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

Notice of Annual Meeting of Shareowners
to be held October 27, 2009

 

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 27, 2009 at 2:00 p.m. (Eastern Time) to consider and act upon the following matters:

 

1. The election of the three directors nominated by the Board of Directors for terms to expire in 2012; and

 

2. The ratification of the selection of the independent registered public accounting firm for the fiscal year ending June 30, 2010.

 

Shareowners also will be asked to consider such other business as may properly come before the meeting. The Board of Directors has fixed Wednesday, August 26, 2009 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 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 10, 2009

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE ANNUAL MEETING OF SHAREOWNERS TO BE HELD
OCTOBER 27, 2009

 

 

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

 

TABLE OF CONTENTS

 

 

When is the 2009 annual meeting?

 

The 2009 annual meeting will be held on Tuesday, October 27, 2009 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.

 

When was this Proxy Statement mailed to shareowners?

 

This proxy statement was first mailed to shareowners on or about September 10, 2009.

 

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 27, 2009, 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?

 

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 Wednesday, August 26, 2009 (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, 81,338,347 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 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 election of directors and the ratification of the selection of the auditors, which are considered “routine” matters, the broker may vote your shares in its discretion. The broker does not have the discretion to vote your shares for “non-routine” matters; if you do not provide instructions, the broker may not vote your shares on a non-routine proposal at all. When that happens, it is called a “broker non-vote.” We do not have any non-routine matters in the 2009 proxy statement.

 

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 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 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 2009 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 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 our principal executive offices 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 2010 annual meeting?

 

We expect to hold our 2010 annual meeting in October 2010. 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 13, 2010. Proposals should be addressed to our 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, our By-Laws provide that any shareowner wishing to propose any other business at the 2010 annual meeting must give the company written notice no earlier than May 1, 2010 and no later than July 1, 2010. That notice must provide certain other information as described in the By-Laws.

 

Shareowner nominations for directors to be elected at the 2010 annual meeting must be submitted to the Secretary in writing no earlier than May 1, 2010 and no later than July 1, 2010. 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, P.O. Box 231, Latrobe, Pennsylvania 15650-0231.

 

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., 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 “2009” mean the fiscal year beginning July 1, 2008 and ending June 30, 2009.

 

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.

 

Three of our currently standing directors, Ronald M. DeFeo, William R. Newlin, and Lawrence W. Stranghoener, have been nominated by our Board of Directors and each is standing for re-election to serve as a director of the Second Class with a term that will expire in 2012. The table below provides additional information about each nominee and each director whose term of office will continue after the 2009 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 (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 three individuals who receive the largest number of votes cast will be elected as Directors of the Second Class.

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

 

 

 

 

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 “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. You may also request a copy in paper form from our 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

 

 

 

Any interested party may also communicate with the Chairman or any director by methods indicated above. 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

 

 

The Board of Directors held 11 meetings during 2009. 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 members of the Board of Directors attended the Annual Meeting in October 2008.

 

The table below shows committee membership and the number of meetings of the full Board and each committee in 2009.

 

 

 

 

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; 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 2009 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. 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.

 

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 2009 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 2009, we provided our non-employee directors with the following cash compensation:

 

 

 

 

In April 2009, our non-employee directors voluntarily reduced their cash compensation for Board service by fifteen percent to demonstrate their commitment to and support of our efforts to reduce costs and strengthen performance. The reduction became effective at the beginning of our 2010 fiscal year on July 1, 2009 and will remain in effect until the salaries of our executive officers, which have also been reduced, are reinstated to previous levels.

 

Equity Compensation

 

Equity compensation for our non-employee directors consists of:

 

 

In 2009, the Compensation Committee approved a transition to the issuance of restricted stock units for annual grants to participating employees under our Long-Term Incentive Programs. The Nominating/Corporate Governance Committee has also transitioned to the issuance of 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.

 

2009 Director Compensation

 

The following table shows the compensation we paid to our non-employee directors for service on the Board and applicable committees in 2009:

 

2009 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 2009

 

We held eight (8) meetings in 2009. 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 2009 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, 2009 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 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, 2009 for filing with the SEC. We have retained PwC as the company’s auditor for the fiscal year ending June 30, 2010, subject to shareowner ratification at the 2009 Annual Meeting of Shareowners.

 

Audit Committee

 

Lawrence W. Stranghoener, Chair

A. Peter Held

Timothy R. McLevish

Steven H. Wunning

 

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, 2010. 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, 2010. 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 2009. The Audit Committee reviewed the non-audit services provided by PwC in 2009 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 2008 and 2009 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, 2010.

 

Executive Summary

 

Our fiscal 2009 presented significant challenges for Kennametal, but it also created new opportunities. Fiscal 2008 was a powerful year for us; we generated record sales, record adjusted earnings per share, and record adjusted return on invested capital. As a result, we entered 2009 with strong momentum and focus on the continued execution of our long-term business strategy. In the first quarter of 2009, our business generated strong results and we achieved new records for sales when compared to the same quarter in previous years. The building uncertainty in the global economic and political climates, however, coupled with the global crises in the financial and equities markets in the fourth calendar quarter of 2008 (our second fiscal quarter) profoundly affected our business and results of operations for the remainder of 2009. As the recession continued to deepen and expand, our business, like those of other global industrial manufacturers, experienced a sharp decline. Customer demand sharply deteriorated, our sales levels declined year over year, and our financial performance reflected the weakness in the end markets we serve.

 

We confronted these challenges quickly and decisively. In 2008, we announced plans for certain restructuring and cost control actions that we believe will build a stronger, leaner, and more efficient business model for us. In 2009, we accelerated some of those actions, and we took additional actions designed to keep our business expenses commensurate with our sales and revenue generation, and to pave the way for future growth. Our responses included:

 

 

Throughout the year, and despite the difficult macro environment, we continued to focus on the execution of our long-term business strategies. We furthered our efforts to diversify our product portfolio, end markets, and the geographic regions we serve. We aggressively reduced operating costs to position us for growth during the recovery and in the future. We reiterated our strong cultural focus on lean manufacturing and processes throughout our entire organization. These initiatives, together with sharp focus on our cash flow and liquidity, enabled us to accomplish some significant objectives. They included:

 

 

Our Compensation Committee (the “committee”) considered all of these challenges and achievements when it made compensation decisions for 2009. Throughout the year, the committee continued to monitor the effectiveness of the company’s compensation policies and programs, including the pay-for-performance aspects of those programs. Our compensation programs are designed to balance objective factors, including long- and short-term

company and business unit performance and market data with respect to compensation, and subjective factors, primarily individual performance, and to correlate those factors with compensation levels and decisions. The link between pay and performance is reflected in many of the outcomes of 2009 compensation for our executive officers (“executives”). The most significant decisions for 2009 include:

 

 

Additionally, the committee continued to collaborate with management to implement changes or revisions as appropriate given the economic climate and current and anticipated affects on our business. In fiscal 2009, and at its July 2009 meeting, which is at the beginning of our fiscal 2010, the committee approved certain changes to our executive compensation programs for 2010. These changes, which are detailed throughout this Compensation Discussion and Analysis where appropriate and will be described in further detail in our 2010 Proxy Statement, include:

 

 

Executive Compensation Philosophy

 

The committee has primary responsibility for the oversight and administration of our executive compensation program. The committee works with its outside consultant and members of 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. The committee makes compensation decisions based upon Kennametal’s executive compensation philosophy, which is founded on the following basic principles:

 

 

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 six basic components: base salary; annual incentives; long-term incentives; special awards (if and when applicable); retirement programs; and executive perquisites. (Additional information about each of these components is presented later in this Compensation Discussion and Analysis.) We’ve designed our executive compensation program to target compensation, in the aggregate, at the median level for similar positions within our industry and peer group 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, 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 grades. Each executive position is assigned a salary grade, which generally defines opportunities for base salary, annual incentives and long-term incentives. There are ranges associated with 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 a Long-Term Perspective

 

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.

 

At-Risk Compensation.  We structure our executive compensation program to put a significant amount of our executives’ total compensation at risk. We think this is appropriate because the executives are best positioned to be able to affect the company’s performance. Accordingly, a substantial portion of annual compensation value for our executives is provided in the form of long-term incentives that measure and reward Kennametal performance over a period of greater than one year. As illustrated in the table below, the actual percentage of at-risk pay relative to total compensation depends on the position level; 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.

 

 

Mix of Equity and Cash in Long-Term Incentive Compensation.  To focus our executives on operational performance that leads to increased long-term shareowner returns, and to address shareowner dilution, which is inherent in all equity-based compensation programs, in 2009 we granted long-term incentive awards to executives through a combination of cash-based long-term performance incentive awards (50% of the total long-term value), stock option awards, (30% of the total long-term value) and restricted stock awards (20% of the total long-term value).

 

Competitive Compensation

 

Pay Positioning Relative to Market — Benchmarking.

 

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.

 

We collect compensation data on base salaries, annual incentives, and long term incentives 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. Management also collects survey information, or requests survey information from the compensation consultant on each of these compensation components. We provide the committee with the results of our benchmarking efforts on a regular basis. We use the benchmarking data to 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 the median level within our peer group and industry. We analyze both target compensation opportunities as well as actual compensation that is paid to our executives. We provide this analysis to the committee, and the committee has the discretion to consider the information, along with company and individual performance factors, when it sets compensation levels.

 

We periodically review our peer group to ensure that the peer companies continue to be appropriate comparisons for performance purposes and for compensation purposes. In 2009, we removed certain companies from the peer group and replaced them with companies we believe are more relevant for comparison 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 2009:

 

 

How Compensation Decisions Are Made

 

Role of the Committee and CEO in Determining Executive Compensation.

 

The committee has primary responsibility for assisting the Board in evaluating executive performance, including that of the Chairman, 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. The compensation policies and process for determining CEO compensation are substantially the same as those used for the other executive officers. The committee solicits information from our management and from its outside compensation consultant during the compensation-setting process, but 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 the CEO and each of our executives over the course of several regularly scheduled meetings from April to July, and 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 outside compensation consultant. In keeping with our compensation philosophy, the committee considers three main categories of information about each executive: individual performance, company performance, and benchmark or market data.

 

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 each year in July (the beginning of the fiscal year) to agree upon the CEO’s performance goals (both individual and company objectives) for the fiscal year. These goals are included 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 determines CEO compensation according to his achievement of those goals and in line with the overall objectives of our compensation program.

 

Other Executive’s Compensation.  Each year in July, each of our other executives must also develop an individual performance plan for the fiscal year (with goals relating to individual and company objectives). That plan is discussed with and approved by the CEO, and the executives periodically report to the CEO on their progress towards the achievement of the goals throughout the year. At the end of the year, the CEO and the committee together assess the performance of the other executives. The CEO assists the committee in evaluating all executives other than the CEO. 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 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:

 

 

Sibson attends all committee meetings and may attend executive sessions at the request of the committee. Sibson consultants 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

 

Our executive compensation program is made up of the following components:

 

 

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. 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 grade of the position. Within each salary grade, 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, 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.

 

Annual Incentives

 

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 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.

 

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

 

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

 

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 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 retains discretion to make special recognition awards outside the calculated provisions of 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. Each executive is assigned performance goals 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 combine performance of the individual, the company and the particular business unit or function for which the executive has responsibility.

 

The Prime Bonus Plan is generally designed such that a certain percentage of an executive’s bonus opportunity (usually 70%) is 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 in 2009 are described below in the “2009 Prime Bonuses” section.

 

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 2009, management recommended and the committee approved a modifier of +/- 10% based upon the company’s reduction of sales, general and administrative expenses relative to total sales (“SG&A”).

 

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 in the course of its review.

 

2009 Prime Bonuses.

 

2009 Target Bonus Amounts

 

For 2009, the committee approved target bonus amounts for our named executives as follows:

 

 

2009 Company Performance Goals

 

At its July 2008 meeting, prior to the sharp decline in the global economy and the manufacturing industry, the Board established corporate performance goals for the company of: Sales Growth ($76 million); Earnings Per Share (“EPS”) ($3.12) and Return on Invested Capital (“ROIC”) (12.8%). 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.

 

2009 Performance Goals for Named Executives

 

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

 

The committee set performance goals for Mr. Cardoso based on the financial and strategic plans for the company. Mr. Cardoso’s 2009 Prime Bonus opportunity was composed of two components:

 

 

Component (1): Performance goals were linked to corporate performance and related to Sales Growth (30% weight, $76 million target), EPS (35% weight, $3.12 target), and ROIC (35% weight, 12.8% 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 2009, including strategic business transactions and portfolio shaping (5% weight), technology development and positioning (5% weight), global expansion and growth in emerging markets (5% weight), implementation of global cost reduction initiatives (5% weight), talent development and succession planning for critical positions (2.5% weight)*, Environmental, Health and Safety (EHS) initiatives (2.5% weight)**; and stewardship of certain employee initiatives (5% weight).

 

For performance goals marked with an *, Prime Bonus amounts would be paid only upon the achievement of the respective goal. Performance goals marked with an ** would be rewarded proportionally for performance between 90% and 100% of the target goal. The stewardship of certain employment initiatives required a 50% improvement for payout. For all other performance goals, performance between 80% and 100% of the target goal would be rewarded proportionally. 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; and

John H. Jacko — Vice President and Chief Marketing Officer

 

Performance goals for Messrs. Simpkins and Jacko were linked to corporate performance (30% of bonus opportunity) and, to ensure alignment across the company’s two reporting business units (MSSG and AMSG, defined below), 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 Sales Growth (30% weight, $76 million target), EPS (35% weight, $3.12 target), and ROIC (35% weight, 12.8% target). Specific to the aggregate business unit component, 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 aggregate business unit-related goals were set based upon the confidential, internal financial plans for each of the business units for 2009. 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.

 

Paul J. DeMand — Vice President and President Metalworking Solutions & Services Group (MSSG)

 

Performance goals for Mr. DeMand were linked to both corporate performance (same as Messrs. Cardoso, Simpkins and Jacko; 30% of bonus opportunity) and business unit performance for MSSG (70% of bonus opportunity). Specific to MSSG, performance goals related to sales growth (30% weight), EBIT (35% weight), and ROCA (35% weight). Target levels for MSSG-related goals were set based upon MSSG’s confidential, internal financial plan for 2009. The committee considered the targets to be consistent with the overall financial plan and

targets set for the company; they were challenging and, to achieve them, the MSSG business unit would have to deliver performance results that exceeded prior year results for the metrics.

 

Gary W. Weismann — Vice President and President Advanced Materials Solutions Group (AMSG)

 

Performance goals for Mr. Weismann were linked to both corporate performance (same as Messrs. Cardoso, Simpkins, Jacko and DeMand; 30% of bonus opportunity) and business unit performance for AMSG, the company’s other reporting business segment (70% of bonus opportunity). Specific to AMSG, performance goals related to sales growth (30% weight), EBIT (35% weight), and ROCA (35% weight). Target levels for AMSG-related goals were set based upon AMSG’s confidential, internal financial plan for 2009. 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. To achieve them, the AMSG business unit also would have to deliver performance results that exceeded prior year results for the metrics.

 

2009 Performance

 

Due in large part to the pervasive global recession and the rapid decline in industrial activity that occurred during our fiscal 2009, neither the company overall nor either of our business units met the threshold performance requirements for a payout under the Prime Bonus Plan. As a result, and in keeping with our pay-for-performance philosophy, none of our executive officers received a calculated bonus under the Prime Bonus Plan for 2009.

 

Under Mr. Cardoso’s Prime Bonus structure, he earned a partial payment under the individual performance component of his program. Mr. Cardoso met or exceeded his individual goals related to technology development and positioning and implementation of global cost reduction initiatives. In meetings with the committee, Mr. Cardoso stated his wish to forego any bonus amounts he might have earned under the Prime Bonus Plan, and the committee approved that request.

 

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 will use the same formula and performance/payout structure as the 2009 program to determine a calculated bonus. Performance goals will be based on two measures: EPS (75% weight) (EBIT as the business unit level) and Free Operating Cash Flow (25% weight). There will be no modifier in the formula for 2010. The bonus pool under the 2010 Prime Bonus program is dependant upon EBIT results at the corporate level, which must reach a threshold amount before the pool will begin to be funded. Participants in the 2010 Prime Bonus program may earn a proportionate share of the bonus pool (based upon their calculated bonus under the program and the degree to which the bonus pool is ultimately funded), which will be subject to further adjustment based upon individual performance.

 

Long-Term Incentives

 

Overview of Long-Term Incentive Programs.  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. 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 may include stock option, restricted stock, or restricted stock unit awards, and also 3-year, long-term incentive cash awards. Each of these components is described more fully below. Certain of our executives, including all of our named executives, participate in a 4-year program called the “2008 Strategic Transformational Equity Program” (the “STEP,” which is described below).

 

The committee must approve all equity and other long-term incentive awards for our executives. All long-term incentive awards, including those under the LTI and the STEP, are granted under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended (the “2002 Plan”). The 2002 Plan provides for the granting of nonstatutory and incentive stock options, restricted stock awards, stock unit awards, and other types of incentive awards.

2009 Long-Term Incentive (LTI) Program.  In 2009, for awards under the LTI, we used a “portfolio approach” to deliver value to eligible employees. The portfolio approach combined 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 used these different types of awards because each type of award serves a slightly different purpose. The broader discussion below contains a description of the awards we used in the LTI and our rationale for using them.

 

Equity Incentives.

 

Stock Option Awards

 

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 LTI 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. 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 (beginning with the first anniversary of the grant date). 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 and Restricted Stock Unit Awards

 

We grant restricted stock and restricted stock unit awards to provide immediate share ownership (or, in the case of restricted stock units, the equivalent of share ownership), which we believe directly aligns 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 (beginning with the first anniversary of the grant date). Also like stock option awards, the vesting schedules may be different depending on the purpose for the grant of restricted stock/units. As is the case with stock option awards, 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.

 

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

 

Timing of 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 awards and stock unit awards under the STEP are generally expressed as a dollar amount (a grantee might receive a restricted stock award of $50,000, for instance.) The number of restricted shares 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 footnotes of the “2009 Summary Compensation Table”, 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 reload feature.

 

LTIP (Cash) Awards.

 

Since 2005, each year we have granted contingent, long-term incentive cash awards (which we refer to as “LTIP” awards) under our LTI to our executives and to other key employees. We granted these awards because we believe they provide a strong incentive for achieving specific financial performance goals that are consistent with our business strategy and important contributors to long-term shareowner value. Payment of LTIP awards is based solely on company performance over three years. Individual LTIP awards are 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 are granted (the 2002 Plan) allows for them to be settled in stock; however, we pay amounts earned under these awards in cash because we believe this approach appropriately balances the cash and equity components of our LTI program. Cash payments are also an excellent way to reward the attainment of these performance objectives. These LTIP awards aid 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.

 

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, 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, 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.

2007 — 2009 LTIP Awards.

 

In July 2006, we granted LTIP awards for fiscal years 2007-2009 payable in August 2009 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 key indicators of our financial and operational success and are key drivers of long-term shareowner value. The performance goals for the 2007-2009 LTIP cycle were: (a) EPS (cumulative target of $7.28); and (b) ROIC (end of period target of 14.0%). 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 that the goals were achievable, but that achievement would require a high level of financial performance over the three-year period.

 

Results for 2007 — 2009 LTIP Cycle.

 

In July 2009, the committee approved payments to each of our named executives who participated in the 2007 — 2009 LTIP cycle. For the period in question, the company achieved cumulative EPS of $5.84 and ROIC of 4.4%. Accordingly, the weighted payout percentage for each participating named executive was 25.3% of his target award amount. The actual LTIP amounts, if any, earned by our named executives are set forth in the 2009 Summary Compensation Table in the “Non-equity Incentive Plan Compensation” column and related footnotes.

 

2008 — 2010 LTIP Awards and 2009 — 2011 LTIP Awards.

 

In July 2007 and July 2008, respectively, the committee granted LTIP awards for fiscal years (a) 2008-2010, payable in August 2010, and (b) 2009-2011, payable in August 2011, in each case only if the company achieves specified performance goals. Performance goals for both the 2008-2010 and 2009-2011 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. In each case, the committee set the goals at target levels that reflected our internal, confidential three-year business plan at the time the awards were established. The goals for both the 2008-2010 and 2009-2011 LTIP cycles will require a high level of financial performance over the three-year period to be achieved, especially in light of the global economic recession and the resultant downturn in our industry. The weighted payout for the 2006-2008 LTIP Cycle was 129.4%, but the weighted payout for the most recent cycle, 2007-2009, as described above, was only 25.3%. (Please see Footnote 5 to the 2009 Summary Compensation Table for actual payouts for the 2007-2009 LTIP cycle for each of the named executives.) The results of the 2006-2008 LTIP cycle were reflective of the strength of our performance over that three-year period. Despite two strong years of company performance during the 2007-2009 LTIP cycle (at the beginning of 2009, the projected payout was approximately 119%), performance levels were negatively affected by 2009 results and the resulting payout reflected the decline in company performance.

 

The potential payouts in 2010 and 2011 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:

 

 

 

 

Neither the 2008-2010 nor the 2009-2011 LTIP cycles are currently projected to have a payout. 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, at the July 28, 2009 meeting of the Committee, we recommended, and the Committee agreed, that no LTIP awards for the 2010-2012 cycle be granted to our executives or the other participants in the LTI program.

 

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 provide an opportunity for premium compensation to participants and a significant return to our shareowners. The STEP has a retention component as well, because the awards are generally forfeited if a participant terminates his employment with the company during the “Performance Period” (defined below).

 

Each STEP participant was awarded a certain number of stock units under the STEP (the “Units”); the Units were granted at the maximum level. Each Unit represents a contingent right to receive one share of the company’s capital stock, to the extent the Unit is earned and becomes payable pursuant to the terms of the STEP. No dividend or voting rights attach to the Units. In general, Units can be earned at certain measurement dates during the four-year period that began October 1, 2007 and ends September 30, 2011 (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 can 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 can 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. In order for the Performance Conditions to be fully satisfied (which would allow participants to earn the maximum number of Units under the STEP) our adjusted earnings per share and stock price at the time the STEP was adopted would have to more than double by the end of the Performance Period. The Performance Conditions are subject to certain threshold levels; if those threshold levels are not achieved, no Units will be earned under the STEP. The STEP participants have the opportunity to “earn and bank” a portion of their Units during the Performance Period at two specified interim measurement dates (September 30th of each of 2009 and 2010). If certain thresholds of adjusted earnings per share and total shareholder return are satisfied on those interim measurement dates, a STEP participant may “earn and bank” up to 35% of the maximum number of Units subject to the award.

 

Payout under the STEP.  The payment of any Units earned under the Program, including any “earned and banked” Units, is also conditioned upon the participant being employed by us on the payment date, subject to certain limited exceptions (such as death and disability). (Please see the discussion of “Potential Payments upon Termination or Change in Control” for more details about payouts under the STEP in the event a participant’s employment with the company is terminated.)

 

After the end of the Performance Period, the committee will certify in writing the extent to which the Performance Conditions and any other material terms of the program have been achieved. Units earned by a participant, if any, will be settled and paid in shares of our capital stock. In the event of a change in control, any Units “earned and banked” as of the most recently completed measurement date will be distributed on the closing date of the change in control transaction as capital stock of the company, or at the discretion of the committee, in cash or other property.

 

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. In 2009, we reversed certain stock-based expense associated with the cumulative adjusted earnings per share component of the STEP. Please see footnote 1 to the 2009 Summary Compensation Table for additional details.

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 2009, we granted a limited amount of special recognition awards 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 certain special recognition awards for our executives, including one-time, strategic bonus awards for Messrs. Weismann, Jacko and Simpkins as described below. The strategic bonus awards were paid in August 2009.

 

 

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

 

Our executives receive various perquisites from us: officer life insurance, financial planning, executive physical, a country club membership and in certain instances, parking. They are 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 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 only provide perquisites that we consider reasonable in nature, and we provide them because we believe 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.

 

The amounts of specific executive perquisites for 2009 are listed in the supplemental table in footnote 5 to the “2009 Summary Compensation Table.” Other than these perquisites, our 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 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. The current guidelines are:

 

 

We require our executives and directors to achieve their ownership requirements within 5 years. Shares owned outright, restricted stock and restricted stock units, 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, certain executives have fallen below their required ownership levels. The committee will evaluate the status of ownership for each executive in October 2009 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 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 and assignment of the executive to a salary grade. Thereafter, the committee makes determinations regarding base salary, incentive awards, and all other components of compensation as described in this Compensation Discussion and Analysis.

 

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 the “Potential Payments Upon Termination or Change in Control” section of this proxy statement for a more detailed discussion.

 

Employment Agreement with Mr. Cardoso

 

Except as set forth in this section, 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, provide for a special incentive bonus for fiscal year 2006, and set his primary Prime Bonus target level at 90% of his base salary. (Mr. Cardoso’s current salary level and incentive opportunities are discussed in this Compensation Discussion and Analysis and in the compensation tables that follow.) In addition, Mr. Cardoso’s employment agreement was amended to implement specific severance provisions. 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 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 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 2009, 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 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.

 

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 director 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 in the “Ethics and Corporate Governance” section of this proxy statement. The compensation of non-employee directors in 2009 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

 

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 2009. These individuals are our named executive officers for 2009, 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, was party to an employment agreement in 2009. The employment agreements are described in the “Compensation Discussion and Analysis” section of this proxy statement.

 

2009 Summary Compensation Table

 

 

Notes and Supplemental Tables to the “2009 Summary Compensation Table”

 

 

 

 

 

 

 

 

2009 Grants of Plan-Based Awards