KENNAMETAL INC
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2011
Commission File Number 1-5318
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
| Pennsylvania | 25-0900168 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
World Headquarters
1600 Technology Way P.O. Box 231 Latrobe, Pennsylvania |
15650-0231 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(724) 539-5000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Capital Stock, par value $1.25 per share | New York Stock Exchange | |
| Preferred Stock Purchase Rights | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes
o
No
þ
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 (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
YES
þ
NO
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if smaller reporting company) |
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, 2010, the aggregate market value of the registrant’s Capital Stock held by
non-affiliates of the registrant, estimated solely for the purposes of this Form 10-K, was
approximately $2,977,300,000. For purposes of the foregoing calculation only, all directors and
executive officers of the registrant and each person who may be deemed to own beneficially more
than 5% of the registrant’s Capital Stock have been deemed affiliates.
As of July 31, 2011, there were 81,256,614 shares of the Registrant’s Capital Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2011 Annual Meeting of Shareowners are incorporated by
reference into Part III.
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FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains “forward-looking” statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are statements that do not relate strictly to historical or current
facts. For example, statements about Kennametal’s outlook for earnings, sales volumes, and cash
flow for its fiscal year 2012, its expectations regarding future growth and any statements
regarding future operating or financial performance or events are forward-looking. We have also
included forward looking statements in this Form 10-K concerning, among other things, our strategy,
goals, plans and projections regarding our financial position, liquidity and capital resources,
results of operations, market position, and product development. These statements are based on
current estimates that involve inherent risks and uncertainties. Should one or more of these risks
or uncertainties materialize, or should the assumptions underlying the forward-looking statements
prove incorrect, our actual results could vary materially from our current expectations. There are
a number of factors that could cause our actual results to differ from those indicated in the
forward-looking statements. They include: economic recession; anticipated benefits resulting from
our recently completed restructuring activities; availability and cost of the raw materials we use
to manufacture our products; our foreign operations and international markets, such as currency
exchange rates, different regulatory environments, trade barriers, exchange controls, and social
and political instability; changes in the regulatory environment in which we operate, including
environmental, health and safety regulations; our ability to protect and defend our intellectual
property; competition; our ability to retain our management and employees; demands on management
resources; potential claims relating to our products; integrating acquisitions and achieving the
expected savings and synergies; business divestitures; global or regional catastrophic events;
energy costs; commodity prices; labor relations; demand for and market acceptance of new and
existing products; and implementation of environmental remediation matters. We provide additional
information about many of the specific risks we face in the “Risk Factors” Section of this Annual
Report on Form 10-K. 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 development.
Table of Contents
| ITEM 1 | — BUSINESS |
OVERVIEW
Kennametal Inc. was incorporated in Pennsylvania in 1943. We deliver
productivity to customers seeking peak performance in demanding environments by providing
innovative custom and standard wear-resistant solutions, enabled through our advanced materials
sciences, application knowledge and commitment to a sustainable environment. We believe that our
reputation for manufacturing excellence, as well as our technological expertise and innovation in
our principal products, has helped us to achieve a leading market presence in our primary markets.
End users of our products include metalworking manufacturers and suppliers across a diverse array
of industries, including the aerospace, defense, transportation, machine tool, light machinery and
heavy machinery industries, as well as manufacturers, producers and suppliers in a number of other
industries including coal mining, highway construction, quarrying, and oil and gas exploration and
production industries. Our end users’ products include items ranging from airframes to coal mining,
engines to oil wells and turbochargers to construction.
Our product offering includes a wide array of standard and custom solution products in
metalworking, such as metal cutting tools and tooling systems, and advanced materials, such as
cemented tungsten carbide products, to address customer demands. These products are offered through
a variety of channels via an enterprise approach. We are a leading global supplier of tooling,
engineered components and advanced materials consumed in production processes. We believe we are
one of the largest global providers of consumable metal cutting tools and tooling supplies.
We specialize in developing and manufacturing metalworking tools and wear-resistant parts and
coatings using a specialized type of powder metallurgy. Our metalworking tools are made of cemented
tungsten carbides, ceramics, cermets 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 also manufacture products made from tungsten
carbide or other hard materials that are used in engineered applications, mining and highway
construction and other similar applications, including compacts and metallurgical powders.
Additionally, we manufacture and market engineered components with a proprietary metal cladding
technology and provide our customers with engineered component process technology and materials
that focus on component deburring, polishing and producing controlled radii.
Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30.
BUSINESS SEGMENT REVIEW
In order to take additional advantage of growth opportunities, as well as
to provide a better platform for continually improving the efficiency and effectiveness of
operations, we implemented a new operating structure at the start of 2011. Our operations are now
organized into two reportable operating segments; Industrial and Infrastructure. Segment
determination 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 Management’s Discussion and Analysis set forth in Item 7 of this annual report on Form
10-K (MD&A). Additional segment data is provided in Note 20 of our consolidated financial
statements set forth in Item 8 of this annual report.
INDUSTRIAL
The Industrial segment is focused on customers within the transportation, aerospace,
defense and general engineering market sectors, as well as the machine tool industry. The customers
in these end markets manufacture engines, airframes, automobiles, trucks, ships and various
industrial goods. The technology needs and level of customization vary by customer and industry
served. We deliver value to our Industrial segment customers through our application expertise and
diverse product offering.
INFRASTRUCTURE
The Infrastructure segment is focused on customers within the energy and earthworks
industries. These customers support primary industries such as oil and gas, power generation,
underground mining, surface and hard rock mining, highway construction and road maintenance.
Generally, our Infrastructure segment customers are served through a customer intimacy model that
allows us to offer full system solutions by gaining an in-depth understanding of our customers’
engineering needs. Our product offering promotes value by bringing enhanced performance and
productivity to our customers’ processes and systems.
INTERNATIONAL OPERATIONS
During 2011, we generated 56.7 percent of our sales in markets outside of
the U.S. Our principal international operations are conducted in Western Europe, Asia Pacific,
India, Latin America and Canada. In addition, we have manufacturing and distribution operations in
Israel and South Africa, as well as sales companies, sales agents and distributors in Eastern
Europe and other areas of the world. 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 operations are subject to the risks of doing business in those
countries, including foreign currency exchange rate fluctuations and changes in social, political
and economic environments.
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Our international assets and sales are presented in Note 20 of our consolidated financial
statements set forth in Item 8 of this annual report on Form 10-K (Item 8). Information pertaining
to the effects of foreign currency exchange rate risk is presented in Quantitative and Qualitative
Disclosures About Market Risk as set forth in Item 7A of this annual report on Form 10-K.
GENERAL DEVELOPMENT OF BUSINESS
We continue to engage in balancing our geographic footprint between
North America, Western Europe, and the rest of the world markets. This strategy, together with
steps to enhance the balance of our sales among our served end markets and business units, has
helped to create a more diverse business base and thereby provide additional sales opportunities,
as well as limit reliance on and exposure to any specific region or market sector.
In fiscal 2011, we experienced sequential sales growth in every quarter, as well as year-over-year
quarterly sales growth. Our sales for the year ended June 30, 2011 were $2.4 billion, comprised of
46 percent in North America, 28 percent in Western Europe and 26 percent in the rest of the world.
We completed our restructuring programs which are expected to reduce our cost structure by
approximately $170 million annually, yielding higher benefits on costs that were lower than
anticipated.
While the global economy continues to improve, we remain confident in our ability to respond
quickly to changes in global markets while continuing to serve our customers and preserve our
competitive strengths. At the same time, we continue to focus on and maximize cash flow and
liquidity. Further discussion and analysis of the developments in our business is set forth in
MD&A.
ACQUISITIONS AND DIVESTITURES
We continue to evaluate new opportunities for the expansion of
existing product lines into new market areas where appropriate. We also continue to evaluate
opportunities for the introduction of new and/or complementary product offerings into new and/or
existing market areas where appropriate. Going forward, we expect to evaluate potential
acquisitions to continue to grow our business and further enhance our market position.
MARKETING AND DISTRIBUTION
We sell our products through the following distinct sales channels:
(i) a direct sales force; (ii) a network of independent distributors and sales agents in North
America, Europe, Latin America, Asia Pacific and other markets around the world; (iii) integrated
supply; and (iv) the Internet. Application engineers and technicians directly assist customers with
product design, selection, application and support.
We market our products through two basic brand names; Kennametal and Widia. These master brands
also include sub-brands under various trademarks and trade names, such as Kennametal with other
identifying sub-brands: Kennametal Conforma Clad, Kennametal Tricon, Kennametal Extrude Hone,
Kennametal Sintec, Kennametal International Specialty Alloys, Kennametal Camco, and similarly with
Widia and other identifying sub-brands: Widia GTD, Widia Rubig, Widia Circle, Widia Manchester,
Widia Hanita, Widia Clappdico, as well as various product names such as ToolBoss, Kyon, Fix-Perfect
and Mill1™. Kennametal Inc. or a subsidiary of Kennametal Inc. owns these trademarks and trade
names. We also sell 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 an
adequate supply of these raw materials currently exists, our major sources for raw materials are
located abroad and prices fluctuate at times. We have entered into extended raw material supply
agreements and will implement product price increases as deemed necessary to mitigate rising costs.
For these reasons, we exercise great care in selecting, purchasing and managing availability of raw
materials. We also purchase steel bars and forgings for making toolholders and other tool parts, as
well as for producing rotary cutting tools and accessories. We obtain products purchased for use in
manufacturing processes and for resale from thousands of suppliers located in the U.S. and abroad.
RESEARCH AND DEVELOPMENT
Our product development efforts focus on providing solutions to our
customers for their manufacturing challenges and productivity requirements. Our product development
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. This program speeds and streamlines development into a series of actions
and decision points, combining efforts and resources to produce new and enhanced products faster.
This program is designed to assure a strong link between customer requirements and corporate
strategy, and to enable us to gain full benefit from our investment in new product development. We
hold a number of patents which, in the aggregate, are material to the operation of our businesses.
Research and development expenses included in operating expense totaled $33.3 million, $28.0
million and $27.6 million in 2011, 2010 and 2009, respectively.
SEASONALITY
Our business is not materially affected by seasonal variations. However, to varying
degrees, traditional summer vacation shutdowns of customers’ plants and holiday shutdowns often
affect our sales levels during the first and second quarters of our fiscal year.
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BACKLOG
Our backlog of orders generally is not significant to our operations.
COMPETITION
We are one of the world’s leading producers of cemented carbide products, and we
maintain a strong competitive position in all major markets worldwide. We actively compete in the
sale of all our products with approximately 30 companies engaged in the cemented tungsten carbide
business in the U.S. and many more outside the U.S. 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.-based 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 and
performance, quality, availability, price and productivity delivered to our customers. We believe
that our competitive strength derives from our global presence, our ability to develop solutions to
address customer needs through new and improved tools, consistent high quality of our products, our
customer service capabilities, our state-of-the-art manufacturing capabilities and multiple sales
channels. With these strengths, we are able to sell products based on the value added productivity
to the customer rather than strictly on competitive prices.
REGULATION
From time to time, we are a party to legal claims and proceedings that arise in the
ordinary course of business, which may relate to our operations or assets, including real,
tangible, or intellectual property. While we currently believe that the amount of ultimate
liability, if any, with respect to these actions will not materially affect our financial position,
results of operations or liquidity, 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 us.
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.
We are involved as a potentially responsible party (PRP) at various sites designated by the United
States Environmental Protection Agency (USEPA) as Superfund sites. For certain of these sites, we
have evaluated the claims and potential liabilities and have determined that neither are material,
individually or in the aggregate. For certain other sites, proceedings are in the very early
stages and have not yet progressed to a point where it is possible to estimate the ultimate cost of
remediation, the timing and extent of remedial action that may be required by governmental
authorities or the amount of our liability alone or in relation to that of any other PRPs.
Reserves for other potential environmental issues at June 30, 2011 and 2010 were $5.4 million and
$5.2 million, respectively. The reserves that we have established for environmental liabilities
represent our best current estimate of the costs of addressing all identified environmental
situations, based on our review of currently available evidence, and take into consideration our
prior experience in remediation and that of other companies, as well as public information released
by the USEPA, other governmental agencies, and by the PRP groups in which we are participating.
Although the reserves currently appear to be sufficient to cover these environmental liabilities,
there are uncertainties associated with environmental liabilities, and we can give no assurance
that our estimate of any environmental liability will not increase or decrease in the future. The
reserved and unreserved liabilities for all environmental concerns could change substantially 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 U.S. government on
these matters.
We maintain a Corporate Environmental, Health and Safety (EHS) Department, as well as an EHS
Steering Committee, to monitor compliance with environmental regulations and to oversee remediation
activities. In addition, we have designated EHS coordinators who are responsible for each of our
global manufacturing facilities. Our financial management team periodically meets with members of
the Corporate EHS Department and the Corporate Legal Department to review and evaluate the status
of environmental projects and contingencies. On a quarterly basis, we review financial provisions
and reserves for environmental contingencies and adjust these reserves when appropriate.
EMPLOYEES
We employed approximately 11,600 persons at June 30, 2011, of which approximately 4,800
were located in the U.S. and 6,800 in other parts of the world, principally Europe, India and Asia
Pacific. At June 30, 2011, approximately 3,000 of the above employees were represented by labor
unions. We consider our labor relations to be generally good.
AVAILABLE INFORMATION
Our Internet address is www.kennametal.com. On the SEC Filings page of our
Web Site, which is accessible under the Investor Relations tab, we post the following filings as
soon as reasonably practicable after they are electronically filed with or furnished to the
Securities and Exchange Commission (SEC): our annual report on Form 10-K, our annual proxy
statement, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments
to those reports filed or
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furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended (Exchange Act). Our Sec Filings Web page also includes Forms 3, 4 and 5
filed pursuant to Section 16(a) of the Exchange Act. All filings posted on our SEC Filings
Web page are available to be viewed on this page free of charge. On the Corporate Governance page
of our Web site, which is under the Investor Relations tab, 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 charters and guidelines posted 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 SEC.
| ITEM 1A | — RISK FACTORS |
Kennametal’s business, financial condition or results of operations may be materially affected by a
number of factors. Our management regularly monitors the risks inherent in our business, with
input and assistance from our Enterprise Risk Management department. In addition to real time
monitoring, we conduct a formal, annual, enterprise-wide risk assessment to identify factors and
circumstances that might present significant risk to the company. Many of these factors are
discussed throughout this report. In addition, the following list details some of the important
factors and uncertainties that we believe could cause Kennametal’s actual results to differ
materially from those projected in any forward-looking statements:
Downturns in the business cycle could adversely affect our sales and profitability.
Our business
has historically been cyclical and subject to significant impact from economic downturns. The
recent global economic downturn that occurred in 2008 and 2009, coupled with the global financial
and credit market disruptions had a negative impact on our sales and profitability. These events
contributed to weak end markets, a sharp drop in demand and higher costs of borrowing and/or
diminished credit availability. While the economy has recovered from the crisis of the economic
downturn and we believe that the long-term prospects for our business remain positive, we are
unable to predict the future course of industry variables or the strength, pace or sustainability
of the economic recovery and the effects of government intervention. We implemented restructuring
and other actions to reduce our manufacturing costs and operating expenses over the past several
years. However, there is no assurance that these actions, or any others that we have taken or may
take, will be sufficient to counter any future economic or industry disruptions.
Our international operations pose certain risks that may adversely impact sales and earnings.
We
have manufacturing operations and assets located outside of the U.S., including Brazil, Canada,
China, Europe, India, Israel and South Africa. We also sell our products to customers and
distributors located outside of the U.S. During the year ended June 30, 2011, 56.7 percent of our
consolidated sales were derived from non-U.S. markets. A key part of our long-term strategy is to
increase our manufacturing, distribution and sales presence in international markets. These
international operations are subject to a number of special risks, in addition to the risks of our
domestic business, including currency exchange rate fluctuations, differing protections of
intellectual property, trade barriers, exchange controls, regional economic uncertainty, differing
(and possibly more stringent) labor regulation, labor unrest, risk of governmental expropriation,
domestic and foreign customs and tariffs, current and changing regulatory environments (including,
but not limited to, the risks associated with the importation and exportation of products and raw
materials), risk of failure of our foreign employees to comply with both U.S. and foreign laws,
including antitrust laws, trade regulations and the Foreign Corrupt Practices Act, difficulty in
obtaining distribution support, difficulty in staffing and managing widespread operations,
differences in the availability and terms of financing, political instability and unrest and risks
of increases in taxes. Also, in some foreign jurisdictions, we may be subject to laws limiting the
right and ability of entities organized or operating therein to pay dividends or remit earnings to
affiliated companies unless specified conditions are met. To the extent we are unable to
effectively manage our international operations and these risks, our international sales may be
adversely affected, we may be subject to additional and unanticipated costs, and we may be subject
to litigation or regulatory action. As a consequence, our business, financial condition and results
of operations could be seriously harmed.
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Changes in the regulatory environment, including environmental, health and safety regulations,
could subject us to increased compliance and manufacturing costs, which could have a material
adverse effect on our business.
Health and Safety Regulations.
Certain of our products contain hard metals, including tungsten and
cobalt. Hard metal dust is being studied for potential adverse health effects by organizations in
several regions throughout the world, including the U.S., Europe and Japan. Future studies on the
health effects of hard metals may result in our products being classified as hazardous to human
health, which could lead to new regulations in countries in which we operate that may restrict or
prohibit the use of, and/or exposure to, hard metal dust. New regulation of hard metals could
require us to change our operations, and these changes could affect the quality of our products and
materially increase our costs.
Environmental Regulations.
We are subject to various environmental laws, and any violation of, or
our liabilities under, these laws could adversely affect us. Our operations necessitate the use and
handling of hazardous materials and, as a result, we are subject to various federal, state, local
and foreign laws, regulations and ordinances relating to the protection of the environment,
including those governing discharges to air and water, handling and disposal practices for solid
and hazardous wastes, the cleanup of contaminated sites and the maintenance of a safe workplace.
These laws impose penalties, fines and other sanctions for noncompliance and liability for response
costs, property damages and personal injury resulting from past and current spills, disposals or
other releases of, or exposure to, hazardous materials. We could incur substantial costs as a
result of noncompliance with or liability for cleanup or other costs or damages under these laws.
We may be subject to more stringent environmental laws in the future. If more stringent
environmental laws are enacted in the future, these laws could have a material adverse effect on
our business, financial condition and results of operations.
Regulations affecting the mining and drilling industries or utilities industry.
Some of our
principal customers are mining and drilling or utility companies. Many of these customers supply
coal, oil, gas or other fuels as a source for the production of utilities in the U.S. and other
industrialized regions. The operations of these mining and drilling companies are geographically
diverse and are subject to or affected by a wide array of regulations in the jurisdictions where
they operate, such as applicable environmental laws and regulations governing the operations of
utilities. As a result of changes in regulations and laws relating to such industries, our
customers’ operations could be disrupted or curtailed by governmental authorities. The high cost of
compliance with mining, drilling and environmental regulations may also induce customers to
discontinue or limit their operations, and may discourage companies from developing new
opportunities. As a result of these factors, demand for our mining- and drilling-related products
could be substantially affected by regulations adversely impacting the mining and drilling
industries or altering the consumption patterns of utilities.
Our continued success depends on our ability to protect and defend our intellectual property.
Our
future success depends in part upon our ability to protect and defend our intellectual property. We
rely principally on nondisclosure agreements and other contractual arrangements and trade secret
law and, to a lesser extent, trademark and patent law, to protect our intellectual property.
However, these measures may be inadequate to protect our intellectual property from infringement by
others or prevent misappropriation of our proprietary rights. In addition, the laws of some foreign
countries do not protect proprietary rights to the same extent as do U.S. laws. If one of our
patents is infringed upon by a third party, we may need to devote significant time and financial
resources to attempt to halt the infringement. We may not be successful in defending the patents
involved in such a dispute. Similarly, while we do not knowingly infringe on patents, copyrights or
other intellectual property rights owned by other parties, we may be required to spend a
significant amount of time and financial resources to resolve any infringement claims against us.
We may not be successful in defending our position or negotiating an alternative remedy. Our
inability to protect our proprietary information and enforce or defend our intellectual property
rights in proceedings initiated by or against us could have a material adverse effect on our
business, financial condition and results of operations.
We operate in a highly competitive environment.
Our domestic and foreign operations are subject to
significant competitive pressures. We compete directly and indirectly with other manufacturers and
suppliers of metalworking tools, engineered components and advanced materials. Some of our
competitors are larger than we are and may have greater access to financial resources or be less
leveraged than us. In addition, the industry in which our products are used is a large, fragmented
industry that is highly competitive.
If we are unable to retain our qualified management and employees, our business may be negatively
affected.
Our ability to provide high quality products and services depends in part on our ability
to retain our skilled personnel in the areas of management, product engineering, servicing and
sales. Competition for such personnel is intense, and our competitors can be expected to attempt to
hire our management and skilled employees from time to time. In addition, our restructuring
activities and strategies for growth have placed, and are expected to continue to place, increased
demands on our management’s skills and resources. If we are unable to retain our management team
and professional personnel, our customer relationships and level of technical expertise could be
negatively affected, which may materially and adversely affect our business.
- 5 -
Table of Contents
Our future operating results may be affected by fluctuations in the prices and availability of raw
materials.
The raw materials we use for our products include ore concentrates, compounds and
secondary materials containing tungsten, tantalum, titanium, niobium and cobalt. A significant
portion of our raw materials is supplied by sources outside the U.S. The raw materials industry as
a whole is highly cyclical, and at times pricing and supply can be volatile due to a number of
factors beyond our control, including natural disasters, general economic and political conditions,
labor costs, competition, import duties, tariffs and currency exchange rates. This volatility can
significantly affect our raw material costs. In an environment of increasing raw material prices,
competitive conditions can affect how much of the price increases in raw materials that we can
recover in the form of higher sales prices for our products. To the extent we are unable to pass on
any raw material price increases to our customers, our profitability could be adversely affected.
Furthermore, restrictions in the supply of tungsten, cobalt and other raw materials could adversely
affect our operating results. If the prices for our raw materials increase or we are unable to
secure adequate supplies of raw materials on favorable terms, our profitability could be impaired.
Product liability claims could have a material adverse effect on our business.
The sale of
metalworking, mining, highway construction and other tools and related products as well as
engineered components and advanced materials entails an inherent risk of product liability claims.
We cannot give assurance that the coverage limits of our insurance policies will be adequate or
that our policies will cover any particular loss. Insurance can be expensive, and we may not always
be able to purchase insurance on commercially acceptable terms, if at all. Claims brought against
us that are not covered by insurance or that result in recoveries in excess of insurance coverage
could have a material adverse affect on our business, financial condition and results of
operations.
Natural disasters or other global or regional catastrophic events could disrupt our operations and
adversely affect results.
Despite our concerted effort to minimize risk to our production
capabilities and corporate information systems and to reduce the effect of unforeseen interruptions
to us through business continuity planning, we still may be exposed to interruptions due to
catastrophe, natural disaster, pandemic, terrorism or acts of war, which are beyond our control.
Disruptions to our facilities or systems, or to those of our key suppliers, could also interrupt
operational processes and adversely impact our ability to manufacture our products and provide
services and support to our customers. As a result, our business, our results of operations,
financial position, cash flows and stock price could be adversely affected.
| ITEM 1B | – UNRESOLVED STAFF COMMENTS | |
None.
| 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:
| Location | Owned/Leased | Principal Products | Segment | |||
|
United States:
|
||||||
|
Irondale, Alabama
|
Owned | Custom Fabricated Wear Plate Solutions and Pins | Infrastructure | |||
|
Rogers, Arkansas
|
Owned/Leased | Carbide Products and Pelletizing Die Plates | Infrastructure | |||
|
University Park, Illinois
|
Owned | Custom Fabricated Wear Plate Solutions | Infrastructure | |||
|
Rockford, Illinois
|
Owned | Indexable Tooling | Industrial | |||
|
New Albany, Indiana
|
Leased | High Wear Coating for Steel Parts | Infrastructure | |||
|
Greenfield, Massachusetts
|
Owned | High-Speed Steel Taps | Industrial | |||
|
Shelby Township, Michigan
|
Leased | Thermal Deburring and High Energy Finishing | Industrial | |||
|
Traverse City, Michigan
|
Owned | Wear Parts | Industrial | |||
|
Walker, Michigan
|
Leased | Thermal Energy Machining | Industrial | |||
|
Elko, Nevada
|
Owned | Custom Fabricated Wear Plate Solutions | Infrastructure | |||
|
Fallon, Nevada
|
Owned | Metallurgical Powders | Infrastructure | |||
|
Asheboro, North Carolina
|
Owned | High-Speed Steel and Carbide Round Tools | Industrial | |||
|
Henderson, North Carolina
|
Owned | Metallurgical Powders | Infrastructure | |||
|
Roanoke Rapids, North
Carolina |
Owned | Metalworking Inserts | Industrial | |||
|
Cleveland, Ohio
|
Leased | Distribution | Industrial | |||
|
Orwell, Ohio
|
Owned | Metalworking Inserts | Industrial | |||
|
Solon, Ohio
|
Owned | Metalworking Toolholders | Industrial | |||
|
Whitehouse, Ohio
|
Owned | Metalworking Inserts and Round Tools | Industrial | |||
- 6 -
Table of Contents
| Location | Owned/Leased | Principal Products | Segment | |||
|
Bedford, Pennsylvania
|
Owned/Leased | Mining and Construction Tools and Wear Parts and Distribution | Infrastructure | |||
|
Irwin, Pennsylvania
|
Owned | Carbide Wear Parts | Industrial | |||
|
Irwin, Pennsylvania
|
Leased | Abrasive Flow Machining | Industrial | |||
|
Latrobe, Pennsylvania
|
Owned | Metallurgical Powders | Infrastructure | |||
|
Nenshannock, Pennsylvania
|
Leased | Specialty Metals and Alloys | Industrial | |||
|
Union, Pennsylvania
|
Owned | Specialty Metals and Alloys | Industrial | |||
|
Johnson City, Tennessee
|
Owned | Metalworking Inserts | Industrial | |||
|
Lyndonville, Vermont
|
Owned | High-Speed Steel Taps | Industrial | |||
|
Chilhowie, Virginia
|
Owned | Mining and Construction Tools and Wear Parts | Infrastructure | |||
|
New Market, Virginia
|
Owned | Metalworking Toolholders | Industrial | |||
|
International:
|
||||||
|
Indaiatuba, Brazil
|
Leased | Metalworking Carbide Drills and Toolholders | Industrial | |||
|
Victoria, Canada
|
Owned | Wear Parts | Industrial | |||
|
Fengpu, China
|
Owned | Intermetallic Composite Ceramic Powders and Parts | Infrastructure | |||
|
Tianjin, China
|
Owned | Metalworking Inserts and Carbide Round Tools | Industrial | |||
|
Xuzhou, China
|
Leased | Mining Tools | Infrastructure | |||
|
Kingswinford, England
|
Leased | Distribution | Industrial | |||
|
Ebermannstadt, Germany
|
Owned | Metalworking Inserts | Industrial | |||
|
Essen, Germany
|
Owned | Metallurgical Powders and Wear Parts | Industrial | |||
|
Koenigsee, Germany
|
Leased | Metalworking Carbide Drills | Industrial | |||
|
Lichtenau, Germany
|
Owned | Metalworking Toolholders | Industrial | |||
|
Mistelgau, Germany
|
Owned | Metallurgical Powders, Metalworking Inserts and Wear Parts | Infrastructure | |||
|
Nabburg, Germany
|
Owned | Metalworking Toolholders | Industrial | |||
|
Nabburg, Germany
|
Owned | Metalworking Round Tools, Drills and Mills | Industrial | |||
|
Nuenkirchen, Germany
|
Owned | Distribution | Industrial | |||
|
Vohenstrauss, Germany
|
Owned | Metalworking Carbide Drills | Industrial | |||
|
Bangalore, India
|
Owned | Metalworking Inserts and Toolholders and Wear Parts | Industrial | |||
|
Shlomi, Israel
|
Owned | High-Speed Steel and Carbide Round Tools | Industrial | |||
|
Milan, Italy
|
Owned | Metalworking Cutting Tools | Industrial | |||
|
Zory, Poland
|
Leased | Mining and Construction Conicals | Infrastructure | |||
|
Barcelona, Spain
|
Leased | Metalworking Cutting Tools | Industrial | |||
|
Newport, United Kingdom
|
Owned | Intermetallic Composite Powders | Infrastructure | |||
We also have a network of warehouses and customer service centers located throughout North America,
Europe, India, Asia Pacific and Latin America, a significant portion of which are leased. The
majority of our research and development efforts is conducted in a corporate technology center
located adjacent to our world headquarters in Latrobe, Pennsylvania, U.S., as well as in our
facilities in Rogers, Arkansas, U.S.; Fuerth, Germany and Essen, Germany.
We use all significant properties in the businesses of powder metallurgy, tools, tooling systems,
engineered components and advanced materials. Our production capacity is adequate for our present
needs. We believe that our properties have been adequately maintained, are generally in good
condition and are suitable for our business as presently conducted.
| ITEM 3 | - LEGAL PROCEEDINGS | |
The information set forth in Part I, Item 1, of this annual report on Form 10-K under the caption
“Regulation” is incorporated into this Item 3. From time to time, we are party to legal claims and
proceedings that arise in the ordinary course of business, which may relate to our operations or
assets, including real, tangible, or intellectual property. Although certain of these actions are
currently pending, we do not believe that any individual proceeding is material or that our pending
legal proceedings in the aggregate are material to Kennametal.
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 “Executive Officers of the Registrant” of this annual report on Form 10-K.
- 7 -
Table of Contents
| ITEM 5 - | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREOWNER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our capital stock is traded on the New York Stock Exchange (symbol KMT). The number of shareowners
of record as of July 31, 2011 was 2,199. Stock price ranges and dividends declared and paid were as follows:
| Quarter ended | September 30 | December 31 | March 31 | June 30 | ||||||||||||
|
2011
|
||||||||||||||||
|
High
|
$ | 31.80 | $ | 39.81 | $ | 44.11 | $ | 43.48 | ||||||||
|
Low
|
24.08 | 30.35 | 36.57 | 37.38 | ||||||||||||
|
Dividends
|
0.12 | 0.12 | 0.12 | 0.12 | ||||||||||||
|
2010
|
||||||||||||||||
|
High
|
$ | 25.17 | $ | 28.29 | $ | 30.64 | $ | 34.89 | ||||||||
|
Low
|
15.29 | 21.66 | 23.45 | 25.31 | ||||||||||||
|
Dividends
|
0.12 | 0.12 | 0.12 | 0.12 | ||||||||||||
The information incorporated by reference in Part III, Item 12 of this annual report on Form 10-K
from our 2011 Proxy Statement under the heading “Equity Compensation Plans — Equity Compensation
Plan Information” is hereby incorporated by reference into this Item 5.
PERFORMANCE GRAPH
The following graph compares cumulative total shareowner return on our capital stock with the
cumulative total shareowner return on the common equity of the companies in the Standard & Poor’s
Mid-Cap 400 Market Index (S&P Mid-Cap 400), the Standard & Poor’s Composite 1500 Market Index (S&P
Composite), and the peer group of companies determined by us for the
period from July 1, 2005 to June 30, 2011.
The Peer Group consists of the following companies: Allegheny Technologies Incorporated; Ametek
Inc.; Barnes Group Inc.; Carpenter Technology Corporation; Crane Co.; Donaldson Company, Inc.;
Dresser-Rand Group Inc.; Flowserve Corp.; Greif Inc.; Harsco Corporation; Joy Global Inc.; Lincoln
Electric Holdings, Inc.; Pall Corporation.; Parker-Hannifin Corporation; Pentair Inc.;
Sauer-Danfoss, Inc.; Teleflex, Incorporated; and The Timken Co.
Comparison of 5-Year Cumulative Total Return
- 8 -
Table of Contents
Assumes $100 Invested on July 1, 2005 and All Dividends Reinvested
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |||||||||||||||||||
|
Kennametal
|
$ | 100.00 | $ | 133.55 | $ | 107.35 | $ | 64.69 | $ | 87.47 | $ | 147.21 | ||||||||||||
|
Peer Group Index
|
100.00 | 131.21 | 132.76 | 79.60 | 102.50 | 163.59 | ||||||||||||||||||
|
S&P Mid-Cap 400
|
100.00 | 118.51 | 109.81 | 79.04 | 98.74 | 137.63 | ||||||||||||||||||
|
S&P 1500 Composite
|
100.00 | 120.22 | 104.92 | 77.29 | 89.32 | 117.58 | ||||||||||||||||||
ISSUER PURCHASES OF EQUITY SECURITIES
| Total Number of | Maximum Number of | |||||||||||||||
| Shares Purchased as | Shares that May Yet | |||||||||||||||
| Total Number of | Part of Publicly | Be Purchased Under | ||||||||||||||
| Shares | Average Price | Announced Plans or | the Plans or | |||||||||||||
| Period | Purchased (1) | Paid per Share | Programs | Programs (2) | ||||||||||||
|
April 1 through April 30, 2011
|
17,129 | $ | 38.95 | 17,000 | 7,284,600 | |||||||||||
|
May 1 through May 31, 2011
|
255,550 | 40.27 | 250,000 | 7,034,600 | ||||||||||||
|
June 1 through June 30, 2011
|
540,998 | 38.99 | 529,500 | 6,505,100 | ||||||||||||
|
Total
|
813,677 | $ | 39.39 | 796,500 | ||||||||||||
| (1) | During the current period, 6,549 shares and 3,232 shares were purchased on the open market on behalf of Kennametal to fund the Company’s 401(k) matching contribution and the Company’s dividend reinvestment program, respectively. Also, during the current period, employees delivered 2,796 shares of restricted stock to Kennametal, upon vesting, to satisfy tax-withholding requirements and 4,600 shares of Kennametal stock as payment for the exercise price of stock options. |
| (2) | On October 26, 2010, the Company publicly announced a repurchase programs of up to 8 million shares of its outstanding capital stock. |
- 9 -
Table of Contents
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
|
OPERATING RESULTS (in thousands)
|
||||||||||||||||||||
|
Sales
|
$ | 2,403,493 | $ | 1,884,067 | $ | 1,999,859 | $ | 2,589,786 | $ | 2,265,336 | ||||||||||
|
Cost of goods sold
|
1,519,102 | 1,256,339 | 1,423,320 | 1,682,715 | 1,438,137 | |||||||||||||||
|
Operating expense
|
538,530 | 477,487 | 489,567 | 594,187 | 543,952 | |||||||||||||||
|
Restructuring and asset impairment charges
|
(1) | 12,586 | 43,923 | 173,656 | 39,891 | 5,970 | ||||||||||||||
|
Interest expense
|
22,760 | 25,203 | 27,244 | 31,586 | 28,999 | |||||||||||||||
|
Provision (benefit) for income taxes
|
63,856 | 26,977 | (11,205 | ) | 62,754 | 68,251 | ||||||||||||||
|
Income (loss) from continuing operations attributable to Kennametal
|
229,727 | 47,842 | (102,402 | ) | 163,666 | 174,717 | ||||||||||||||
|
Net income (loss)
attributable to Kennametal
|
(2) | 229,727 | 46,419 | (119,742 | ) | 167,775 | 174,243 | |||||||||||||
|
FINANCIAL POSITION (in thousands)
|
||||||||||||||||||||
|
Working capital
|
$ | 446,064 | $ | 522,926 | $ | 496,935 | $ | 630,675 | $ | 529,265 | ||||||||||
|
Total assets
|
2,754,469 | 2,267,823 | 2,346,974 | 2,784,349 | 2,606,227 | |||||||||||||||
|
Long-term debt, including capital leases, excluding current maturities
|
1,919 | 314,675 | 436,592 | 313,052 | 361,399 | |||||||||||||||
|
Total debt, including capital leases and notes payable
|
312,882 | 337,668 | 485,957 | 346,652 | 366,829 | |||||||||||||||
|
Total Kennametal shareowners’ equity
|
1,638,072 | 1,315,500 | 1,247,443 | 1,647,907 | 1,484,467 | |||||||||||||||
|
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL
|
||||||||||||||||||||
|
Basic earnings (loss) from continuing operations
|
$ | 2.80 | $ | 0.59 | $ | (1.40 | ) | $ | 2.13 | $ | 2.28 | |||||||||
|
Basic earnings (loss)
|
(3) | 2.80 | 0.57 | (1.64 | ) | 2.18 | 2.27 | |||||||||||||
|
Diluted earnings (loss) from continuing operations
|
2.76 | 0.59 | (1.40 | ) | 2.10 | 2.22 | ||||||||||||||
|
Diluted earnings (loss)
|
(4) | 2.76 | 0.57 | (1.64 | ) | 2.15 | 2.22 | |||||||||||||
|
Dividends
|
0.48 | 0.48 | 0.48 | 0.47 | 0.41 | |||||||||||||||
|
Book value (at June 30)
|
20.19 | 16.06 | 17.03 | 21.44 | 19.04 | |||||||||||||||
|
Market Price (at June 30)
|
42.21 | 25.43 | 19.18 | 32.55 | 40.50 | |||||||||||||||
|
OTHER DATA (in thousands, except number of employees)
|
||||||||||||||||||||
|
Capital expenditures
|
$ | 83,442 | $ | 56,679 | $ | 104,842 | $ | 163,489 | $ | 92,001 | ||||||||||
|
Number of employees (at June 30)
|
11,612 | 11,047 | 11,584 | 13,673 | 13,947 | |||||||||||||||
|
Basic weighted average shares outstanding
|
82,063 | 80,966 | 73,122 | 76,811 | 76,788 | |||||||||||||||
|
Diluted weighted average shares outstanding
|
83,173 | 81,690 | 73,122 | 78,201 | 78,545 | |||||||||||||||
|
KEY RATIOS
|
||||||||||||||||||||
|
Sales growth
|
27.6 | % | (5.8 | %) | (22.8 | %) | 14.3 | % | 2.4 | % | ||||||||||
|
Gross profit margin
|
36.8 | 33.3 | 28.8 | 35.0 | 36.5 | |||||||||||||||
|
Operating profit (loss) margin
|
13.4 | 4.9 | (5.0 | ) | 10.0 | 11.7 | ||||||||||||||
| (1) | In 2011 and 2010, charges related to restructuring activity. In 2009, the charges related to an impairment of $111.0 million for Industrial goodwill and an Industrial indefinite-lived trademark as well as restructuring charges of $62.6 million. In 2008, the charges related to an Industrial goodwill impairment of $35.0 million as well as restructuring charges of $4.9 million. In 2007, the charge related to the impairment of an indefinite-lived Industrial trademark | |
| (2) | Net income (loss) attributable to Kennametal includes (loss) income from discontinued operations of ($1.4) million, ($17.3) million, $4.1 million and ($0.5) million for 2010, 2009, 2008 and 2007, respectively. | |
| (3) | Basic earnings (loss) per share includes basic (loss) earnings from discontinued operations per share of ($0.02), ($0.24), $0.05 and ($0.01) for 2010, 2009, 2008 and 2007 respectively. | |
| (4) | Diluted earnings (loss) per share includes diluted (loss) earnings from discontinued operations per share of ($0.02), ($0.24) and $0.05 for 2010, 2009 and 2008, respectively. |
- 10 -
Table of Contents
| ITEM 7 | - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION | |
The following discussion should be read in connection with the consolidated financial statements of
Kennametal Inc. and the related financial statement notes. 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.
OVERVIEW
Kennametal Inc. delivers productivity to customers seeking peak performance in demanding
environments by providing innovative custom and standard wear-resistant solutions, enabled through
our advanced materials sciences, application knowledge and commitment to a sustainable environment.
We believe that our reputation for manufacturing excellence, as well as our technological expertise
and innovation in our principal products, has helped us to achieve a leading market presence in our
primary markets. We believe that we are one of the largest global providers of consumable
metalcutting tools and tooling supplies.
In 2011, the Company achieved sequential sales growth each quarter, with an organic sales increase
of 28 percent for the year. The Company had strong earnings per diluted share (EPS) of $2.76 as a
result of sales growth and solid operating margins. We completed our restructuring programs which
are expected to reduce our cost structure by approximately $170 million annually, yielding higher
benefits on costs that were lower than anticipated.
For 2011, sales were $2.4 billion, an increase of 27.6 percent compared to prior year sales of $1.9
billion. Operating income was $321.7 million, an increase of $228.4 million compared to operating
income of $93.2 million in 2010. The increase in operating income was primarily due to sales
volume and price realization, improved capacity utilization and incremental restructuring benefits
of approximately $28 million, partially offset by higher raw material costs.
We generated cash flow from operating activities of $230.8 million in the current year. Capital
expenditures were $83.4 million during the year.
In addition, we invested further in technology and innovation to continue delivering a high level
of new products to our customers. Research and development expenses included in operating expense
totaled $33.3 million for 2011. In 2011, we generated approximately 40 percent of our sales from
new products.
NEW OPERATING STRUCTURE
In order to take additional advantage of growth opportunities as well as to
provide a better platform for continually improving the efficiency and effectiveness of operations,
we implemented a new operating structure as of July 1, 2010. We restated the segment financial
information for the years ended June 30, 2010 and 2009, respectively, to reflect the change in
reportable operating segments.
The new structure provides for an enhanced market sector approach coupled with a more
customer-centric focus for the sales organization and other key market-facing functions such as
customer service, marketing, product management, engineering and product development. The new
structure also involves the formation of a single, global integrated supply chain and logistics
organization that unleashes additional opportunities to achieve higher customer satisfaction and
realize lower costs to serve. Furthermore, the new structure provides for more uniform management
of administrative functions on a global basis to further improve the consistency, effectiveness and
efficiency of the services provided by these functions.
A key attribute of the new structure is the establishment of two new operating segments by market
sector which replace the previous two operating segments that were based on a product focus. The
two new reportable operating segments are named Industrial and Infrastructure. The Industrial
business is primarily focused on customers within the transportation, aerospace, defense and
general engineering market sectors. The Infrastructure business is primarily focused on customers
within the energy and earthworks industries. The formation of the two new reportable operating
segments is consistent with the new management approach and internal financial reporting
established under the new structure.
Under the new structure, more corporate expenses will be allocated to the new segments than were
allocated to the previous segments. The remaining corporate expenses that are determined to be
non-allocable will continue to be reported as Corporate.
- 11 -
Table of Contents
RESTRUCTURING ACTIONS
During 2011, we completed our restructuring programs to reduce costs and
improve operating efficiencies. These programs related to the rationalization of certain
manufacturing and service facilities, as well as other employment and cost reduction programs.
Restructuring and related charges recorded in 2011 amounted to $21.5 million. This included $13.7
million of restructuring charges of which $1.1 million were related to inventory disposals and
recorded as cost of goods sold. Restructuring related charges of $4.4 million were recorded in
cost of goods sold and $3.4 million in operating expense during 2011. We realized pre-tax benefits
from these restructuring programs of approximately $165 million during 2011.
The Company’s restructuring programs are expected to deliver annual ongoing pre-tax savings of
approximately $170 million now that all programs are fully implemented. Total pre-tax charges
recorded from inception to June 30, 2011 was approximately $150 million.
ACQUISITIONS AND DIVESTITURES
In 2011 and 2010, we had no acquisitions or divestitures.
In 2009, we acquired Tricon Metals and Services Inc. (Tricon) in our Infrastructure segment for a
net purchase price of $64.1 million. Tricon is a leading supplier of custom wear solutions
specializing in consumable proprietary steels for the surface and underground mining markets,
including hard rock and coal. During 2009, we also made an acquisition within our Industrial
segment. We also had one divestiture in 2009 that was accounted for as discounted operations and
described below.
DISCONTINUED OPERATIONS
On June 30, 2009, we divested our high speed steel business (HSS)
from our Industrial segment as part of our continuing focus to shape our business portfolio and
rationalize our manufacturing footprint. This divestiture was accounted for as discontinued
operations. Cash proceeds from this divestiture amounted to $28.5 million. We incurred pre-tax
charges related to the divestiture of $2.3 million and $25.9 million during 2010 and 2009,
respectively. The pre-tax charges as well as the related tax effects were recorded in discontinued
operations. We do not expect to incur any additional pre-tax charges related to this divestiture.
The following represents the results of discontinued operations for the years ended June 30:
| (in thousands) | 2010 | 2009 | ||||||
|
Sales
|
$ | – | $ | 80,630 | ||||
|
Loss from discontinued operations before income taxes
|
$ | (2,269 | ) | $ | (25,923 | ) | ||
|
Income tax expense (benefit)
|
(846 | ) | (8,583 | ) | ||||
|
Loss from discontinued operations
|
$ | (1,423 | ) | $ | (17,340 | ) | ||
RESULTS OF CONTINUING OPERATIONS
SALES
Sales of $2,403.5 million in 2011 increased 27.6 percent from $1,884.1 million in 2010 as a
result of strong organic growth. Organic sales increased in both segments and across all regions.
Organic sales growth drivers were general engineering of 40 percent, transportation of 30 percent
and energy markets of 26 percent.
Sales of $1,884.1 million in 2010 decreased 5.8 percent from $1,999.9 million in 2009. Sales
declined organically by 8 percent as a result of the global economy, partially offset by a 1
percent increase from favorable foreign currency effects and a 1 percent increase from an
acquisition. Organic sales declined in Europe and the Americas, partially offset by an organic
sales increase in Asia. Organic sales decreased in both segments primarily due to lower sales in
general engineering of 14 percent and reduced demand in energy markets of 13 percent, partially
offset by an increase in the transportation and earthworks market sectors of 8 percent and 3
percent, respectively.
GROSS PROFIT
Gross profit increased $256.7 million to $884.4 million in 2011 from $627.7 million in
2010. The increase was primarily due to increased organic sales of $523.9 million, price
realization, improved absorption of manufacturing costs due to higher production levels, cost
reduction benefits, favorable business mix and favorable foreign currency effects of $3.5 million.
The impact of these items was partially offset by higher raw material costs and one-time benefits
in the prior year from certain labor negotiations in Europe that did not occur in the current
period. The gross profit margin for 2011 increased to 36.8 percent from 33.3 percent in 2010.
- 12 -
Table of Contents
Gross profit increased $51.2 million to $627.7 million in 2010 from $576.5 million in 2009. The
increase was primarily due to restructuring and other cost reduction benefits, lower raw material
costs which more than offset unfavorable price realization, one-time benefits from certain labor
negotiations in Europe, favorable foreign currency effects of $7.5 million, a decrease in
restructuring and related charges of $7.0 million, as well as improved absorption of manufacturing
costs due to higher production levels. The impact of these items was partially offset by lower
organic sales of $151.2, unfavorable business mix and the restoration of salaries and other
employment costs that had been temporarily reduced. The gross profit margin for 2010 increased to
33.3 percent from 28.8 percent in 2009.
OPERATING EXPENSE
Operating expense in 2011 was $538.5 million, an increase of $61.0 million, or
12.8 percent, compared to $477.5 million in 2010. The increase is primarily driven by higher
employment costs of $31.9 million due to the reinstatement of salaries and other temporary
employment cost reductions and a higher provision for incentive compensation of $18.7 million, as a
result of better operating performance. Foreign currency unfavorably impacted operating expense by
$2.1 million
Operating expense in 2010 was $477.5 million, a decrease of $12.1 million, or 2.5 percent,
compared to $489.6 million in 2009. The decrease is primarily attributable to a $40.2 million
decrease in employment expenses driven by restructuring and cost management activities and a $5.4
million decrease in the provision for bad debts. These decreases were partially offset by higher
provisions for incentive compensation programs of $20.5 million, increased spending on strategic
projects of $8.2 million and the unfavorable impact of foreign currency of $4.3 million.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
During 2011, we completed our restructuring programs and
recognized $21.5 million of restructuring charges of which $13.7 million were recorded as
restructuring charges including $1.1 million related to inventory disposals and recorded in cost of
goods sold. No asset impairment occurred in 2011. See the discussion under the heading
“Restructuring Actions” within this MD&A for additional information.
During 2010, we continued to implement restructuring actions and recognized $48.9 million of
restructuring charges of which $44.3 million were recorded as restructuring charges including $0.4
million related to inventory disposals and recorded in cost of goods sold. No asset impairment
occurred in 2010.
During 2009, restructuring and related charges amounted to $73.3 million, including $64.7 million
of restructuring charges of which $2.1 million were related to inventory disposals and recorded in
cost of goods sold. During 2009, we recorded a goodwill impairment charge of $100.2 million. Of
this amount, $37.3 million related to our surface finishing machines and services business and
$62.9 million related to our engineered products business. No goodwill remains on the books for our
surface finishing machines and services business and $39.6 million of goodwill remains on the
engineered products business. We also recorded a $10.8 million impairment charge for the
indefinite-lived trademark for our surface finishing machines and services business.
AMORTIZATION OF INTANGIBLES
Amortization expense was $11.6 million, $13.1 million and $13.1 million
in 2011, 2010 and 2009, respectively.
INTEREST EXPENSE
Interest expense decreased $2.4 million to $22.8 million in 2011, compared with
$25.2 million in 2010. This decrease was due to a decrease in the average interest rates on
domestic borrowings to 4.8 percent, compared to 5.0 percent in 2010, partially offset by higher
borrowings. The portion of our debt subject to variable rates of interest was approximately 2
percent and 6 percent at June 30, 2011 and 2010, respectively.
Interest expense decreased $2.0 million to $25.2 million in 2010, compared with $27.2 million in
2009. This decrease was due to lower borrowings, partially offset by an increase in the average
interest rates on domestic borrowings to 5.0 percent compared to 3.9 percent in 2009. The portion
of our debt subject to variable rates of interest was approximately 6 percent and 34 percent at
June 30, 2010 and 2009, respectively, due to lower borrowings outstanding against our revolving
credit facility.
OTHER EXPENSE (INCOME), NET
In 2011, other expense, net decreased by $11.4 million to $2.8 million
expense, net compared to $8.6 million income, net in 2010. The decrease was primarily due to a
$10.2 million unfavorable change in foreign currency transaction results, primarily driven by the
euro.
In 2010, other income, net decreased by $6.0 million to $8.6 million compared to $14.6 million in
2009. The decrease was primarily due to an unfavorable change in foreign currency transaction
results of $3.2 million, primarily due to the euro and a $3.1 million decrease in interest income
due to a decrease in interest rates.
INCOME TAXES
The effective tax rate from continuing operations for 2011 was 21.6 percent compared
to 35.2 percent for 2010. The change in the effective rate from 2010 to 2011 was primarily driven
by increased income in international locations where the tax rate is lower than the U.S. as well as
restructuring charges in the prior year in jurisdictions where no tax benefit could be recognized.
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The 2011 effective rate was favorably impacted by a $21.5 million release of a valuation allowance
in the United Kingdom, but that impact was offset by the tax cost of approximately $22.0 million,
predominately U.S., associated with dividends of current year net
income from some of our international subsidiaries. The 2010 effective rate was
unfavorably impacted by the expiration of the research, development and experimental tax credit as
well as the impact of restructuring charges in jurisdictions where no tax benefit could be
recognized.
During 2011, we generated taxable income in other jurisdictions where we have valuation allowances
recorded against our net deferred tax assets. The corresponding impact on the 2011 effective tax
rate was immaterial. In conjunction with our annual planning process during the fourth quarter of
2011, we determined that sustainability of future income in the United Kingdom is likely, and as a
result, we believe that it is more likely than not that we will be able to realize the net deferred
tax assets in this jurisdiction. Accordingly, we recorded a valuation allowance adjustment of
$21.5 million that reduced tax expense. With respect to the other jurisdictions, we believe
sustainability of future income remains uncertain. We therefore have not adjusted the valuation
allowance in these jurisdictions. We will continue to monitor our ability to realize the net
deferred tax assets in these jurisdictions, and if appropriate, will adjust the valuation
allowance. Such an adjustment would likely result in a material reduction to tax expense in the
period the adjustment occurs.
The effective tax rate from continuing operations for 2010 was 35.2 percent (provision on income)
compared to 10.0 percent (benefit on a loss) for 2009. The change in the effective rate from 2009
to 2010 was primarily driven by asset impairment charges in the prior period. In addition, the
2010 effective rate was unfavorably impacted by the expiration of the research, development and
experimental tax credit as well as the impact of restructuring charges in jurisdictions where no
tax benefit could be recognized. The 2009 effective rate benefited from a valuation allowance
adjustment in Europe.
INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO KENNAMETAL SHAREOWNERS
Income from
continuing operations attributable to Kennametal Shareowners was $229.7 million, or $2.76 per
diluted share, in 2011 compared to $47.8 million, or $0.59 per diluted share, in 2010. The
increase in income from continuing operations was a result of the factors previously discussed.
Income from continuing operations attributable to Kennametal Shareowners was $47.8 million, or
$0.59 per diluted share, in 2010 compared to loss of ($102.4) million, or ($1.40) per diluted
share, in 2009. The increase in income from continuing operations was a result of the factors
previously discussed.
BUSINESS SEGMENT REVIEW
We operate two reportable operating segments consisting of Industrial and
Infrastructure. Corporate expenses that do not have a meaningful base
for allocation are reported in
Corporate. Segment determination 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.
INDUSTRIAL
| 2011 | 2010 | 2009 | ||||||||||
|
External sales
|
$ | 1,528,672 | $ | 1,166,793 | $ | 1,277,981 | ||||||
|
Operating income (loss)
|
209,663 | 31,210 | (115,083 | ) | ||||||||
External sales of $1,528.7 million in 2011 increased by $361.9 million, or 31.0 percent, from
2010. The increase in sales was attributed to an organic sales increase of 32 percent and
favorable foreign currency effects of 1 percent, offset by the impact of fewer business days. On
an organic basis, sales increased in all served market sectors led by strong growth in general
engineering and transportation sales of 40 percent and 30 percent, respectively. On a regional
basis, organic sales increased by approximately 40 percent in Asia, 29 percent in Europe and 28
percent in the Americas.
Operating income for 2011 was $209.7 million and reflects an increase in operating performance of
$178.5 million from 2010. The primary drivers of the increase in operating income were higher
organic sales of $369.7 million, price realization, improved capacity utilization and incremental
restructuring benefits. These benefits were partially offset by higher raw material costs.
Industrial operating income included restructuring and related charges of $12.9 million and $35.5
million in 2011 and 2010, respectively. Industrial operating margin increased to 13.7 percent from
2.7 percent in the prior year.
External sales of $1,166.8 million in 2010 decreased by $111.2 million, or 8.7 percent, from 2009.
The decrease in sales was attributed to organic sales decline of 10 percent offset by favorable
foreign currency effects of 2 percent. On an organic basis, sales decreased in both aerospace and
defense and general engineering, by 28 percent and 14 percent, respectively, partially offset by
an increase in transportation sales of 8 percent. On a regional basis, organic sales decreased by
approximately 15 percent in Europe and 12 percent in the Americas, partially offset by a 13
percent increase in Asia.
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Operating income for 2010 was $31.2 million and reflects an increase in operating performance of
$146.3 million from the operating loss generated in 2009. The primary drivers of the increase in
operating performance were cost savings from restructuring programs, continued cost containment
actions and favorable price realization, partially offset by lower organic sales of $133.5 million.
Industrial operating income (loss) included restructuring and related charges of $35.5 million and
$24.5 million in 2010 and 2009, respectively and $111.0 million of asset impairment charges in
2009.
INFRASTRUCTURE
| 2011 | 2010 | 2009 | ||||||||||
|
External sales
|
$ | 874,821 | $ | 717,274 | $ | 721,878 | ||||||
|
Operating income
|
121,733 | 79,899 | 19,768 | |||||||||
External sales of $874.8 million in 2011 increased by $157.5 million, or 22.0 percent, from
2010. The increase in sales was attributed to organic sales increase of 21 percent and favorable
foreign currency effects of 1 percent. The organic increase was driven by higher sales in the
energy and earthworks markets of 26 percent and 18 percent, respectively. On a regional basis,
organic sales increased by approximately 27 percent in Asia, 22 percent in the Americas and 13
percent in Europe.
Operating income for 2011 was $121.7 million and reflects an increase of $41.8 million from 2010.
Operating income improved primarily due to higher organic sales of $153.1 million, price
realization, increased capacity utilization and incremental restructuring benefits, partially
offset by higher raw material costs. Infrastructure operating income included restructuring and
related charges of $6.2 million and $13.4 million in 2011 and 2010, respectively. Infrastructure
operating margin increased from the prior year quarter to 13.9 percent from 11.1 percent.
External sales of $717.3 million in 2010 decreased by $4.6 million, or 0.6 percent, from 2009. The
decrease in sales was attributed to organic sales decline of 4 percent offset by the positive
effects of acquisitions of 2 percent and favorable foreign currency effects of 1 percent. The
decrease in organic sales was driven by lower sales in the energy market of 13 percent, partially
offset by an increase in the earthworks market of 3 percent. On a regional basis, organic sales
decreased by approximately 8 percent in Europe and 6 percent in the Americas, partially offset by a
14 percent increase in Asia.
Operating income for 2010 was $79.9 million and reflects an increase of $60.1 million from 2009.
The increase was driven by cost savings from restructuring programs and continued cost containment
actions, partially offset due to lower organic sales of $27.0 million and unfavorable price
realization. For 2010, operating loss included $13.4 million of restructuring and related charges,
compared to $47.9 million of restructuring and related charges in 2009.
CORPORATE
| 2011 | 2010 | 2009 | ||||||||||
|
Corporate unallocated expense
|
$ | (9,723 | ) | $ | (17,881 | ) | $ | (4,503 | ) | |||
In 2011,
unallocated expense decreased $8.2 million, or 45.6 percent from 2010. The decrease was
driven by $4.2 million of lower strategic project spending, $4.1 million higher allocation of
Corporate expense to the segments than in the prior year, $1.2 million higher foreign government
subsidy income for certain research projects and a $1.1 million reversal of an international
environmental liability, partially offset by charge of $2.4 million recorded to write-off our
pre-existing ERP system.
In 2010, unallocated expense increased $13.4 million from 2009. The increase was primarily due to $9.0
million of higher strategic project spending and $1.7 million higher foreign government subsidy
income for certain research projects.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is our primary source of funding for
capital expenditures. During the year ended June 30, 2011, cash flow provided
by operating activities was $230.8 million, driven by our operating performance.
To augment cash from operations and as an additional source of funds, we maintain a syndicated
revolving credit-facility. On June 25, 2010 we entered into a five-year, multi-currency, revolving
credit facility (2010 Credit Agreement) that extends to June 2015. This agreement replaces the
prior credit facility that was scheduled to mature in March 2011. The 2010 Credit Agreement permits
revolving credit loans of up to $500.0 million for working capital, capital expenditures and
general corporate purposes. The 2010 Credit Agreement allows for borrowings in U.S. dollars, euro,
Canadian dollars, pound sterling and Japanese yen. Interest payable
under the 2010 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 an applicable margin, or (3) fixed as negotiated by us.
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The 2010 Credit Agreement requires us to comply with various restrictive and affirmative covenants,
including two financial covenants: a maximum leverage ratio and a minimum consolidated interest
coverage ratio (as those terms are defined in the agreement). We were in compliance with these
financial covenants as of June 30, 2011. We had no borrowings outstanding under the 2010 Credit
Agreement as of June 30, 2011.
Borrowings under the 2010 Credit Agreement are guaranteed by our significant domestic subsidiaries.
Our $300 million Senior Unsecured Notes due in June 2012 have been reclassified to current
maturities of long-term debt as of June 30, 2011. The repayment of this debt is expected to be
financed in due course through a new corporate bond issuance.
Additionally, we obtain local financing through credit lines with commercial banks in the various
countries in which we operate. At June 30, 2011, these borrowings amounted to $3.7
million of notes payable and $3.3 million of term debt, capital leases and other debt. 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, 2011 and 2010, approximately 2
percent and 6 percent of our debt, respectively, was exposed to variable rates of interest.
The decrease in the portion of our debt subject to variable rates was due to a reduction in notes
payable and term debt subject to variable interest rates.
At June 30, 2011, we had cash and cash equivalents of $204.6 million. Total Kennametal shareowners’
equity was $1,658.1 million and total debt was $312.9 million. Our current senior credit ratings
are at investment grade levels. We believe that our current financial position, liquidity and
credit ratings provide us access to the capital markets. We continue to closely monitor our
liquidity position and the condition of the capital markets, as well as the counterparty risk of
our credit providers.
Following is a summary of our contractual obligations and other commercial commitments as of June
30, 2011 (in thousands):
| Contractual Obligations | Total | 2012 | 2013-2014 | 2015-2016 | Thereafter | |||||||||||||||||||
|
Long-term debt
|
(1 | ) | $ | 327,718 | $ | 327,651 | $ | 67 | $ | - | $ | - | ||||||||||||
|
Notes payable
|
(2 | ) | 3,821 | 3,821 | - | - | - | |||||||||||||||||
|
Pension benefit payments
|
(3) | 41,230 | 83,988 | 91,304 | (3) | |||||||||||||||||||
|
Postretirement benefit payments
|
(3) | 2,416 | 4,586 | 4,203 | (3) | |||||||||||||||||||
|
Capital leases
|
(4 | ) | 3,505 | 1,392 | 1,385 | 728 | - | |||||||||||||||||
|
Operating leases
|
64,893 | 16,962 | 17,516 | 6,714 | 23,701 | |||||||||||||||||||
|
Purchase obligations
|
(5 | ) | 830,285 | 616,984 | 90,493 | 57,792 | 65,016 | |||||||||||||||||
|
Unrecognized tax benefits
|
(6 | ) | 21,462 | 16,096 | - | - | 5,366 | |||||||||||||||||
|
Total
|
$ | 1,026,552 | $ | 198,035 | $ | 160,741 | ||||||||||||||||||
| (1) | Long-term debt includes interest obligations of $21.6 million. Interest obligations were determined assuming interest rates as of June 30, 2011 remain constant. | |
| (2) | Notes payable includes interest obligations of $0.2 million. Interest obligations were determined assuming interest rates as of June 30, 2011 remain constant. | |
| (3) | Annual payments are expected to continue into the foreseeable future at the amounts noted in the table. | |
| (4) | Capital leases include interest obligations of $0.4 million. | |
| (5) | 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 market prices as of June 30, 2011 remain constant. | |
| (6) | Unrecognized tax benefits are positions taken or expected to be taken on an income tax return that may result in additional payments to tax authorities. These amounts include interest of $3.2 million accrued related to such positions as of June 30, 2011. The amount included for 2012 is expected to be settled within the next twelve months. The remaining amount of unrecognized tax benefits is included in the ‘Thereafter’ column as we are not able to reasonably estimate the timing of potential future payments. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary. |
| Other Commercial Commitments | Total | 2012 | 2013-2014 | 2015-2016 | Thereafter | |||||||||||||||
|
Standby letters of credit
|
$ | 5,234 | $ | 5,234 | $ | - | $ | - | $ | - | ||||||||||
|
Guarantees
|
32,241 | 25,725 | 454 | 9 | 6,053 | |||||||||||||||
|
Total
|
$ | 37,475 | $ | 30,959 | $ | 454 | $ | 9 | $ | 6,053 | ||||||||||
The standby letters of credit relate to insurance and other activities. The
guarantees are non-debt guarantees in foreign locations with financial institutions required
primarily for security deposits, product performance guarantees and advances.
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Cash flows from discontinued operations are not deemed material and have been combined with cash
flows from continuing operations within each cash flow statement category. The absence of cash
flows from discontinued operations is not expected to have a material impact on our future
liquidity and capital resources.
Cash Flow Provided by Operating Activities
During 2011, cash flow provided by operating activities was $230.8 million, compared to $164.8
million in 2010. Cash flow provided by operating activities for the current year consisted of net
income and non-cash items amounting to $329.8 million, offset by changes in certain assets and
liabilities netting to $99.0 million. These changes were primarily driven by an increase in
inventory of $124.1 million, due to increased demand and higher raw material costs, and an increase in accounts
receivable of $89.2 million driven by higher sales volumes, partially offset by an increase in
accounts payable and accrued liabilities of $100.3 million, driven by higher accounts payable
balances related to increased production and an increase in accrued income taxes of $22.2 million.
During 2010, cash flow provided by operating activities was $164.8 million, compared to $192.3
million in 2009. Cash flow provided by operating activities for 2010 consisted of net income and
non-cash items amounting to $158.4 million and changes in certain assets and liabilities netting to
$6.5 million. These changes were driven by an increase in accounts receivable of $58.2 million,
driven by higher sales volumes in the latter part of the year, partially offset by an increase in
accounts payable and accrued liabilities of $41.0 million, driven by increased accounts payable
related to increased production and an increase in accrued income taxes of $19.2 million.
During 2009, cash flow provided by operating activities was $192.3 million. Cash flow provided by
operating activities for 2009 consisted of net loss and non-cash items amounting to $113.1 million
of cash generation, including $115.2 million of restructuring and asset impairment charges, and
changes in certain assets and liabilities netting to $79.2 million. Contributing to these changes
was a decrease in accounts receivable of $200.2 million and a decrease in inventories of $36.0
million, partially offset by a decrease in accounts payable and accrued liabilities of $118.1
million, a decrease in accrued income taxes of $12.0 million and a net change in other assets and
liabilities of $26.9 million.
Cash Flow Used for Investing Activities
Cash flow used for investing activities was $71.8 million for 2011, an increase of $31.4 million, compared to $40.4 million in 2010. During the current year, cash flow used for investing activities included $83.4 million used for purchases of property, plant and equipment, which consisted primarily of upgrades of equipment and our enterprise resource planning (ERP) system.
Cash flow used for investing activities was $71.8 million for 2011, an increase of $31.4 million, compared to $40.4 million in 2010. During the current year, cash flow used for investing activities included $83.4 million used for purchases of property, plant and equipment, which consisted primarily of upgrades of equipment and our enterprise resource planning (ERP) system.
We have projected our capital expenditures for 2012 to be approximately $100 million, which are
expected to be used primarily to invest in equipment upgrades and manufacturing capabilities. We
believe this level of capital spending is sufficient to maintain competitiveness and improve
productivity.
Cash flow used for investing activities was $40.4 million for 2010, a decrease of $129.7 million,
compared to $170.1 million in 2009. During 2010, cash flow used for investing activities included
$56.7 million used for purchases of property, plant and equipment, which consisted primarily of
equipment upgrades, and $17.0 million used for the acquisition of business assets, primarily the
deferred purchase price of $16.0 million for a 2007 acquisition, as well as $27.8 million of cash
proceeds from divestitures.
Cash flow used for investing activities was $170.1 million for 2009
and included $104.8 million used for purchases of property, plant and equipment, which consisted
primarily of equipment upgrades, and $69.5 million used for the acquisition of business assets,
primarily the Tricon acquisition with a net purchase price of $64.1 million.
Cash Flow Used for Financing Activities
Cash flow used for financing activities was $96.0 million for 2011, compared to $58.2 million in 2010. During the current year, cash flow used for financing activities included $57.9 million used for the purchase of capital stock, $39.8 million of cash dividends paid to shareowners and a $17.6 million net decrease in borrowings, partially offset by $18.3 million of dividend reinvestment and the effect of employee benefit and stock plans.
Cash flow used for financing activities was $96.0 million for 2011, compared to $58.2 million in 2010. During the current year, cash flow used for financing activities included $57.9 million used for the purchase of capital stock, $39.8 million of cash dividends paid to shareowners and a $17.6 million net decrease in borrowings, partially offset by $18.3 million of dividend reinvestment and the effect of employee benefit and stock plans.
Cash flow used for financing activities was $58.2 million for 2010, compared to $15.5 million in
2009. During 2010, cash flow used for financing activities included a $143.0 million net decrease
in borrowings and $39.3 million of cash dividends paid to shareowners, partially offset by $120.7
million in net proceeds from equity offering and $10.7 million of dividend reinvestment and the
effect of employee benefit and stock plans.
In 2009, cash flow used for financing activities was $15.5 million and included a $128.0 million
net increase in borrowings, $12.6 million in proceeds from termination of interest rate swap
contracts and $4.9 million of dividend reinvestment and the effect of employee benefit and stock
plans offset by $127.7 million used for the purchase of capital stock and $35.5 million of cash
dividends paid to shareowners.
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FINANCIAL CONDITION
At June 30, 2011, total assets were $2,754.5 million, an increase of $486.7
million from $2,267.8 million at June 30, 2010. Total liabilities increased $161.4 million from
$934.4 million at June 30, 2010 to $1,095.8 million at June 30, 2011.
Working capital was $446.1 million at June 30, 2011, a decrease of $76.8 million or 14.7 percent
from $522.9 million at June 30, 2010. The decrease in working capital was primarily driven by an increase in current
maturities of long-term debt and capital leases and notes payable to banks of $288.0 million due to
the $306.0 million senior unsecured notes being reclassified from long-term to current as they are
due in 2012, an increase in accounts payable of $97.3 million due to increased production and
better working capital management, an increase in accrued payroll of $25.9 million due to the
timing of the payroll disbursement at year end and an increase in accrued income taxes of $20.2
million, partially offset by an increase in inventories of $155.7 million driven by the impact of
higher production to meet demand and higher raw material costs, an increase of $121.1 million in
accounts receivable due to higher sales and an increase of $86.4 million in cash and cash
equivalents. Foreign currency effects accounted for $54.4 million of the working capital change.
Property, plant and equipment, net increased $32.6 million from $664.5 million at June 30, 2010 to
$697.1 million at June 30, 2011, primarily due to capital additions of $83.4 million, consisting of
equipment upgrades and ERP system capitalization and foreign currency impact of $38.6 million,
partially offset by depreciation expense of $81.9 million.
At June 30, 2011, other assets were $769.8 million, an increase of $82.4 million from $687.4
million at June 30, 2010. The primary drivers for the increase were an increase in other assets of
$47.0 million, an increase in goodwill of $21.9 million and an increase in deferred income taxes of
$18.0 million. The increase in other assets was primarily due to an increase in pension assets due
to higher return on plan assets. Foreign currency effects accounted for $21.6 million and $5.3
million in the change in goodwill and deferred income taxes, respectively.
Long-term debt and capital leases decreased $312.8 million to $1.9 million at June 30, 2011 from
$314.7 million at June 30, 2010. The decrease was driven by the reclassification of senior
unsecured notes which are due in 2012 to current.
Kennametal shareowners’ equity was $1,638.1 million at June 30, 2011, an increase of $322.6 million
from $1,315.5 million in the prior year. The increase was primarily due to net income attributable
to Kennametal of $229.7 million, foreign currency translation adjustments of $120.1 million, effect
of amortization of employee benefit plan gains into other comprehensive income of $35.2 million and capital stock issued under employee benefit and stock plans of $34.9 million,
partially offset by purchase of capital stock of $57.9 million and cash dividends paid to
shareowners of $39.8 million.
ENVIRONMENTAL MATTERS
The operation of our business has exposed us to certain liabilities and
compliance costs related to environmental matters. We are involved in various environmental cleanup
and remediation activities at certain of our locations.
Superfund Sites
We are involved as a PRP at various sites designated by the USEPA as Superfund
sites. For certain of these sites, we have evaluated the claims and potential liabilities and have
determined that neither are material, individually or in the aggregate. For certain other sites,
proceedings are in the very early stages and have not yet progressed to a point where it is
possible to estimate the ultimate cost of remediation, the timing and extent of remedial action
that may be required by governmental authorities or the amount of our liability alone or in
relation to that of any other PRPs.
Other Environmental Issues
We establish and maintain reserves for other potential environmental
issues. At June 30, 2011 and 2010, the total of accruals for these reserves was $5.4 million and
$5.2 million, respectively. These totals represent anticipated costs associated with the
remediation of these issues. We recorded additional reserves of $1.5 million and $0.6 million in
2011 and 2010, respectively. We recorded unfavorable foreign currency translation adjustments of
$0.6 million during 2011 and favorable foreign currency translation adjustment of $0.6 million
during 2010, respectively. Cash payments of $0.8 million and $0.1 million were made against these
reserves during 2011 and 2010, respectively. We also had a $1.1 million reversal of an
international environmental liability in 2011.
We maintain a Corporate EHS Department, as well as an EHS Steering Committee, to monitor compliance
with environmental regulations and to oversee remediation activities. In addition, we have
designated EHS coordinators who are responsible for each of our global manufacturing facilities.
Our financial management team periodically meets with members of the Corporate EHS Department and
the Corporate Legal Department to review and evaluate the status of environmental projects and
contingencies. On a quarterly basis, we review financial provisions and reserves for environmental
contingencies and adjust these reserves when appropriate.
EFFECTS OF INFLATION
Despite modest inflation in recent years, rising costs, including 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.
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DISCUSSION OF CRITICAL ACCOUNTING POLICIES
In preparing our financial statements in conformity with
accounting principles generally accepted in the United States of America (U.S. GAAP), 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 set forth in Item 8. We believe that the following
discussion addresses our critical accounting policies.
Revenue Recognition
We recognize revenue upon shipment of our products and assembled machines. Our
general conditions of sale explicitly state that the delivery of our products and assembled
machines 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 or assembled machines 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 products or assembled machines
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 products and assembled machines and do not consider the effect of returned
products and assembled machines to be material. We have recorded an estimated returned goods
allowance to provide for any potential 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 the
customer of shipping instructions from Kennametal. We have included an estimated allowance for
warranty returns in our returned goods allowance discussed above.
We recognize revenue related to the sale of specialized assembled machines upon customer acceptance
and installation, as installation is deemed essential to the functionality of a specialized
assembled machine. Sales of specialized assembled machines were immaterial for 2011, 2010 and 2009.
Stock-Based Compensation
We recognize stock-based compensation expense for all stock options,
restricted stock awards and restricted stock units 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). We utilize the Black-Scholes valuation method to establish the fair
value of all stock option awards.
Accounting for Contingencies
We accrue for contingencies 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 in both 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.
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Long-Lived Assets
We evaluate the recoverability of property, plant and equipment and intangible
assets that are amortized whenever events or changes in circumstances indicate the carrying amount
of 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 expected to generate. When the sum of the
undiscounted cash flows is less than the carrying value, we will recognize an impairment loss to
the extent that carrying value exceeds fair value. We apply our best judgment when performing these
evaluations to determine if a triggering event has occurred, the undiscounted cash flows used to
assess recoverability and the fair value of the asset.
Goodwill and Indefinite-Lived Intangible Assets
We evaluate the recoverability of goodwill of each
of our reporting units 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. We evaluate the recoverability of indefinite-lived
intangible assets using a discounted cash flow analysis based on projected financial information.
These valuations are sensitive to changes in market interest rates.
Pension and Other Postretirement and Postemployment Benefits
We sponsor these types of benefit
plans for certain employees and retirees. 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 investment grade
bond yield curves with a duration that approximates the benefit payment timing of each plan. This
rate can fluctuate based on changes in investment grade bond yields. At June 30, 2011, a
hypothetical 25 basis point increase or decrease in our discount rates would increase or decrease,
respectively, our pre-tax income by approximately $2.7 million.
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 cost increases 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 2029. At June 30, 2011, a hypothetical 1 percent increase or decrease
in our health care cost trend rates would be immaterial to our pre-tax income.
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 a review of published mortality tables.
We expect to contribute $7.0 million and $2.1 million to our pension and other postretirement
benefit plans, respectively, in 2012.
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 additional factors such as our
historical bad debt experience, 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 deteriorate, additional allowances may
be required, resulting in future operating losses that are not included in the allowance for
doubtful accounts at June 30, 2011.
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 our 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.
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Table of Contents
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. 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. As of June 30, 2011, the deferred
tax assets net of valuation allowances relate primarily to net operating loss carryforwards,
accrued employee benefits and inventory reserves. 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. In the event we were to determine that we are able to use our deferred
tax assets and a valuation allowance had been recorded against the deferred tax assets, a decrease
in the valuation allowance would be required.
NEW ACCOUNTING STANDARDS
Adopted
As of January 1, 2011, Kennametal adopted changes to intangible impairment testing for reporting
units with zero or negative carrying amounts. These changes require an entity to perform all steps
in the test for a reporting unit whose carrying value is zero or negative if it is more likely than
not that an intangible impairment exists based on qualitative factors, resulting in the elimination
of an entity’s ability to assert that such a reporting unit’s intangible assets are not impaired
and additional testing is not necessary despite the existence of qualitative factors that indicate
otherwise. The adoption of this guidance did not have an impact on our consolidated financial
statements.
As of January 1, 2011, Kennametal adopted changes to the disclosures related to business
combinations for a public entity that presents comparative financial statements. This guidance also
expanded the supplemental pro forma business combination disclosures. The adoption of this
guidance did not have an impact on our consolidated financial statements.
As of July 1, 2010, Kennametal adopted new guidance on consolidations for enterprises involved with
variable interest entities. The guidance modifies how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar) rights should be
consolidated and clarifies that the determination of whether a company is required to consolidate a
variable interest entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly impact the
entity’s economic performance. This guidance requires an ongoing reassessment of whether a company
is the primary beneficiary of a variable interest entity and also requires additional disclosures
about a company’s involvement in variable interest entities and any significant changes in risk
exposure due to that involvement. The adoption of this guidance did not have an impact on our
consolidated financial statements.
As of July 1, 2010, Kennametal adopted new guidance on accounting for transfers of financial
assets. This guidance requires additional disclosure regarding transfers of financial assets,
including securitization transactions, and where companies have continuing exposure to the risks
related to transferred financial assets. The adoption of this guidance did not have an impact on
our consolidated financial statements.
As of July 1, 2010, Kennametal adopted new guidance on revenue recognition for multiple-deliverable
revenue arrangements. The guidance allows companies to allocate arrangement consideration in
multiple deliverable arrangements in a manner that better reflects the transaction’s economics and
may result in earlier revenue recognition. In addition, the residual method of allocating
arrangement consideration is no longer permitted. The adoption of this guidance did not have a
material impact on our consolidated financial statements.
Issued
In June 2011, the Financial Accounting Standards Board (FASB) issued new guidance on presentation
of comprehensive income. This new guidance eliminates the current option to report other
comprehensive income and its components in the statement of changes in equity. An entity can elect
to present items of net income and other comprehensive income in one continuous statement (referred
to as the statement of comprehensive income) or in two separate consecutive statements. Each
component of net income and other comprehensive income, together with totals for comprehensive
income and its two parts — net income and other comprehensive income, would need to be displayed
under either alternative. The statement(s) would need to be presented with equal prominence as the
other primary financial statements. This guidance is effective for Kennametal beginning July 1,
2012.
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In May 2011, the FASB issued new guidance on fair value measurements and disclosure. The objective
of the new guidance is a consistent definition of fair value and common requirements for
measurement of and disclosure about fair value between accounting principles U.S. GAAP and
international financial reporting standards (IFRS). Many of the amendments in this new guidance
represent clarifications to existing guidance or changes in the measurement guidance for
determining fair value. The most significant change in disclosures is an expansion of the
information required for Level 3 measurements. New disclosures are required about the use of a
nonfinancial asset measured or disclosed at fair value if its use differs from its highest and best
use. In addition, entities must report the level in the fair value hierarchy of assets and
liabilities not recorded at fair value but where fair value is disclosed. This guidance is
effective for Kennametal beginning January 1, 2012. We are in the process of evaluating the impact
of adoption on our consolidated financial statements.
| 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 provide predictability to 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 volatility in cash flow, allowing us to focus
more of 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
expense (income), net. See Notes 2 and 16 set forth in Item 8.
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, 2011 foreign currency rates and the effective interest
rates under our current borrowing arrangements. We compared the contractual derivative and
borrowing arrangements in effect at June 30, 2011 to the hypothetical foreign exchange or interest
rates in the sensitivity analysis to determine the effect on interest expense, pre-tax income or
accumulated other comprehensive income. 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 range forwards and forward contracts primarily to sell
foreign currency. The notional amounts of the contracts translated into U.S. dollars at June 30,
2011 and 2010 rates were $37.6 million and $9.4 million, respectively. We would have paid
immaterial amounts at June 30, 2011 and 2010, respectively, to settle these contracts, which
represent the fair value of these contracts. At June 30, 2011, a hypothetical 10 percent
strengthening or weakening of the U.S. dollar would change accumulated other comprehensive (loss)
income, net of tax, by $1.5 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, 2011 and 2010, we had outstanding forward contracts to
purchase and sell foreign currency with notional amounts, translated into U.S. dollars at June 30,
2011 and 2010 rates, of $39.3 million and $134.0 million, respectively. At June 30, 2011, a
hypothetical 10 percent change in the year-end exchange rates would result in an increase or
decrease in pre-tax income of $0.8 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 contracts to manage exposure to
interest rate changes
- 22 -
Table of Contents
related to these borrowings. We had forward starting interest rate swap
contracts outstanding for forecasted transactions that effectively converted a cumulative notional
amount of $150 million and $75 million from floating to fixed interest rates as of June 30,
2011 and 2010, respectively. These contracts are expected to be settled by December 2011. We would
have paid $2.4 million and $2.3 million at June 30, 2011 and 2010, respectively, to settle these
interest rate swap contracts, which represented the fair value of these contracts.
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 contracts. At June 30, 2011 and 2010, we had no such
contracts in place.
On June 25, 2010, we entered into a five-year, multi-currency, revolving credit facility (2010
Credit Agreement) that extends to June 2015. This agreement replaces the prior credit facility that
was scheduled to mature in March 2011. The 2010 Credit Agreement permits revolving credit loans of
up to $500.0 million for working capital, capital expenditures and general corporate purposes. We
had no borrowings outstanding under the 2010 Credit Agreement as of June 30, 2011.
Also during July 2009, the Company completed the issuance of 8.1 million shares of its common stock
generating net proceeds of $120.7 million which were used to pay down outstanding indebtedness
under the revolving credit facility.
FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS
Foreign currency exchange rate fluctuations materially
decreased earnings in 2011 and materially increased earnings in 2009. Such fluctuations did not
materially impact earnings in 2010. Foreign currency exchange rate fluctuations may have a material
impact on future earnings in the short term and long term.
| ITEM 8 | - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MANAGEMENT’S 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 of the Company’s internal controls over financial
reporting as of June 30, 2011 using the criteria in
Internal Control — Integrated Framework
,
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s 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 accounting principles generally accepted in the United States
of America. 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.
Based on its assessment, management has concluded that the Company maintained effective internal
control over financial reporting as of June 30, 2011, based on criteria in
Internal Control —
Integrated Framework
issued by the COSO. The effectiveness of the Company’s internal control over
financial reporting as of June 30, 2011 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which appears herein.
- 23 -
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareowners of Kennametal Inc.:
In our opinion,
the accompanying consolidated balance sheets and the related
consolidated statements of income, shareowners’ equity and cash
flow present fairly, in all material respects, the financial position of Kennametal Inc. and
its subsidiaries at June 30, 2011 and 2010, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2011 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. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of June 30, 2011, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Management’s Report on Internal Control over
Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and on the Company’s internal control
over financial reporting based on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects. Our audits of the financial
statements included 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. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A company’s 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
company’s 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 company’s 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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
August 11, 2011
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
August 11, 2011
- 24 -
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| Year ended June 30 (in thousands, except per share data) | 2011 | 2010 | 2009 | |||||||||
|
Sales
|
$ | 2,403,493 | $ | 1,884,067 | $ | 1,999,859 | ||||||
|
Cost of goods sold
|
1,519,102 | 1,256,339 | 1,423,320 | |||||||||
|
Gross profit
|
884,391 | 627,728 | 576,539 | |||||||||
|
Operating expense
|
538,530 | 477,487 | 489,567 | |||||||||
|
Restructuring and asset impairment charges (Notes 2 and 15)
|
12,586 | 43,923 | 173,656 | |||||||||
|
Amortization of intangibles
|
11,602 | 13,090 | 13,134 | |||||||||
|
Operating income (loss)
|
321,673 | 93,228 | (99,818 | ) | ||||||||
|
Interest expense
|
22,760 | 25,203 | 27,244 | |||||||||
|
Other expense (income), net
|
2,780 | (8,577 | ) | (14,566 | ) | |||||||
|
Income (loss) from continuing operations before income taxes
|
296,133 | 76,602 | (112,496 | ) | ||||||||
|
Provision (benefit) for income taxes (Note 12)
|
63,856 | 26,977 | (11,205 | ) | ||||||||
|
Income (loss) from continuing operations
|
232,277 | 49,625 | (101,291 | ) | ||||||||
|
Loss from discontinued operations (Note 5)
|
- | (1,423 | ) | (17,340 | ) | |||||||
|
Net income (loss)
|
232,277 | 48,202 | (118,631 | ) | ||||||||
|
Less: Net income attributable to noncontrolling interests
|
2,550 | 1,783 | 1,111 | |||||||||
|
Net income (loss) attributable to Kennametal
|
$ | 229,727 | $ | 46,419 | $ | (119,742 | ) | |||||
|
|
||||||||||||
|
Amounts attributable to Kennametal Shareowners:
|
||||||||||||
|
Income (loss) from continuing operations
|
$ | 229,727 | $ | 47,842 | $ | (102,402 | ) | |||||
|
Loss from discontinued operations (Note 5)
|
- | (1,423 | ) | (17,340 | ) | |||||||
|
Net income (loss) attributable to Kennametal
|
$ | 229,727 | $ | 46,419 | $ | (119,742 | ) | |||||
|
|
||||||||||||
|
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL
|
||||||||||||
|
Basic earnings (loss) per share:
|
||||||||||||
|
Continuing operations
|
$ | 2.80 | $ | 0.59 | $ | (1.40 | ) | |||||
|
Discontinued operations
|
- | (0.02 | ) | (0.24 | ) | |||||||
|
|
$ | 2.80 | $ | 0.57 | $ | (1.64 | ) | |||||
|
|
||||||||||||
|
Diluted earnings (loss) per share:
|
||||||||||||
|
Continuing operations
|
$ | 2.76 | $ | 0.59 | $ | (1.40 | ) | |||||
|
Discontinued operations
|
- | (0.02 | ) | (0.24 | ) | |||||||
|
|
$ | 2.76 | $ | 0.57 | $ | (1.64 | ) | |||||
|
|
||||||||||||
|
Dividends per share
|
$ | 0.48 | $ | 0.48 | $ | 0.48 | ||||||
|
|
||||||||||||
|
Basic weighted average shares outstanding
|
82,063 | 80,966 | 73,122 | |||||||||
|
|
||||||||||||
|
Diluted weighted average shares outstanding
|
83,173 | 81,690 | 73,122 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
- 25 -
Table of Contents
| As of June 30 (in thousands, except per share data) | 2011 | 2010 | ||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 204,565 | $ | 118,129 | ||||
|
Accounts receivable, less allowance for doubtful accounts of $20,958 and $24,789
|
447,835 | 326,699 | ||||||
|
Inventories (Note 8)
|
519,973 | 364,268 | ||||||
|
Deferred income taxes (Note 12)
|
60,257 | 62,083 | ||||||
|
Other current assets
|
54,955 | 44,752 | ||||||
|
Total current assets
|
1,287,585 | 915,931 | ||||||
|
Property, plant and equipment:
|
||||||||
|
Land and buildings
|
373,971 | 341,748 | ||||||
|
Machinery and equipment
|
1,396,306 | 1,281,872 | ||||||
|
Less accumulated depreciation
|
(1,073,215 | ) | (959,085 | ) | ||||
|
Property, plant and equipment, net
|
697,062 | 664,535 | ||||||
|
Other assets:
|
||||||||
|
Investments in affiliated companies
|
829 | 2,251 | ||||||
|
Goodwill (Note 2)
|
511,328 | 489,443 | ||||||
|
Other intangible assets, less accumulated amortization of $78,712 and $63,343
(Note 2)
|
152,279 | 155,306 | ||||||
|
Deferred income taxes (Note 12)
|
29,876 | 11,827 | ||||||
|
Other
|
75,510 | 28,530 | ||||||
|
Total other assets
|
769,822 | 687,357 | ||||||
|
Total assets
|
$ | 2,754,469 | $ | 2,267,823 | ||||
|
LIABILITIES
|
||||||||
|
Current liabilities:
|
||||||||
|
Current maturities of long-term debt and capital leases (Note 10)
|
$ | 307,304 | $ | 3,539 | ||||
|
Notes payable to banks (Note 11)
|
3,659 | 19,454 | ||||||
|
Accounts payable
|
222,678 | 125,360 | ||||||
|
Accrued income taxes (Note 12)
|
38,098 | 17,857 | ||||||
|
Accrued vacation pay
|
37,311 | 34,615 | ||||||
|
Accrued payroll
|
65,265 | 39,374 | ||||||
|
Other current liabilities (Note 9)
|
167,206 | 152,806 | ||||||
|
Total current liabilities
|
841,521 | 393,005 | ||||||
|
Long-term debt and capital leases, less current maturities (Note 10)
|
1,919 | 314,675 | ||||||
|
Deferred income taxes (Note 12)
|
83,310 | 63,266 | ||||||
|
Accrued postretirement benefits (Note 13)
|
17,853 | 17,894 | ||||||
|
Accrued pension benefits (Note 13)
|
117,066 | 111,807 | ||||||
|
Accrued income taxes (Note 12)
|
3,094 | 5,193 | ||||||
|
Other liabilities
|
31,065 | 28,540 | ||||||
|
Total liabilities
|
1,095,828 | 934,380 | ||||||
|
Commitments and contingencies (Note 19)
|
||||||||
|
EQUITY
|
||||||||
|
Kennametal Shareowners’ Equity:
|
||||||||
|
Preferred stock, no par value; 5,000 shares authorized; none issued
|
- | - | ||||||
|
Capital stock, $1.25 par value; 120,000 shares authorized; 81,129 and 81,903
shares issued
|
101,411 | 102,379 | ||||||
|
Additional paid-in capital
|
470,758 | 492,454 | ||||||
|
Retained earnings
|
983,374 | 793,448 | ||||||
|
Accumulated other comprehensive income (loss)
|
82,529 | (72,781 | ) | |||||
|
Total Kennametal Shareowners’ Equity
|
1,638,072 | 1,315,500 | ||||||
|
Noncontrolling interests
|
20,569 | 17,943 | ||||||
|
Total equity
|
1,658,641 | 1,333,443 | ||||||
|
Total liabilities and equity
|
$ | 2,754,469 | $ | 2,267,823 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
- 26 -
Table of Contents
| Year ended June 30 (in thousands) | 2011 | 2010 | 2009 | |||||||||
|
OPERATING ACTIVITIES
|
||||||||||||
|
Net income (loss)
|
$ | 232,277 | $ | 48,202 | $ | (118,631 | ) | |||||
|
Adjustments for non-cash items:
|
||||||||||||
|
Depreciation
|
81,869 | 83,339 | 83,247 | |||||||||
|
Amortization
|
11,602 | 13,090 | 13,134 | |||||||||
|
Stock-based compensation expense
|
18,852 | 16,640 | 9,412 | |||||||||
|
Restructuring and asset impairment charges (Note 15)
|
2,914 | 855 | 115,212 | |||||||||
|
Loss on divestitures
|
- | 527 | 22,704 | |||||||||
|
Deferred income tax (benefit) provision
|
(7,881 | ) | 230 | (10,898 | ) | |||||||
|
Other
|
(9,872 | ) | (4,506 | ) | (1,088 | ) | ||||||
|
Changes in certain assets and liabilities, excluding effects
of acquistions
and divestitures:
|
||||||||||||
|
Accounts receivable
|
(89,153 | ) | (58,245 | ) | 200,159 | |||||||
|
Inventories
|
(124,082 | ) | (2,576 | ) | 36,048 | |||||||
|
Accounts payable and accrued liabilities
|
100,325 | 40,985 | (118,133 | ) | ||||||||
|
Accrued income taxes
|
22,158 | 19,227 | (11,969 | ) | ||||||||
|
Other
|
(8,212 | ) | 7,060 | (26,934 | ) | |||||||
|
Net cash flow provided by operating activities
|
230,797 | 164,828 | 192,263 | |||||||||
|
INVESTING ACTIVITIES
|
||||||||||||
|
Purchases of property, plant and equipment
|
(83,442 | ) | (56,679 | ) | (104,842 | ) | ||||||
|
Disposals of property, plant and equipment
|
9,755 | 5,141 | 2,914 | |||||||||
|
Cash paid for acquisitions, net of cash acquired (Note 4)
|
- | (16,969 | ) | (69,485 | ) | |||||||
|
Proceeds from divestitures (Notes 4 and 5)
|
- | 27,788 | 1,544 | |||||||||
|
Proceeds from sale of investments in affiliated companies
|
1,723 | 23 | 108 | |||||||||
|
Other
|
139 | 276 | (295 | ) | ||||||||
|
Net cash flow used for investing activities
|
(71,825 | ) | (40,420 | ) | (170,056 | ) | ||||||
|
FINANCING ACTIVITIES
|
||||||||||||
|
Net (decrease) increase in notes payable
|
(15,992 | ) | (27,335 | ) | 14,311 | |||||||
|
Term debt borrowings
|
450,109 | 564,366 | 974,248 | |||||||||
|
Term debt repayments
|
(451,748 | ) | (680,023 | ) | (860,522 | ) | ||||||
|
Purchase of capital stock
|
(57,909 | ) | (306 | ) | (127,720 | ) | ||||||
|
Net proceeds from equity offering
|
- | 120,696 | - | |||||||||
|
Proceeds from interest rate swap agreement termination (Note 7)
|
- | - | 12,566 | |||||||||
|
Dividend reinvestment and the effect of employee benefit and
stock plans
|
18,328 | 10,677 | 4,873 | |||||||||
|
Cash dividends paid to shareowners
|
(39,801 | ) | (39,316 | ) | (35,466 | ) | ||||||
|
Other
|
988 | (6,926 | ) | 2,184 | ||||||||
|
Net cash flow used for financing activities
|
(96,025 | ) | (58,167 | ) | (15,526 | ) | ||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
23,489 | (17,935 | ) | (23,336 | ) | |||||||
|
CASH AND CASH EQUIVALENTS
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
86,436 | 48,306 | (16,655 | ) | ||||||||
|
Cash and cash equivalents, beginning of period
|
118,129 | 69,823 | 86,478 | |||||||||
|
Cash and cash equivalents, end of period
|
$ | 204,565 | $ | 118,129 | $ | 69,823 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
Note: Amounts presented include cash flows from discontinued operations.
- 27 -
Table of Contents
CONSOLIDATED STATEMENTS OF SHAREOWNERS’ EQUITY
| 2011 | 2010 | 2009 | ||||||||||||||||||||||
| Year ended June 30 (in thousands) | Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||
|
CAPITAL STOCK
|
||||||||||||||||||||||||
|
Balance at beginning of year
|
81,903 | $ | 102,379 | 73,232 | $ | 91,540 | 76,858 | $ | 96,076 | |||||||||||||||
|
Dividend reinvestment
|
8 | 10 | 12 | 15 | 28 | 35 | ||||||||||||||||||
|
Capital stock issued under employee benefit and
stock plans
|
721 | 901 | 621 | 776 | 346 | 429 | ||||||||||||||||||
|
Equity offering
|
- | - | 8,050 | 10,063 | - | - | ||||||||||||||||||
|
Purchase of capital stock
|
(1,503 | ) | (1,879 | ) | (12 | ) | (15 | ) | (4,000 | ) | (5,000 | ) | ||||||||||||
|
Balance at end of year
|
81,129 | 101,411 | 81,903 | 102,379 | 73,232 | 91,540 | ||||||||||||||||||
|
ADDITIONAL PAID-IN CAPITAL
|
||||||||||||||||||||||||
|
Balance at beginning of year
|
492,454 | 357,839 | 468,169 | |||||||||||||||||||||
|
Dividend reinvestment
|
354 | 290 | 569 | |||||||||||||||||||||
|
Capital stock issued under employee benefit and
stock plans
|
33,980 | 23,986 | 11,821 | |||||||||||||||||||||
|
Equity offering
|
- | 110,630 | - | |||||||||||||||||||||
|
Purchase of capital stock
|
(56,030 | ) | (291 | ) | (122,720 | ) | ||||||||||||||||||
|
Balance at end of year
|
470,758 | 492,454 | 357,839 | |||||||||||||||||||||
|
RETAINED EARNINGS
|
||||||||||||||||||||||||
|
Balance at beginning of year
|
793,448 | 786,345 | 941,553 | |||||||||||||||||||||
|
Net income (loss)
|
229,727 | 46,419 | (119,742 | ) | ||||||||||||||||||||
|
Cash dividends paid to shareowners
|
(39,801 | ) | (39,316 | ) | (35,466 | ) | ||||||||||||||||||
|
Balance at end of year
|
983,374 | 793,448 | 786,345 | |||||||||||||||||||||
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
||||||||||||||||||||||||
|
Balance at beginning of year
|
(72,781 | ) | 11,719 | 142,109 | ||||||||||||||||||||
|
Unrealized gain (loss) on derivatives designated and
qualified as cash flow hedges, net of tax
|
642 | (936 | ) | (3,006 | ) | |||||||||||||||||||
|
Reclassification of unrealized (gain) loss on expired
derivatives designated and qualified as cash flow hedges, net of tax
|
(679 | ) | (1,482 | ) | 5,290 | |||||||||||||||||||
|
Unrecognized net pension and other postretirement
benefit gains (losses), net of tax
|
28,087 | (17,397 | ) | (14,283 | ) | |||||||||||||||||||
|
Reclassification of net pension and other
postemployment benefit losses, net of tax
|
7,131 | 2,975 | 1,496 | |||||||||||||||||||||
|
Foreign currency translation adjustments, net of tax
|
120,129 | (67,660 | ) | (119,887 | ) | |||||||||||||||||||
|
Other comprehensive income (loss), net of tax
|
155,310 | (84,500 | ) | (130,390 | ) | |||||||||||||||||||
|
Balance at end of year
|
82,529 | (72,781 | ) | 11,719 | ||||||||||||||||||||
|
NONCONTROLLING INTERESTS
|
||||||||||||||||||||||||
|
Balance at beginning of year
|
17,943 | 20,012 | 21,527 | |||||||||||||||||||||
|
Net income
|
2,550 | 1,783 | 1,111 | |||||||||||||||||||||
|
Other comprehensive income (loss), net of tax
|
2,229 | (1,177 | ) | (2,158 | ) | |||||||||||||||||||
|
Purchase of noncontrolling interests
|
- | (401 | ) | (165 | ) | |||||||||||||||||||
|
Cash dividends paid to noncontrolling interests
|
(2,153 | ) | (2,274 | ) | (303 | ) | ||||||||||||||||||
|
Balance at end of year
|
20,569 | 17,943 | 20,012 | |||||||||||||||||||||
|
Total equity, June 30
|
$ | 1,658,641 | $ | 1,333,443 | $ | 1,267,455 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
- 28 -
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Kennametal Inc. delivers productivity to customers seeking peak performance in demanding
environments by providing innovative custom and standard wear-resistant solutions, enabled through
our advanced materials sciences, application knowledge and commitment to a sustainable environment.
We believe that our reputation for manufacturing excellence, as well as our technological expertise
and innovation in our principal products, has helped us to achieve a leading market presence in our
primary markets. End users of our products include metalworking manufacturers and suppliers across
a diverse array of industries, including the aerospace, defense, transportation, machine tool,
light machinery and heavy machinery industries, as well as manufacturers, producers and suppliers
in a number of other industries including coal mining, highway construction, quarrying, and oil and
gas exploration and production industries. Our end users’ products include items ranging from
airframes to coal mining, engines to oil wells and turbochargers to construction.
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.
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
our 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, our 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 investee’s 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 consolidated 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 and bank deposits at June 30, 2011.
ACCOUNTS RECEIVABLE
We market our products to a diverse customer base throughout the world. Trade
credit is extended based upon periodically updated evaluations of each customer’s 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
(LIFO) method for determining the cost of a significant portion of our United States (U.S.)
inventories. The cost of the remainder of our 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, 2011 and 2010 was
$55.3 million and $68.3 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 the facilities estimated useful life.
- 29 -
Table of Contents
Depreciation for financial reporting purposes is computed using the straight-line method over the
following estimated useful lives: building and improvements over 15-40 years; machinery and
equipment over 4-15 years; furniture and fixtures over 5-10 years and computer hardware and
software over 3-5 years.
Leased property and equipment under capital leases are amortized using the straight-line method
over the terms of the related leases.
LONG-LIVED ASSETS
We evaluate the recoverability of property, plant and equipment and intangible
assets 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 expected to generate. When the sum of the
undiscounted cash flows is less than the carrying value of the asset or asset group, we will
recognize an impairment loss to the extent that carrying value exceeds fair value. We apply our
best judgment when performing these evaluations to determine if a triggering event has occurred,
the undiscounted cash flows used to assess recoverability and the fair value of the asset.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of
the net assets of acquired companies. Goodwill and intangible assets with indefinite lives are
tested at least annually for impairment. We perform our annual impairment tests during the June
quarter in connection with our annual planning process unless there are impairment indicators that
warrant a test prior to that.
The carrying amount of goodwill attributable to each segment at June 30 is as follows:
| (in thousands) | Industrial | Infrastructure | Total | |||||||||
|
Goodwill
|
$ | 406,626 | $ | 247,199 | $ | 653,825 | ||||||
|
Accumulated impairment losses
|
(150,842 | ) | - | (150,842 | ) | |||||||
|
Balance as of June 30, 2009
|
$ | 255,784 | $ | 247,199 | $ | 502,983 | ||||||
|
Acquisitions / Divestitures
|
536 | - | 536 | |||||||||
|
Translation
|
(13,188 | ) | (888 | ) | (14,076 | ) | ||||||
|
Change in goodwill
|
(12,652 | ) | (888 | ) | (13,540 | ) | ||||||
|
Goodwill
|
$ | 393,974 | $ | 246,311 | $ | 640,285 | ||||||
|
Accumulated impairment losses
|
(150,842 | ) | - | (150,842 | ) | |||||||
|
Balance as of June 30, 2010
|
$ | 243,132 | $ | 246,311 | $ | 489,443 | ||||||
|
Adjustments
|
$ | 252 | $ | - | $ | 252 | ||||||
|
Translation
|
17,719 | 3,914 | 21,633 | |||||||||
|
Change in goodwill
|
17,971 | 3,914 | 21,885 | |||||||||
|
Goodwill
|
411,945 | 250,225 | 662,170 | |||||||||
|
Accumulated impairment losses
|
(150,842 | ) | - | (150,842 | ) | |||||||
|
Balance as of June 30, 2011
|
$ | 261,103 | $ | 250,225 | $ | 511,328 | ||||||
We recorded no goodwill or intangible asset impairments in 2011 and 2010. We also recorded
goodwill impairment charges of $37.3 million related to our surface finishing machines and services
business and $62.9 million related to our engineered products business in 2009.
During 2010, we acquired the remaining noncontrolling interest of a consolidated entity which
resulted in additional Industrial goodwill of $0.7 million.
- 30 -
Table of Contents
The components of our intangible assets were as follows as of June 30:
| Estimated | 2011 | 2010 | ||||||||||||||||||
| Useful Life | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||
| (in thousands) | (in years) | Amount | Amortization | Amount | Amortization | |||||||||||||||
|
Contract-based
|
4 to 15 | $ | 6,349 | $ | (5,380 | ) | $ | 6,357 | $ | (5,218 | ) | |||||||||
|
Technology-based and other
|
4 to 15 | 39,743 | (25,442 | ) | 37,136 | (20,422 | ) | |||||||||||||
|
Customer-related
|
10 to 20 | 113,977 | (38,275 | ) | 108,470 | (29,255 | ) | |||||||||||||
|
Unpatented technology
|
30 | 19,540 | (4,740 | ) | 19,216 | (4,572 | ) | |||||||||||||
|
Trademarks
|
5 to 20 | 10,902 | (4,875 | ) | 10,647 | (3,876 | ) | |||||||||||||
|
Trademarks
|
Indefinite | 40,480 | - | 36,823 | - | |||||||||||||||
|
Total
|
$ | 230,991 | $ | (78,712 | ) | $ | 218,649 | $ | (63,343 | ) | ||||||||||
During 2011, we recorded foreign currency translation adjustments which increased intangible
assets by $8.5 million. During 2010, we recorded foreign currency translation adjustments which
decreased intangible assets by $6.0 million. We also recorded a
$10.8 million impairment charge in 2009 for the indefinite-lived trademark for our surface
finishing machines and services business.
Amortization expense for intangible assets was $11.6 million, $13.1 million and $13.1 million for
2011, 2010 and 2009, respectively. Estimated amortization expense for 2012 through 2016 is $10.8
million, $10.1 million, $9.8 million, $9.5 million, and $9.1 million, respectively.
PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
We sponsor these types of benefit
plans for certain employees and retirees. 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 investment grade
bond yield curves 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 year and adjusted for administrative charges. This rate is expected to
decrease until 2029.
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 a review of published mortality tables.
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 the issuance of capital stock under stock option grants,
restricted stock awards and restricted stock units. The difference between basic and diluted
earnings per share relates solely to the effect of capital stock options, restricted stock awards
and restricted stock units.
For purposes of determining the number of diluted shares outstanding at June 30, 2011 and 2010,
weighted average shares outstanding for basic earnings per share calculations were increased due
solely to the dilutive effect of unexercised capital stock options, unvested restricted stock
awards and unvested restricted stock units by 1.1 million and 0.7 million shares, respectively. For
June 30, 2009, the effect of unexercised capital stock options, unvested restricted stock awards
and unvested restricted stock units was anti-dilutive and therefore has been excluded from diluted
shares outstanding as well as from the diluted earnings per share calculation. Unexercised capital
stock options, restricted stock units and restricted stock awards of 0.4 million, 2.3 million and
2.6 million shares at
June 30, 2011, 2010, and 2009, respectively, were not included in the computation of diluted
earnings per share because the option exercise price was greater than the average market price, and
therefore the inclusion would have been anti-dilutive.
- 31 -
Table of Contents
REVENUE RECOGNITION
We recognize revenue upon shipment of our products and assembled machines. Our
general conditions of sale explicitly state that the delivery of our products and assembled
machines is F.O.B. shipping point and that title and all risks of loss and damage pass to the buyer
upon delivery of the sold products or assembled machines to the common carrier.
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 products or assembled machines
unless we have documentation from our customers authorizing shipment. Our products are consumed by
our customers in the manufacture of their products. Historically, we have experienced very low
levels of returned products and assembled machines and do not consider the effect of returned
products and assembled machines to be material. We have recorded an estimated returned goods
allowance to provide for any potential 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 the customer of shipping instructions from Kennametal. We have included an estimated
allowance for warranty returns in our returned goods allowance.
We recognize revenue related to the sale of specialized assembled machines upon customer
acceptance and installation, as installation is deemed essential to the functionality of a
specialized assembled machine. Sales of specialized assembled machines were immaterial for 2011,
2010 and 2009.
STOCK-BASED COMPENSATION
We recognize stock-based compensation expense for all stock options,
restricted stock awards and restricted stock units 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). We utilize the Black-Scholes valuation method to establish the fair
value of all stock option awards.
Capital stock options are granted to eligible employees at fair market value at the date of
grant. Capital stock options are exercisable under specified conditions for up to 10 years from the
date of grant. On October 26, 2010, the Company’s shareowners approved the Kennametal Inc., Stock
and Incentive Plan of 2010 (2010 Plan). The 2010 Plan authorizes the issuance of up to 3,500,000
shares of the Company’s capital stock plus any shares remaining unissued under the Kennametal Inc.
Stock and Incentive Plan of 2002, as amended (2002 Plan). Under the provisions of these Plans,
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 during 2011, 2010 and 2009 was $0.8 million, $0.1 million, and
$0.7 million, respectively. In addition to stock option grants, these Plans permit the award of
stock appreciation rights, performance shares, performance units, restricted stock and restricted
stock units to directors, officers and key employees.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs of $33.3 million, $28.0 million and
$27.6 million in 2011, 2010 and 2009, respectively, were expensed as incurred. These costs are
included in operating expense in the consolidated statements of income.
SHIPPING AND HANDLING FEES AND COSTS
All fees billed to customers for shipping and handling are
classified as a component of 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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 provide predictability to the effects of changes in foreign
exchange rates on our consolidated results, achieve our targeted mix of fixed and floating interest
rates on outstanding debt and forecasted transactions. Our objective in managing foreign exchange
exposures with derivative instruments is to reduce volatility in cash flow, allowing us to focus
more of 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 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. 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 expense (income),
net.
- 32 -
Table of Contents
Certain currency 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 expense (income), net.
CASH FLOW HEDGES
Currency
Forward contracts and range forward contracts (a transaction where both a
put option is purchased and a call option is sold) are designated as cash flow hedges and 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
income (loss), net of tax, and are recognized as a component of other expense (income), net when
the underlying sale of products or services is recognized into earnings.
Interest Rate
Floating-to-fixed interest rate swap contracts, designated as cash flow hedges, are
entered into from time to time to hedge our exposure to interest rate changes on a portion of our
floating rate debt. These interest rate swap contracts convert a portion of our floating rate debt
to fixed rate debt. We record the fair value of these contracts as an asset or a liability, as
applicable, in the balance sheet, with the offset to accumulated other comprehensive income (loss),
net of tax.
FAIR VALUE HEDGES
Interest Rate
Fixed-to-floating interest rate swap contracts, designated as fair
value hedges, are entered into from time to time to hedge our exposure to fair value fluctuations
on a portion of our fixed rate debt. These interest rate swap contracts convert a portion of our
fixed rate debt to floating rate debt. When in place, these contracts require periodic settlement,
and the difference between amounts to be received and paid under the contracts is recognized in
interest expense.
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 income (loss). The local currency is the functional
currency of most of our locations. Losses from foreign currency transactions included in other
expense (income), net were $6.6 million for 2011. Gains from foreign currency transactions included
in other expense (income), net were $3.5 million and $6.8 million for 2010 and 2009, respectively.
NEW ACCOUNTING STANDARDS
Adopted
As of January 1, 2011, Kennametal adopted changes to intangible impairment testing for reporting
units with zero or negative carrying amounts. These changes require an entity to perform all steps
in the test for a reporting unit whose carrying value is zero or negative if it is more likely than
not that an intangible impairment exists based on qualitative factors, resulting in the elimination
of an entity’s ability to assert that such a reporting unit’s intangible assets are not impaired
and additional testing is not necessary despite the existence of qualitative factors that indicate
otherwise. The adoption of this guidance did not have an impact on our consolidated financial
statements.
As of January 1, 2011, Kennametal adopted changes to the disclosures related to business
combinations for a public entity that presents comparative financial statements. This guidance also
expanded the supplemental pro forma business combination disclosures. The adoption of this
guidance did not have an impact on our consolidated financial statements.
As of July 1, 2010, Kennametal adopted new guidance on consolidations for enterprises involved with
variable interest entities. The guidance modifies how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar) rights should be
consolidated and clarifies that the determination of whether a company is required to consolidate a
variable interest entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly impact the
entity’s economic performance. This guidance requires an ongoing reassessment of whether a company
is the primary beneficiary of a variable interest entity and also
requires additional disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. The adoption of this guidance did not
have an impact on our consolidated financial statements.
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Table of Contents
As of July 1, 2010, Kennametal adopted new guidance on accounting for transfers of financial
assets. This guidance requires additional disclosure regarding transfers of financial assets,
including securitization transactions, and where companies have continuing exposure to the risks
related to transferred financial assets. The adoption of this guidance did not have an impact on
our consolidated financial statements.
As of July 1, 2010, Kennametal adopted new guidance on revenue recognition for multiple-deliverable
revenue arrangements. The guidance allows companies to allocate arrangement consideration in
multiple deliverable arrangements in a manner that better reflects the transaction’s economics and
may result in earlier revenue recognition. In addition, the residual method of allocating
arrangement consideration is no longer permitted. The adoption of this guidance did not have a
material impact on our consolidated financial statements.
Issued
In June 2011, the Financial Accounting Standards Board (FASB) issued new guidance on presentation
of comprehensive income. This new guidance eliminates the current option to report other
comprehensive income and its components in the statement of changes in equity. An entity can elect
to present items of net income and other comprehensive income in one continuous statement (referred
to as the statement of comprehensive income) or in two separate consecutive statements. Each
component of net income and other comprehensive income, together with totals for comprehensive
income and its two parts — net income and other comprehensive income, would need to be displayed
under either alternative. The statement(s) would need to be presented with equal prominence as the
other primary financial statements. This guidance is effective for Kennametal beginning July 1,
2012.
In May 2011, the FASB issued new guidance on fair value measurements and disclosure. The objective
of the new guidance is a consistent definition of fair value and common requirements for
measurement of and disclosure about fair value between U.S. GAAP and IFRS. Many of the amendments
in this new guidance represent clarifications to existing guidance or changes in the measurement
guidance for determining fair value. The most significant change in disclosures is an expansion of
the information required for Level 3 measurements. New disclosures are required about the use of a
nonfinancial asset measured or disclosed at fair value if its use differs from its highest and best
use. In addition, entities must report the level in the fair value hierarchy of assets and
liabilities not recorded at fair value but where fair value is disclosed. This guidance is
effective for Kennametal beginning January 1, 2012. We are in the process of evaluating the impact
of adoption on our consolidated financial statements.
| Year ended June 30 (in thousands) | 2011 | 2010 | 2009 | |||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest
|
$ | 26,624 | $ | 28,626 | $ | 26,328 | ||||||
|
Income taxes
|
95,382 | 3,788 | 18,020 | |||||||||
|
|
||||||||||||
|
Supplemental disclosure of non-cash information:
|
||||||||||||
|
Contribution of capital stock to employees’ defined contribution
benefit plans
|
948 | 6,352 | 1,738 | |||||||||
|
Change in fair value of derivative contracts
|
- | - | 730 | |||||||||
|
Changes in accounts payable related to purchases of property, plant
and equipment
|
- | - | (12,800 | ) | ||||||||
During 2009, we acquired Tricon for a net purchase price of $64.1 million. As part of our
Infrastructure segment, we acquired Tricon to expand our products and solutions in the surface and
underground mining markets, including hard rock and coal. During 2009, we also made an acquisition
within our Industrial segment. Also during 2009, we made final payments for two Industrial
acquisitions that we made in Europe during 2008. During 2009, we had one divestiture that was
accounted for as discontinued operations, see Note 5.
- 34 -
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Effective June 30, 2009, we divested HSS from our Industrial segment as part of our continuing
focus to shape our business portfolio and rationalize our manufacturing footprint. This divestiture
was accounted for as discontinued operations. The net assets disposed of as a result of this
transaction had a net book value of approximately $51 million and consisted primarily of inventory
and equipment, as well as owned and leased facilities. Cash proceeds from this divestiture amounted
to $28.5 million, the majority of which was received in 2010. We incurred pre-tax charges related
to the divestiture of $2.3 million and $25.9 million during 2010 and 2009, respectively. The
pre-tax charges as well as the related tax effects were recorded in discontinued operations. We do
not expect to incur any additional pre-tax charges related to this divestiture.
The following represents the results of discontinued operations for the years ended June 30:
| (in thousands) | 2010 | 2009 | ||||||
|
Sales
|
$ | - | $ | 80,630 | ||||
|
|
||||||||
|
Loss from discontinued operations before income taxes
|
$ | (2,269 | ) | $ | (25,923 | ) | ||
|
Income tax expense (benefit)
|
(846 | ) | (8,583 | ) | ||||
|
Loss from discontinued operations
|
$ | (1,423 | ) | $ | (17,340 | ) | ||
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. The fair
value hierarchy consists of three levels to prioritize the inputs used in valuations, as defined
below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly or indirectly, including quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices that are observable for the asset or
liability (e.g., interest rates); and inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
Level 3: Inputs that are unobservable.
As of June 30, 2011 the fair values of the Company’s financial assets and financial liabilities
measured at fair value on a recurring basis are categorized as follows:
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Assets:
|
||||||||||||||||
|
Derivatives
(1)
|
$ | - | $ | 896 | $ | - | $ | 896 | ||||||||
|
Total assets at fair value
|
$ | - | $ | 896 | $ | - | $ | 896 | ||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives
(1)
|
$ | - | $ | 3,330 | $ | - | $ | 3,330 | ||||||||
|
Total liabilities at fair value
|
$ | - | $ | 3,330 | $ | - | $ | 3,330 | ||||||||
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As of June 30, 2010 the fair values of the Company’s financial assets and financial liabilities
measured at fair value on a recurring basis are categorized as follows:
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Assets:
|
||||||||||||||||
|
Derivatives
(1)
|
$ | - | $ | 43 | $ | - | $ | 43 | ||||||||
|
Total assets at fair value
|
$ | - | $ | 43 | $ | - | $ | 43 | ||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives
(1)
|
$ | - | $ | 3,453 | $ | - | $ | 3,453 | ||||||||
|
Total liabilities at fair value
|
$ | - | $ | 3,453 | $ | - | $ | 3,453 | ||||||||
(1)
Foreign currency derivative and interest rate swap contracts are valued based on
observable market spot and forward rates and are classified within Level 2 of the fair value
hierarchy.
As part of our financial risk management program, we use certain derivative financial
instruments. See Note 2 for discussion on our derivative instruments and hedging activities policy.
The fair value of derivatives designated and not designated as hedging instruments in the
consolidated balance sheets at June 30 is as follows:
| (in thousands) | 2011 | 2010 | ||||||
|
Derivatives designated as hedging instruments
|
||||||||
|
Other current assets — range forward contracts
|
$ | 87 | $ | 34 | ||||
|
Other current liabilities — range forward contracts
|
(159 | ) | (2 | ) | ||||
|
Other assets — forward starting interest rate swap contracts
|
772 | - | ||||||
|
Other liabilities — forward starting interest rate swap contracts
|
(3,169 | ) | (2,348 | ) | ||||
|
Total derivatives designated as hedging instruments
|
(2,469 | ) | (2,316 | ) | ||||
|
Derivatives not designated as hedging instruments
|
||||||||
|
Other current assets — currency forward contracts
|
37 | 9 | ||||||
|
Other current liabilities — currency forward contracts
|
(2 | ) | (1,103 | ) | ||||
|
Total derivatives not designated as hedging instruments
|
35 | (1,094 | ) | |||||
|
Total derivatives
|
$ | (2,434 | ) | $ | (3,410 | ) | ||
Certain currency forward contracts hedging significant cross-border intercompany loans are
considered as 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 expense (income), net.
The following represents (gains) losses related to derivatives not designated as hedging
instruments for the years ended June 30:
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
| | | | | ||||||||||||
|
Other expense (income), net — currency forward contracts
|
$ | (1,126 | ) | $ | 1,077 | $ | 73 | |||||
FAIR VALUE HEDGES
Fixed-to-floating interest rate swap contracts, designated as fair value hedges, are entered into
from time to time to hedge our exposure to fair value fluctuations on a portion of our fixed rate
debt. We had no such contracts outstanding at June 30, 2011 and 2010, respectively.
- 36 -
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In February 2009, we terminated interest rate swap contracts to convert $200 million of our fixed
rate debt to floating rate debt. These contracts were originally set to mature in June 2012. Upon
termination, we received a cash payment of $13.2 million. Within the consolidated statement of cash
flow for the year ended June 30, 2009, $12.6 million related to the forward portion of the payment
and has been disclosed under cash flow used for financing activities and the $0.6 million related
to the current interest portion has been disclosed under cash flow provided by operating
activities. This gain is being amortized as a component of interest expense over the
remaining term of the related debt using the effective interest rate method. During the years ended
June 30, 2011, 2010 and 2009
$5.9 million, $5.6 million and $3.2 million, respectively were recognized as a reduction in
interest expense.
CASH FLOW HEDGES
Currency forward contracts and range forward contracts (a transaction where both a put option is
purchased and a call option is sold) are designated as cash flow hedges and 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) income, net of
tax, and are recognized as a component of other expense (income), net when the underlying sale of
products or services is recognized into earnings. The notional amount of the contracts translated
into U.S. dollars at June 30, 2011 and 2010 was $37.6 million and $9.4 million, respectively. The
time value component of the fair value of range forwards is excluded from the assessment of hedge
effectiveness. Assuming the market rates remain constant with the rates at June 30, 2011, we expect
to recognize into earnings in the next 12 months immaterial losses on outstanding derivatives.
Floating-to-fixed interest rate swap contracts, designated as cash flow hedges, are entered into
from time to time to hedge our exposure to interest rate changes on a portion of our floating rate
debt. These interest rate swap contracts convert a portion of our floating rate debt to fixed rate
debt. We record the fair value of these contracts as an asset or a liability, as applicable, in the
balance sheet, with the offset to accumulated other comprehensive income (loss), net of tax. We had
forward starting interest rate swap contracts outstanding for forecasted
transactions that effectively converted a cumulative notional amount
of $150 million and
$75 million at June 30, 2011 and 2010, respectively from floating
to fixed interest rates. As of June 30, 2011 and 2010 we recorded a liability of $2.4 million and
$2.3 million, respectively on these contracts which was recorded as an offset in other
comprehensive income (loss), net of tax. Over the next 12 months, assuming the market rates remain
constant with the rates at June 30, 2011, we do not expect to recognize into earnings any
significant gains or losses on outstanding derivatives.
The following represents gains (losses) related to cash flow hedges for the years ended June 30:
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
|
(Losses) gains recognized in other comprehensive income (loss)
|
$ | (26 | ) | $ | (962 | ) | $ | 107 | ||||
|
Losses (gains) reclassified from accumulated other
comprehensive loss into other expense (income), net
|
$ | 1,041 | $ | (1,107 | ) | $ | (8,505 | ) | ||||
No portion of the gains or losses recognized in earnings was due to ineffectiveness and no amounts
were excluded from our effectiveness testing for the years ended June 30, 2011, 2010 and 2009.
Inventories consisted of the following at June 30:
| (in thousands) | 2011 | 2010 | ||||||
|
Finished goods
|
$ | 303,716 | $ | 227,096 | ||||
|
Work in
process and powder blends
|
202,940 | 134,732 | ||||||
|
Raw materials and supplies
|
109,683 | 62,673 | ||||||
|
Inventories at current cost
|
616,339 | 424,501 | ||||||
|
Less: LIFO valuation
|
(96,366 | ) | (60,233 | ) | ||||
|
Total inventories
|
$ | 519,973 | $ | 364,268 | ||||
We used the LIFO method of valuing our inventories for approximately 50 percent and 51 percent
of total inventories at June 30, 2011 and 2010, respectively.
- 37 -
Table of Contents
Other current liabilities consisted of the following at June 30:
| (in thousands) | 2011 | 2010 | ||||||
|
Accrued employee benefits
|
$ | 55,833 | $ | 44,474 | ||||
|
Payroll, state and local taxes
|
15,997 | 9,107 | ||||||
|
Accrued restructuring expense (Note 15)
|
12,711 | 27,254 | ||||||
|
Other
|
82,665 | 71,971 | ||||||
|
Total other current liabilities
|
$ | 167,206 | $ | 152,806 | ||||
Long-term debt and capital lease obligations consisted of the following at June 30:
| (in thousands) | 2011 | 2010 | ||||||
|
7.2% Senior Unsecured Notes due 2012 net of discount of $0.1 million and $0.2
million
for 2011 and 2010, respectively. Also including interest rate swap adjustments of
$6.1 million and $12.1 million in 2011 and 2010, respectively
|
$ | 305,954 | $ | 311,849 | ||||
|
Capital leases with terms expiring through 2015 at 2.3% to 2.8% in 2011 and 2.0%
to 4.7%
in 2010
|
3,113 | 6,020 | ||||||
|
Other
|
156 | 345 | ||||||
|
Total debt and capital leases
|
309,223 | 318,214 | ||||||
|
Less current maturities:
|
||||||||
|
Long-term debt
|
(306,032 | ) | (133 | ) | ||||
|
Capital leases
|
(1,272 | ) | (3,406 | ) | ||||
|
Total current maturities
|
(307,304 | ) | (3,539 | ) | ||||
|
Long-term debt and capital leases, less current maturities
|
$ | 1,919 | $ | 314,675 | ||||
|
|
||||||||
Senior Unsecured Notes
On June 19, 2002, we issued $300 million of 7.2 percent Senior Unsecured
Notes due 2012 (Senior Unsecured Notes). Interest is payable semi-annually on June 15 and December
15 of each year. 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. These notes have been reclassified to current maturities of
long-term debt as of June 30, 2011. The repayment of this debt is expected to be financed in due
course through a new corporate bond issuance.
2010 Credit Agreement
On June 25, 2010 we entered into a five-year, multi-currency, revolving
credit facility (2010 Credit Agreement) that extends to June 2015. This agreement replaces the
prior credit facility that was scheduled to mature in March 2011. The 2010 Credit Agreement permits
revolving credit loans of up to $500 million for working capital, capital expenditures and general
corporate purposes. The 2010
Credit Agreement allows for borrowings in U.S. dollars, euro, Canadian dollars, pound sterling and
Japanese yen. Interest payable under the 2010 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 an applicable margin, or (3) fixed as negotiated by
us.
The 2010 Credit Agreement requires us to comply with various restrictive and affirmative covenants,
including two financial covenants: a maximum leverage ratio and a minimum consolidated interest
coverage ratio (as those terms are defined in the agreement). We were in compliance with these
financial covenants as of June 30, 2011. We had no borrowings outstanding under the 2010 Credit
Agreement as of June 30, 2011 or 2010.
Borrowings under the 2010 Credit Agreement are guaranteed by our significant domestic subsidiaries.
Future principal maturities of long-term debt are $306.0 million and $0.1 million, respectively, in
2012 and 2013.
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Table of Contents
Future minimum lease payments under capital leases for the next five years and thereafter in
total are as follows:
| (in thousands) | ||||
|
2012
|
$ | 1,392 | ||
|
2013
|
1,111 | |||
|
2014
|
274 | |||
|
2015
|
728 | |||
|
2016
|
— | |||
|
After 2016
|
— | |||
|
Total future minimum lease payments
|
3,505 | |||
|
Less amount representing interest
|
(392 | ) | ||
|
Amount recognized as capital lease obligations
|
$ | 3,113 | ||
Our collateralized debt at June 30, 2011 and 2010 was comprised of industrial revenue bond
obligations of $0.2 million and $0.3 million, respectively, and the capitalized lease obligations of $3.1 million and $6.0 million,
respectively. The underlying assets collateralize these obligations.
Notes payable to banks of $3.7 million and $19.5 million at June 30, 2011 and 2010, respectively,
represents short-term borrowings under credit lines with commercial banks. These credit lines,
translated into U.S. dollars at June 30, 2011 exchange rates, totaled $200.6 million at June 30,
2011, of which $196.9 million was unused. The weighted average interest rate for notes payable and
lines of credit was 4.4 percent and 3.1 percent at June 30, 2011 and 2010, respectively.
Income from continuing operations before income taxes consisted of the following for the years
ended June 30:
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
|
Income (loss) from continuing operations before income taxes:
|
||||||||||||
|
United States
|
$ | 69,042 | $ | 3,925 | $ | (135,133 | ) | |||||
|
International
|
227,091 | 72,677 | 22,637 | |||||||||
|
Total income (loss) from continuing operations before income taxes
|
$ | 296,133 | $ | 76,602 | $ | (112,496 | ) | |||||
|
Current income taxes:
|
||||||||||||
|
Federal
|
$ | 26,234 | $ | 1,915 | $ | (25,071 | ) | |||||
|
State
|
1,063 | 1,376 | 2,019 | |||||||||
|
International
|
44,440 | 23,456 | 21,169 | |||||||||
|
Total current income taxes
|
71,737 | 26,747 | (1,883 | ) | ||||||||
|
Deferred income taxes
|
(7,881 | ) | 230 | (9,322 | ) | |||||||
|
Provision (benefit) for income taxes
|
$ | 63,856 | $ | 26,977 | $ | (11,205 | ) | |||||
|
Effective tax rate
|
21.6 | % | 35.2 | % | 10.0 | % | ||||||
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Table of Contents
The reconciliation of income taxes computed using the statutory U.S. income tax rate and the
provision (benefit) for income taxes was as follows for the years ended June 30:
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
|
Income taxes at U.S. statutory rate
|
$ | 103,647 | $ | 26,811 | $ | (39,374 | ) | |||||
|
State income taxes, net of federal tax benefits
|
1,956 | 2,290 | (131 | ) | ||||||||
|
U.S. income taxes provided on international income
|
21,556 | 1,107 | (47 | ) | ||||||||
|
Combined tax effects of international income
|
(35,423 | ) | (4,460 | ) | 4,029 | |||||||
|
Change in valuation allowance and other uncertain tax positions
|
(20,215 | ) | 2,024 | (4,638 | ) | |||||||
|
Impact of goodwill impairment charges
|
- | - | 29,296 | |||||||||
|
Impact of domestic production activities deduction
|
(6,413 | ) | (456 | ) | 672 | |||||||
|
Research and development credit
|
(2,685 | ) | (460 | ) | (1,501 | ) | ||||||
|
Other
|
1,433 | 121 | 489 | |||||||||
|
Provision (benefit) for income taxes
|
$ | 63,856 | $ | 26,977 | $ | (11,205 | ) | |||||
During 2011, we recorded net valuation allowance adjustments of $20.5 million, which reduced
income tax expense. The valuation allowance adjustments reflect a change in judgment about the
realizability of certain deferred tax assets in the United Kingdom and Europe. The effect of this
tax benefit is included in the income tax reconciliation table under the caption “change in
valuation allowance and other uncertain tax positions.”
During 2011, we incurred U.S. Federal income taxes of $17.9 million associated with dividends of
international subsidiary current year income. The effect of this expense is included in the income
tax reconciliation table under the caption “U.S. income taxes provided on international income.”
During 2010, we recorded restructuring charges related to our engineered products business for
which there was no tax benefit. The effect of this is included in the income tax reconciliation
table under the caption “combined tax effects of international income.”
During 2009, we recorded goodwill impairment charges related to our surface finishing machines and
services business and our engineered products business for the majority of which there was no tax
benefit. The federal effect of these permanent differences is included in the income tax
reconciliation table under the caption “impact of goodwill impairment charges.”
During 2009, the Internal Revenue Service completed its examination of our 2005 and 2006 tax years,
which resulted in a net tax benefit of $1.8 million, including the impact of state taxes and
interest. The federal effect of this benefit is included in the income tax reconciliation table
under the caption “change in valuation allowance and other uncertain tax positions.”
During 2009, we recorded a valuation allowance adjustment of $2.8 million, which reduced income tax
expense. This valuation allowance adjustment reflects a change in circumstances that caused a
change in judgment about the realizability of certain deferred tax assets in Europe. The effect of
this tax benefit is included in the income tax reconciliation table under the caption “change in
valuation allowance and other uncertain tax positions.”
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Table of Contents
The components of net deferred tax assets and liabilities were as follows at June 30:
| (in thousands) | 2011 | 2010 | ||||||
|
Deferred tax assets:
|
||||||||
|
Net operating loss carryforwards
|
$ | 65,768 | $ | 61,605 | ||||
|
Inventory valuation and reserves
|
29,646 | 29,302 | ||||||
|
Pension benefits
|
713 | 15,913 | ||||||
|
Other postretirement benefits
|
8,312 | 10,499 | ||||||
|
Accrued employee benefits
|
30,975 | 22,551 | ||||||
|
Other accrued liabilities
|
7,939 | 6,755 | ||||||
|
Hedging activities
|
13,528 | 9,785 | ||||||
|
Tax credits and other carryforwards
|
5,431 | 5,541 | ||||||
|
Other
|
2,558 | 7,953 | ||||||
|
Total
|
164,870 | 169,904 | ||||||
|
Valuation allowance
|
(25,662 | ) | (47,987 | ) | ||||
|
Total deferred tax assets
|
$ | 139,208 | $ | 121,917 | ||||
|
|
||||||||
|
Deferred tax liabilities:
|
||||||||
|
Tax depreciation in excess of book
|
$ | 98,957 | $ | 79,712 | ||||
|
Intangible assets
|
35,965 | 33,271 | ||||||
|
Total deferred tax liabilities
|
$ | 134,922 | $ | 112,983 | ||||
|
Total net deferred tax assets (liabilities)
|
$ | 4,286 | $ | 8,934 | ||||
Included in deferred tax assets at June 30, 2011 is $65.8 million associated with net
operating loss carryforwards in foreign and state jurisdictions. Of that amount, $9.3 million
expires through June 2016, $6.8 million expires through 2021, $4.3 million expires through 2026,
$6.9 million expires through 2031, and the remaining $38.5 million do not expire. The realization
of these tax benefits is primarily dependent on future taxable income in these jurisdictions.
A valuation allowance of $25.7 million has been placed against deferred tax assets in Europe,
China, Hong Kong, Mexico, Brazil and the U.S., which would be allocated to income tax expense upon
realization of these tax benefits. In 2011, the valuation allowance related to these deferred tax
assets decreased $22.3 million. As the respective operations generate sufficient income, the
valuation allowances will be partially or fully reversed at such time we believe it will be more
likely than not that the deferred tax assets will be realized. In 2011, a change in judgment about
the realizability of certain deferred tax assets in the United Kingdom resulting in the valuation
allowance of $21.5 million being reversed.
June 30, 2011 unremitted earnings of our non-U.S. subsidiaries and affiliates of $1,084.5 million,
the majority of which have not been previously taxed in the U.S., are permanently reinvested, and
accordingly, no deferred tax liability has been recorded in connection therewith. It is not
practical to estimate the income tax effect that might be incurred if cumulative prior year
earnings not previously taxed in the U.S. were remitted to the U.S.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding
interest) is as follows as of June 30:
| (in thousands) | 2011 | 2010 | ||||||
|
Balance at beginning of year
|
$ | 16,391 | $ | 15,817 | ||||
|
Increases for tax positions of prior years
|
- | 1,303 | ||||||
|
Decreases for tax positions of prior years
|
(85 | ) | (184 | ) | ||||
|
Increases for tax positions related to the current year
|
285 | 2,390 | ||||||
|
Decreases related to settlement with taxing authority
|
- | (1,190 | ) | |||||
|
Decreases related to lapse of statute of limitations
|
(794 | ) | - | |||||
|
Foreign currency translation
|
2,492 | (1,745 | ) | |||||
|
Balance at end of year
|
$ | 18,289 | $ | 16,391 | ||||
- 41 -
Table of Contents
The total amount of unrecognized tax benefits that, if recognized, would affect the effective
tax rate in 2011, 2010 and 2009 is $18.0 million, $15.8 million and $15.2 million, respectively.
Our policy is to recognize interest and penalties related to income taxes as a component of the
provision for income taxes in the consolidated statement of income. We recognized interest expense
of $0.9 million, $0.4 million and an interest reduction of $0.8 million for 2011, 2010 and 2009,
respectively. As of June 30, 2011 and 2010 the amount of interest accrued was $3.2 million and
$2.0 million, respectively.
With few exceptions, we are no longer subject to income tax examinations by tax authorities for
years prior to 2002. The Internal Revenue Service has audited all U.S. tax years prior to 2009 and
is currently examining 2009 and 2010. Various state and foreign jurisdiction tax authorities are in
the process of examining our income tax returns for various tax years ranging from 2002 to 2010.
We continue to execute and expand our pan-European business model. As a result of this and other
matters, we continuously review our uncertain tax positions and evaluate any potential issues that
may lead to an increase or decrease in the total amount of unrecognized tax benefits recorded. We
believe that it is reasonably possible that the amount of unrecognized tax benefits could decrease
by approximately $13.0 million to $14.0 million within the next twelve months as a result of the
progression of various federal, state, and foreign audits in process.
Pension benefits under defined benefit pension plans are based on years of service and, for certain
plans, on average compensation for specified years 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.
We have an Executive Retirement Plan (ERP) for various executives and a Supplemental Executive
Retirement Plan (SERP) which was closed to future participation on July 26, 2006.
We presently provide varying levels of postretirement health care and life insurance benefits
(OPEB) to certain employees and retirees. Postretirement health care benefits are available to
employees and their spouses retiring on or after age 55 with 10 or more years of service. Beginning
with retirements on or after January 1, 1998, our portion of the costs of postretirement health
care benefits is capped at 1996 levels. Beginning with retirements on or after January 1, 2009, we
have no obligation to provide a company subsidy for retiree medical costs.
In 2010 and 2009, special termination benefits of $3.6 million and $2.7 million, respectively, were
recognized in the U.S.-based defined benefit pension plan due to an amendment of the plan for
supplemental retirement benefits.
We use a June 30 measurement date for all of our plans.
- 42 -
Table of Contents
Defined Benefit Pension Plans
The funded status of our pension plans and amounts recognized in the consolidated balance sheets as
of June 30 were as follows:
| (in thousands) | 2011 | 2010 | ||||||
|
Change in benefit obligation:
|
||||||||
|
Benefit obligation, beginning of year
|
$ | 759,075 | $ | 687,700 | ||||
|
Service cost
|
7,650 | 7,949 | ||||||
|
Interest cost
|
40,984 | 42,437 | ||||||
|
Participant contributions
|
39 | 33 | ||||||
|
Actuarial (gains) losses
|
(4,400 | ) | 78,606 | |||||
|
Benefits and expenses paid
|
(37,082 | ) | (41,848 | ) | ||||
|
Foreign currency translation adjustments
|
22,074 | (19,679 | ) | |||||
|
Plan amendments
|
675 | 3,577 | ||||||
|
Plan curtailments
|
(2,443 | ) | 300 | |||||
|
Benefit obligation, end of year
|
$ | 786,572 | $ | 759,075 | ||||
|
|
||||||||
|
Change in plan assets:
|
||||||||
|
Fair value of plan assets, beginning of year
|
$ | 656,516 | $ | 606,875 | ||||
|
Actual return on plan assets
|
93,570 | 90,623 | ||||||
|
Company contributions
|
8,536 | 6,970 | ||||||
|
Participant contributions
|
39 | 33 | ||||||
|
Benefits and expenses paid
|
(39,525 | ) | (41,847 | ) | ||||
|
Foreign currency translation adjustments
|
6,330 | (6,138 | ) | |||||
|
Fair value of plan assets, end of year
|
$ | 725,466 | $ | 656,516 | ||||
|
|
||||||||
|
Funded status of plan
|
$ | (61,106 | ) | $ | (102,559 | ) | ||
|
|
||||||||
|
Amounts recognized in the balance sheet consist of:
|
||||||||
|
Long-term prepaid benefit
|
$ | 63,579 | $ | 16,026 | ||||
|
Short-term accrued benefit obligation
|
(7,619 | ) | (6,778 | ) | ||||
|
Accrued pension benefits
|
(117,066 | ) | (111,807 | ) | ||||
|
Net amount recognized
|
$ | (61,106 | ) | $ | (102,559 | ) | ||
The pre-tax amounts related to our defined benefit pension plans recognized in accumulated
other comprehensive income were as follows at June 30:
| (in thousands) | 2011 | 2010 | ||||||
|
Unrecognized net actuarial losses
|
$ | 66,734 | $ | 125,971 | ||||
|
Unrecognized net prior service credits
|
(1,540 | ) | (2,534 | ) | ||||
|
Unrecognized transition obligations
|
1,202 | 1,120 | ||||||
|
Total
|
$ | 66,396 | $ | 124,557 | ||||
Prepaid pension benefits are included in other long-term assets. The assets of our U.S. and
international defined benefit pension plans consist principally of capital stocks, corporate bonds
and government securities.
To the best of our knowledge and belief, the asset portfolios of our defined benefit pension plans
do not contain our capital stock. We do not issue insurance contracts to cover future annual
benefits of defined benefit pension plan participants. Transactions between us and our defined
benefit pension 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 pension plans was $772.6 million and
$743.0 million as of June 30, 2011 and 2010, respectively.
- 43 -
Table of Contents
Included in the above information are plans with accumulated benefit obligations exceeding the fair
value of plan assets as of June 30 as follows:
| (in thousands) | 2011 | 2010 | ||||||
|
Projected benefit obligation
|
$ | 124,684 | $ | 189,042 | ||||
|
Accumulated benefit obligation
|
123,016 | 186,723 | ||||||
|
Fair value of plan assets
|
- | 70,456 | ||||||
The components of net periodic pension cost include the following as of June 30:
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
|
Service cost
|
$ | 7,650 | $ | 7,949 | $ | 7,824 | ||||||
|
Interest cost
|
40,984 | 42,437 | 41,652 | |||||||||
|
Expected return on plan assets
|
(48,203 | ) | (46,226 | ) | (46,939 | ) | ||||||
|
Amortization of transition obligation
|
52 | 56 | 63 | |||||||||
|
Amortization of prior service credit
|
(281 | ) | (280 | ) | (213 | ) | ||||||
|
Special termination benefits
|
- | 3,577 | 2,651 | |||||||||
|
Curtailment loss
|
- | 300 | - | |||||||||
|
Settlement loss
|
18 | - | - | |||||||||
|
Recognition of actuarial losses
|
12,277 | 4,447 | 1,900 | |||||||||
|
Net periodic pension cost
|
$ | 12,497 | $ | 12,260 | $ | 6,938 | ||||||
Net periodic pension cost increased $5.4 million to $12.3 million in 2010 from $6.9 million in
2009. This increase was primarily the result of discount rate changes and recognition of special
termination charges.
As of June 30, 2011, the projected benefit payments, including future service accruals for these
plans for 2012 through 2016, are
$41.2 million, $41.4 million, $42.6 million, $44.7 million and $46.6 million, respectively and
$270.3 million in 2017 through 2021.
The amounts of accumulated other comprehensive loss expected to be recognized in net periodic
pension cost during 2012 related to net actuarial losses and transition obligations are $8.2
million and $0.1 million, respectively. The amount of accumulated other comprehensive income
expected to be recognized in net periodic pension cost during 2012 related to prior service credit
is $0.2 million.
We expect to contribute approximately $7.0 million to our pension plans in 2012.
Other Postretirement Benefit Plans
The funded status of our other postretirement benefit plans and the related amounts recognized in
the consolidated balance sheets were as follows:
| (in thousands) | 2011 | 2010 | ||||||
|
Change in benefit obligation:
|
||||||||
|
Benefit obligation, beginning of year
|
$ | 19,910 | $ | 20,598 | ||||
|
Service cost
|
77 | 99 | ||||||
|
Interest cost
|
1,037 | 1,265 | ||||||
|
Actuarial losses
|
2,474 | 1,260 | ||||||
|
Benefits paid
|
(3,203 | ) | (3,312 | ) | ||||
|
Plan amendment
|
(524 | ) | - | |||||
|
Benefit obligation, end of year
|
$ | 19,771 | $ | 19,910 | ||||
|
|
||||||||
|
Funded status of plan
|
$ | (19,771 | ) | $ | (19,910 | ) | ||
- 44 -
Table of Contents
| (in thousands) | 2011 | 2010 | ||||||
|
Amounts recognized in the balance sheet consist of:
|
||||||||
|
Short-term accrued benefit obligation
|
$ | (1,918 | ) | $ | (2,016 | ) | ||
|
Accrued postretirement benefits
|
(17,853 | ) | (17,894 | ) | ||||
|
Net amount recognized
|
$ | (19,771 | ) | $ | (19,910 | ) | ||
The pre-tax amounts related to our OPEB plans which were recognized in accumulated other
comprehensive income were as follows at June 30:
| (in thousands) | 2011 | 2010 | ||||||
|
Unrecognized net actuarial gains
|
$ | (864 | ) | $ | (3,529 | ) | ||
|
Unrecognized net prior service cost
|
(524 | ) | - | |||||
|
Total
|
$ | (1,388 | ) | $ | (3,529 | ) | ||
The components of net periodic other postretirement costs (benefit) include the following for
the years ended June 30:
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
|
Service cost
|
$ | 77 | $ | 99 | $ | 294 | ||||||
|
Interest cost
|
1,037 | 1,266 | 1,631 | |||||||||
|
Amortization of prior service cost
|
- | 8 | 39 | |||||||||
|
Recognition of actuarial gains
|
(190 | ) | (368 | ) | (107 | ) | ||||||
|
Curtailment gain
|
- | - | (3,169 | ) | ||||||||
|
Net periodic other postretirement benefit cost (income)
|
$ | 924 | $ | 1,005 | $ | (1,312 | ) | |||||
As of June 30, 2010, the projected benefit payments, including future service accruals for our
other postretirement benefit plans for 2012 through 2016, are $2.4 million, $2.3 million, $2.3
million, $2.1 million and $2.1 million, respectively and $8.6 million in 2017 through 2021.
The amounts of accumulated other comprehensive income expected to be recognized in net periodic
other postretirement benefit cost during 2012 related to net actuarial gains are immaterial for
prior service cost.
We expect to contribute approximately $2.1 million to our postretirement benefit plans in 2012.
Assumptions
The significant actuarial assumptions used to determine the present value of net benefit
obligations for our defined benefit pension plans and other postretirement benefit plans were as
follows:
| 2011 | 2010 | 2009 | ||||||||||
|
Discount Rate:
|
||||||||||||
|
U.S. plans
|
5.5 | % | 5.5 | % | 6.5 | % | ||||||
|
International plans
|
5.5-5.8 | % | 5.0-5.5 | % | 5.8-7.0 | % | ||||||
|
Rates of future salary increases:
|
||||||||||||
|
U.S. plans
|
3.0 -5.0 | % | 3.0 -5.0 | % | 3.0 -5.0 | % | ||||||
|
International plans
|
2.0 -3.5 | % | 3.5 | % | 3.5 | % | ||||||
- 45 -
Table of Contents
The significant assumptions used to determine the net periodic costs (benefits) for our
pension and other postretirement benefit plans were as follows:
| 2011 | 2010 | 2009 | ||||||||||
|
Discount Rate:
|
||||||||||||
|
U.S. plans
|
5.5 | % | 6.5 | % | 6.8 | % | ||||||
|
International plans
|
5.0-5.5 | % | 5.8-7.0 | % | 6.3 -6.8 | % | ||||||
|
Rates of future salary increases:
|
||||||||||||
|
U.S. plans
|
3.0 -5.0 | % | 3.0 -5.0 | % | 3.0 -5.0 | % | ||||||
|
International plans
|
3.5 | % | 3.5 | % | 3.5-4.0 | % | ||||||
|
Rate of return on plans assets:
|
||||||||||||
|
U.S. plans
|
8.0 | % | 8.0 | % | 8.0 | % | ||||||
|
International plans
|
6.4 | % | 6.7 | % | 7.1 | % | ||||||
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:
| 2011 | 2010 | 2009 | ||||||||||
|
Health care costs trend rate assumed for next year
|
8.3 | % | 8.6 | % | 8.8 | % | ||||||
|
Rate to which the cost trend rate gradually declines
|
4.5 | % | 4.5 | % | 4.5 | % | ||||||
|
Year that the rate reaches the rate at which it is assumed to remain
|
2029 | 2029 | 2029 | |||||||||
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 our other postretirement cost and other postretirement benefit obligation at June 30, 2011:
| (in thousands) | 1% Increase | 1% Decrease | ||||||
|
Effect on total service and interest cost components
|
$ | 58 | $ | (51 | ) | |||
|
Effect on other postretirement obligation
|
849 | (757 | ) | |||||
Plan Assets
The primary objective of certain of our pension plans’ investment policies is to ensure that
sufficient assets are available to provide the benefit obligations at the time the obligations come
due. The overall investment strategy for the defined benefit pension plans’ assets combine
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.
Investment management practices must comply with ERISA and all applicable regulations and rulings
thereof. The use of derivative instruments is permitted where appropriate and necessary for
achieving overall investment policy objectives. Currently, the use of derivative instruments is not
significant when compared to the overall investment portfolio.
The Company utilizes a liability driven investment strategy (LDI) for the assets of its U.S.
defined benefit pension plans in order to reduce the volatility of the funded status of these plans
and to meet the obligations at an acceptable cost over the long term. This LDI strategy entails
modifying the asset allocation and duration of the assets of the plans to more closely match the
liability profile of these plans. The asset reallocation involves increasing the fixed income
allocation, reducing the equity component and adding alternative investments. Longer duration
interest rate swaps have been added in order to increase the overall duration of the asset
portfolio to more closely match the liabilities.
- 46 -
Table of Contents
Our defined benefit pension plans’ asset allocations as of June 30, 2011 and 2010 and target
allocations for 2012, by asset class, were as follows:
| 2011 | 2010 | Target | % | |||||||||
|
Equity
|
35 | % | 31 | % | 30 | % | ||||||
|
Fixed Income
|
60 | % | 66 | % | 70 | % | ||||||
|
Other
|
5 | % | 3 | % | 0 | % | ||||||
The following sections describe the valuation methodologies used by the trustee to measure the fair
value of the defined benefit pension plan assets, including an indication of the level in the fair
value hierarchy in which each type of asset is generally classified (see Note 6 for the definition
of fair value and a description of the fair value hierarchy).
Corporate fixed income securities
Investments in corporate fixed income securities consist of
corporate debt and asset backed securities. These investments are classified as level two and are
valued using independent observable market inputs such as the treasury curve, swap curve and yield
curve.
Common / collective trusts
Investments in common / collective trusts invest primarily in publicly
traded securities and are classified as level two and valued based on observable market data.
Common stock
Common stocks are classified as level one and are valued at their quoted market price.
Government securities
Investments in government securities consist of fixed income securities such
as U.S. government and agency obligations and foreign government bonds and asset and mortgage
backed securities such as obligations issued by government sponsored organizations. These
investments are classified as level two and are valued using independent observable market inputs
such as the treasury curve, credit spreads and interest rates.
Other fixed income securities
Investments in other fixed income securities are classified as level
two and valued based on observable market data.
Other
Other investments consist primarily of short term instruments including money market funds,
certificates of deposit and state and local obligations. These investments are primarily classified
as level two and are valued using independent observable market inputs.
The fair value methods described may not be reflective of future fair values. Additionally, while
the Company believes the valuation methods used by the plans’ trustee are appropriate and
consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in different fair value
measurement at the reporting date.
The following table presents the fair value of the benefit plan assets classified under the
appropriate level of the fair value hierarchy as of June 30, 2011:
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Corporate fixed income securities
|
$ | - | $ | 338,955 | $ | - | $ | 338,955 | ||||||||
|
Common / collective trusts:
|
||||||||||||||||
|
Value funds
|
- | 92,625 | - | 92,625 | ||||||||||||
|
Growth funds
|
- | 54,392 | - | 54,392 | ||||||||||||
|
Balanced funds
|
- | 15,798 | - | 15,798 | ||||||||||||
|
Common stock
|
93,403 | - | - | 93,403 | ||||||||||||
|
Government securities:
|
||||||||||||||||
|
U.S. Government securities
|
- | 30,236 | - | 30,236 | ||||||||||||
|
Foreign government securities
|
- | 27,465 | - | 27,465 | ||||||||||||
|
Other fixed income securities
|
- | 41,043 | - | 41,043 | ||||||||||||
|
Other
|
1,723 | 36,772 | - | 38,495 | ||||||||||||
|
Total investments
|
$ | 95,126 | $ | 637,286 | $ | - | $ | 732,412 | ||||||||
- 47 -
Table of Contents
The following table presents the fair value of the benefit plan assets classified under the
appropriate level of the fair value hierarchy as of June 30, 2010:
| (in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Corporate fixed income securities
|
$ | - | $ | 364,773 | $ | - | $ | 364,773 | ||||||||
|
Common / collective trusts:
|
||||||||||||||||
|
Value funds
|
- | 74,532 | - | 74,532 | ||||||||||||
|
Growth funds
|
- | 42,985 | - | 42,985 | ||||||||||||
|
Balanced funds
|
- | 12,460 | - | 12,460 | ||||||||||||
|
Common stock
|
75,714 | - | - | 75,714 | ||||||||||||
|
Government securities:
|
||||||||||||||||
|
U.S. Government securities
|
- | 30,562 | - | 30,562 | ||||||||||||
|
Foreign government securities
|
- | 20,627 | - | 20,627 | ||||||||||||
|
Other fixed income securities
|
- | 17,114 | - | 17,114 | ||||||||||||
|
Other
|
1,513 | 16,294 | - | 17,807 | ||||||||||||
|
Total investments
|
$ | 77,227 | $ | 579,347 | $ | - | $ | 656,574 | ||||||||
| years ended June 30 (in thousands) | 2011 | 2010 | 2009 | |||||||||
|
Net income (loss)
|
$ | 232,277 | $ | 48,202 | $ | (118,631 | ) | |||||
|
Unrealized gain (loss) on derivatives designated and qualified as
cash flow hedges, net of income tax expense (benefit) of $0.4
million, $(0.6) million and $(1.9) million, respectively
|
642 | (936 | ) | (3,006 | ) | |||||||
|
Reclassification of unrealized (gain) loss on expired derivatives
designated and qualified as cash flow hedges, net of income tax
expense (benefit) of $0.4 million, $0.9 million and $(3.3) million,
respectively
|
(679 | ) | (1,482 | ) | 5,290 | |||||||
|
Unrecognized net pension and other postretirement benefit gains
(losses), net of income tax expense (benefit) of $15.1 million,
$(14.1) million and $0.6 million, respectively
|
28,087 | (17,397 | ) | (14,283 | ) | |||||||
|
Reclassification of net pension and other postretirement benefit
losses, net of income tax benefit of $4.4 million, $0.9 million and
$0.5 million, respectively
|
7,131 | 2,975 | 1,496 | |||||||||
|
Foreign currency translation adjustments, net of income tax expense
(benefit) of $75.0 million, $(41.5) million and $(73.5) million,
respectively
|
122,358 | (68,837 | ) | (122,044 | ) | |||||||
|
Total comprehensive income (loss), net of tax
|
389,816 | (37,475 | ) | (251,178 | ) | |||||||
|
Comprehensive income (loss) attributable to noncontrolling interests
|
4,779 | 606 | (1,046 | ) | ||||||||
|
Comprehensive income (loss) attributable to Kennametal Shareowners
|
$ | 385,037 | $ | (38,081 | ) | $ | (250,132 | ) | ||||
The components of accumulated other comprehensive income (loss) consist of the following at
June 30 (in thousands):
| 2011 | Pre-tax | Tax | After-tax | |||||||||
|
Unrealized loss on derivatives designated and qualified as cash flow hedges
|
$ | (3,227 | ) | $ | 1,331 | $ | (1,896 | ) | ||||
|
Unrecognized net actuarial losses
|
(71,262 | ) | 23,003 | (48,259 | ) | |||||||
|
Unrecognized net prior service credit
|
2,252 | (963 | ) | 1,289 | ||||||||
|
Unrecognized transition obligation
|
(1,203 | ) | (95 | ) | (1,298 | ) | ||||||
|
Foreign currency translation adjustments
|
161,451 | (28,758 | ) | 132,693 | ||||||||
|
Total accumulated other comprehensive income
|
$ | 88,011 | $ | (5,482 | ) | $ | 82,529 | |||||
- 48 -
Table of Contents
| 2010 | Pre-tax | Tax | After-tax | |||||||||
|
Unrealized loss on derivatives designated and qualified as
cash flow hedges
|
$ | (2,998 | ) | $ | 1,139 | $ | (1,859 | ) | ||||
|
Unrecognized net actuarial losses
|
(122,442 | ) | 38,629 | (83,813 | ) | |||||||
|
Unrecognized net prior service credit
|
2,534 | (962 | ) | 1,572 | ||||||||
|
Unrecognized transition obligation
|
(1,120 | ) | (127 | ) | (1,247 | ) | ||||||
|
Foreign currency translation adjustments
|
19,913 | (7,347 | ) | 12,566 | ||||||||
|
Total accumulated other comprehensive loss
|
$ | (104,113 | ) | $ | 31,332 | $ | (72,781 | ) | ||||
During 2011, we completed our restructuring plans to reduce costs and improve operating
efficiencies. These actions related to the rationalization of certain manufacturing and service
facilities as well as other employment and cost reduction programs. Restructuring and related
charges recorded in 2011 amounted to $21.5 million, including $13.7 million of restructuring
charges of which $1.1 million were related to inventory disposals and recorded in cost of goods
sold. Restructuring related charges of $4.4 million were recorded in cost of goods sold and $3.4
million in operating expense during 2011.
During 2010, restructuring and related charges amounted to $48.9 million, including $44.3 million
of restructuring charges of which $0.4 million were related to inventory disposals and recorded in
cost of goods sold. Restructuring related charges of $3.5 million were recorded in cost of goods
sold and $1.1 million in operating expense during 2010.
During 2009, restructuring and related charges amounted to $73.3 million, including $64.7 million
of restructuring charges of which $2.1 million were related to inventory disposals and recorded in
cost of goods sold. Restructuring related charges of $8.8 million were recorded in cost of goods
sold and a net restructuring related benefit of $0.2 million was recorded in operating expense
during 2009.
The combined total pre-tax charges from inception of these restructuring programs through June 30,
2011 were approximately $150 million. The majority of these pre-tax charges were severance charges.
Total restructuring and related charges since inception through June 30, 2011 have been recorded as
follows: approximately $104 million in Industrial, approximately $44 million in Infrastructure and
approximately $2 million in Corporate for the write-off our pre-existing ERP system. These
restructuring programs are complete and we do not expect any additional charges.
Restructuring accruals are recorded in other current liabilities in our consolidated balance sheet
and the amount attributable to each segment is as follows:
| Asset | Cash | |||||||||||||||||||||||
| (in thousands) | June 30, 2010 | Expense | Write-down | Expenditures | Translation | June 30, 2011 | ||||||||||||||||||
|
Industrial
|
||||||||||||||||||||||||
|
Severance
|
$ | 18,327 | $ | 4,363 | $ | - | $ | (16,510 | ) | $ | 1,631 | $ | 7,811 | |||||||||||
|
Facilities
|
508 | 2,318 | (1,857 | ) | (444 | ) | - | 525 | ||||||||||||||||
|
Other
|
403 | 2,031 | - | (931 | ) | 101 | 1,604 | |||||||||||||||||
|
Total Industrial
|
19,238 | 8,712 | (1,857 | ) | (17,885 | ) | 1,732 | 9,940 | ||||||||||||||||
|
Infrastructure
|
||||||||||||||||||||||||
|
Severance
|
7,637 | 2,484 | - | (9,399 | ) | 928 | 1,650 | |||||||||||||||||
|
Facilities
|
211 | 1,319 | (1,057 | ) | (204 | ) | - | 269 | ||||||||||||||||
|
Other
|
168 | 1,156 | - | (530 | ) | 58 | 852 | |||||||||||||||||
|
Total Infrastructure
|
8,016 | 4,959 | (1,057 | ) | (10,133 | ) | 986 | 2,771 | ||||||||||||||||
|
Total
|
$ | 27,254 | $ | 13,671 | $ | (2,914 | ) | $ | (28,018 | ) | $ | 2,718 | $ | 12,711 | ||||||||||
- 49 -
Table of Contents
| Asset | ||||||||||||||||||||||||
| (in thousands) | June 30, 2009 | Expense | Write-down | Cash Expenditures | Translation | June 30, 2010 | ||||||||||||||||||
|
Industrial
|
||||||||||||||||||||||||
|
Severance
|
$ | 18,378 | $ | 29,082 | $ | - | $ | (28,086 | ) | $ | (1,047 | ) | $ | 18,327 | ||||||||||
|
Facilities
|
477 | 790 | (604 | ) | (142 | ) | (13 | ) | 508 | |||||||||||||||
|
Other
|
176 | 1,393 | - | (1,241 | ) | 75 | 403 | |||||||||||||||||
|
Total Industrial
|
19,031 | 31,265 | (604 | ) | (29,469 | ) | (985 | ) | 19,238 | |||||||||||||||
|
Infrastructure
|
||||||||||||||||||||||||
|
Severance
|
7,659 | 12,119 | - | (11,704 | ) | (437 | ) | 7,637 | ||||||||||||||||
|
Facilities
|
199 | 329 | (251 | ) | (59 | ) | (7 | ) | 211 | |||||||||||||||
|
Other
|
73 | 580 | - | (517 | ) | 32 | 168 | |||||||||||||||||
|
Total Infrastructure
|
7,931 | 13,028 | (251 | ) | (12,280 | ) | (412 | ) | 8,016 | |||||||||||||||
|
Total
|
$ | 26,962 | $ | 44,293 | $ | (855 | ) | $ | (41,749 | ) | $ | (1,397 | ) | $ | 27,254 | |||||||||
Asset impairment
See discussion of our 2009 Industrial goodwill and indefinite-lived trademark
impairment charges in Note 2 under the caption “Goodwill and Other Intangible Assets.”
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 $315.8 million and $325.5 million at June
30, 2011 and 2010, respectively. The fair value is determined based on the 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 $37.6 million and $9.4 million at June 30, 2011 and 2010,
respectively. We would have paid immaterial amounts at June 30, 2011 and 2010, respectively, to
settle these contracts representing the fair value of these agreements. The carrying value equaled
the fair value for these contracts at June 30, 2011 and 2010. Fair value was estimated based on
quoted market prices of comparable instruments.
Interest Rate Swap Contracts
The cumulative notional amount of outstanding forward starting
interest rate swap contracts was
$150 million at June 30, 2011. We recorded a net liability of $2.4 million on these contracts which
was recorded as an offset in other comprehensive income, net of tax. The carrying value equaled the
fair value for these contracts at June 30, 2011. Fair value was estimated based on quoted market
prices of comparable instruments.
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 institutions and limit the
amount of exposure to any one financial institution. 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, 2011 and 2010, we had no
significant concentrations of credit risk.
- 50 -
Table of Contents
Options
The assumptions used in our Black-Scholes valuation related to grants made during 2011, 2010 and
2009 were as follows:
| 2011 | 2010 | 2009 | ||||||||||
|
Risk-free interest rate
|
1.4 | % | 2.3 | % | 3.0 | % | ||||||
|
Expected life (years)
(2)
|
4.5 | 4.5 | 4.5 | |||||||||
|
Expected volatility
(3)
|
47.0 | % | 44.0 | % | 27.7 | % | ||||||
|
Expected dividend yield
|
2.0 | % | 1.8 | % | 1.3 | % | ||||||
| (2) | Expected life is derived from historical experience. | |
| (3) | Expected volatility is based on the implied historical volatility of our stock. |
Changes in our stock options for 2011 were as follows:
| Weighted | ||||||||||||||||
| Weighted | Average | Aggregate | ||||||||||||||
| Average | Remaining | Intrinsic value | ||||||||||||||
| Options | Exercise Price | Life (years) | (in thousands) | |||||||||||||
|
Options outstanding, June 30, 2010
|
3,582,075 | $ | 25.59 | |||||||||||||
|
Granted
|
559,987 | 27.30 | ||||||||||||||
|
Exercised
|
(646,567 | ) | 22.25 | |||||||||||||
|
Lapsed and forfeited
|
(107,492 | ) | 26.05 | |||||||||||||
|
Options outstanding, June 30, 2011
|
3,388,003 | $ | 26.50 | 6.0 | $ | 53,216 | ||||||||||
|
Options vested and expected to vest, June 30, 2011
|
3,299,431 | $ | 26.54 | 5.9 | $ | 51,706 | ||||||||||
|
Options exercisable, June 30, 2011
|
1,948,442 | $ | 26.85 | 4.6 | $ | 29,937 | ||||||||||
During 2011, 2010 and 2009, compensation expense related to stock options was $5.2 million, $4.3
million and $4.0 million, respectively. As of June 30, 2011, the total unrecognized compensation
cost related to options outstanding was $4.6 million and is expected to be recognized over a
weighted average period of 2.2 years.
Weighted average fair value of options granted during 2011, 2010 and 2009 was $9.33, $7.32 and
$7.15, respectively. Fair value of options vested during 2011, 2010 and 2009 was $4.4 million,
$4.1 million and $3.5 million, respectively.
Tax benefits, relating to excess stock-based compensation deductions, are presented in the
statement of cash flow as financing cash inflows. Tax benefits resulting from stock-based
compensation deductions in excess of amounts reported for financial reporting purposes were $2.9
million, $0.5 million and $0.9 million in 2011, 2010 and 2009, respectively.
The amount of cash received from the exercise of capital stock options during 2011, 2010 and 2009
was $13.6 million, $7.2 million and $2.2 million, respectively. The related tax benefit was $3.2
million, $1.2 million, and $1.1 million for 2011, 2010 and 2009, respectively. The total intrinsic
value of options exercised during 2011, 2010 and 2009 was $9.9 million, $4.0 million, and
$3.0 million, respectively.
Restricted Stock Awards
Changes in our restricted stock awards for 2011 were as follows:
| Weighted | ||||||||
| Average Fair | ||||||||
| Shares | Value | |||||||
|
Unvested restricted stock awards, June 30, 2010
|
198,701 | $ | 32.71 | |||||
|
Vested
|
(105,847 | ) | 32.56 | |||||
|
Forfeited
|
(3,539 | ) | 33.00 | |||||
|
Unvested restricted stock awards, June 30, 2011
|
89,315 | $ | 32.90 | |||||
- 51 -
Table of Contents
During 2011, 2010 and 2009, compensation expense related to restricted stock awards was $2.1
million, $2.7 million and $4.5 million, respectively. As of June 30, 2011, the total unrecognized
compensation cost related to unvested restricted stock awards was
$0.9 million and is expected to be recognized over a weighted average period of 0.9 years.
Restricted Stock Units — Time Vesting and Performance Vesting
In fiscal year 2010, we began granting time vesting restricted stock units under the 2002 Plan in
place of restricted stock awards that had been traditionally granted under the plan.
Performance vesting restricted stock units (performance units) were granted to certain individuals
in fiscal 2011. These performance units are earned pro rata each year if certain performance goals
are met over a 3-year period, and are also subject to a service condition that requires the
individual to be employed by the Company at the payment date after the 3-year performance period.
Changes in our time vesting and performance vesting restricted stock units for 2011 were as
follows:
| Performance | ||||||||||||||||
| Performance | Vesting | Time Vesting | ||||||||||||||
| Vesting | Weighted | Time Vesting | Weighted | |||||||||||||
| Stock | Average Fair | Stock | Average Fair | |||||||||||||
| Units | Value | Units | Value | |||||||||||||
|
Unvested performance vesting and time vesting restricted
stock units, June 30, 2010
|
— | $ | — | 546,713 | $ | 24.29 | ||||||||||
|
Granted
|
134,807 | 26.89 | 526,153 | 26.95 | ||||||||||||
|
Vested
|
— | — | (84,784 | ) | 23.53 | |||||||||||
|
Forfeited
|
(18,439 | ) | 26.89 | (82,000 | ) | 25.47 | ||||||||||
|
Unvested performance vesting and time vesting restricted
stock units, June 30, 2011
|
116,368 | $ | 26.89 | 906,082 | $ | 25.81 | ||||||||||
During 2011 and 2010, compensation expense related to time vesting and performance vesting
restricted stock units was $10.3 million and $2.7 million, respectively. As of June 30, 2011, the
total unrecognized compensation cost related to unvested time vesting and performance vesting
restricted stock units was $13.1 million and is expected to be recognized over a weighted average
period of 2.4 years.
Restricted Stock Units – STEP
On November 26, 2007, the Company adopted a one-time, long-term equity program, the Kennametal Inc.
2008 Strategic Transformational Equity Program, under the 2002 Plan (STEP). The STEP was designed
to compensate participating executives for
achievement of certain performance conditions during the period which began on October 1, 2007 and
ends on September 30, 2011. Each participant was awarded a maximum number of restricted stock
units, each representing a contingent right to receive one share of capital stock of the Company to
the extent the unit is earned during the performance period and becomes payable under the STEP. The
performance conditions are based on the Company’s total shareholder return (TSR), which governs 35
percent of the awarded restricted stock units, and cumulative adjusted earnings per share (EPS),
which governs 65 percent of the awarded restricted stock units. As of June 30, 2011, participating
executives had been granted awards equal to that number of restricted stock units having a value of
$26.0 million. A further amount of $11.3 million remains available under the STEP for additional
awards that could be made to other executives; however, the Company has decided that it will not
make any further awards under the STEP. No new grants under the STEP were made in 2011. There are
no voting rights or dividends associated with restricted stock units under the STEP.
Under the STEP, there are two interim measurement dates, September 30, 2009 and 2010, and a final
measurement date,
September 30, 2011, at which performance is assessed. Participants may earn up to a cumulative 35
percent of the maximum restricted stock units awarded if certain threshold levels of performance
are achieved through the two interim measurement dates. The threshold level of performance for
September 30, 2009 and September 30, 2010 were not achieved. Generally, the payment of any
restricted stock units under the STEP is also conditioned upon the participants being employed by
the Company on the date of distribution and the satisfaction of all other provisions of the STEP.
As of June 30, 2011, no restricted stock units have been earned or paid under the STEP.
- 52 -
Table of Contents
Changes in the EPS performance-based portion of STEP restricted stock units for 2011 were as
follows:
| Weighted | ||||||||
| Stock | Average Fair | |||||||
| Units | Value | |||||||
|
Unvested EPS performance-based restricted stock units, June 30, 2010
|
502,371 | $ | 35.54 | |||||
|
Forfeited
|
(70,582 | ) | 37.45 | |||||
|
Unvested EPS performance-based restricted stock units, June 30, 2011
|
431,789 | $ | 35.23 | |||||
As of June 30, 2011, we assumed that none of the EPS performance-based restricted stock units will
vest.
Changes in the TSR performance-based STEP restricted stock units for 2011 were as follows:
| Weighted | ||||||||
| Stock | Average Fair | |||||||
| Units | Value | |||||||
|
Unvested TSR performance-based restricted stock units, June 30, 2010
|
270,501 | $ | 8.35 | |||||
|
Forfeited
|
(38,004 | ) | 9.20 | |||||
|
Unvested TSR performance-based restricted stock units, June 30, 2011
|
232,497 | $ | 8.21 | |||||
During 2011 and 2010, compensation expense related to STEP restricted stock units was $0.4 million
and $0.5 million, respectively. Based on a change in the probability of achieving the performance
criteria related to the vesting of the EPS performance-based portion of these restricted stock
units, in 2009, we reversed previously recognized compensation expense related to these units. The
net credit recognized as compensation expense related to restricted stock units was $0.6 million
for 2009. As of June 30, 2011, the total unrecognized compensation cost related to unvested STEP
restricted stock units was $0.1 million and is expected to be recognized over a weighted average
period of 0.3 years.
The operation of our business has exposed us to certain liabilities and compliance costs related to
environmental matters. We are involved in various environmental cleanup and remediation activities
at certain of our locations.
Superfund Sites
We are involved as a PRP at various sites designated by the USEPA as Superfund
sites. For certain of these sites, we have evaluated the claims and potential liabilities and have
determined that neither are material, individually or in the aggregate. For certain other sites,
proceedings are in the very early stages and have not yet progressed to a point where it is
possible to estimate the ultimate cost of remediation, the timing and extent of remedial action
that may be required by governmental authorities or the amount of our liability alone or in
relation to that of any other PRPs.
Other Environmental Issues
We establish and maintain reserves for other potential environmental
issues. At June 30, 2011 and 2010, the total of accruals for these reserves was $5.4 million and
$5.2 million, respectively. These totals represent anticipated costs associated with the
remediation of these issues. We recorded additional reserves of $1.5 million and $0.6 million in
2011 and 2010, respectively. Additional reserves recorded in 2011 primarily relate to an
environmental liability in our international operations. We recorded unfavorable foreign
currency translation adjustments of $0.6 million during 2011 and favorable foreign currency
translation adjustment of $0.6 million during 2010, respectively. Cash payments of $0.8 million and
$0.1 million were made against these reserves during 2011 and 2010, respectively. In 2011 we also
had a $1.1 million reversal of an international environmental liability and payment of a civil
penalty of $0.2 million related to our Chestnut Ridge, Pennsylvania facility closure. The reserves
we have established for environmental liabilities represent our best current estimate of the costs
of addressing all identified environmental situations, based on our review of currently available
evidence, and take into consideration our prior experience in remediation and that of other
companies, as well as public information released by the USEPA, other governmental agencies, and by
the PRP groups in which we are participating. Although the reserves currently appear to be
sufficient to cover these environmental liabilities, there are uncertainties associated with
environmental liabilities, and we can give no assurance that our estimate of any environmental
liability will not increase or decrease in the future. The reserved and unreserved liabilities for
all environmental concerns could change substantially 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.
- 53 -
Table of Contents
We maintain a Corporate EHS Department, as well as an EHS Steering Committee, to monitor compliance
with environmental regulations and to oversee remediation activities. In addition, we have
designated EHS coordinators who are responsible for each of our global manufacturing facilities at
each of our global manufacturing facilities. Our financial management team periodically meets with
members of the Corporate EHS Department and the Corporate Legal Department to review and evaluate
the status of environmental projects and contingencies. On a quarterly basis, we review financial
provisions and reserves for environmental contingencies and adjust these reserves when appropriate.
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 $27.1 million, $28.2 million and $30.9 million in 2011, 2010 and 2009,
respectively. Future minimum lease payments for non-cancelable operating leases are $17.0 million,
$11.0 million, $6.5 million, $4.1 million and $2.6 million for the years 2012 through 2016 and
$23.7 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. 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 immaterial in 2011, 2010 and 2009. We
do not have any other related party transactions that affect our operations, results of operations,
cash flow or financial condition.
We operate in two reportable operating segments consisting of Industrial and Infrastructure. We do
not allocate certain corporate expenses related to executive retirement plans, the Company’s Board
of Directors and strategic initiatives, as well as certain other costs and report them in
Corporate. Segment determination 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 to
a single customer did not aggregate 3.5 percent or more of total sales in 2011, 2010 or
2009. Export sales from U.S. operations to unaffiliated customers were $90.6 million, $84.1
million, and $116.6 million in 2011, 2010 and 2009, respectively.
INDUSTRIAL
The Industrial segment serves customers that operate in industrial end markets such as
aerospace, defense, transportation and general engineering. The customers in these end markets
manufacture engines, airframes, automobiles, trucks, ships and various industrial goods. The
technology needs and level of customization vary by customer and industry served. We deliver value
to our Industrial segment customers through our application expertise and diverse product offering.
INFRASTRUCTURE
The Infrastructure segment serves customers that operate in the earthworks and
energy end markets. These customers support primary industries such as oil and gas, power
generation, underground mining, surface and hard rock mining, highway construction and road
maintenance. Generally, our Infrastructure segment customers are served through a customer intimacy
model that allows us to offer full system solutions by gaining an in-depth understanding of our
customers’ engineering needs. Our product offering promotes value by bringing enhanced performance
and productivity to our customers’ processes and systems.
We restated the segment financial information for the years ended June 30, 2010 and 2009,
respectively, to reflect the change in reportable operating segments.
- 54 -
Table of Contents
Segment data is summarized as follows:
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
|
External sales:
|
||||||||||||
|
Industrial
|
$ | 1,528,672 | $ | 1,166,793 | $ | 1,277,981 | ||||||
|
Infrastructure
|
874,821 | 717,274 | 721,878 | |||||||||
|
Total external sales
|
$ | 2,403,493 | $ | 1,884,067 | $ | 1,999,859 | ||||||
|
|
||||||||||||
|
Operating income (loss):
|
||||||||||||
|
Industrial
|
$ | 209,663 | $ | 31,210 | $ | (115,083 | ) | |||||
|
Infrastructure
|
121,733 | 79,899 | 19,768 | |||||||||
|
Corporate
|
(9,723 | ) | (17,881 | ) | (4,503 | ) | ||||||
|
Total operating income
|
$ | 321,673 | $ | 93,228 | $ | (99,818 | ) | |||||
|
|
||||||||||||
|
Interest expense
|
$ | 22,760 | $ | 25,203 | $ | 27,244 | ||||||
|
Other expense (income), net
|
2,780 | (8,577 | ) | (14,566 | ) | |||||||
|
Income (loss) from continuing operations
before income taxes
|
$ | 296,133 | $ | 76,602 | $ | (112,496 | ) | |||||
|
|
||||||||||||
|
Depreciation and amortization
|
||||||||||||
|
Industrial
|
$ | 68,000 | $ | 70,383 | $ | 71,718 | ||||||
|
Infrastructure
|
25,471 | 26,046 | 24,663 | |||||||||
|
Total depreciation and amortization
|
$ | 93,471 | $ | 96,429 | $ | 96,381 | ||||||
|
|
||||||||||||
|
Equity income:
|
||||||||||||
|
Industrial
|
$ | 229 | $ | 107 | $ | (1 | ) | |||||
|
Infrastructure
|
- | - | - | |||||||||
|
Total equity income
|
$ | 229 | $ | 107 | $ | (1 | ) | |||||
|
|
||||||||||||
|
Total assets:
|
||||||||||||
|
Industrial
|
$ | 1,531,409 | $ | 1,310,635 | $ | 1,386,324 | ||||||
|
Infrastructure
|
785,718 | 682,169 | 672,287 | |||||||||
|
Corporate
|
437,342 | 275,019 | 288,363 | |||||||||
|
Total assets
|
$ | 2,754,469 | $ | 2,267,823 | $ | 2,346,974 | ||||||
|
|
||||||||||||
|
Capital expenditures:
|
||||||||||||
|
Industrial
|
$ | 48,518 | $ | 31,609 | $ | 78,841 | ||||||
|
Infrastructure
|
26,411 | 11,017 | 26,001 | |||||||||
|
Corporate
|
8,513 | 14,053 | - | |||||||||
|
Total capital expenditures
|
$ | 83,442 | $ | 56,679 | $ | 104,842 | ||||||
|
|
||||||||||||
|
Investments in affiliated companies:
|
||||||||||||
|
Industrial
|
$ | 829 | $ | 748 | $ | 635 | ||||||
|
Infrastructure
|
- | 1,503 | 1,503 | |||||||||
|
Total investments in affiliated companies
|
$ | 829 | $ | 2,251 | $ | 2,138 | ||||||
- 55 -
Table of Contents
Geographic information for sales, based on country of origin, and assets is as follows:
| (in thousands) | 2011 | 2010 | 2009 | |||||||||
|
External sales:
|
||||||||||||
|
United States
|
$ | 1,041,427 | $ | 839,168 | $ | 907,967 | ||||||
|
Germany
|
398,532 | 313,929 | 360,560 | |||||||||
|
Asia
|
441,397 | 311,616 | 266,676 | |||||||||
|
United Kingdom
|
63,466 | 52,145 | 59,749 | |||||||||
|
Canada
|
59,743 | 44,538 | 47,348 | |||||||||
|
Other
|
398,928 | 322,671 | 357,559 | |||||||||
|
Total external sales
|
$ | 2,403,493 | $ | 1,884,067 | $ | 1,999,859 | ||||||
|
|
||||||||||||
|
Total assets:
|
||||||||||||
|
United States
|
$ | 1,165,705 | $ | 1,091,510 | $ | 1,153,109 | ||||||
|
Germany
|
472,665 | 333,917 | 371,394 | |||||||||
|
Asia
|
440,535 | 330,282 | 302,355 | |||||||||
|
United Kingdom
|
67,549 | 35,964 | 41,233 | |||||||||
|
Canada
|
40,421 | 29,025 | 28,055 | |||||||||
|
Other
|
567,594 | 447,125 | 450,828 | |||||||||
|
Total assets:
|
$ | 2,754,469 | $ | 2,267,823 | $ | 2,346,974 | ||||||
| For the quarter ended (in thousands, except per share data) | September 30 | December 31 | March 31 | June 30 | ||||||||||||
|
2011
|
||||||||||||||||
|
Sales
|
$ | 529,158 | $ | 565,768 | $ | 614,830 | $ | 693,737 | ||||||||
|
Gross profit
|
188,740 | 200,025 | 229,981 | 265,645 | ||||||||||||
|
Income from continuing operations attributable to
Kennametal
(4)
|
34,921 | 43,469 | 64,683 | 86,655 | ||||||||||||
|
Net income attributable to Kennametal
(4)
|
34,921 | 43,469 | 64,683 | 86,655 | ||||||||||||
|
Basic earnings per share attributable to Kennametal
(5)
Continuing operations
|
0.43 | 0.53 | 0.79 | 1.06 | ||||||||||||
|
Net income
|
0.43 | 0.53 | 0.79 | 1.06 | ||||||||||||
|
Diluted earnings per share attributable to Kennametal
(5)
Continuing operations
|
0.42 | 0.52 | 0.77 | 1.04 | ||||||||||||
|
Net income
|
0.42 | 0.52 | 0.77 | 1.04 | ||||||||||||
|
2010
|
||||||||||||||||
|
Sales
|
$ | 409,395 | $ | 442,865 | $ | 493,165 | $ | 538,642 | ||||||||
|
Gross profit
|
117,801 | 140,088 | 170,324 | 199,515 | ||||||||||||
|
(Loss) income from continuing operations attributable to
Kennametal
(4)
|
(8,450 | ) | 6,023 | 9,685 | 40,584 | |||||||||||
|
Net (loss) income attributable to Kennametal
(4)
|
(9,817 | ) | 5,967 | 9,685 | 40,584 | |||||||||||
|
Basic (loss) earnings per share attributable to Kennametal
(5)
|
||||||||||||||||
|
Continuing operations
|
(0.10 | ) | 0.07 | 0.12 | 0.50 | |||||||||||
|
Net (loss) income
|
(0.12 | ) | 0.07 | 0.12 | 0.50 | |||||||||||
|
Diluted (loss) earnings per share attributable to Kennametal
(5)
|
||||||||||||||||
|
Continuing operations
|
(0.10 | ) | 0.07 | 0.12 | 0.49 | |||||||||||
|
Net (loss) income
|
(0.12 | ) | 0.07 | 0.12 | 0.49 | |||||||||||
| (4) | Income from continuing operations and net income attributable to Kennametal for the quarter ended June 30 and March 31, 2011 and December 31 and September 30, 2010, includes restructuring charges of $4.9 million, $1.0 million, $3.4 million and $3.3 million, respectively. Income from continuing operations and net income attributable to Kennametal for the quarter ended June 30 and March 31, 2010, includes restructuring charges of $12.0 million and $20.7 million, respectively. Income (loss) from continuing operations and net income (loss) attributable to Kennametal for the quarter ended December 31 and September 30, 2009, includes restructuring charges of $3.3 million and $7.8 million, respectively. | |
| (5) | Earnings per share amounts attributable to Kennametal for each quarter are computed using the weighted average number of shares outstanding during the quarter. Earnings per share amounts attributable to Kennametal 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 attributable to Kennametal does not always equal the full-year earnings per share attributable to Kennametal. |
- 56 -
Table of Contents
| 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 Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). The Company’s disclosure controls were designed to provide a reasonable assurance that information required to be disclosed in reports that we file or submit under the 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 Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance at June 30, 2011 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 Company’s 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) | Management’s Report on Internal Control over Financial Reporting | ||
| Management’s Report on Internal Control over Financial Reporting is included in Item 8 of this Form 10-K and incorporated here by reference. | |||
| (c) | Attestation Report of the Independent Registered Public Accounting Firm | ||
| The effectiveness of Kennametal’s internal control over financial reporting as of June 30, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in Item 8 of this annual report on Form 10-K. | |||
| (d) | Changes in Internal Control over Financial Reporting | ||
| There have been no changes in internal control over financial reporting that occurred during the fourth quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. |
| ITEM 9B | — OTHER INFORMATION |
None.
| ITEM 10 | — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the executive officers of Kennametal Inc. is as follows: Name, Age, Position,
and Experience During the Past Five Years
(1)
.
Carlos M. Cardoso, 53
Chairman of the Board, President and Chief Executive Officer
Chairman of the Board of Directors since January 2008; President and Chief Executive Officer since January 2006.
Chairman of the Board of Directors since January 2008; President and Chief Executive Officer since January 2006.
- 57 -
Table of Contents
Judith L. Bacchus, 49
Vice President and Chief Human Resources Officer
Vice President and Chief Human Resources Officer since June 2011; Vice President, Human Resources Field Services from July 2009
to June 2011; Director, Human Resources Shared Services from December 2007 to July 2009; Manger Global Talent Acquisition from
April 2006 to December 2007.
Vice President and Chief Human Resources Officer
Vice President and Chief Human Resources Officer since June 2011; Vice President, Human Resources Field Services from July 2009
to June 2011; Director, Human Resources Shared Services from December 2007 to July 2009; Manger Global Talent Acquisition from
April 2006 to December 2007.
Martha A. Bailey, 37
Vice President Finance and Corporate Controller
Vice President Finance and Corporate Controller since December 2009; Controller, Metalworking Americas from January 2009 to
December 2009; Manager, Global Financial Reporting from June 2005 to July 2009.
Vice President Finance and Corporate Controller
Vice President Finance and Corporate Controller since December 2009; Controller, Metalworking Americas from January 2009 to
December 2009; Manager, Global Financial Reporting from June 2005 to July 2009.
Steven R. Hanna, 57
Vice President and Chief Information Officer
Vice President and Chief Information Officer since October 2008. Formerly, Corporate Information Officer at General Motors
Corporation (a manufacturer of automobiles) from May 1998 to September 2008.
Vice President and Chief Information Officer
Vice President and Chief Information Officer since October 2008. Formerly, Corporate Information Officer at General Motors
Corporation (a manufacturer of automobiles) from May 1998 to September 2008.
John H. Jacko, Jr., 54
Vice President and Chief Marketing Officer
Vice President and Chief Marketing Officer since July 2008; Vice President Corporate Strategy and MSSG Global Marketing from
March 2007 to July 2008. Formerly, Vice President, Chief Marketing Officer at Flowserve Corporation (a manufacturer / provider of
flow management products and services) from November 2002 to February 2007.
Vice President and Chief Marketing Officer
Vice President and Chief Marketing Officer since July 2008; Vice President Corporate Strategy and MSSG Global Marketing from
March 2007 to July 2008. Formerly, Vice President, Chief Marketing Officer at Flowserve Corporation (a manufacturer / provider of
flow management products and services) from November 2002 to February 2007.
Lawrence J. Lanza, 62
Vice President and Treasurer
Vice President since October 2006; Treasurer since July 2003.
Vice President and Treasurer
Vice President since October 2006; Treasurer since July 2003.
Kevin G. Nowe, 59
Vice President, Secretary and General Counsel
Vice President, Secretary and General Counsel since November 2009; Assistant General Counsel and Assistant Secretary from November 1992 to October 2009.
Vice President, Secretary and General Counsel
Vice President, Secretary and General Counsel since November 2009; Assistant General Counsel and Assistant Secretary from November 1992 to October 2009.
Frank P. Simpkins, 48
Vice President and Chief Financial Officer
Vice President and Chief Financial Officer since December 2006; Vice President Finance and Corporate Controller from February
2006 to December 2006.
Vice President and Chief Financial Officer
Vice President and Chief Financial Officer since December 2006; Vice President Finance and Corporate Controller from February
2006 to December 2006.
John R. Tucker, 64
Vice President and President Business Groups
Vice President and President Business Groups since December 2010; Vice President and Chief Technical Officer October 2008 to
December 2010. Formerly, Chairman and Chief Executive Officer of Sermatech International (a developer of engineered protective
coatings) from August 2006 to May 2008; President and Chief Executive Officer of Capstone Turbine Corporation (a producer of low-
emission microturbine systems) from August 2003 to July 2006.
Vice President and President Business Groups
Vice President and President Business Groups since December 2010; Vice President and Chief Technical Officer October 2008 to
December 2010. Formerly, Chairman and Chief Executive Officer of Sermatech International (a developer of engineered protective
coatings) from August 2006 to May 2008; President and Chief Executive Officer of Capstone Turbine Corporation (a producer of low-
emission microturbine systems) from August 2003 to July 2006.
Philip H. Weihl, 55
Vice President, Integrated Supply Chain and Logistics
Vice President, Integrated Supply Chain and Logistics since July 2009; Vice President Kennametal Value Business System and Lean
Enterprise from January 2005 to June 2009.
Vice President, Integrated Supply Chain and Logistics
Vice President, Integrated Supply Chain and Logistics since July 2009; Vice President Kennametal Value Business System and Lean
Enterprise from January 2005 to June 2009.
| (1) Each executive officer has been elected by the Board of Directors to serve until removed or until a successor is elected and qualified. Unless otherwise noted, none of the executive officers (i) has an arrangement or understanding with any other person(s) pursuant to which he was selected as an officer, (ii) has any family relationship with any director or executive officer of the company, or (iii) is involved in any legal proceeding which would require disclosure under this item. | ||
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, 2011 (2011
Proxy Statement). Incorporated herein by reference is the information set forth under the caption
“Ethics and Corporate Governance-Code of Business Ethics and Conduct” in the 2011 Proxy Statement.
- 58 -
Table of Contents
The Company has a separately designated standing Audit Committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are: Timothy R.
McLevish (Chair); Lawrence W. Stranghoener; Steven H. Wunning; 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 2011
Proxy Statement.
Incorporated herein by reference is the information set forth under the captions “Executive
Compensation” and “Executive Compensation Tables” and certain information regarding directors’
compensation under the caption “Board of Directors and Board Committees-Board of Directors
Compensation and Benefits” and “Board of Directors and Board Committees-Committee
Functions-Compensation Committee Interlocks and Insider Participation” in the 2011 Proxy Statement.
Incorporated herein by reference from our 2011 Proxy Statement are: (i) the information set forth
under the caption “Equity Compensation Plans” and the related tabular disclosure under the table
entitled “Equity Compensation Plan Information;” (ii) the information set forth under the caption
“Ownership of Capital Stock by Directors, Nominees and Executive Officers” with respect to the
directors’ and officers’ shareholdings; and (iii) the information set forth under the caption
“Principal Holders of Voting Securities” with respect to other beneficial owners.
Incorporated herein by reference is certain information
set forth under the captions “Ethics and
Corporate Governance – Corporate Governance – Board of Director Review and Approval of a Related
Person Transations,” “Executive Compensation,” “Executive Compensation Tables” and “Ethics and
Corporate Governance – Corporate Governance – Board Composition and Independence” in the 2011
Proxy Statement.
Incorporated herein by reference is the information with respect to pre-approval policies set forth
under the caption “Independent Registered Public Accounting Firm – Proposal II. Ratification of
The Selection of the Independent Registered Public Accounting Firm – Audit Committee Pre-Approval
Policy” and the information with respect to principal accountant fees and services set forth under
“Independent Registered Public Accounting Firm – Proposal II. Ratification of the Selection of The
Independent Registered Public Accounting Firm – Fees and Services” in the 2011 Proxy Statement.
(a) Documents filed as part of this Form 10-K report.
1. Financial Statements included in Part II, Item 8
2. Financial Statement Schedule
1. Financial Statements included in Part II, Item 8
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.
| FINANCIAL STATEMENT SCHEDULE: | Page | |||
|
Schedule II—Valuation and Qualifying Accounts and Reserves for the Years Ended June 30, 2011, 2010 and 2009
|
65 | |||
- 59 -
Table of Contents
3. Exhibits
|
(3)
|
Articles of Incorporation and Bylaws | |||
|
(3.1)
|
Amended and Restated Articles of Incorporation as amended through October 30, 2006 | Exhibit 3.1 of the December 31, 2006 Form 10-Q filed February 9, 2007 is incorporated herein by reference. | ||
|
(3.2)
|
Bylaws of Kennametal Inc. as amended through May 8, 2007 | Exhibit 3.1 of March 31, 2007 Form 10-Q filed May 9, 2007 is incorporated herein by reference. | ||
|
(4)
|
Instruments Defining the Rights of Security Holders, Including Indentures | |||
|
(4.1)
|
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 Form 8-K filed June 20, 2002 is incorporated herein by reference. | ||
|
(4.2)
|
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 Form 8-K filed June 20, 2002 is incorporated herein by reference. | ||
|
(10)
|
Material Contracts | |||
|
(10.1)*
|
Kennametal Inc. Management Performance Bonus Plan | Appendix A to the 2005 Proxy Statement filed September 26, 2005 is incorporated herein by reference. | ||
|
(10.2)*
|
Deferred Fee Plan for Outside Directors, as amended and restated effective December 30, 2008 | Exhibit 10.1 of the December 31, 2008 Form 10-Q filed February 4, 2009 is incorporated herein by reference. | ||
|
(10.3)*
|
Executive Deferred Compensation Trust Agreement | Exhibit 10.5 of the June 30, 1988 Form 10- K (SEC file no. reference 1-5318; docket entry date—September 23, 1988) is incorporated herein by reference. | ||
|
(10.4)*
|
Directors Stock Incentive Plan, as amended and restated effective December 30, 2008 | Exhibit 10.2 of the December 31, 2008 Form 10-Q filed February 4, 2009 is incorporated herein by reference. | ||
|
(10.5)*
|
Performance Bonus Stock Plan of 1995, as amended and restated effective December 30, 2008 | Exhibit 10.3 of the December 31, 2008 Form 10-Q filed February 4, 2009 is incorporated herein by reference. | ||
|
(10.6)*
|
Stock Option and Incentive Plan of 1996 | Exhibit 10.14 of the September 30, 1996 Form 10-Q filed November 13, 1996 is incorporated herein by reference. | ||
|
(10.7)*
|
Kennametal Inc. 1999 Stock Plan | Exhibit 10.5 of the Form 8-K filed June 11, 1999 is incorporated herein by reference. | ||
|
(10.8)*
|
Kennametal Inc. Stock Option and Incentive Plan of 1999 | Exhibit A of the 1999 Proxy Statement filed September 20, 1999 is incorporated herein by reference. | ||
|
(10.9)*
|
Kennametal Inc. Stock and Incentive Plan of 2002 (as amended on October 21, 2008) | Appendix A to the 2008 Proxy Statement filed September 8, 2008 is incorporated herein by reference. | ||
|
(10.10)*
|
Forms of Award Agreements under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended | Exhibit 10.18 of the June 30, 2004 Form 10-K filed September 10, 2004 is incorporated herein by reference. | ||
|
(10.11)*
|
Form of Kennametal Inc. Restricted Unit Award (granted under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended) | Exhibit 10.1 of the September 30, 2009 Form 10-Q filed November 5, 2009 is incorporated herein by reference. | ||
- 60 -
Table of Contents
|
(10.12)*
|
Form of Kennametal Inc. Performance Unit Award (granted under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended) | Exhibit 10.1 of Form 10-Q filed November 5, 2010 is incorporated herein by reference. | ||
|
|
||||
|
(10.13)*
|
Kennametal Inc. 2008 Strategic Transformational Equity Program | Exhibit 10.2 of the December 31, 2007 Form 10-Q filed February 7, 2008 is incorporated herein by reference. | ||
|
|
||||
|
(10.14)*
|
Form of Award Agreement under the Kennametal Inc. 2008 Strategic Transformational Equity Program | Exhibit 10.3 of the December 31, 2007 Form 10-Q filed February 7, 2008 is incorporated herein by reference. | ||
|
|
||||
|
(10.15)*
|
Form of Employment Agreement with Carlos M. Cardoso | Exhibit 10.9 of the June 30, 2000 Form 10-K filed September 22, 2000 is incorporated herein by reference. | ||
|
|
||||
|
(10.16)*
|
Letter Agreement amending Employment Agreement with Carlos M. Cardoso | Exhibit 10.2 of the Form 8-K filed December 9, 2005 is incorporated herein by reference. | ||
|
|
||||
|
(10.17)*
|
Amendment No. 3 to Employment Agreement with Carlos M. Cardoso | Exhibit 10.5 of the December 31, 2008 Form 10-Q filed February 4, 2009 is incorporated herein by reference. | ||
|
|
||||
|
(10.18)*
|
Form of Amended and Restated Employment Agreement with Named Executive Officers (other than Mr. Cardoso) | Exhibit 10.1 of the December 31, 2006 Form 10-Q filed February 9, 2007 is incorporated herein by reference. | ||
|
|
||||
|
(10.19)*
|
Form of Amendment to Amended and Restated Employment Agreement with Named Executive Officers (other than Mr. Cardoso) | Exhibit 10.6 of the December 31, 2008 Form 10-Q filed February 4, 2009 is incorporated herein by reference. | ||
|
|
||||
|
(10.20)*
|
Schedule of Named Executive Officers who have entered into the Form of Amended and Restated Employment Agreement and Form of Amendment as set forth in Exhibits 10.18 and 10.19 | Filed herewith. | ||
|
|
||||
|
(10.21)*
|
Form of Indemnification Agreement for Named Executive Officers | Exhibit 10.2 of the Form 8-K filed March 22, 2005 is incorporated herein by reference. | ||
|
|
||||
|
(10.22)*
|
Schedule of Named Executive Officers who have entered into the Form of Indemnification Agreement as set forth in Exhibit 10.21 | Filed herewith. | ||
|
|
||||
|
(10.23)*
|
Kennametal Inc. Executive Retirement Plan (for Designated Others) (as amended effective December 30, 2008) | Exhibit 10.8 of the December 31, 2008 |
| Form 10-Q filed February 4, 2009 is incorporated herein by reference. | ||||
|
|
||||
|
(10.24)*
|
Kennametal Inc. Supplemental Executive Retirement Plan (as amended effective December 30, 2008) | Exhibit 10.9 of the December 31, 2008 Form 10-Q filed February 4, 2009 is incorporated herein by reference. | ||
|
|
||||
|
(10.25)*
|
Description of Compensation Payable to Non-Employee Directors | Exhibit 10.23 from the June 30, 2008 Form 10-K filed August 14, 2008 is incorporated herein by reference. |
- 61 -
Table of Contents
|
(10.26)
|
Third Amended and Restated Credit Agreement dated as of June 25, 2010 among Kennametal Inc., Kennametal Europe GmbH, Bank of America, N.A., London Branch (as Euro Swingline Lender), PNC Bank, National Association and JPMorgan Chase Bank, N.A. (as Co-Syndication Agents), Citizens Bank of Pennsylvania and Bank of Tokyo- Mitsubishi UFJ Trust Company (as Co-Documentation Agents), Bank of America, N.A. (as the Administrative Agent), and the following lenders: | Exhibit 10.1 of Form 8-K filed June 30, 2010 is incorporated herein by reference. | ||
|
|
Bank of America, N.A., PNC Bank, National Association, JPMorgan Chase Bank, N.A., Bank of Tokyo-Mitsubishi UFJ Trust Company, Citizens Bank of Pennsylvania, Mizuho Corporate Bank, Ltd., Comerica Bank, Commerzbank AG New York and Grand Cayman Branches, HSBC Bank USA, National Association, Intesa Sanpaolo S.p.A New York Branch, U.S. Bank National Association, First Commonwealth Bank and TriState Capital Bank | |||
|
|
||||
|
(10.27)
|
Form of Third Amended and Restated Guarantee (in connection with the Third Amended and Restated Credit Agreement set forth in Exhibit 10.24) | Exhibit 10.26 of Form 10-K filed August 12, 2010 is incorporated herein by reference. | ||
|
|
||||
|
(10.28)*
|
Stock and Incentive Plan of 2010 | Exhibit A of the 2010 Proxy Statement filed September 13, 2010 is incorporated herein by reference. | ||
|
|
||||
|
(10.29)*
|
Form of Kennametal Inc. Performance Unit Award (granted under the Kennametal Inc. Stock and Incentive Plan of 2010) | Exhibit 10.2 of Form 10-Q filed February 8, 2011 is incorporated herein by reference. | ||
|
|
||||
|
(10.30)*
|
Form of Kennametal Inc. Restricted Unit Award (granted under the Kennametal Inc. Stock and Incentive Plan of 2010) | Exhibit 10.3 of Form 10-Q filed February 8, 2011 is incorporated herein by reference. | ||
|
|
||||
|
(10.31)*
|
Form of Kennametal Inc. Restricted Unit Award for Non-Employee Directors (granted under the Kennametal Inc. Stock and Incentive Plan of 2010) | Exhibit 10.4 of Form 10-Q filed February 8, 2011 is incorporated herein by reference. | ||
|
|
||||
|
(10.32)*
|
Form of Kennametal Inc. Nonstatutory Stock Option Award (granted under the Kennametal Inc. Stock and Incentive Plan of 2010) | Exhibit 10.5 of Form 10-Q filed February 8, 2011 is incorporated herein by reference. | ||
|
|
||||
|
(10.33)*
|
Form of Kennametal Inc. Nonstatutory Stock Option Award for Non-Employee Directors (granted under the Kennametal Inc. Stock and Incentive Plan of 2010) | Exhibit 10.6 of Form 10-Q filed February 8, 2011 is incorporated herein by reference. | ||
|
|
||||
|
(10.34)*
|
Form of Officer’s Employment Agreement | Exhibit 10.1 of Form 10-Q filed May 13, 2011 is incorporated herein by reference. | ||
|
|
||||
|
(10.35)*
|
Schedule of Executive Officers who have entered into the Form of Officer’s Employment Agreement as set forth in Exhibits 10.34. | 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 Carlos M. Cardoso, Chairman, President and Chief Executive Officer of Kennametal Inc. | Filed herewith. | ||
|
|
||||
|
(31.2)
|
Certification executed by Frank P. Simpkins, Vice President and 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 Section 906 of the Sarbanes-Oxley Act of 2002, executed by Carlos M. Cardoso, Chairman, President and Chief Executive Officer of Kennametal Inc., and Frank P. Simpkins, Vice President and Chief Financial Officer of Kennametal Inc. | Filed herewith. | ||
|
|
||||
|
|
*Denotes management contract or compensatory plan or arrangement. | |||
- 62 -
Table of Contents
|
(101)
|
XBRL | |||
|
(101.INS)**
|
XBRL Instance Document | Filed herewith. | ||
|
|
||||
|
(101.SCH)**
|
XBRL Taxonomy Extension Schema Document | Filed herewith. | ||
|
|
||||
|
(101.CAL)**
|
XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith. | ||
|
|
||||
|
(101.DEF)**
|
XBRL Taxonomy Definition Linkbase | Filed herewith. | ||
|
|
||||
|
(101.LAB)**
|
XBRL Taxonomy Extension Label Linkbase Document | Filed herewith. | ||
|
|
||||
|
(101.PRE)**
|
XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith. |
| ** | The XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” or part of a registration statement or prospects for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of these sections. |
- 63 -
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: August 11, 2011 | By: | /s/ Martha A. Bailey | ||
| Martha A. Bailey | ||||
|
Vice President Finance
and Corporate Controller |
||||
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/ CARLOS M. CARDOSO
|
||||
|
Carlos M. Cardoso
|
Chairman, President and Chief Executive Officer | August 11, 2011 | ||
|
|
||||
|
/s/ FRANK P. SIMPKINS
|
||||
|
Frank P. Simpkins
|
Vice President and Chief Financial Officer | August 11, 2011 | ||
|
|
||||
|
/s/ MARTHA A. BAILEY
|
||||
|
Martha A. Bailey
|
Vice President Finance and Corporate Controller | August 11, 2011 | ||
|
|
||||
|
/s/ RONALD M. DEFEO
|
||||
|
Ronald M. DeFeo
|
Director | August 11, 2011 | ||
|
|
||||
|
/s/ PHILIP A. DUR
|
||||
|
Philip A. Dur
|
Director | August 11, 2011 | ||
|
|
||||
|
/s/ WILLIAM J. HARVEY
|
||||
|
William J. Harvey
|
Director | August 11, 2011 | ||
|
|
||||
|
/s/ TIMOTHY R. MCLEVISH
|
||||
|
Timothy R. McLevish
|
Director | August 11, 2011 | ||
|
|
||||
|
/s/ WILLIAM R. NEWLIN
|
||||
|
William R. Newlin
|
Director | August 11, 2011 | ||
|
|
||||
|
/s/ LAWRENCE W. STRANGHOENER
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Lawrence W. Stranghoener
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Director | August 11, 2011 | ||
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/s/ STEVEN H. WUNNING
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Steven H. Wunning
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Director | August 11, 2011 | ||
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/s/ LARRY D. YOST
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Larry D. Yost
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Director | August 11, 2011 |
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Table of Contents
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| Charged | Charged to | |||||||||||||||||||||||||||
| (In thousands) | Balance at | (Recoveries) | Other | Deductions | ||||||||||||||||||||||||
| For the year ended | Beginning | to Costs and | Comprehensive | Other | from | Balance at | ||||||||||||||||||||||
| June 30 | of Year | Expenses | Income | Recoveries | Adjustments | Reserves | End of Year | |||||||||||||||||||||
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2011
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Allowance for
doubtful accounts
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$ | 24,789 | $ | 518 | $ | — | $ | 966 | $ | 1,993 | (1) | $ | 7,308 | (3) | $ | 20,958 | ||||||||||||
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Reserve for
obsolete inventory
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68,270 | 4,971 | — | — | 4,525 | (1) | 22,483 | (4) | 55,283 | |||||||||||||||||||
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Deferred tax asset
valuation allowance
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47,987 | (27,313 | ) | — | — | 5,491 | (1) | 503 | (5) | 25,662 | ||||||||||||||||||
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2010
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Allowance for
doubtful accounts
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$ | 25,228 | $ | 4,163 | $ | — | $ | 1,181 | $ | (1,055 | ) (1) | $ | 4,728 | (3) | $ | 24,789 | ||||||||||||
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Reserve for
obsolete inventory
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61,123 | 19,580 | — | — | 2,854 | (1) | 15,287 | (4) | 68,270 | |||||||||||||||||||
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Deferred tax asset
valuation allowance
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48,206 | 5,035 | (1,715 | ) | — | (3,539 | ) (1) | — | 47,987 | |||||||||||||||||||
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2009
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Allowance for
doubtful accounts
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$ | 18,473 | $ | 9,597 | $ | — | $ | 856 | $ | 1,566 | (2) | $ | 5,264 | (3) | $ | 25,228 | ||||||||||||
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Reserve for
obsolete inventory
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61,470 | 22,730 | — | — | (14,164 | ) (1) | 8,913 | (4) | 61,123 | |||||||||||||||||||
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Deferred tax asset
valuation allowance
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46,650 | 2,490 | 4,572 | — | (5,506 | ) (1) | — | 48,206 | ||||||||||||||||||||
| (1) | Represents foreign currency translation adjustment. | |
| (2) | Represents foreign currency translation adjustment and $0.2 million of reserves acquired through business combinations. | |
| (3) | Represents uncollected accounts charged against the allowance. | |
| (4) | Represents scrapped inventory and other charges against the reserve. | |
| (5) | Represents a forfeited net operating loss deduction. |
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TABLE OF CONTENTS
Part IItem 1 BusinessItem 1A Risk FactorsItem 1B Unresolved Staff CommentsItem 2 PropertiesItem 3 - Legal ProceedingsPart IIItem 5 - Market For The Registrant S Common Equity, Related Shareowner Matters and Issuer Purchases Of Equity SecuritiesItem 6- Selected Financial DataItem 7 - Management S Discussion and Analysis Of Financial Condition and Results Of OperationItem 7A - Quantitative and Qualitative Disclosures About Market RiskItem 8 - Financial Statements and Supplementary DataNote 1 - Nature Of OperationsNote 2 - Summary Of Significant Accounting PoliciesNote 3 Supplemental Cash Flow InformationNote 4 Acquisitions and DivestituresNote 5 Discontinued OperationsNote 6 Fair Value MeasurementsNote 7 Derivative Instruments and Hedging ActivitiesNote 8 InventoriesNote 9 Other Current LiabilitiesNote 10 Long-term Debt and Capital LeasesNote 11 - Notes Payable and Lines Of CreditNote 12 - Income TaxesNote 13 - Pension and Other Postretirement and Postemployment BenefitsNote 14 Comprehensive Income (loss) and Accumulated Other Comprehensive (loss) IncomeNote 15 - Restructuring and Asset Impairment ChargesNote 16 - Financial InstrumentsNote 17 Stock-based CompensationNote 18 Environmental MattersNote 19 Commitments and ContingenciesNote 20 Segment DataNote 21 Selected Quarterly Financial Data (unaudited)Note 21 Selected Quarterly Financial DataItem 9 Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A Controls and ProceduresItem 9B Other InformationPart IIIItem 10 Directors, Executive Officers and Corporate GovernanceItem 11 Executive CompensationItem 12 Security Ownership Of Certain Beneficial Owners and Management and Related Shareowner MattersItem 13 Certain Relationships and Related Transactions, and Director IndependenceItem 14 Principal Accountant Fees and ServicesPart IVItem 15 Exhibits, Financial Statement Schedules