10-K 1 kmt630201910k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2019
Commission File Number 1-5318
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
 
25-0900168
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
600 Grant Street
 
 
Suite 5100
 
 
Pittsburgh, Pennsylvania
 
15219-2706
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (412) 248-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Capital Stock, par value $1.25 per share
KMT
New York Stock Exchange
Preferred Stock Purchase Rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [  ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]
 
 
  
Accelerated filer [  ]
 
 
Non-accelerated filer [  ]
  
Smaller reporting company [  ]
 
 
Emerging growth company [ ]
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes [  ] No [X]
As of December 31, 2018, the aggregate market value of the registrant’s Capital Stock held by non-affiliates of the registrant, estimated solely for the purposes of this Form 10-K, was approximately $1,833,100,000. For purposes of the foregoing calculation only, all directors and executive officers of the registrant and each person who may be deemed to own beneficially more than 5% of the registrant’s Capital Stock have been deemed affiliates.
As of July 31, 2019, there were 82,462,011 of the Registrant’s Capital Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2019 Annual Meeting of Shareholders are incorporated by reference into Part III.
 


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FORWARD-LOOKING INFORMATION
Statements and financial discussion and analysis contained herein and in the documents incorporated by reference herein that are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For example, statements about Kennametal's outlook for earnings, sales volumes, cash flow, and capital expenditures for its fiscal year 2020 and 2021, its expectations regarding future growth and any statements regarding future operating or financial performance or events are forward-looking. We have also included forward-looking statements in this Annual Report on Form 10-K ("Annual Report") concerning, among other things, our strategy, goals, plans and projections regarding our financial position, liquidity and capital resources, results of operations, market position, and product development. Forward-looking statements are based on management's beliefs, assumptions and estimates using information available to us at the time the statements are made. These statements are not guarantees of future events or performance and are subject to various risks and uncertainties that are difficult to predict. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: downturns in the business cycle or economic downturns; our ability to achieve all anticipated benefits from our restructuring, simplification and modernization initiatives; risks related to our foreign operations and international markets, such as fluctuations in currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; changes in the regulatory environment in which we operate, including environmental, health and safety regulations; potential for future goodwill and other intangible asset impairment charges; our ability to protect and defend our intellectual property; continuity and security of information technology infrastructure; competition; our ability to retain our management and employees; demands on management resources; availability and cost of the raw materials we use to manufacture our products; additional tax expenses or exposures; product liability claims; integrating acquisitions and achieving the expected savings and synergies; global or regional catastrophic events; demand for and market acceptance of our products; business divestitures; labor relations; and implementation of environmental remediation matters. We provide additional information about many of the specific risks we face in the "Risk Factors" section of this Annual Report. We can give no assurance that any goal or plan set forth in our forward-looking statements will be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. Except as required by law, we do not intend to release publicly any revisions to forward-looking statements as a result of future events or developments.

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PART I

ITEM 1 - BUSINESS
OVERVIEW Kennametal Inc. (the Company) was founded based on a tungsten carbide technology breakthrough in 1938. The Company was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling and was listed on the New York Stock Exchange (NYSE) in 1967. With more than 80 years of materials expertise, the Company is a global industrial technology leader, helping customers across the aerospace, earthworks, energy, general engineering and transportation end markets manufacture with precision and efficiency. This expertise includes the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and extreme wear applications to keep customers up and running longer against conditions such as corrosion and high temperatures.
Our standard and custom product offering spans metalworking and wear applications including turning, milling, hole making, tooling systems and services, as well as specialized wear components and metallurgical powders. End users of the Company's metalworking products include manufacturers engaged in a diverse array of industries including: the manufacturers of transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation. The Company’s wear and metallurgical powders are used by producers and suppliers in equipment-intensive operations such as road construction, mining, quarrying, oil and gas exploration, refining, production and supply.
Unless otherwise specified, any reference to a “year” refers to our fiscal year ending on June 30. Unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
BUSINESS SEGMENT REVIEW The Company operates in three segments: Industrial, Widia and Infrastructure. The Company's reportable operating segments have been determined in accordance with the Company's internal management structure, which is organized based on operating activities, the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results. Sales and operating income by segment are presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 of this Annual Report (MD&A). Additional segment data is provided in Note 19 of our consolidated financial statements set forth in Item 8 of this Annual Report which is incorporated herein by reference.
INDUSTRIAL The Industrial segment develops and manufactures high performance tooling and metalworking products and services for diverse end markets, including aerospace and defense, general engineering, energy and transportation. These products include milling, hole making, turning, threading and toolmaking systems used in the manufacture of airframes, aero engines, trucks and automobiles, ships and various types of industrial equipment. We leverage advanced manufacturing capabilities in combination with varying levels of customization to solve our customers’ toughest challenges and deliver improved productivity for a wide range of applications. Industrial goes to market under the Kennametal® brand through its direct sales force, a network of independent and national distributors, integrated supplier channels and via the internet. Application engineers and technicians are critical to the sales process and directly assist our customers with specified product design, selection, application and support.
WIDIA Widia offers an assortment of standard and custom metal cutting solutions to general engineering, aerospace, energy and transportation customers. We serve our customers primarily through a network of value added resellers, integrated supplier channels and via the internet. Widia markets its products under the WIDIA®, WIDIA Hanita® and WIDIA GTD® brands.
INFRASTRUCTURE Our Infrastructure segment produces engineered tungsten carbide and ceramic components, earth-cutting tools, and advanced metallurgical powders, primarily for the energy, earthworks and general engineering end markets. These wear-resistant products include compacts, nozzles, frac seats and custom components used in oil & gas and petrochemical industries; rod blanks and abrasive water jet nozzles for general industries; earth cutting tools and systems used in underground mining, trenching and foundation drilling and road milling; tungsten carbide and specialty alloy powders for the oil and gas, aerospace and process industries; and ceramics used by the packaging industry for metallization of films and papers. We combine deep metallurgical and engineering expertise with advanced manufacturing capabilities to deliver solutions that drive improved productivity for our customers. Infrastructure markets its products primarily under the Kennametal® brand and sells through a direct sales force as well as through distributors.

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INTERNATIONAL OPERATIONS During 2019, we generated 57 percent of our consolidated sales in markets outside of the United States of America (U.S.), with principal international operations in Western Europe and Asia. We also operate manufacturing and distribution facilities in Israel, Latin America and South Africa, while serving customers through sales offices, agents and distributors in Eastern Europe and other parts of the world. While geographic diversification helps to minimize the sales and earnings effect of demand changes in any one particular region, our international operations are subject to normal risks of doing business globally, including fluctuations in currency exchange rates and changes in social, political and economic environments.
Our international assets and sales are presented in Note 19 of the Company’s consolidated financial statements, set forth in Item 8 of this Annual Report. Further information about the effects and risks of currency exchange rates is presented in the Quantitative and Qualitative Disclosures About Market Risk section, set forth in Item 7A of this Annual Report.
STRATEGY AND GENERAL DEVELOPMENT OF BUSINESS We continued to make progress on our growth and simplification/modernization initiatives in the following areas in fiscal 2019.
Growth
•
Continued development and refining of our channel strategy;
•
Introduced new products across our business aimed at improving customer productivity and performance, including HarviTM Ultra 8X, our new tangential milling system, KennaFlow hydraulic frac seats and Road KingTM Xtreme; and
•
Announced a new distribution agreement with Gardner Denver for KennaFlow valve seats
Simplification/modernization
•
Substantially completed our previous phase (FY19 Restructuring Actions) of simplification/modernization restructuring initiative, and
•
Announced FY20 and FY21 Restructuring Actions, which are expected to reduce structural costs, improve operational efficiency and position the Company for long-term profitable growth
◦
Restructurings and proposed facility closures in fiscal 2020 are currently estimated to deliver annualized savings of $35 million to $40 million and $55 million to $65 million in pre-tax charges;
◦
Fiscal 2021 proposed restructuring and facility closures expected to deliver annualized savings of $25 million to $30 million and pre-tax charges of $60 million to $75 million through fiscal 2020 and 2021
Operational results in 2019 reflected increasing progress on our simplification/modernization initiatives with earnings per diluted share (EPS) of $2.90, a 20 percent improvement over the prior year results. A key milestone of those initiatives was the recent announcement of the intended closure of four of our facilities, which is expected to drive further structural benefits and improve operational efficiency. Sales in 2019 of $2,375.2 million grew slightly compared to $2,367.9 million in 2018, reflecting a 3 percent increase from organic sales growth offset by unfavorable currency exchange effect of 3 percent. We also continued to gain traction on our growth initiatives in general engineering and aerospace, with aerospace growing 12 percent. Against this backdrop of year-over-year progress, we saw increased softening in most of our end-markets late in the year. Our expectation is that this challenging macro environment will continue into the first half of fiscal 2020. Nevertheless, we expect to continue executing our plan to improve long-term profitability.
ACQUISITIONS AND DIVESTITURES We continually evaluate new opportunities to expand existing product lines into new market areas, and to introduce new and/or complementary product offerings into new or existing areas where appropriate. In the near term, we expect to continue to grow our business and further enhance our market position through the investment opportunities that exist within our core businesses, though we may evaluate acquisition opportunities that have the potential to strengthen or expand our business.
RAW MATERIALS AND SUPPLIES Our major metallurgical raw materials consist of tungsten ore concentrates and scrap carbide, which are used to make tungsten oxide, as well as compounds and secondary materials such as cobalt. Although an adequate supply of these raw materials currently exists, our major sources for raw materials are located abroad and prices fluctuate at times. We have entered into extended raw material supply agreements and expect to implement product price increases as necessary to mitigate rising costs. For these reasons, we exercise great care in selecting, purchasing and managing availability of raw materials. We also purchase steel bars and forgings for making toolholders and other tool parts, as well as for producing mining tools, rotary cutting tools and accessories. We purchase products for use in manufacturing processes and for resale from thousands of suppliers located in the U.S. and abroad. Our internal capabilities provide access to additional sources of raw materials and offer tungsten carbide recycling capabilities, and therefore, help mitigate our reliance on third parties.

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RESEARCH AND DEVELOPMENT (R&D) Our R&D efforts focus on delivering innovations to our customers from both new product and process technology development. New product development provides solutions to our customers’ manufacturing challenges and productivity requirements. New process technology is developed and implemented in-house as part of our simplification/modernization efforts to enhance product quality and efficiency at our plant sites. We use a disciplined framework, and have established “gates,” or sequential tests to remove inefficiencies and accelerate commercial success. This framework is designed to acclerate and streamline development into a series of actions and decision points, integrating resource tasks to implement new and enhanced products and process technologies faster. It is designed to assure a strong linkage between verified customer requirements and corporate strategy, and to enable us to gain the full benefits of our investment in development work.
We hold a number of patents and trademarks which, in the aggregate, are material to the operation of our businesses. The duration of our patent protection varies throughout the world by jurisdiction.
SEASONALITY Our business is affected by seasonal variations to varying degrees by traditional summer vacation shutdowns of customers’ plants and holiday shutdowns that affect our sales levels during the first and second quarters of our fiscal year.
BACKLOG Our backlog of orders generally is not significant to our operations.
COMPETITION As one of the world’s leading producers of tooling and metalworking products, specialty wear-resistant components and ceramics, earth cutting tools and advanced metallurgical powders, we maintain a leading competitive position in major markets worldwide. We actively compete in the sale of all our products with several large global competitors and with many smaller niche businesses offering various capabilities to customers around the world. While several of our competitors are divisions of larger corporations, our industry remains largely fragmented, containing several hundred fabricators, toolmakers and niche specialty coating businesses. Many of our competitors operate relatively small facilities, producing a limited selection of tools while buying cemented tungsten carbide components from original producers of cemented tungsten carbide products, including Kennametal. We also supply coating solutions and other engineered wear-resistant products to both larger corporations and smaller niche businesses. Given the fragmentation, opportunities for consolidation exist from both U.S.-based and internationally-based firms, as well as among thousands of industrial supply distributors.
The principal competitive differentiators in our businesses include customer focused support and application expertise, custom and standard product innovation, product performance and quality and our brand recognition. We derive competitive advantage from our premium brand positions, global presence, application expertise and ability to address unique customer needs with new and improved tools, innovative surface and wear-resistant solutions, highly engineered components, consistent quality, traditional and digital customer service and technical assistance capabilities, state-of-the-art manufacturing and multiple sales channels. With these strengths, we are able to sell products based on the value-added productivity we deliver to our customers, rather than competing solely on price.
REGULATION From time to time, we are a party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible, or intellectual property assets. While we currently believe that the amount of ultimate liability, if any, we may face with respect to these actions will not materially affect our financial position, results of operations or liquidity, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur or if protracted litigation were to ensue, the effect on us could be material.
Compliance with government laws and regulations pertaining to the discharge of materials or pollutants into the environment or otherwise relating to the protection of the environment did not have a material effect on our capital expenditures or competitive position for the years covered by this Annual Report, nor is such compliance expected to have a material effect on us in the future.
The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain of our locations.
We establish and maintain reserves for certain potential environmental issues. At June 30, 2019 and 2018, the balances of these reserves were $12.4 million and $12.6 million, respectively. These reserves represent anticipated costs associated with the remediation of these issues and are generally not discounted.


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The reserves we have established for environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the United States Environmental Protection Agency (USEPA), other governmental agencies and by the Potentially Responsible Party (PRP) groups in which we are participating. Although the reserves currently appear to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The reserved and unreserved liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.
Among other environmental laws, we are subject to the Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund), under which we have been designated by the USEPA as a PRP with respect to environmental remedial costs at certain Superfund sites. We have evaluated our claims and potential liability associated with these Superfund sites based upon the best information currently available to us. We believe our environmental accruals will be adequate to cover our portion of the environmental remedial costs at those Superfund sites where we have been designated a PRP, to the extent these expenses are probable and reasonably estimable.
EMPLOYEES We employed approximately 10,400 people at June 30, 2019, of which approximately 3,400 were located in the U.S. and 7,000 were located in other parts of the world, principally Germany, India and China. At June 30, 2019, approximately 3,100 of our employees were represented by labor unions. We consider our labor relations to be generally good.
AVAILABLE INFORMATION Our internet address is www.kennametal.com. On the SEC Filings page of our Website, which is accessible under the "About Us" tab, under Investor Relations, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): our annual reports on Form 10-K, our annual proxy statements, our annual conflict minerals disclosure and reports on Form SD, our annual reports on Form 11-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. The SEC Filings page of our Website also includes Forms 3, 4 and 5 filed pursuant to Section 16(a) of the Exchange Act. All filings posted on our SEC Filings page are available to be viewed on our Website free of charge. On the Corporate Governance page of our Website, which is accessible under the "About Us" tab, under Investor Relations, we post the following charters and guidelines: Audit Committee Charter, Compensation Committee Charter, Nominating/Corporate Governance Committee Charter, Kennametal Inc. Corporate Governance Guidelines and Kennametal Inc. Stock Ownership Guidelines. On the Ethics and Compliance page of our Website, which is under the "About Us" tab, under Company Profile, we post our Code of Conduct and our Conflict Minerals Statement. All charters and guidelines posted on our Website are available to be viewed free of charge. Information contained on our Website is not part of this Annual Report or our other filings with the SEC. Copies of this Annual Report and those items disclosed on the Corporate Governance and Ethics and Compliance pages of our Website are available without charge upon written request to: Investor Relations, Kennametal Inc., 600 Grant Street, Suite 5100, Pittsburgh, Pennsylvania 15219-2706. The SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

RISK FACTORS
This section describes material risks to our business that are currently known to us. Our business, financial condition or results of operations may be materially affected by a number of factors. Our management regularly monitors the risks inherent in our business, with input from our Enterprise Risk Management process. In addition to real time monitoring, we periodically conduct a formal enterprise-wide risk assessment to identify factors and circumstances that might present significant risk to the Company. Many of these risks are discussed throughout this report. The risks below, however, are not exhaustive. We operate in a rapidly changing environment. Other risks that we currently believe to be immaterial could become material in the future. We are also subject to legal and regulatory changes. New factors could emerge, and it is not possible to predict the outcome of all such risk factors on our business, financial condition or results of operations. The following discussion details the material risk factors and uncertainties that we believe could cause Kennametal’s actual results to differ materially from those projected in any forward-looking statements.
Downturns in the business cycle could adversely affect our sales and profitability. Our business has historically been cyclical and subject to significant impact from economic downturns. Global economic downturns coupled with global financial and credit market disruptions have had a negative effect on our sales and profitability historically. These events could contribute to weak end markets, a sharp drop in demand for our products and services and higher costs of borrowing and/or diminished credit availability. Although we believe that the long-term prospects for our business remain positive, we are unable to predict the future course of industry variables or the strength and pace or sustainability of economic development.

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Our restructuring efforts may not have the intended effects. We are implementing restructuring and other actions to reduce structural costs, improve operational efficiency and position the Company for long-term profitable growth. However, there is no assurance that these efforts, or that any other actions that we have taken or may take in the future, will be sufficient to counter any future economic or industry disruptions. We cannot provide assurance that we will not incur additional restructuring charges or impairment charges, or that we will achieve all of the anticipated benefits from the restructuring actions we have taken, are taking now, or plan to take in the future. If we are unable to effectively restructure our operations in light of evolving market conditions, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our simplification/modernization initiative began in fiscal 2017. The purpose of this initiative is to invest in our plants, equipment and processes to automate and lower our overall labor cost. These capital investments have resulted in savings and are expected to result in further savings from reduced labor, maintenance and supply costs, while at the same time improving the quality of our products. We cannot provide any assurances that we will achieve all of the anticipated savings from these planned actions. These initiatives are expected to put pressure on our cash flows for the near-term. If we are unable to effectively execute our plans, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our international operations pose certain risks that may adversely effect sales and earnings. We have manufacturing operations and assets located outside of the U.S., including but not limited to those in Western Europe, Brazil, Canada, China, India, Israel and South Africa. We also sell our products to customers and distributors located outside of the U.S. During the year ended June 30, 2019, 57 percent of our consolidated sales were derived from non-U.S. markets. These international operations are subject to a number of special risks, in addition to the risks of our domestic operations, including currency exchange rate fluctuations, differing protections of intellectual property, trade barriers, exchange controls, regional economic uncertainty, overlap of different tax regimens, differing (and possibly more stringent) labor regulations, labor unrest, risk of governmental expropriation, domestic and foreign customs and tariffs, current and changing regulatory environments (including, but not limited to, the risks associated with the importation and exportation of products and raw materials), risk of failure of our foreign employees to comply with both U.S. and foreign laws, including antitrust laws, trade regulations and the Foreign Corrupt Practices Act, difficulty in obtaining distribution support, difficulty in staffing and managing widespread operations, differences in the availability and terms of financing, social and political instability and unrest and risks of increased taxes and/or adverse tax consequences. Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met. To the extent we are unable to effectively manage our international operations and these risks, our international sales may be adversely affected, we may be subject to additional and unanticipated costs, and we may be subject to litigation or regulatory action. As a consequence, our business, financial condition and results of operations could be seriously harmed.
Additional tax expense or exposures could affect our financial condition and results of operations.  We are subject to various taxes in the U.S. and numerous other jurisdictions. Our future results of operations could be adversely affected by changes in our effective tax rate as a result of a change in the mix of earnings between U.S. and non-U.S. jurisdictions or among jurisdictions with differing statutory tax rates, changes in tax laws or treaties or in their application or interpretation, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, changes in the amount of earnings indefinitely reinvested in certain non-U.S. jurisdictions, and the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures.
Implementation of new tariffs and changes to or uncertainties related to tariffs and trade agreements could adversely affect our business. The U.S. has recently announced the implementation of certain new tariffs on steel, aluminum and other raw materials imported into the country and may also consider additional tariffs. In response, certain foreign governments have implemented or are reportedly considering implementing additional tariffs on U.S. goods. In addition, there have been recent changes to trade agreements. Uncertainties with respect to tariffs, trade agreements or any potential trade wars could negatively effect the global economic markets and could affect demand for our products and could have a material adverse effect on our financial condition, results of operations and cash flows. Changes in tariffs could also result in changes in supply and demand of our raw material needs and could affect our manufacturing capabilities and could lead to increased prices that we may not be able to effectively pass on to customers, each of which could materially adversely affect our operating margins, results of operations and cash flows.

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Changes in the regulatory environment, including environmental, health and safety regulations, could subject us to increased compliance and manufacturing costs, which could have a material adverse effect on our business.
Health and Safety Regulations. Certain of our products contain hard metals, including tungsten and cobalt. Hard metal dust is being studied for potential adverse health effects by organizations in several regions throughout the world, including the U.S., Europe and Japan. Future studies on the health effects of hard metals may result in our products being classified as hazardous to human health, which could lead to new regulations in countries in which we operate that may restrict or prohibit the use of, and/or exposure to, hard metal dust. New regulation of hard metals could require us to change our operations, and these changes could affect the quality of our products and materially increase our costs.
Environmental Regulations. We are subject to various environmental laws, and any violation of, or our liabilities under, these laws could adversely affect us. Our operations necessitate the use and handling of hazardous materials and, as a result, we are subject to various federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. These laws impose penalties, fines and other sanctions for noncompliance and liability for response costs, property damages and personal injury resulting from past and current spills, disposals or other releases of, or exposure to, hazardous materials. We could incur substantial costs as a result of noncompliance with or liability for cleanup or other costs or damages under these laws. We may be subject to more stringent environmental laws in the future. If more stringent environmental laws are enacted in the future, these laws could have a material adverse effect on our business, financial condition and results of operations.
Regulations affecting the mining and drilling industries or utilities industry. Some of our principal customers are mining and drilling companies. Many of our mining and drilling customers supply coal, oil, gas or other fuels as a source of energy to utility companies in the U.S. and other industrialized regions. The operations of these mining and drilling companies are geographically diverse and are subject to or affected by a wide array of regulations in the jurisdictions where they operate, such as applicable environmental laws and regulations governing the mining and drilling industry and the utilities industry. As a result of changes in regulations and laws relating to these industries, our customers’ operations could be disrupted or curtailed by governmental authorities. The high cost of compliance with these regulations may also induce customers to discontinue or limit their operations and may discourage companies from developing new opportunities. As a result of these factors, demand for our mining- and drilling-related products could be substantially affected by regulations adversely effecting the mining and drilling industries or altering the consumption patterns of utilities.
Impairment of goodwill and other intangible assets with indefinite lives could result in a negative effect on our financial condition and results of operations. At June 30, 2019, goodwill and other indefinite-lived intangible assets totaled $314.6 million, or 12 percent of our total assets. Goodwill results from acquisitions, representing the excess of cost over the fair value of the net tangible and other identifiable intangible assets we have acquired. We assess at least annually whether there has been impairment in the value of our goodwill and indefinite-lived intangible asset. If future operating performance at one or more of our reporting units were to fall significantly below current levels, we could record, under current applicable accounting rules, a non-cash impairment charge for goodwill or other intangible asset impairment. Any determination requiring the impairment of a significant portion of goodwill or other intangible assets would negatively affect our financial condition and results of operations.
Our continued success depends on our ability to protect and defend our intellectual property. Our future success depends in part upon our ability to protect and defend our intellectual property. We rely principally on nondisclosure agreements and other contractual arrangements and trade secret laws and, to a lesser extent, trademark and patent laws, to protect our intellectual property. However, these measures may be inadequate to protect our intellectual property from infringement by others or prevent misappropriation of our proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do U.S. laws. If one of our patents is infringed upon by a third party, we may need to devote significant time and financial resources to defend our rights with respect to such patent. We may not be successful in defending our patents. Similarly, while we do not knowingly infringe on the patents, copyrights or other intellectual property rights of others, we may be required to spend a significant amount of time and financial resources to resolve any infringement claims against us, and we may not be successful in defending our position or negotiating alternative remedies. Our inability to protect our proprietary information and enforce or defend our intellectual property rights in proceedings initiated by us or brought against us could have a material adverse effect on our business, financial condition and results of operations.
Failure of, or a breach in security of, our information technology systems could adversely affect our business. We rely on information technology infrastructure to achieve our business objectives. Any disruption of our infrastructure could negatively effect our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any disruption could cause us to lose customers or revenue and could require us to incur significant expense to remediate.

9

In recent years, cybersecurity attacks have become more sophisticated and more prevalent. A security breach of our information technology systems could interrupt or damage our operations or harm our reputation. In addition, we could be subject to liability if confidential information relating to customers, employees, vendors and the extended supply chain or other parties is misappropriated from our computer system. We do not believe we have been the target of a material successful cyber attack. While we have dedicated increased resources to fortify our security measures, our systems may be vulnerable to physical break-ins, computer viruses, human error, programming errors or similar disruptive problems. Therefore, we cannot assure that our system improvements will be sufficient to prevent or limit the damage from any cyber attack or network disruption.
We operate in a highly competitive environment. Our domestic and foreign operations are subject to significant competitive pressures. We compete directly and indirectly with other manufacturers and suppliers of metalworking tools, engineered components and advanced materials. Some of our competitors are larger than we are and may have greater access to financial resources or be less leveraged than us. In addition, the industry in which our products are used is a large, fragmented industry that is highly competitive.
If we are unable to retain our qualified management and employees, our business may be negatively affected. Our ability to provide high quality products and services depends in part on our ability to retain our skilled personnel in the areas of management, product engineering, servicing and sales. Competition for such personnel is intense, and our competitors can be expected to attempt to hire our management and skilled employees from time to time. In addition, our restructuring activities and strategies for growth have placed, and are expected to continue to place, increased demands on our management’s skills and resources. If we are unable to retain our management team and professional personnel, our customer relationships and level of technical expertise could be negatively affected, which may materially and adversely affect our business.
Any interruption of our workforce, including interruptions due to our restructuring initiatives, unionization efforts, changes in labor relations or shortages of appropriately skilled individuals could effect our business.
Our future operating results may be affected by fluctuations in the prices and availability of raw materials. The raw materials we use for our products include tungsten ore concentrates and scrap carbide, which are used to make tungsten oxide, as well as compounds and secondary materials such as cobalt. A significant portion of our raw materials is supplied by sources outside of the U.S. The raw materials extraction industry is highly cyclical and at times pricing and supply can be volatile due to a number of factors beyond our control, including natural disasters, general economic and political conditions, labor costs, competition, import duties, tariffs and currency exchange rate fluctuations. This volatility can significantly affect our raw material costs. In an environment of increasing raw material prices, competitive conditions can affect how much of these price increases we can recover in the form of higher sales prices for our products. To the extent we are unable to pass on any raw material price increases to our customers, our profitability could be adversely affected. Furthermore, restrictions in the supply of tungsten, cobalt and other raw materials could adversely affect our operating results. If the prices for our raw materials increase or we are unable to secure adequate supplies of raw materials on favorable terms, our profitability could be impaired. If the prices for our raw materials decrease, we could face product pricing challenges.
Product liability claims could have a material adverse effect on our business. The sale of metalworking, mining, highway construction and other tools and related products as well as engineered components and advanced materials entails an inherent risk of product liability claims. We cannot give any assurances that the coverage limits of our insurance policies will be adequate or that our policies will cover any particular loss. Insurance can be expensive, and we may not always be able to purchase insurance on commercially acceptable terms, if at all. Claims brought against us that are not covered by insurance or that result in recoveries in excess of our insurance coverage could have a material adverse affect on our business, financial condition and results of operations.
We may not be able to complete, manage or integrate acquisitions successfully. We have acquired companies in the past and we may continue to evaluate acquisition opportunities that have the potential strengthen or expand our business. We can give no assurances, however, that any acquisition opportunities will arise or if they do, that they will be consummated, or that additional financing, if needed, will be available on satisfactory terms. In addition, acquisitions involve inherent risks that the businesses acquired will not perform in accordance with our expectations. We may not be able to achieve the synergies and other benefits we expect from the integration of acquisitions as successfully or rapidly as projected, if at all. Our failure to consummate an acquisition or effectively integrate newly acquired operations could prevent us from realizing our expected strategic growth and rate of return on an acquired business and could have a material and adverse effect on our results of operations and financial condition.

10

Natural disasters or other global or regional catastrophic events could disrupt our operations and adversely affect results. Despite our concerted effort to minimize risk to our production capabilities and corporate information systems and to reduce the effect of unforeseen interruptions to us through business continuity planning, we still may be exposed to interruptions due to catastrophe, natural disaster, pandemic, terrorism or acts of war, which are beyond our control. Disruptions to our facilities or systems, or to those of our key suppliers, could also interrupt operational processes and adversely effect our ability to manufacture our products and provide services and support to our customers. As a result, our business, our results of operations, financial position, cash flows and stock price could be adversely affected.

ITEM 1B – UNRESOLVED STAFF COMMENTS
None.

ITEM 2 – PROPERTIES
Our principal executive offices are located at 600 Grant Street, Suite 5100, Pittsburgh, Pennsylvania, 15219. Our corporate and technology center is located at 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania, 15650. A summary of our principal manufacturing facilities and other materially important properties is as follows:
 
 
 
 
Primary Segment
Location
 
Owned/Leased
Principal Products
IND(1)
WID(2)
INF(3)
United States:
 
 
 
 
 
Gurley, Alabama
Owned
Metallurgical Powders
 
 
X
Huntsville, Alabama
Owned
Metallurgical Powders
 
 
X
Rogers, Arkansas
Owned/Leased
Carbide Products, Pelletizing Die Plates and Downhole Drilling Carbide Components
 
 
X
Goshen, Indiana
Leased
Powders; Welding Rods, Wires and Machines
 
 
X
New Albany, Indiana
Leased
High Wear Coating for Steel Parts
 
 
X
Greenfield, Massachusetts
Owned
High-Speed Steel Taps
 
X
 
Traverse City, Michigan
Owned
Wear Parts
 
 
X
Fallon, Nevada
Owned
Metallurgical Powders
 
 
X
Asheboro, North Carolina
Owned
Carbide Round Tools
X
 
 
Henderson, North Carolina
Owned
Metallurgical Powders
 
 
X
Roanoke Rapids, North Carolina
Owned
Metalworking Inserts
X
 
 
Cleveland, Ohio
Leased
Distribution
X
 
 
Orwell, Ohio
Owned
Metalworking Inserts
X
 
 
Solon, Ohio
Owned
Metalworking Toolholders
X
 
 
Whitehouse, Ohio
Owned/Leased
Metalworking Inserts and Round Tools
X
 
 
Bedford, Pennsylvania
Owned/Leased
Mining and Construction Tools, Wear Parts and Distribution
 
 
X
Irwin, Pennsylvania
Owned
Carbide Wear Parts
 
 
X
New Castle, Pennsylvania
Owned/Leased
Specialty Metals and Alloys
 
 
X
Johnson City, Tennessee
Owned
Metalworking Inserts
X
 
 
La Vergne, Tennessee
Owned
Metalworking Inserts
X
 
 
New Market, Virginia
Owned
Metalworking Toolholders
X
 
 
International:
 
 
 
 
 
La Paz, Bolivia
Owned
Tungsten Concentrate
 
 
X
Indaiatuba, Brazil
Leased
Metalworking Carbide Drills and Toolholders
X
 
 
Belleville, Canada
Owned
Casting Components, Coatings and Powder Metallurgy Components
 
 
X
Victoria, Canada
Owned
Wear Parts
 
 
X
Fengpu, China
Owned
Intermetallic Composite Ceramic Powders and Parts
 
 
X
Shanghai, China
Owned
Powders, Welding Rods and Wires and Cast Components
 
 
X
Shanghai, China
Owned
Distribution
X
 
 
Tianjin, China
Owned
Metalworking Inserts, Carbide Round Tools and Metallurgical Powders
X
 
X

11

 
 
 
 
Primary Segment
Location
 
Owned/Leased
Principal Products
IND(1)
WID(2)
INF(3)
Xuzhou, China
Leased
Mining Tools
 
 
X
Ebermannstadt, Germany
Owned
Metalworking Inserts
X
 
 
Essen, Germany
Owned/Leased
Metalworking Inserts
X
 
 
Königsee, Germany
Leased
Metalworking Carbide Drills
X
 
 
Lichtenau, Germany
Owned
Metalworking Toolholders
X
 
 
Mistelgau, Germany
Owned
Wear Parts and Metallurgical Powders
 
 
X
Nabburg, Germany
Owned
Metalworking Toolholders and Metalworking Round Tools, Drills and Mills
X
 
 
Neunkirchen, Germany
Owned
Distribution
X
 
 
Schongau, Germany
Owned
Ceramic Vaporizer Boats
 
 
X
Vohenstrauss, Germany
Owned
Metalworking Carbide Drills
X
 
 
Bangalore, India
Owned
Metalworking Inserts, Toolholders and Wear Parts
X
X
X
Shlomi, Israel
Owned
High-Speed Steel and Carbide Round Tools
 
X
 
Zory, Poland
Leased
Mining and Construction Conicals
 
 
X
Boksburg, South Africa
Leased
Mining and Construction Conicals
 
 
X
Barcelona, Spain
Leased
Metalworking Cutting Tools
X
 
 
Kingswinford, United Kingdom
Leased
Distribution
X
 
 
Newport, United Kingdom
Owned
Intermetallic Composite Powders
 
 
X
(1)
Industrial segment
(2)
Widia segment
(3)
Infrastructure segment
We also have a network of customer service centers located throughout North America, Europe, India, Asia Pacific and Latin America, a significant portion of which are leased. The majority of our research and development efforts are conducted at our technology center located in Latrobe, Pennsylvania, U.S., as well as at our facilities in Rogers, Arkansas, U.S.; Fürth, Germany and Bangalore, India.
We use all of our significant properties in the businesses of powder metallurgy, tools, tooling systems, engineered components and advanced materials. Our production capacity is adequate for our present needs. We believe that our properties have been adequately maintained, are generally in good condition and are suitable for our business as presently conducted.

ITEM 3 - LEGAL PROCEEDINGS

The information set forth in Part I, Item 1, of this Annual Report under the caption “Regulation” is incorporated by reference into this Item 3. From time to time, we are party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible or intellectual property. Although certain of these types of actions are currently pending, we do not believe that any individual proceeding is material or that our pending legal proceedings in the aggregate are material to Kennametal.

ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference into this Part I is the information set forth in Part III, Item 10 of this Annual Report under the caption “Information About Our Executive Officers.”

PART II
ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our capital stock is traded on the New York Stock Exchange under the symbol "KMT." The number of shareholders of record as of July 31, 2019 was 1,492.

12

The information incorporated by reference into Part III, Item 12 of this Annual Report from our 2019 Proxy Statement under the heading “Equity Compensation Plans – Equity Compensation Plan Information” is hereby incorporated by reference into this Item 5.
PERFORMANCE GRAPH
The following graph compares cumulative total shareholder return on our capital stock with the cumulative total shareholder return on the common stock of the companies in the Standard & Poor’s Mid-Cap 400 Market Index (S&P Midcap 400), the Standard & Poor’s 400 Capital Goods (S&P 400 Capital Goods), the Standard & Poor's Global 1200 Industrials Index (S&P Global 1200 Industrials) and the peer group of companies determined by us for the period from July 1, 2013 to June 30, 2019.
The Peer Group consists of the following companies: Actuant Corporation; Allegheny Technologies Incorporated; Ametek, Inc.; Barnes Group Inc.; Carpenter Technology Corporation; Crane Co.; Donaldson Company, Inc.; Flowserve Corporation; Graco Inc.; Harsco Corporation; IDEX Corporation; ITT Inc.; Lincoln Electric Holdings, Inc.; The Manitowoc Company, Inc.; Nordson Corporation; Rexnord Corporation; Sandvik AB, Corp.; SPX Corporation; SPX FLOW, Inc.; The Timken Company; and Woodward, Inc.
performancegrapha20.jpg
Assumes $100 Invested on July 1, 2013 and All Dividends Reinvested
 
2014
2015
2016
2017
2018
2019
Kennametal
$
100.00

$
75.11

$
50.33

$
87.29

$
85.46

$
89.97

Peer Group Index
100.00

84.61

77.54

108.15

122.82

140.28

S&P Midcap 400
100.00

106.40

107.81

127.83

145.09

147.07

S&P 400 Capital Goods
100.00

96.52

97.33

125.90

139.42

156.12

S&P Global 1200 Industrials
100.00

98.68

99.98

124.38

132.75

141.75



13

ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number
of Shares Purchased(1) 

 
Average Price
Paid per Share

 
Total Number of 
Shares Purchased as Part of Publicly Announced Plans or Programs

 
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs (2) 

April 1 through April 30, 2019
1,100

 
$
37.59

 
—

 
10,100,100

May 1 through May 31, 2019
2,258

 
33.71

 
—

 
10,100,100

June 1 through June 30, 2019
471

 
36.99

 
—

 
10,100,100

Total
3,829

 
$
35.22

 
—

 
 

(1) 
During the fourth quarter of 2019, 1,673 shares were purchased on the open market on behalf of Kennametal to fund the Company’s dividend reinvestment program. Employees also delivered 2,156 shares of restricted stock to Kennametal, upon vesting, to satisfy tax withholding requirements.
(2) 
On July 25, 2013, the Company publicly announced an open-ended, amended repurchase program for up to 17 million shares of its outstanding common stock outside of the Company's dividend reinvestment program.

UNREGISTERED SALES OF EQUITY SECURITIES
None.


14

ITEM 6 - SELECTED FINANCIAL DATA
 
 
2019
2018
2017
2016
2015
OPERATING RESULTS (in thousands)
 
 
 
Sales
 
$
2,375,234

$
2,367,853

$
2,058,368

$
2,098,436

$
2,647,195

Cost of goods sold
(1
)
1,543,738

1,547,734

1,413,453

1,492,697

1,853,458

Operating expense
(1
)
474,151

503,252

468,568

496,792

557,718

Restructuring and asset impairment charges
(2
)
14,084

11,907

65,018

143,810

582,235

Loss on divestiture
 
—

—

—

131,463

—

Interest expense
 
32,994

30,081

28,842

27,752

31,466

Provision (benefit) for income taxes
 
63,359

69,981

29,895

25,313

(16,654
)
Income (loss) from continuing operations attributable to Kennametal
 
241,925

200,180

49,138

(225,968
)
(373,896
)
Net income (loss) attributable to Kennametal
 
241,925

200,180

49,138

(225,968
)
(373,896
)
FINANCIAL POSITION (in thousands)
 
 
 
 
 
 
Working capital
 
$
729,101

$
659,635

$
652,423

$
648,066

$
775,802

Total assets
 
2,656,269

2,925,737

2,415,496

2,362,783

2,843,655

Long-term debt, including capital leases, excluding current maturities
 
592,474

591,505

694,991

693,548

730,011

Total debt, including capital leases and notes payable
 
592,631

991,705

695,916

695,443

745,713

Total Kennametal shareholders' equity
 
1,335,172

1,194,325

1,017,294

964,323

1,345,807

PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
 
 
Basic earnings (loss) from continuing operations
(3
)
$
2.94

$
2.45

$
0.61

$
(2.83
)
$
(4.71
)
Basic earnings (loss)
(3
)
2.94

2.45

0.61

(2.83
)
(4.71
)
Diluted earnings (loss) from continuing operations
(3
)
2.90

2.42

0.61

(2.83
)
(4.71
)
Diluted earnings (loss)
(3
)
2.90

2.42

0.61

(2.83
)
(4.71
)
Dividends
 
0.80

0.80

0.80

0.80

0.72

Book value (at June 30)
 
16.17

14.63

12.61

12.10

16.96

Market Price (at June 30)
 
36.99

35.90

37.42

22.11

34.12

OTHER DATA (in thousands, except number of employees)
 
 
 
Capital expenditures
 
$
212,343

$
171,004

$
118,018

$
110,697

$
100,939

Number of employees (at June 30)
 
10,395

10,491

10,744

11,178

12,718

Basic weighted average shares outstanding
82,379

81,544

80,351

79,835

79,342

Diluted weighted average shares outstanding
83,291

82,754

81,169

79,835

79,342

KEY RATIOS
 
 
 
 
 
 
Sales growth (decline)
(4
)
0.3
%
15.0
%
(1.9
)%
(20.7
)%
(6.7
)%
Gross profit margin
 
35.0

34.6

31.3

28.9

30.0

Operating margin
(5
)
13.8

12.3

4.6
 %
(2.7
)%
(14.1
)%
(1)
Amounts were restated to reflect retrospective application for adoption of ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" on July 1, 2018. Cost of goods sold was increased by $12.2 million, $12.8 million, $10.3 million and $12.3 million for 2018, 2017, 2016 and 2015, respectively. Operating expense was increased by $5.1 million, $5.4 million, $1.8 million and $2.8 million for 2018, 2017, 2016 and 2015, respectively.
(2)
In 2019, 2018 and 2017, all charges were related to restructuring. In 2016, the charges related to intangible asset impairment of $108.5 million, restructuring charges of $30.0 million and fixed asset disposal charges of $5.4 million. In 2015, the charges related to intangible asset impairment of $541.7 million and restructuring charges of $40.5 million.
(3)
2019 included restructuring and related charges of $0.17, a net benefit from tax reform of $0.11, a charge related to changes in the indefinite reinvestment assertion on certain foreign subsidiaries' undistributed earnings of $0.07 and $0.01 of benefit from the release of the valuation allowance on Australian deferred tax assets. 2018 included restructuring and related charges of $0.16, effect of an out of period adjustment to the provision for income taxes of $0.06 and net effect of tax reform of $0.01. 2017 included restructuring and related charges of $0.89 and Australia deferred tax valuation allowance of $0.02. 2016 included U.S. deferred tax valuation allowance of $1.02, divestiture and related charges of $1.39, intangible asset impairment charges of $0.96, restructuring and related charges of $0.50, fixed asset disposal charges of $0.05 and operations of divested businesses of $0.02. 2015 included intangible asset impairment charges of $6.13 and restructuring and related charges of $0.56.
(4)
Divestiture effect of sales decline was negative 4 percent and negative 5 percent in 2017 and 2016, respectively.
(5)
Included restructuring and related charges of $16.9 million, $15.9 million, $76.2 million, $53.5 million and $58.1 million in 2019, 2018, 2017, 2016 and 2015, respectively; intangible asset impairment of $108.5 million and $541.7 million in 2016 and 2015, respectively; and divestiture and related charges of $131.5 million in 2016.

15

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in connection with the consolidated financial statements of Kennametal Inc. and the related financial statement notes included in Item 8 of this Annual Report. Unless otherwise specified, any reference to a “year” is to our fiscal year ended June 30. Additionally, when used in this Annual Report, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
OVERVIEW Kennametal Inc. was founded based on a tungsten carbide technology breakthrough in 1938. The Company was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling, and was listed on the New York Stock Exchange (NYSE) in 1967. With more than 80 years of materials expertise, the Company is a global industrial technology leader, helping customers across the aerospace, earthworks, energy, general engineering and transportation industries manufacture with precision and efficiency. This expertise includes the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and extreme wear applications to keep customers up and running longer against conditions such as corrosion and high temperatures.
Our standard and custom product offering spans metalworking and wear applications including turning, milling, hole making, tooling systems and services, as well as specialized wear components and metallurgical powders. End users of the Company's metalworking products include manufacturers engaged in a diverse array of industries including: the manufacturers of transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation. The Company’s wear and metallurgical powders are used by producers and suppliers in equipment-intensive operations such as road construction, mining, quarrying, oil and gas exploration, refining, production and supply.
Throughout the MD&A, we refer to measures used by management to evaluate performance. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, constant currency regional sales growth (decline) and constant currency end market sales growth (decline). The explanation at the end of the MD&A provides the definition of these non-GAAP financial measures as well as details on their use and a reconciliation to the most directly comparable GAAP financial measures.
Operational results in 2019 reflected increasing progress on our simplification/modernization initiatives with earnings per diluted share (EPS) of $2.90, a 20 percent improvement over the prior year results. A key milestone of those initiatives was the recent announcement of the intended closure of four of our facilities, which is expected to drive further structural benefits and improve operational efficiency. Sales in 2019 of $2,375.2 million grew slightly compared to $2,367.9 million in 2018, reflecting a 3 percent increase from organic sales growth offset by unfavorable currency exchange effect of 3 percent. We also continued to gain traction on our growth initiatives in general engineering and aerospace, with aerospace growing by double digits. Against this backdrop of year-over-year progress, we saw increased softening in most of our end-markets late in the year. Our expectation is that this challenging macro environment will continue into the first half of fiscal 2020. Nevertheless, we expect to continue executing our plan to improve long-term profitability.
Operating income was $328.9 million compared to $290.3 million in the prior year. The increase was driven primarily by organic sales growth, incremental simplification/modernization benefits, favorable mix and lower compensation expense, partially offset by unfavorable volume-related labor and fixed cost absorption in certain facilities in part due to simplification/modernization efforts in progress, higher raw material costs, unfavorable currency exchange and greater restructuring and related charges. Price realization exceeded raw material cost inflation in 2019, and operating margin improved to 13.8 percent from 12.3 percent in the prior year. The Industrial, Infrastructure and Widia segments had operating margins of 17.3 percent, 12.0 percent and 1.5 percent, respectively.
As previously announced, the Company initiated several restructuring actions associated with our ongoing simplification/modernization program. These proposed actions are expected to reduce structural costs, improve operational efficiency and position the Company for long-term profitable growth. Proposed facility closures and other actions in fiscal 2020 (FY20 Restructuring Actions) in total are expected to deliver estimated annualized savings of $35 million to $40 million, with total expected pre-tax charges of $55 million to $65 million.
Proposed facility closures in fiscal 2021 (FY21 Restructuring Actions) are expected to result in further structural cost reductions with estimated annualized savings of $25 million to $30 million. Most of these savings would be achieved in fiscal 2021 with full run rate savings being realized in fiscal 2022. The Company expects to incur pre-tax charges of $60 million to $75 million through fiscal 2020 and 2021 related to the restructuring. These charges are primarily cash with the majority expected to be spent in fiscal 2021.

16

During 2019 we recorded $17.5 million of pre-tax restructuring and related charges during the year and pre-tax benefits from cost savings initiatives were approximately $12 million, with annualized run-rate pre-tax benefits of approximately $15 million achieved.
We generated cash flow from operating activities of $300.5 million in 2019 compared to $277.3 million during the prior year. Capital expenditures were $212.3 million and $171.0 million during 2019 and 2018, respectively, with the increase due in part to higher spending in connection with our simplification/modernization efforts, and the Company returned $65.7 million to shareholders through dividends.
For discussion related to the results of operations, changes in financial condition and liquidity and capital resources for fiscal 2018 compared to fiscal 2017 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2018 Form 10-K, which was filed with the United States Securities and Exchange Commission on August 10, 2018.

RESULTS OF CONTINUING OPERATIONS
SALES Sales in 2019 were $2,375.2 million and were flat compared to $2,367.9 million in 2018. Organic sales growth of 3 percent from organic sales growth was offset by unfavorable currency exchange effect of 3 percent.
 
2019
(in percentages)
As Reported
Constant Currency
End market sales growth (decline):
 
 
Aerospace and defense
12%
16%
Energy
4
5
General engineering
3
7
Earthworks
(6)
(3)
Transportation
(9)
(5)
Regional sales growth (decline):
 
 
Americas
4%
5%
Asia Pacific
(2)
2
Europe, the Middle East and Africa (EMEA)
(4)
2
GROSS PROFIT Gross profit increased $11.4 million to $831.5 million in 2019 from $820.1 million in 2018. This increase was primarily due to organic sales growth, incremental simplification/modernization benefits and favorable mix, partially offset by higher raw material costs, unfavorable volume-related labor and fixed cost absorption in certain facilities in part due to simplification/modernization efforts in progress, higher raw material costs and unfavorable foreign currency exchange effect of approximately $29 million. The gross profit margin for 2019 was 35.0 percent compared to 34.6 percent in 2018.
OPERATING EXPENSE Operating expense in 2019 was $474.2 million, a decrease of $29.1 million, or 5.8 percent, from $503.2 million in 2018. The decrease was primarily due to lower compensation expense, favorable currency exchange effect of approximately $13 million and incremental restructuring simplification/modernization benefits, partially offset by salary inflation.
We invested further in technology and innovation to continue delivering high quality products to our customers. Research and development expenses included in operating expense totaled $39.0 million and 38.9 million for 2019 and 2018, respectively.
RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES
FY19 Restructuring Actions
In the June quarter of fiscal 2018, we implemented and subsequently substantially completed restructuring activities to simplify the Industrial segment's cost structure by directing our resources to more profitable business and increasing sales force productivity. We supplemented this with the rationalization of small manufacturing facilities in the Infrastructure and Industrial segments, which we substantially completed in fiscal 2019. Total restructuring and related charges since inception of $13.4 million were recorded for this program through June 30, 2019: $11.8 million in Industrial, $1.0 million in Widia, $0.5 million in Infrastructure and $0.1 million in Corporate.

17

FY20 Restructuring Actions
In the June quarter of fiscal 2019, we began implementing the next phase of restructuring associated with our simplification/modernization initiative. These proposed actions are expected to reduce structural costs, improve operational efficiency and position the Company for long-term profitable growth, and are currently estimated to achieve $35 million to $40 million of annualized savings by the end of fiscal 2020. The Company expects to incur pre-tax charges of $55 million to $65 million through fiscal 2020 for these restructuring activities, which are anticipated to be primarily cash expenditures and are expected to be approximately 80 percent Industrial, 5 percent Widia and 15 percent Infrastructure. Total restructuring and related charges since inception of $14.2 million were recorded for this program through June 30, 2019: $10.0 million in Industrial, $2.4 million in Infrastructure and $1.8 million in Widia.
FY21 Restructuring Actions
Fiscal 2021 proposed closures are expected to result in further structural cost reductions with estimated annualized savings of $25 million to $30 million. Most of these savings would be achieved in fiscal 2021 with full run rate savings being realized in fiscal 2022. The Company is expected to incur pre-tax charges of $60 million to $75 million, primarily in the Industrial segment, through fiscal 2020 and 2021 for this restructuring. These charges are primarily cash with the majority expected to be spent in fiscal 2021.
Annual Restructuring Charges
During 2019, we recorded restructuring and related charges of $16.9 million, net of a $4.8 million gain on the sale of our previously closed Madison, AL manufacturing location as part of our FY19 Restructuring Actions. Of this amount, restructuring charges totaled $19.5 million, of which $0.7 million was related to inventory and was recorded in cost of goods sold. Restructuring-related charges of $1.8 million were recorded in cost of goods sold and $0.3 million were recorded in operating expense during 2019.
During 2018, we recorded restructuring and related charges of $15.9 million, net of a $4.7 million gain on the sale of our previously closed Houston, TX manufacturing location as part of our legacy restructuring programs. Of this amount, restructuring charges totaled $16.4 million, of which benefit of $0.2 million was related to inventory and was recorded in cost of goods sold. Restructuring-related charges of $3.7 million were recorded in cost of goods sold and $0.5 million were recorded in operating expense during 2018.
AMORTIZATION OF INTANGIBLES Amortization expense was $14.4 million and $14.7 million in 2019 and 2018, respectively.
INTEREST EXPENSE Interest expense in 2019 was $33.0 million, an increase of $2.9 million, compared to $30.1 million in 2018. The increase was primarily due to the incremental interest expense on the $300.0 million of 4.625 percent Senior Unsecured Notes issued in June 2018 (New Notes). The portion of our debt subject to variable rates of interest was less than 1 percent at June 30, 2019 and 2018.
OTHER INCOME, NET In 2019, other income, net was $15.4 million, an increase of $0.6 million from $14.8 million in 2018. The increase was primarily due to lower foreign currency transaction losses, partially offset by lower pension income and lower interest income in the current year.
INCOME TAXES The effective tax rate for 2019 was 20.4 percent compared to 25.4 percent for 2018. The current year rate reflects several effects associated with the Tax Cuts and Jobs Act of 2017 (TCJA) including a lower U.S. federal statutory tax rate, a $9.3 million net tax benefit associated with the finalization of a one-time tax that is imposed on our unremitted foreign earnings (toll tax), a tax on global intangible low-taxed income (GILTI) and a $6.1 million charge related to changes in the Company's permanent reinvestment assertion on certain foreign subsidiaries' undistributed earnings, which are no longer considered permanently reinvested. The 2019 rate also includes a benefit of $1.1 million from the release of the valuation allowance that was previously recorded against the net deferred tax assets of our subsidiary in Australia. The prior year rate includes charges related to TCJA and an out of period adjustment. See Note 11 of our consolidated financial statements set forth in Item 8 of this Annual Report for a more comprehensive discussion about the TCJA (Note 11).
In 2012, we received an assessment from the Italian tax authority that denied certain tax deductions primarily related to our 2008 tax return. Attempts at negotiating a reasonable settlement with the tax authority were unsuccessful; and as a result, we decided to litigate the matter. The outcome of the litigation is still pending; however, we continue to believe that the assessment is baseless, and do not anticipate making a payment in connection with this assessment. Accordingly, no income tax liability has been recorded in connection with this assessment in any period. However, if the Italian tax authority were to be successful in litigation, settlement of the amount alleged by the Italian tax authority would result in an increase to income tax expense for as much as €35 million, or $40 million, of which penalties and interest is €20 million, or $23 million.
NET INCOME ATTRIBUTABLE TO KENNAMETAL Net income attributable to Kennametal was $241.9 million, or $2.90 EPS, in 2019, compared to $200.2 million, or $2.42 EPS, in 2018. The increase is a result of the factors previously discussed.

18


BUSINESS SEGMENT REVIEW We operate in three reportable operating segments consisting of Industrial, Widia and Infrastructure. Corporate expenses that are not allocated are reported in Corporate. Segment determination is based upon internal organizational structure, the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results. See Note 19 of our consolidated financial statements set forth in Item 8 of this Annual Report.

Our sales and operating income by segment are as follows:
(in thousands)
2019
 
2018
Sales:
 
 
 
Industrial
$
1,274,499

 
$
1,292,098

Widia
197,522

 
198,568

Infrastructure
903,213

 
877,187

Total sales
$
2,375,234

 
$
2,367,853

Operating income (loss):
 
 
 
Industrial
$
220,696

 
$
176,978

Widia
2,882

 
2,919

Infrastructure
108,480

 
112,998

Corporate
(3,208
)
 
(2,596
)
Total operating income
328,850

 
290,299

Interest expense
32,994

 
30,081

Other income, net
(15,379
)
 
(14,823
)
Income from continuing operations before income taxes
$
311,235

 
$
275,041

INDUSTRIAL
(in thousands)
2019
 
2018
Sales
$
1,274,499

 
$
1,292,098

Operating income
220,696

 
176,978

Operating margin
17.3
%
 
13.7
%
(in percentages)
2019
Organic sales growth
2%
Foreign currency exchange impact
(3)
Business days impact
—
Sales decline
(1)%
 
2019
(in percentages)
As Reported
 
Constant Currency
End market sales growth (decline):
 
 
 
Aerospace and defense
12%
 
16%
General engineering
2
 
5
Energy
(2)
 
1
Transportation
(9)
 
(5)
Regional sales growth (decline):
 
 
 
Americas
4%
 
7%
EMEA
(5)
 
1
Asia Pacific
(5)
 
(1)

19

In 2019, Industrial sales of $1,274.5 million decreased by $17.6 million, or 1 percent, from 2018. Sales in aerospace were higher in all three regions driven by higher demand for engines and frames globally, and general engineering sales increased in all three regions due to the overall economic environment, particularly in the first half of the fiscal year. The slight growth in energy, excluding the unfavorable impact of currency exchange, was driven primarily by oil and gas drilling in the Americas and strength in the renewable energy market in China. Transportation sales declined in all three regions due to weaker market conditions. Growth in the Americas and slight growth in EMEA, excluding the unfavorable impact of currency exchange, was primarily driven by the performance in the general engineering and aerospace end markets, partially offset by a decrease in the transportation end market. The sales decrease in Asia Pacific was primarily driven by conditions in the transportation end market, partially offset by growth in the aerospace, general engineering and energy end markets.
In 2019, Industrial operating income was $220.7 million, a $43.7 million increase from 2018. The primary drivers for the increase were organic sales growth, incremental simplification/modernization benefits and favorable mix, partially offset by unfavorable volume-related labor and fixed cost absorption in certain facilities in part due to simplification/modernization efforts in progress, unfavorable currency exchange impact of approximately $11 million, $8.4 million incremental restructuring and related charges and higher raw material costs.
WIDIA
(in thousands)
2019
 
2018
Sales
$
197,522

 
$
198,568

Operating income
2,882

 
2,919

Operating margin
1.5
%
 
1.5
%
(in percentages)
2019
Organic sales growth
3%
Foreign currency exchange impact
(4)
Business days impact
—
Sales decline
(1)%
 
2019
(in percentages)
As Reported
 
Constant Currency
Regional sales growth (decline):
 
 
 
EMEA
—%
 
7%
Americas
(1)
 
—
Asia Pacific
(1)
 
5
In 2019, Widia sales of $197.5 million decreased by $1.0 million, or 1 percent, from 2018. Sales growth in EMEA, despite the increasingly difficult market environment, was driven mainly by growth in products focused on aerospace applications due in part to our successful aerospace growth initiatives. Sales growth in Asia Pacific, excluding the unfavorable impact of currency exchange, was driven primarily by strong sales in India, partially offset by overall market softness in China. Sales in the Americas were flat, with increases in Mexico and in aerospace applications offset by the effects of exiting portions of our product portfolio and actions taken to improve the effectiveness of the distribution network.
Widia operating income was $2.9 million in 2019 and 2018. The current year operating income reflects organic sales growth in the current period, offset by unfavorable mix, salary inflation, $1.6 million incremental restructuring and related charges and unfavorable currency exchange impact of approximately $1 million.
INFRASTRUCTURE
(in thousands)
2019
 
2018
Sales
$
903,213

 
$
877,187

Operating income
108,480

 
112,998

Operating margin
12.0
%
 
12.9
%

20

(in percentages)
2019
Organic sales growth
5%
Foreign currency exchange impact
(2)
Business days impact
—
Sales growth
3%
 
2019
(in percentages)
As Reported
 
Constant Currency
End market sales growth (decline):
 
 
 
General engineering
10%
 
12%
Energy
6
 
7
Earthworks
(6)
 
(3)
Regional sales growth (decline):
 
 
 
Americas
4%
 
5%
Asia Pacific
2
 
6
EMEA
(1)
 
5
In 2019, Infrastructure sales of $903.2 million increased by $26.0 million, or 3 percent, from 2018. Strong growth in general engineering was driven primarily by more robust activity in all regions. Increases in process industries, power generation, and the U.S. oil and gas market drove year-over-year growth in energy, with average U.S. land rig counts up 7 percent compared to the prior year. Earthworks end market sales were down year-over-year due to softness in mining in the Americas and EMEA, offset by growth in Asia Pacific. The sales increase in Asia Pacific was driven primarily by the performance in the earthworks and energy end markets. Growth in the Americas and in EMEA, excluding the unfavorable impact of currency exchange, was driven by the performance in the general engineering and energy end markets, partially offset by a decrease in earthworks.
In 2019, Infrastructure operating income was $108.5 million, a $4.5 million decrease from 2018. The primary drivers for the decrease were higher raw material costs and manufacturing expenses and an unfavorable currency exchange impact of approximately $3 million, partially offset by, organic sales growth, incremental simplification/modernization benefits and $3.6 million less restructuring and related charges.
CORPORATE
(in thousands)
 
2019
 
2018
Corporate expense
 
$
(3,208
)
 
$
(2,596
)
In 2019, Corporate expense increased $0.6 million from 2018.

LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the primary source of funding for our capital expenditures. During the year ended June 30, 2019, cash flow provided by operating activities was $300.5 million.
Our five-year, multi-currency, revolving credit facility, as amended and restated in June 2018 (Credit Agreement), is used to augment cash from operations and as an additional source of funds. The Credit Agreement provides for revolving credit loans of up to $700.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement allows for borrowings in U.S. dollars, euros, Canadian dollars, pounds sterling and Japanese yen. Interest payable under the Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin or (3) fixed as negotiated by us. The Credit Agreement matures in June 2023. We had no outstanding borrowings on our Credit Agreement as of June 30, 2019.
The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the Credit agreement). We were in compliance with all covenants as of June 30, 2019. For the year ended June 30, 2019, average daily borrowings outstanding under the Credit Agreement were approximately $12.1 million. We had no borrowings outstanding under the Credit Agreement as of June 30, 2019 and 2018. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries.

21

Additionally, we obtain local financing through credit lines with commercial banks in the various countries in which we operate. At June 30, 2019, these borrowings were immaterial. We believe that cash flow from operations and the availability under our credit lines will be sufficient to meet our cash requirements over the next 12 months.
Based upon our debt structure at June 30, 2019 and 2018, less than 1 percent of our debt was exposed to variable rates of interest.
Based on regulations issued by the U.S. Department of the Treasury and the Internal Revenue Service and other relevant guidance issued through June 30, 2019, we recorded a net benefit of $9.3 million during 2019 to finalize the toll tax. We did not make a cash payment associated with the toll tax.
As a result of the Tax Cuts and Jobs Act of 2017 (TCJA), which among other provisions allows for a 100 percent dividends received deduction from controlled foreign subsidiaries, we re-evaluated our assertion with respect to permanent reinvestment in all jurisdictions during the current year and concluded that a portion of the unremitted earnings and profits of certain non-U.S. subsidiaries and affiliates will no longer be permanently reinvested. These changes in assertion required the recognition of a tax charge of $6.1 million recorded in the current year primarily for foreign withholding and U.S. state income taxes. The remaining amount of approximately $1.4 billion is substantially all of the unremitted earnings of our non-U.S. subsidiaries which continues to be indefinitely reinvested. The deferred tax liability associated with unremitted earnings of our non-U.S. subsidiaries not permanently reinvested is $3.9 million as of June 30, 2019. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested earnings is not practicable due to our legal entity structure and the complexity of U.S. and local tax laws. With regard to the unremitted earnings which remain indefinitely reinvested, we have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.
At June 30, 2019, we had cash and cash equivalents of $182.0 million. Total Kennametal Shareholders’ equity was $1,335.2 million and total debt was $592.6 million. Our current senior credit ratings are considered investment grade. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers.
The following is a summary of our contractual obligations and other commercial commitments as of June 30, 2019 (in thousands): 
Contractual Obligations
 
  
 
Total
 
2020
 
2021-2022
 
2023-2024
 
Thereafter
Long-term debt, including current maturities
 
(1
)
 
$
713,450

 
$
25,500

 
$
347,125

 
$
27,750

 
$
313,075

Notes payable
 
(2
)
 
196

 
196

 
—

 
—

 
—

Pension benefit payments
 
 
 
(3)
 
51,516

 
104,535

 
109,198

 
(3)
Postretirement benefit payments
 
 
 
(3)
 
1,418

 
2,535

 
2,177

 
(3)
Operating leases
 
 
 
60,077

 
17,074

 
18,905

 
6,930

 
17,168

Purchase obligations
 
(4
)
 
254,450

 
139,444

 
99,976

 
15,030

 
—

Unrecognized tax benefits
 
(5
)
 
9,701

 
608

 
2,694

 
5,376

 
1,023

Total
 
 
 
 
 
$
235,756

 
$
575,770

 
$
166,461

 


(1)
Long-term debt includes interest obligations of $114.3 million and excludes debt issuance costs of $5.5 million. Interest obligations were determined assuming interest rates as of June 30, 2019 remain constant.
(2)
Notes payable includes interest obligations of an immaterial amount. Interest obligations were determined assuming interest rates as of June 30, 2019 remain constant.
(3)
Annual payments are expected to continue into the foreseeable future at the amounts noted in the table.
(4)
Purchase obligations consist of purchase commitments for materials, supplies and machinery and equipment as part of the ordinary conduct of business. Purchase obligations with variable price provisions were determined assuming market prices as of June 30, 2019 remain constant.
(5)
Unrecognized tax benefits are positions taken or expected to be taken on an income tax return that may result in additional payments to tax authorities. These amounts include interest of $0.7 million and penalty of $0.1 million accrued related to such positions as of June 30, 2019. Positions for which we are not able to reasonably estimate the timing of potential future payments are included in the ‘Thereafter’ column. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary.
Other Commercial Commitments
 
Total
 
2020
 
2021-2022
 
2023-2024
 
Thereafter
Standby letters of credit
 
$
4,097

 
$
2,665

 
$
1,432

 
$
—

 
$
—

Guarantees
 
29,708

 
19,004

 
2,026

 
—

 
8,678

Total
 
$
33,805

 
$
21,669

 
$
3,458

 
$
—

 
$
8,678

The standby letters of credit relate to insurance and other activities. The guarantees are non-debt guarantees with financial institutions, which are required primarily for security deposits, product performance guarantees and advances.

22

Cash Flow Provided by Operating Activities
During 2019, cash flow provided by operating activities was $300.5 million, compared to $277.3 million in 2018. During 2019, cash flow provided by operating activities consisted of net income and non-cash items amounting to $388.0 million and changes in certain assets and liabilities netting to an outflow of $87.5 million. Contributing to the changes in certain assets and liabilities were an increase in inventories of $53.4 million, a decrease in accounts payable and accrued liabilities of $49.4 million and a decrease in accrued pension and postretirement benefits of $8.2 million, partially offset by a decrease in accounts receivable of $17.3 million. The changes in inventories and accounts receivable were primarily due to increased demand in the September and December quarters, increased strategic inventory on our high volume/high profitability products for improved customer service, raw material price increases, a temporary increase in inventory related to product moves between facilities as part of simplification/modernization and lower than anticipated sales in the March and June quarters.
During 2018, cash flow provided by operating activities was $277.3 million. Cash flow provided by operating activities consisted of net income and non-cash items amounting to $361.9 million and changes in certain assets and liabilities netting to an outflow of $84.6 million. Contributing to the changes in certain assets and liabilities were an increase in inventories of $37.2 million, a decrease in accrued pension and postretirement benefits of $26.8 million, an increase in accounts receivable of $22.2 million and a decrease in accounts payable and accrued liabilities of $5.0 million, partially offset by an increase in accrued income taxes of $11.1 million. The increases in inventories and accounts receivable were due in part to higher demand in our end markets, in addition to the effects of raw material cost inflation on inventories.
Cash Flow Used for Investing Activities
Cash flow used for investing activities was $201.5 million for 2019, an increase of $44.6 million, compared to $156.9 million in 2018. During 2019, cash flow used for investing activities included capital expenditures, net of $201.1 million, which consisted primarily of equipment upgrades and modernization initiatives.
Cash flow used for investing activities was $156.9 million for 2018. During 2018, cash flow used for investing activities included capital expenditures, net of $156.6 million, which consisted primarily of machinery and equipment upgrades and additions related to our modernization initiatives and capacity additions.
Cash Flow (Used for) Provided by Financing Activities
Cash flow used for financing activities was $471.4 million for 2019, compared to cash flow provided by financing activities of $247.2 million in 2018. During 2019, cash flow used for financing activities included outflows of $400.9 million of net term debt repayments primarily due to the early extinguishment of our 2.650 percent Senior Unsecured Notes, $65.7 million of cash dividends paid to Shareholders and $4.7 million of the effect of employee benefit and stock plans and dividend reinvestment.
Cash flow provided by financing activities was $247.2 million for 2018. During 2018, cash flow provided by financing activities included a $296.2 million net increase in borrowings due primarily to the issuance of the New Notes and $18.0 million of the effect of employee benefit and stock plans and dividend reinvestment, partially offset by $65.1 million of cash dividends paid to Shareholders.

FINANCIAL CONDITION At June 30, 2019, total assets were $2,656.3 million, a decrease of $269.5 million from $2,925.7 million at June 30, 2018. Total liabilities decreased $413.8 million from $1,695.4 million at June 30, 2018 to $1,281.6 million at June 30, 2019.
Working capital was $729.1 million at June 30, 2019, an increase of $69.5 million from $659.6 million at June 30, 2018. The increase in working capital was primarily driven by a decrease in current maturities of long-term debt and capital leases of $399.3 million due to the early redemption of our $400 million of 2.650 percent Senior Unsecured Notes; an increase in inventory of $46.1 million due primarily to increased demand in the September and December quarters, increased strategic inventory on our high volume/high profitability products for improved customer service, raw material price increases, a temporary increase in inventory related to product moves between facilities as part of simplification/modernization and lower than anticipated sales in the March and June quarters; a decrease in accrued payroll of $18.0 million and a decrease in accounts payable of $9.0 million. Partially offsetting these items were a decrease in cash and cash equivalents of $374.1 million, a decrease in accounts receivable of $21.4 million and an increase in accrued income taxes of $10.6 million due primarily to increased taxable income in taxpaying jurisdictions. Currency exchange rate effects decreased working capital by a total of approximately $11 million, the effects of which are included in the aforementioned changes.
Property, plant and equipment, net increased $110.7 million from $824.2 million at June 30, 2018 to $934.9 million at June 30, 2019, primarily due to capital additions of $212.3 million and favorable currency exchange effects of $7.2 million. This increase was partially offset by depreciation expense of $97.6 million and disposals of $11.2 million.

23

At June 30, 2019, other assets were $530.5 million, a decrease of $24.8 million from $555.4 million at June 30, 2018. The primary drivers for the decrease were a decrease in intangible assets of $15.5 million, which was due to amortization expense of $14.4 million and unfavorable currency exchange effects of $1.1 million, a decrease in pension plan assets of $11.0 million due mostly to lower discount rates and a decrease in goodwill of $1.8 million primarily due to unfavorable currency exchange rate effects.
Kennametal Shareholders’ equity was $1,335.2 million at June 30, 2019, an increase of $140.8 million from $1,194.3 million in the prior year. The increase was primarily due to net income attributable to Kennametal of $241.9 million, capital stock issued under employee benefit and stock plans of $17.9 million, the reclassification of net pension and other postretirement benefit loss of $5.1 million and the reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges of $1.3 million, partially offset by cash dividends paid to Shareholders of $65.7 million, unrecognized net pension and other postretirement benefit loss of $39.6 million and unfavorable currency exchange effects of $20.2 million.

EFFECTS OF INFLATION Despite modest inflation in recent years, rising costs, including the cost of certain raw materials, continue to affect our operations throughout the world. We strive to minimize the effects of inflation through cost containment, productivity improvements and price increases.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES In preparing our financial statements in conformity with accounting principles generally accepted in the U.S., we make judgments and estimates about the amounts reflected in our financial statements. As part of our financial reporting process, our management collaborates to determine the necessary information on which to base our judgments and develops estimates used to prepare the financial statements. We use historical experience and available information to make these judgments and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in our financial statements. Our significant accounting policies are described in Note 2 of our financial statements, which are included in Item 8 of this Annual Report. We believe that the following discussion addresses our critical accounting policies.
Revenue Recognition The Company's contracts with customers are comprised of purchase orders, and for larger customers, may also include long-term agreements. We account for a contract when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. These contracts with customers typically relate to the manufacturing of products, which represent single performance obligations that are satisfied when control of the product passes to the customer. The Company considers the timing of right to payment, transfer of risk and rewards, transfer of title, transfer of physical possession and customer acceptance when determining when control transfers to the customer. As a result, revenue is generally recognized at a point in time - either upon shipment or delivery - based on the specific shipping terms in the contract. The shipping terms vary across all businesses and depend on the product, customary local commercial terms and the type of transportation. Shipping and handling activities are accounted for as activities to fulfill a promise to transfer a product to a customer and as such, costs incurred are recorded when the related revenue is recognized. Payment for products is due within a limited time period after shipment or delivery, typically within 30 to 90 calendar days of the respective invoice dates. The Company does not generally offer extended payment terms.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Amounts billed and due from our customers are classified as accounts receivable, less allowance for doubtful accounts on the consolidated balance sheet. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract. Variable consideration primarily includes volume incentive rebates, which are based on achieving a certain level of purchases and other performance criteria as established by our distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned. The majority of our products are consumed by our customers or end users in the manufacture of their products. Historically, we have experienced very low levels of returned products and do not consider the effect of returned products to be material. We have recorded an estimated returned goods allowance to provide for any potential returns.
We warrant that products sold are free from defects in material and workmanship under normal use and service when correctly installed, used and maintained. This warranty terminates 30 days after delivery of the product to the customer and does not apply to products that have been subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be returned to Kennametal only after inspection and approval by Kennametal and upon receipt by the customer of shipping instructions from Kennametal. We have included an estimated allowance for warranty returns in our returned goods allowance discussed above.

24

The Company records a contract asset when it has a right to payment from a customer that is conditioned on events that have occurred other than the passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material remaining performance obligations, contract assets or liabilities as of June 30, 2019 and 2018.
The Company pays sales commissions related to certain contracts, which qualify as incremental costs of obtaining a contract. However, the Company applies the practical expedient that allows an entity to recognize incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would have been recognized is one year or less. These costs are recorded within operating expense in our condensed consolidated statement of income.
Stock-Based Compensation We recognize stock-based compensation expense for all stock options, restricted stock awards and restricted stock units over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service (substantive vesting period), net of expected forfeitures. We utilize the Black-Scholes valuation method to establish the fair value of all stock option awards. Time vesting stock units are valued at the market value of the stock on the grant date. Performance vesting stock units with a market condition are valued using a Monte Carlo model.
Accounting for Contingencies We accrue for contingencies when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment in both assessing whether or not a liability or loss has been incurred and estimating the amount of probable loss. The significant contingencies affecting our financial statements include environmental, health and safety matters and litigation.
Long-Lived Assets We evaluate the recoverability of property, plant and equipment and intangible assets that are amortized whenever events or changes in circumstances indicate the carrying amount of such assets may not be fully recoverable. Changes in circumstances include technological advances, changes in our business model, capital structure, economic conditions or operating performance. Our evaluation is based upon, among other things, our assumptions about the estimated future undiscounted cash flows these assets are expected to generate. When the sum of the undiscounted cash flows is less than the carrying value, we will recognize an impairment loss to the extent that carrying value exceeds fair value. We apply our best judgment when performing these evaluations to determine if a triggering event has occurred, the undiscounted cash flows used to assess recoverability and the fair value of the asset.
Goodwill and Indefinite-Lived Intangible Assets We evaluate the recoverability of goodwill of each of our reporting units by comparing the fair value of each reporting unit with its carrying value. The fair values of our reporting units are determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. We perform our annual impairment tests during the June quarter in connection with our annual planning process unless there are impairment indicators based on the results of an ongoing cumulative qualitative assessment that warrant a test prior to that quarter. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit. The discounted cash flow method was used to measure the fair value of our equity under the income approach. A terminal value utilizing a constant growth rate of cash flows was used to calculate a terminal value after the explicit projection period. The estimates and assumptions used in our calculations include revenue and gross margin growth rates, expected capital expenditures to determine projected cash flows, expected tax rates and an estimated discount rate to determine present value of expected cash flows. These estimates are based on historical experiences, our projections of future operating activity and our weighted average cost of capital (WACC). In order to determine the discount rate, the Company uses a market perspective WACC approach. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an effect on future calculations of estimated fair value.
The $272.7 million of goodwill allocated to the Industrial reporting unit is not at risk of failing the quantitative impairment test since fair value substantially exceeded the carrying value as of the date of the last impairment test. There is no goodwill allocated to the Infrastructure reporting unit.
The $27.3 million of goodwill allocated to the Widia reporting unit exceeded carrying value by 25 percent as of the date of the last impairment test. We completed a quantitative test of goodwill impairment using both an income approach and a market approach. To determine fair value, we assumed revenue growth rates of 4 percent to 9 percent and a residual period growth rate of 3 percent. The future period cash flows were discounted at 17 percent per annum. Under the market approach, we estimate the fair value based on market multiples of revenue and earnings of comparable publicly traded companies and comparable transactions of similar companies. The valuation model assumes an increase in sales and profitability within the projection period. Changes in demand and end market conditions may also have an effect on future calculations of estimated fair value. The Company also performed sensitivity analysis on revenue and gross margin growth rate assumptions, as well as the discount rate.

25

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill and indefinite-lived intangible impairment test will prove to be an accurate prediction of the future. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends; (ii) inability to achieve the anticipated benefits from simplification/modernization and other cost reduction programs and (iii) inability to achieve the sales from our strategic growth initiatives.
Further, an indefinite-lived trademark intangible asset of $14.5 million in the Widia reporting unit had a fair value that approximated its carrying value as of the date of the last impairment test. To determine fair value, we used a relief from royalty approach and assumed revenue growth rates of 4 percent to 9 percent and a residual period growth rate of 3 percent. We assumed a royalty rate of 1 percent, and the future period cash flows were discounted at 18.5 percent per annum. The estimated fair value of this asset could be negatively affected by a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends, and inability to achieve the sales from our strategic growth initiatives. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends; (ii) inability to achieve the sales from our strategic growth initiatives.
Pension and Other Postretirement Benefits We sponsor pension and other postretirement benefit plans for certain employees and retirees. Accounting for the cost of these plans requires the estimation of the cost of the benefits to be provided well into the future and attributing that cost over either the expected work life of employees or over average life of participants participating in these plans, depending on plan status and on participant population. This estimation requires our judgment about the discount rate used to determine these obligations, expected return on plan assets, rate of future compensation increases, rate of future health care costs, withdrawal and mortality rates and participant retirement age. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans.
In the valuation of our pension and other postretirement benefit liabilities, management utilizes various assumptions. Our discount rates are derived by identifying a theoretical settlement portfolio of high quality corporate bonds sufficient to provide for a plan’s projected benefit payments. This rate can fluctuate based on changes in the corporate bond yields. At June 30, 2019, a hypothetical 25 basis point increase in our discount rates would increase our pre-tax income by approximately $0.2 million, and a hypothetical 25 basis point decrease in our discount rates would decrease our pre-tax income by an immaterial amount.
The long-term rate of return on plan assets is estimated based on an evaluation of historical returns for each asset category held by the plans, coupled with the current and short-term mix of the investment portfolio. The historical returns are adjusted for expected future market and economic changes. This return will fluctuate based on actual market returns and other economic factors.
The rate of future health care cost increases is based on historical claims and enrollment information projected over the next fiscal year and adjusted for administrative charges. This rate is expected to decrease until 2027. At June 30, 2019, a hypothetical 1 percent increase or decrease in our health care cost trend rates would be immaterial to our pre-tax income.
Future compensation rates, withdrawal rates and participant retirement age are determined based on historical information. These assumptions are not expected to significantly change. Mortality rates are determined based on a review of published mortality tables.
We expect to contribute approximately $10 million and $1 million to our pension and other postretirement benefit plans, respectively, in 2020. Expected pension contributions in 2020 are primarily for international plans.
Allowance for Doubtful Accounts We record allowances for estimated losses resulting from the inability of our customers to make required payments. We assess the creditworthiness of our customers based on multiple sources of information and analyze additional factors such as our historical bad debt experience, industry concentrations of credit risk, current economic trends and changes in customer payment terms. This assessment requires significant judgment. If the financial condition of our customers was to deteriorate, additional allowances may be required, resulting in future operating losses that are not included in the allowance for doubtful accounts at June 30, 2019.

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Inventories We use the last-in, first-out method for determining the cost of a significant portion of our U.S. inventories, and they are stated at the lower of cost or market. The cost of the remainder of our inventories is measured using approximate costs determined on the first-in, first-out basis or using the average cost method, and are stated at the lower of cost or net realizable value. When market conditions indicate an excess of carrying costs over market value, a lower of cost or net realizable value provision or a lower of cost or market provision, as applicable, is recorded. Excess and obsolete inventory reserves are established based upon our evaluation of the quantity of inventory on hand relative to demand.
Income Taxes Realization of our deferred tax assets is primarily dependent on future taxable income, the timing and amount of which are uncertain, in part, due to the expected profitability of certain foreign subsidiaries. A valuation allowance is recognized if it is “more likely than not” that some or all of a deferred tax asset will not be realized. As of June 30, 2019, the deferred tax assets net of valuation allowances relate primarily to net operating loss carryforwards, pension benefits, accrued employee benefits and inventory reserves. In the event that we were to determine that we would not be able to realize our deferred tax assets in the future, an increase in the valuation allowance would be required. In the event we were to determine that we are able to use our deferred tax assets for which a valuation allowance is recorded, a decrease in the valuation allowance would be required.

NEW ACCOUNTING STANDARDS
Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which requires an entity to recognize revenue in a manner that depicts the transfer of promised goods to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange. The standard also expands the disclosure requirements around contracts with customers. We adopted Topic 606 on July 1, 2018 using the modified retrospective transition method applied to those contracts that were not completed as of that date. The adoption did not have a material impact on the condensed consolidated financial statements beyond the additional disclosure requirements. Refer to the "Revenue Recognition" section of Note 2 and to Note 19 of our consolidated financial statements set forth in Item 8 of this Annual Report for further details.
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)," which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice with respect to how these are classified in the statement of cash flows. We adopted this ASU on July 1, 2018. Adoption of this guidance did not have a material effect on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory," which clarifies that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. We adopted this ASU on July 1, 2018. Adoption of this guidance did not have a material effect on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. We adopted this ASU on July 1, 2018, with the amendments applied on a retrospective basis. Refer to Note 12 to the consolidated financial statements for further details.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting," which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. We adopted this ASU on July 1, 2018. Adoption of this guidance did not have a material effect on our condensed consolidated financial statements.
Issued
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The standard requires implementation costs incurred by customers in cloud computing arrangements to be capitalized and amortized under the same premises of authoritative guidance for internal-use software. This standard is effective for Kennametal beginning July 1, 2020. We are in the process of assessing the impact the adoption of this guidance will have on our consolidated financial statements.

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In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General: Disclosure Framework - Changes to Disclosure Requirements for Defined Benefit Plans." The standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This standard is effective for Kennametal beginning July 1, 2021. We are in the process of assessing the impact the adoption of this guidance will have on our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting" which expands the scope of accounting for stock-based compensation to nonemployees. This guidance is effective for Kennametal July 1, 2019. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which includes amendments allowing the reclassification of the income tax effects of the Tax Cuts and Jobs Act of 2017 (TCJA) to improve the usefulness of information reported to financial statement users. The amendments in this update also require certain disclosures about stranded tax effects. Certain guidance is optional and is effective for Kennametal July 1, 2019, although early adoption is permitted. We elected not to reclassify the stranded tax effects as permissible under this standard. We do not expect the adoption of this guidance to have a material effect on the consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities," which seeks to improve financial reporting and obtain closer alignment with risk management activities, in addition to simplifying the application of hedge accounting guidance and additional disclosures. This guidance is effective for Kennametal July 1, 2019. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments," which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. Beyond other modifications in the update, the scope of this amendment includes valuation of trade receivables. This standard is effective for Kennametal beginning July 1, 2020. We are in the process of assessing the impact the adoption of this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases: Topic 842," which replaces the existing guidance in ASC 840, Leases. The standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This standard is effective for Kennametal beginning July 1, 2019. We expect to elect the optional transition relief that allows for a cumulative-effect adjustment in the period of adoption and not restate prior periods. We expect to elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward our historical lease classification. We also expect to elect the short-term lease measurement and recognition exemption, which means that leases with an initial term of 12 months or less would not be recorded on the consolidated balance sheet. We are nearly complete in assessing the effect the adoption will have on our consolidated financial statements and expect to record a right-of-use asset and lease liability, each in the range of $45 million to $55 million, on the consolidated balance sheet for several types of operating leases, including land and buildings, vehicles and equipment.

RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BY U.S. GAAP In accordance with the SEC's Regulation G, we are providing descriptions of the non-GAAP financial measures included in this Annual Report and reconciliations to the most closely related GAAP financial measures. We believe that these measures provide useful perspective on underlying business trends and results and a supplemental measure of year-over-year results. The non-GAAP financial measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes and may, therefore, also be useful to investors as they are a view of our business results through the eyes of management. These non-GAAP financial measures are not intended to be considered by the user in place of the related GAAP financial measure, but rather as supplemental information to our business results. These non-GAAP financial measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted.
Organic sales growth Organic sales growth is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) excluding the impacts of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. We report organic sales growth at the consolidated and segment levels.

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Constant currency end market sales growth (decline) Constant currency end market sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by end market excluding the impacts of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth, constant currency end market sales growth (decline) does not exclude the impact of business days. We believe this measure provides investors with a supplemental understanding of underlying end market trends by providing end market sales growth (decline) on a consistent basis. We report constant currency end market sales growth (decline) at the consolidated and segment levels. Widia sales are reported only in the general engineering end market. Therefore, we do not provide constant currency end market sales growth (decline) for the Widia segment and, thus, do not include a reconciliation for that metric.
Constant currency regional sales growth (decline) Constant currency regional sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by region excluding the impacts of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth, constant currency regional sales growth (decline) does not exclude the impact of business days. We believe this measure provides investors with a supplemental understanding of underlying regional trends by providing regional sales growth (decline) on a consistent basis. We report constant currency regional sales growth (decline) at the consolidated and segment levels.
Reconciliations of organic sales growth to sales growth are as follows:
Year ended June 30, 2019
 
Industrial
 
Widia
 
Infrastructure
 
Total
Organic sales growth
 
2%
 
3%
 
5%
 
3%
Foreign currency exchange impact(6)
 
(3)
 
(4)
 
(2)
 
(3)
Business days impact(7)
 
—
 
—
 
—
 
—
Sales (decline) growth
 
(1)%
 
(1)%
 
3%
 
—%
Reconciliations of constant currency end market sales growth (decline) to end market sales growth (decline)(9), are as follows:
Industrial
 
 
 
 
 
 
 
 
Year ended June 30, 2019
 
General engineering
 
Transportation
 
Aerospace and defense
 
Energy
Constant currency end market sales growth (decline)
 
5%
 
(5)%
 
16%
 
1%
Foreign currency exchange impact(6)
 
(3)
 
(4)
 
(4)
 
(3)
End market sales growth (decline)(8)
 
2%
 
(9)%
 
12%
 
(2)%
Infrastructure
 
 
 
 
 
 
Year ended June 30, 2019
 
Energy
 
Earthworks
 
General engineering
Constant currency end market sales growth (decline)
 
7%
 
(3)%
 
12%
Foreign currency exchange impact(6)
 
(1)
 
(3)
 
(2)
End market sales growth (decline)(8)
 
6%
 
(6)%
 
10%
Total
 
 
 
 
 
 
 
 
 
 
Year ended June 30, 2019
 
General engineering
 
Transportation
 
Aerospace and defense
 
Energy
 
Earthworks
Constant currency end market sales growth (decline)
 
7%
 
(5)%
 
16%
 
5%
 
(3)%
Foreign currency exchange impact(6)
 
(4)
 
(4)
 
(4)
 
(1)
 
(3)
End market sales growth (decline)(8)
 
3%
 
(9)%
 
12%
 
4%
 
(6)%

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Reconciliations of constant currency regional sales growth (decline) to reported regional sales growth (decline)(10), are as follows:
 
 
Year Ended June 30, 2019
 
 
Americas
 
EMEA
 
Asia Pacific
Industrial
 
 
 
 
 
 
Constant currency regional sales growth (decline)
 
7%
 
1%
 
(1)%
Foreign currency exchange impact(6)
 
(3)
 
(6)
 
(4)
Regional sales growth (decline)(9)
 
4%
 
(5)%
 
(5)%
 
 
 
 
 
 
 
Widia
 
 
 
 
 
 
Constant currency regional sales growth
 
—%
 
7%
 
5%
Foreign currency exchange impact(6)
 
(1)
 
(7)
 
(6)
Regional sales decline(9)
 
(1)%
 
—%
 
(1)%
 
 
 
 
 
 
 
Infrastructure
 
 
 
 
 
 
Constant currency regional sales growth
 
5%
 
5%
 
6%
Foreign currency exchange impact(6)
 
(1)
 
(6)
 
(4)
Regional sales growth (decline)(9)
 
4%
 
(1)%
 
2%
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
Constant currency regional sales growth
 
5%
 
2%
 
2%
Foreign currency exchange impact(6)
 
(1)
 
(6)
 
(4)
Regional sales growth (decline)(9)
 
4%
 
(4)%
 
(2)%
(6) Foreign currency exchange impact is calculated by dividing the difference between current period sales at prior period foreign exchange rates and prior period sales by prior period sales.
(7) Business days impact is calculated by dividing the year-over-year change in weighted average working days (based on mix of sales by country) by prior period weighted average working days.
(8) Aggregate sales for all end markets sum to the sales amount presented on Kennametal's financial statements.
(9) Aggregate sales for all regions sum to the sales amount presented on Kennametal's financial statements.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK We are exposed to certain market risks arising from transactions that are entered into in the normal course of business. As part of our financial risk management program, we use certain derivative financial instruments to manage these risks. We do not enter into derivative transactions for speculative purposes and, therefore, hold no derivative instruments for trading purposes. We may use derivative financial instruments to provide predictability to the effects of changes in foreign exchange rates on our consolidated results and to achieve our targeted mix of fixed and floating interest rates on our outstanding debt. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow, allowing us to focus more of our attention on business operations. With respect to interest rate management, these derivative instruments may allow us to achieve our targeted fixed-to-floating interest rate mix as a separate decision from funding arrangements in the bank and public debt markets. We measure hedge effectiveness by assessing the changes in the fair value or expected future cash flows of the hedged item. The ineffective portions are recorded in other income, net. See Notes 2 and 15 of our consolidated financial statements set forth in Item 8 of this Annual Report.
We are exposed to counterparty credit risk for nonperformance of derivative contracts and, in the event of nonperformance, to market risk for changes in interest and currency exchange rates, as well as settlement risk. We manage exposure to counterparty credit risk through credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. We do not anticipate nonperformance by any of the counterparties.

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The following provides additional information on our use of derivative instruments. Included below is a sensitivity analysis that is based upon a hypothetical 10 percent weakening or strengthening in the U.S. dollar and its effects on the June 30, 2019 currency exchange rates and the effective interest rates under our current borrowing arrangements. We compared our contractual derivative and borrowing arrangements in effect at June 30, 2019 to the hypothetical foreign exchange or interest rates in the sensitivity analysis to determine the effect on interest expense, pre-tax income and accumulated other comprehensive loss. Our analysis takes into consideration the different types of derivative instruments and the applicability of hedge accounting.
CASH FLOW HEDGES Currency A portion of our operations consists of investments in foreign subsidiaries. Our exposure to market risk from changes in foreign exchange rates arises from these investments, intercompany loans utilized to finance these subsidiaries, trade receivables and payables and firm commitments arising from international transactions. We manage our foreign exchange transaction risk to reduce the volatility of cash flows caused by currency exchange rate fluctuations through natural offsets where appropriate and through foreign exchange contracts. These contracts are designated as hedges of forecasted transactions that will settle in future periods and that would otherwise expose us to currency risk.
Our foreign exchange hedging program is intended to mitigate our exposure to currency exchange rate movements. This exposure arises largely from anticipated cash flows from cross-border intercompany sales of products and services. This program utilizes range forwards and forward contracts primarily to sell foreign currency. The notional amounts of the contracts translated into U.S. dollars at June 30, 2019 and 2018 were $61.5 million and $62.9 million, respectively. We would have received $0.2 million and $0.8 million at June 30, 2019 and 2018, respectively, to settle these contracts representing the fair value of these agreements. At June 30, 2019, a hypothetical 10 percent strengthening or weakening of the U.S. dollar would have changed accumulated other comprehensive loss, net of tax, by $1.4 million.
In addition, we may enter into forward contracts to hedge transaction exposures or significant cross-border intercompany loans by either purchasing or selling specified amounts of foreign currency at a specified date. At June 30, 2019 and 2018, we had outstanding forward contracts to purchase and sell foreign currency with notional amounts, translated into U.S. dollars at June 30, 2019 and 2018 rates, of $14.1 million in a buy position and $3.9 million in a sell position, respectively. At June 30, 2019, a hypothetical 10 percent change in the year-end exchange rates would have resulted in a $0.6 million increase or decrease in pre-tax income and a $1.3 million increase or decrease in accumulated other comprehensive loss, net of tax, related to these positions.
DEBT AND NOTES PAYABLE At June 30, 2019 and 2018, we had $592.6 million and $991.7 million, respectively, of outstanding debt, including capital leases and notes payable. Effective interest rates as of June 30, 2019 and 2018 were 4.8 percent and 3.6 percent, respectively. A hypothetical change of 10 percent in market interest rates from June 30, 2019 levels would have had an immaterial impact on our interest expense.
CURRENCY EXCHANGE RATE FLUCTUATIONS Currency exchange rate fluctuations decreased diluted earnings per share by $0.17 in 2019 and increased diluted earnings per share by $0.05 in 2018. Currency exchange rate fluctuations may have a material impact on future earnings in the short term and long term.

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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management has conducted an assessment of the Company’s internal controls over financial reporting as of June 30, 2019 using the criteria in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of June 30, 2019, based on the criteria in Internal Control – Integrated Framework (2013) issued by the COSO. The effectiveness of the Company’s internal control over financial reporting as of June 30, 2019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in this Annual Report on Form 10-K.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Kennametal Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Kennametal Inc. and its subsidiaries (the “Company”) as of June 30, 2019 and 2018, and the related consolidated statements of income, comprehensive income, cash flow and shareholders’ equity for each of the three years in the period ended June 30, 2019, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
COSO.
 
Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill and Indefinite-Lived Intangible Asset Impairment Assessments – Widia Reporting Unit and WIDIA Trademark

As described in Notes 2 and 7 to the consolidated financial statements, the Company’s goodwill balance was $300.0 million and indefinite-lived intangible assets balance was $14.5 million at June 30, 2019. The goodwill associated with the Widia reporting unit was $27.3 million, and the carrying value of the indefinite-lived trademark intangible asset in the Widia reporting unit (WIDIA trademark) was $14.5 million. Management performs an annual impairment test during the June quarter, unless there are impairment indicators based on the results of an ongoing cumulative qualitative assessment that warrant a test prior to that quarter. Management evaluates the recoverability of goodwill for each of its reporting units by comparing the fair value of each reporting unit to its carrying value. Fair value is determined using a combination of a market multiples approach and a discounted cash flow analysis based upon historical and projected financial information. Estimating fair value of each reporting unit requires various assumptions, including revenue and gross margin growth rates, expected capital expenditures to determine projected cash flows, expected tax rates and an estimated discount rate. Management evaluates the recoverability of indefinite-lived intangible assets by comparing the fair value of the asset to its carrying value. Fair value is determined using a discounted cash flow analysis based on projected financial information. Estimating fair value of the indefinite-lived asset requires various assumptions, including revenue growth rate and an estimated royalty rate.

The principal considerations for our determination that performing procedures relating to goodwill and indefinite-lived intangible asset impairment assessments of the Widia reporting unit and WIDIA trademark is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the Widia reporting unit and WIDIA trademark, which in turn led to a high degree of auditor judgment, effort and subjectivity in performing procedures and evaluating audit evidence obtained relating to management’s projected financial information and significant assumptions,
including revenue and gross margin growth rates for goodwill and revenue growth rate for the indefinite-lived intangible asset.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill and indefinite-lived intangible asset impairment assessments, including controls over the valuation of the Widia reporting unit and the WIDIA trademark. These procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the market multiple and discounted cash flow
analysis; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the reasonableness of significant assumptions used by management in estimating the fair value of the Widia reporting unit and WIDIA trademark, including revenue and gross margin growth rates. Evaluating management’s assumptions related to revenue and gross margin growth rates involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the reporting unit, consistency with third-party industry data, and whether the assumptions were consistent with evidence obtained in other areas of the audit.


/s/ PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania
August 13, 2019

We have served as the Company’s auditor since 2002.

34

CONSOLIDATED STATEMENTS OF INCOME
Year ended June 30 (in thousands, except per share data)
2019
 
2018
 
2017
Sales
$
2,375,234

 
$
2,367,853

 
$
2,058,368

Cost of goods sold
1,543,738

 
1,547,730

 
1,413,452

Gross profit
831,496

 
820,123

 
644,916

Operating expense
474,151

 
503,249

 
468,568

Restructuring and asset impairment charges (Note 14)
14,084

 
11,907

 
65,018

Amortization of intangibles
14,411

 
14,668

 
16,578

Operating income
328,850

 
290,299

 
94,752

Interest expense
32,994

 
30,081

 
28,842

Other income, net
(15,379
)
 
(14,823
)
 
(15,965
)
Income before income taxes
311,235

 
275,041

 
81,875

Provision for income taxes (Note 11)
63,359

 
69,981

 
29,895

Net income
247,876

 
205,060

 
51,980

Less: Net income attributable to noncontrolling interests
5,951

 
4,880

 
2,842

Net income attributable to Kennametal
$
241,925

 
$
200,180

 
$
49,138

PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
 
 
Basic earnings per share
$
2.94

 
$
2.45

 
$
0.61

Diluted earnings per share
$
2.90

 
$
2.42

 
$
0.61

Dividends per share
$
0.80

 
$
0.80

 
$
0.80

Basic weighted average shares outstanding
82,379

 
81,544

 
80,351

Diluted weighted average shares outstanding
83,291

 
82,754

 
81,169


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended June 30 (in thousands)
 
2019
 
2018
 
2017
Net income
 
$
247,876

 
$
205,060

 
$
51,980

Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
Unrealized gain (loss) on derivatives designated and qualified as cash flow hedges
 
197

 
(922
)
 
(471
)
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges
 
1,348

 
3,747

 
1,557

Unrecognized net pension and other postretirement benefit (loss) gain
 
(39,639
)
 
(5,991
)
 
15,559

Reclassification of net pension and other postretirement benefit loss
 
5,124

 
7,274

 
7,566

Foreign currency translation adjustments
 
(20,785
)
 
(1,490
)
 
5,888

Total other comprehensive (loss) income, net of tax
 
(53,755
)
 
2,618

 
30,099

Total comprehensive income
 
194,121

 
207,678

 
82,079

Less: comprehensive income attributable to noncontrolling interests
 
5,414

 
4,131

 
4,124

Comprehensive income attributable to Kennametal Shareholders
 
$
188,707

 
$
203,547

 
$
77,955

The accompanying notes are an integral part of these consolidated financial statements.


35

CONSOLIDATED BALANCE SHEETS
 As of June 30 (in thousands, except per share data)
2019
 
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
182,015

 
$
556,153

Accounts receivable, less allowance for doubtful accounts of $10,083 and $11,807 respectively
379,855

 
401,290

Inventories (Note 6)
571,576

 
525,466

Other current assets
57,381

 
63,257

Total current assets
1,190,827

 
1,546,166

Property, plant and equipment:
 
 
 
Land and buildings
351,142

 
351,953

Machinery and equipment
1,804,871

 
1,702,243

Less accumulated depreciation
(1,221,118
)
 
(1,229,983
)
Property, plant and equipment, net
934,895

 
824,213

Other assets:
 
 
 
Goodwill (Notes 2 and 7)
300,011

 
301,802

 Other intangible assets, less accumulated amortization of $158,507 and $145,334, respectively (Notes 2 and 7)
160,998

 
176,468

Deferred income taxes (Note 11)
20,507

 
17,015

Long-term prepaid pension benefit (Note 12)
31,581

 
42,543

Other
17,450

 
17,530

Total other assets
530,547

 
555,358

Total assets
$
2,656,269

 
$
2,925,737

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt (Note 9)
$
—

 
$
399,266

Notes payable to banks (Note 10)
157

 
934

Accounts payable
212,908

 
221,903

Accrued income taxes
29,223

 
18,603

Accrued vacation pay
17,422

 
18,078

Accrued payroll
59,194

 
77,161

Other current liabilities (Note 8)
142,822

 
150,586

Total current liabilities
461,726

 
886,531

Long-term debt, less current maturities (Note 9)
592,474

 
591,505

Deferred income taxes (Note 11)
23,322

 
26,991

Accrued postretirement benefits (Note 12)
11,174

 
13,725

Accrued pension benefits (Note 12)
162,829

 
145,797

Accrued income taxes
9,038

 
6,249

Other liabilities
21,002

 
24,612

Total liabilities
1,281,565

 
1,695,410

Commitments and contingencies (Note 18)

 

EQUITY
 
 
 
Kennametal Shareholders’ Equity:
 
 
 
Preferred stock, no par value; 5,000 shares authorized; none issued
—

 
—

Capital stock, $1.25 par value; 120,000 shares authorized; 82,421 and 81,646 shares issued, respectively
103,026

 
102,058

Additional paid-in capital
528,827

 
511,909

Retained earnings
1,076,862

 
900,683

Accumulated other comprehensive loss (Note 13)
(373,543
)
 
(320,325
)
Total Kennametal Shareholders’ Equity
1,335,172

 
1,194,325

Noncontrolling interests
39,532

 
36,002

Total equity
1,374,704

 
1,230,327

Total liabilities and equity
$
2,656,269

 
$
2,925,737

The accompanying notes are an integral part of these consolidated financial statements.

36

CONSOLIDATED STATEMENTS OF CASH FLOW
Year ended June 30 (in thousands)
2019
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
 
 
Net income
$
247,876

 
$
205,060

 
$
51,980

Adjustments for non-cash items:
 
 
 
 
 
Depreciation
97,641

 
94,012

 
91,078

Amortization
14,411

 
14,668

 
16,578

Stock-based compensation expense
22,845

 
20,830

 
21,065

Restructuring and asset impairment charges (Notes 2 and 14)
(203
)
 
(248
)
 
1,802

Deferred income tax provision
2,806

 
22,915

 
6,267

Other
2,654

 
4,651

 
94

Changes in certain assets and liabilities:
 
 
 
 
 
Accounts receivable
17,323

 
(22,201
)
 
(7,606
)
Inventories
(53,387
)
 
(37,230
)
 
(24,300
)
Accounts payable and accrued liabilities
(49,378
)
 
(5,046
)
 
54,554

Accrued income taxes
9,013

 
11,093

 
6,873

Accrued pension and postretirement benefits
(8,186
)
 
(26,759
)
 
(27,818
)
Other
(2,896
)
 
(4,441
)
 
4,771

Net cash flow provided by operating activities
300,519

 
277,304

 
195,338

INVESTING ACTIVITIES
 
 
 
 
 
Purchases of property, plant and equipment
(212,343
)
 
(171,004
)
 
(118,018
)
Disposals of property, plant and equipment
11,243

 
14,358

 
5,023

Other
(381
)
 
(225
)
 
247

Net cash flow used for investing activities
(201,481
)
 
(156,871
)
 
(112,748
)
FINANCING ACTIVITIES
 
 
 
 
 
Net (decrease) increase in notes payable
(715
)
 
495

 
(317
)
Net decrease in short-term revolving and other lines of credit
(174
)
 
—

 
—

Term debt borrowings
—

 
295,863

 
25,298

Term debt repayments
(400,000
)
 
(190
)
 
(25,899
)
Purchase of capital stock
(214
)
 
(217
)
 
(241
)
The effect of employee benefit and stock plans and dividend reinvestment
(4,744
)
 
17,975

 
18,319

Cash dividends paid to Shareholders
(65,746
)
 
(65,104
)
 
(64,128
)
Other
161

 
(1,625
)
 
(6,317
)
Net cash flow (used for) provided by financing activities
(471,432
)
 
247,197

 
(53,285
)
Effect of exchange rate changes on cash and cash equivalents
(1,744
)
 
(2,106
)
 
(255
)
CASH AND CASH EQUIVALENTS
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(374,138
)
 
365,524

 
29,050

Cash and cash equivalents, beginning of year
556,153

 
190,629

 
161,579

Cash and cash equivalents, end of year
$
182,015

 
$
556,153

 
$
190,629

The accompanying notes are an integral part of these consolidated financial statements.


37

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
2019
 
2018
 
2017
Year ended June 30 (in thousands)
Shares

 
Amount

 
Shares

 
Amount

 
Shares

 
Amount

CAPITAL STOCK
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
81,646

 
$
102,058

 
80,665

 
$
100,832

 
79,694

 
$
99,618

Dividend reinvestment
6

 
7

 
5

 
7

 
7

 
9

Capital stock issued under employee benefit and stock plans
775

 
968

 
981

 
1,226

 
971

 
1,214

Purchase of capital stock
(6
)
 
(7
)
 
(5
)
 
(7
)
 
(7
)
 
(9
)
Balance at end of year
82,421

 
103,026

 
81,646

 
102,058

 
80,665

 
100,832

ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
 
511,909

 
 
 
474,547

 
 
 
436,617

Dividend reinvestment
 
 
207

 
 
 
210

 
 
 
235

Capital stock issued under employee benefit and stock plans
 
 
16,918

 
 
 
37,362

 
 
 
37,930

Purchase of capital stock
 
 
(207
)
 
 
 
(210
)
 
 
 
(235
)
Balance at end of year
 
 
528,827

 
 
 
511,909

 
 
 
474,547

RETAINED EARNINGS
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
 
900,683

 
 
 
765,607

 
 
 
780,597

Net income
 
 
241,925

 
 
 
200,180

 
 
 
49,138

Cash dividends
 
 
(65,746
)
 
 
 
(65,104
)
 
 
 
(64,128
)
Balance at end of year
 
 
1,076,862

 
 
 
900,683

 
 
 
765,607

ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
 
(320,325
)
 
 
 
(323,692
)
 
 
 
(352,509
)
Unrealized gain (loss) on derivatives designated and qualified as cash flow hedges
 
 
197

 
 
 
(922
)
 
 
 
(471
)
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges
 
 
1,348

 
 
 
3,747

 
 
 
1,557

Unrecognized net pension and other postretirement benefit (loss) gain
 
 
(39,639
)
 
 
 
(5,991
)
 
 
 
15,559

Reclassification of net pension and other postretirement benefit loss
 
 
5,124

 
 
 
7,274

 
 
 
7,566

Foreign currency translation adjustments
 
 
(20,248
)
 
 
 
(741
)
 
 
 
4,606

Other comprehensive (loss) income, net of tax
 
 
(53,218
)
 
 
 
3,367

 
 
 
28,817

Balance at end of year
 
 
(373,543
)
 
 
 
(320,325
)
 
 
 
(323,692
)
NONCONTROLLING INTERESTS
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
 
36,002

 
 
 
35,359

 
 
 
31,478

Net income
 
 
5,951

 
 
 
4,880

 
 
 
2,842

Other comprehensive (loss) income, net of tax
 
 
(537
)
 
 
 
(749
)
 
 
 
1,282

Additions to noncontrolling interests
 
 
443

 
 
 
591

 
 
 
—

Cash dividends
 
 
(2,327
)
 
 
 
(4,079
)
 
 
 
(243
)
Balance at end of year
 
 
39,532

 
 
 
36,002

 
 
 
35,359

Total equity, June 30
 
 
$
1,374,704

 
 
 
$
1,230,327

 
 
 
$
1,052,653

The accompanying notes are an integral part of these consolidated financial statements.

38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF OPERATIONS
With more than 80 years of materials expertise, the Company is a global industrial technology leader, helping customers across the aerospace, earthworks, energy, general engineering and transportation end markets manufacture with precision and efficiency. This expertise includes the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and extreme wear applications to keep customers up and running longer against conditions such as corrosion and high temperatures.
Our standard and custom product offering spans metalworking and wear applications including turning, milling, hole making, tooling systems and services, as well as specialized wear components and metallurgical powders. End users of the Company's metalworking products include manufacturers engaged in a diverse array of industries including: the manufacturers of transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation. The Company’s wear and metallurgical powders are used by producers and suppliers in equipment-intensive operations such as road construction, mining, quarrying, oil and gas exploration, refining, production and supply.
Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. When used in this Annual Report on Form 10-K, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
 
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of our significant accounting policies is presented below to assist in evaluating our consolidated financial statements.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include our accounts and those of our majority-owned subsidiaries. All significant intercompany balances and transactions are eliminated. Investments in entities of less than 50 percent of the voting stock over which we have significant influence are accounted for on an equity basis. The factors used to determine significant influence include, but are not limited to, our management involvement in the investee, such as hiring and setting compensation for management of the investee, the ability to make operating and capital decisions of the investee, representation on the investee’s board of directors and purchase and supply agreements with the investee. Investments in entities of less than 50 percent of the voting stock in which we do not have significant influence are accounted for on the cost basis.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), we make judgments and estimates about the amounts reflected in our financial statements. As part of our financial reporting process, our management collaborates to determine the necessary information on which to base our judgments and develop estimates used to prepare the financial statements. We use historical experience and available information to make these judgments and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in our financial statements.
CASH AND CASH EQUIVALENTS Cash investments having original maturities of three months or less are considered cash equivalents. Cash equivalents principally consist of investments in money market funds and bank deposits at June 30, 2019.
ACCOUNTS RECEIVABLE We market our products to a diverse customer base throughout the world. Trade credit is extended based upon periodically updated evaluations of each customer’s ability to satisfy its obligations. We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Accounts receivable reserves are determined based upon an aging of accounts and a review of specific accounts.
INVENTORIES We use the last-in, first-out (LIFO) method for determining the cost of a significant portion of our United States (U.S.) inventories, and they are stated at the lower of cost or market. The cost of the remainder of our inventories is measured using approximate costs determined on the first-in, first-out basis or using the average cost method, and are stated at the lower of cost or net realizable value. When market conditions indicate an excess of carrying costs over market value, a lower of cost or net realizable value provision or a lower of cost or market provision, as applicable, is recorded. Excess and obsolete inventory reserves are established based upon our evaluation of the quantity of inventory on hand relative to demand. The excess and obsolete inventory reserve at June 30, 2019 and 2018 was $37.4 million and $31.3 million, respectively.

39

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Major improvements are capitalized, while maintenance and repairs are expensed as incurred. Retirements and disposals are removed from cost and accumulated depreciation accounts, with the gain or loss reflected in operating income. Interest related to the construction of major facilities is capitalized as part of the construction costs and is depreciated over the facilities' estimated useful lives.
Depreciation for financial reporting purposes is computed using the straight-line method over the following estimated useful lives: building and improvements over 15-40 years; machinery and equipment over 4-15 years; furniture and fixtures over 5-10 years and computer hardware and software over 3-5 years.
Leased property and equipment under capital leases are depreciated using the straight-line method over the terms of the related leases.
LONG-LIVED ASSETS We evaluate the recoverability of property, plant and equipment and intangible assets that are amortized, whenever events or changes in circumstances indicate the carrying amount of any such assets may not be fully recoverable. Changes in circumstances include technological advances, changes in our business model, capital structure, economic conditions or operating performance. Our evaluation is based upon, among other things, our assumptions about the estimated future undiscounted cash flows these assets are expected to generate. When the sum of the undiscounted cash flows is less than the carrying value of the asset or asset group, we will recognize an impairment loss to the extent that carrying value exceeds fair value. We apply our best judgment when performing these evaluations to determine if a triggering event has occurred, the undiscounted cash flows used to assess recoverability and the fair value of the asset.
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of cost over the fair value of the net assets of acquired companies. Goodwill and other intangible assets with indefinite lives are tested at least annually for impairment. We perform our annual impairment tests during the June quarter in connection with our annual planning process unless there are impairment indicators based on the results of an ongoing cumulative qualitative assessment that warrant a test prior to that quarter. We evaluate the recoverability of goodwill for each of our reporting units by comparing the fair value of each reporting unit with its carrying value. The fair values of our reporting units are determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit. We evaluate the recoverability of indefinite-lived intangible assets using a discounted cash flow analysis based on projected financial information. This evaluation is sensitive to changes in market interest rates and other external factors.
The majority of our intangible assets with definite lives are amortized on a straight-line basis, while certain customer-related intangible assets are amortized on an accelerated method. Identifiable assets with finite lives are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable.
We performed our annual goodwill and indefinite-lived intangible assets impairment test during the June quarter of fiscal 2019 and concluded that there was no impairment.

PENSION AND OTHER POSTRETIREMENT BENEFITS We sponsor these types of benefit plans for certain employees and retirees. Accounting for the cost of these plans requires the estimation of the cost of the benefits to be provided well into the future and attributing that cost over either the expected work life of employees or over average life of participants participating in these plans, depending on plan status and on participant population. This estimation requires our judgment about the discount rate used to determine these obligations, expected return on plan assets, rate of future compensation increases, rate of future health care costs, withdrawal and mortality rates and participant retirement age. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans.
In the valuation of our pension and other postretirement benefit liabilities, management utilizes various assumptions. Discount rates are derived by identifying a theoretical settlement portfolio of high quality corporate bonds sufficient to provide for a plan’s projected benefit payments. This rate can fluctuate based on changes in the corporate bond yields.
The long-term rate of return on plan assets is estimated based on an evaluation of historical returns for each asset category held by the plans, coupled with the current and short-term mix of the investment portfolio. The historical returns are adjusted for expected future market and economic changes. This return will fluctuate based on actual market returns and other economic factors.
The rate of future health care costs is based on historical claims and enrollment information projected over the next year and adjusted for administrative charges. This rate is expected to decrease until 2027.
Future compensation rates, withdrawal rates and participant retirement age are determined based on historical information. These assumptions are not expected to significantly change. Mortality rates are determined based on a review of published mortality tables.

40


EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of shares outstanding during the period, while diluted earnings per share is calculated to reflect the potential dilution that would occur related to the issuance of capital stock under stock option grants, performance awards and restricted stock units. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options, performance awards and restricted stock units.
The following tables provide the computation of diluted shares outstanding:
(in thousands)
2019
 
2018
 
2017
Weighted-average shares outstanding during period
82,379

 
81,544

 
80,351

Add: Unexercised stock options and unvested restricted stock units
912

 
1,210

 
818

Number of shares on which diluted earnings per share is calculated
83,291

 
82,754

 
81,169

Unexercised stock options with an exercise price greater than the average market price and restricted stock units not included in the computation because they were anti-dilutive
427

 
381

 
1,412


REVENUE RECOGNITION The Company's contracts with customers are comprised of purchase orders, and for larger customers, may also include long-term agreements. We account for a contract when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. These contracts with customers typically relate to the manufacturing of products, which represent single performance obligations that are satisfied when control of the product passes to the customer. The Company considers the timing of right to payment, transfer of risk and rewards, transfer of title, transfer of physical possession and customer acceptance when determining when control transfers to the customer. As a result, revenue is generally recognized at a point in time - either upon shipment or delivery - based on the specific shipping terms in the contract. The shipping terms vary across all businesses and depend on the product, customary local commercial terms and the type of transportation. Shipping and handling activities are accounted for as activities to fulfill a promise to transfer a product to a customer and as such, costs incurred are recorded when the related revenue is recognized. Payment for products is due within a limited time period after shipment or delivery, typically within 30 to 90 calendar days of the respective invoice dates. The Company does not generally offer extended payment terms.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Amounts billed and due from our customers are classified as accounts receivable, less allowance for doubtful accounts on the consolidated balance sheet. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract. Variable consideration primarily includes volume incentive rebates, which are based on achieving a certain level of purchases and other performance criteria as established by our distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned. The majority of our products are consumed by our customers or end users in the manufacture of their products. Historically, we have experienced very low levels of returned products and do not consider the effect of returned products to be material. We have recorded an estimated returned goods allowance to provide for any potential returns.
We warrant that products sold are free from defects in material and workmanship under normal use and service when correctly installed, used and maintained. This warranty terminates 30 days after delivery of the product to the customer and does not apply to products that have been subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be returned to Kennametal only after inspection and approval by Kennametal and upon receipt by the customer of shipping instructions from Kennametal. We have included an estimated allowance for warranty returns in our returned goods allowance discussed above.
See "Note 19. Segment Data" for disaggregation of revenue by geography and end market.
The Company records a contract asset when it has a right to payment from a customer that is conditioned on events that have occurred other than the passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material remaining performance obligations, contract assets or liabilities as of June 30, 2019 and 2018.
The Company pays sales commissions related to certain contracts, which qualify as incremental costs of obtaining a contract. However, the Company applies the practical expedient that allows an entity to recognize incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would have been recognized is one year or less. These costs are recorded within operating expense in our condensed consolidated statement of income.

41

STOCK-BASED COMPENSATION We recognize stock-based compensation expense for all stock options, restricted stock awards and restricted stock units over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service (substantive vesting period), net of expected forfeitures. We utilize the Black-Scholes valuation method to establish the fair value of all stock option awards. Time vesting stock units are valued at the market value of the stock on the grant date. Performance vesting stock units with a market condition are valued using a Monte Carlo model.
Capital stock options are granted to eligible employees at fair market value at the date of grant. Capital stock options are exercisable under specified conditions for up to 10 years from the date of grant. The Kennametal Inc. Stock and Incentive Plan of 2010, as Amended and Restated on October 22, 2013, and as further amended January 27, 2015 (A/R 2010 Plan) and the Kennametal Inc. 2016 Stock and Incentive Plan (2016 Plan) authorize the issuance of up to 9,500,000 shares of the Company’s capital stock plus any shares remaining unissued under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended (2002 Plan). Under the provisions of the A/R 2010 Plan and 2016 Plan participants may deliver stock, owned by the holder for at least six months, in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. The fair market value of shares delivered during 2019, 2018 and 2017 was immaterial. In addition to stock option grants, the A/R 2010 Plan and the 2016 Plan permit the award of stock appreciation rights, performance share awards, performance unit awards, restricted stock awards, restricted unit awards and share awards to directors, officers and key employees.
RESEARCH AND DEVELOPMENT COSTS Research and development costs of $39.0 million, $38.9 million and $38.0 million in 2019, 2018 and 2017, respectively, were expensed as incurred. These costs are included in operating expense in the consolidated statements of income.
SHIPPING AND HANDLING FEES AND COSTS All fees billed to customers for shipping and handling are classified as a component of sales. All costs associated with shipping and handling are classified as a component of cost of goods sold.
INCOME TAXES Deferred income taxes are recognized based on the future income tax effects (using enacted tax laws and rates) of differences in the carrying amounts of assets and liabilities for financial reporting and tax purposes. A valuation allowance is recognized if it is “more likely than not” that some or all of a deferred tax asset will not be realized.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES As part of our financial risk management program, we use certain derivative financial instruments. We do not enter into derivative transactions for speculative purposes and, therefore, hold no derivative instruments for trading purposes. We use derivative financial instruments to provide predictability to the effects of changes in foreign exchange rates on our consolidated results. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow, allowing us to focus more of our attention on business operations.
We account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated as a hedge of such items. We measure hedge effectiveness by assessing the changes in the fair value or expected future cash flows of the hedged item. The ineffective portions are recorded in other income, net. Certain currency forward contracts hedging significant cross-border intercompany loans are considered other derivatives and, therefore, do not qualify for hedge accounting. These contracts are recorded at fair value in the balance sheet, with the offset to other income, net.
CASH FLOW HEDGES Currency Forward contracts and range forward contracts (a transaction where both a put option is purchased and a call option is sold) are designated as cash flow hedges and hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts are recorded in accumulated other comprehensive loss, and are recognized as a component of other income, net when the underlying sale of products or services is recognized into earnings.
FAIR VALUE HEDGES Interest Rate Fixed-to-floating interest rate swap contracts, designated as fair value hedges, may be entered into from time to time to hedge our exposure to fair value fluctuations on a portion of our fixed rate debt. These interest rate swap contracts convert a portion of our fixed rate debt to floating rate debt. When in place, these contracts require periodic settlement, and the difference between amounts to be received and paid under the contracts is recognized in interest expense.
NET INVESTMENT HEDGES We designate financial instruments as net investment hedges from time to time to hedge the foreign exchange exposure of our net investment in foreign currency-based subsidiaries. The remeasurements of these non-derivatives designated as net investment hedges are calculated each period with changes reported in foreign currency translation adjustment within accumulated other comprehensive loss. Such amounts will remain in accumulated other comprehensive loss unless we complete or substantially complete liquidation or disposal of our investment in the underlying foreign operations.

42

CURRENCY TRANSLATION Assets and liabilities of international operations are translated into U.S. dollars using year-end exchange rates, while revenues and expenses are translated at average exchange rates throughout the year. The resulting net translation adjustments are recorded as a component of accumulated other comprehensive loss. The local currency is the functional currency of most of our locations.
Losses of $2.7 million, $6.4 million and $6.7 million from currency transactions were included in other income, net in 2019, 2018 and 2017, respectively.
NEW ACCOUNTING STANDARDS
Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which requires an entity to recognize revenue in a manner that depicts the transfer of promised goods to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange. The standard also expands the disclosure requirements around contracts with customers. We adopted Topic 606 on July 1, 2018 using the modified retrospective transition method applied to those contracts that were not completed as of that date. The adoption did not have a material impact on the condensed consolidated financial statements beyond the additional disclosure requirements. Refer to the "Revenue Recognition" section of this Note 2 and to Note 19 to the consolidated financial statements for further details.
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)," which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice with respect to how these are classified in the statement of cash flows. We adopted this ASU on July 1, 2018. Adoption of this guidance did not have a material effect on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory," which clarifies that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. We adopted this ASU on July 1, 2018. Adoption of this guidance did not have a material effect on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. We adopted this ASU on July 1, 2018, with the amendments applied on a retrospective basis. Refer to Note 12 to the consolidated financial statements for further details.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting," which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. We adopted this ASU on July 1, 2018. Adoption of this guidance did not have a material effect on our condensed consolidated financial statements.
Issued
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The standard requires implementation costs incurred by customers in cloud computing arrangements to be capitalized and amortized under the same premises of authoritative guidance for internal-use software. This standard is effective for Kennametal beginning July 1, 2020. We are in the process of assessing the impact the adoption of this guidance will have on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General: Disclosure Framework - Changes to Disclosure Requirements for Defined Benefit Plans." The standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This standard is effective for Kennametal beginning July 1, 2021. We are in the process of assessing the impact the adoption of this guidance will have on our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting" which expands the scope of accounting for stock-based compensation to nonemployees. This guidance is effective for Kennametal July 1, 2019. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.

43

In February 2018, the FASB issued ASU No. 2018-02, “Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which includes amendments allowing the reclassification of the income tax effects of the Tax Cuts and Jobs Act of 2017 (TCJA) to improve the usefulness of information reported to financial statement users. The amendments in this update also require certain disclosures about stranded tax effects. Certain guidance is optional and is effective for Kennametal July 1, 2019, although early adoption is permitted. We elected not to reclassify the stranded tax effects as permissable under this standard. We do not expect the adoption of this guidance to have a material effect on the consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities," which seeks to improve financial reporting and obtain closer alignment with risk management activities, in addition to simplifying the application of hedge accounting guidance and additional disclosures. This guidance is effective for Kennametal July 1, 2019. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments," which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. Beyond other modifications in the update, the scope of this amendment includes valuation of trade receivables. This standard is effective for Kennametal beginning July 1, 2020. We are in the process of assessing the impact the adoption of this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases: Topic 842," which replaces the existing guidance in ASC 840, Leases. The standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This standard is effective for Kennametal beginning July 1, 2019. We expect to elect the optional transition relief that allows for a cumulative-effect adjustment in the period of adoption and not restate prior periods. We expect to elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward our historical lease classification. We also expect to elect the short-term lease measurement and recognition exemption, which means that leases with an initial term of 12 months or less would not be recorded on the consolidated balance sheet. We are nearly complete in assessing the effect the adoption will have on our consolidated financial statements and expect to record a right-of-use asset and lease liability, each in the range of $45 million to $55 million, on the consolidated balance sheet for several types of operating leases, including land and buildings, vehicles and equipment.

NOTE 3 — SUPPLEMENTAL CASH FLOW DISCLOSURES
Year ended June 30 (in thousands)
2019
 
2018
 
2017
Cash paid during the period for:
 
 
 
 
 
Income taxes
$
51,540

 
$
35,974

 
$
16,755

Interest
30,265

 
27,887

 
27,529

Supplemental disclosure of non-cash information:
 
 
 
 
 
Changes in accounts payable related to purchases of property, plant and equipment
15,500

 
9,500

 
(3,900
)

NOTE 4 — FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three levels to prioritize the inputs used in valuations, as defined below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Inputs that are unobservable.

44

As of June 30, 2019, the fair values of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows: 
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Derivatives (1)
$
—

 
$
152

 
$
—

 
$
152

Total assets at fair value
$
—

 
$
152

 
$
—

 
$
152

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives (1)
$
—

 
$
55

 
$
—

 
$
55

Total liabilities at fair value
$
—

 
$
55

 
$
—

 
$
55

As of June 30, 2018, the fair value of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows:
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Derivatives (1)
$
—

 
$
1,665

 
$
—

 
$
1,665

Total assets at fair value
$
—

 
$
1,665

 
$
—

 
$
1,665

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives (1)
$
—

 
$
207

 
$
—

 
$
207

Total liabilities at fair value
$
—

 
$
207

 
$
—

 
$
207

 
 (1) Currency derivatives are valued based on observable market spot and forward rates and are classified within Level 2 of the fair value hierarchy.
There have been no changes in classification and transfers between levels in the fair value hierarchy in the current period.

NOTE 5 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As part of our financial risk management program, we use certain derivative financial instruments. See Note 2 for discussion on our derivative instruments and hedging activities policy.
The fair value of derivatives designated and not designated as hedging instruments in the consolidated balance sheet are as follows:
(in thousands)
2019
 
2018
Derivatives designated as hedging instruments
 
 
 
Other current assets - range forward contracts
$
145

 
$
799

Other current liabilities - range forward contracts
—

 
(5
)
Other assets - range forward contracts
—

 
27

Total derivatives designated as hedging instruments
145

 
821

Derivatives not designated as hedging instruments
 
 
 
Other current assets - currency forward contracts
8

 
839

Other current liabilities - currency forward contracts
(56
)
 
(202
)
Total derivatives not designated as hedging instruments
(48
)
 
637

Total derivatives
$
97

 
$
1,458

Certain currency forward contracts that hedge significant cross-border intercompany loans are considered as other derivatives and therefore do not qualify for hedge accounting. These contracts are recorded at fair value in the consolidated balance sheet, with the offset to other income, net. Losses (gains) related to derivatives not designated as hedging instruments have been recognized as follows:
(in thousands)
2019
 
2018
 
2017
Other income, net - currency forward contracts
$
108

 
$
(122
)
 
$
(873
)
 

45

FAIR VALUE HEDGES
Fixed-to-floating interest rate swap contracts, designated as fair value hedges, may be entered into from time to time to hedge our exposure to fair value fluctuations on a portion of our fixed rate debt. We had no such contracts outstanding at June 30, 2019 and June 30, 2018.
CASH FLOW HEDGES
Currency forward contracts and range forward contracts (a transaction where both a put option is purchased and a call option is sold) are designated as cash flow hedges and hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts are recorded in accumulated other comprehensive loss, and are recognized as a component of other income, net when the underlying sale of products or services is recognized into earnings. The notional amount of the contracts translated into U.S. dollars at June 30, 2019 and 2018 was $61.5 million and $62.9 million, respectively. The time value component of the fair value of range forward contracts is excluded from the assessment of hedge effectiveness. Assuming the market rates remain constant with the rates at June 30, 2019, we expect to recognize into earnings in the next 12 months $0.2 million of loss on outstanding derivatives.
The following represents gains and losses related to cash flow hedges:
(in thousands)
2019
 
2018
 
2017
Gains (losses) recognized in other comprehensive (loss) income, net
$
921

 
$
(922
)
 
$
(471
)
Losses reclassified from accumulated other comprehensive loss into other income, net
$
1,004

 
$
3,001

 
$
1,557

No portion of the gains or losses recognized in earnings was due to ineffectiveness and no amounts were excluded from our effectiveness testing for the years ended June 30, 2019, 2018 and 2017.
NET INVESTMENT HEDGES
As of June 30, 2019, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of €22.5 million designated as net investment hedges to hedge the foreign exchange exposure of our net investment in Euro-based subsidiaries. A gain of $2.4 million and losses of $0.7 million and $4.5 million were recorded as a component of foreign currency translation adjustments in other comprehensive (loss) income during 2019, 2018 and 2017, respectively.
As of June 30, 2019, the foreign currency-denominated intercompany loans payable designated as net investment hedges consisted of:
Instrument
Notional (EUR in thousands)(2)
Notional (USD in thousands)(2)
Maturity
Foreign currency-denominated intercompany loan payable
28,125

32,024

June 26, 2022
(2) Includes principal and accrued interest.

NOTE 6 — INVENTORIES
Inventories consisted of the following at June 30: 
(in thousands)
2019
 
2018
Finished goods
$
311,684

 
$
279,240

Work in process and powder blends
246,414

 
232,973

Raw materials
95,620

 
96,859

Inventories at current cost
653,718

 
609,072

Less: LIFO valuation
(82,142
)
 
(83,606
)
Total inventories
$
571,576

 
$
525,466

We used the LIFO method of valuing inventories for approximately 41 percent and 40 percent of total inventories at June 30, 2019 and 2018, respectively.


46

NOTE 7 — GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of the carrying amount of goodwill attributable to each segment, as well as the changes in such, is as follows:
(in thousands)
Industrial
 
Widia
 
Infrastructure
 
Total
Gross goodwill
$
410,694

 
$
41,515

 
$
633,211

 
$
1,085,420

Accumulated impairment losses
(137,204
)
 
(13,638
)
 
(633,211
)
 
(784,053
)
Balance as of June 30, 2017
$
273,490

 
$
27,877

 
$
—

 
$
301,367

 
 
 
 
 
 
 
 
Activity for 2018:
 
 
 
 
 
 
 
Change in gross goodwill due to translation
764

 
(329
)
 
—

 
435

 
 
 
 
 
 
 
 
Gross goodwill
411,458

 
41,186

 
633,211

 
1,085,855

Accumulated impairment losses
(137,204
)
 
(13,638
)
 
(633,211
)
 
(784,053
)
Balance as of June 30, 2018
$
274,254

 
$
27,548

 
$
—

 
$
301,802

 
 
 
 
 
 
 
 
Activity for 2019:
 
 
 
 
 
 
 
Change in gross goodwill due to translation
(1,546
)
 
(245
)
 
—

 
(1,791
)
 
 
 
 
 
 
 
 
Gross goodwill
409,912

 
40,941

 
633,211

 
1,084,064

Accumulated impairment losses
(137,204
)
 
(13,638
)
 
(633,211
)
 
(784,053
)
Balance as of June 30, 2019
$
272,708

 
$
27,303

 
$
—

 
$
300,011

The components of our other intangible assets were as follows: 
 
Estimated
Useful Life
(in years)
 
June 30, 2019
 
 
June 30, 2018
(in thousands)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
 
Gross Carrying
Amount
 
Accumulated
Amortization
Contract-based
3 to 15
 
$
7,062

 
$
(7,062
)
 
 
$
7,061

 
$
(7,036
)
Technology-based and other
4 to 20
 
46,228

 
(31,890
)
 
 
46,666

 
(30,923
)
Customer-related
10 to 21
 
205,213

 
(94,711
)
 
 
206,162

 
(85,301
)
Unpatented technology
10 to 30
 
31,702

 
(15,492
)
 
 
31,854

 
(13,096
)
Trademarks
5 to 20
 
14,755

 
(9,352
)
 
 
12,450

 
(8,978
)
Trademarks
Indefinite
 
14,545

 
—

 
 
17,609

 
—

Total
 
 
$
319,505

 
$
(158,507
)
 
 
$
321,802

 
$
(145,334
)
Amortization expense for intangible assets was $14.4 million, $14.7 million and $16.6 million for 2019, 2018 and 2017, respectively. Estimated amortization expense for 2019 through 2023 is $14.5 million, $14.2 million, $13.8 million, $13.6 million, and $12.3 million, respectively.

NOTE 8 — OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following at June 30:
(in thousands)
 
2019
 
2018
Accrued employee benefits
 
$
36,268

 
$
48,889

Accrued restructuring (Note 14)
 
19,212

 
17,469

Accrued legal and professional fees
 
13,481

 
9,291

Payroll, state and local taxes
 
7,971

 
10,146

Accrued interest
 
5,205

 
7,898

Other
 
60,685

 
56,893

Total other current liabilities
 
$
142,822

 
$
150,586



47

NOTE 9 — LONG-TERM DEBT
Long-term debt and capital lease obligations consisted of the following at June 30:
(in thousands)
2019
 
2018
2.650% Senior Unsecured Notes due fiscal 2020, net of discount of $0.1 million for 2018
$
—

 
$
399,898

3.875% Senior Unsecured Notes due fiscal 2022, net of discount of $0.1 million for 2019 and 2018
299,903

 
299,868

4.625% Senior Unsecured Notes due fiscal 2028, net of discount of $2.0 million for 2019 and $2.2 million for 2018
298,046

 
297,813

Total debt
597,949

 
997,579

Less unamortized debt issuance costs
(5,475
)
 
(6,808
)
Less current maturities:
 
 
 
Long-term debt
—

 
(399,266
)
Total long-term debt
$
592,474

 
$
591,505

Senior Unsecured Notes On June 7, 2018, we issued $300.0 million of 4.625 percent Senior Unsecured Notes with a maturity date of June 15, 2028. Interest will be paid semi-annually on June 15 and December 15 of each year. We used the net proceeds from the offering of the notes, plus cash on hand, for the early extinguishment of our $400.0 million of 2.650 percent Senior Unsecured Notes ($400.0 million Notes) in July of fiscal 2019. The $400 million Notes, with an original maturity date of November 1, 2019, were reclassified to current maturities of long-term debt as of June 30, 2018, since our notification of early redemption to bondholders in June 2018 created an irrevocable commitment to redeem the debt. Interest on the $400 million Notes was paid semi-annually on May 1 and November 1 of each year. On February 14, 2012, we issued $300 million of 3.875 percent Senior Unsecured Notes with a maturity date of February 15, 2022. Interest on these Notes is paid semi-annually on February 15 and August 15 of each year.
Credit Agreement The five-year, multi-currency, revolving credit facility, as amended and restated in June 2018 (Credit Agreement) provides for revolving credit loans of up to $700.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement matures in June 2023 and allows for borrowings in U.S. dollars, euros, Canadian dollars, pounds sterling and Japanese yen. Interest payable under the Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us.
The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the Credit agreement). We were in compliance with all covenants as of June 30, 2019. We had no borrowings outstanding under the Credit Agreement as of June 30, 2019 and 2018. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries.
Future principal maturities of long-term debt are $300 million in 2022 and $300 million in 2028.
 
NOTE 10 — NOTES PAYABLE AND LINES OF CREDIT
Notes payable to banks of $0.2 million and $0.9 million at June 30, 2019 and 2018, respectively, represent short-term borrowings under credit lines with commercial banks in the various countries in which we operate. These credit lines, translated into U.S. dollars at June 30, 2019 exchange rates, totaled $70.9 million at June 30, 2019, of which $70.7 million was unused.


48

NOTE 11 — INCOME TAXES
Income before income taxes consisted of the following for the years ended June 30: 
(in thousands)
2019
 
2018
 
2017
Income (loss) before income taxes:
 
 
 
 
 
United States
$
60,756

 
$
57,109

 
$
(23,055
)
International
250,479

 
217,932

 
104,930

Total income before income taxes
$
311,235

 
$
275,041

 
$
81,875

Current income taxes:
 
 
 
 
 
Federal
$
5,679

 
$
3,755

 
$
(1,455
)
State
321

 
(816
)
 
172

International
54,553

 
44,127

 
24,911

Total current income taxes
60,553

 
47,066

 
23,628

Deferred income taxes:
 
 
 
 
 
Federal
$
(3,606
)
 
$
1,121

 
$
298

State
45

 
3,552

 
(867
)
International
6,367

 
18,242

 
6,836

Total deferred income taxes:
2,806

 
22,915

 
6,267

Provision for income taxes
$
63,359

 
$
69,981

 
$
29,895

Effective tax rate
20.4
%
 
25.4
%
 
36.5
%
Tax Cuts and Jobs Act of 2017 (TCJA)
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law in the U.S. TCJA amends the Internal Revenue Code of 1986 to reduce tax rates and modify policies, credits and deductions for individuals and corporations. For corporations, TCJA reduced the federal tax rate from a maximum of 35.0 percent to a flat 21.0 percent rate and eliminated U.S. federal taxes on most future foreign earnings. TCJA also added many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII). The three primary items from TCJA that effected the Company for fiscal 2019 are the reduction in the statutory tax rate, the one-time tax that was imposed on our unremitted foreign earnings (toll tax) and the tax on global intangible low-taxed income (GILTI) which we elected to record as a period cost. BEAT and FDII did not have an impact on our 2019 income tax provision.
The U.S. federal tax rate reduction was effective January 1, 2018. As a June 30 fiscal year-end taxpayer, our 2018 fiscal year U.S. federal statutory tax rate was a blended rate of 28.1 percent, and our 2019 U.S. federal statutory tax rate was 21.0 percent.
The finalized total toll tax charge is $71.2 million as of June 30, 2019. Based on regulations issued by the U.S. Department of the Treasury and the Internal Revenue Service and other relevant guidance issued through June 30, 2019, we recorded a net benefit of $9.3 million during the year ended June 30, 2019 to adjust the toll tax charge. We did not make a cash payment associated with the toll tax.
In accordance with the SEC Staff Accounting Bulletin 118, in the December quarter of fiscal 2019 we finalized our accounting for the impacts of the TCJA provisions enacted in fiscal 2018, including the remeasurement of deferred tax assets and liabilities at the reduced U.S. federal rate of 21.0 percent.

49

The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for income taxes was as follows for the years ended June 30:
(in thousands)
2019
 
2018
 
2017
Income taxes at U.S. statutory rate
$
65,359

 
$
77,286

 
$
28,656

State income taxes, net of federal tax benefit
289

 
2,975

 
(306
)
U.S. income taxes provided on international income
7,347

 
1,010

 
10,273

Combined tax effects of international income
162

 
(9,333
)
 
(11,530
)
Change in valuation allowance and other uncertain tax positions
(1,473
)
 
(90,817
)
 
5,163

U.S. research and development credit
(3,911
)
 
(3,141
)
 
(1,895
)
Change in permanent reinvestment assertion
6,093

 
—

 
—

Combined effects of U.S. tax reform
(9,280
)
 
86,044

 
—

Adjustment to deferred tax charges on intra-entity transfers
—

 
5,297

 
—

Other
(1,227
)
 
660

 
(466
)
Provision for income taxes
$
63,359

 
$
69,981

 
$
29,895


During 2019, we recorded a net tax benefit of $9.3 million associated with the finalization of our toll tax charge which included a benefit of $15.0 million for the toll tax charge and a $5.3 million charge for an unrecognized tax benefit. The impact of these items is included in the tax reconciliation table under the caption “Combined effects of U.S. tax reform.”

During 2019, we recorded a charge of $6.1 million related to a change in assertion with respect to a portion of the unremitted earnings and profits of certain non-U.S. subsidiaries and affiliates. The impact of this item is included in the tax reconciliation table under the caption “Change in permanent reinvestment assertion.”

During 2019, we released a $1.1 million valuation allowance that was previously recorded against the net deferred tax assets of our Australian subsidiary. The impact of this item is included in the tax reconciliation table under the caption “Change in valuation allowance and other uncertain tax positions.”
During 2018, we recorded a charge for the combined effects of tax reform of $86.0 million, which included $80.9 million for the toll tax charge and a net charge in our U.S. provision of $5.1 million for revaluation of U.S. net deferred taxes. The impact of these items is included in the tax reconciliation table under the caption “Combined effects of tax reform.” The revaluation of U.S. net deferred taxes was preliminary and subject to finalization of the 2018 U.S. federal income tax return.
During 2018, we released $91.3 million of the U.S. valuation allowance that was previously recorded against our net deferred tax assets in the U.S., including deferred tax assets related to items of Other Comprehensive Income. The valuation allowance release was triggered by utilization of a significant portion of our deferred tax assets to satisfy the toll tax provision in TCJA.
During 2017, we recorded a valuation allowance against the net deferred tax assets of our Australian subsidiary. The impact of the valuation allowance was approximately $1.3 million and is included in the tax reconciliation table under the caption "change in valuation allowance and other uncertain tax positions."

50

The components of net deferred tax assets and liabilities were as follows at June 30:
(in thousands)
2019
 
2018
Deferred tax assets:
 
 
 
Net operating loss (NOL) carryforwards
$
28,886

 
$
39,884

Inventory valuation and reserves
8,230

 
10,023

Pension benefits
21,445

 
15,750

Other postretirement benefits
4,752

 
3,996

Accrued employee benefits
16,029

 
15,697

Other accrued liabilities
7,758

 
9,386

Tax credits and other carryforwards
4,733

 
644

Total
91,833

 
95,380

Valuation allowance
(14,614
)
 
(21,629
)
Total deferred tax assets
$
77,219

 
$
73,751

Deferred tax liabilities:
 
 
 
Tax depreciation in excess of book
$
74,645

 
$
77,106

Intangible assets
4,259

 
537

Other
1,130

 
6,084

Total deferred tax liabilities
$
80,034

 
$
83,727

Total net deferred tax liabilities
$
(2,815
)
 
$
(9,976
)
As noted previously, TCJA reduced the statutory Federal income tax rate from 35.0 percent to 21.0 percent. The table above reflects deferred taxes calculated using the U.S. Federal rates, which was at the 21.0 percent rate as of June 30, 2019 and 2018.
During 2018, we identified an error related to the tax rate that had historically been used to calculate the deferred tax charge on intra-entity product transfers. This resulted in an overstatement of deferred tax assets of $8.2 million as of June 30, 2017. During 2018, $2.9 million of this amount was corrected in connection with the release of the U.S. valuation allowance. Therefore, the out of period adjustment recorded resulted in a further increase of $5.3 million to the provision for income taxes during 2018. The remaining balance related to this item was reclassified and included in other current assets. The impact to the effective tax rate was 1.9 percent in 2018. After evaluation, we determined that the impact of the adjustment was not material to the previously issued financial statements, nor are the out of period adjustments material to the 2018 results.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50 percent) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, we consider all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, and projections of future profitability within the carry forward period, including taxable income from tax planning strategies. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of the deferred tax asset based on existing projections of income. Upon changes in facts and circumstances, we may conclude that deferred tax assets for which no valuation allowance is currently recorded may not be realized, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released.
In 2016, we recorded a valuation allowance of $105.9 million against our net deferred tax assets in the U.S. During 2018, we released $91.3 million of the valuation allowance, which was triggered by utilization of a significant portion of our deferred tax assets to satisfy the toll tax provision in TCJA. A valuation allowance on certain state NOLs in the amount of $9.7 million remains recorded on our U.S. deferred tax assets.
Included in deferred tax assets at June 30, 2019 is $4.7 million associated with tax credits and other carryforward items primarily in federal and state jurisdictions. Of that amount, $0.1 million expires through 2024, $4.4 million expires through 2039 and $0.2 million does not expire.

51

Included in deferred tax assets at June 30, 2019 is $28.9 million associated with NOL carryforwards in state and foreign jurisdictions. Of that amount, $7.4 million expires through 2024, $1.7 million expires through 2029, $1.3 million expires through 2034, $3.0 million expires through 2039, and the remaining $15.5 million does not expire. The realization of these tax benefits is primarily dependent on future taxable income in these jurisdictions.
A valuation allowance of $14.6 million has been placed against deferred tax assets primarily in the U.S., Brazil and the Netherlands, all of which would be allocated to income tax expense upon realization of the deferred tax assets. As the respective operations generate sufficient income, the valuation allowances will be partially or fully reversed at such time we believe it will be more likely than not that the deferred tax assets will be realized. In 2019, the valuation allowance related to these deferred tax assets decreased by $7.0 million.
As a result of the Tax Cuts and Jobs Act of 2017 (TCJA), which among other provisions allows for a 100 percent dividends received deduction from controlled foreign subsidiaries, we re-evaluated our assertion with respect to permanent reinvestment in all jurisdictions during the current year and concluded that a portion of the unremitted earnings and profits of certain non-U.S. subsidiaries and affiliates will no longer be permanently reinvested. These changes in assertion required the recognition of a tax charge of $6.1 million recorded in the current year primarily for foreign withholding and U.S. state income taxes. The remaining amount of approximately $1.4 billion is substantially all of the unremitted earnings of our non-U.S. subsidiaries which continues to be indefinitely reinvested. The deferred tax liability associated with unremitted earnings of our non-U.S. subsidiaries not permanently reinvested is $3.9 million as of June 30, 2019. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested earnings is not practicable due to our legal entity structure and the complexity of U.S. and local tax laws. With regard to the unremitted earnings which remain indefinitely reinvested, we have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest) is as follows as of June 30:
(in thousands)
 
2019
 
2018
 
2017
Balance at beginning of year
 
$
5,775

 
$
2,632

 
$
3,106

Increases for tax positions of prior years
 
7,384

 
3,409

 
—

Decreases related to settlement with taxing authority
 
(3,765
)
 
—

 
(231
)
Decreases related to lapse of statute of limitations
 
(324
)
 
(289
)
 
(184
)
Foreign currency translation
 
(118
)
 
23

 
(59
)
Balance at end of year
 
$
8,952

 
$
5,775

 
$
2,632

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate in 2019, 2018 and 2017 is $9.0 million, $5.8 million and $2.6 million, respectively. Our policy is to recognize interest and penalties related to income taxes as a component of the provision for income taxes in the consolidated statement of income. We recognized a decrease of $0.4 million in 2019 and increases of $0.7 million and $0.2 million in 2018 and 2017, respectively. As of June 30, 2019 and 2018 the amount of interest accrued was $0.7 million and $1.1 million, respectively. As of June 30, 2019 and 2018, the amount of penalty accrued was $0.1 million.
With few exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2013. The Internal Revenue Service has audited or the statute of limitations has expired for all U.S. tax years prior to 2016. Various state and foreign jurisdiction tax authorities are in the process of examining our income tax returns for various tax years ranging from 2013 to 2016. We continuously review our uncertain tax positions and evaluate any potential issues that may lead to an increase or decrease in the total amount of unrecognized tax benefits recorded.
We believe that it is reasonably possible that the amount of unrecognized tax benefits could decrease by approximately $0.4 million within the next twelve months.


52

NOTE 12 — PENSION AND OTHER POSTRETIREMENT BENEFITS
Defined Benefit Pension Plans
We have defined benefit pension plans that cover certain employees in the U.S., Germany, the UK, Switzerland, Canada and Israel. Pension benefits under defined benefit pension plans are based on years of service and, for certain plans, on average compensation for specified years preceding retirement. We fund pension costs in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, for U.S. plans and in accordance with local regulations or customs for non-U.S. plans. Beginning in 2017, the accrued benefit for all participants in the Kennametal Inc. Retirement Income Plan is frozen as the result of amendment. The majority of our defined benefit pension plans are closed to future participation.
We have an Executive Retirement Plan for various executives and a Supplemental Executive Retirement Plan both of which have been closed to future participation on June 15, 2017 and July 26, 2006, respectively.
We presently provide varying levels of postretirement health care and life insurance benefits to certain employees and retirees. Postretirement health care benefits are available to employees and their spouses retiring on or after age 55 with 10 or more years of service. Beginning with retirements on or after January 1, 1998, our portion of the costs of postretirement health care benefits is capped at 1996 levels. Beginning with retirements on or after January 1, 2009, we have no obligation to provide a company subsidy for retiree medical costs. Postretirement health and life benefits are closed to future participants as of December 31, 2016.
We use a June 30 measurement date for all of our plans.

53

The funded status of our pension plans and amounts recognized in the consolidated balance sheets as of June 30 were as follows:
(in thousands)
2019
 
2018
Change in benefit obligation:
 
 
 
Benefit obligation, beginning of year
$
902,711

 
$
941,094

Service cost
1,627

 
1,635

Interest cost
31,901

 
30,751

Participant contributions
—

 
3

Actuarial losses (gains)
64,648

 
(24,501
)
Benefits and expenses paid
(49,510
)
 
(47,212
)
Currency translation adjustments
(6,208
)
 
3,876

Plan amendments
1,465

 
—

New plans
18,107

 
—

Plan settlements
—

 
(2,935
)
Benefit obligation, end of year
$
964,741

 
$
902,711

Change in plans' assets:
 
 
 
Fair value of plans' assets, beginning of year
$
792,758

 
$
808,635

Actual return on plans' assets
68,981

 
24,931

Company contributions
7,905

 
7,999

Participant contributions
—

 
3

New plans
9,480

 
—

Plan settlements
—

 
(2,935
)
Benefits and expenses paid
(49,510
)
 
(47,212
)
Currency translation adjustments
(3,745
)
 
1,337

Fair value of plans' assets, end of year
$
825,869

 
$
792,758

Funded status of plans
$
(138,872
)
 
$
(109,953
)
Amounts recognized in the balance sheet consist of:
 
 
 
Long-term prepaid benefit
$
31,581

 
$
42,543

Short-term accrued benefit obligation
(7,624
)
 
(6,699
)
Accrued pension benefits
(162,829
)
 
(145,797
)
Net amount recognized
$
(138,872
)
 
$
(109,953
)
The amount included under the captions "new plans" in the preceding table represents obligations under a defined benefit pension plan in Switzerland and a termination benefit plan covering certain employees in Israel. We determined in 2019 that these obligations should be included within our defined benefit pension plan obligation and the related disclosures. After evaluation, we determined that the effect of the corrections was not material to the previously issued financial statements.
The pre-tax amounts related to our defined benefit pension plans recognized in accumulated other comprehensive loss were as follows at June 30:
(in thousands)
2019
 
2018
Unrecognized net actuarial losses
$
292,992

 
$
247,230

Unrecognized net prior service costs
2,229

 
723

Unrecognized transition obligations
432

 
539

Total
$
295,653

 
$
248,492

To the best of our knowledge and belief, the asset portfolios of our defined benefit pension plans do not contain our capital stock. We do not issue insurance contracts to cover future annual benefits of defined benefit pension plan participants. Transactions between us and our defined benefit pension plans include the reimbursement of plan expenditures incurred by us on behalf of the plans. To the best of our knowledge and belief, the reimbursement of cost is permissible under current ERISA rules or local government law. The accumulated benefit obligation for all defined benefit pension plans was $962.9 million and $902.1 million as of June 30, 2019 and 2018, respectively.

54


Included in the above information are plans with accumulated benefit obligations exceeding the fair value of plan assets as of June 30 as follows:
(in thousands)
2019
 
2018
Projected benefit obligation
$
179,921

 
$
152,485

Accumulated benefit obligation
178,039

 
151,871

Fair value of plan assets
9,480

 
—

The components of net periodic pension income include the following as of June 30:
(in thousands)
2019
 
2018
 
2017
Service cost
$
1,627

 
$
1,635

 
$
2,908

Interest cost
31,901

 
30,751

 
31,113

Expected return on plans' assets
(53,789
)
 
(56,579
)
 
(58,781
)
Amortization of transition obligation
91

 
94

 
89

Amortization of prior service cost
(19
)
 
48

 
(452
)
Special termination benefit charge
—

 
—

 
98

Settlement loss
—

 
626

 
379

Recognition of actuarial losses
6,723

 
6,907

 
8,356

Net periodic pension income
$
(13,466
)
 
$
(16,518
)
 
$
(16,290
)
As of June 30, 2019, the projected benefit payments, including future service accruals for these plans for 2020 through 2024, are $51.5 million, $52.0 million, $52.6 million, $53.7 million and $55.5 million, respectively, and $278.6 million in 2025 through 2029.
The amounts of accumulated other comprehensive loss expected to be recognized in net periodic pension cost during 2020 related to net actuarial losses are $10.4 million. The amount of accumulated other comprehensive income expected to be recognized in net periodic pension cost during 2020 related to transition obligations and prior service cost is immaterial.
We expect to contribute approximately $10 million to our pension plans in 2020, which is primarily for international plans.
Other Postretirement Benefit Plans
The funded status of our other postretirement benefit plans and the related amounts recognized in the consolidated balance sheets were as follows:
(in thousands)
2019
 
2018
Change in benefit obligation:
 
 
 
Benefit obligation, beginning of year
$
15,323

 
$
18,160

Interest cost
613

 
629

Actuarial losses
(264
)
 
(323
)
Benefits paid
(1,505
)
 
(2,208
)
Plan amendments
(1,525
)
 
(935
)
Benefit obligation, end of year
$
12,642

 
$
15,323

Funded status of plan
$
(12,642
)
 
$
(15,323
)
Amounts recognized in the balance sheet consist of:
 
 
 
Short-term accrued benefit obligation
$
(1,468
)
 
$
(1,598
)
Accrued postretirement benefits
(11,174
)
 
(13,725
)
Net amount recognized
$
(12,642
)
 
$
(15,323
)

55

The pre-tax amounts related to our other postretirement benefit plans which were recognized in accumulated other comprehensive loss were as follows at June 30:
(in thousands)
2019
 
2018
Unrecognized net actuarial losses
$
4,150

 
$
4,662

Unrecognized net prior service credits
(2,476
)
 
(1,041
)
Total
$
1,674

 
$
3,621

The components of net periodic other postretirement benefit cost include the following for the years ended June 30:
(in thousands)
2019
 
2018
 
2017
Interest cost
$
613

 
$
629

 
$
673

Amortization of prior service credit
(90
)
 
(22
)
 
(22
)
Recognition of actuarial loss
248

 
280

 
355

Net periodic other postretirement benefit cost
$
771

 
$
887

 
$
1,006

As of June 30, 2019, the projected benefit payments, including future service accruals for our other postretirement benefit plans for 2020 through 2024, are $1.4 million, $1.3 million, $1.2 million, $1.1 million and $1.0 million, respectively, and $4.1 million in 2025 through 2029.
The amounts of accumulated other comprehensive loss expected to be recognized in net periodic pension cost during 2020 related to net actuarial losses and related to prior service credit are costs of $0.3 million and income of $0.3 million, respectively.
We expect to contribute approximately $1 million to our other postretirement benefit plans in 2020.
In accordance with ASU 2017-07, as described in Note 2, the service cost component of net periodic pension income of $1.6 million, $1.6 million and $2.9 million for 2019, 2018 and 2017, respectively, was reported as a component of cost of goods sold and operating expense. The other components of net periodic pension income and net periodic other postretirement benefit cost totaling a net benefit of $14.3 million, $17.3 million and $18.2 million for 2019, 2018 and 2017, respectively, were presented as a component of other income, net. For 2018 and 2017, we reclassified a net benefit of $12.2 million and $12.8 million, respectively, from cost of goods sold to other income, net and a net benefit of $5.1 million and $5.4 million, respectively, from operating expense to other income, net.
Assumptions
The significant actuarial assumptions used to determine the present value of net benefit obligations for our defined benefit pension plans and other postretirement benefit plans were as follows:
 
2019
 
2018
 
2017
Discount Rate:
 
 
 
 
 
U.S. plans
2.7-3.6%
 
4.0-4.3%
 
3.3-3.9%
International plans
0.4-2.9%
 
1.8-3.3%
 
2.0-3.3%
Rates of future salary increases:
 
 
 
 
 
U.S. plans
4.0%
 
4.0%
 
4.0%
International plans
1.8-3.0%
 
2.5-3.0%
 
2.5-3.0%

56

The significant assumptions used to determine the net periodic (income) cost for our pension and other postretirement benefit plans were as follows:
 
2019
 
2018
 
2017
Discount Rate:
 
 
 
 
 
U.S. plans
4.0-4.3%
 
3.3-3.9%
 
2.4-3.7%
International plans
1.8-3.3%
 
2.0-3.3%
 
0.9-3.2%
Rates of future salary increases:
 
 
 
 
 
U.S. plans
4.0%
 
4.0%
 
3.0-4.0%
International plans
2.5-3.0%
 
2.5-3.0%
 
2.5-3.0%
Rate of return on plans assets:
 
 
 
 
 
U.S. plans
7.0%
 
7.3%
 
7.5%
International plans
5.0-5.3%
 
5.3%
 
5.3-5.5%
The rates of return on plan assets are based on historical performance, as well as future expected returns by asset class considering macroeconomic conditions, current portfolio mix, long-term investment strategy and other available relevant information.
The annual assumed rate of increase in the per capita cost of covered benefits (the health care cost trend rate) for our postretirement benefit plans was as follows: 
 
2019
 
2018
 
2017
Health care costs trend rate assumed for next year
7.0
%
 
7.5
%
 
8.0
%
Rate to which the cost trend rate gradually declines
5.0
%
 
5.0
%
 
5.0
%
Year that the rate reaches the rate at which it is assumed to remain
2027

 
2027

 
2027

A change of one percentage point in the assumed health care cost trend rates would have an immaterial effect on both the total service and interest cost components of our other postretirement cost and other postretirement benefit obligation at June 30, 2019.
Plan Assets
The primary objective of certain of our pension plans' investment policies is to ensure that sufficient assets are available to provide the benefit obligations at the time the obligations come due. The overall investment strategy for the defined benefit pension plans' assets combine considerations of preservation of principal and moderate risk-taking. The assumption of an acceptable level of risk is warranted in order to achieve satisfactory results consistent with the long-term objectives of the portfolio. Fixed income securities comprise a significant portion of the portfolio due to their plan-liability-matching characteristics and to address the plans' cash flow requirements. Additionally, diversification of investments within each asset class is utilized to further reduce the impact of losses in single investments.
Investment management practices for U.S. defined benefit pension plans must comply with ERISA and all applicable regulations and rulings thereof. The use of derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives. Currently, the use of derivative instruments is not significant when compared to the overall investment portfolio.
The Company utilizes a liability driven investment strategy (LDI) for the assets of its U.S. defined benefit pension plans in order to reduce the volatility of the funded status of these plans and to meet the obligations at an acceptable cost over the long term. This LDI strategy entails modifying the asset allocation and duration of the assets of the plans to more closely match the liability profile of these plans. The asset reallocation involves increasing the fixed income allocation, reducing the equity component and adding alternative investments. Longer duration interest rate swaps have been utilized periodically in order to increase the overall duration of the asset portfolio to more closely match the liabilities.

57

Our defined benefit pension plans’ asset allocations as of June 30, 2019 and 2018 and target allocations for 2020, by asset class, were as follows:
 
2019
 
2018
 
Target %
Equity
23
%
 
28
%
 
23
%
Fixed Income
67

 
62

 
70

Other
10

 
11

 
7

The following sections describe the valuation methodologies used by the trustee to measure the fair value of the defined benefit pension plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally classified (see Note 4 for the definition of fair value and a description of the fair value hierarchy).
Corporate fixed income securities Investments in corporate fixed income securities consist of corporate debt and asset backed securities. These investments are classified as level two and are valued using independent observable market inputs such as the treasury curve, swap curve and yield curve.
Common stock Common stocks are classified as level one and are valued at their quoted market price.
Government securities Investments in government securities consist of fixed income securities such as U.S. government and agency obligations and foreign government bonds and asset and mortgage backed securities such as obligations issued by government sponsored organizations. These investments are classified as level two and are valued using independent observable market inputs such as the treasury curve, credit spreads and interest rates.
Other fixed income securities Investments in other fixed income securities are classified as level two and valued based on observable market data.
Other Other investments consist primarily of a hedge fund, in addition to state and local obligations and short term investments including cash, corporate notes, and various short term debt instruments which can be redeemed within a nominal redemption notice period. These investments are primarily classified as level two and are valued using independent observable market inputs.
The fair value methods described may not be reflective of future fair values. Additionally, while the Company believes the valuation methods used by the plans’ trustee are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in different fair value measurement at the reporting date.
The following table presents the fair value of the benefit plan assets by asset category as of June 30, 2019:
(in thousands)
Level 1
 
Level 2
 
Level 3
 
NAV(3)
 
Total
Common / collective trusts (3):
 
 
 
 
 
 
 
 
 
Value funds
$
—

 
$
—

 
$
—

 
$
66,950

 
$
66,950

Growth funds
—

 
—

 
—

 
38,119

 
38,119

Balanced funds
—

 
—

 
—

 
10,921

 
10,921

Corporate fixed income securities
—

 
407,008

 
—

 
—

 
407,008

Common stock
74,448

 
—

 
—

 
—

 
74,448

Government securities:
 
 
 
 
 
 
 
 
 
U.S. government securities
—

 
61,770

 
—

 
—

 
61,770

Foreign government securities
—

 
48,011

 
—

 
—

 
48,011

Other fixed income securities
—

 
32,971

 
—

 
—

 
32,971

Other
3,888

 
81,783

 
—

 
—

 
85,671

Total investments
$
78,336

 
$
631,543

 
$
—

 
$
115,990

 
$
825,869


58

The following table presents the fair value of the benefit plan assets by asset category as of June 30, 2018:
(in thousands)
Level 1
 
Level 2
 
Level 3
 
NAV(3)
 
Total
Common / collective trusts (3):
 
 
 
 
 
 
 
 
 
Value funds
$
—

 
$
—

 
$
—

 
$
74,070

 
$
74,070

Growth funds
—

 
—

 
—

 
49,438

 
49,438

Balanced funds
—

 
—

 
—

 
11,854

 
11,854

Corporate fixed income securities
—

 
350,394

 
—

 
—

 
350,394

Common stock
83,361

 
—

 
—

 
—

 
83,361

Government securities:
 
 
 
 
 
 
 
 
 
U.S. government securities
—

 
62,381

 
—

 
—

 
62,381

Foreign government securities
—

 
46,286

 
—

 
—

 
46,286

Other fixed income securities
—

 
31,630

 
—

 
—

 
31,630

Other
3,898

 
79,446

 
—

 
—

 
83,344

Total investments
$
87,259

 
$
570,137

 
$
—

 
$
135,362

 
$
792,758

(3) Investments in common / collective trusts invest primarily in publicly traded securities and are valued using net asset value (NAV) of units of a bank collective trust. Therefore, these amounts have not been classified in the fair value hierarchy and are presented in the tables to reconcile the fair value hierarchy to the total fair value of plan assets.
Defined Contribution Plans
We sponsor several defined contribution retirement plans. Costs for defined contribution plans were $16.3 million, $19.6 million and $15.8 million in 2019, 2018 and 2017, respectively.
Certain U.S. employees are eligible to participate in the Kennametal Thrift Plus Plan (Thrift), which is a qualified defined contribution plan under section 401(k) of the Internal Revenue Code. Under the Thrift, eligible employees receive a full match of their contributions up to 6 percent of eligible compensation. Additionally, we have the right to make discretionary contributions to the Thrift.
All contributions, including the company match and discretionary, are made in cash and invested in accordance with participants’ investment elections. There are no minimum amounts that must be invested in company stock, and there are no restrictions on transferring amounts out of company stock to another investment choice, other than excessive trading rules applicable to such investments. Employee contributions and our matching and discretionary contributions vest immediately as of the participants' employment dates.

NOTE 13 — ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of and changes in accumulated other comprehensive loss (AOCL) were as follows, net of tax, for the year ended June 30, 2019 (in thousands):
Attributable to Kennametal:
Postretirement benefit plans
Currency translation adjustment
Derivatives
Total
Balance, June 30, 2018
$
(187,755
)
$
(127,347
)
$
(5,223
)
$
(320,325
)
Other comprehensive loss before reclassifications
(39,639
)
(20,248
)
197

(59,690
)
Amounts Reclassified from AOCL
5,124

—

1,348

6,472

Net current period other comprehensive loss
(34,515
)
(20,248
)
1,545

(53,218
)
AOCL, June 30, 2019
$
(222,270
)
$
(147,595
)
$
(3,678
)
$
(373,543
)
 
 
 
 
 
Attributable to noncontrolling interests:
 
 
 
 
Balance, June 30, 2018
$
—

$
(2,913
)
$
—

$
(2,913
)
Other comprehensive loss before reclassifications
—

(537
)
—

(537
)
Net current period other comprehensive loss
—

(537
)
—

(537
)
AOCL, June 30, 2019
$
—

$
(3,450
)
$
—

$
(3,450
)


59

The components of and changes in AOCL were as follows, net of tax, for the year ended June 30, 2018 (in thousands):
Attributable to Kennametal:
Postretirement benefit plans
Currency translation adjustment
Derivatives
Total
Balance, June 30, 2017
$
(189,038
)
$
(126,606
)
$
(8,048
)
$
(323,692
)
Other comprehensive loss before reclassifications
(5,991
)
(741
)
(922
)
(7,654
)
Amounts Reclassified from AOCL
7,274

—

3,747

11,021

Net current period other comprehensive
    income
1,283

(741
)
2,825

3,367

AOCL, June 30, 2018
$
(187,755
)
$
(127,347
)
$
(5,223
)
$
(320,325
)
 
 
 
 
 
Attributable to noncontrolling interests:
 
 
 
 
Balance, June 30, 2017
$
—

$
(2,164
)
$
—

$
(2,164
)
Other comprehensive loss before reclassifications
—

(749
)
—

(749
)
Net current period other comprehensive
    loss
—

(749
)
—

(749
)
AOCL, June 30, 2018
$
—

$
(2,913
)
$
—

$
(2,913
)

The components of and changes in AOCL were as follows, net of tax, for the year ended June 30, 2017 (in thousands):
Attributable to Kennametal:
Postretirement benefit plans
Currency translation adjustment
Derivatives
Total
Balance, June 30, 2016
$
(212,163
)
$
(131,212
)
$
(9,134
)
$
(352,509
)
Other comprehensive income before reclassifications
15,559

4,606

(471
)
19,694

Amounts Reclassified from AOCL
7,566

—

1,557

9,123

Net current period other comprehensive income
23,125

4,606

1,086

28,817

AOCL, June 30, 2017
$
(189,038
)
$
(126,606
)
$
(8,048
)
$
(323,692
)
 
 
 
 
 
Attributable to noncontrolling interests:
 
 
 
 
Balance, June 30, 2016
$
—

$
(3,446
)
$
—

$
(3,446
)
Other comprehensive income before
reclassifications
—

1,282

—

1,282

Net current period other comprehensive income
—

1,282

—

1,282

AOCL, June 30, 2017
$
—

$
(2,164
)
$
—

$
(2,164
)


60

Reclassifications out of AOCL for the years ended June 30, 2019, 2018 and 2017 consisted of the following:
 
Year Ended June 30,
 
Details about AOCL components
(in thousands)
2019
2018
2017
Affected line item in the Income Statement
Gains and losses on cash flow hedges:
 
 
 
 
Forward starting interest rate swaps
$
2,352

$
2,265

$
2,180

Interest expense
Currency exchange contracts
(567
)
2,243

(623
)
Other income, net
Total before tax
1,785

4,508

1,557

 
Tax impact
(437
)
(761
)
—

Provision for income taxes
Net of tax
$
1,348

$
3,747

$
1,557

 
 
 
 
 
 
Postretirement benefit plans:
 
 
 
 
Amortization of transition obligations
$
91

$
94

$
89

Other income, net
Amortization of prior service credit
(109
)
26

(474
)
Other income, net
Recognition of actuarial losses
6,971

7,187

8,711

Other income, net
Total before tax
6,953

7,307

8,326

 
Tax impact
(1,829
)
(33
)
(760
)
Provision for income taxes
Net of tax
$
5,124

$
7,274

$
7,566

 

The amount of income tax allocated to each component of other comprehensive income for the year ended June 30, 2019:
(in thousands)
Pre-tax
Tax impact
Net of tax
Unrealized gain on derivatives designated and qualified as cash flow hedges
$
261

$
(64
)
$
197

Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges
1,785

(437
)
1,348

Unrecognized net pension and other postretirement benefit loss
(52,087
)
12,448

(39,639
)
Reclassification of net pension and other postretirement benefit loss
6,953

(1,829
)
5,124

Foreign currency translation adjustments
(20,881
)
96

(20,785
)
Other comprehensive income
$
(63,969
)
$
10,214

$
(53,755
)

The amount of income tax allocated to each component of other comprehensive loss for the year ended June 30, 2018:
(in thousands)
Pre-tax
Tax impact
Net of tax
Unrealized loss on derivatives designated and qualified as cash flow hedges
$
(928
)
$
6

$
(922
)
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges
4,508

(761
)
3,747

Unrecognized net pension and other postretirement benefit loss
(8,043
)
2,052

(5,991
)
Reclassification of net pension and other postretirement benefit loss
7,307

(33
)
7,274

Foreign currency translation adjustments
(1,593
)
103

(1,490
)
Other comprehensive income
$
1,251

$
1,367

$
2,618



61

The amount of income tax allocated to each component of other comprehensive loss for the year ended June 30, 2017:
(in thousands)
Pre-tax
Tax impact
Net of tax
Unrealized loss on derivatives designated and qualified as cash flow hedges
$
(471
)
$
—

$
(471
)
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges
1,557

—

1,557

Unrecognized net pension and other postretirement benefit gain
18,656

(3,097
)
15,559

Reclassification of net pension and other postretirement benefit loss
8,326

(760
)
7,566

Foreign currency translation adjustments
6,266

(378
)
5,888

Other comprehensive income
$
34,334

$
(4,235
)
$
30,099


NOTE 14 — RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES

FY19 Restructuring Actions
In the June quarter of fiscal 2018, we implemented and subsequently substantially completed restructuring activities to simplify the Industrial segment's cost structure by directing our resources to more profitable business and increasing sales force productivity. We supplemented this with the rationalization of small manufacturing facilities in the Infrastructure and Industrial segments, which we substantially completed in fiscal 2019. Total restructuring and related charges since inception of $13.4 million were recorded for this program through June 30, 2019: $11.8 million in Industrial, $1.0 million in Widia, $0.5 million in Infrastructure and $0.1 million in Corporate.
FY20 Restructuring Actions
In the June quarter of fiscal 2019, we began implementing the next phase of restructuring associated with our simplification/modernization initiative. These proposed actions are expected to reduce structural costs, improve operational efficiency and position the Company for long-term profitable growth. The Company expects to incur pre-tax charges of $55 million to $65 million through fiscal 2020 for these restructuring activities, which are anticipated to be primarily cash expenditures. Total restructuring and related charges since inception of $14.2 million were recorded for this program through June 30, 2019: $10.0 million in Industrial, $2.4 million in Infrastructure and $1.8 million in Widia.
FY21 Restructuring Actions
On July 11, 2019, we announced the initiation of restructuring actions in Germany associated with simplification/modernization. Incremental to restructuring actions previously announced, the actions are expected to reduce structural costs and be completed by fiscal 2022. Pre-tax charges of $60 million to $75 million are expected to be incurred through fiscal 2020 and 2021 and are anticipated to be primarily cash expenditures.
Annual Restructuring Charges
During 2019, we recorded restructuring and related charges of $16.9 million, net of a $4.8 million gain on the sale of our previously closed Madison, AL manufacturing location as part of our legacy restructuring programs. Of this amount, restructuring charges totaled $19.5 million, of which $0.7 million was related to inventory and was recorded in cost of goods sold. Restructuring-related charges of $1.8 million were recorded in cost of goods sold and $0.3 million were recorded in operating expense during 2019.
During 2018, we recorded restructuring and related charges of $15.9 million, net of a $4.7 million gain on the sale of our previously closed Houston, TX manufacturing location as part of our legacy restructuring programs. Of this amount, restructuring charges totaled $16.4 million, of which benefit of $0.2 million was related to inventory and was recorded in cost of goods sold. Restructuring-related charges of $3.7 million were recorded in cost of goods sold and $0.5 million were recorded in operating expense during 2018.
During 2017, we recorded restructuring and related charges of $76.2 million. Of this amount, restructuring charges totaled $65.6 million, of which $0.6 million were charges related to inventory and was recorded in cost of goods sold. Restructuring-related charges of $7.1 million were recorded in cost of goods sold and $3.5 million were recorded in operating expense during 2017.

62

As of June 30, 2019, the restructuring accrual of $19.2 million is recorded in other current liabilities. As of June 30, 2018 and 2017, $17.5 million and $27.3 million of the restructuring accrual is recorded in other current liabilities, and $0.1 million and $2.5 million is recorded in other liabilities, respectively, in our consolidated balance sheet. The amount attributable to each segment is as follows:
(in thousands)
June 30, 2018
 
Expense
 
Asset Write-Down
 
Translation
 
Cash Expenditures
 
June 30, 2019
Industrial
 
 
 
 
 
 
 
 
 
 
 
Severance
$
7,967

 
$
8,957

 
$
—

 
$
(176
)
 
$
(7,885
)
 
$
8,863

Facilities
—

 
3,488

 
(3,488
)
 
—

 
—

 
—

Other
—

 
(103
)
 
—

 
(1
)
 
139

 
35

Total Industrial
7,967

 
12,342

 
(3,488
)
 
(177
)
 
(7,746
)
 
8,898

 
 
 
 
 
 
 
 
 
 
 
 
Widia
 
 
 
 
 
 
 
 
 
 
 
Severance
2,087

 
2,185

 
—

 
(43
)
 
(1,923
)
 
2,306

Facilities
—

 
401

 
(401
)
 
—

 
—

 
—

Other
15

 
(25
)
 
—

 
—

 
34

 
24

Total Widia
2,102

 
2,561

 
(401
)
 
(43
)
 
(1,889
)
 
2,330

 
 
 
 
 
 
 
 
 
 
 
 
Infrastructure
 
 
 
 
 
 
 
 
 
 
 
Severance
7,558

 
3,977

 
—

 
(78
)
 
(3,501
)
 
7,956

Facilities
—

 
708

 
(708
)
 
—

 
—

 
—

Other
12

 
(46
)
 
—

 
—

 
62

 
28

Total Infrastructure
7,570

 
4,639

 
(708
)
 
(78
)
 
(3,439
)
 
7,984

Total
$
17,639

 
$
19,542

 
$
(4,597
)
 
$
(298
)
 
$
(13,074
)
 
$
19,212


(in thousands)
June 30, 2017
 
Expense
 
Asset Write-Down
 
Translation
 
Cash Expenditures
 
June 30, 2018
Industrial
 
 
 
 
 
 
 
 
 
 
 
Severance
$
17,639

 
$
9,734

 
$
—

 
$
868

 
$
(20,274
)
 
$
7,967

Facilities
—

 
3,084

 
(3,084
)
 
—

 
—

 
—

Other
94

 
(85
)
 
—

 
1

 
(10
)
 
—

Total Industrial
17,733

 
12,733

 
(3,084
)
 
869

 
(20,284
)
 
7,967

 
 
 
 
 
 
 
 
 
 
 
 
Widia
 
 
 
 
 
 
 
 
 
 
 
Severance
2,434

 
475

 
—

 
42

 
(864
)
 
2,087

Facilities
—

 
747

 
(747
)
 
—

 
—

 
—

Other
—

 
(4
)
 
—

 
—

 
19

 
15

Total Widia
2,434

 
1,218

 
(747
)
 
42

 
(845
)
 
2,102

 
 
 
 
 
 
 
 
 
 
 
 
Infrastructure
 
 
 
 
 
 
 
 
 
 
 
Severance
9,573

 
2,053

 
—

 
183

 
(4,251
)
 
7,558

Facilities
21

 
433

 
(433
)
 
—

 
(21
)
 
—

Other
45

 
(18
)
 
—

 
—

 
(15
)
 
12

Total Infrastructure
9,639

 
2,468

 
(433
)
 
183

 
(4,287
)
 
7,570

Total
$
29,806

 
$
16,419

 
$
(4,264
)
 
$
1,094

 
$
(25,416
)
 
$
17,639



63

NOTE 15 — FINANCIAL INSTRUMENTS
The methods used to estimate the fair value of our financial instruments are as follows:
Cash and Equivalents, Current Maturities of Long-Term Debt and Notes Payable to Banks The carrying amounts approximate their fair value because of the short maturity of the instruments.
Long-Term Debt, Including Current Maturities Fixed rate debt had a fair market value of $622.0 million and $996.4 million at June 30, 2019 and 2018, respectively. The Level 2 fair value is determined based on the quoted market prices for similar debt instruments as of June 30, 2019 and 2018, respectively.
Foreign Exchange Contracts The notional amount of outstanding foreign exchange contracts, translated at current exchange rates, was $61.5 million and $62.9 million at June 30, 2019 and 2018, respectively. We would have received $0.2 million and $0.8 million at June 30, 2019 and 2018, respectively, to settle these contracts representing the fair value of these agreements. The carrying value equaled the fair value for these contracts at June 30, 2019 and 2018. Fair value was estimated based on quoted market prices of comparable instruments.
Concentrations of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. By policy, we make temporary cash investments with high credit quality financial institutions and limit the amount of exposure to any one financial institution. With respect to trade receivables, concentrations of credit risk are significantly reduced because we serve numerous customers in many industries and geographic areas.
We are exposed to counterparty credit risk for nonperformance of derivatives and, in the unlikely event of nonperformance, to market risk for changes in interest and currency exchange rates, as well as settlement risk. We manage exposure to counterparty credit risk through credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. We do not anticipate nonperformance by any of the counterparties. As of June 30, 2019 and 2018, we had no significant concentrations of credit risk.

NOTE 16 — STOCK-BASED COMPENSATION
Stock Options

Changes in our stock options for 2019 were as follows:
 
Options
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Life (years)
 
Aggregate
Intrinsic value
(in thousands)
Options outstanding, June 30, 2018
989,992

 
$
33.08

 

 


Exercised
(188,528
)
 
28.47

 
 
 
 
Lapsed and forfeited
(19,791
)
 
44.20

 
 
 
 
Options outstanding, June 30, 2019
781,673

 
$
33.92

 
3.5
 
$
4,158

Options vested and expected to vest, June 30, 2019
781,673

 
$
33.92

 
3.5
 
$
4,158

Options exercisable, June 30, 2019
781,673

 
$
33.92

 
3.5
 
$
4,158

During 2019, 2018 and 2017, compensation expense related to stock options was $0.1 million, $0.7 million and $1.5 million, respectively. As of June 30, 2019, there was no unrecognized compensation cost related to options outstanding.
Fair value of options vested during 2019, 2018 and 2017 was $1.2 million, $1.9 million and $3.3 million, respectively.
Tax benefits relating to excess stock-based compensation deductions are presented in the consolidated statements of cash flow as operating cash inflows for 2019 and 2018 and as financing cash inflows for 2017. Tax benefits resulting from stock-based compensation deductions were greater than the amounts reported for financial reporting purposes by $1.3 million in 2019 and by an immaterial amount in 2018. No tax benefits were realized resulting from stock-based compensation deductions for 2017 due to the valuation allowance on U.S. deferred tax assets.
The amount of cash received from the exercise of capital stock options during 2019, 2018 and 2017 was $4.8 million, $22.2 million and $21.3 million, respectively. The related tax benefit in 2019 and 2018 was $0.5 million and $1.4 million, respectively. No related tax benefit was realized in 2017 due to the valuation allowance on U.S. deferred tax assets. The total intrinsic value of options exercised in 2019, 2018 and 2017 was $2.4 million, $6.6 million and $3.1 million, respectively.


64

Restricted Stock Units – Time Vesting and Performance Vesting
Performance vesting restricted stock units are earned pro rata each year if certain performance goals are met over a three-year period, and are also subject to a service condition that requires the individual to be employed by the Company at the payment date after the three-year performance period, with the exception of retirement eligible grantees, who upon retirement are entitled to receive payment for any units that have been earned, including a prorated portion in the partially completed fiscal year in which the retirement occurs. Time vesting stock units are valued at the market value of the stock on the grant date. Performance vesting stock units with a market condition are valued using a Monte Carlo model.
Changes in our time vesting and performance vesting restricted stock units for 2019 were as follows:
 
Performance
Vesting
Stock
Units
 
Performance
Vesting
Weighted
Average Fair
Value
 
Time Vesting
Stock Units
 
Time Vesting
Weighted
Average Fair
Value
Unvested, June 30, 2018
409,297

 
$
31.22

 
1,083,675

 
$
30.47

Granted
161,066

 
40.10

 
544,297

 
38.91

Vested
(141,394
)
 
27.77

 
(646,155
)
 
28.73

Performance metric adjustments, net
41,196

 
29.69

 
—

 
—

Forfeited
(64,935
)
 
32.60

 
(54,890
)
 
34.67

Unvested, June 30, 2019
405,230

 
$
35.58

 
926,927

 
$
36.43

During 2019, 2018 and 2017, compensation expense related to time vesting and performance vesting restricted stock units was $21.9 million, $19.4 million and $19.3 million, respectively. As of June 30, 2019, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $17.7 million and is expected to be recognized over a weighted average period of 1.9 years.

NOTE 17— ENVIRONMENTAL MATTERS
The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain of our locations.
We establish and maintain reserves for certain potential environmental issues. At June 30, 2019 and 2018, the balances of these reserves were $12.4 million and $12.6 million, respectively. These reserves represent anticipated costs associated with the remediation of these issues and are generally not discounted.
The reserves we have established for environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the United States Environmental Protection Agency (USEPA), other governmental agencies and by the Potentially Responsible Party (PRP) groups in which we are participating. Although the reserves currently appear to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The reserved and unreserved liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.
Among other environmental laws, we are subject to the Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund), under which we have been designated by the USEPA as a PRP with respect to environmental remedial costs at certain Superfund sites. We have evaluated our claims and potential liability associated with these Superfund sites based upon the best information currently available to us. We believe our environmental accruals will be adequate to cover our portion of the environmental remedial costs at those Superfund sites where we have been designated a PRP, to the extent these expenses are probable and reasonably estimable.

NOTE 18 — COMMITMENTS AND CONTINGENCIES
Legal Matters Various lawsuits arising during the normal course of business are pending against us. In our opinion, the ultimate liability, if any, resulting from these matters will have no significant effect on our consolidated financial positions or results of operations.

65

Lease Commitments We lease a wide variety of facilities and equipment under operating leases, primarily for warehouses, production and office facilities and equipment. Lease expense under these rentals amounted to $26.6 million in 2019 and 2018, and $26.3 million in 2017. Future minimum lease payments for non-cancelable operating leases are $17.1 million, $12.2 million, $6.7 million, $4.3 million and $2.6 million for the years 2020 through 2024 and $17.2 million thereafter.
Purchase Commitments We have purchase commitments for materials, supplies and machinery and equipment as part of the ordinary conduct of business. Some of these commitments extend beyond one year and are based on minimum purchase requirements. We believe these commitments are not at prices in excess of current market.
Other Contractual Obligations We do not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect our liquidity.
Related Party Transactions Sales to affiliated companies were immaterial in 2019, 2018 and 2017. We do not have any other related party transactions that affect our operations, results of operations, cash flow or financial condition.

NOTE 19 — SEGMENT DATA
The Company manages and reports its business in the following three segments: Industrial, Widia and Infrastructure. The Company's reportable operating segments have been determined in accordance with the Company's internal management structure, which is organized based on operating activities, the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results. We do not allocate certain corporate expenses related to executive retirement plans, the Company’s Board of Directors and strategic initiatives, as well as certain other costs and report them in Corporate. None of our reportable operating segments represent the aggregation of two or more operating segments.
Sales to a single customer did not aggregate to 4 percent or more of total sales in 2019, 2018 and 2017. Export sales from U.S. operations to unaffiliated customers were $67.8 million, $72.4 million and $58.6 million in 2019, 2018 and 2017, respectively.
INDUSTRIAL The Industrial segment develops and manufactures high performance tooling and metalworking products and services for diverse end markets, including aerospace and defense, general engineering, energy and transportation. These products include milling, hole making, turning, threading and toolmaking systems used in the manufacture of airframes, aero engines, trucks and automobiles, ships and various types of industrial equipment. We leverage advanced manufacturing capabilities in combination with varying levels of customization to solve our customers’ toughest challenges and deliver improved productivity for a wide range of applications. Industrial goes to market under the Kennametal® brand through its direct sales force, a network of independent and national distributors, integrated supplier channels and via the Internet. Application engineers and technicians are critical to the sales process and directly assist our customers with specified product design, selection, application and support.
WIDIA Widia offers an assortment of standard and custom metal cutting solutions to general engineering, aerospace, energy and transportation customers. We serve our customers primarily through a network of value added resellers, integrated supplier channels and via the internet. Widia markets its products under the WIDIA®, WIDIA Hanita® and WIDIA GTD® brands.
INFRASTRUCTURE Our Infrastructure segment produces engineered tungsten carbide and ceramic components, earth-cutting tools, and advanced metallurgical powders, primarily for the energy, earthworks and general engineering end markets. These wear-resistant products include compacts, nozzles, frac seats and custom components used in oil & gas and petrochemical industries; rod blanks and abrasive water jet nozzles for general industries; earth cutting tools and systems used in underground mining, trenching and foundation drilling and road milling; tungsten carbide and specialty alloy powders for the oil and gas, aerospace and process industries; and ceramics used by the packaging industry for metallization of films and papers. We combine deep metallurgical and engineering expertise with advanced manufacturing capabilities to deliver solutions that drive improved productivity for our customers. Infrastructure markets its products primarily under the Kennametal® brand and sells through a direct sales force as well as through distributors.

66

Segment data is summarized as follows: 
(in thousands)
2019
 
2018
 
2017
Sales:
 
 
 
 
 
Industrial
$
1,274,499

 
$
1,292,098

 
$
1,126,309

Widia
197,522

 
198,568

 
177,662

Infrastructure
903,213

 
877,187

 
754,397

Total sales
$
2,375,234

 
$
2,367,853

 
$
2,058,368

 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
Industrial
$
220,696

 
$
176,978

 
$
73,053

Widia
2,882

 
2,919

 
(6,800
)
Infrastructure
108,480

 
112,998

 
28,063

Corporate
(3,208
)
 
(2,596
)
 
436

Total operating income
$
328,850

 
$
290,299

 
$
94,752

 
 
 
 
 
 
Interest expense
$
32,994

 
$
30,081

 
$
28,842

Other income, net
(15,379
)
 
(14,823
)
 
(15,965
)
Income from continuing operations before income taxes
$
311,235

 
$
275,041

 
$
81,875

 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
Industrial
$
58,373

 
$
57,261

 
$
54,269

Widia
9,390

 
9,483

 
10,728

Infrastructure
44,284

 
41,916

 
42,596

Corporate
5

 
20

 
63

Total depreciation and amortization
$
112,052

 
$
108,680

 
$
107,656

 
 
 
 
 
 
Total assets:
 
 
 
 
 
Industrial
$
1,245,624

 
$
1,169,610

 
$
1,103,686

Widia
216,633

 
193,971

 
191,626

Infrastructure
883,566

 
864,402

 
813,747

Corporate
310,446

 
697,754

 
306,437

Total assets
$
2,656,269

 
$
2,925,737

 
$
2,415,496

 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
Industrial
$
145,485

 
$
112,124

 
$
70,281

Widia
22,162

 
17,445

 
17,853

Infrastructure
44,696

 
41,435

 
29,884

Total capital expenditures
$
212,343

 
$
171,004

 
$
118,018


67

Geographic information for sales, based on country where the sale originated, and long-lived assets is as follows:
(in thousands)
2019
 
2018
 
2017
Sales:
 
 
 
 
 
   United States
$
1,014,189

 
$
970,003

 
$
868,466

   Germany
314,035

 
331,893

 
282,347

   China
247,858

 
271,343

 
220,561

   India
113,287

 
102,120

 
84,769

   Canada
108,261

 
102,139

 
85,488

   Italy
68,585

 
69,049

 
59,967

   France
59,899

 
62,982

 
56,231

   United Kingdom
44,384

 
45,714

 
39,731

   Other(4)
404,736

 
412,610

 
360,808

Total sales
$
2,375,234

 
$
2,367,853

 
$
2,058,368

 
 
 
 
 
 
Total long-lived assets:
 
 
 
 
 
   United States
$
525,713

 
$
456,678

 
$
423,543

   Germany
201,714

 
188,673

 
157,323

   China
78,410

 
67,462

 
60,908

   India
44,643

 
31,984

 
28,569

   Israel
24,042

 
25,831

 
26,627

   Canada
20,435

 
19,396

 
19,576

   Other
39,938

 
34,189

 
34,822

Total long-lived assets(5)
$
934,895

 
$
824,213

 
$
751,368

(4) Other consists of sales from 27 countries, none of which individually exceed 2 percent of total sales.
(5) Total long-lived assets as of June 30, 2019 and 2018 include property, plant and equipment, net of $934.9 million and $824.2 million, respectively. Total long-lived assets as of June 30, 2017 include property, plant and equipment, net of $744.4 million and assets held for sale of $7.0 million.

The following table presents Kennametal's revenue disaggregated by segment by geography:
 
Industrial
 
Widia
 
Infrastructure
 
Total Kennametal
 
2019
2018
2017
 
2019
2018
2017
 
2019
2018
2017
 
2019
2018
2017
Americas
40%
38%
39%
 
45%
46%
49%
 
66%
65%
65%
 
50%
49%
49%
EMEA
40
41
41
 
26
25
24
 
16
16
17
 
30
31
31
Asia Pacific
20
21
20
 
29
29
27
 
18
19
18
 
20
20
20
The following table presents Kennametal's revenue disaggregated by segment by end market:
 
Industrial
 
Widia
 
Infrastructure
 
Total Kennametal
 
2019
2018
2017
 
2019
2018
2017
 
2019
2018
2017
 
2019
2018
2017
General Engineering
44%
43%
43%
 
100%
100%
100%
 
34%
31%
28%
 
45%
41%
39%
Transportation
34
36
36
 
—
—
—
 
—
—
—
 
18
20
20
Aerospace and Defense
13
12
12
 
—
—
—
 
—
—
—
 
7
8
8
Energy
9
9
9
 
—
—
—
 
33
33
33
 
17
17
18
Earthworks
—
—
—
 
—
—
—
 
33
36
39
 
13
14
15


68

NOTE 20 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
For the quarter ended (in thousands, except per share data)
September 30
 
December 31
 
March 31
 
June 30
2019
 
 
 
 
 
 
 
Sales
$
586,687

 
$
587,394

 
$
597,204

 
$
603,949

Gross profit
211,092

 
198,598

 
208,086

 
213,719

Net income attributable to Kennametal
56,699

 
54,698

 
68,550

 
61,978

Basic earnings per share attributable to Kennametal (6)
 
 
 
 
 
 
 
Net income
0.69

 
0.66

 
0.83

 
0.75

Diluted earnings per share attributable to Kennametal (6)
 
 
 
 
 
 
 
Net income
0.68

 
0.66

 
0.82

 
0.74

2018
 
 
 
 
 
 
 
Sales
$
542,454

 
$
571,345

 
$
607,936

 
$
646,119

Gross profit
181,949

 
189,501

 
216,417

 
232,256

Net income attributable to Kennametal 
39,183

 
41,601

 
50,866

 
68,528

Basic earnings per share attributable to Kennametal (6)
 
 
 
 
 
 
 
Net income
0.48

 
0.51

 
0.62

 
0.84

Diluted earnings per share attributable to Kennametal (6)
 
 
 
 
 
 
 
Net income
0.48

 
0.50

 
0.61

 
0.83

(6) Earnings per share amounts attributable to Kennametal for each quarter are computed using the weighted average number of shares outstanding during the quarter. Earnings per share amounts attributable to Kennametal for the full year are computed using the weighted average number of shares outstanding during the year. Thus, the sum of the four quarters’ earnings per share attributable to Kennametal does not always equal the full-year earnings per share attributable to Kennametal.

ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A — CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2019. The Company’s disclosure controls were designed to provide a reasonable assurance that information required to be disclosed in reports that we file or submit under the Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance at June 30, 2019 to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
(b)
Management’s Report on Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting is included in Item 8 of this Annual Report and incorporated herein by reference.
(c)
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of Kennametal’s internal control over financial reporting as of June 30, 2019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in Item 8 of this Annual Report, which is incorporated herein by reference.

69

(d)
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the fourth quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B — OTHER INFORMATION
None.


70

PART III

ITEM 10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Information regarding the executive officers of Kennametal Inc. is as follows: Name, Age, Position, and Experience During the Past Five Years (1).
Christopher Rossi, 55
President and Chief Executive Officer
President and Chief Executive Officer since August 2017; Formerly, Chief Executive Officer of Dresser-Rand at Siemens Aktiengesellschaft (provides custom-engineered rotating equipment for applications in the oil, gas, process, power, and other industries), from September 2015 to May 2017; Executive Vice President of Global Operations at Dresser-Rand Group Inc. from September 2012 to September 2015.
Judith L. Bacchus, 57
Vice President and Chief Administrative Officer
Vice President and Chief Administrative Officer since May 2019; Vice President and Chief Human Resources and Corporate Relations Officer since December 2015; Vice President and Chief Human Resources Officer from June 2011 to November 2015.
Carlonda R. Reilly, 51
Vice President and Chief Technology Officer
Vice President and Chief Technology Officer since September 2018; Formerly, Global Technology Director in Transportation and Advanced Polymers business at DuPont (chemical company) from January 2016 to September 2018 and Gloval Technology Director in Building Innovations at DuPont from 2013 to January 2016.
Peter A. Dragich, 56
Vice President, Kennametal Inc. and President, Industrial Business Segment
Vice President, Kennametal Inc. and President, Industrial Business Segment since January 2017; Vice President, Kennametal Inc. and President, Infrastructure Business Segment from May 2016 to January 2017; Vice President and Executive Vice President, Infrastructure Business Segment from October 2015 to May 2016; Vice President Integrated Supply Chain and Logistics from October 2012 to October 2015.
Damon J. Audia, 48
Vice President and Chief Financial Officer
Vice President and Chief Financial Officer since September 2018; Formerly, Senior Vice President and Chief Financial Officer at Carpenter Technology Corporation (manufactures, fabricates and distributes specialty metals) from October 2015 to September 2018; Senior Vice President of Finance in North America Business at The Goodyear Tire & Rubber Company (develops, manufactures, markets and distributes tires).
Michelle R. Keating, 43
Vice President, Secretary and General Counsel, Kennametal Inc.
Vice President, Secretary and General Counsel, Kennametal Inc. since December 2016; Vice President, Secretary and Interim General Counsel from July 2016 to December 2016; Vice President, Associate General Counsel & Assistant Secretary from March 2016 to July 2016; Assistant General Counsel & Assistant Secretary from August 2011 to February 2016.
Ronald L. Port, 54
Vice President, Kennametal Inc. and President, Infrastructure Business Segment
Vice President, Kennametal Inc. and President, Infrastructure Business Segment since January 2018; Vice President & General Manager, Engineered Components from April 2015 to January 2018; Formerly, Vice President Marketing & Business Development, Flow Technology segment at SPX Corporation (provided highly-engineered process equipment into industrial flow markets) from September 2013 to April 2015.
Patrick S. Watson, 46
Vice President Finance and Corporate Controller, Kennametal Inc.
Vice President Finance and Corporate Controller, Kennametal Inc. since March 2017; Vice President Finance - Industrial Business from March 2014 to February 2017; Director Finance, Kennametal EMEA from August 2011 to August 2014.


71

(1) Each executive officer has been elected by the Board of Directors to serve until removed or until a successor is elected and qualified. Unless otherwise noted, none of the executive officers (i) has an arrangement or understanding with any other person(s) pursuant to which he or she was selected as an officer, (ii) has any family relationship with any director or executive officer of the Company, or (iii) is involved in any legal proceeding which would require disclosure under this item.
Incorporated herein by reference is the information to be provided under the captions “Proposal I. Election of Directors” and “Delinquent Section 16(a) Reports” in our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after June 30, 2019 (2019 Proxy Statement). Also incorporated herein by reference is the information to be set forth under the caption “Ethics and Corporate Governance-Code of Conduct” and "Ethics and Corporate Governance-Corporate Governance" in the 2019 Proxy Statement.
The Company has a separately designated standing Audit Committee established in accordance with Section 3(a) (58) (A) of the Exchange Act. The members of the Audit Committee are: William M. Lambert (Chair); Cindy L. Davis; Lorraine M. Martin; and Sagar A. Patel. Incorporated herein by reference is the information provided under the caption “Board of Directors and Board Committees-Committee Functions-Audit Committee” in the 2019 Proxy Statement.

ITEM 11 — EXECUTIVE COMPENSATION

Incorporated herein by reference from our 2019 Proxy Statement is the information to be set forth under the captions “Executive Compensation, Compensation Discussion and Analysis,” "Compensation Committee Report," "Analysis of Risk Inherent in our Compensation Policies and Practices," "Executive Compensation Tables," "2019 Nonqualified Deferred Compensation," "Retirement Programs" and "Potential Payments Upon Termination or Change in Control." Also incorporated herein by reference from our 2019 Proxy Statement is the information to be set forth under the captions “Board of Directors Compensation and Benefits” and “Board of Directors and Board Committees - Committee Functions - Compensation Committee Interlocks and Insider Participation."

ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Incorporated herein by reference from our 2019 Proxy Statement are: (i) the information to be set forth under the caption “Equity Compensation Plans,” (ii) the information to be set forth under the caption “Ownership of Capital Stock by Directors, Nominees and Executive Officers” with respect to the directors’ and officers’ shareholdings; and (iii) the information to be set forth under the caption “Principal Holders of Voting Securities” with respect to other beneficial owners.

ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated herein by reference is the information to be set forth under the captions “Ethics and Corporate Governance-Corporate Governance-Board of Director Review and Approval of Related Person Transactions,” “Executive Compensation,” “Executive Compensation Tables” and “Ethics and Corporate Governance-Corporate Governance-Board Composition and Independence” in the 2019 Proxy Statement.

ITEM 14 — PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated herein by reference is the information with respect to pre-approval policies set forth under the caption “Proposal II. Ratification of PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm for the Fiscal Year ending June 30, 2020-Audit Committee Pre-Approval Policy” and the information with respect to principal accountant fees and services set forth under “Proposal II. Ratification of PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm for the Fiscal Year ending June 30, 2020-Fees and Services” to be set forth in the 2019 Proxy Statement.


72

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 
 
 
 
 
KENNAMETAL INC.
Date: August 13, 2019
 
 
 
By:
 
/s/ Patrick S. Watson
 
 
 
 
 
 
Patrick S. Watson
 
 
 
 
 
 
Vice President Finance and Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
 
 
 
 
 
SIGNATURE
  
TITLE
  
DATE
 
 
 
/s/ CHRISTOPHER ROSSI
Christopher Rossi
 
President and Chief Executive Officer
 
August 13, 2019
 
 
 
 
 
/s/ DAMON J. AUDIA
Damon J. Audia
  
Vice President and Chief Financial Officer
  
August 13, 2019
 
 
 
 
 
/s/ PATRICK S. WATSON
Patrick S. Watson
  
Vice President Finance and Corporate Controller
  
August 13, 2019
 
 
 
/s/ LAWRENCE W. STRANGHOENER
Lawrence W. Stranghoener
  
Chairman of the Board
  
August 13, 2019
 
 
 
 
 
/s/ JOSEPH ALVARADO
Joseph Alvarado
  
Director
  
August 13, 2019
 
 
 
 
 
/s/ CINDY L. DAVIS
Cindy L. Davis
  
Director
  
August 13, 2019
 
 
 
 
 
/s/ WILLIAM J. HARVEY
William J. Harvey
  
Director
  
August 13, 2019
 
 
 
/s/ WILLIAM M. LAMBERT
William M. Lambert
  
Director
  
August 13, 2019
 
 
 
 
 
/s/ LORRAINE M. MARTIN
Lorraine M. Martin
  
Director
  
August 13, 2019
 
 
 
/s/ TIMOTHY R. MCLEVISH
Timothy R. McLevish
  
Director
  
August 13, 2019
 
 
 
 
 
/s/ SAGAR A. PATEL
Sagar A. Patel
  
Director
  
August 13, 2019
 
 
 
/s/ STEVEN H. WUNNING
Steven H. Wunning
  
Director
  
August 13, 2019

73

PART IV
ITEM 15 — EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Form 10-K report.
1. Financial Statements included in Part II, Item 8
2. Financial Statement Schedule
The financial statement schedule required by Part II, Item 8 of this document is filed as part of this report. All of the other schedules are omitted as the required information is inapplicable or the information is presented in our consolidated financial statements or related notes.
FINANCIAL STATEMENT SCHEDULE
Page
Schedule II—Valuation and Qualifying Accounts and Reserves for the Years Ended June 30, 2019, 2018 and 2017     
3. Exhibits
3

 
Articles of Incorporation and Bylaws
 
 
3.1

 
 
Exhibit 3.(i) of the Form 8-K filed October 30, 2014 (File No. 001-05318) is incorporated herein by reference.
3.2

 
 
Exhibit 10.1 of the Form 8-K filed July 28, 2016 (File No. 001-05318) is incorporated herein by reference.
 
 
 
 
 
4

 
Instruments Defining the Rights of Security Holders, Including Indentures
4.1

 
 
Exhibit 4.1 of the Form 8-K filed June 20, 2002 (File No. 001-05318) is incorporated herein by reference.
4.2

 
 
Exhibit 4.2 of the Form 8-K filed June 20, 2002 (File No. 001-05318) is incorporated herein by reference.
4.3

 
 
Exhibit 4.1 of the Form 8-K filed February 14, 2012 (File No. 001-05318) is incorporated herein by reference.
4.4

 
 
Exhibit 4.2 of the Form 8-K filed February 14, 2012 (File No. 001-05318) is incorporated herein by reference.
4.5

 
 
Exhibit 4.4 of the Form 8-K filed November 7, 2012 (File No. 001-05318) is incorporated herein by reference.
4.6

 
 
Exhibit 4.1 of the Form 8-K filed June 7, 2018 (File No. 001-05318) is incorporated herein by reference.
4.7

 
 
Filed herewith.
 
 
 
 
 
10

 
Material Contracts
 
 
10.1*

 
 
Exhibit 10.1 of the December 31, 2008 Form 10-Q filed February 4, 2009 (File No. 001-05318) is incorporated herein by reference.
10.2*

 
 
Exhibit 10.2 of the December 31, 2008 Form 10-Q filed February 4, 2009 (File No. 001-05318) is incorporated herein by reference.
10.3*

 
 
Exhibit 10.3 of the December 31, 2008 Form 10-Q filed February 4, 2009 (File No. 001-05318) is incorporated herein by reference.
10.4*

 
 
Appendix A to the 2008 Proxy Statement filed September 8, 2008 (File No. 001-05318) is incorporated herein by reference.
10.5*

 
 
Exhibit 10.2 of the Form 8-K filed March 22, 2005 (File No. 001-05318) is incorporated herein by reference.
10.6*

 
 
Filed herewith.
10.7*

 
 
Exhibit 10.8 of the December 31, 2008 Form 10-Q filed February 4, 2009 (File No. 001-05318) is incorporated herein by reference.

74

10.8*

 
 
Exhibit 10.2 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference.
10.9*

 
 
Exhibit 10.1 of the Form 8-K filed June 23, 2015 (File No. 001-05318) is incorporated herein by reference.
10.10*

 
 
Exhibit 10.9 of the December 31, 2008 Form 10-Q filed February 4, 2009 (File No. 001-05318) is incorporated herein by reference.
10.11*

 
 
Exhibit 10.2 of the Form 8-K filed June 23, 2015 (File No. 001-05318) is incorporated herein by reference.
10.12*

 
 
Exhibit 10.12 of the Form 10-K filed August 10, 2018 (File No. 001-05318) is incorporated herein by reference.
10.13*

 
 
Exhibit 10.5 of Form 10-Q filed February 8, 2011 (File No. 001-05318) is incorporated herein by reference.
10.14*

 
 
Exhibit 10.6 of Form 10-Q filed February 8, 2011 (File No. 001-05318) is incorporated herein by reference
10.15*

 
 
Exhibit 10.1 of Form 8-K filed May 13, 2011 (File No. 001-05318) is incorporated herein by reference.
10.16*

 
 
Filed herewith.
10.17*

 
 
Exhibit 10.3 to Form 8-K filed February 5, 2016 (File No. 001-05318) is incorporated herein by reference
10.18*

 
 
Exhibit 10.2 to Form 8-K filed February 5, 2016 (File No. 001-05318) is incorporated herein by reference
10.19*

 
 
Exhibit 10.40 of the Form 10-K filed August 11, 2016 (File No. 001-05318) is incorporated herein by reference.
10.20*

 
 
Exhibit 10.41 of the Form 10-K filed August 11, 2016 (File No. 001-05318) is incorporated herein by reference.
10.21*

 
 
Appendix A of the 2013 Proxy Statement filed September 17, 2013 (File No. 001-05318) is incorporated herein by reference.
10.22*

 
 
Exhibit 10.39 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference.
10.23*

 
 
Exhibit 10.41 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference.
10.24*

 
 
Exhibit 10.42 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference.
10.25*

 
 
Exhibit 10.43 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference.
10.26*

 
 
Exhibit 10.45 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference.
10.27*

 
 
Exhibit 10.46 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference.
10.28*

 
 
Exhibit 10.1 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference.
10.29*

 
 
Exhibit 10.3 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference.

75

10.30*

 
 
Exhibit 10.4 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference.
10.31*

 
 
Exhibit 10.5 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference.

10.32*

 
 
Exhibit 10.6 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference.
10.33*

 
 
Exhibit 10.8 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference.
10.34*

 
 
Exhibit 10.9 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference.
10.35*

 
 
Exhibit 10.10 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference.
10.36*

 
 
Exhibit 10.12 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference.
10.37*

 
 
Exhibit 10.1 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference.
10.38*

 
 
Exhibit 10.3 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference.
10.39*

 
 
Exhibit 10.5 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference.
10.40*

 
 
Exhibit 10.6 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference.
10.41*

 
 
Exhibit 10.7 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference.
10.42*

 
 
Exhibit 10.9 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference.
10.43*

 
 
Appendix C of 2016 Proxy Statement filed September 13, 2016 (File No. 001-05318) is incorporated by reference herein.
10.44*

 
 
Exhibit 10.1 of the Form 10-Q filed November 7, 2016 (File No. 001-05318) is incorporated by reference herein.
10.45*

 
 
Exhibit 10.2 of the Form 10-Q filed November 7, 2016 (File No. 001-05318) is incorporated by reference herein.
10.46*

 
 
Exhibit 10.4 of the Form 10-Q filed November 7, 2016 (File No. 001-05318) is incorporated by reference herein.
10.47*

 
 
Exhibit 10.5 of the Form 10-Q filed November 7, 2016 (File No. 001-05318) is incorporated by reference herein.
10.48*

 
 
Exhibit 10.1 of the Form 10-Q filed February 8, 2017 (File No. 001-05318) is incorporated by reference herein.

76

10.49*

 
 
Exhibit 10.74 to Form 10-K filed August 14, 2017 (File No. 001-05318) is incorporated by reference herein.
10.50*

 
 
Exhibit 10.75 to Form 10-K filed August 14, 2017 (File No. 001-05318) is incorporated by reference herein.
10.51*

 
 
Exhibit 10.76 to Form 10-K filed August 14, 2017 (File No. 001-05318) is incorporated by reference herein.
10.52*

 
 
Filed herewith.
10.53*

 
 
Exhibit 10.77 to Form 10-K filed August 14, 2017 (File No. 001-05318) is incorporated by reference herein.
10.54*

 
 
Filed herewith.
10.55*

 
 
Exhibit 10.78 to Form 10-K filed August 14, 2017 (File No. 001-05318) is incorporated by reference herein.
10.56*

 
 
Exhibit 10.2 to Form 10-Q filed November 6, 2018 (File No. 001-05318) is incorporated by reference herein.
10.57*

 
 
Exhibit 10.1 of the Form 8-K filed November 3, 2017 (File No. 001-05318) is incorporated herein by reference.
10.58*

 
 
Exhibit 10.2 of the Form 8-K filed November 3, 2017 (File No. 001-05318) is incorporated herein by reference.
10.59*

 
 
Filed herewith.
10.60*

 
 
Exhibit 10.60 of the Form 10-K filed August 10, 2018 (File No. 001-05318) is incorporated by reference herein.
10.61*

 
 
Filed herewith.
10.62

 
 
Exhibit 10.1 of the Form 8-K filed June 22, 2018 (File No. 001-05318) is incorporated herein by reference.
10.63*

 
 
Exhibit 10.1 of the Form 8-K filed September 13, 2018 (File No. 001-05318) is incorporated herein by reference.
 
 
 
 
 
21

 
 
Filed herewith.
 
 
 
 
 
23

 
 
Filed herewith.
 
 
 
 
 
31

 
Certifications
 
 
31.1

 
 
Filed herewith.
31.2

 
 
Filed herewith.
 
 
 
 
 
32

 
Section 1350 Certifications
 
 
32.1

 
 
Filed herewith.
 
 
 
 
 
*Denotes management contract or compensatory plan or arrangement.
 
 
 
 
 
 
 
101

 
XBRL
 
 
101.INS

 
XBRL Instance Document.
 
Filed herewith.
101.SCH

 
XBRL Taxonomy Extension Schema Document.
 
Filed herewith.
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
Filed herewith.

77

101.DEF

 
XBRL Taxonomy Definition Linkbase
 
Filed herewith.
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document.
 
Filed herewith.
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
Filed herewith.

78

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(In thousands)
For the year ended June 30
 
Balance at
Beginning
of Year
 
Charges to
Costs and
Expenses
 
 
Charged to
Other
Comprehensive Income (Loss)
 
 
Recoveries
 
Other
Adjustments
 
 
Deductions
from
Reserves
 
Balance at
End of 
Year
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for
doubtful accounts
 
$
11,807

 
$
2,366

 
 
$
—

 
 
$
111

 
$
(248
)
 
(1) 
$
(3,953
)
(2) 
$
10,083

Reserve for excess and obsolete inventory
 
31,257

 
12,343

 
 
—

 
 
—

 
(484
)
 
(1) 
(5,721
)
(3) 
37,395

Deferred tax asset valuation allowance
 
21,629

 
(5,597
)
 
 
—

 
 
—

 
(1,418
)
 
(1)  
—

 
14,614

2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for
doubtful accounts
 
$
13,693

 
$
1,831

 
 
$
—

 
 
$
559

 
$
(135
)
 
(1) 
$
(4,141
)
(2) 
$
11,807

Reserve for excess and obsolete inventory
 
32,114

 
9,067

 
 
—

 
 
—

 
108

 
(1) 
(10,032
)
(3) 
31,257

Deferred tax asset valuation allowance
 
116,770

 
(94,641
)
 
(5) 
511

 
 
—

 
(1,011
)
 
(1) 
—

 
21,629

2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for
doubtful accounts
 
$
12,724

 
$
3,589

 
 
$
—

 
 
$
45

 
$
(24
)
 
(1) 
$
(2,641
)
(2) 
$
13,693

Reserve for excess and obsolete inventory
 
36,713

 
9,603

 
 
—

 
 
—

 
328

 
(1) 
(14,530
)
(3) 
32,114

Deferred tax asset valuation allowance
 
122,699

 
2,361

 
 
(5,805
)
 
 
—

 
(2,485
)
 
(4) 
—

 
116,770

 
(1)Represents foreign currency translation adjustment.
(2)Represents uncollected accounts charged against the allowance.
(3)Represents scrapped inventory and other charges against the reserve.
(4)Represents the shortfall on restricted stock units and non-qualified stock options which resulted in a reduction of our deferred tax asset and
subsequently the valuation allowance, in addition to foreign currency translation adjustment.
(5)Represents primarily the effects from the release of the valuation allowance against our net deferred tax assets in the U.S.

ITEM 16 — FORM 10-K SUMMARY
None.

79