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

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

 

Notice of Annual Meeting of Shareowners
to be held October 23, 2007

 

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 23, 2007 at 2:00 p.m. (Eastern Time) to consider and act upon the following matters:

 

1. The election of three directors for terms to expire in 2010; and

 

2. The ratification of the selection of the independent registered public accounting firm for the fiscal year ending June 30, 2008.

 

Shareowners also will be asked to consider such other business as may properly come before the meeting. The Board of Directors has fixed Tuesday, September 4, 2007 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) will need to 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 and return it in the enclosed envelope, or vote by telephone or via the Internet as instructed on the enclosed form of proxy, to ensure your shares are voted at the Annual Meeting.

 

By Order of the Board of Directors

 

 

David W. Greenfield

Secretary

 

September 14, 2007

 

TABLE OF CONTENTS

 

Proxy Statement for Kennametal Inc. Annual Meeting of Shareowners

 

October 23, 2007

 

General Information

 

When is the 2007 annual meeting?

 

The 2007 annual meeting will be held on Tuesday, October 23, 2007 at 2:00 p.m. 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.

 

When was this Proxy Statement mailed to shareowners?

 

This proxy statement was first mailed to shareowners on or about September 14, 2007.

 

Why did I receive this Proxy Statement?

 

The Board of Directors of Kennametal Inc. (“Kennametal” or the “company”) is soliciting proxies to be voted at the annual meeting of shareowners (the “annual meeting”) to be held on October 23, 2007, and at any adjournment of the annual meeting. When the company asks 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?

 

Two 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 gives discretionary authority to the persons named on the proxy 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 Tuesday, September 4, 2007 (the “record date”) may vote at the annual meeting. For all 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, 38,900,380 shares of company 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 differing vote requirements for the two proposals.

 

 

Broker nonvotes.  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 election of directors and the ratification of the selection of the auditors, the broker may vote your shares in its discretion. For certain other non-routine proposals, though, the broker may not vote your shares at all. When that happens, it is called a “broker nonvote.” There are no proposals of this type to be voted upon for this year’s annual meeting.

 

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.

 

 

Note that if you previously elected to receive proxy-related materials electronically, you did not receive a proxy card. If you wish to vote by mail, rather than by telephone or on the Internet as discussed below, you may request paper copies of these materials, including a proxy card, by calling 1-866-211-6288. Please make sure you give us the control number from the e-mail message that you received notifying you of the electronic availability of these materials, along with your name and mailing address.

 

 

Voting In Person.  If you are a shareowner of record, you may vote your shares in person at the meeting. However, we encourage you to vote by proxy card, by telephone, or on the Internet even if you plan to attend the meeting.

 

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 the company’s Secretary in writing or (2) delivering a later-dated proxy 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 form of proxy (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 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 and for the ratification of the selection of the independent auditor.

 

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 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 (formerly Mellon Investor Services LLC), 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 will need to 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 admittance or parking, you may call 724-539-5000.

 

Does the company offer an opportunity to receive future proxy materials electronically?

 

Yes. If you are a shareowner of record you may, if you wish, receive future proxy statements and annual reports online. If you would like to elect this feature, you may enroll at www.melloninvestor.com/ISD. Once enrolled, you will have secure online access to your proxy materials, statements, tax documents and other important shareowner correspondence.

 

If you received these materials electronically, you do not need to do anything to continue receiving materials electronically in the future. If you hold your shares in a brokerage account, you may also have the opportunity to receive proxy materials electronically. Please follow the instructions of your broker.

 

What are the benefits of electronic delivery?

 

Electronic delivery reduces the company’s printing and mailing costs. It is also a convenient way for you to receive your proxy materials and makes it easy to vote your shares online. If you have shares in more than one account, it is an easy way to avoid receiving duplicate copies of proxy materials.

What are the costs of electronic delivery?

 

The company charges nothing for electronic delivery. You may, of course, incur the usual expenses associated with Internet access, such as telephone charges or charges from your Internet service provider.

 

May I change my mind later?

 

Yes. You may discontinue electronic delivery at any time. If you have questions about electronic delivery or wish to elect or discontinue electronic delivery, you may contact BNY Mellon Shareowner Services (formerly, Mellon Investor Services LLC) by any of the following methods:

 

 

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 separate copy of the annual report and proxy statement?

 

If you participate in householding and wish to receive a separate copy of the 2007 annual report and proxy statement, or if you wish to receive separate copies of future annual reports and proxy statements, please call our Secretary at 724-539-6578 or write to Kennametal Inc., Attention: Secretary, 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania 15650-0231. We will deliver the requested documents to you promptly upon your request.

 

How do I contact the company or the Board of Directors?

 

The address of the principal executive offices of Kennametal Inc. is 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania 15650-0231.

 

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

 

Kennametal Inc.

c/o Corporate Secretary

1600 Technology way

P.O. Box 231

Latrobe, Pennsylvania 15650-0231.

 

All such communications will be forwarded to the relevant director(s), except for solicitations or other matters unrelated to the company.

 

What are the procedures for submitting a shareowner proposal or nomination for the 2008 annual meeting?

 

The company’s 2008 annual meeting is expected to be held in October 2008. 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 17, 2008. Proposals should be addressed to the company’s Secretary at Kennametal Inc., 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania 15650-0231. 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, the company’s By-Laws provide that any shareowner wishing to propose any other business at the annual meeting must give the company written notice no earlier than May 1, 2008 and no later than July 1, 2008. That notice must provide certain other information as described in the By-Laws.

 

Shareowner nominations for directors to be elected at the 2008 annual meeting must be submitted to the Secretary in writing no earlier than May 1, 2008 and no later than July 1, 2008. 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 by submitting a written request to the company’s Secretary at Kennametal Inc., 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania 15650-0231.

 

Who pays for the solicitation of proxies?

 

Kennametal pays all costs related to the 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., Inc. 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 in connection with the solicitation; we do not expect those fees and expenses to exceed $35,000. 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 “2007” mean the fiscal year beginning July 1, 2006 and ending June 30, 2007.

 

ELECTION OF DIRECTORS

 

Proposal I. Election of Directors

 

The terms for each of the following directors will expire at this year’s annual meeting: Carlos M. Cardoso, A. Peter Held, and Larry D. Yost. Each of these directors has been nominated by our Board of Directors and is standing for election to serve another term that will expire in 2010. The table below provides additional information about each nominee and each director whose term of office will continue after the annual meeting.

 

Our Board of Directors selected the persons named in the enclosed proxy (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, 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 three individuals who receive the largest number of votes cast will be elected as Directors of the Third Class.

 

The Board of Directors unanimously recommends a vote FOR the election of each of the nominees.

 

 

 

 

ETHICS AND CORPORATE GOVERNANCE

 

Code of Business Ethics and Conduct

 

All directors, officers and employees of the company, 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 “Corporate” 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.

 

Corporate Governance Guidelines

 

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 “Corporate” tab. You may also request a copy in paper form from the company’s Secretary. Any changes to the Guidelines in the future will also be posted on our website.

 

The following summary provides highlights of the Guidelines and related matters:

 

Selection of New Director Candidates

 

 

Board Membership Criteria

 

 

Board Composition and Independence

 

 

 

 

 

Outside Board Membership

 

 

Retirement Age

 

 

Conflicts of Interest

 

 

Directors Orientation and Continuing Education

 

 

Board Compensation

 

 

Lead Director

 

 

Selection of Agenda Items for Board Meetings

 

 

Distribution of Board Materials

 

 

Executive Sessions of the Board/Communications with Directors

 

 

 

 

All communications regarding our company will be forwarded to the appropriate director or directors as soon as practicable.

 

Board Access to Management and Independent Advisors

 

 

Assessing the Performance of the Board

 

 

Board Committees

 

 

Board of Director Review and Approval of Related Person Transactions

 

 

 

 

 

Formal Evaluation of the Chief Executive Officer

 

 

Succession Planning

 

 

Review of the Guidelines and Code of Business Ethics and Conduct

 

 

BOARD OF DIRECTORS AND BOARD COMMITTEES

 

Meeting Information

 

The Board of Directors held 5 meetings during 2007. Each director attended at least 75% of the total number of meetings of the Board and the committees on which he serves. We expect our directors to attend our Annual Meeting of Shareowners absent exceptional circumstances. All of the current members of the Board of Directors attended the Annual Meeting in October 2006.

 

The table below shows committee membership and the number of meetings of the full Board and each committee in 2007.(1)

 

 

 

 

Board Committees

 

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 is accessible under the “Corporate” 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.

Committee Functions

 

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 “Audit Committee Report” beginning on page 17. The Board has determined that all of the members of the Audit Committee are “financially literate,” and that Mr. Stranghoener and 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; 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 “Compensation Discussion and Analysis” beginning on page 20.

 

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 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 2008 annual meeting?” under the “General Information” section of this proxy statement.

 

Board of Directors Compensation and Benefits

 

The Board has delegated primary responsibility for matters relating to compensation of our directors to the Nominating/Corporate Governance Committee. Prior to 2007, this responsibility resided with the Compensation Committee. In 2007, the charter for the Nominating/Corporate Governance Committee was amended to include as one of the committee’s primary functions responsibility for director compensation. Because the committee is also responsible for the recruitment of new directors and ensuring that the Board and committees are properly constituted, it was 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. Currently, the committee engages Sibson Consulting as its outside compensation consultant for matters related to director compensation.

 

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” on page 31 of the “Compensation Discussion and Analysis” section.

 

Overview of Director Compensation

 

Directors who are employees receive no additional compensation for serving as a director and do not serve on any committee. Our non-employee directors receive a combination of cash and equity compensation for their services as a director or committee member.

Cash Compensation

 

We provide non-employee directors the following cash compensation:

 

 

 

 

Equity Compensation

 

Equity compensation for our non-employee directors consists of:

 

 

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 paid by the company for this insurance. Directors are also reimbursed for travel and related expenses for attendance at Board or committee meetings.

 

Deferred Fee Plan

 

We have a Deferred Fee Plan for Outside Directors (the “Deferred Fee Plan”). On an annual basis, our non-employee directors may request that the payment of any Board or committee compensation be deferred for payment to a later time (with interest at a rate of prime minus 2%). In addition, 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, 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 on page 40.

 

Matching Gift Program

 

Directors are eligible to participate in our Matching Gifts Program, which is 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.

 

2007 Director Compensation

 

The following table shows the compensation we paid to our non-employee directors for service on the Board and applicable committees in 2007:

 

2007 Non-Employee Director Compensation(1)

 

 

 

 

 

 

 

 

AUDIT COMMITTEE REPORT

 

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 controls over financial reporting in accordance with standards established by the Public Company Accounting Oversight Board and issuing a report thereon. 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 the company’s employees, 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 Fiscal Year 2007

 

We held nine (9) meetings in fiscal year 2007. 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 fiscal year 2007 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, 2007 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, relating to communication with audit committees. We received from PwC written disclosures and the letter regarding PwC’s independence as required by Independence Standards Board Standard No. 1, describing all relationships between PwC and the company that might bear on PwC’s independence, and discussed with PwC their independence.

 

Based on these reviews and these meetings, discussions and reports, we recommend 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, 2007, for filing with the SEC. We have, subject to shareowner ratification at the 2007 Annual Meeting of Shareowners, retained PwC as the company’s auditor for the fiscal year ending June 30, 2008.

 

Audit Committee

 

Lawrence W. Stranghoener, Chair

Ronald M. DeFeo

A. Peter Held

Timothy R. McLevish

 

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Proposal II. Ratification of the Selection of the Independent Registered Public Accounting Firm

 

The Audit Committee elected to retain PricewaterhouseCoopers LLP (“PwC”) as the company’s Independent Registered Public Accounting Firm (“auditors”) for the fiscal year ending June 30, 2008. 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, 2008. 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 fiscal year 2007. The Audit Committee reviewed the non-audit services provided by PwC in fiscal year 2007 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 fiscal 2006 and 2007 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, 2008.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Executive Compensation Philosophy

 

The Compensation Committee (referred to in this discussion as the “committee”) has primary responsibility for the oversight and administration of our executive compensation program. Members of management work with the committee 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 executive officers (“executives”), including our named executive officers (“named executives”)¹. The committee makes compensation decisions based upon Kennametal’s overall compensation philosophy, which is comprised of the following basic principles:

 

 

Objectives of the Executive Compensation Program

 

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

 

 

 

¹ Although Ms. Smith and Mr. Tambakeras have been included in our named executives for purposes of the executive compensation tables and the narrative discussion that accompanies them, specific discussion in this Compensation Discussion and Analysis is limited to the named executives who remained with the company throughout 2007 (Messrs. Cardoso, Duzy, Hsu, Keating, and Simpkins). Mr. Keating submitted his resignation to us effective August 17, 2007; as a result, the discussion of long term incentives and certain other matters in this section does not include information related to him.

 

Design of Our Executive Compensation Program

 

Overall Design

 

We’ve designed our executive compensation program to target pay, in the aggregate, at the median level for similar positions within our industry with the potential for above or below median compensation depending on company and individual performance. We may deviate from the median if, in the judgment of management and/or the committee, the value of an individual’s experience, performance and specific skill set warrants. For individual executives, pay may also vary depending on:

 

 

The foundation of our executive compensation program is a system of salary grades. Executive positions are structured such that the grade of the position generally defines opportunities for base salary, annual incentives and long-term incentives. There are broad pay ranges for the salary grades, 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 must reflect 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:

 

 

Although individual and company performance are weighted most heavily in compensation decisions, the committee also considers external factors, market and survey data and pay positioning for our executives relative to market data, as explained in further detail below under the subheading “Pay Positioning Relative to Market — Benchmarking.”

 

At-Risk Compensation and Promotion of Long-Term Perspective

 

Allocation Policies.  Our allocation policies further our philosophy of placing a significant amount of our executives’ targeted total compensation at-risk and promoting a long-term perspective.

 

 

 

 

Competitive Compensation

 

Pay Positioning Relative to Market — Benchmarking

 

We benchmark compensation levels 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. We currently use the same custom peer group to benchmark both performance and compensation factors.

 

Our peer group consists of these 17 companies:

 

 

Many of the companies in the peer group were selected because they are similar to Kennametal in terms of revenue, operational scope, or organizational complexity. Some of the peers are larger than we are; they were included to help understand the effect size and complexity has on compensation levels and designs. We periodically review our peer group to ensure that the peer companies continue to be appropriate comparisons for performance purposes and for compensation purposes.

 

We provide the committee with the results of our benchmarking efforts on a regular basis. We collect compensation data for the 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. We use the benchmarking data to assess the competitiveness of our executives’ pay compared to the pay 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.

How Compensation Decisions Are Made

 

Role of Committee and CEO in Determining Executive Compensation

 

The committee has primary responsibility for assisting the Board in evaluating executive performance, including that of the President and Chief Executive Officer (the “CEO”), and for overseeing the development of executive succession plans. As part of this responsibility, the committee oversees the design, development and implementation of the executive compensation program for the CEO and the other executives. Although the committee solicits information from our management and from its outside compensation consultant during the compensation-setting process, it is the committee that ultimately sets and approves compensation for our CEO and other executives.

 

Each year, the committee reviews all components of compensation for each of our executives over the course of several regularly scheduled meetings from April to July. The committee is assisted in its review by members of management, the human resources department, and its outside compensation consultant. Decisions regarding individual components and compensation changes take into account information specific to the executive, including the executive’s current compensation, future potential, performance, 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 specified 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 in executive session annually at the beginning of the fiscal year to agree upon the CEO’s performance goals (both individual and company objectives) for the year. At the end of the year, the committee evaluates the performance of the CEO and determines CEO compensation in light of the goals and objectives of the compensation program.

 

Other Executive’s Compensation.  The CEO assists the committee in making compensation decisions for all executives other than the CEO. The CEO and the committee together assess the performance of the other executives and determine their compensation, based on initial recommendations from the CEO. The other executives do not play a role in their own compensation determination, other than discussing individual performance objectives and achievements with the CEO.

 

Role of the Compensation Consultant

 

The committee has engaged Sibson Consulting as its outside executive compensation consultant. Sibson consultants receive direction from, and are accountable to, the committee and have served in that capacity since February 2005. The committee solicits advice and counsel from Sibson on all matters pertaining to executive compensation design and delivery. Specifically, Sibson provides the following types of services to the committee:

 

• Competitive data and benchmarking analytics for all components of pay for executive officers and the CEO

 

• Equity dilution, value sharing, and performance assessment analyses relative to peers

 

• Compensation program analysis, redesign considerations, and recommendations

 

• Tax, accounting, regulatory, and other compensation-related education

 

• Individual pay considerations for the CEO, as well as executive officer promotions and new hires

 

• Review of compensation plan payouts for the CEO and executive officers

 

• Proxy statement review and recommendations

 

Sibson attends all committee meetings and may attend executive sessions at the request of the committee. Sibson consultants may also collaborate with our management team for purposes of meeting planning, program design and analysis and other logistics, but all services performed by Sibson are ultimately at the direction of the committee.

Components of Kennametal’s Executive Compensation Program

 

The components of our executive compensation program are:

 

• Base salary;

 

• Annual incentives — primarily the Prime Bonus Plan;

 

• Long-term incentives — namely, equity grants and long-term cash incentive awards;

 

• Special recognition and retention awards;

 

 

• Executive benefits and perquisites and other benefits.

 

Each component serves one or more of our compensation objectives, but all are designed to promote our core values as a company, further our overall compensation philosophy and align the interests of our executives with the interests of our shareowners.

 

Base Salary

 

Base salary is the fixed element of our executives’ annual compensation. The amount of base salary an executive receives depends on the salary grade of the position and the executive’s level of responsibility, skills, experience, future potential and individual performance. We target base salary levels for each position at median pay levels for similar positions in the market.

 

Annual Incentive Compensation

 

Management Performance Bonus Plan (Prime Bonus Plan).  The Management Performance Bonus Plan, which we refer to as the “Prime Bonus Plan,” was approved by our shareowners in 2005; it is a formula-based, pay-for-performance annual incentive plan. The Prime Bonus Plan is the primary vehicle we use to reward participants for their contributions to strong annual business performance. The primary purpose of the Prime Bonus Plan is to motivate participants to enable the company to achieve short-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 paid under the Prime Bonus Plan are determined according to the following formula:

 

 

As illustrated in the table below, Prime Bonus threshold and maximum amounts range from 50% of the target bonus amount to 200% of the target bonus amount based on performance achievement of between 80% and 120% of the applicable performance goal.

 

 

With respect to each performance goal, no bonus is awarded under the Prime Bonus system if actual performance is less than 80% of the performance goal. Under the terms of the Prime Bonus Plan, the committee may decide whether adjustments will be made for non-recurring or unusual items in determining whether performance goals have been met. In addition, the committee always retains discretion to make special recognition awards outside the Prime Bonus Plan. Please see the discussion under “Special Recognition and Retention Awards” for more information.

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.

 

Performance Goals

 

We link Prime Bonus opportunities directly with company performance, business unit performance and the maximization of shareowner value. To do so, we assign performance goals for each executive at the beginning of the fiscal year based upon the performance goals of the company as 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 levels achieved in the prior year. These performance goals vary by executive, are weighted and usually combine performance of the individual, the company and of the particular business unit or function for which the executive has responsibility.

 

The Prime Bonus Plan is generally designed such that 70% of an executive’s bonus opportunity is based upon the performance of the executive’s specific business unit and 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 over which he is best positioned to exert control. For certain of our named executives, including Mr. Cardoso, Mr. Duzy, Mr. Hsu and Mr. Simpkins, the bonus opportunity is based solely on the company’s overall performance.

 

*Modifier

 

At the outset of each fiscal year, the committee, in its discretion, may approve a modifier for use in the calculation of Prime Bonus amounts for that year. The calculated Prime Bonus amounts may be adjusted based upon the company’s (and/or business unit’s) performance with key initiatives. In 2007, no modifier was applied to the calculation of Prime Bonuses.

 

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 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 upward or downward in the course of its review.

2007 Prime Bonuses

 

 

For 2007, the committee approved target bonus amounts for our named executives as follows:

 

 

 

At its July 2006 meeting, the Board established performance goals for the company of: Sales Growth ($218 million); Earnings Per Share (“EPS”) ($4.25); and Return on Invested Capital (“ROIC”) (11.5%). The performance goals were consistent with the 2007 outlook publicly disclosed by the company in its earnings release in July 2006. 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.

 

 

For 2007, consistent with the company’s focus on continuous improvement, the committee set performance objectives for each of the named executives (other than the CEO) based on the financial and strategic plans for the company and, in the case of Mr. Keating, on the financial and strategic plans of his individual business unit. In each case the committee considered the targets to be aggressive but achievable with the focused effort of the individuals and systematic execution of the plans. As approved by the committee for 2007, the performance goals for the named executives were as follows:

 

Carlos M. Cardoso — President and Chief Executive Officer

 

Mr. Cardoso’s Prime Bonus opportunity in 2007 was broken down into two components:

 

 

Component (1): Performance goals were linked to overall company performance and related to Sales Growth (30% weight, $218 million target), EPS (35% weight, $4.25 target), and ROIC (35% weight, 11.5% 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 2007, including strategic business transactions and portfolio shaping (5% weight), technology development and positioning (5% weight), global expansion and growth in emerging markets (5% weight), succession planning for critical positions (5% weight)*, achievement of a specified target amount of Free Operating Cash Flow (a non-GAAP financial measure the company uses to gauge Kennametal’s cash generating capability) (5% weight), global manufacturing initiatives (2.5% weight)*, and our internal control environment (2.5% weight)*.

 

For performance goals marked with an *, Prime Bonus amounts would be paid only upon the achievement of the respective goal. For all other performance goals, performance between 80% and 100% of the target goal would be rewarded proportionally. The committee considered these performance objectives strategically important and aggressive, but achievable with concentrated effort and focus by Mr. Cardoso.

Stanley B. Duzy — Vice President and Chief Administrative Officer

William Y. Hsu — Vice President and Chief Technical Officer

Frank P. Simpkins — Vice President and Chief Financial Officer

 

Performance goals for Messrs. Duzy, Hsu and Simpkins were linked to overall company performance and related to Sales Growth (30% weight, $218 million target), EPS (35% weight, $4.25 target), and ROIC (35% weight, 11.5% target)

 

Ronald C. Keating — Vice President and President, Metalworking Services and Solutions Group (“MSSG”)

 

Performance goals for Mr. Keating were linked to both overall company performance (same as Messrs. Cardoso, Duzy, Hsu and Simpkins; 30% weight) and business unit performance for MSSG (70% weight). Specific to MSSG, performance goals related to sales growth (30% weight), earnings before interest and taxes (“EBIT”) (35% weight), and return on controllable assets (“ROCA”) (35% weight). Target levels for MSSG-related goals were set based upon MSSG’s confidential, internal financial plan for 2007. The committee considered the targets 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 MSSG were well executed.

 

 

The tables below sets forth the percentage of performance goals achieved and the amount of Prime Bonus compensation earned in 2007 for each of our named executives.

 

Carlos M. Cardoso

 

 

 

 

Named Executives other than Carlos M. Cardoso

 

 

Long-Term Incentives

 

Kennametal’s long-term incentives are designed to focus our employees on sustained, 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. All of our executives, members of senior management, and a significant number of key employees are eligible to receive long-term incentive awards. The committee must approve all equity and other long-term incentive awards for our executives.

 

We use a “portfolio approach” to deliver long-term incentives to eligible employees. The portfolio approach combines stock option awards (30% of total long-term incentive value), restricted stock awards (20% of total long-term incentive value), and cash-based long-term performance incentive awards (“LTIP” awards) (50% of total long-term incentive value). We use these different types of awards because each type of award serves a slightly different

purpose, as described below. All of our long-term incentives are designed to encourage creation of long-term value for our shareowners. They also aid in retention and help promote stock ownership by our employees.

 

All long-term incentive awards are granted under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended (the “2002 Plan”). The 2002 Plan is a shareowner approved plan that provides for the granting of nonstatutory and incentive stock options, restricted stock awards, and other types of incentive awards. The 2002 Plan is described more fully on page 39.

 

Equity Incentives

 

 

We use stock option awards as a long-term incentive because they precisely align the interests of our employees with those of our shareowners. 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 long-term incentive program, but occasionally we grant special stock option awards, either alone or in connection with restricted stock awards, to employees for attraction, retention or recognition purposes. Stock options typically vest at the rate of one-fourth per year for four years (beginning one year from the date of grant), which furthers 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.

 

 

We grant restricted stock awards to provide immediate share ownership and to directly align the interests of our employees and our shareowners. As is the case with stock option awards, we typically grant restricted stock awards annually to our executives as part of our broader long-term incentive program, but we sometimes make these grants for other purposes. For example, we may grant restricted stock awards to attract new talent or to motivate our employees. Like stock option awards, restricted stock awards typically vest at the rate of one-fourth per year for four years (beginning one year from the date of grant), which further promotes our retention objectives. Any unvested portion of a restricted stock award is forfeited if an executive voluntarily terminates his or her employment.

 

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.

 

Equity Grant Practices

 

 

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.

 

 

 

 

LTIP Cash Awards

 

Beginning in 2005, contingent long-term incentive awards, which we refer to as “LTIP” awards, have been granted each year to our executives and to other key employees. We grant these awards because we believe they provide a strong incentive for achieving specified financial performance goals that are consistent with our business strategy and important contributors to long-term shareowner value. Payment of long-term incentive awards is based solely on company performance and is targeted at market value for comparable positions, utilizing the same comparative compensation data used for setting total annual compensation. The plan under which these awards are granted (the 2002 Plan) allows for them to be settled in stock; however, we pay these awards in cash because we believe this approach appropriately balances the cash and equity components of our long-term incentive program. Cash payments are also an excellent way to reward the attainment of these performance objectives. These long-term performance awards aid in retention as they are subject to forfeiture if the executive’s employment terminates for any reason other than death, disability or retirement before the end of the three-year performance period.

 

As illustrated in the table below, LTIP threshold and maximum amounts range from 50% of the target bonus amount to 200% of the target bonus amount based on performance achievement of between 80% and 120% of the applicable performance goal.

 

 

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 2002 Plan, measurement of business results against the goals may be adjusted, at the committee’s discretion, 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 sets target bonus amounts for our executives for the upcoming 3-year cycle at its meeting in July.

 

 

In July 2004, we granted LTIP awards for fiscal years 2005-2007 payable in August 2007 if the company achieved specified performance goals 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 key indicators of our financial and operational success and are key drivers of long-term shareowner value. The performance goals for the 2005-2007

LTIP cycle were: (a) EPS (cumulative target of $10.50); and (b) ROIC (target of 11.5%). The committee believed that the goals were achievable, but achievement would require a high level of financial performance over the three-year period.

 

Results for 2005 — 2007 LTIP Cycle

 

In July 2007, the committee approved payments to each of our named executives who participated in the 2005 — 2007 LTIP cycle. For the period in question, the company achieved cumulative EPS of $12.03 and ROIC of 11.3%. Accordingly, the weighted payout percentage for each participating named executive was 134.4% of his target award amount. The actual LTIP amounts, if any, earned by our named executives are set forth in the 2007 Summary Compensation Table in the ‘Non-equity Incentive Plan Compensation’ column and related footnotes.

 

 

In July 2005 and July 2006, respectively, the committee granted LTIP awards for fiscal years (a) 2006-2008, payable in August 2008, and (b) 2007-2009, payable in August 2009, in each case only if the company achieves specified performance goals. Performance goals for both the 2006-2008 and 2007-2009 LTIP cycles were once again based upon EPS and ROIC. Awards will be paid based on achieving threshold, target or maximum levels for the specified measurements. For example, the named executives will receive only one-half of the target payment if the company, at the end of the three-year period, satisfies only a single target goal for a single measurement. The committee set the goals at levels that reflected our internal, confidential three-year business plan at the time the awards were established. The committee believes the goals for both the 2006-2008 and the 2007-2009 LTIP cycles will require a high level of financial performance over the three-year period to be achieved.

 

The potential payouts in 2008 and 2009 for each named executive (assuming both measurements are met at threshold, target or maximum levels over the three-year period) are shown in the table below:

 

 

 

 

Special Recognition and Retention Awards

 

On a limited and selective basis, we sometimes pay additional compensation to our employees in the form of special recognition 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, for retention purposes, 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. In 2007, none of our named executives received a special award.

 

Retirement Programs

 

We maintain both qualified and nonqualified 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 was 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, including Messrs. Duzy and Hsu, 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 Messrs. Cardoso and Simpkins, 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).²

 

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. Each of the retirement programs in which our executives may participate is described in further detail in the “Retirement Programs” section on page 44.

 

Executive Benefits and Perquisites

 

Our executives receive various perquisites provided by the company: health club dues, officer life insurance, financial planning, executive physical, and in certain instances, parking and a country club membership. The value of these perquisites is imputed as income to the executive and taxed accordingly; therefore, we provide 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.

 

Perquisites represent a relatively small portion of our overall executive compensation package. We believe the perquisites we offer are reasonable in nature and that the inclusion of perquisites in our executive compensation program enhances the program’s competitiveness and aids in the attraction and retention of executives.

 

The committee periodically reviews the perquisites to ensure that they are appropriate in light of the company’s total compensation program and market practice.

 

Specific executive perquisites are listed in the supplemental table on page 38. Other than these perquisites, executives have the same benefits that are generally provided to other 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

 

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

 

 

² Although Mr. Keating participated in the ERP during 2007, he voluntarily resigned his employment with the company effective August 17, 2007 prior to vesting under the ERP; accordingly, he will not receive any benefit under the ERP.

1995 and are reviewed annually by the committee at its October meeting as a standing agenda item. The current guidelines are:

 

 

We require our executives and directors to achieve their ownership requirements within 5 years. Shares owned outright, restricted stock, and shares owned in benefit plans (such as a 401(k)) count toward fulfilling the ownership guidelines. All of our named executives have met or exceeded their ownership guidelines.

 

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 our named executives and all other executive officers. The following summary describes the material terms of the agreements for each of our named executives except Mr. Cardoso.

 

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. Thereafter, the committee makes determinations regarding base salary, incentive awards, and all other components of compensation as described above.

 

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 prior to a change in control and not for cause, the executive is entitled to 12 months’ severance in the form of salary continuation. The executive officer is not entitled to severance under any other termination scenario outside of a change in control context.

 

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 “Potential Payments Upon Termination or Change in Control” on page 45 for a more detailed discussion.

 

Employment Agreement with Mr. Cardoso

 

Except as set forth below, Mr. Cardoso’s employment agreement contains substantially the same provisions as the agreements with our other named executives. Mr. Cardoso’s employment agreement was amended December 6, 2005 to, among other things, set forth his base salary upon commencement of his duties as CEO and provide for a special incentive bonus for fiscal year 2006. (Mr. Cardoso’s current salary level and incentive opportunities are discussed in this Compensation Discussion and Analysis section and in the compensation tables that follow.) In addition, Mr. Cardoso’s employment agreement was amended to provide the following:

 

FY 2007 Incentive Compensation.  Effective July 1, 2006, Mr. Cardoso’s primary target bonus incentive is equal to 90% of his base salary, and, commencing July 2006, he became eligible for a long-term incentive award of $1,330,000 (which will be payable, if earned, 30% in stock options, 20% in restricted stock, and 50% in cash as described above under “Long-Term Incentives” ).

 

Severance.  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 such 24-month period. Mr. Cardoso is not entitled to severance under any other termination scenario outside of a change in control context.

 

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 on page 45 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. 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 executives 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 executives 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 the executives’ 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 “Potential Payments upon Termination or Change in Control” on page 45.

 

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 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 2007, the payments 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 Sibson 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 types of information the committee reviews and considers when making compensation decisions include:

 

 

The above analyses are reviewed either annually or by special request of the committee.

 

2007 Compensation Highlights

 

2007 Compensation Decisions for Named Executives

 

The committee based its 2007 compensation decisions on a variety of factors specific to each named executive. For individual named executives, those factors included:

 

 

Review of Executive Retirement Programs

 

The committee directed a comprehensive assessment of the Supplemental Executive Retirement Program (“SERP”) to determine its effectiveness with respect to attraction and retention of key executives, market competitiveness, regulatory compliance and financial considerations. After a comprehensive review the Committee adopted the new Executive Retirement Program (“ERP”), which it felt was better aligned with our strategic and financial interests. You can find further information about the SERP and ERP on pages 44 and 45.

 

Executive Talent

 

During the year, management presented to the committee its formal succession plan as well as an executive assessment and development plan facilitated by an international executive consulting/search firm. Noted key appointments during the year included the positions of Chief Financial Officer; Chief Information Officer, and Vice President Corporate Strategy and MSSG Global Marketing.

 

Stock Option Grant Practices

 

In conjunction with the Audit Committee, the committee directed an internal review of the company’s stock option practices over the ten (10) year period January 1, 1996 through December 31, 2005. The review revealed no instances of backdating of stock options.

 

New SEC Disclosure Regulations

 

Throughout the year the committee comprehensively reviewed the requirements of the new SEC Executive Compensation disclosure regulations and provided direction to management regarding the preparation of required disclosures.

 

Compensation for Non-Employee Directors

 

Historically, non-employee directors’ compensation was set by the Board at the recommendation of the committee. In 2007, the Nominating/Corporate Governance Committee assumed responsibility for the review and oversight of non-employee director compensation. Non-employee directors’ compensation is reviewed by the Board on an as-needed basis, which historically has been about once every other year. The role of the Nominating/

Corporate Governance Committee in this context is explained in further detail on page 13. The compensation of non-employee directors in 2007 is described on pages 13-16.

 

COMPENSATION COMMITTEE REPORT

 

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 found on pages 20-36 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

 

Ronald M. DeFeo, Chair

Philip A. Dur

A. Peter Held

William R. Newlin

Steven H. Wunning

 

Executive Compensation Tables

 

The Executive Compensation Tables show the compensation paid to our Chief Executive Officer, our current and former Chief Financial Officer, the three other most highly compensated executive officers serving in that capacity as of June 30, 2007, and our former Executive Chairman, who served as an executive officer during 2007 but retired effective December 31, 2006. These individuals are our named executive officers for 2007, and are referred to as “named executives” in the tables and the narrative disclosure that accompanies them.

 

Each of our executive officers, including the named executives (other than Ms. Smith and Mr. Tambakeras), was party to an employment agreement in 2007. The employment agreements are described on page 32.

 

2007 Summary Compensation Table

 

 

 

 

 

 

 

 

 

 

Equity Compensation Plans

 

Following is a summary of the company’s equity compensation plans. Grant practices and related information are generally described in the Compensation Discussion and Analysis beginning on page 20.

 

Kennametal Inc. Stock and Incentive Plan of 2002.  The Kennametal Inc. Stock and Incentive Plan of 2002, as amended (the “2002 Plan”), provides for the granting of nonstatutory and incentive stock options and certain share awards. The aggregate number of shares available for issuance under the 2002 Plan is 3,750,000. 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. Participants must pay the purchase price in full at the time of exercise. Payments may be made either in cash, by delivering shares of our common stock (a stock swap), or by delivering a combination of shares and cash having an aggregate fair market value equal to the purchase price. All grants reflected in the 2007 Grants of Plan—Based Awards’ table were made under the 2002 Plan.

 

Other Stock and Incentive Plans.  Each of the Kennametal Inc. Stock Option and Incentive Plan of 1988 (the “1988 Plan”), the Kennametal Inc. Stock Option and Incentive Plan of 1992 (the “1992 Plan”), the Kennametal Inc. Stock Option and Incentive Plan of 1996 (the “1996 Plan”), and the Kennametal Inc. Stock Option and Incentive Plan of 1999 (the “1999 Plan”) were shareowner approved plans that provided for the granting of nonstatutory and incentive stock options and certain share awards. The Kennametal Inc. 1999 Stock Plan (the “1999 Stock Plan”) was a non-shareowner approved plan that provided for the granting of nonstatutory stock options and certain share awards. The 1999 Stock Plan was implemented in connection with the hiring of new employees and was not submitted for shareowner approval because at that time the NYSE permitted the listing of shares under non-shareowner approved plans for stock awards to new employees and other limited circumstances. Although options are still outstanding under the 1988 Plan, 1992 Plan, 1996 Plan, 1999 Plan and 1999 Stock Plan, no further grants may be made under these plans.

 

The Performance Bonus Stock Plan of 1995 (the “Bonus Stock Plan”) provided for the issuance of not more than 750,000 shares. The Bonus Stock Plan provided that certain performance-based bonus compensation plans for

management and/or senior executives (each a “Management Performance Bonus Plan”) were eligible for participation in the Bonus Stock Plan. Up to and including bonuses for 2005, each participant in a Management Performance Bonus Plan was able to elect to receive common stock or stock credits in lieu of a cash bonus under the Bonus Stock Plan. Pursuant to the Bonus Stock Plan, any portion of a bonus paid in shares of common stock or in stock credits was increased by up to 25% of that value. Beginning with 2006, the opportunity to elect to receive shares of common stock and the 25% premium feature under the Bonus Stock Plan was discontinued.

 

The Directors Stock Incentive Plan, which is a non-shareowner approved plan, provides for the issuance of not more than 200,000 shares. The plan allows any non-employee director to 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 and to receive stock credits for any compensation that is deferred.

 

2007 Grants of Plan-Based Awards