ITEM 1. BUSINESS
Kennametal Inc. was incorporated in Pennsylvania in 1943. Kennametal Inc.
(Kennametal or the company) is a global leader engaged in the manufacture,
purchase and distribution of a broad range of tools, tooling systems, and
solutions to the metalworking, mining, oil and energy industries, and
wear-resistant parts for a wide range of industries. Unless otherwise specified,
any reference to a "year" is to a fiscal year ended June 30.
Kennametal specializes in developing and manufacturing metalworking tools and
wear-resistant parts using a specialized type of powder metallurgy. Kennametal's
metalworking tools are made of cemented tungsten carbides, ceramics, cermets,
high-speed steel and other hard materials. Kennametal also manufactures and
markets a complete line of toolholders, toolholding systems and rotary cutting
tools by machining and fabricating steel bars and other metal alloys. The
company, through its 83 percent-owned subsidiary JLK Direct Distribution Inc.
(JLK), also is one of the largest suppliers of metalworking consumables and
related products in the United States. Kennametal also manufactures tungsten
carbide products used in engineered applications, mining and highway
construction, and other similar applications, including circuit board drills,
compacts and metallurgical powders.
During 1998, the company expanded its metalworking focus by acquiring Greenfield
Industries, Inc. (Greenfield), a leading worldwide manufacturer of consumable
cutting tools and related products used in a variety of industrial, electronics,
energy and construction, engineered and consumer markets. Greenfield
manufactures a complete line of high-speed steel and tungsten carbide products,
including drills; endmills; taps and dies and fixed limit gages; products used
in oil and gas drilling; carbide drills, endmills and routers used to make
printed circuit boards for the electronics industry; and "made-to-order"
tungsten carbide parts for demanding wear applications such as plastics
processing, tool and die manufacturing and petroleum flow control. The company
also manufactures cutting tools, drill bits, saw blades and other tools for
builders, contractors, mechanics and "do-it-yourselfers."
This Form 10-K contains "forward-looking statements" as defined by Section 21E
of the Securities Exchange Act of 1934. Actual results may differ materially
from those expressed or implied in the forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
the extent that the economic conditions in the United States and Europe, and to
a lesser extent, Asia Pacific are not sustained, risks associated with
integrating businesses, demands on management resources, risks associated with
international markets such as currency exchange rates, competition, and risks
associated with the implementation of restructuring actions and environmental
remediation. The company undertakes no obligation to publicly release any
revisions to forward-looking statements to reflect events or circumstances
occurring after the date hereof.
BUSINESS SEGMENT REVIEW
The company reports global business units consisting of Metalworking, Engineered
Products, Mining & Construction and JLK/Industrial Supply. Segment selection was
based upon internal organizational structure, the manner in which management
organizes segments for making operating decisions and assessing performance, the
availability of separate financial results, and materiality considerations. The
company's sales and operating income by segment are presented on pages 13
through 15 of the 2000 Annual Report to Shareowners, and such information is
incorporated herein by reference. Additional information about the company's
operations and assets by segment and geographic area is presented on pages 43
through 45 of the 2000 Annual Report to Shareowners, and such information is
incorporated herein by reference.
In the metalworking segment, the company provides consumable metalcutting tools
and tooling systems to manufacturing companies in a wide range of industries
throughout the world. Metalcutting operations include turning, boring,
threading, grooving, milling and drilling. The company's tooling systems
consists of a steel toolholder and an indexable cutting tool such as an insert
or drill made from cemented tungsten carbides, ceramics, cermets, high-speed
steel and other hard materials. Other cutting tools include end mills, reamers
and taps. The company provides application support and simultaneous engineering
services. The company also manufactures cutting tools, drill bits, saw blades
and other tools for the consumer market which are marketed under private label
and other proprietary brands.
During a metalworking operation, the toolholder is positioned in a machine tool
that provides the turning power. While the workpiece or toolholder is rapidly
rotating, the cutting tool insert or drill contacts the workpiece and cuts or
shapes the workpiece. The cutting tool insert or drill is consumed during use
and must be replaced periodically.
The company serves a wide variety of industries that cut and shape metal parts
including manufacturers of automobiles, trucks, aerospace components, farm
equipment, oil and gas drilling and processing equipment, railroad, marine and
power generation equipment, machinery, appliances, factory equipment and metal
components, as well as the job shops and maintenance operations. Products are
delivered to customers through a direct field sales force, distribution,
integrated supply programs, mail-order and e-commerce.
With a global marketing organization and operations worldwide, the company
believes it is the largest North American and the second largest global provider
of consumable metalcutting tools and supplies.
This segment's principal business is the production and sale of cemented
tungsten carbide products used in engineered applications, including circuit
board drills, compacts, punches, dies molds, seal rings and a wide variety of
other parts. The company also provides application specific component design
services. These products have technical commonality to the company's core
These products are used by manufacturers or in operations where extremes of
abrasion, corrosion or impact require combinations of hardness or other
toughness afforded by cemented tungsten carbides or other hard materials. These
products are sold through a direct field sales force and distribution. The
company believes that it is the largest independent supplier of oil field
compacts in the world. Compacts are the cutting edges of oil well drilling bits,
which are commonly referred to as "rock bits."
MINING & CONSTRUCTION
This segment's principal business is the production and sale of cemented
tungsten carbide products used in mining and highway construction and other
similar applications. These products also have technical commonality to the
company's core metalworking products. The company also sells metallurgical
powders to manufacturers of cemented tungsten carbide products.
These tools are fabricated from steel parts and tipped with cemented carbide.
Mining tools, used primarily in the coal industry, include longwall shearer and
continuous miner drums, blocks, conical bits, drills, pinning rods, augers and a
wide range of mining tool accessories. Highway construction cutting tools
include carbide-tipped bits for ditching, trenching and road planing, grader
blades for site preparation and routine roadbed control, and snowplow blades and
shoes for winter road plowing. The company also provides on-site application
The company produces these products for mine operators and suppliers, highway
construction companies, municipal governments and manufacturers of mining
equipment. Products are distributed through a direct field sales force and
distribution. The company believes it is the world market leader in mining and
highway construction tooling.
This segment's operations include the distribution of industrial supply products
through JLK. JLK distributes a broad range of metalcutting tools, abrasives,
drills, machine tool accessories, precision measuring tools, gages, hand tools
and other supplies used in metalcutting operations. The majority of industrial
supplies distributed by JLK are purchased from other manufacturers, although the
product offering does include Kennametal-manufactured items.
The markets served include convenience-oriented users of metalcutting tools and
supplies and large commercially-oriented customers seeking a single source of
metalcutting supplies. Sales of metalworking consumable products are distributed
through mail-order catalogs, retail showrooms, integrated supply or Full Service
Supply (FSS) programs, a distributor-based direct field sales force and
e-commerce. The company markets to the needs of the small-and medium-sized
customers through its direct marketing catalog and showroom programs and serves
medium- and large-sized industrial manufacturers through FSS programs and
distributor-based direct field sales.
Through FSS programs, the industrial manufacturers engage JLK to carry out all
aspects of complex metalworking supply processes, including needs assessment,
cost analysis, procurement planning, supplier selection, "just-in-time"
restocking of supplies and ongoing technical support. JLK also distributes
through mail-order catalogs to small- and medium-sized customers in the United
Kingdom and Germany.
The company's principal international operations are conducted in Western
Europe, Canada, the Asia Pacific region, South Africa and Mexico. In addition,
the company has joint ventures in China, Poland and Russia, manufacturing and/or
distribution in Israel and South America, and sales agents and distributors in
Eastern Europe and other areas of the world.
The company's international operations are subject to the usual risks of doing
business in those countries, including currency fluctuations and changes in
social, political and economic environments. In management's opinion, the
company's business is not materially dependent upon any one international
location involving significant risk.
The company's international assets and sales are presented on page 45 of the
2000 Annual Report to Shareowners, and such information is incorporated herein
by reference. Information pertaining to the effects of foreign currency
fluctuations is contained under the caption "Market Risk" in Management's
Discussion and Analysis on pages 22 and 23 of the 2000 Annual Report to
Shareowners and under the captions "Foreign Currency Translation" and
"Derivative Financial Instruments" in the notes to the consolidated financial
statements on page 31 of the 2000 Annual Report to Shareowners. Such information
is incorporated herein by reference.
MARKETING AND DISTRIBUTION
The company's manufactured products are sold primarily through the following
distinct sales channels: (i) a direct sales force; (ii) integrated supply and
FSS programs; (iii) retail showrooms; (iv) mail-order catalogs; (v) a network of
independent distributors and sales agents in the United States and certain
international markets; and (vi) the Internet. Service engineers and technicians
directly assist customers with product design, selection and application. In
addition, purchased products are sold through FSS programs, retail showrooms,
mail-order catalogs and the Internet.
The company's products are marketed under various trademarks and tradenames,
such as Kennametal*, Hertel*, the letter K combined with other identifying
letters and/or numbers*, Block Style K*, Kendex*, Kenloc*, KennaMAX*, Top
Notch*, Erickson*, Kyon*, KM*, Drill-Fix*, Fix-Perfect*, Disston*, Chicago
Latrobe*, Putnam*, Greenfield*, RTW* and Cleveland*. The company also sells
products to customers who resell such products under the customers' names or
RAW MATERIALS AND SUPPLIES
Major metallurgical raw materials consist of ore concentrates, compounds and
secondary materials containing tungsten, tantalum, titanium, niobium and cobalt.
Although these raw materials are in relatively adequate supply, major sources
are located abroad and prices at times have been volatile. For these reasons,
the company exercises great care in the selection, purchase and inventory
availability of these materials. The company also purchases steel bars and
forgings for making toolholders, high-speed steel and other tool parts, rotary
cutting tools and accessories. Products purchased for use in manufacturing
processes and for resale are obtained from thousands of suppliers located in the
United States and abroad.
RESEARCH AND DEVELOPMENT
The company's product development efforts are focused on providing solutions to
customers' manufacturing problems and productivity requirements. The company has
implemented a program, ACE or Achieving a Competitive Edge, that provides
discipline and focus for the product development process. ACE speeds and
streamlines development into a series of actions and decision points, combining
effort and resources to produce new and enhanced products, faster. ACE assures a
strong link between customer needs and corporate strategy, and enables the
company to gain full benefit from its investment in new product development.
Research and development expenses totaled $19.2 million, $18.8 million and $20.4
million in 2000, 1999 and 1998, respectively. Additionally, certain costs
associated with improving manufacturing processes are included in cost of goods
sold. The company holds a number of patents and licenses, which, in the
aggregate, are not material to the operation of the business.
* Trademark owned by Kennametal Inc. or a subsidiary of Kennametal Inc.
Seasonal variations do not have a major effect on the company's business.
However, to varying degrees, traditional summer vacation shutdowns of
metalworking customers' plants and holiday shutdowns often affect the company's
sales levels during the first and second quarters of its fiscal year.
The company's backlog of orders generally is not significant to its operations.
Approximately 90 percent of all orders are filled from stock, and the balance
generally is filled within short lead times.
Kennametal is one of the world's leading producers of cemented carbide tools and
high-speed steel tools, and maintains a strong competitive position, especially
in North America and Europe. There is active competition in the sale of all
products made by the company, with approximately 30 companies engaged in the
cemented tungsten carbide business in the United States and many more outside
the United States. Several competitors are divisions of larger corporations. In
addition, several hundred fabricators and toolmakers, many of whom operate out
of relatively small shops, produce tools similar to those made by the company
and buy the cemented tungsten carbide components for such tools from cemented
tungsten carbide producers, including the company. Major competition exists from
both U.S.-based and international-based concerns. In addition, the company
competes with thousands of industrial supply distributors.
The principal elements of competition in the company's business are service,
product innovation, quality, availability and price. The company believes that
its competitive strength rests on its customer service capabilities, including
its multiple distribution channels, its global presence, its state-of-the-art
manufacturing capabilities, its ability to develop solutions to customer needs
through new and improved tools, and the consistent high quality of its products.
These factors frequently permit the company to sell such products based on the
value added for the customer rather than strictly on competitive prices.
Compliance with government laws and regulations pertaining to the discharge of
materials or pollutants into the environment or otherwise relating to the
protection of the environment did not have a material effect on the company's
capital expenditures or competitive position for the years covered by this
report, nor is such compliance expected to have a material effect in the future.
The company has been involved in various environmental cleanup and remediation
activities at several of its manufacturing facilities. In addition, the company
is currently named as a potentially responsible party (PRP) at several Superfund
sites in the United States. In the December 1999 quarter, the company recorded a
remediation reserve of $3.0 million with respect to its involvement in these
matters, which is recorded as a component of operating expense. This represents
management's best estimate of its undiscounted future obligation based on its
evaluations and discussions with outside counsel and independent consultants,
and the current facts and circumstances related to these matters. The company
recorded this liability in the December quarter because certain events occurred,
including sufficient progress made by the government and the PRPs in the
identification of other PRPs and review of potential remediation solutions, that
clarified the level of involvement in these matters by the company and its
relationship to other PRPs. This led the company to conclude that it was
probable that a liability had been incurred.
In addition to the amount currently reserved, the company may be subject to loss
contingencies related to these matters estimated to be up to an additional $3.3
million. The company believes that such undiscounted unreserved losses are
reasonably possible but are not currently considered to be probable of
occurrence. The reserved and unreserved liabilities may change substantially in
the near term due to factors such as the nature and extent of contamination,
changes in remedial requirements, technological changes, discovery of new
information, the financial strength of other PRPs and the identification of new
The company maintains a Corporate Environmental, Health and Safety (EH&S)
Department, as well as an EH&S Policy Committee, to ensure compliance with
environmental regulations and to monitor and oversee remediation activities. In
addition, the company has established an EH&S administrator at each of its
domestic manufacturing facilities. The company's financial management team
periodically meets with members of the Corporate EH&S Department and the
Corporate Legal Department to review and evaluate the status of environmental
contingencies. On a quarterly basis, management establishes or adjusts financial
provisions and reserves for environmental contingencies in accordance with
Statement of Financial Accounting Standards No. 5, "Accounting for
On March 20, 1998, the company sold 3.45 million shares of common stock
resulting in net proceeds of $171.4 million. The proceeds were used to reduce a
portion of the company's long-term debt.
On July 2, 1997, an initial public offering (IPO) of approximately 4.9 million
shares of Class A Common Stock of JLK was consummated at a price of $20.00 per
share. JLK operates the industrial supply operations consisting of the company's
wholly owned J&L America, Inc. subsidiary and its FSS programs. The net proceeds
from the offering were $90.4 million and represented the sale of approximately
20 percent of JLK's common stock. The net proceeds were used by JLK to repay
$20.0 million of indebtedness related to a dividend to the company and $20.0
million related to intercompany obligations to the company incurred in 1997. The
company used these proceeds to repay short-term debt. JLK used the remaining net
proceeds of $50.4 million from the offering during 1998 to make acquisitions.
The company's ownership in JLK increased to approximately 83 percent due to
treasury stock purchases made by JLK since the IPO.
In November 1997, the company completed the acquisition of Greenfield for $1.0
billion. The company acquired all of Greenfield's outstanding common stock for
$38.00 per share, and assumed outstanding debt and convertible securities of
$320.0 million. Greenfield is a manufacturer of consumable cutting tools and
related products used in a variety of industrial, electronics, energy and
construction, engineered and consumer markets. The acquisition of Greenfield
increased the company's market share in the high-speed rotary steel product
Additionally, the company also has made several other acquisitions in 1999 and
1998 to expand its product offering and distribution channels. All acquisitions
were accounted for using the purchase method of accounting.
The company will continue to evaluate new opportunities that allow for the
expansion of existing product lines into new market areas, either directly or
indirectly through joint ventures, where appropriate.
The company employed approximately 13,200 persons at June 30, 2000, of which
approximately 8,800 were located in the United States and 4,400 in other parts
of the world, principally Europe and Asia Pacific. Approximately 2,600 employees
were represented by labor unions, of which approximately 800 were hourly-rated
employees located at five plants in the United States. The remaining 1,800
employees represented by labor unions were employed at twelve locations outside
of the United States. The company considers its labor relations to be generally
The following is a summary of the company's consolidated subsidiaries and
affiliated companies as of June 30, 2000:
CONSOLIDATED SUBSIDIARIES (% OWNERSHIP, IF LESS THAN 100%)
Kennametal Hertel de Argentina S.A., Argentina
Kennametal Australia Pty. Ltd., Australia
Kennametal Foreign Sales Corporation, Barbados
Kennametal Hertel do Brasil Ltda., Brazil
Kennametal Ltd., Canada
Kennametal Hertel Chile Ltda., Chile
Kennametal (China) Limited, China
Kennametal (Shanghai) Ltd., China
Kennametal Hardpoint (Shanghai) Ltd., China (90%)
Shanxi-Kennametal Mining Cutting Systems Manufacturing
Company Limited, China (70%)
Xuzhou-Kennametal Mining Cutting Systems Manufacturing
Company Limited, China (70%)
CONSOLIDATED SUBSIDIARIES (% OWNERSHIP, IF LESS THAN 100%) (CONTINUED)
Kennametal Hertel AG, Germany (96%)
Kennametal Hardpoint H.K. Ltd., Hong Kong (90%)
Kennametal Hertel Japan, Ltd., Japan
Kennametal Hertel (Malaysia) Sdn. Bhd., Malaysia
Kennametal de Mexico, S.A. de C.V., Mexico
Kennametal/Becker-Warkop Ltd., Poland (84%)
Kennametal Hertel (Singapore) Pte. Ltd., Singapore
Kennametal South Africa (Proprietary) Limited, South Africa
Kennametal Hertel Korea Ltd., South Korea
Kennametal Hardpoint (Taiwan) Inc., Taiwan (90%)
Kennametal Hertel Co., Ltd., Thailand (75%)
Adaptive Technologies Corp., United States
Circle Machine Company, United States
Greenfield Industries, Inc., United States
JLK Direct Distribution Inc., United States (83%)
Kennametal Financing II, United States
Kennametal PC Inc., United States
Kennametal Receivables Corporation, United States
Kennametal TC Inc., United States
CONSOLIDATED SUBSIDIARIES OF KENNAMETAL HERTEL AG (% OWNERSHIP, IF LESS THAN
Kennametal Hertel Belgium S.A., Belgium
Kennametal Hertel EDG Limited, England
Kennametal Hertel Limited, England
Kennametal Hertel France S.A., France
Kennametal Hertel G.m.b.H., Germany
Kennametal Hertel Korea G.m.b.H., Germany
Rubig G.m.b.H. & Co. K.G., Germany
Kennametal Hertel S.p.A., Italy (55%)
Kennametal Hertel Nederland B.V., Netherlands
Nederlandse Hardmetaal Fabrieken B.V., Netherlands
Kennametal Hertel Kesici Takimlar ve Sistemler Anonim Sirketi, Turkey (55%)
CONSOLIDATED SUBSIDIARIES OF JLK DIRECT DISTRIBUTION INC.
J&L America, Inc., United States
CONSOLIDATED SUBSIDIARIES OF J&L AMERICA, INC.
J&L Industrial Supply Ltd., Canada
J&L Industrial Supply U.K., England (branch)
J&L Werkzeuge und Industriebedarf G.m.b.H., Germany
Abrasive & Tool Specialties Company, United States
GRS Industrial Supply Company, United States
Production Tools Sales, Inc., United States
Strong Tool Co., United States
CONSOLIDATED SUBSIDIARIES OF GREENFIELD INDUSTRIES, INC.
Greenfield Industries, Incorporated Canada, Canada
Cirbo Limited, England
Kemmer Hartmetallwerkzeuge G.m.b.H., Germany
Kemmer Prazision G.m.b.H., Germany
Hanita Metal Works, Ltd., Israel
Kemmer-Cirbo S.r.L., Italy
Cleveland Twist Drill de Mexico, S.A. de C.V., Mexico
Greenfield Tools de Mexico, S.A. de C.V., Mexico
CONSOLIDATED SUBSIDIARIES OF GREENFIELD INDUSTRIES, INC. (CONTINUED)
Herramientas Cleveland, S.A. de C.V., Mexico
Bassett Rotary Tool Company, United States
Carbidie Corporation, United States
Hanita Cutting Tools, Inc., United States
Kemmer International, Inc., United States
Rogers Tool Works, Inc., United States
South Deerfield Industrial, Inc., United States
TCM Europe, Inc., United States
AFFILIATED COMPANIES (% OWNERSHIP)
Kennametal Hertel G. Beisteiner G.m.b.H., Austria (26%)
ISIS Informatics Limited, England (20%)
Birla Kennametal Ltd., India (44%)
Kemmer Japan, Japan (29%)
Wilke Carbide B.V., Netherlands (50%)
PIGMA-Kennametal Joint Venture, Russia (49%)
Carbidie Asia Pacific Pte. Ltd., Singapore (40%)
Kenci, S.A., Spain (20%)