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The following is an excerpt from a 10-K405 SEC Filing, filed by KENNAMETAL INC on 9/22/2000.
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KENNAMETAL INC - 10-K405 - 20000922 - BUSINESS

ITEM 1. BUSINESS

OVERVIEW
Kennametal Inc. was incorporated in Pennsylvania in 1943. Kennametal Inc. (Kennametal or the company) is a global leader engaged in the manufacture, purchase and distribution of a broad range of tools, tooling systems, and solutions to the metalworking, mining, oil and energy industries, and wear-resistant parts for a wide range of industries. Unless otherwise specified, any reference to a "year" is to a fiscal year ended June 30.

Kennametal specializes in developing and manufacturing metalworking tools and wear-resistant parts using a specialized type of powder metallurgy. Kennametal's metalworking tools are made of cemented tungsten carbides, ceramics, cermets, high-speed steel and other hard materials. Kennametal also manufactures and markets a complete line of toolholders, toolholding systems and rotary cutting tools by machining and fabricating steel bars and other metal alloys. The company, through its 83 percent-owned subsidiary JLK Direct Distribution Inc. (JLK), also is one of the largest suppliers of metalworking consumables and related products in the United States. Kennametal also manufactures tungsten carbide products used in engineered applications, mining and highway construction, and other similar applications, including circuit board drills, compacts and metallurgical powders.

During 1998, the company expanded its metalworking focus by acquiring Greenfield Industries, Inc. (Greenfield), a leading worldwide manufacturer of consumable cutting tools and related products used in a variety of industrial, electronics, energy and construction, engineered and consumer markets. Greenfield manufactures a complete line of high-speed steel and tungsten carbide products, including drills; endmills; taps and dies and fixed limit gages; products used in oil and gas drilling; carbide drills, endmills and routers used to make printed circuit boards for the electronics industry; and "made-to-order" tungsten carbide parts for demanding wear applications such as plastics processing, tool and die manufacturing and petroleum flow control. The company also manufactures cutting tools, drill bits, saw blades and other tools for builders, contractors, mechanics and "do-it-yourselfers."

This Form 10-K contains "forward-looking statements" as defined by Section 21E of the Securities Exchange Act of 1934. Actual results may differ materially from those expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, the extent that the economic conditions in the United States and Europe, and to a lesser extent, Asia Pacific are not sustained, risks associated with integrating businesses, demands on management resources, risks associated with international markets such as currency exchange rates, competition, and risks associated with the implementation of restructuring actions and environmental remediation. The company undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or circumstances occurring after the date hereof.

BUSINESS SEGMENT REVIEW
The company reports global business units consisting of Metalworking, Engineered Products, Mining & Construction and JLK/Industrial Supply. Segment selection was based upon internal organizational structure, the manner in which management organizes segments for making operating decisions and assessing performance, the availability of separate financial results, and materiality considerations. The company's sales and operating income by segment are presented on pages 13 through 15 of the 2000 Annual Report to Shareowners, and such information is incorporated herein by reference. Additional information about the company's operations and assets by segment and geographic area is presented on pages 43 through 45 of the 2000 Annual Report to Shareowners, and such information is incorporated herein by reference.

METALWORKING
In the metalworking segment, the company provides consumable metalcutting tools and tooling systems to manufacturing companies in a wide range of industries throughout the world. Metalcutting operations include turning, boring, threading, grooving, milling and drilling. The company's tooling systems consists of a steel toolholder and an indexable cutting tool such as an insert or drill made from cemented tungsten carbides, ceramics, cermets, high-speed steel and other hard materials. Other cutting tools include end mills, reamers and taps. The company provides application support and simultaneous engineering services. The company also manufactures cutting tools, drill bits, saw blades and other tools for the consumer market which are marketed under private label and other proprietary brands.

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During a metalworking operation, the toolholder is positioned in a machine tool that provides the turning power. While the workpiece or toolholder is rapidly rotating, the cutting tool insert or drill contacts the workpiece and cuts or shapes the workpiece. The cutting tool insert or drill is consumed during use and must be replaced periodically.

The company serves a wide variety of industries that cut and shape metal parts including manufacturers of automobiles, trucks, aerospace components, farm equipment, oil and gas drilling and processing equipment, railroad, marine and power generation equipment, machinery, appliances, factory equipment and metal components, as well as the job shops and maintenance operations. Products are delivered to customers through a direct field sales force, distribution, integrated supply programs, mail-order and e-commerce.

With a global marketing organization and operations worldwide, the company believes it is the largest North American and the second largest global provider of consumable metalcutting tools and supplies.

ENGINEERED PRODUCTS
This segment's principal business is the production and sale of cemented tungsten carbide products used in engineered applications, including circuit board drills, compacts, punches, dies molds, seal rings and a wide variety of other parts. The company also provides application specific component design services. These products have technical commonality to the company's core metalworking products.

These products are used by manufacturers or in operations where extremes of abrasion, corrosion or impact require combinations of hardness or other toughness afforded by cemented tungsten carbides or other hard materials. These products are sold through a direct field sales force and distribution. The company believes that it is the largest independent supplier of oil field compacts in the world. Compacts are the cutting edges of oil well drilling bits, which are commonly referred to as "rock bits."

MINING & CONSTRUCTION
This segment's principal business is the production and sale of cemented tungsten carbide products used in mining and highway construction and other similar applications. These products also have technical commonality to the company's core metalworking products. The company also sells metallurgical powders to manufacturers of cemented tungsten carbide products.

These tools are fabricated from steel parts and tipped with cemented carbide. Mining tools, used primarily in the coal industry, include longwall shearer and continuous miner drums, blocks, conical bits, drills, pinning rods, augers and a wide range of mining tool accessories. Highway construction cutting tools include carbide-tipped bits for ditching, trenching and road planing, grader blades for site preparation and routine roadbed control, and snowplow blades and shoes for winter road plowing. The company also provides on-site application support services.

The company produces these products for mine operators and suppliers, highway construction companies, municipal governments and manufacturers of mining equipment. Products are distributed through a direct field sales force and distribution. The company believes it is the world market leader in mining and highway construction tooling.

JLK/INDUSTRIAL SUPPLY
This segment's operations include the distribution of industrial supply products through JLK. JLK distributes a broad range of metalcutting tools, abrasives, drills, machine tool accessories, precision measuring tools, gages, hand tools and other supplies used in metalcutting operations. The majority of industrial supplies distributed by JLK are purchased from other manufacturers, although the product offering does include Kennametal-manufactured items.

The markets served include convenience-oriented users of metalcutting tools and supplies and large commercially-oriented customers seeking a single source of metalcutting supplies. Sales of metalworking consumable products are distributed through mail-order catalogs, retail showrooms, integrated supply or Full Service Supply (FSS) programs, a distributor-based direct field sales force and e-commerce. The company markets to the needs of the small-and medium-sized customers through its direct marketing catalog and showroom programs and serves medium- and large-sized industrial manufacturers through FSS programs and distributor-based direct field sales.

Through FSS programs, the industrial manufacturers engage JLK to carry out all aspects of complex metalworking supply processes, including needs assessment, cost analysis, procurement planning, supplier selection, "just-in-time"

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restocking of supplies and ongoing technical support. JLK also distributes through mail-order catalogs to small- and medium-sized customers in the United Kingdom and Germany.

INTERNATIONAL OPERATIONS
The company's principal international operations are conducted in Western Europe, Canada, the Asia Pacific region, South Africa and Mexico. In addition, the company has joint ventures in China, Poland and Russia, manufacturing and/or distribution in Israel and South America, and sales agents and distributors in Eastern Europe and other areas of the world.

The company's international operations are subject to the usual risks of doing business in those countries, including currency fluctuations and changes in social, political and economic environments. In management's opinion, the company's business is not materially dependent upon any one international location involving significant risk.

The company's international assets and sales are presented on page 45 of the 2000 Annual Report to Shareowners, and such information is incorporated herein by reference. Information pertaining to the effects of foreign currency fluctuations is contained under the caption "Market Risk" in Management's Discussion and Analysis on pages 22 and 23 of the 2000 Annual Report to Shareowners and under the captions "Foreign Currency Translation" and "Derivative Financial Instruments" in the notes to the consolidated financial statements on page 31 of the 2000 Annual Report to Shareowners. Such information is incorporated herein by reference.

MARKETING AND DISTRIBUTION
The company's manufactured products are sold primarily through the following distinct sales channels: (i) a direct sales force; (ii) integrated supply and FSS programs; (iii) retail showrooms; (iv) mail-order catalogs; (v) a network of independent distributors and sales agents in the United States and certain international markets; and (vi) the Internet. Service engineers and technicians directly assist customers with product design, selection and application. In addition, purchased products are sold through FSS programs, retail showrooms, mail-order catalogs and the Internet.

The company's products are marketed under various trademarks and tradenames, such as Kennametal*, Hertel*, the letter K combined with other identifying letters and/or numbers*, Block Style K*, Kendex*, Kenloc*, KennaMAX*, Top Notch*, Erickson*, Kyon*, KM*, Drill-Fix*, Fix-Perfect*, Disston*, Chicago Latrobe*, Putnam*, Greenfield*, RTW* and Cleveland*. The company also sells products to customers who resell such products under the customers' names or private labels.

RAW MATERIALS AND SUPPLIES
Major metallurgical raw materials consist of ore concentrates, compounds and secondary materials containing tungsten, tantalum, titanium, niobium and cobalt. Although these raw materials are in relatively adequate supply, major sources are located abroad and prices at times have been volatile. For these reasons, the company exercises great care in the selection, purchase and inventory availability of these materials. The company also purchases steel bars and forgings for making toolholders, high-speed steel and other tool parts, rotary cutting tools and accessories. Products purchased for use in manufacturing processes and for resale are obtained from thousands of suppliers located in the United States and abroad.

RESEARCH AND DEVELOPMENT
The company's product development efforts are focused on providing solutions to customers' manufacturing problems and productivity requirements. The company has implemented a program, ACE or Achieving a Competitive Edge, that provides discipline and focus for the product development process. ACE speeds and streamlines development into a series of actions and decision points, combining effort and resources to produce new and enhanced products, faster. ACE assures a strong link between customer needs and corporate strategy, and enables the company to gain full benefit from its investment in new product development.

Research and development expenses totaled $19.2 million, $18.8 million and $20.4 million in 2000, 1999 and 1998, respectively. Additionally, certain costs associated with improving manufacturing processes are included in cost of goods sold. The company holds a number of patents and licenses, which, in the aggregate, are not material to the operation of the business.


* Trademark owned by Kennametal Inc. or a subsidiary of Kennametal Inc.

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SEASONALITY
Seasonal variations do not have a major effect on the company's business. However, to varying degrees, traditional summer vacation shutdowns of metalworking customers' plants and holiday shutdowns often affect the company's sales levels during the first and second quarters of its fiscal year.

BACKLOG
The company's backlog of orders generally is not significant to its operations. Approximately 90 percent of all orders are filled from stock, and the balance generally is filled within short lead times.

COMPETITION
Kennametal is one of the world's leading producers of cemented carbide tools and high-speed steel tools, and maintains a strong competitive position, especially in North America and Europe. There is active competition in the sale of all products made by the company, with approximately 30 companies engaged in the cemented tungsten carbide business in the United States and many more outside the United States. Several competitors are divisions of larger corporations. In addition, several hundred fabricators and toolmakers, many of whom operate out of relatively small shops, produce tools similar to those made by the company and buy the cemented tungsten carbide components for such tools from cemented tungsten carbide producers, including the company. Major competition exists from both U.S.-based and international-based concerns. In addition, the company competes with thousands of industrial supply distributors.

The principal elements of competition in the company's business are service, product innovation, quality, availability and price. The company believes that its competitive strength rests on its customer service capabilities, including its multiple distribution channels, its global presence, its state-of-the-art manufacturing capabilities, its ability to develop solutions to customer needs through new and improved tools, and the consistent high quality of its products. These factors frequently permit the company to sell such products based on the value added for the customer rather than strictly on competitive prices.

REGULATION
Compliance with government laws and regulations pertaining to the discharge of materials or pollutants into the environment or otherwise relating to the protection of the environment did not have a material effect on the company's capital expenditures or competitive position for the years covered by this report, nor is such compliance expected to have a material effect in the future.

The company has been involved in various environmental cleanup and remediation activities at several of its manufacturing facilities. In addition, the company is currently named as a potentially responsible party (PRP) at several Superfund sites in the United States. In the December 1999 quarter, the company recorded a remediation reserve of $3.0 million with respect to its involvement in these matters, which is recorded as a component of operating expense. This represents management's best estimate of its undiscounted future obligation based on its evaluations and discussions with outside counsel and independent consultants, and the current facts and circumstances related to these matters. The company recorded this liability in the December quarter because certain events occurred, including sufficient progress made by the government and the PRPs in the identification of other PRPs and review of potential remediation solutions, that clarified the level of involvement in these matters by the company and its relationship to other PRPs. This led the company to conclude that it was probable that a liability had been incurred.

In addition to the amount currently reserved, the company may be subject to loss contingencies related to these matters estimated to be up to an additional $3.3 million. The company believes that such undiscounted unreserved losses are reasonably possible but are not currently considered to be probable of occurrence. The reserved and unreserved liabilities may change substantially in the near term due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs and the identification of new PRPs.

The company maintains a Corporate Environmental, Health and Safety (EH&S) Department, as well as an EH&S Policy Committee, to ensure compliance with environmental regulations and to monitor and oversee remediation activities. In addition, the company has established an EH&S administrator at each of its domestic manufacturing facilities. The company's financial management team periodically meets with members of the Corporate EH&S Department and the Corporate Legal Department to review and evaluate the status of environmental projects and

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contingencies. On a quarterly basis, management establishes or adjusts financial provisions and reserves for environmental contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies."

STOCK ISSUANCES
On March 20, 1998, the company sold 3.45 million shares of common stock resulting in net proceeds of $171.4 million. The proceeds were used to reduce a portion of the company's long-term debt.

On July 2, 1997, an initial public offering (IPO) of approximately 4.9 million shares of Class A Common Stock of JLK was consummated at a price of $20.00 per share. JLK operates the industrial supply operations consisting of the company's wholly owned J&L America, Inc. subsidiary and its FSS programs. The net proceeds from the offering were $90.4 million and represented the sale of approximately 20 percent of JLK's common stock. The net proceeds were used by JLK to repay $20.0 million of indebtedness related to a dividend to the company and $20.0 million related to intercompany obligations to the company incurred in 1997. The company used these proceeds to repay short-term debt. JLK used the remaining net proceeds of $50.4 million from the offering during 1998 to make acquisitions. The company's ownership in JLK increased to approximately 83 percent due to treasury stock purchases made by JLK since the IPO.

ACQUISITIONS
In November 1997, the company completed the acquisition of Greenfield for $1.0 billion. The company acquired all of Greenfield's outstanding common stock for $38.00 per share, and assumed outstanding debt and convertible securities of $320.0 million. Greenfield is a manufacturer of consumable cutting tools and related products used in a variety of industrial, electronics, energy and construction, engineered and consumer markets. The acquisition of Greenfield increased the company's market share in the high-speed rotary steel product markets.

Additionally, the company also has made several other acquisitions in 1999 and 1998 to expand its product offering and distribution channels. All acquisitions were accounted for using the purchase method of accounting.

The company will continue to evaluate new opportunities that allow for the expansion of existing product lines into new market areas, either directly or indirectly through joint ventures, where appropriate.

EMPLOYEES
The company employed approximately 13,200 persons at June 30, 2000, of which approximately 8,800 were located in the United States and 4,400 in other parts of the world, principally Europe and Asia Pacific. Approximately 2,600 employees were represented by labor unions, of which approximately 800 were hourly-rated employees located at five plants in the United States. The remaining 1,800 employees represented by labor unions were employed at twelve locations outside of the United States. The company considers its labor relations to be generally good.

CORPORATE DIRECTORY
The following is a summary of the company's consolidated subsidiaries and affiliated companies as of June 30, 2000:

CONSOLIDATED SUBSIDIARIES (% OWNERSHIP, IF LESS THAN 100%)
Kennametal Hertel de Argentina S.A., Argentina Kennametal Australia Pty. Ltd., Australia Kennametal Foreign Sales Corporation, Barbados Kennametal Hertel do Brasil Ltda., Brazil Kennametal Ltd., Canada
Kennametal Hertel Chile Ltda., Chile
Kennametal (China) Limited, China
Kennametal (Shanghai) Ltd., China
Kennametal Hardpoint (Shanghai) Ltd., China (90%) Shanxi-Kennametal Mining Cutting Systems Manufacturing Company Limited, China (70%)
Xuzhou-Kennametal Mining Cutting Systems Manufacturing Company Limited, China (70%)

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CONSOLIDATED SUBSIDIARIES (% OWNERSHIP, IF LESS THAN 100%) (CONTINUED)
Kennametal Hertel AG, Germany (96%)
Kennametal Hardpoint H.K. Ltd., Hong Kong (90%) Kennametal Hertel Japan, Ltd., Japan
Kennametal Hertel (Malaysia) Sdn. Bhd., Malaysia Kennametal de Mexico, S.A. de C.V., Mexico Kennametal/Becker-Warkop Ltd., Poland (84%) Kennametal Hertel (Singapore) Pte. Ltd., Singapore Kennametal South Africa (Proprietary) Limited, South Africa Kennametal Hertel Korea Ltd., South Korea Kennametal Hardpoint (Taiwan) Inc., Taiwan (90%) Kennametal Hertel Co., Ltd., Thailand (75%) Adaptive Technologies Corp., United States Circle Machine Company, United States
Greenfield Industries, Inc., United States JLK Direct Distribution Inc., United States (83%) Kennametal Financing II, United States
Kennametal PC Inc., United States
Kennametal Receivables Corporation, United States Kennametal TC Inc., United States

CONSOLIDATED SUBSIDIARIES OF KENNAMETAL HERTEL AG (% OWNERSHIP, IF LESS THAN
100%)
Kennametal Hertel Belgium S.A., Belgium
Kennametal Hertel EDG Limited, England
Kennametal Hertel Limited, England
Kennametal Hertel France S.A., France
Kennametal Hertel G.m.b.H., Germany
Kennametal Hertel Korea G.m.b.H., Germany Rubig G.m.b.H. & Co. K.G., Germany
Kennametal Hertel S.p.A., Italy (55%)
Kennametal Hertel Nederland B.V., Netherlands Nederlandse Hardmetaal Fabrieken B.V., Netherlands Kennametal Hertel Kesici Takimlar ve Sistemler Anonim Sirketi, Turkey (55%)

CONSOLIDATED SUBSIDIARIES OF JLK DIRECT DISTRIBUTION INC.
J&L America, Inc., United States

CONSOLIDATED SUBSIDIARIES OF J&L AMERICA, INC.
J&L Industrial Supply Ltd., Canada
J&L Industrial Supply U.K., England (branch) J&L Werkzeuge und Industriebedarf G.m.b.H., Germany Abrasive & Tool Specialties Company, United States GRS Industrial Supply Company, United States Production Tools Sales, Inc., United States Strong Tool Co., United States

CONSOLIDATED SUBSIDIARIES OF GREENFIELD INDUSTRIES, INC.
Greenfield Industries, Incorporated Canada, Canada Cirbo Limited, England
Kemmer Hartmetallwerkzeuge G.m.b.H., Germany Kemmer Prazision G.m.b.H., Germany
Hanita Metal Works, Ltd., Israel
Kemmer-Cirbo S.r.L., Italy
Cleveland Twist Drill de Mexico, S.A. de C.V., Mexico Greenfield Tools de Mexico, S.A. de C.V., Mexico

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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%)

BROKERAGE PARTNERS