Kennametal Inc.

views updated

Kennametal Inc.

1600 Technology Way
Latrobe, Pennsylvania 15650
U.S.A.
Telephone: (724) 539-5000
Fax: (724) 539-7835
Web site: http://www.kennametal.com

Public Company
Incorporated: 1938 as McKenna Metals Company
Employees: 13,700
Sales: $1.97 billion (2004)
Stock Exchanges: New York
Ticker Symbol: KMT
NAIC: 333512 Machine Tool (Metal Cutting Types) Manufacturing; 333131 Mining Machinery and Equipment Manufacturing; 333515 Cutting Tool and Machine Tool Accessory Manufacturing

Kennametal Inc. ranks as the largest manufacturer of metalcutting tools in North America and as the second-largest competitor worldwide. Kennametal also ranks as the world's leading manufacturer of tools used by the mining and highway construction industries. Kennametal's tools and tooling systems utilize complex metallurgy and materials science in tungsten carbide powders, high-speed steels, ceramics, industrial diamonds, and other materials resistant to heat, abrasion, pressure, and wear. The company markets its products under various brand names, including Kennametal, Hertel, Rubig, Widia, Cleveland Twist Drill, Greenfield, Hanita, Circle Machine, and Disston. Kennametal markets its products in more than 60 countries, deriving nearly half its sales from outside the United States. Overseas, the company's European operations are based in Furth, Germany, and its Asian operations are based in Singapore. Kennametal operates 28 manufacturing plants in the United States and 25 production facilities overseas.

Background of the McKenna Family

In 1832 a coppersmith named Robert McKenna traveled from Ireland to Pittsburgh, Pennsylvania. McKenna established his own copperworks and, after he died in 1852, the business was reorganized by his three sons—Alexander, John, and Thomas—as A. & J. McKenna. The name was later changed to the A. and T. McKenna Brass and Copper Works. By 1899 all the brothers had died, and the firm was once again reorganized, this time under the name McKenna Brothers Brass Company. The seven sons of Thomas McKenna continued the brass and copper works, and also struck an agreement with Firth Sterling Steel Company to become its sole agent for selling cutting tools in the cities of Pittsburgh and Cincinnati, Ohio.

In 1900 one of the seven brothers, A.G. McKenna, developed an alloy tool steel that contained about 18 percent tungsten. A.G.'s development was a milestone in cutting medium steel. Prior to that time, the cutting speed of steel had been only about 16 feet per minute in 1800 and 26 feet per minute in 1860. The 18 percent tungsten alloy, however, increased the cutting speed to 99 feet per minute. Yet this was not the final development. When A.G. added 1 percent vanadium, the cutting speed nearly doubled. As a result, in 1910 the McKenna clan organized a new company. The offices for the new venture, Vanadium Alloys Steel Company (VASCO), were established in Latrobe, Pennsylvania. The McKenna family was the majority stockholder, and McKenna Brothers Brass Company became the new firm's sales agent in the United States.

A.G. McKenna was the single largest stockholder and the impetus behind the firm's metallurgical developments, although he was never officially an officer of the company. Men of A.G.'s acquaintance at Firth Sterling ran the company until brother Roy McKenna became president in 1915. VASCO grew rapidly under the able management of Roy, especially during World War I. The company manufactured most of the ferro-tungsten alloy needed for the American war effort. Near the end of the war, VASCO was producing half as much ferro-tungsten as tool steel sales. It is at this point in the history of Kennametal that Philip M. McKenna begins to play a prominent role.

Philip was exposed to the finer points of metallurgy at a very young age by his father, A.G. McKenna. Born in 1897, by the age of seven Philip was given the responsibility of stoking the fire for his father's blacksmith forge, where he carefully watched the heating of drill steels. In 1907 Philip learned how to operate a lathe and, when he later entered high school, was knowledgeable enough to manufacture a true-tempered hunting knife on his own. Trained in pattern-making, drafting, and mechanical drawing in high school, in 1914 he worked as an assistant in the Iron Division of the U.S. Bureau of Standards. His duties there included cleaning electroplating and other equipment. By 1915 Philip was employed as a professional chemist and had secured two registered patents, one for an efficient process to extract tungsten values from ores, the other for a method of separating cobalt from nickel.

An ambitious young man, Philip convinced his father to help him start Chemical Products Company in order to market some of his patents. Chemical Products began to provide cobalt, based on the process patented by Philip, for VASCO to use. When the supply of tungsten became more urgent with the advent of World War I, Philip patented a highly efficient method of producing ferro-tungsten. This process was not only used by his own company but also employed by VASCO. After the war, Philip engaged in a number of activities. He attended Columbia University, searched for tantalum and niobium ores in the American west, closed down the Chemical Products Company, and started an analytic laboratory in San Leandro, California, for the purpose of conducting more intense research on tooling materials.

In 1928 Philip moved to Latrobe, Pennsylvania, to become research director at VASCO. At VASCO, Philip began to work with tantalum alloys in order to produce better steel-cutting tools than the tungsten carbide tools manufactured by other companies. In 1936 an agreement was reached to create a new company, Vascoloy-Ramet, for the manufacture of tantalum carbide tools. Participants in the venture included Ramet Corporation of America, General Electric Company, Carboloy Company, and Fansteel Metallurgical Corporation. Sales in 1936 amounted to $450,000, but the new company was plagued with mismanagement and complaints from customers about tools that were poorly made. At one point, Chevrolet Auto Body rejected 1,200 tools made by Vascoloy-Ramet. Dissatisfied with the direction of the new company, Philip resigned from Vanadium Alloys in early 1938.

McKenna Metals Birth in 1938 Leads to Kennametal

Just a few months later, Philip was busy forming a new company based on the tungsten-titanium carbide composition he had patented while working for VASCO. The denseness of this metal, known by its trade name Kennametal, led to an easier machining process. As a result, tools could be made more quickly than ever before. Although the firm was initially set up as a sole proprietorship to develop and manufacture tool materials, in 1940 Philip convinced his cousin Alex, his brother Donald, and other McKenna family members to join him as partners in the new company. Philip's development of hard carbide tools produced results immediately—tools manufactured by the new McKenna Metals Company were soon recognized as the highest quality products in the entire metal cutting industry. During the first year of operations, the company's sales amounted to $30,000. By the end of fiscal 1941, however, sales had skyrocketed to $999,000.

The coming of World War II provided McKenna Metals Company with just the outlet it needed to market its tools. In 1941 the firm received its first order based on the Lend-Lease agreement between the United States and Britain. Orders also arrived from United States Steel Export Company and Chrysler Tank Arsenal. Due to the rapid growth of the firm and the burgeoning administrative responsibilities, in 1943 Philip decided to conclude the partnership and incorporate under the name of Kennametal, Inc. Throughout the war, the company helped machine the enormous quantities of steel required to produce war materials for the U.S. armed forces. It improved tooling for shell production at the same time that it developed a process that increased the production of tungsten carbine penetrators (the outer core of a shell casing made to pierce German tank armor). Kennametal's revenues increased to $7.55 million by the end of fiscal 1943.

The end of the war in 1945 triggered a decrease in orders from the U.S. government, and Kennametal's revenues suddenly dropped. To compensate for this loss of business, Philip McKenna began to develop tools for the mining industry. A new plant was built in Bedford, Pennsylvania, for the production of these mining tools.

In 1946 the company started a virtual revolution in the metal cutting industry. Philip and the men working for him at Kennametal developed indexable carbide insert systems (which included thermal strain-free assemblies and precision-ground "throw-away" inserts) and a carbide designed specifically for all-purpose, high-speed tooling. It was not long, however, before the company was once again in the employ of the U.S. government.

When the Korean War started in 1950, the U.S. Department of Defense contracted Kennametal to manufacture the anti-tank penetrators that it had become famous for producing during World War II. With 190,000 of these items produced for use in Korea, sales increased to $24 million by the end of 1954.

The mid- and late 1950s were a period of expansion and growth for the company. Kennametal opened a tungsten mining venture in Nevada, with the accumulated stockpile sold to the American government. When mining was halted in 1957, the company patented an original process to reduce tungsten ore concentrates into tungsten carbide. This revolutionary process formed the basis of Kennametal's tungsten powder business for the future. In 1958 the company expanded overseas with the creation of Kennametal Overseas Corporation. It also established an affiliation with an Italian firm to sinter Kennametal's carbide in Europe. A joint venture was established in Britain just a few years later.

Company Perspectives:

Kennametal's aspiration is to be the premier tooling solutions supplier in the world with operational excellence throughout the value chain and best-in-class technology.

During the 1960s, revenues for the company continued to increase. In 1962 sales were 31 percent higher than the previous year, while net income was up 58 percent; 1963 revenues increased more than 12 percent, while net profits rose 29 percent. Major technological developments were also introduced by Kennametal during the decade, including the production of high-purity tantalum powders for electronic applications and tool materials, the production of heavy tungsten alloy materials under the trade name "Kennertium," and the manufacture of Kengrip tire studs. Three rock bit firms were purchased, new warehouses were opened in Illinois and West Virginia, a powder preparation plant was built in Fallon, Nevada, and sales offices were established in West Germany and Australia. Sales over the period from 1961 to 1969 more than doubled, and net income was five times greater at the end of the decade than it had been at the beginning. Philip McKenna died in 1969, but the company remained under the management of family members. Alex McKenna retained his position as president and chief executive officer, and Donald McKenna assumed the position of chairman of the board.

Kennametal's success continued into the 1970s as the new generation of family members supervised the development of innovative products and manufacturing techniques. In collaboration with its Italian affiliate, the company developed a clamping system that provided more stable and accurate holding of metal cutting tools. Kennametal also introduced a revolutionary line of ceramic tooling materials, such as ceramic inserts and holders. By the end of the decade, Kennametal was the undisputed leader in metal cutting tooling throughout the United States. The company had grown into the largest producer of cemented carbide products, bypassing such industry giants as General Electric.

1977 IPO Fuels Expansion

Kennametal made its first public stock offering in 1977, a move that triggered a dramatic surge in interest in the company. By the end of fiscal 1979, sales had more than tripled, net income and earnings per share had quadrupled, and dividends had more than doubled. With the influx of new capital, management expanded the company's West German and Australian operations and acquired the oldest carbide producer in Canada, A.C. Wickman.

The 1980s began auspiciously for the company, with record sales of $389.9 million by 1982. In 1983, however, sales dropped 31 percent due to the worst recession since World War II. Nonetheless, management initiated a comprehensive expansion and acquisition strategy. Two new plants were built in North Carolina, and construction was completed on a new headquarters near Latrobe Airport, in Pennsylvania. Consolidation of operations in Ohio led to the construction of a new steel products plant in Cleveland. A new plant was also built in Neunkirchen, West Germany. In addition, Kennametal purchased all the holdings of Lempereur (Belgium, The Netherlands, and France), Craig Bit Company (Canada), and Bristol-Erickson (England). During this time, a joint venture was started with Kobe Steel in Japan to market the company's metalworking and construction products in that country. By the late 1980s, the company had completely recovered from the recession of the early and mid-1980s. It posted record sales of $420 million in 1988.

In 1991 Kennametal created a $27 million Corporate Technology Center in order to remain at the forefront of technological developments in the metalcutting industry. New products and manufacturing techniques in metalcutting inserts, toolholding systems, carbide-tipped bits for mining machines and road planers, and other metalcutting tooling applications of carbides, ceramics, and artificial diamonds are the focus of engineers at the center. The center, located near company headquarters at Latrobe, Pennsylvania, also provides consulting services in tooling management and productivity to meet the unique and rapidly changing needs of Kennametal customers.

Acquisitions Highlight the 1990s

With a revitalized cash flow, Kennametal entered the 1990s determined to surpass its previous success. Management's first move was the acquisition of J&L Industrial Supply, a catalog supplier of metalwork tooling located in Detroit, Michigan. Kennametal's purchase of J&L provided the company with the ability to respond more quickly than ever before to satisfy customer needs for metalwork equipment and supplies. In 1993 Kennametal purchased an 81 percent interest in Hertel AG, a German manufacturer of tooling systems. This acquisition was made to give Kennametal greater access to the growing Eastern European markets. In 1994 Kennametal purchased W.W. Grainger (an American distributor of industrial equipment and supplies), thus improving upon its fast-growing marketing base already established with J&L. These acquisitions boosted Kennametal to a position as the second largest metalworking products manufacturer in the world, and the leader in mining and construction tooling. Nearly 35 percent of the company's total sales were from outside the United States.

Key Dates:

1938:: McKenna Metals Company is organized.
1943:: McKenna Metals is incorporated as Kennametal Inc.
1958:: Company expands abroad, forming Kennametal Overseas Corporation.
1977:: Kennametal completes its initial public offering of stock.
1990:: Kennametal acquires J&L Industrial Supply.
1991:: Kennametal spends $27 million to build its Corporate Technology Center.
1993:: Kennametal acquires German toolmaker, Hertel AG.
1997:: Kennametal acquires Greenfield Industries Inc.
1999:: Markos Tambakeras is appointed president and chief executive officer.
2000:: After spinning off JLK Direct Distribution Inc., Kennametal purchases all the company's outstanding shares.
2002:: Kennametal acquires Widia (India) Ltd.
2004:: Revenues reach a record high of $1.97 billion.

As Kennametal bolstered its operations during the first half of the 1990s, it did so under the leadership of Robert McGeehan, the first non-McKenna family member to head the company. McGeehan, who joined the company in 1973 as a metalworking service engineer, was appointed president in 1989 and chief executive officer two years later. His acquisition of J&L Industrial Supply, completed at the beginning of his leadership term, was a masterstroke, giving the company a mail-order operation that served as a one-stop source for cutting tools, abrasives, machinery and accessories, precision measuring instruments, and industrial supplies. The company, which became known as JLK Direct Distribution Inc., was spun off as a separate public company toward the end of McGeehan's decade-long tenure, a period of great activity for the company.

JLK Direct was spun off from Kennametal in early 1997, roughly two years before McGeehan's retirement. His last years were busy years, particularly during the period when JLK Direct was spun off. During the year, the company moved 270 workers from its metalworking division in Raleigh, North Carolina, to its headquarters facility in Latrobe. The most significant event of the year—and perhaps during the decade—was the announcement in October that the company was acquiring Augusta, Georgia-based Greenfield Industries Inc. in a staggering $1 billion deal. Greenfield, which generated $510 million in sales in 1996, obtained slightly more than half its revenues from cutting tools, drill bits, and related tools. The company also manufactured tools used in oil and gas drilling and circuit board manufacturing, as well as saw blades for builders, contractors, and consumers. Greenfield served as the exclusive supplier of drill bits for Sears' Craftsman line of tools. The acquisition was completed in November 1997, a move applauded by analysts who praised McGeehan's success in adding a new dimension to Kennametal's product line. "Strategically," one analyst remarked in the February 6, 1998 issue of Pittsburgh Business Times, "this makes sense because Greenfield makes round cutting tools, like drill bits, whereas Kennametal is strong in carbide inserts."

The acquisition of Greenfield was McGeehan's last major contribution to Kennametal's development. He announced his retirement in mid-1998 and stepped aside in July 1999. His replacement was Markos Tambakeras, who left his post as president of Honeywell Industrial Control to take charge of Kennametal. Born in Egypt, raised in Greece, and educated in South Africa, Tambakeras arrived at Kennametal with a sterling reputation. "Markos is innovative, hard driving, a big motivator," an analyst noted in an October 22, 1999 interview with Pittsburgh Business Times. "He definitely does not shy from a challenge." The challenge facing Tambakeras was renewing the financial community's faith in both Kennametal and JLK Direct (Kennametal owned more than 80 percent of JLK Direct after its spin off). Both companies' stock performance was lackluster in the months leading up to Tambakeras' arrival, with Kennametal's woes related to the enormous debt incurred from the Greenfield acquisition.

Kennametal at the Turn of the Century

One of Tambakeras' first accomplishments was gaining full control of JLK Direct. In November 2000, Kennametal paid $36 million to purchase all the outstanding shares of JLK Direct, returning the company to its role as a wholly-owned, private subsidiary. At the turn of the century, Tambakeras guided the company through a difficult period, as recessive economic conditions dampened demand in Kennametal's key markets. In November 2001, the company announced it was closing three manufacturing plants in an attempt to cut costs in the face of declining sales.

The anemic market conditions prevalent during the early years of the decade gave way to more prosperous times, as Kennametal entered the mid-2000s on a high note. The company strengthened its position in its Asia Pacific territory with the 2002 purchase of Widia (India) Ltd., a India-based maker of carbide-tipped, metal-cutting tools that primarily served the automotive and defense industries. Kennametal completed the integration of Widia into its operations in 2004, a year which sales increased 12 percent to a record high of $1.97 billion. The company, by this point, held a firm grasp on markets throughout North America, Europe, and Asia, ranking as the second largest metals company in the world. In the years ahead, Kennametal was expected to fortify its position and purse global dominance, a lofty objective that provided the impetus for future expansion.

Principal Subsidiaries

Kennametal Australia Pty. Ltd.; Kennametal Exports Inc.; Kennametal Foreign Sales Corporation; Kennametal (Canada) Ltd.; Kennametal (Shanghai) Ltd.; Kennametal (Thailand) Co., Ltd.; Kennametal (Xuzhou) Company Ltd.; Kennametal Hardpoint Inc.; Kennametal International S.A. (Panama); Kennametal Japan Ltd.; Kennametal (Malaysia) Sdn. Bhd.; Kennametal de Mexico, S.A. de C.V.; Kennametal SP. Z.o.o.; Kennametal (Singapore) Pte. Ltd.; Kennametal South Africa (Pty.) Ltd.; Kennametal Korea Ltd.; Kennametal Holding (Cayman Islands) Limited; Kennametal Financing I; Kennametal Financing II; Kennametal Holdings Europe Inc.; Adaptive Technologies Corp.; Circle Machine Company; Conforma Clad Inc.; Greenfield Industries, Inc.

Principal Operating Units

Metalworking Solutions and Services Group; Mining and Construction Division; Engineered Products Group; Energy Products Group; Industrial Products Group; Electronics Products Group; J&L Industrial Supply; Kennametal Europe; Kennametal Asia Pacific.