UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

(Rule 14a-101)

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to § 240.14a-12

 

KENNAMETAL INC.

(Name of Registrant as Specified in Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KENNAMETAL INC.
1600 Technology Way
P.O. Box 231
Latrobe, Pennsylvania 15650-0231

Notice of Annual Meeting of Shareowners
to be held October 26, 2010

 

To the Shareowners of Kennametal Inc.:

 

The Annual Meeting of Shareowners of Kennametal Inc. will be held at the Quentin C. McKenna Technology Center, located at the company’s executive offices at 1600 Technology Way (on Route 981 South), Latrobe, Unity Township, Pennsylvania, on Tuesday, October 26, 2010 at 2:00 p.m. (Eastern Time) to consider and act upon the following matters:

 

1. The election of two directors for terms to expire in 2013;

 

2. The ratification of the selection of the independent registered public accounting firm for the fiscal year ending June 30, 2011; and

 

3. The approval of the Kennametal Inc. Stock and Incentive Plan of 2010.

 

Shareowners also will be asked to consider such other business as may properly come before the meeting. The Board of Directors has fixed Monday, August 30, 2010 as the record date. Only shareowners of record at the close of business on the record date are entitled to notice of, and to vote at, the Annual Meeting.

 

If you plan to attend the Annual Meeting, please note that each shareowner must present valid picture identification, such as a driver’s license or passport. Additionally, shareowners holding stock in brokerage accounts (“street name” holders) must bring a copy of a brokerage statement reflecting stock ownership as of the record date to be admitted to the Annual Meeting. No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted in the Annual Meeting.

 

Whether or not you plan to attend the Annual Meeting, please complete, date and sign the enclosed proxy card and return it in the enclosed envelope, or vote by telephone or via the Internet as instructed on the enclosed proxy card, to ensure your shares are voted at the Annual Meeting.

 

By Order of the Board of Directors

 

 

Kevin G. Nowe

Vice President, Secretary

and General Counsel

 

September 13, 2010

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE ANNUAL MEETING OF SHAREOWNERS TO BE HELD
OCTOBER 26, 2010

 

 

This proxy statement and the annual report are available for viewing at
http:///bnymellon.mobular.net/bnymellon/kmt

 

TABLE OF CONTENTS

 

 

When is the 2010 annual meeting?

 

The 2010 annual meeting will be held on Tuesday, October 26, 2010 at 2:00 p.m. (Eastern Time) at the Quentin C. McKenna Technology Center, located at our executive offices at 1600 Technology Way (on Route 981 South), Latrobe, Unity Township, Pennsylvania, 15650.

 

When was this Proxy Statement mailed to shareowners?

 

This proxy statement was first mailed to shareowners on or about September 13, 2010.

 

Why did I receive this Proxy Statement?

 

The Board of Directors of Kennametal Inc. (“we,” “us,” “Kennametal” or the “company”) is soliciting proxies to be voted at the annual meeting of shareowners (the “annual meeting”) to be held on October 26, 2010, and at any adjournment of the annual meeting. When we ask for your proxy, we must provide you with a proxy statement that contains certain information specified by law.

 

What will the shareowners vote on at the annual meeting?

 

Three items:

 

 

Will there be any other items of business on the agenda?

 

We do not expect any other items of business; however, in case there is an unforeseen need, the accompanying proxy card gives discretionary authority to the persons named in the proxy card with respect to any other matters that might be brought before the meeting. Those persons intend to vote that proxy in accordance with their best judgment.

 

Who is entitled to vote?

 

Shareowners as of the close of business on Monday, August 30, 2010 (the “record date”) may vote at the annual meeting. For matters other than the election of directors (for which you are permitted to cumulate votes), you have one vote for each share of common stock you held on the record date, including shares:

 

 

What constitutes a quorum?

 

A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the annual meeting. As of the record date, 81,972,257 shares of our common stock were issued and outstanding. Abstentions and broker non-votes (which are explained below) will be counted for purposes of determining a quorum, but will not be counted as votes cast.

How many votes are required for the approval of each item?

 

There are different vote requirements for the proposals.

 

 

 

Explanation of “Broker Non-votes.”  If your shares are held by a broker (in street name), the broker will ask you how you want your shares to be voted. If you give the broker instructions, your shares will be voted as you direct. If you do not give instructions, one of two things can happen, depending on the type of proposal. For the ratification of the selection of the auditors, which is considered a “routine” matter, the broker may vote your shares in its discretion. The broker does not have the discretion to vote your shares for the election of directors or the 2010 Plan; these are considered “non-routine” matters. If you do not provide voting instructions, the broker may not vote your shares on these proposals at all. When that happens, it is called a “broker non-vote.”

 

How do I vote by proxy?

 

If you are a shareowner of record, you may vote your proxy by any one of the following methods.

 

 

How do I vote shares that are held by my broker?

 

If you have shares held by a broker or other nominee, you may instruct your broker or other nominee to vote your shares by following instructions that the broker or nominee provides for you. Most brokers offer voting by mail, telephone, and on the Internet.

 

How do I vote my shares in the 401(k) plan?

 

You may instruct the plan trustee on how to vote your shares in the 401(k) plan by mail, by telephone, or on the Internet as described above, except that, if you vote by mail, the card that you use will be a voting instruction card rather than a proxy card. You will receive the voting instruction card from the plan trustee in the mail.

 

How can I revoke a proxy or change my vote?

 

You have the right to revoke your proxy at any time before the meeting by (1) notifying our Secretary in writing or (2) delivering a later-dated proxy card by telephone, on the Internet or by mail. If you are a shareowner of record, you may also revoke your proxy by voting in person at the meeting.

 

How will the named proxies vote my shares?

 

The shares represented by all properly executed proxies received by the Secretary prior to the meeting and not revoked will be voted. If you specify a voting choice on the proxy card (or the proxy given by telephone or via the Internet), the shares will be voted in accordance with that choice. If you return your signed proxy card but do not indicate your voting preferences, the named proxies will vote on your behalf for the election of the nominees for director listed below, for the ratification of the selection of the independent auditor and for the approval of the Kennametal Inc. Stock and Incentive Plan of 2010.

 

What does it mean if I receive more than one proxy card?

 

It means that you hold shares in more than one account. To ensure that all of your shares are voted, sign and return each card. Alternatively, if you vote by telephone or on the Internet, you will need to vote once for each proxy card and voting instruction card you receive.

 

Who tabulates the votes?

 

The votes are tabulated by BNY Mellon Shareowner Services, which acts as an independent inspector of election.

 

What should I do if I want to attend the annual meeting?

 

If you plan to attend the annual meeting, you must present valid picture identification, such as a driver’s license or passport. If you hold your shares in a brokerage account, you must also bring a copy of a brokerage statement reflecting stock ownership as of the record date to be admitted to the annual meeting. Please do not bring cameras, recording equipment, electronic devices, large bags, briefcases or packages with you. You will be asked to check in with our security personnel and none of these items will be permitted in the annual meeting.

 

If you have questions about directions, admittance or parking, you may call 724-539-5000.

 

Can I view the Proxy Statement and Annual Report electronically?

 

Yes. Copies of this proxy statement and the 2010 Annual Report to Shareowners are available free of charge for electronic (online) access and viewing at http:///bnymellon.mobular.net/bnymellon/kmt.

 

You may also view the proxy statement and annual report free of charge on our website at www.kennametal.com in the “Investor Relations” section under the “SEC Filings” tab.

What is “householding”?

 

We have adopted “householding,” a procedure under which shareowners of record who have the same address and last name and do not receive proxy materials electronically will receive only one copy of our annual report and proxy statement unless one or more of these shareowners notifies us that they wish to continue receiving individual copies. This procedure saves printing and postage costs by reducing duplicative mailings. Shareowners who participate in householding will continue to receive separate proxy cards. Householding will not affect dividend check mailings. Beneficial shareowners can request information about householding from their banks, brokers, or other holders of record.

 

What if I want to receive a copy of the annual report and proxy statement?

 

You may request a proxy statement or annual report via our website, www.kennametal.com, under the Investor Relations tab. Select “Printed Materials Request” from the “Investor Toolkit” menu. If you prefer, you may call our Secretary at 724-539-5776 or write to Kennametal Inc., Attention: Secretary, 1600 Technology Way, Latrobe, Pennsylvania 15650:

 

 

We will deliver the requested documents to you promptly upon your request.

 

How can I contact the company, the Board of Directors, the Lead Director, or any of the Independent Directors?

 

The address of our principal executive offices is 1600 Technology Way, Latrobe, Pennsylvania 15650.

 

You can send written communications to any of our Board members, addressed to:

 

Kennametal Inc.

c/o Kevin G. Nowe

Vice President, Secretary and General Counsel

1600 Technology Way

Latrobe, Pennsylvania 15650.

 

We will forward any communication we receive to the relevant director(s), except for advertisements, solicitations, or other matters unrelated to the company.

 

What are the procedures for submitting a shareowner proposal or nomination for the 2011 annual meeting?

 

We expect to hold our 2011 annual meeting in October 2011. If a shareowner wishes to have a proposal considered for inclusion in next year’s proxy statement, he or she must submit the proposal in writing so that we receive it by May 16, 2011. Proposals should be addressed to our Secretary at Kennametal Inc., 1600 Technology Way, Latrobe, Pennsylvania 15650. Proposals must comply with Rule 14a-8 of Regulation 14A of the SEC proxy rules and must contain certain information specified in the company’s By-Laws.

 

In addition, our By-Laws provide that any shareowner wishing to propose any other business at the 2011 annual meeting must give the company written notice no earlier than May 1, 2011 and no later than July 1, 2011. That notice must provide certain other information as described in the By-Laws.

 

Shareowner nominations for directors to be elected at the 2011 annual meeting must be submitted to the Secretary in writing no earlier than May 1, 2011 and no later than July 1, 2011. The By-Laws contain certain requirements for the information that must be provided in any shareowner nomination, including information about

the nominee and the nominating shareowner. Please see “Committee Functions — Nominating/Corporate Governance Committee” under the “Board of Directors and Board Committees” section of this proxy statement for additional information regarding shareowner nominations to be considered by the Nominating/Corporate Governance Committee.

 

Any shareowner may obtain a copy of the By-Laws or any of our corporate governance materials by submitting a written request to the Secretary at Kennametal Inc., 1600 Technology Way, Latrobe, Pennsylvania 15650.

 

Who pays for the solicitation of proxies?

 

Kennametal pays all costs related to the company’s solicitation of proxies. We may solicit proxies by mail, or our directors, officers or employees may solicit proxies personally, by telephone, facsimile, or the Internet. We have retained the services of Morrow & Co., LLC, 470 West Avenue, Stamford, CT 06902 to assist in soliciting proxies from brokerage houses, custodians, nominees, other fiduciaries and other shareowners of the company. We will pay all fees and expenses of Morrow & Co., LLC in connection with the solicitation; we do not expect those fees and expenses to exceed $20,000. We will reimburse brokerage firms and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for sending proxy materials to shareowners and obtaining their votes.

 

Fiscal Year.

 

Kennametal’s fiscal year begins each year on July 1 and ends on the following June 30. Any reference to a “year” in this Proxy Statement is to a fiscal year. For example, references to “2010” mean the fiscal year beginning July 1, 2009 and ending June 30, 2010.

 

Stock Split.

 

Where applicable, the figures presented in this proxy statement have been adjusted to reflect the 2-for-1 stock split effected by the company on December 18, 2007.

 

Kennametal seeks directors with strong reputations and experience in areas relevant to the strategy and operations of our businesses, particularly industries and growth segments that we serve, as well as key geographic markets where we operate. Our Board has nominated two of our current directors, Carlos M. Cardoso, and Larry D. Yost, for re-election to serve as directors of the Third Class with a term that will expire in 2013. Each of the nominees for election as a director at the 2010 annual meeting and each of the company’s current directors holds or has held senior executive positions in large, complex organizations and has operating experience that meets our objectives, as described below. In these positions, they have also gained experience in core management skills, such as strategic and financial planning, public company financial reporting, corporate governance, risk management, and leadership development.

 

We have provided additional information about each nominee and each director whose term of office will continue after the 2010 annual meeting below, including the specific characteristics and traits that we believe qualify these individuals to serve as directors of our company. Peter Held, who has served Kennametal as a director since 1995, has announced his intention to retire from the Board after the 2010 annual meeting.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE NOMINEES.

 

 

 

 

Important Information about Proxies and Cumulative Voting

 

Our Board of Directors selected the persons named on the enclosed proxy card (the “named proxies”) to act as proxies for the annual meeting. The named proxies have advised the Board that, unless authority is withheld, they will vote the shares represented by them for the election of the nominees named above. Each of the nominees has indicated his willingness to serve as a director. If, at the time of the meeting, any of the nominees is not available to serve as a director (a situation we do not anticipate), the Board may nominate another person in the nominee’s stead. In that unlikely event, the named proxies intend to vote the shares represented by them for such other person or persons as may be nominated by the Board.

 

Kennametal shareowners have cumulative voting rights in the election of directors. When voting for directors, you may multiply the total number of shares that you are entitled to vote by the number of directors to be elected in a class. You may then cast the whole number of votes for one nominee or distribute them among the nominees as desired. If you’ve given voting instructions to a proxy, that person will follow your instructions. If you have not otherwise instructed the proxy as to cumulative voting, the proxy will have the discretion to exercise cumulative voting rights. Directors are elected by a plurality of votes cast; this means that the two individuals who receive the largest number of votes cast will be elected as Directors of the Third Class.

 

All of our directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Corporate Controller, must strictly adhere to our Code of Business Ethics and Conduct.

 

The Code of Business Ethics and Conduct is designed to:

 

 

We view violations of the Code very seriously. Personal consequences for violations can be severe and can include termination and/or legal action. Directors, officers and employees who know of or suspect a violation of the Code must report the matter to us promptly. Any of these individuals can report a concern or potential violation of the Code:

 

 

The Code of Business Ethics and Conduct is posted on our website at www.kennametal.com on the “Corporate Governance” page, which is accessible under the “Company Profile” tab. We will disclose any future amendments to the Code that relate to our directors or executive officers on our website, as well as any waivers of the Code that relate to directors and executive officers.

 

Our Board of Directors adopted the Kennametal Inc. Corporate Governance Guidelines (the “Guidelines”) to assist the Board in the exercise of its duties and responsibilities and to serve the best interests of the company. The Guidelines reflect the Board’s commitment to monitor the effectiveness of policy and decision making both at the Board and management level.

 

A complete copy of the Guidelines is available on our website at www.kennametal.com on the “Corporate Governance” page, which is accessible under the “Company Profile” tab. Any changes to the Guidelines in the future will also be posted on our website. Following is a summary that provides highlights of our Guidelines and many related Corporate Governance matters:

 

The Board’s Oversight of Risk Management

 

The Board recognizes that companies face a variety of risks, including credit risk, liquidity risk, strategic risk, and operational risk. The Board believes an effective risk management system will (1) timely identify the material risks that the company faces, (2) communicate necessary information with respect to material risks to senior executives and, as appropriate, to the Board or relevant Board Committee, (3) implement appropriate and responsive risk management strategies consistent with company’s risk profile, and (4) integrate risk management into company decision-making. The Board has designated the Audit Committee to take the lead in overseeing risk management. The Audit Committee makes periodic reports to the Board regarding briefings provided by management and advisors as well as the committee’s own analysis and conclusions regarding the adequacy of the company’s risk management processes. The full Board receives an annual overview of the company’s enterprise risk management operations, material risks and uncertainties facing the company, and the company’s strategic and operational plans for addressing and mitigating those risks. In addition to the formal compliance program, the Board

encourages and management promotes a corporate culture that incorporates risk management into the company’s corporate strategy and day-to-day business operations. The Board also continually works, with the input of our management and executive officers, to assess and analyze the most likely areas of future risk for the company.

 

Selection of New Director Candidates and Criteria for Board Membership

 

Kennametal believes that the Board as a whole should encompass a range of talent, skill, diversity, and expertise that enable it to provide sound guidance with respect to our operations and interests. Board nominees are identified, screened and recommended by the Nominating/Corporate Governance Committee and approved by the full Board. The Nominating/Governance Committee evaluates and ultimately selects director nominees on the basis of a number of criteria, including independence, integrity, diversity, business and industry experience, areas of expertise, ability to exercise sound judgment in areas relevant to our businesses, and willingness to commit sufficient time to the Board. In addition to considering a candidate’s background and accomplishments, candidates are reviewed in the context of the current composition of the Board and the evolving needs of our businesses.

 

 

Board Composition and Independence

 

 

 

Outside Board Membership

 

Management directors are required to seek and obtain the approval of the Board before accepting outside board memberships.

 

Retirement Age

 

Unless otherwise determined by the Nominating/Corporate Governance Committee due to special circumstances, no director may be nominated for re-election or re-appointment to the Board if he or she would be age seventy-three (73) or older at the time of election or appointment.

 

Conflicts of Interest

 

Directors must avoid any action, position or interest that conflicts with an interest of the company, or gives the appearance of conflict. We solicit information annually from directors in order to monitor potential conflicts of interest. Any potential conflict of interest is promptly brought to the attention of the Board for evaluation.

 

Directors Orientation and Continuing Education

 

 

Board Compensation

 

 

 

Board Leadership Structure

 

Our Board is led by Mr. Cardoso, our Chairman, President, and Chief Executive Officer. Mr. Cardoso has served as our President and Chief Executive Officer since January 2006 and as our Chairman since January 2008. Our By-Laws and Guidelines give the Board the flexibility to determine whether the roles of Chief Executive Officer and Board Chairman should be held by the same person or by two separate individuals. Each year in October, the Board evaluates our leadership structure and determines the most appropriate structure for the coming year based upon its assessment of our position, strategy, and long term plans for our company. The Board also considers the specific circumstances facing the company and the characteristics and membership of the Board. At this time, the Board has determined that having Mr. Cardoso serve as both the Chief Executive Officer and the Chairman is in the best interest of our shareowners. We believe this structure makes the best use of the Chief Executive Officer’s extensive knowledge of the company, our strategic initiatives and our industry, and also fosters real-time communication between management and the Board.

 

When the roles of Chairman and Chief Executive Officer are combined in one individual, as they are now, the Board also has the ability to designate a Lead Director to provide additional leadership and guidance to the Board. Larry D. Yost currently serves as our Lead Director, a position he has held since 2008, when Mr. Cardoso assumed the Chairman role. As our Lead Director, Mr. Yost consults with the Chairman to set agendas and establish Board priorities and procedures. He presides over executive sessions of the non-employee directors and acts as the liaison between the non-employee directors and the Chairman and Chief Executive Officer. Our Guidelines contain a list of the various responsibilities with which Mr. Yost, as Lead Director, is tasked. In addition to the responsibilities described above, the Lead Director also:

 

 

Selection of Agenda Items for Board Meetings

 

Agendas for Board and committee meetings are established by the Chairman in consultation with the Lead Director, Board members and management. Board members are also encouraged to raise, at any Board meeting, subjects that are not on the agenda for that meeting.

 

Distribution of Board Materials

 

A preliminary agenda and presentation materials are distributed to Board and committee members in advance of each meeting, to the extent practicable.

 

Executive Sessions of the Board/Communications with Directors

 

 

 

 

We will forward any communication regarding our company to the appropriate director or directors as soon as practicable.

 

Board Access to Management and Independent Advisors

 

 

Assessing the Performance of the Board

 

The Board’s performance is assessed annually to determine whether the Board and its committees are functioning effectively. The Nominating/Corporate Governance Committee oversees this assessment.

 

Board Committees

 

 

Board of Director Review and Approval of Related Person Transactions

 

 

 

 

 

 

Formal Evaluation of the Chief Executive Officer

 

 

Succession Planning

 

Each year, the Chief Executive Officer delivers a report on succession planning to the Board, which includes an assessment of senior officers and their potential to succeed the Chief Executive Officer and other senior management positions.

 

Review of the Guidelines and Code of Business Ethics and Conduct

 

The Nominating/Corporate Governance Committee annually reviews the Guidelines and the Code of Business Ethics and Conduct and recommends any changes to the Board.

 

The Board of Directors held 5 meetings during 2010. Each director attended at least 75% of the total number of meetings of the Board and the committees on which he served (during the periods the director served on the committee). We expect our directors to attend our Annual Meeting of Shareowners absent exceptional circumstances. All of the members of the Board of Directors attended the Annual Meeting in October 2009.

 

The table below shows committee membership and the number of meetings of the full Board and each committee in 2010.

 

 

 

 

The Board has three standing committees: Audit, Compensation and Nominating/Corporate Governance. Each member of these committees is independent under the NYSE’s listing standards, U.S. Securities and Exchange Commission (“SEC”) regulations and the standards set forth in the Corporate Governance Guidelines discussed above.

 

Each committee has a written charter, which details its duties and responsibilities. The committee charters are posted on our website at www.kennametal.com on the “Corporate Governance” page, which can be found under the “Company Profile” tab.

 

Each committee performs an annual self-evaluation, using the roles and responsibilities outlined in the committee charter as a foundation for the review and evaluation. The Nominating/Corporate Governance Committee reviews and considers the results of each committee self-evaluation. The Chair of each committee also reports the results of the committee’s self-evaluation to the full Board.

 

Audit Committee:  The Audit Committee assists the Board in overseeing the company’s financial reporting process. You can find additional information about the functions of the Audit Committee under the “Audit Committee Report” section of this proxy statement. The Board has determined that all of the members of the Audit Committee are “financially literate,” and that Mr. Stranghoener and Mr. McLevish each qualify as an “audit committee financial expert” as that term is defined by SEC regulations.

Compensation Committee:  The Compensation Committee’s functions include: recommending an overall compensation policy to the Board; having direct responsibility for matters relating to compensation of our executive officers; overseeing the company’s compensation policies and procedures and monitoring risk related to them, advising the Board regarding management succession; and the administration of our equity compensation plans and deferred compensation plans.

 

You can find additional information about the Compensation Committee’s functions and processes in the “Compensation Discussion and Analysis” section of this proxy statement.

 

Compensation Committee Interlocks and Insider Participation:  There are no compensation committee interlocks and no insider participation in compensation decisions that are required to be disclosed in this proxy statement.

 

Nominating/Corporate Governance Committee:  The Nominating/Corporate Governance Committee’s functions include: ensuring that the Board is properly constituted to meet its fiduciary responsibilities; identifying and recommending qualified candidates for membership to the Board; having direct responsibility for matters relating to compensation of our directors; and recommending directors for committee membership. The committee also takes a leadership role in shaping the company’s corporate governance.

 

The Nominating/Corporate Governance Committee will evaluate shareowner nominees on the same basis as all other nominees. For further information on shareowner nominating procedures, please refer to the response to the question “What are the procedures for submitting a shareowner proposal or nomination for the 2010 annual meeting?” under the “General Information” section of this proxy statement.

 

The Board has delegated primary responsibility for matters relating to compensation of our directors to the Nominating/Corporate Governance Committee. Because the committee is also responsible for the recruitment of new directors and ensuring that the Board and committees are properly constituted, it is the sense of the Board and the committee that compensation matters for directors should also reside with the committee. The committee recommends the overall compensation structure for directors to the Board for full review and approval.

 

Committee Review of Director Compensation

 

The committee reviews director compensation on a regular basis. Historically, the committee responsible for director compensation matters has undertaken a comprehensive review of our director compensation program no less than once every two years. The Nominating/Corporate Governance Committee has the authority to retain outside advisors in connection with its review and analysis of director compensation matters.

 

Equity Ownership by Directors

 

The committee believes that directors should hold meaningful equity ownership positions in the company. Accordingly, a significant portion of overall director compensation is in the form of company equity, as shown in the “Overview of Director Compensation” section below. For additional information, see the discussion of “Stock Ownership Guidelines” in the “Compensation Discussion and Analysis” section.

 

Overview of Director Compensation

 

We do not pay any additional cash compensation to management employees who serve as directors. In addition, no director who is employed by the company may serve on any committee. Currently, Mr. Cardoso, who serves as the Chairman of the Board, is the only employee of the company that serves as a director. All elements of compensation for Mr. Cardoso are included in the 2010 Summary Compensation Table and the related text and compensation tables. Our non-employee directors receive a combination of cash and equity compensation for their services as a director or committee member.

Cash Compensation for Non-Employee Directors

 

In 2010, our non-employee directors were entitled to receive the following cash compensation:

 

 

 

 

Equity Compensation

 

Equity compensation for our non-employee directors consists of:

 

 

In 2009, the Compensation Committee approved a transition to restricted stock units for annual grants to participating employees under our Long-Term Incentive Programs. The Nominating/Corporate Governance Committee has also transitioned to restricted stock units for annual grants to our non-employee directors beginning with the annual grant cycle for fiscal 2010 grants, which occurred in August 2009.

 

Perquisites and Personal Benefits

 

All non-employee directors receive $50,000 of life insurance coverage, which is paid for by the company. In addition, directors receive tax reimbursements for income imputed to them for the premiums we pay for this insurance. We also reimburse directors for customary travel and related expenses for their attendance at Board or committee meetings.

Deferred Fee Plan

 

We have a Deferred Fee Plan for Non-Employee Directors (the “Deferred Fee Plan”). On an annual basis, our non-employee directors may elect to defer payment of any Board or committee compensation to a later time (with interest at a rate of prime minus 2%). In addition, under the Directors Stock Incentive Plan (described below), any non-employee director may elect to receive stock credits (representing shares of our common stock) with respect to all or a portion of any compensation deferred under the Deferred Fee Plan. Dividend equivalents are credited to the account of any director who has elected to receive stock credits. Dividend equivalents are calculated at the same rate as the current dividend; there is no preferential or above-market earnings potential for deferrals into stock credits. The Deferred Fee Plan is currently unfunded. In the event of a change in control, we would fund the deferred payments by a transfer of cash into a deferred compensation trust (a so-called “Rabbi Trust”), administered by an independent trustee.

 

Directors Stock Incentive Plan

 

Under the Directors Stock Incentive Plan, in addition to the deferral opportunity described above, any non-employee director may elect to receive shares of our common stock in lieu of all or a portion of any Board or committee compensation that is not deferred pursuant to the Deferred Fee Plan. The Directors Stock Incentive Plan is described in more detail in the “Equity Compensation Plans” discussion under the subheading “Other Stock and Incentive Plans.”

 

Matching Gifts Program

 

Directors are eligible to participate in our Matching Gifts Program, which is also generally available to all U.S. employees. Under the program, the Kennametal Foundation will match gifts to qualified institutions on a dollar-for-dollar basis up to $5,000 per calendar year.

 

2010 Director Compensation

 

The following table shows the actual compensation we paid to our non-employee directors for service on the Board and applicable committees in 2010. Mr. Cardoso does not receive additional compensation for his service on our Board.

 

2010 Non-Employee Director Compensation(1)

 

 

 

 

 

 

 

Functions of the Audit Committee

 

The Audit Committee (“we” or the “committee”) assists the Board in its oversight of: the quality and integrity of the company’s financial statements; the company’s compliance with legal and regulatory requirements; the performance, qualifications and independence of the company’s Independent Registered Public Accounting Firm (“auditors”); and the performance of the internal audit function. We have the sole authority to appoint, retain, terminate and replace the company’s auditors, subject to shareowner ratification with respect to retention at the next regularly scheduled Annual Meeting of Shareowners. We perform an annual self-assessment to evaluate the composition, activities and interactions of the committee and submit the results of the self-assessment to both the Nominating/Corporate Governance Committee and the Board.

 

Responsibilities

 

Management is responsible for the company’s financial reporting process and system of internal controls, and for the preparation and presentation of consolidated financial statements in accordance with accounting principles generally accepted in the United States. The auditors are responsible for planning and carrying out an audit of the financial statements and internal control over financial reporting in accordance with standards established by the Public Company Accounting Oversight Board (“PCAOB”) and issuing a report on that audit. Our responsibility is to provide oversight to these processes. We do not certify the financial statements or guarantee the auditor’s report. To fulfill our oversight role, we rely (without independent verification) on the information provided to us, the representations made by management and the auditors and the report of the auditors.

 

Complaints

 

Anyone, including any company employee, who has a complaint or concern regarding the company’s accounting, internal auditing controls or auditing matters may communicate that complaint or concern to the committee:

 

 

Monitoring Activities in 2010

 

We held nine (9) meetings in 2010. During these meetings, we discussed with management, the internal auditors and the company’s auditors, PricewaterhouseCoopers LLP (“PwC”) (to the extent applicable), the quality and adequacy of the company’s internal control over financial reporting, the internal audit function’s organization, responsibilities, budget and staffing and the results of internal audit examinations. We also reviewed with both PwC and the internal auditors their respective audit plans, audit scope and identification of audit risks, and met separately with PwC and with the internal auditors, without management present, to discuss the results of their examinations, their evaluations of the company’s internal control over financial reporting and the overall quality of the company’s financial reporting. We reviewed the interim financial information contained in each quarterly earnings announcement and each Form 10-Q filed with the SEC in 2010 and discussed this information with PwC and with the company’s Chief Financial Officer and Corporate Controller prior to release. We also reviewed and discussed with both management and PwC the audited financial statements for the year ended June 30, 2010 prior to release.

 

The discussions with PwC included the matters required by generally accepted auditing standards, including those described in Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1 AU section 380), as adopted by the PCAOB in Rule 3200T. We received from PwC written disclosures and the letter required by applicable requirements of the PCAOB regarding PwC’s communications with us concerning their independence, and discussed with PwC their independence.

Based on these reviews and these meetings, discussions and reports, we have recommended to the Board of Directors that the company’s audited consolidated financial statements be included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2010 for filing with the SEC. We have retained PwC as the company’s auditor for the fiscal year ending June 30, 2011, subject to shareowner ratification at the 2010 Annual Meeting of Shareowners.

 

Audit Committee

 

Timothy R. McLevish, Chair

A. Peter Held

Lawrence W. Stranghoener

Steven H. Wunning

Larry D. Yost

 

The Audit Committee has retained PricewaterhouseCoopers LLP (“PwC”) as the company’s Independent Registered Public Accounting Firm (“auditors”) for the fiscal year ending June 30, 2011. As a matter of good corporate practice, the Audit Committee is submitting its selection to our shareowners for ratification at the annual meeting. Unless otherwise directed by the shareowners, proxies will be voted in favor of the ratification of the selection of PwC as the company’s auditors for the fiscal year ending June 30, 2011. In the event that this selection is not ratified by the shareowners, the Audit Committee will consider this vote in determining its future selection of an auditor. Even if the selection is ratified, the Audit Committee in its discretion may change the appointment at any time during the year if it determines that a change would be in the best interests of the company and its shareowners.

 

Representatives of PwC attended all meetings of the Audit Committee held during 2010. The Audit Committee reviewed the non-audit services provided by PwC in 2010 and, based on that review, determined that the non-audit services provided by PwC were compatible with maintaining the independence of PwC.

 

Representatives of PwC will attend the Annual Meeting, and will have the opportunity to make a statement at the meeting if they wish. They also will be available to respond to appropriate questions from shareowners in accordance with the rules of the meeting.

 

Fees and Services

 

Fees for professional services (including expense) rendered by PwC to the company and its subsidiaries in 2009 and 2010 were as follows (in millions):

 

 

 

 

Audit Committee Pre-Approval Policy

 

The Audit Committee annually adopts a policy for pre-approval of audit and non-audit services to be provided by the auditors. Under the policy, the Audit Committee pre-approves categories of services and fee caps for each category. The pre-approved services include: (i) audit services, such as statutory audits and internal control-related services, services associated with regulatory filings and consultations regarding disclosure treatment of certain transactions or events; (ii) audit-related services, such as due diligence and accounting consultations; (iii) tax services, such as tax compliance (domestic and international), and tax planning and advice; and (iv) other permissible non-audit services that the Audit Committee believes will not impair the auditor’s independence. The Audit Committee must specifically pre-approve the terms of the annual audit services engagement. All other audit and permissible non-audit services not specifically covered by the policy, and any proposed services which materially exceed the pre-approved fee levels, require separate specific pre-approval by the Audit Committee. The Audit Committee may delegate specific engagement pre-approval authority to one or more of its members. The member(s) to whom such authority is delegated must present any pre-approval decisions to the Audit Committee at

its next scheduled meeting for ratification. The policy requires the auditor to provide the Audit Committee with detailed supporting documentation regarding the specific services to be provided.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE RATIFICATION OF THE SELECTION OF PwC AS THE COMPANY’S AUDITORS FOR THE FISCAL YEAR ENDING JUNE 30, 2011.

 

Analysis of Risk Inherent in Our Compensation Policies and Practices

 

During 2010, the Compensation Committee directed our management to work with Towers Watson, its compensation consultant, to conduct a risk assessment of all of our compensation policies and practices. We analyzed our compensation policies and practices to ensure that they do not foster risk taking above the level of risk associated with our business model. Based upon that review, we have concluded that we have balanced pay for performance programs and our compensation policies and procedures do not motivate imprudent risk taking. We based our conclusion on a variety of factors, including these specific aspects of our compensation practices:

 

Compensation Discussion and Analysis

 

Executive Summary¹

 

We began our 2010 fiscal year in a climate of uncertainty and global economic volatility. Like many other industrial companies, we experienced a sharp decline in our sales during 2009 and in the beginning of 2010 were still faced with challenging conditions in many of the regions and end markets we serve.

 

In the wake of a difficult 2009 and despite the uncertainty that surrounded the prospects for economic stabilization and growth for 2010, we took the opportunity to evaluate our business and strategies and redoubled our efforts to streamline our operations. We continued to implement the aggressive restructuring initiatives we announced during 2008 and 2009 and identified new cost-saving actions that have increased the efficiency of our business. We realigned our business groups and transitioned to a new operating and segment structure for 2011 that is market based and more customer centric. We accomplished these significant achievements while remaining sharply focused on our core businesses and the execution of our long-term strategies.

 

 

 ¹ Our named executive officers for 2010 are Carlos M. Cardoso, Frank P. Simpkins, Gary W. Weismann, Kevin R. Walling, Philip H. Weihl, and Paul J. DeMand. Mr. DeMand, our former Vice President and President, Metalworking Solutions and Services Group (MSSG), left the company in May 2010 prior to the end of our fiscal year. We have included compensation information for Mr. DeMand in our Executive Compensation Tables where required, but in this Compensation Discussion and Analysis we have addressed information pertinent to Mr. DeMand’s compensation only where it remained applicable or relevant for 2010.

All of these activities required strong leadership from our executive team and the dedication, focus, and commitment of our employees across the globe. We asked our employees to make some significant sacrifices for the short term so that the company, our shareowners, and the entire global team could benefit in the long term from the actions and initiatives we were implementing. Certain of the decisions made by our Compensation Committee (the “committee”) in the beginning of 2010 were a reflection of the difficult business environment in which we were operating. In support of our efforts to restructure the business and streamline our costs, the committee made certain changes to our executive compensation programs for 2010, which included:

 

 

Both management and the committee viewed these changes as temporary but necessary measures that would support our cost reduction initiatives while we focused on repositioning the company. As always, the committee monitored our executive compensation program throughout the year to ensure that it continued to reflect our pay-for-performance philosophy and that the measures that had been taken in the beginning of 2010 continued to be appropriate.

 

In the second half of the fiscal year, we benefitted from the strengthening global economy, improvements in the industrial sector in which we operate and the aggressive restructuring actions we implemented over the past several years. These factors, combined with our focus on the steady execution of our long-term business strategies, enabled us to deliver strong financial results for the second half of 2010, and ultimately to return to profitability with solid financial results for the full year.

 

The committee considered these factors as it met periodically throughout the year, and made decisions relating to our executive compensation programs in response to the changing circumstances. Some of the more significant decisions the committee made include:

 

 

Each of these actions furthered one or more objectives of our executive compensation programs. They also demonstrate our emphasis on paying for performance, on both an individual and company basis.

 

In July 2010 (the start of our 2011 fiscal year), the committee reviewed and finalized decisions for 2010, and also made some changes to our programs and the compensation for our named executives for 2011. Changes to the executive compensation programs reflect the more positive position of the company and our continued commitment to fair and balanced compensation practices, and include:

 

 

 

Decisions for individual named executives reflect factors specific to each, as we discuss in further detail throughout this Compensation Discussion and Analysis.

 

Executive Compensation Philosophy

 

Kennametal’s executive compensation philosophy is premised on the following basic principles, which we believe form the foundation of effective and responsible compensation programs:

 

 

The committee has responsibility for the oversight and administration of our executive compensation program. The committee works with its compensation consultant and members of our management to collect and analyze relevant data during the compensation decision-making process, but it is the committee that ultimately oversees and approves all compensation matters regarding our executives, including our named executives.

 

Objectives of the Executive Compensation Program

 

To support our overall compensation philosophy, we have designed our executive compensation program to:

 

 

Design of Our Executive Compensation Program

 

Overall Design of the Executive Compensation Program

 

Each of our executives receives a compensation package comprised of the six basic components described in the table below. The table summarizes some important information about these components for 2010, and we describe each one in more detail later in this Compensation Discussion and Analysis.

 

We’ve designed our executive compensation program to target total compensation at the median level for similar positions within our industry and peer group. There is potential for actual compensation to be above or below median compensation depending on company and individual performance. We believe that target compensation under our incentive plans should allow for above-median compensation for exceptional performance, as well as below-median compensation when performance falls below our expectations. Also, we may deviate from the median if, in the judgment of management and/or the committee, the value of an executive’s experience, performance and specific skill set warrants. For individual executives, compensation may also vary depending on the nature of the executive’s role and its importance to our business strategy; or market competition and/or availability of talent for the position.

 

The foundation of our program is a system of salary bands. Each executive position is situated within a salary band, which generally defines opportunities for base salary, annual incentives and long-term incentives. There are ranges associated with the salary bands, which reflect each position’s internal value, scope and complexity of responsibilities and market competitiveness. The pay ranges give the committee flexibility to position individual compensation above or below market median levels depending on job performance, professional qualifications, business experience, technical expertise and career potential.

 

Pay for Performance

 

The committee believes that an effective compensation program reflects a balance between individual factors (i.e., level of responsibility, skills, experience and individual performance), organizational measures (i.e., company or business unit performance), and external or market factors (i.e., competitive benchmarking and survey data). We incorporate each of these factors into the design of our executive compensation program. Accordingly, we compensate our executives based upon an assessment of:

 

 

Variable Compensation and Promotion of a Long-Term Perspective

 

We increase the variable component of compensation for our executives as they progress through our management levels and adjust the ratio of short-term to long-term compensation to promote accountability and a long-term perspective. We structure our executive compensation program so that the proportion of variable vs. fixed compensation increases as the role and responsibility of the executive increases. We think this is appropriate because the executives are best positioned to be able to affect the company’s performance, and therefore they should receive a substantial portion of total compensation value in the form of long-term incentives that measure and reward Kennametal’s performance over a period of greater than one year. The table below illustrates that the actual percentage of variable pay relative to total compensation depends on the position level; generally speaking, the higher an executive’s position within the company, the greater proportion of pay that is linked to company performance and shareowner returns. Similarly, as an executive rises to positions of greater responsibility within our

company, short-term compensation begins to decrease proportionally and long-term compensation represents a greater proportion of total compensation.

 

 

Competitive Compensation

 

Pay Positioning Relative to Market — Benchmarking.

 

When we make compensation decisions, we compare the compensation of our executive officers to the compensation of similarly positioned executives at other companies to gain a general understanding of current market compensation practices for these positions. Specifically, we benchmark total compensation levels and certain of the individual elements of our compensation packages (mainly base salary, annual incentives (together, “total cash compensation”) and long-term incentives (together with base salary and annual incentives, “total direct compensation”) to both published survey data of comparable companies and to a custom peer group of public companies within the manufacturing industry. Benchmark data is part of the external information we consider when designing and executing our compensation programs.

 

Both our management and Towers Watson, the committee’s compensation consultant, assist the committee in its benchmarking efforts. Towers Watson collects compensation data for our peer group companies from available sources, including, in most cases, the executive compensation data included in the most recently available annual proxy statement for each company. Towers Watson can also provide survey data representing industry-specific and general industry companies included in the Towers Watson and Mercer executive compensation databases. Management also collects survey information on its own, or requests survey information from Towers Watson or other service providers on compensation components. We provide the committee with the results of our benchmarking efforts on a regular basis. The benchmarking data helps us assess the competitiveness of our executives’ compensation compared to that of other executives at our peer companies and in the broader market. We also use the data to help ensure proper alignment between executive and shareowner interests, and to assess compensation versus company performance.

 

When we evaluate our compensation structure, we compare the target range for total compensation, the mix of compensation components and the allocation of those components in our executives’ individual compensation packages against benchmark data. At least once every two years, we evaluate the total cash compensation and total direct compensation we provide to our executives against the benchmark data to determine if these measures reflect our aim to provide compensation at approximately the median level within our peer group and industry. We analyze both target compensation opportunities as well as the actual compensation paid to our executives. The committee considers this information, along with data provided by Towers Watson, and company and individual performance factors when it sets compensation levels.

 

We use the same custom peer group for compensation purposes as we do for comparing our financial performance. We periodically review our peer group to ensure that the peer companies continue to be appropriate comparisons for performance purposes and for compensation purposes. Many of the companies in our current peer group are included because they are similar to Kennametal in terms of revenue, operational scope, or organizational

complexity. Some of the peers are larger than we are; we include those companies to help understand the effect size and complexity has on compensation levels and designs.

 

The following companies comprised our peer group for both performance and compensation purposes for 2010:

 

 

How Compensation Decisions Are Made

 

Role of the Committee and CEO in Determining Executive Compensation.

 

The committee is responsible for designing and implementing our executive compensation programs, evaluating executive performance, including that of the Chairman, President and Chief Executive Officer (the “CEO”), and overseeing the development of executive succession plans. The committee solicits information from our management and from its compensation consultant during the compensation-setting process, but it is the committee that ultimately sets and approves compensation for our CEO and all other executives.

 

The committee uses substantially the same process for determining CEO compensation as it uses for the other executive officers. Each year, the committee reviews all components of compensation for the CEO and each of our executives over the course of several regularly scheduled meetings from April to July. Final compensation decisions are made in July for the current fiscal year. The committee is assisted in its review by members of management, the human resources department, and its compensation consultant.

 

In keeping with our compensation philosophy, the committee considers three main categories of information about each executive: individual performance, company performance, and market data. The committee evaluates each executive’s current compensation and solicits input from management on the executive’s future potential, performance for the year, leadership skills, and contribution to the company’s performance. The committee also considers factors relating to the company, such as our overall performance and achievement of specific strategic and operational initiatives. Finally, the committee assesses the market competitiveness of the executive’s total compensation package.

 

CEO Compensation.  The committee meets with the CEO each year in July (the beginning of our fiscal year) to set the CEO’s performance goals (both individual and company objectives) for the fiscal year. These goals are then reflected in the CEO’s individual performance plan for the year. The CEO periodically reports on his progress with respect to his performance goals at committee meetings throughout the year. At the end of the year, the committee evaluates the CEO’s performance against his plan and makes decisions about the CEO’s compensation based in part on his achievement of those goals and in part on the company’s performance, taking in to account the overall objectives of our compensation program.

 

Other Executives’ Compensation.  Each year in August, each of our other executives must also develop an individual performance plan for the fiscal year (with goals that align with the CEO’s objectives, and include individual and company objectives). That plan is discussed with and approved by the CEO, and the executives report to the CEO on their progress towards the achievement of the goals periodically throughout the year. At the end of the year, the CEO and the committee together assess the performance of our other executives. Based upon these evaluations and recommendations from the CEO, the committee determines the other executives’ compensation. The other executives do not play a role in the determination of their compensation, other than discussing individual performance objectives and achievements with the CEO.

Role of the Compensation Consultant.

 

The committee has engaged Towers Watson to provide compensation consulting services. The role of the compensation consultant is to make sure the committee has the objective information and expertise necessary to make informed decisions that are in the best long-term interests of our business and shareowners. The compensation consultant also keeps the committee informed as to compensation trends and developments affecting public companies in general and our industry in particular. The committee solicits advice and counsel from Towers Watson on all matters related to executive compensation design and delivery. Specifically, Towers Watson provides the following types of services to the committee:

 

 

A Towers Watson consultant attends all committee meetings and may attend executive sessions at the request of the committee. Consultants from Towers Watson also collaborate with our management team for purposes of meeting planning, program design and analysis and other logistics, but all executive compensation-related services performed by Towers Watson are ultimately at the direction of the committee.

 

With the committee’s approval, Towers Watson has also been engaged by management for certain services unrelated to executive compensation consulting, primarily consulting services related to our health care plan and our other health and welfare plans. Management discloses the nature and extent of other services provided by Towers Watson to the committee and the committee considers these engagements when it assesses the objectivity and independence of Towers Watson as its compensation consultant. We understand, based on information provided to us by Towers Watson, that there is an internal separation between the Towers Watson group providing health and welfare services to us and the Towers Watson group providing consulting services to the committee on executive compensation matters. Towers Watson has a policy prohibiting these groups from sharing information regarding us.

 

In fiscal 2010, we paid Towers Watson approximately $195,000 for executive compensation consulting services provided at the committee’s request or direction. During the same period, we paid approximately $430,000 for additional services provided to us related to our health care plan and our other health and welfare plans.

 

At its July 2010 meeting, the Committee approved the retention of its executive compensation consultant, which will transition from Towers Watson to Pay Governance, LLC, an independent executive compensation consulting firm effective September 2011. Pay Governance, LLC will perform no other work for the Company.

 

Components of our Executive Compensation Program

 

Throughout this discussion of the components of our executive compensation program, we provide commentary on the types of factors the committee considers when it is engaged in the compensation setting process, which is a very disciplined process that is applied consistently for our CEO and all other executives. We provide a general overview of the process that is followed for all executives for each component and, unless we say otherwise, you can assume that the process we outline is the one the committee followed in 2010. We also identify the factors the committee considers when it makes compensation decisions for our executives, and unless we say otherwise, you can assume that those are the factors the committee considered for each individual.

 

Base Salary

 

Base salary is the fixed element of our executives’ annual compensation. We pay it to provide a competitive level of fixed income for our executives. We target base salary levels for each position at median pay levels for

similar positions in the market. The amount of base salary an executive receives depends primarily on the salary band within which the position lies. Within each salary band, there are ranges of possible salary levels, and the actual amount of base salary an executive receives depends upon his or her manager’s annual evaluation of certain objective and subjective factors. Objective factors include the executive’s level of responsibility, skills and training, accomplishment of the goals set forth in the annual, individual performance plan, and, for newer executives, prior experience. Subjective factors include our assessment of the executive’s future potential and individual contributions. The CEO evaluates each of the executives who report directly to him and reviews the evaluations of executives who report to other managers. Both objective and subjective factors are considered, as relevant, and the CEO makes recommendations to the committee for changes to base salary during the annual compensation setting process. The committee annually evaluates the CEO, and ultimately may make changes to the base salaries for all of our executives in its discretion as part of the broader compensation setting process.

 

In setting the named executives’ base salaries for fiscal 2010, the committee considered all of the factors described above for each executive. Despite the fact that each of our executives had strong individual performance in 2009, the ongoing economic recession, the difficult business environment for industrial companies, and the challenges posed to our global employees and operations from the restructuring and cost-savings initiatives we were undergoing necessitated some changes to base salary. On behalf of management, Mr. Cardoso recommended that all of our executive officers receive a 15% base salary reduction in 2010, except for one officer, Mr. Weismann, whose responsibilities increased. The committee agreed with this recommendation and the rationale for it and each of our named executives except Mr. Weismann had their base salaries decreased by 15% effective July 1, 2009. The 15% reduction was effective until February 1, 2010, when the committee determined that the company’s performance had improved sufficiently to reinstate salaries at pre-reduction levels. For each of our named executives other than Mr. Weismann, base salaries returned to the levels that had been set in July 2008 effective February 1, 2010.

 

Mr. Weismann received a base salary increase to $400,000 effective August 1, 2009. Throughout 2009, Mr. Weismann led AMSG through internal restructuring to position it as a market-facing organization with streamlined operations and sharper focus on customer satisfaction. He also agreed to assume additional responsibilities in his then - current role as the Vice President and President, AMSG going forward in 2010. Given Mr. Weismann’s outstanding stewardship of the AMSG business segment, the success of his restructuring initiatives and the increase in the scope of his responsibilities, the committee determined that the base salary increase was appropriate. The committee also recognized that Mr. Weismann’s previous base salary level was below the median level paid to executives in similar positions in our industry.

 

Mr. Weihl was promoted in 2010 to Vice President, Integrated Supply Chain and Logistics in connection with our restructuring initiatives and the implementation of our new operating structure. His new role has significantly more responsibility associated with it and is situated within a higher salary band than his previous role. The transition to the new operating structure took place over the course of the entire fiscal year, and Mr. Weihl’s role continued to expand throughout the year. The committee recognized that an adjustment to his base salary level was appropriate to reflect the increased scope of his job responsibilities. As a result, the committee increased Mr. Weihl’s salary to $350,000 with effect from July 1, 2009. At the end of the fiscal year, Mr. Weihl received a lump sum payment representing the difference between his previous salary level and new salary level, adjusted to reflect the 15% reduction in pay that was effective from July 1, 2009 through January 31, 2010.

 

In July 2010, the committee reviewed base salary levels and approved merit increases for 2011 for each of our named executives. The average increase was 4.2%.

 

Annual Incentives

 

Overview of Management Performance Bonus Plan (Prime Bonus Plan).  The Management Performance Bonus Plan, which we refer to as the “Prime Bonus Plan,” is a shareowner approved, formula-based, pay-for-performance annual cash incentive plan. The Prime Bonus Plan is the main vehicle we use to reward participants for their contributions to strong annual business performance. The purpose of the Prime Bonus Plan is to motivate participants to help the company to achieve shorter-term financial goals, which are designed to create sustainable shareowner value, and to reward them to the extent we achieve those goals. All of our executives, our senior management team members, and certain of our key employees participate in the Prime Bonus Plan.

Bonuses under the Prime Bonus Plan are determined according to the following formula:

 

Target Bonus Amount x Achievement of Performance Goals x Modifier = Prime Bonus Award

 

The following table presents the possible payouts under the Prime Bonus Plan at different levels of performance:

 

 

With respect to each performance goal, no bonus is awarded if actual performance is less than 80% of the performance goal. Under the terms of the Prime Bonus Plan, the committee makes the same adjustments for non-recurring or unusual items in determining whether performance goals have been met as we make to our financial results when we are reporting them to our shareowners.

 

Target Bonus Amounts.  Individual target bonus amounts are based on a combination of individual factors and market-competitive data and are established as a percentage of base salary. Consistent with our executive compensation philosophy, individuals with greater job responsibilities have a greater proportion of their total cash compensation tied to company performance through the Prime Bonus Plan. Each year, the committee sets target bonus amounts for our executives based on recommendations from our management and Mr. Cardoso and its own evaluation of the competitiveness of each executive’s compensation package.

 

Performance Goals.  We link Prime Bonus opportunities directly with company performance, business unit performance and the maximization of shareowner value. Each executive is assigned performance goals at the beginning of the fiscal year based upon the performance goals of the company that are approved by the Board. The Board approves the goals for overall company performance based upon management’s financial and strategic plans.

 

Once the Board has approved the performance goals for the company, the committee reviews and approves the bonus structure and individual goals for the CEO and all other executive officers. To ensure alignment with our shareowners’ interests, the committee assigns the CEO both quantitative and qualitative goals that are aggressive, designed to stretch performance, and will significantly impact the growth or improvement of a business unit or our company. For each of the other executives, the committee, with the input of the CEO, sets performance objectives that it considers achievable but that require personal performance and stewardship appreciably above the plan levels for the coming year. These performance goals vary by executive, are weighted and combine performance of the individual, the company and the particular business unit or function for which the executive has responsibility.

 

The Prime Bonus Plan for 2010 was generally designed such that a certain percentage of an executive’s bonus opportunity (usually 70%) was based upon the performance of the executive’s specific business unit and an additional percentage (usually 30%) on the performance of the next higher organizational unit. In this manner, the majority of an executive’s bonus opportunity is linked directly with results that he is best positioned to impact. Certain of our executives are not assigned to any one particular business unit, however. The bonus opportunities for each of our named executives (except Mr. DeMand), and certain changes we made to the Prime Bonus design in 2010, are described below in the “2010 Prime Bonuses” section.

 

Modifier.  At the outset of each fiscal year, the committee may select a key initiative to use as a modifier in the calculation of Prime Bonus amounts for that year. The calculated Prime Bonus amounts are then adjusted based upon the level of performance for that key initiative.

 

Individual Performance.  At its July meeting each year, the committee reviews each executive officer’s achievement of his performance goals for the previous year and approves any corresponding amounts to be paid under the Prime Bonus Plan. In connection with Prime Bonus determinations, the committee considers the individual performance of the executive and the recommendations of the CEO (for all other executives). The committee has the discretion to adjust calculated Prime Bonuses for our executives in the course of its review.

2010 Prime Bonuses.

 

Changes for 2010 Prime Bonus Program.  In July 2009, the committee approved certain modifications to the Prime Bonus program for 2010. The 2010 Prime Bonus program used the same formula and performance/payout structure described above to determine a calculated bonus. Performance goals were based on two measures: Earnings Per Share, or EPS (75% weight), (Earnings Before Interest and Taxes, or EBIT, at the business unit level) and Free Operating Cash Flow (25% weight). There was no modifier for 2010. At management’s recommendation, and considering the challenging business environment we were facing at the time, the committee decided that we would not accrue for and fund a bonus pool at the start of the fiscal year. Instead, funding for the bonus pool under the 2010 Prime Bonus program depended on our achievement of two conditions: EBIT results at the corporate level needed to reach a threshold amount; and base salary levels for our global employees needed to be restored before a Prime Bonus pool would be funded. (In previous years, the Prime Bonus pool was accrued for and funded as part of the annual planning process and in accordance with our expectations on the likelihood of payout.) Participants in the 2010 Prime Bonus program earned a proportionate share of the bonus pool (based upon their calculated bonus under the program and the degree to which the bonus pool was ultimately funded). As in years past individual awards were subject to further adjustment based upon individual performance.

 

2010 Target Bonus Amounts.  For 2010, the committee approved target bonus amounts for our named executives as follows:

 

 

2010 Company Performance Goals.  At its July 2009 meeting, in the midst of the sharp decline in the global economy and the manufacturing industry, the Board established corporate performance goals for the company of: Earnings Per Share (“EPS”) ($.66) and Free Operating Cash Flow (“FOCF”)², a non-GAAP financial measure, ($10.0 mil). At the time, the Board considered the targets to be challenging for the company, but achievable if the financial and strategic plans of the company were well executed. These goals were then used by the committee when it reviewed and approved performance measures and target goals for each of our executives.

 

2010 Performance Goals for Named Executives.

 

Carlos M. Cardoso — Chairman of the Board, President and Chief Executive Officer

 

Performance goals for Mr. Cardoso are based on the financial and strategic plans for the company. Mr. Cardoso’s 2010 Prime Bonus opportunity was composed of two components:

 

 

 

 

 ² Free operating cash flow is a non-GAAP financial measure and, which we define as cash provided by operations (which is the most directly comparable GAAP measure) less capital expenditures plus proceeds from disposals of fixed assets.

 

Component (1): Performance goals related to EPS (75% weight, $.66 target) and FOCF (25% weight, $10.0 mil target).

 

Component (2): Individual performance goals were based on both quantitative and qualitative goals related to critical business and strategic objectives of the company for 2010, including restructuring initiatives (10% weight), technology development and positioning (5% weight), global expansion and growth in emerging markets (5% weight), global talent development and succession planning for critical positions (5% weight), Environmental, Health and Safety (EHS) initiatives (2.5% weight); and stewardship of certain employee initiatives (2.5% weight).

 

Performance goals would be rewarded proportionally for performance between 80% and 100% of the target goal, except for the stewardship of certain employment initiatives and the EHS initiatives, which both required a 50% improvement for payout. At the time they were put in place, the committee considered these performance objectives strategically important and aggressive, but achievable with concentrated effort and focus by Mr. Cardoso.

 

Frank P. Simpkins — Vice President and Chief Financial Officer

Kevin R. Walling — Vice President and Chief Human Resources Officer; and

Philip H. Weihl — Vice President, Integrated Supply Chain and Logistics

 

Messrs. Simpkins, Walling and Weihl were not assigned to one particular business unit in 2010, which means that their Prime Bonus opportunity was partly based on our results at the corporate level (30% of bonus opportunity). To ensure alignment across our two reporting business units in 2010 (Metalworking Solutions and Services Group, or MSSG, and Advanced Materials Solutions Group, or AMSG), the remainder of their Prime Bonus opportunity was based on the financial and strategic plans of those business units in the aggregate (70% of bonus opportunity). Performance goals for the corporate performance component related to EPS (75% weight, $.66 target) and FOCF (25% weight, $10.0 mil target). Specific to the aggregate business unit component, performance goals related to EBIT (75% weight) and FOCF (25% weight). Target levels for aggregate business unit-related goals were set based upon the confidential, internal financial plans for each of the business units for 2010. The committee considered the targets on the business unit level, both individually and in the aggregate, to be consistent with the overall financial plan and targets set for the company; they were challenging but achievable if the financial and strategic plans of the business units were well executed.

 

Gary W. Weismann — Vice President and President, Business Groups

 

In 2010, Mr. Weismann was the Vice President and President, AMSG from July 2009 to May 2010, and was promoted to Vice President and President, Business Groups, with responsibility for both AMSG and MSSG from May to our fiscal year end June 30, 2010. Performance goals for Mr. Weismann were set in July 2009 and were linked to both corporate performance (same as Messrs. Cardoso, Simpkins, Walling and Weihl; 30% of bonus opportunity) and business unit performance for AMSG (70% of bonus opportunity). Specific to AMSG, performance goals related to EBIT (75% weight) and FOCF (25% weight). Target levels for AMSG-related goals were set based upon AMSG’s confidential, internal financial plan for 2010. The committee considered the targets to be consistent with the overall financial plan and targets set for the company; they were aggressive but achievable with the focused effort of the individuals and systematic execution of the plan.

 

2010 Performance

 

Prime Bonus Pool for 2010.  As calculated, the Prime Bonus program would have paid out at 200% of target for 2010. However, the actual Prime Bonuses paid to participants ranged from 35.2% of target to 140.9% of target because we did not begin to fund the Prime Bonus pool until we reached a threshold EBIT at the corporate level. As a result, the Prime Bonus pool for 2010 was smaller than it would have been under the previous, fully funded design, and each participant received a proportionate share of the final pool. The following tables show the performance achieved and the amount of Prime Bonus compensation received in 2010 for each of our named executives.

Carlos M. Cardoso

 

 

Named Executives other than Carlos M. Cardoso

 

 

Mr. DeMand did not receive a Prime Bonus due to his having left Kennametal during 2010 prior to the end of the fiscal year.

 

Changes for 2011 Prime Bonus Program.  The committee made several changes to the design of the Prime Bonus program for 2011, mainly to align the program with our new operating structure. The 2011 Prime Bonus program will be funded at target and the pool will be adjusted accordingly throughout the year. The payout curve and target opportunities will remain the same for participants. Corporate performance goals will return to Sales Growth (35% weight), EPS (40% weight), and Return on Invested Capital (ROIC, 25% weight). Individual goals will relate to corporate performance for all participants, and for certain participants will be combined with goals related to the business segment, region, or function to which they belong. Target levels remained the same for each of our named executives.

 

Long-Term Incentives

 

Overview of Long-Term Incentive Programs.  Kennametal’s long-term incentives are designed to focus our employees on sustainable, long-term performance. We use these incentives because they promote an ownership culture, align the interests of our employees and shareowners, and foster the long-term perspective necessary to increase shareowner value. They also aid in retention and help advance stock ownership by our employees.

 

All of our executives, members of senior management, and a significant number of key employees are eligible to receive long-term incentive awards under our broad-based, long-term incentive program (the “LTI”). We use a portfolio approach to the LTI, which includes stock options, restricted stock unit awards, and, in the past, has included restricted stock and 3-year, long-term incentive cash awards. We provide more information about each of these components below. Certain of our executives, including all of our named executives, participated in a one-time, strategic 4-year program called the “2008 Strategic Transformational Equity Program” (the “STEP”) which is also described below.

 

The committee approves all equity and other long-term incentive awards for our executives. All long-term incentive awards, including those under the LTI and the STEP, have been granted under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended (the “2002 Plan”). If our shareowners approve the 2010 Plan at the 2010 Annual Meeting, we will no longer grant any awards under the 2002 Plan, and all future awards under our LTI will be granted under the 2010 Plan. Both the 2002 Plan and the 2010 Plan provide for the granting of nonstatutory and incentive stock options, restricted stock awards, stock unit awards, and other types of incentive awards.

 

Stock Option Awards.  We use stock option awards to align the interests of our employees with those of our shareowners and focus our employees on delivering superior total shareowner return over the long term (10 years). Stock option grantees can only profit from stock option awards if our stock price increases over time; conversely, grantees receive no value if our stock price decreases. We typically grant stock option awards to our executives

annually as part of our broader LTI program, but occasionally we grant special stock option awards, either alone or in connection with other awards, to employees for attraction, retention or recognition purposes. Vesting schedules for our stock option awards vary according to the purpose for which they are granted. Awards granted under the LTI typically time vest at the rate of one-fourth per year over four years. A stock option award granted for attraction purposes, upon hiring, or for special recognition purposes may have a different vesting schedule (for example, 50% may vest on the second anniversary of the grant date, and 25% each year thereafter). In every case, the stock option awards help further our retention objective as any unvested portion is forfeited if an executive voluntarily terminates employment. Stock option awards expire ten years from the date of grant, which serves to promote the long-term perspective that is key to our growth and success.

 

Restricted Stock Unit Awards.  We grant restricted stock unit awards because we believe they precisely and immediately align the interests of our employees and our shareowners. As is the case with stock option awards, we typically grant restricted stock unit awards annually to our executives as part of our broader LTI program, but we sometimes make these grants for other purposes. For example, we may grant these awards to attract new talent or to recognize or motivate our employees. Like stock option awards, restricted stock unit awards granted under the LTI typically vest at the rate of one-fourth per year over four years. Also like stock option awards, the vesting schedules may be different depending on the purpose for the grant of restricted stock units. Restricted stock unit awards help promote our retention efforts because any unvested portion of a restricted stock unit award is forfeited if an executive voluntarily terminates his or her employment with us. Prior to 2010, we granted restricted stock awards as part of our LTI program, but we have moved to grants of restricted stock unit awards for ease of administration and compliance purposes.

 

Fair Market Value of Equity Awards.  Under the 2002 Plan, the exercise price for a stock option award must not be less than the fair market value of our shares at the time the option is granted. Fair market value is determined by taking the average of the highest and lowest sales prices as quoted on the New York Stock Exchange — Composite Transactions reporting system for the last trading day prior to the grant date.

 

Timing of Equity Grants.  The committee grants equity-based awards to our executives on both an annual and an as-desired basis. We do not have any program, plan or practice to time annual or ad hoc grants of equity-based awards in coordination with the release of material non-public information or otherwise.

 

 

Determination of Equity Grant Amounts.  Restricted stock unit awards and stock unit awards under the STEP are generally expressed as a dollar amount (a grantee might receive a restricted stock unit award of $50,000, for instance.) The number of restricted stock units or stock units awarded to the grantee is determined by dividing the dollar amount of the award by the fair market value of our stock on the last trading day prior to the grant date. Stock option awards are also expressed in a dollar amount, and the number of shares underlying a stock option award is determined by dividing the dollar amount of the award by the compensation value of the option on grant date (essentially using the assumptions disclosed in the notes to our consolidated financial statements for our 2010 10-K, but considering the full term of the option (10 years)).

 

Repricing of Stock Options.  The 2002 Plan prohibits the repricing of stock options and does not contain a full reload feature. The proposed 2010 Plan contains similar provisions.

 

Cash LTIP Awards.  While no Cash LTIP award was granted in fiscal 2010, in the past, we have granted contingent, long-term incentive cash awards (which we refer to as “Cash LTIP” awards) under our LTI to our executives and to other key employees. We granted these awards because we believed they provide a strong incentive for achieving specific financial performance goals that are consistent with our business strategy and

contribute to long-term shareowner value. Payment of Cash LTIP awards was based solely on company performance over three years. Individual Cash LTIP awards were targeted at market value for comparable positions, utilizing the same comparative compensation data we use for setting total annual compensation. The plan under which these awards were granted (the 2002 Plan) allows for them to be settled in stock; however, we paid amounts earned under these awards in cash to balance the cash and equity components of our LTI program. These Cash LTIP awards have aided us in retention because they are subject to forfeiture if the awardee’s employment terminates for any reason other than death, disability or retirement before the end of the three-year performance period.

 

The following table presents the possible payouts for Cash LTIP awards at different levels of performance:

 

 

With respect to each performance goal, there is no payment of that portion of the LTIP if actual performance is less than 80% of the performance goal. Under the terms of the 2002 Plan, measurement of business results against the goals may be adjusted to account for the effects of unusual events.

 

Target Bonus Amounts.  Target bonus amounts for our executives are determined on an individual basis considering the executive’s performance and career potential (internal and individual factors), as well as the competitive market level for long term compensation for similar positions (external factors). The committee set target bonus amounts for our executives for the relevant 3-year cycle at its meeting in July of the first year.

 

Changes to the 2010 Long-Term Incentive (LTI) Program.  In 2010, for awards under the LTI, we continued to use a “portfolio approach” to deliver value to eligible employees, but we significantly reduced the value provided to our employees under this program. We used a combination of stock options and restricted stock unit awards, but we did not provide Cash LTIP awards in 2010, which in the past have represented 50% of total long-term incentive value. Accordingly, for 2010, participants in our LTI program only received 50% of target long-term incentive value. The following table shows target levels for each of our named executives under our LTI program for 2010:

 

 

Mr. DeMand forfeited all restricted stock units and stock options received under the 2010 LTI when he left the company in May 2010.

 

Results for 2008 — 2010 LTIP Cycle.  In July 2007, we granted LTIP awards for the fiscal 2008-2010 cycle payable in August 2010 if the company achieved specified performance goals over that period based on two equally weighted business measurements: EPS and ROIC. For LTIP purposes, EPS is calculated on a cumulative basis by summing the adjusted EPS disclosed in our financial results at fiscal year end for each of the three years in the cycle. ROIC is measured at the end of the three-year cycle. EPS and ROIC were selected because the committee believes they are strong indicators of our financial and operational success and are key drivers of long-term shareowner value. The performance goals for the 2008-2010 LTIP cycle were: (a) EPS (cumulative target of $10.03); and (b) ROIC (end of period target of 14.8%). The committee set these performance goals well before the global economic and financial crises that began in 2008. When it set the performance goals, the committee considered our internal, confidential three-year business plan at the time the awards were established. Considering the strategic goals of the company, as well as other factors contained in the plan, the committee believed at that time that the goals were achievable, but that achievement would require a high level of financial performance over the three-year period. For the period in question, the company did not achieve the EPS target or the ROIC target. Accordingly, no payout was earned under this cycle.

2009 — 2011 LTIP Awards.  In July 2008, the committee granted LTIP awards for fiscal years 2009-2011, payable in August 2011, if the company achieved specified performance goals. Performance goals for the 2009-2011 LTIP cycle were once again based upon EPS and ROIC. Due, in large part, to the significant effect of the world-wide economic and financial crises experienced in 2008 and 2009, and the resultant decrease in the global manufacturing industry, the 2009-2011 LTIP cycle is not projected to have a payout.

 

No LTIP Awarded for 2010 — 2012 Cycle.  In July 2009, due to the limited visibility and the uncertainty regarding the timing and extent of economic recovery in the global markets we serve, and the resulting difficulty in reliably projecting our results of operations, the committee did not grant LTIP awards for the 2010-2012 cycle to our executives or the other participants in the LTI program. As a result, all LTI participants received only 50% of their targeted value of long term incentives in 2010.

 

Changes to the LTI for 2011.  In July 2010, in light of the improvement in our business conditions, the committee reinstated the full value of the LTI for all participants in the 2011 LTI program. For certain of our executives, including our named executives (except Mr. DeMand), the committee approved certain changes in the design of our LTI program to include an annual grant of performance stock units. Target LTI opportunities remained the same for all named executives except for Mr. Weihl, whose target level was increased to $500,000 as a result of his promotion, and Mr. DeMand, who is no longer a participant. In August 2010, eligible executives received 20% of their LTI value in restricted stock units (time vested); 30% of their LTI value in stock options (time vested and expiring in 10 years); and 50% of their LTI value in performance stock units (able to be earned pro rata each year if we meet certain performance goals over a 3-year period, and also subject to a service condition that requires the executive to be employed by us at the payment date after the 3-year performance period ends). These and other less significant design changes to our LTI will be described in more detail in our 2011 Proxy Statement.

 

Strategic Transformational Equity (STEP) Program.  In 2008, the committee approved a special, long-term program under the 2002 Plan called the 2008 Strategic Transformational Equity Program (the “STEP”). The STEP was designed to propel the company to superior levels of performance that, if achieved, would have provided an opportunity for premium compensation to participants and a significant return to our shareowners. The STEP had a retention component as well, because the awards are generally forfeited if a participant terminates his employment with the company during the four-year period that began October 1, 2007 and ends September 30, 2011 (the “Performance Period”).

 

Each STEP participant was awarded a certain number of stock units under the STEP (the “Units”); the Units were granted at the maximum level. In general, Units could be earned if certain performance conditions were met at certain measurement dates during the Performance Period.

 

Performance Conditions.  The STEP awards were broken down in to two components with thirty five percent (35%) of the total number of Units which a participant could earn based on our total shareowner return at the measurement dates and sixty five percent (65%) of the total number of Units which a participant could earn based on our cumulative adjusted earnings per share on the same measurement dates (these conditions are referred to in this discussion as the “Performance Conditions”). The Performance Conditions were designed to require exceptional financial performance during the Performance Period.

 

Payout under the STEP.  The payment of any Units earned under the Program was also conditioned upon the participant being employed by us on the payment date, subject to certain limited exceptions (such as death and disability). According to current projections, we do not expect the Performance Conditions under the STEP to be satisfied. As a result, we do not believe that there will be a payout under the STEP.

 

Special Recognition, Attraction and Retention Awards

 

On a limited and selective basis, we sometimes pay additional compensation to our employees in the form of special recognition, attraction or retention awards. For example, we may provide a special award to an individual to reimburse him/her for compensation he/she would forfeit by terminating previous employment, or to recognize contributions to a critical strategic initiative.

 

Employees at all levels of the company are eligible to receive special awards. We may provide awards in the form of cash bonuses, equity awards, or via a mixture of cash and equity awards, in each case depending on the

reason for the bonus. The amount of any special recognition or retention award depends on the reason it is being granted. The committee must approve any special awards for our executives.

 

For 2010, we granted a limited amount of special recognition awards in cash for employees of the company who performed exceptionally throughout the year or contributed significantly to strategic initiatives during a particularly challenging period. The committee approved special recognition awards for three of our executives, including a strategic bonus award for Mr. Weismann. Management recommended and the committee approved an award of $65,000 for Mr. Weismann, in part because he steadily increased his responsibilities throughout 2010, culminating in his assumption of responsibility for both our MSSG and AMSG business units upon Mr. DeMand’s departure, and in part because of his leadership and direction of the implementation of our new operating structure.

 

Additionally, the committee granted certain of our executives, including all of our named executives, a retention award on February 1, 2010. The retention grants were in the form of restricted stock units that cliff vest on the third anniversary of the grant date. The committee granted these retention awards because it recognized that these executives were personally committing extraordinary time and effort to our restructuring initiatives while continuing to keep their global teams focused on growing our business and servicing our customers. Certain of them were transitioning in to new executive roles with increased responsibilities during our transition, and several more were occupying multiple roles while we implemented our new operating structure. The economic situation was uncertain and each of them made leading our global team through the recession and back to profitability their first priority. Finally, each of them had their target long-term compensation significantly reduced due to the fact that our 3-year LTIP awards paid out at 25% for the cycle ending in 2009 and no payouts were expected for the cycles ending in 2010 or 2011. Additionally, we did not grant a 3-year Cash LTIP award in 2010, due to the challenging business conditions we were facing, which reduced the value of their long-term incentive opportunity by 50%. The committee believed that these circumstances, when combined, raised the potential that one or more of our executives would look for a position with another company. Since we believe that our executives are strong leaders with valuable skills and experience that contribute significantly to our success, the committee considered the retention grants an appropriate way to recognize their contributions and provide an incentive to remain focused on the execution of our business strategies. The retention grants are described in the ‘2010 Grants of Plan-Based Award’ table.

 

Retirement Programs

 

We maintain both qualified and non-qualified defined benefit retirement plans that are designed to work together to provide retirement pay to our executives. We provide pension and retirement benefits as part of our broader executive compensation program to attract and retain our executives.

 

Qualified Plans.  We maintain two principal qualified retirement plans for substantially all U.S. employees, including our executive officers. The Retirement Income Plan (“RIP”) is a defined benefit pension plan. As of December 31, 2003, the RIP was frozen for non-grandfathered participants and is no longer offered to new employees. None of our named executives were grandfathered under the RIP. The Thrift Plus Plan (“TPP”) is a defined contribution or “401(k)” plan in which all of our executives participate.

 

Non-Qualified Plans.  We maintain two non-qualified retirement plans for our executives. Certain of our executives participate in the Supplemental Executive Retirement Plan (“SERP”), which provides for monthly payments for a participant’s lifetime. Under the SERP, there is no right to payments if a participant leaves the company before age 56; beginning at age 56, benefits in the SERP vest 20% per year until the age of 60, when benefits become 100% vested.

 

In 2007, the committee replaced the SERP with the Executive Retirement Plan (“ERP”). Only those executives for whom vesting under the SERP had commenced as of December 31, 2006 continue to participate in the SERP. Executives who were not vested under the SERP, including all of our named executives, participate in the ERP, which provides for a lump sum payment of benefits to a participant upon termination (but only to the extent the executive has vested under the plan).

The amount payable under each retirement plan for each named executive is determined by the plan’s benefit formula. The amount of benefits varies based upon the plan, the executive’s years of service with us, and the executive’s compensation.

 

Executive Benefits and Perquisites

 

In 2010, our executives received various perquisites from us: officer life insurance, financial planning, executive physical, and in certain instances, a country club membership. They were also able to use the health club facilities we maintain for our employees at our headquarters in Latrobe, Pennsylvania at no cost to them. The value of these perquisites was imputed as income to the executive and taxed accordingly; therefore, we also provided a tax gross-up payment to the executive to reimburse him for approximate amounts of additional tax liability as a result of receiving these benefits.

 

In June 2010 we examined our approach to perquisites and recommended certain changes to the committee. To promote our emphasis on the health, safety and wellness of our employees, the committee decided to retain officer life insurance and an annual executive physical. We have eliminated all other perquisites and all perquisite-related tax-gross-ups and, beginning in our 2011 fiscal year, will provide each executive officer with an annual allowance of $20,000. The allowance may be used by the executive in his or her discretion for financial planning fees, business or country club memberships, or any other appropriate perquisite, and will not be grossed up for tax purposes.

 

Perquisites represent a small portion of our overall executive compensation package. We only provide perquisites that we consider reasonable in nature, and we provide them because we believe that the inclusion of limited perquisites in our executive compensation program enhances the program’s competitiveness and aids in the attraction and retention of executives. As it did in 2010, the committee periodically reviews the perquisites to ensure that they are appropriate in light of our total compensation program and market practice.

 

The amounts of specific executive perquisites for 2010 are listed in a supplemental table in the footnotes to the “2010 Summary Compensation Table.” Other than these perquisites, our executives have the same benefits that are generally provided to other salaried employees, including eligibility to participate in group medical and dental plans, vision, long- and short-term disability, group life insurance, accidental death and dismemberment insurance, business travel accident insurance, health care and dependent care spending accounts, qualified retirement plans, and other benefits, in accordance with the terms of the programs.

 

Stock Ownership Guidelines and Insider Trading Policy

 

We have adopted Stock Ownership Guidelines for directors, executives and key managers to effectively link the interests of management and our shareowners and to promote an ownership culture throughout our organization. We believe that stock should be acquired and held in quantities that encourage management to make decisions and take actions that will enhance company performance and increase its value. These guidelines were first adopted in 1995 and are reviewed annually by the committee at its October meeting as a standing agenda item. Employees and directors have five years from the date they become subject to the guidelines to acquire the requisite holdings. The current guidelines are:

 

Shares owned outright, restricted stock and restricted stock units, deferred stock credits, and shares owned in benefit plans (such as a 401(k)) count toward fulfilling the ownership guidelines. Due to the contraction of the stock market and the price of our shares during 2009 and 2010, certain executives have fallen below their required ownership levels. The committee will evaluate the status of ownership for each executive in October 2010 and will determine at that time whether the guidelines need to be addressed.

 

We have an insider trading policy that prohibits executives from engaging in any transaction in our stock unless that transaction has been pre-cleared and approved. Although we generally do not mandate when executives may trade, our policy strongly encourages them to trade only during established window periods, which open 2 days after our quarterly earnings release and remain open for one month thereafter.

 

Employment Agreements

 

We have employment agreements with all of our executive officers. We have summarized the material terms of these agreements below. Mr. Cardoso’s agreement contains some modified provisions, which are identified where applicable in the summary.

 

General.  The agreements require our executives to devote their entire time and attention to the business of Kennametal while they are employed.

 

Term.  There is no predetermined term. Each executive entered into the agreement upon commencing duties as an executive officer of our company.

 

Compensation.  The executive officer’s base salary, size of bonus award, if any, and any other compensation for services are not specified under the agreements but rather are determined by the committee upon the commencement of employment and assignment of the executive to a salary band. Thereafter, the committee makes determinations regarding base salary, incentive awards, and all other components of compensation as described in this Compensation Discussion and Analysis.

 

Mr. Cardoso’s agreement was amended December 6, 2005 to, among other things, set his primary Prime Bonus target level at 90% of his base salary. (Mr. Cardoso’s current incentive opportunities are discussed elsewhere in this Compensation Discussion and Analysis and in the executive compensation tables that follow.)

 

Non-competition / non-disclosure.  Unless we consent in writing, if an executive voluntarily terminates his employment or we terminate his employment for cause, then for three years after the date of termination, the executive officer can not, in any geographic area in which Kennametal is offering its services and products: (a) directly or indirectly engage in, or (b) assist or have an active interest in, or (c) enter the employ of, or act as agent for, any entity which is or is about to become directly or indirectly engaged in any business that is competitive with any business of the company or any of our subsidiaries. The non-competition provisions do not apply if we terminate an executive without cause. However, in case of termination for any reason, the executive officer can not disclose any of our confidential or trade secret information.

 

Assignment of Inventions.  Each executive officer must assign to us all inventions conceived or made during his employment with Kennametal.

 

Termination.  The executive officer’s employment may be terminated by either party at any time, for any reason or no reason at all; provided, that the company may only terminate an executive officer’s employment with the approval and authorization of the Board.

 

Severance.  If, with Board authorization, we terminate an executive officer’s employment (other than Mr. Cardoso’s) prior to a change in control and not for cause, the executive is entitled to 12 months severance in the form of salary continuation. Our executive officers are not entitled to severance under any other termination scenario outside of a change in control context.

 

If, with Board authorization, Mr. Cardoso’s employment is terminated by us prior to a change in control and not for cause, Mr. Cardoso is entitled to up to 24 months severance in the form of salary continuation. Severance amounts would be offset by any salary earned by Mr. Cardoso in the event he obtains other employment during that 24-month period.

Change in control.  Under certain circumstances, the agreement provides for payments to an executive officer if his employment is terminated after a change of control. See “Termination Conditions and Arrangements” below and the “Potential Payments Upon Termination or Change in Control” section of this proxy statement for a more detailed discussion.

 

Termination Conditions and Arrangements

 

In a non-change in control context, our employment agreement with our executives provides for severance if the executive’s employment is terminated by us without “cause.” Additional details regarding the severance provisions and potential payments to our named executives outside of a change in control context can be found in the “Potential Payments upon Termination or Change in Control” section.

 

Our executive employment agreement, stock and incentive plans and certain of our retirement and post-employment plans contain change in control provisions. The change in control provisions in the executive employment agreement are applicable only for those executives that have entered into these agreements, which includes each of our named executives (except Mr. DeMand, whose agreement is no longer in effect). The provisions of our incentive plans and retirement plans are applicable to a broader base of our employees and include all those who participate in those plans. We include these provisions because we believe they help to align executive, company, and shareowner interests. If we evaluate a possible transaction, we want our management to focus on the potential fit with our corporate goals and strategy and the creation of long-term value for our shareowners. We believe that change in control protections enable our management to consider corporate transactions objectively and to decide whether they are in the best interests of the company and its shareowners without undue concern over whether the transactions may jeopardize future employment.

 

The change in control protections under the executive employment agreement only provide payments upon the occurrence of a “double trigger.” For severance benefits to be “triggered,” a change-in-control must take place and an executive must be involuntarily terminated (not for “cause”) or must leave for “good reason” within 36 months following the change-in-control. For additional information concerning the change in control arrangements for our named executives, see the “Potential Payments upon Termination or Change in Control” section of this proxy statement.

 

Recoupment of Awards and Incentive Payments

 

In any case where there has been an allegation of fraud or misconduct, the Board of Directors would investigate and carefully review the facts and circumstances of the alleged misconduct before determining the appropriate course of action. If, after completing its investigation, the Board were to determine that an employee or officer did engage in fraudulent behavior or misconduct, the Board would take appropriate action, which could include, among other things, termination of employment, institution of legal proceedings against the wrongdoer, or bringing the misconduct to the attention of the proper authorities. If the misconduct results in a material restatement of Kennametal’s financial results, then the Board, in addition to the above remedies, may also seek repayment of any bonus received for the period restated, seek repayment of gains realized as a result of exercising stock options awarded for the period restated, or cancel any outstanding stock options or other equity or incentive compensation.

 

Kennametal also incorporates restrictive covenants (prohibiting working for competitors for a period following separation from employment and disclosure of confidential or proprietary information) into the executive employment agreements, the STEP, the SERP, and the ERP. If the Board of Directors determines that a violation of any one of these covenants has occurred, it may, in its discretion, discontinue any future payments and/or take appropriate legal action to recoup amounts paid under these programs.

 

Tax, Accounting, and Regulatory Considerations

 

We consider the affect of tax, accounting and other regulatory requirements in designing and implementing compensation programs, and while these factors may impact plan designs, ultimately decisions reflect the pay strategy of the company and the program intent.

Section 162(m) of the Internal Revenue Code of 1986, as amended, imposes a $1 million limit on the amount that a public company may deduct for compensation paid to the company’s CEO or any of the company’s three other most highly compensated executive officers who are employed as of the end of the year. This limitation does not apply to compensation that meets the requirements under Section 162(m) for “qualifying performance-based” compensation (i.e., compensation paid only if the individual’s performance meets pre-established objective goals based on performance criteria approved by shareowners). For 2010, payments, if any, of annual bonuses under the Prime Bonus Plan and long-term performance awards were intended to satisfy the requirements for deductible compensation.

 

Tools and Analytics

 

The committee utilizes various tools and analytics provided by both Towers Watson and our internal management and human resources personnel to execute its duties. These tools and analyses provide internal and external context and perspective to assist the committee with its decision making process. The committee reviews and considers the following information, as appropriate, when making compensation decisions:

 

 

The information above is reviewed either annually or by special request of the committee.

 

Compensation for Non-Employee Directors

 

The Nominating/Corporate Governance Committee has responsibility for the review and oversight of non-employee director compensation. The role of the Nominating/Corporate Governance Committee in this context is explained in further detail in the “Ethics and Corporate Governance” section of this proxy statement. The compensation of non-employee directors in 2010 is described more fully in the “Board of Directors Compensation and Benefits” section of this proxy statement.

 

The Compensation Committee (“we” or “the committee”) recommends an overall compensation policy to the Board, has direct responsibility for matters relating to compensation of the executive officers, advises the Board regarding management succession, and administers the company’s equity compensation plans and deferred compensation plans. Management has the primary responsibility for the company’s financial statements and reporting process, including the disclosure of executive compensation. With this in mind, we have reviewed and discussed with management the Compensation Discussion and Analysis section of this proxy statement. Based on that review, we have recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement for filing with the Securities and Exchange Commission.

 

Compensation Committee

 

William R. Newlin, Chair

Ronald M. DeFeo

Philip A. Dur

A. Peter Held

Lawrence W. Stranghoener

Steven H. Wunning

Executive Compensation Tables

 

The Executive Compensation Tables show the compensation paid to our Chief Executive Officer, our Chief Financial Officer, and the three other most highly compensated executive officers for 2010. Because it is required under SEC rules, they also include information for Paul J. DeMand, our former Vice President and President, Metalworking Solutions and Services Group, who left the company in May 2010. These individuals are our named executive officers for 2010, and are referred to as “named executives” in the tables and the narrative disclosure that accompanies them.

 

2010 Summary Compensation Table

 

 

Notes and Supplemental Tables to the “2010 Summary Compensation Table”

 

 

 

 

 

 

2010 Grants of Plan-Based Awards