|
|
$ |
126,657 |
|
|
$ |
88,213 |
|
AMSG |
|
|
80,932 |
|
|
|
53,168 |
|
|
|
19,762 |
|
J&L |
|
|
27,094 |
|
|
|
19,547 |
|
|
|
6,140 |
|
FSS |
|
|
(4,105 |
) |
|
|
818 |
|
|
|
(56 |
) |
Corporate |
|
|
(83,460 |
) |
|
|
(65,348 |
) |
|
|
(46,134 |
) |
|
|
|
Total operating income |
|
|
207,871 |
|
|
|
134,842 |
|
|
|
67,925 |
|
Interest expense |
|
|
27,277 |
|
|
|
25,884 |
|
|
|
36,166 |
|
Other (income) expense, net |
|
|
(3,683 |
) |
|
|
(1,716 |
) |
|
|
(2,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest |
|
$ |
184,277 |
|
|
$ |
110,674 |
|
|
$ |
34,290 |
|
|
|
|
|
|
|
|
|
|
|
- 54 -
Segment data (continued):
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
MSSG |
|
$ |
44,345 |
|
|
$ |
44,413 |
|
|
$ |
57,674 |
|
AMSG |
|
|
9,806 |
|
|
|
7,283 |
|
|
|
12,325 |
|
J&L |
|
|
2,489 |
|
|
|
2,272 |
|
|
|
2,654 |
|
FSS |
|
|
1,198 |
|
|
|
1,610 |
|
|
|
1,658 |
|
Corporate |
|
|
9,046 |
|
|
|
10,411 |
|
|
|
9,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
66,884 |
|
|
$ |
65,989 |
|
|
$ |
84,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
MSSG |
|
$ |
1,579 |
|
|
$ |
766 |
|
|
$ |
849 |
|
AMSG |
|
|
(314 |
) |
|
|
393 |
|
|
|
(447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity income |
|
$ |
1,265 |
|
|
$ |
1,159 |
|
|
$ |
402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets: |
|
|
|
|
|
|
|
|
|
|
|
|
MSSG |
|
$ |
1,172,497 |
|
|
$ |
1,053,806 |
|
|
$ |
1,050,161 |
|
AMSG |
|
|
627,761 |
|
|
|
452,589 |
|
|
|
376,559 |
|
J&L |
|
|
103,704 |
|
|
|
109,274 |
|
|
|
108,142 |
|
FSS |
|
|
|
|
|
|
51,260 |
|
|
|
41,330 |
|
Corporate |
|
|
188,375 |
|
|
|
271,734 |
|
|
|
246,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,092,337 |
|
|
$ |
1,938,663 |
|
|
$ |
1,822,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
MSSG |
|
$ |
63,948 |
|
|
$ |
43,382 |
|
|
$ |
33,992 |
|
AMSG |
|
|
14,779 |
|
|
|
8,535 |
|
|
|
5,921 |
|
J&L |
|
|
1,829 |
|
|
|
1,392 |
|
|
|
2,281 |
|
FSS |
|
|
367 |
|
|
|
837 |
|
|
|
281 |
|
Corporate |
|
|
7,629 |
|
|
|
2,816 |
|
|
|
6,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
88,552 |
|
|
$ |
56,962 |
|
|
$ |
49,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in affiliated companies: |
|
|
|
|
|
|
|
|
|
|
|
|
MSSG |
|
$ |
13,478 |
|
|
$ |
12,458 |
|
|
$ |
10,903 |
|
AMSG |
|
|
1,578 |
|
|
|
3,317 |
|
|
|
2,877 |
|
Corporate |
|
|
398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in affiliated
companies |
|
$ |
15,454 |
|
|
$ |
15,775 |
|
|
$ |
13,780 |
|
|
|
|
|
|
|
|
|
|
|
- 55 -
Geographic information for sales, based on country of origin, and assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
External sales: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,261,315 |
|
|
$ |
1,098,470 |
|
|
$ |
1,011,222 |
|
Germany |
|
|
366,244 |
|
|
|
314,627 |
|
|
|
285,364 |
|
United Kingdom |
|
|
100,285 |
|
|
|
91,828 |
|
|
|
85,947 |
|
Canada |
|
|
78,210 |
|
|
|
67,185 |
|
|
|
55,516 |
|
Other |
|
|
498,113 |
|
|
|
399,331 |
|
|
|
320,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external sales |
|
$ |
2,304,167 |
|
|
$ |
1,971,441 |
|
|
$ |
1,758,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,132,591 |
|
|
$ |
1,082,464 |
|
|
$ |
989,607 |
|
Germany |
|
|
390,054 |
|
|
|
393,531 |
|
|
|
441,289 |
|
United Kingdom |
|
|
65,703 |
|
|
|
64,177 |
|
|
|
77,803 |
|
Canada |
|
|
24,931 |
|
|
|
26,693 |
|
|
|
23,740 |
|
Other |
|
|
479,058 |
|
|
|
371,798 |
|
|
|
290,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,092,337 |
|
|
$ |
1,938,663 |
|
|
$ |
1,822,548 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 19 SELECTED QUARTERLY FINANCIAL DATA (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
Sep. 30 |
|
|
Dec. 31 |
|
|
Mar. 31 |
|
|
Jun. 30 |
|
Fiscal 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
531,436 |
|
|
$ |
556,218 |
|
|
$ |
597,355 |
|
|
$ |
619,158 |
|
Gross profit |
|
|
173,395 |
|
|
|
181,414 |
|
|
|
211,261 |
|
|
|
224,463 |
|
Net income a |
|
|
22,720 |
|
|
|
28,181 |
|
|
|
30,650 |
|
|
|
37,740 |
|
Basic earnings per share b |
|
|
0.62 |
|
|
|
0.77 |
|
|
|
0.83 |
|
|
|
1.01 |
|
Diluted earnings per share b |
|
|
0.61 |
|
|
|
0.74 |
|
|
|
0.80 |
|
|
|
0.98 |
|
Fiscal 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
444,575 |
|
|
$ |
460,778 |
|
|
$ |
524,230 |
|
|
$ |
541,858 |
|
Gross profit |
|
|
144,107 |
|
|
|
147,632 |
|
|
|
175,854 |
|
|
|
185,774 |
|
Net income c |
|
|
8,764 |
|
|
|
10,892 |
|
|
|
24,070 |
|
|
|
29,852 |
|
Basic earnings per share b |
|
|
0.25 |
|
|
|
0.31 |
|
|
|
0.67 |
|
|
|
0.83 |
|
Diluted earnings per share b |
|
|
0.24 |
|
|
|
0.30 |
|
|
|
0.66 |
|
|
|
0.81 |
|
|
|
|
(a) |
|
Net income includes asset impairment charges of $4.7 million for the quarter ended March
31, 2004. |
|
(b) |
|
Earnings per share amounts for each quarter are computed using the weighted average number of
shares outstanding during the quarter. Earnings per share amounts for the full year are computed
using the weighted average number of shares outstanding during the year. Thus, the sum of the four
quarters earnings per share does not always equal the full-year earnings per share. |
|
(c) |
|
Net income includes restructuring charges of $0.6 million and $3.1 million for the quarters
ended September 30, 2003 and December 31, 2003, respectively. |
- 56 -
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Companys management evaluated, with the participation of the Companys Chief Executive Officer
and Chief Financial Officer, the effectiveness of the Companys disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). The Companys disclosure controls were
designed to provide a reasonable assurance that information required to be disclosed in reports
that we file or submit under the Securities Exchange Act of 1934, as amended, (Exchange Act) is
recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission. It should be noted that the design of any system
of controls is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. However, the controls have been designed to
provide reasonable assurance of achieving the controls stated goals. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures are effective to provide reasonable assurance at June 30, 2005
to ensure that information required to be disclosed in the reports that we file or submit under the
Exchange Act is (i) accumulated and communicated to management, including the Companys Chief
Executive Officer and Chief Financial Officer, to allow timely decisions regarding required
disclosure and (ii) recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission.
(b) Managements Report on Internal Control over Financial Reporting
Managements Report on Internal Control over Financial Reporting is included in Item 8 of this Form
10-K.
(c) Attestation Report of the Independent Registered Public Accounting Firm
Managements assessment of effectiveness of Kennametals internal control over financial reporting
and the effectiveness of Kennametals internal control over financial reporting as of June 30, 2005
has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as stated in their report included in Item 8 of this Form 10-K.
(d) Changes in Internal Control over Financial Reporting
On May 1, 2005, the Company implemented a global financial consolidation tool. The implementation
of this tool is expected to enhance our internal control over financial reporting. This
implementation was not made in preparation of our first management report on internal control over
financial reporting as of June 30, 2005 nor was it made in response to an identified significant
deficiency or material weakness in our internal control over financial reporting.
There have been no other significant changes in internal control over financial reporting that
occurred during the fourth quarter of 2005 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
ITEM 9B OTHER INFORMATION
None.
- 57 -
Part III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICERS OF THE REGISTRANT
Information regarding the officers of Kennametal Inc. is as follows: Name, Age and Position,
Experience During Past Five Years.(2)
Markos I. Tambakeras, 54(1)
Chairman,
President and Chief Executive Officer
Chairman of the Board effective July 1, 2002. President and Chief Executive Officer since July 1,
1999.
R. Daniel Bagley, 45(1)
Vice President, Corporate Strategy and MSSG Global Marketing
Vice President since July 2002. Formerly, Business Development Director and Industrial Consultant
for Deloitte & Touche Consulting Group (a professional services firm) from December 2000 to May
2002; Principal, B&B Management Labs from September 1997 to December 2000.
James R. Breisinger, 55(1)
Vice
President,
President, Advanced Components Group
Vice President since 1990. President, Advanced Components Group since July 2005. President,
Advanced Materials Solutions Group from August 2000 to July 2005. Chief Financial Officer from
September 1998 to August 2000.
Carlos M. Cardoso, 47(1)
Executive Vice President and Chief Operating Officer
Executive Vice President and Chief Operating Officer since January 2005. Vice President and
President, Metalworking Solutions and Services Group from April 2003 to December 2004. Formerly,
President, Pump Division, Flowserve Corporation (a manufacturer of flow management products and
services) from August 2001 to March 2003; Vice President and General Manager, Engine Systems and
Accessories, of Honeywell International, Inc. (formerly Allied Signal, Inc., a diversified
technology and manufacturing company) from March 1999 to August 2001.
Stanley B. Duzy, Jr., 58(1)
Vice
President,
Chief Administrative Officer
Vice President since November 1999. Chief Administrative Officer since 1999.
David W. Greenfield, 55(1)
Vice
President,
Secretary and General Counsel
Vice President,
Secretary and General Counsel since October 2001. Formerly, member, Buchanan
Ingersoll Professional Corporation (attorneys-at-law) July 2000 to September 2001; Special Counsel,
ArvinMeritor (a provider of components for vehicles) from February 1999 to July 2000.
Timothy A. Hibbard, 48(1)
Corporate Controller and Chief Accounting Officer
Corporate Controller and Chief Accounting Officer since February 2002. Formerly, Director of
Finance, Advanced Materials Solutions Group from September 2000 to February 2002; Vice President
and Controller, Greenfield Industries, Inc. from October 1998 to September 2000.
Dr. William Y. Hsu, 57(1)
Vice
President,
Chief Technical Officer
Vice President and
Chief Technical Officer since April 2004. Formerly, Vice President & Chief
Technical Officer, DuPont Performance Materials from January 2004 to April 2004; Vice President,
Technology, Sustainable Growth & Americas, DuPont Engineering Polymers from July 2003 to December
2003; Vice President, Technology & Americas, DuPont Engineering Polymers from February 1999 to
2003. (Dupont is a manufacturer of technology-based products.)
Ronald C. Keating, 37
Vice
President,
Group Vice President, Energy, Mining and Construction Solutions
Vice President since July 2004. Group Vice President of Energy, Mining and Construction Solutions
since September 2004. Vice President and General Manager of Mining and Construction from April 2002
to September 2004. Vice President and General Manager
- 58 -
of Electronics Products Group from July 2001
to January 2003. Formerly employed by Ingersoll-Rand (a provider of climate control, industrial
solutions, infrastructure development and security and safety products) from 1998 to 2001 as
Business Unit Manager for Blaw-Knox Globally and General Manager of the Small Paver Division.
Brian E. Kelly, 42
Assistant Treasurer and Director of Tax
Assistant Treasurer and Director of Tax since September 1998.
Lawrence J. Lanza, 56(1)
Corporate Treasurer
Corporate Treasurer since July 2003. Assistant Treasurer and Director of Treasury Services from
April 1999 to July 2003.
James E. Morrison, 54(1)
Vice
President,
Vice President, Mergers and Acquisitions
Vice President since 1994. Vice President, Mergers and Acquisitions since July 2003; Treasurer from
1987 to July 2003.
Wayne D. Moser, 52
Vice
President,
Chief Financial Officer Europe
Vice President since July 1998. Chief Financial Officer Europe since August 2005; Director,
European Strategic Initiatives from November 2004 to July 2005; General Manager, Industrial
Products Europe, from July 2003 to October 2004; Integration Director from May 2002 to June 2003;
General Manager, Mining & Construction from November 1997 to April 2002.
Ralph G. Niederst, 54(1)
Vice
President,
Chief Information Officer
Vice President since May 2000. Chief Information Officer since May 2000; Vice President of Global
Information Systems since May 2000.
Kevin G. Nowe, 53
Assistant Secretary and Assistant General Counsel
Assistant General Counsel since 1992; Assistant Secretary since 1993.
P. Mark Schiller, 57
Vice
President,
Director of Distribution Services
Vice President since 1991; Director of Distribution Services since 1990.
Catherine R. Smith, 42(1)
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Financial Officer since April 2005. Formerly, Executive Vice
President and Chief Financial Officer, Bell Systems (a provider of vertical takeoff and landing
aircraft, provider of advanced technology solutions to global defense and aerospace industries, and
designer and manufacturer of reciprocating piston aircraft engines) (a business segment of Textron,
Inc.) from October 2003 to March 2005; Vice President and Chief Financial Officer, Intelligence and
Information Systems Division, Ratheon Company (a defense and aerospace systems supplier) from April
2003 to September 2003; Controller, Intelligence and Information Systems Division, Ratheon Company
from October 2002 to March 2003; Chief Financial Officer, Tactical Systems Business Unit, Ratheon
Company from January 2000 to September 2002.
John Q. Stang, 51
Vice President, Global Sales Metalworking Solutions and Services Group
Vice President, Global Sales Metalworking Solutions and Services Group since August 2002. Formerly,
Vice President, Sales U.S. and Canada Road Development Group, Ingersoll-Rand Company from March
2000 to August 2002.
Philip H. Weihl, 49
Vice President, Kennametal Value Business System and Lean Enterprise
Vice President, Kennametal Value Business System and Lean Enterprise since January 2005. Vice
President of Global Manufacturing from September 2001 to December 2004; Director of Global
Manufacturing from January 2000 to August 2001.
Michael P. Wessner, 44(1)
Vice
President,
President, J&L Industrial Supply
- 59 -
Vice President since January 2001. President, J&L Industrial Supply since April 2003. Chief
Operating Officer from January 2001 to April 2003. Formerly, Chief Executive Officer, Emco/ESS
Holdings (a distributor of office supplies and furniture) from 1999 to 2000.
Notes
(1) Executive officer of the Registrant for purposes of Section 16 of the Securities and Exchange
Act of 1934.
(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.
Incorporated herein by reference is the information under the captions Election of Directors and
Section 16(a) Beneficial Ownership Reporting Compliance in our definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after June 30, 2005 (2005 Proxy
Statement).
Incorporated herein by reference is the information set forth under the caption Ethics and
Corporate GovernanceCode of Business Ethics and Conduct in the 2005 Proxy Statement.
The Company has a separately designated standing audit committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee of
the Companys Board of Directors include: Lawrence W. Stranghoener, Ronald M. DeFeo, A. Peter Held,
Timothy R. McLevish and Larry D. Yost. Incorporated herein by reference is the information set
forth in the second and third sentences under the caption Board of Directors and Board Committees
Committee Functions Audit Committee in the 2005 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 Board of Directors Compensation and Benefits in the 2005 Proxy
Statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREOWNER
MATTERS
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, under the caption Principal Holders of Voting Securities with respect to
other beneficial owners and under the caption Compensation Plans Equity Compensation Plan
Information with respect to disclosure regarding the number of outstanding options, warrants and
rights granted under equity compensation plans and the number of shares remaining for issuance
under such plans, each in the 2005 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 2005 Proxy
Statement.
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated herein by reference is the information with respect to pre-approval policies set forth
under the caption Independent Registered Public Accounting Firm Ratification of the Selection of
the Independent Registered Public Accounting Firm Audit Committee Pre-Approval Policies and the
information with respect to principal accountant fees and services set forth under Independent
Registered Public Accounting Firm Ratification of the Selection of the Independent Registered
Public Accounting Firm Fees and Services in the 2005 Proxy Statement.
Part IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Form 10-K report.
1. Financial Statements
2. Financial Statement Schedule
The financial statement schedule required by Part II, Item 8 of this document is filed as part of
this report. All of the other schedules are omitted as the required information is inapplicable or
the information is presented in our consolidated financial statements or related notes.
- 60 -
|
|
|
|
|
FINANCIAL STATEMENT SCHEDULE: |
|
Page |
Schedule IIValuation and Qualifying Accounts and Reserves for
the Years Ended June 30, 2005, 2004 and 2003
|
|
|
65 |
|
3. Exhibits
|
|
|
|
|
(2)
|
|
Plan of Acquisition,
Reorganization,
Arrangement, Liquidation, or
Succession |
|
|
|
|
|
|
|
(2.1)
|
|
Stock Purchase Agreement dated
May 3, 2002
among Milacron Inc., Milacron
B.V. and Kennametal Inc.
|
|
Exhibit 2.1 of the May 6,
2002 Form 8-K is
incorporated herein by
reference. |
|
|
|
|
|
(3)
|
|
Articles of Incorporation and
Bylaws |
|
|
|
|
|
|
|
(3.1)
|
|
Bylaws of Kennametal Inc. as
amended through January 29,
2002
|
|
Exhibit 3.1 of December
31, 2001 Form 10-Q is
incorporated herein by
reference. |
|
|
|
|
|
(3.2)
|
|
Amended and Restated Articles
of Incorporation as Amended
|
|
Exhibit 3.1 of the
September 30, 1994 Form
10-Q (SEC file no.
reference 1-5318; docket
entry dateNovember 14,
1994) is incorporated
herein by reference. |
|
|
|
|
|
(4)
|
|
Instruments Defining the Rights
of Security Holders, Including
Indentures |
|
|
|
|
|
|
|
(4.1)
|
|
Rights Agreement effective as
of November 2,
2000
|
|
Exhibit 1 of the Form 8-A
dated October 10, 2000 is
incorporated herein by
reference. |
|
|
|
|
|
(4.2)
|
|
First amendment to Rights
Agreement, made and entered
into as of October 6, 2004, by
and between the registrant and
Mellon Investor Services LLC
|
|
Exhibit 10.1 of the
October 26, 2004 Form 8-K
is incorporated herein by
reference. |
|
|
|
|
|
(4.3) |
|
Indenture, dated as of June 19,
2002, by and between the registrant and Bank One Trust Company, N.A.,
as trustee |
|
Exhibit 4.1 of the June 14, 2002
Form 8-K is incorporated herein by reference. |
|
|
|
|
|
(4.4) |
|
First Supplemental Indenture, dated
as of June 19, 2002, by and between the registrant and Bank One Trust
Company, N.A. as trustee |
|
Exhibit 4.2 of the June 14, 2002
Form 8-K 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 Compensation
Committee of the Board of
Directors contained in
the 2003 Proxy Statement
is incorporated herein by
reference. |
|
|
|
|
|
(10.2)*
|
|
Stock Option and Incentive Plan
of 1988
|
|
Exhibit 10.1 of the
December 31, 1988 Form
10-Q (SEC file no.
reference 1-5318; docket
entry dateFebruary 9,
1989) is incorporated
herein by reference. |
|
|
|
|
|
(10.3)*
|
|
Deferred Fee Plan for
Outside Directors
|
|
Exhibit 10.4 of the June 30, 1988 Form 10-K (SEC file
no. reference 1-5318; docket entry dateSeptember
23, 1988) is incorporated herein by reference. |
|
|
|
|
|
(10.4)*
|
|
Executive Deferred
Compensation Trust Agreement
|
|
Exhibit 10.5 of the June 30, 1988 Form 10-K (SEC file
no. reference 1-5318; docket entry dateSeptember
23, 1988) is incorporated herein by reference. |
|
|
|
|
|
(10.5)*
|
|
Directors Stock Incentive
Plan, as amended
|
|
Exhibit 10.5 of the June 30, 2003 Form 10-K is
incorporated herein by reference. |
|
|
|
|
|
(10.6)*
|
|
Performance Bonus Stock Plan of 1995, as
amended
|
|
Exhibit 10.6 of the June 30, 1999 Form 10-K is
incorporated herein by reference. |
|
|
|
|
|
- 61 -
|
|
|
|
|
(10.7)*
|
|
Stock Option and Incentive Plan of 1996
|
|
Exhibit 10.14 of the September 30, 1996 Form 10-Q is
incorporated herein by reference. |
|
|
|
|
|
(10.8)*
|
|
Stock Option and Incentive Plan of 1992, as
amended
|
|
Exhibit 10.8 of the December 31, 1996 Form 10-Q is
incorporated herein by reference. |
|
|
|
|
|
(10.9)*
|
|
Form of Employment Agreement with Named
Executive Officers (other than Mr.
Tambakeras)
|
|
Exhibit 10.9 of the June 30, 2000 Form 10-K is
incorporated herein by reference. |
|
|
|
|
|
|
|
|
|
|
(10.10)*
|
|
Schedule of Named Executive
Officers who have entered into Form of Employment Agreement
as
set forth in Exhibit 10.9.
|
|
Exhibit 10.10 of the June 30, 2004 Form 10-K is
incorporated herein by reference. |
|
|
|
|
|
(10.11)*
|
|
Kennametal Inc. Supplemental Executive
Retirement Plan (as amended January 1,
2004)
|
|
Exhibit 10.3 of the September 30, 2004 Form 10-Q is
incorporated herein by reference. |
|
|
|
|
|
(10.12)*
|
|
Executive Employment Agreement dated May 1,
2002 between Kennametal Inc. and Markos I.
Tambakeras
|
|
Exhibit 10.11 of the June 30, 2002 Form 10-K is
incorporated herein by reference. |
|
|
|
|
|
(10.13)*
|
|
Kennametal Inc. 1999 Stock Plan
|
|
Exhibit 10.5 of the June 11, 1999 Form 8-K is
incorporated herein by reference. |
|
|
|
|
|
(10.14)*
|
|
Kennametal Inc. Stock Option and Incentive
Plan
of 1999
|
|
Exhibit A of the 1999 Proxy Statement is incorporated
herein by reference. |
|
|
|
|
|
(10.15)
|
|
Amended and Restated Credit Agreement
dated as of October 29, 2004 among
Kennametal Inc., Bank of America, N.A. (as
Administrative Agent); Keybank National
Association and National City Bank of
Pennsylvania (as Co-Syndication Agents);
PNC Bank, National Association and JP
Morgan Chase Bank (as Co-Documentation
Agents); and the following lenders: Bank
of American, N.A., Keybank National
Association, National City Bank of
Pennsylvania, PNC Bank, National
Association, and JP Morgan Chase Bank.
|
|
Exhibit 10.1 of the October 29, 2004 Form 8-K is
incorporated herein by reference. |
|
|
|
|
|
(10.16)*
|
|
Executive Employment Agreement dated April
29, 2003 between Kennametal Inc. and
Carlos M. Cardoso
|
|
Exhibit 10.15 of the June 30, 2003 Form 10-K is
incorporated herein by reference. |
|
|
|
|
|
(10.17)*
|
|
Kennametal Inc. Stock and Incentive Plan
of 2002 (as amended on October 26, 2004)
|
|
Exhibit 10.1 of the October 26, 2004 Form 8-K is
incorporated herein by reference. |
|
|
|
|
|
(10.18)*
|
|
Forms of Award Agreements under the
Kennametal Inc. Stock and Incentive Plan
of 2002 (as amended on October 26, 2004)
|
|
Exhibit 10.18 of the June 30, 2004 Form 10-K is
incorporated herein by reference. |
|
|
|
|
|
(10.19)*
|
|
Description of Compensation Payable to
Non-Employee Directors
|
|
Exhibit 10.1 of the March 31, 2005 Form 10-Q is
incorporated herein by reference. |
|
|
|
|
|
(10.20)*
|
|
Offer letter of Cathy R. Smith dated March
9, 2005
|
|
Exhibit 10.1 of the March 22, 2005 Form 8-K is
incorporated herein by reference. |
|
|
|
|
|
(10.21)*
|
|
Form of Indemnification Agreement for
Cathy R. Smith
|
|
Exhibit 10.2 of the March 22, 2005 Form 8-K is
incorporated herein by reference. |
- 62 -
|
|
|
|
|
(10.22)*
|
|
Summary of Perquisites Program
|
|
The text of Item 1.01 of the April 22, 2005 Form 8-K
is incorporated herein by reference. |
|
|
|
|
|
(10.23)* |
|
Charter Jet Policy &
Procedures, Personal Use of
Aircraft Chartered by the
Company |
|
Filed herewith. |
|
|
|
|
|
(21)
|
|
Subsidiaries of the Registrant
|
|
Filed herewith. |
|
|
|
|
|
(23)
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
Filed herewith. |
|
|
|
|
|
(31)
|
|
Certifications |
|
|
|
|
|
|
|
(31.1)
|
|
Certification executed by
Markos I. Tambakeras,
Chief Executive Officer of
Kennametal Inc.
|
|
Filed herewith. |
|
|
|
|
|
(31.2)
|
|
Certification executed by
Catherine R. Smith,
Chief Financial Officer of
Kennametal Inc.
|
|
Filed herewith. |
|
|
|
|
|
(32)
|
|
Section 1350 Certifications |
|
|
|
|
|
|
|
(32.1)
|
|
Certification Pursuant to 18
U.S.C. Section
1350 as Adopted Pursuant to
Filed herewith.
Section 906 of the Sarbanes-Oxley
Act of 2002,
executed by Markos I. Tambakeras,
Chief
Executive Officer of Kennametal
Inc., and
Catherine R. Smith, Chief Financial
Officer of
Kennametal Inc.
|
|
Filed herewith. |
|
|
|
* |
|
Denotes management contract or compensatory plan or arrangement. |
- 63 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
KENNAMETAL INC.
|
Date: September 9, 2005
|
|
By:
|
|
/s/ Timothy A. Hibbard |
|
|
|
|
|
|
|
|
|
Timothy A. Hibbard |
|
|
|
|
Corporate Controller and Chief Accounting Officer |
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/ MARKOS I. TAMBAKERAS
Markos I. Tambakeras
|
|
Chairman, President and
Chief Executive Officer
|
|
September 9, 2005 |
|
|
|
|
|
/s/ CATHERINE R. SMITH
Catherine R. Smith
|
|
Executive Vice President and
Chief Financial Officer
|
|
September 9, 2005 |
|
|
|
|
|
/s/ TIMOTHY A. HIBBARD
Timothy A. Hibbard
|
|
Corporate Controller and
Chief Accounting Officer
|
|
September 9, 2005 |
|
|
|
|
|
/s/ PETER B. BARTLETT
|
|
Director
|
|
September 9, 2005 |
Peter B. Bartlett |
|
|
|
|
|
|
|
|
|
/s/ RONALD M. DEFEO
|
|
Director
|
|
September 9, 2005 |
Ronald M. DeFeo |
|
|
|
|
|
|
|
|
|
/s/ A. PETER HELD
|
|
Director
|
|
September 9, 2005 |
A. Peter Held |
|
|
|
|
|
|
|
|
|
/s/ TIMOTHY R. MCLEVISH
|
|
Director
|
|
September 9, 2005 |
Timothy R. McLevish |
|
|
|
|
|
|
|
|
|
/s/ WILLIAM R. NEWLIN
|
|
Director
|
|
September 9, 2005 |
William R. Newlin |
|
|
|
|
|
|
|
|
|
/s/ LAWRENCE W. STRANGHOENER
|
|
Director
|
|
September 9, 2005 |
Lawrence W. Stranghoener |
|
|
|
|
|
|
|
|
|
/s/ STEVEN H. WUNNING
|
|
Director
|
|
September 9, 2005 |
Steven H. Wunning |
|
|
|
|
|
|
|
|
|
/s/ LARRY D. YOST
|
|
Director
|
|
September 9, 2005 |
Larry D. Yost |
|
|
|
|
- 64 -
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
Balance at |
|
Charged to |
|
Other |
|
|
|
|
|
|
|
|
|
Deductions |
|
at |
(in thousands) |
|
Beginning |
|
Costs and |
|
Comprehensive |
|
|
|
|
|
Other |
|
from |
|
End of |
For the year ended June 30, |
|
of Year |
|
Expenses |
|
Income |
|
Recoveries |
|
Adjustments |
|
Reserves |
|
Year |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts |
|
$ |
18,727 |
|
|
$ |
3,905 |
|
|
$ |
|
|
|
$ |
265 |
|
|
$ |
(257 |
) a |
|
$ |
5,805 |
b |
|
$ |
16,835 |
|
Reserve for obsolete inventory |
|
$ |
77,810 |
|
|
$ |
11,577 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,942 |
) a |
|
$ |
26,075 |
c |
|
$ |
59,370 |
|
Deferred tax asset valuation
allowance |
|
$ |
53,051 |
|
|
$ |
(4,772 |
) |
|
$ |
905 |
|
|
$ |
(1,827 |
) |
|
$ |
(9,980 |
) a |
|
$ |
|
|
|
$ |
37,377 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts |
|
$ |
23,405 |
|
|
$ |
6,427 |
|
|
$ |
|
|
|
$ |
134 |
|
|
$ |
389 |
a |
|
$ |
11,628 |
b |
|
$ |
18,727 |
|
Reserve for obsolete inventory |
|
$ |
70,866 |
|
|
$ |
9,905 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,799 |
a |
|
$ |
10,760 |
c |
|
$ |
77,810 |
|
Deferred tax asset valuation
allowance |
|
$ |
41,041 |
|
|
$ |
12,518 |
|
|
$ |
(4,049 |
) |
|
$ |
(1,792 |
) |
|
$ |
7,952 |
a |
|
$ |
2,619 |
d |
|
$ |
53,051 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts |
|
$ |
12,671 |
|
|
$ |
6,204 |
|
|
$ |
|
|
|
$ |
307 |
|
|
$ |
11,652 |
a |
|
$ |
7,429 |
b |
|
$ |
23,405 |
|
Reserve for obsolete inventory |
|
$ |
46,693 |
|
|
$ |
15,596 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,852 |
a |
|
$ |
9,275 |
c |
|
$ |
70,866 |
|
Deferred tax asset valuation
allowance |
|
$ |
7,507 |
|
|
$ |
15,869 |
|
|
$ |
5,590 |
|
|
$ |
(1,064 |
) |
|
$ |
13,139 |
a |
|
$ |
|
|
|
$ |
41,041 |
|
|
|
|
(a) |
|
Represents foreign currency translation adjustment and
reserves divested or acquired through business
combinations. |
|
(b) |
|
Represents uncollected accounts charged against the allowance. |
|
(c) |
|
Represents scrapped inventory and other charges against the reserve. |
|
(d) |
|
Represents write-offs against the valuation allowance related to reorganization and a
subsidiary liquidation. |
- 65 -
EX-10.23
Exhibit 10.23
CHARTER JET POLICY & PROCEDURES
Personal Use Of Aircraft Chartered By The Company
Kennametal Inc. (the Company) may make available aircraft owned, leased or chartered by it for
personal use by executive officers of the Company if such corporate aircraft is not otherwise being
used for business purposes.
APPROVAL OF USE
A request by any executive (other than the Chief Executive Officer) for personal use of an aircraft
owned, leased or chartered by the Company must be approved by the Chief Executive Officer. A
request by the Chief Executive Officer for the personal use of such aircraft must be pre-approved
by either the Chief Financial Officer or the General Counsel, or by the Compensation Committee of
the Board of Directors if the request for personal use by the Chief Executive Officer came after
the use had already occurred. Any executive desiring to use such aircraft for personal use must
complete the request form attached to the Charter Jet Policy & Procedures and deliver such form to
the Chief Executive Officer (or the Chief Financial Officer or General Counsel in the case of the
Chief Executive Officer) for approval. The approved request form must then be promptly submitted
to the payroll department at the executives location.
COST OF USE
Imputation of Income. Taxable income will be imputed to the executive (considered compensation)
for each personal trip at a rate equivalent to the Standard Industry Fare Level formula calculation
(SIFL), or such other calculation as may be required under applicable IRS rules and regulations,
for that trip for the executive and each family member or guest over the age of two.
Hitchhiker Rules. The hitchhiker rules apply when a flight is for business purposes, but
certain passengers on the flight (referred to as hitchhikers) come along for non-business
purposes. If at least one-half (1/2) of the regular seating capacity on the aircraft is occupied
by employees whose flights are primarily for employers business purposes, no income will be
imputed to an executive and/or an immediate family member of an executive who is a hitchhiker. If
less than one-half (1/2) of the regular seating capacity on the aircraft is occupied by employees
whose flights are primarily for employers business purposes, then income using the SIFL formula
will be imputed to an executive and/or an immediate family member of an executive who is a
hitchhiker.
Other Charges. All other charges such as catering, ground transportation and other extra charges
incurred by the executive while using the corporate aircraft for personal use will be imputed to
the executive (considered compensation) at their actual cost to the Company.
EX-21
Exhibit 21
CORPORATE DIRECTORY
Our consolidated subsidiaries and affiliated companies as of June 30, 2005 are:
Consolidated Subsidiaries of Kennametal Inc.
Kennametal Australia Pty. Ltd.
Kennametal Exports Inc.
Kennametal Foreign Sales Corporation
Kennametal (Canada) Ltd.
Kennametal (Shanghai) Ltd.
Kennametal (Thailand) Co., Ltd.
Kennametal (Xuzhou) Company Ltd.
Kennametal Hardpoint Inc.
Kennametal International S.A. (Panama)
Kennametal Japan Ltd.
Kennametal (Malaysia) Sdn. Bhd.
Kennametal de Mexico, S.A. de C.V.
Kennametal SP. Z.o.o
Kennametal (Singapore) Pte. Ltd.
Kennametal South Africa (Pty.) Ltd.
Kennametal Korea Ltd.
Kennametal Holding (Cayman Islands) Limited
Kennametal Hungary Holdings Inc.
Kennametal Hungary Finance Services Kft.
Kennametal Financing I
Kennametal Financing II
Kennametal Holdings Europe Inc.
Barbara Brown & Associates, Inc.
Carbide Precision Grinding Company II, Inc.
Carbidie Asia Pacific Pte. Ltd.
Cleveland Twist Drill de Mexico, S.A. de C.V.
Extrude Hone Corporation
Greenfield Industries Canada Incorporated
Hanita Metal Works, Ltd.
Kemmer International, Inc.
South Deerfield Industrial, Inc.
TCM Europe, Inc.
Consolidated Subsidiaries of Kennametal Financing II
Kennametal PC Inc.
Kennametal TC Inc.
Kennametal Receivables Corporation
Consolidated Subsidiaries of Kennametal Holdings Europe Inc.
JLK Direct Distribution Inc.
Kennametal Widia Holdings Inc.
Consolidated
Subsidiaries and Affiliated Company of Kennametal Widia Holdings Inc.
Kennametal Bermuda L. (partnership)
Kennametal Europe Holding GmbH
Kennametal Holding GmbH (Germany)
CIRBO Limited (England)
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Consolidated Subsidiary of Kennametal Bermuda L.P.
Kennametal Europe GmbH
Consolidated Subsidiary of Kennametal Holding GmbH (Germany)
Kennametal Hertel Europe Holding GmbH
Consolidated Subsidiaries of Kennametal Hertel Europe Holding GmbH
Kennametal AMSG GmbH
Kennametal Hertel AG
Kennametal Hungaria Kft.
Kennametal Logistics GmbH
Kennametal Shared Services GmbH
Kennametal Technologies GmbH
Kennametal Widia Beteiligungs GmbH
Kemmer Hartmetallwerkeuge GmbH
V&S Werkzeuge GmbH
Widia GmbH
Consolidated
Subsidiaries and Affiliated Company of Kennametal Hertel AG
Kennametal Belgium S.A.
Kennametal Beteiligungs GmbH
Kennametal Czech s.r.o.
Kennametal Deutschland GmbH
Kennametal France S.A.S
Kennametal Hertel International GmbH
Kennametal Hertel Korea GmbH
Kennametal Iberica S.L.
Kennametal Kesici Tak.mlar Sanayi ve Ticaret A.S. (Turkey)
Kennametal Nederland B.V.
Kennametal Osterreich GmbH
Kennametal UK Limited
Rubig Beteiligungs GmbH
Rubig GmbH & Co. Kg
Kennametal GmbH & Co. Kg Werkzeuge & Hartstoffe (partnership)
Consolidated
Affiliated Company of Kennametal Beteiligungs GmbH
Kennametal Verwaltungs GmbH & Co Kg (partnership)
Consolidated
Affiliated Company of Kennametal GmbH & Co. Kg Werkzeuge &
Hartstoffe (partnership)
Kennametal Real Estate GmbH & Co. Kg (partnership)
Consolidated Affiliated Company of Kennametal Deutschland GmbH
Kennametal (Deutschland) Real Estate GmbH & Co. Kg (partnership)
Consolidated Affiliated Company of Rubig GmbH & Co. Kg
Kennametal Rubig Real Estate GmbH & Co. Kg (partnership)
Consolidated Affiliated Company of Kennametal Widia Beteiligungs GmbH
Kennametal Widia GmbH & Co. Kg (partnership)
Consolidated
Subsidiary of CIRBO Limited (England)
International Twist Drill Limited Cleveland Europe Limited
Consolidated Subsidiaries of Kennametal Hardpoint, Inc.
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Kennametal Hardpoint H.K. Ltd.
Kennametal Hardpoint (Taiwan) Inc.
Consolidated Subsidiary of Kennametal Hardpoint H.K. Ltd.
Kennametal Hardpoint (Shanghai) Ltd.
Consolidated
Subsidiary and Affiliated Company of Widia GmbH
Kennametal Widia Real Estate GmbH & Co. Kg (partnership)
Meturit AG
Consolidated Subsidiary of Meturit AG
Kennametal Widia India Limited
Consolidated Subsidiaries of Kennametal Holding (Cayman Islands) Limited
Kennametal Argentina S.A.
Kennametal do Brasil Ltda.
Kennametal Chile Ltda.
Consolidated Subsidiaries of JLK Direct Distribution Inc.
J&L America, Inc.
Fusion Liquidation Corp.
Consolidated Subsidiary of Fusion Liquidation Corp.
Fusion Liquidation Ltd. (Canada)
Consolidated Subsidiaries of Kemmer Hartmetallwerkzeuge GmbH
Kemmer Prazisian GmbH (Germany)
Kemmer CIRBO S.r.l. (Italy)
Kemmer AG (Switzerland)
Consolidated Subsidiary of Kennametal Iberica S. L.
Kennametal Manufacturing Spain S.L.
Consolidated Subsidiary of Kennametal Hertel International GmbH
Kennametal Italia S.p.A.
Consolidated Subsidiary of Kennametal Osterreich GmbH
Kennametal Polska Sp. Z.o.o.
Consolidated Subsidiaries of Kennametal UK Limited
Kennametal Logistics UK Ltd.
Kennametal Manufacturing UK Ltd.
Widia UK Ltd.
Consolidated Subsidiary of Kennametal Nederland B.V.
Kennametal Engineered Products B.V.
Consolidated Subsidiaries of J&L America, Inc.
J&L Industrial Supply UK (branch)
J&L Werkzeuge und Industriebedarf GmbH (Germany)
STC Liquidation Corp.
Consolidated Subsidiaries of Extrude Hone Corporation
Extrude Hone Korea Co. Ltd.
Extrude Hone Ltd.
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Extrude Hone (UK) Ltd.
Extrude Hone Participacoes Ltda.
Dynetics, LLC
Surftran Manufacturing Co., LLC
Tokyo Extrude Hone Ltd.
Consolidated
Subsidiaries of Extrude Hone Ltd.
Extrude Hone (Ireland) Ltd.
Extrude Hone France S.A.
Extrude Hone GmbH
Extrude Hone Spain (SC)
Consolidated Subsidiary of Extrude Hone Participacoes Ltda.
Extrude Hone do Brasil Sistemas De Acabamentos De Peca Ltda.
Consolidated Subsidiaries of Surftran Manufacturing Co., LLC
Cation LLC
The Surftran Company, LLC
Thermoburr Illinois LLC
Thermoburr Michigan East LLC
Thermoburr Michigan West LLC
Thermoburr New York LLC
Thermoburr South Carolina LLC
Consolidated Subsidiaries of Hanita Metal Works, Ltd.
Hanita Cutting Tools, Inc.
Hanita Metal Works GmbH (Germany)
Consolidated Subsidiary of Cleveland Twist Drill de Mexico, S.A. de C.V.
Herramientas Cleveland, S.A. de C.V.
Consolidated Subsidiary of Herramientas Cleveland, S.A. de C.V.
Greenfield Tools de Mexico, S.A. de C.V.
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EX-23
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.
33-25331, No. 33-55768, No. 33-55766, No. 33-65023, No. 333-18423, No. 333-18429, No. 333-18437,
No. 333-77411, No. 333-88049, No. 333-30454, No. 333-30448, No. 333-53562, No. 333-100867, No.
333-124774, No. 333-120314), and Form S-3 (No. 333-61854, No. 333-40809) of Kennametal Inc. of our
report dated September 6, 2005, relating to the financial statements, financial statement schedule,
managements assessment of the effectiveness of internal control over financial reporting and the
effectiveness of internal control over financial reporting, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
September 9, 2005
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EX-31.1
Exhibit 31.1
I, Markos I. Tambakeras, certify that:
1. I have reviewed this annual report on Form 10-K of Kennametal Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
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/s/ Markos I. Tambakeras |
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Markos I. Tambakeras |
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Chairman, President and Chief Executive Officer |
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September 9, 2005 |
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EX-31.2
Exhibit 31.2
I, Catherine R. Smith, certify that:
1. I have reviewed this annual report on Form 10-K of Kennametal Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrants internal control over financial
reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrants
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
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/s/ Catherine R. Smith |
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Catherine R. Smith |
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Executive Vice President and Chief Financial Officer |
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September 9, 2005 |
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EX-32.1
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Kennametal Inc. (the Corporation) on Form 10-K for the
period ended June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof
(the Report), each of the undersigned officers of the Corporation certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and result of operations of the Corporation.
/s/ Markos I. Tambakeras
Markos I. Tambakeras
Chairman, President and Chief Executive Officer
September 9, 2005
/s/ Catherine R. Smith
Catherine R. Smith
Executive Vice President and Chief Financial Officer
September 9, 2005
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This certification is made solely for purposes of 18 U.S.C. Section 1350, subject to the knowledge
standard contained therein, and not for any other purpose. |
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