10-Q 1 kmt331201810-q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
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
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES [X] NO [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 [  ] (Do not check if a smaller reporting company)
  
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 in Rule 12b-2 of the Exchange Act). YES [  ] NO [X]
Indicate the number of shares outstanding of each of the issuer’s classes of capital stock, as of the latest practicable date.
Title of Each Class
 
Outstanding at April 30, 2018
Capital Stock, par value $1.25 per share     
 
81,628,262
 



KENNAMETAL INC.
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2018
TABLE OF CONTENTS
 
Item No.
Page No.
 
 
 
 
 
 
1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
1.
 
 
 
2.
 
 
 
6.
 
 

2


FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that do not relate strictly to historical or current facts. You can identify forward-looking statements by the fact they use words such as “should,” “anticipate,” “estimate,” “approximate,” “expect,” “may,” “will,” “project,” “intend,” “plan,” “believe” and other words of similar meaning and expression in connection with any discussion of future operating or financial performance or events. We have also included forward looking statements in this Quarterly Report on Form 10-Q 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. These statements are based on current estimates that involve inherent risks and uncertainties. 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 the economy; our ability to achieve anticipated benefits of our restructuring 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; 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 our Annual Report on Form 10-K. We can give no assurance that any goal or plan set forth in forward-looking statements can 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.




3


PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
 
 
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in thousands, except per share amounts)
2018
 
2017
 
2018
 
2017
Sales
$
607,936

 
$
528,630

 
$
1,721,734

 
$
1,493,343

Cost of goods sold
388,475

 
342,365

 
1,124,736

 
1,015,926

Gross profit
219,461

 
186,265

 
596,998

 
477,417

Operating expense
129,151

 
116,939

 
369,131

 
347,808

Restructuring and asset impairment charges (Note 7)
1,264

 
7,169

 
6,834

 
44,230

Amortization of intangibles
3,690

 
4,245

 
11,028

 
12,665

Operating income
85,356

 
57,912

 
210,005

 
72,714

Interest expense
7,468

 
7,331

 
21,848

 
21,475

Other expense, net
647

 
1,626

 
2,046

 
2,470

Income before income taxes
77,241

 
48,955

 
186,111

 
48,769

Provision for income taxes
24,130

 
9,301

 
51,204

 
22,401

Net income
53,111

 
39,654

 
134,907

 
26,368

Less: Net income attributable to noncontrolling interests
2,245

 
764

 
3,256

 
1,873

Net income attributable to Kennametal
$
50,866

 
$
38,890

 
$
131,651

 
$
24,495

PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
 
 
 
 
Basic earnings per share
$
0.62

 
$
0.48

 
$
1.62

 
$
0.31

Diluted earnings per share
$
0.61

 
$
0.48

 
$
1.59

 
$
0.30

Dividends per share
$
0.20

 
$
0.20

 
$
0.60

 
$
0.60

Basic weighted average shares outstanding
81,793

 
80,398

 
81,445

 
80,219

Diluted weighted average shares outstanding
83,109

 
81,381

 
82,670

 
80,965

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


4


KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
 
 
Three Months Ended March 31,
Nine Months Ended March 31,
(in thousands)
2018
 
2017
2018
 
2017
Net income
$
53,111

 
$
39,654

$
134,907

 
$
26,368

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges
(783
)
 
(866
)
(1,688
)
 
614

Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges
898

 
389

2,301

 
1,158

Unrecognized net pension and other postretirement benefit (loss) gain
(1,749
)
 
(725
)
(4,339
)
 
3,376

Reclassification of net pension and other postretirement benefit loss
1,344

 
1,804

4,692

 
5,434

Foreign currency translation adjustments
20,282

 
13,785

54,075

 
(26,480
)
Total other comprehensive income (loss), net of tax
19,992

 
14,387

55,041

 
(15,898
)
Total comprehensive income
73,103

 
54,041

189,948

 
10,470

Less: comprehensive income attributable to noncontrolling interests
2,515

 
1,734

4,699

 
2,203

Comprehensive income attributable to Kennametal Shareholders
$
70,588

 
$
52,307

$
185,249

 
$
8,267

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

5


KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
 
 
 
(in thousands, except per share data)
March 31,
2018
 
June 30,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
221,906

 
$
190,629

Accounts receivable, less allowance for doubtful accounts of $13,404 and $13,693, respectively
410,550

 
380,425

Inventories (Note 10)
537,205

 
487,681

Assets held for sale (Note 7)
4,947

 

Other current assets
65,979

 
55,166

Total current assets
1,240,587

 
1,113,901

Property, plant and equipment:
 
 
 
Land and buildings
359,512

 
350,002

Machinery and equipment
1,703,582

 
1,577,776

Less accumulated depreciation
(1,258,140
)
 
(1,183,390
)
Property, plant and equipment, net
804,954

 
744,388

Other assets:
 
 
 
Assets held for sale (Note 7)
886

 
6,980

Goodwill (Note 17)
309,433

 
301,367

Other intangible assets, less accumulated amortization of $144,012 and $129,981, respectively (Note 17)
181,676

 
190,527

Deferred income taxes (Note 3)
22,160

 
28,349

Other
58,166

 
29,984

Total other assets
572,321

 
557,207

Total assets
$
2,617,862

 
$
2,415,496

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt and capital leases
$

 
$
190

Notes payable to banks
1,399

 
735

Accounts payable
220,205

 
215,722

Accrued income taxes
27,300

 
6,202

Accrued expenses
88,505

 
85,682

Other current liabilities
140,381

 
152,947

Total current liabilities
477,790

 
461,478

Long-term debt and capital leases, less current maturities (Note 11)
696,087

 
694,991

Deferred income taxes
14,856

 
14,883

Accrued pension and postretirement benefits
168,328

 
160,860

Accrued income taxes
8,766

 
2,636

Other liabilities
25,881

 
27,995

Total liabilities
1,391,708

 
1,362,843

Commitments and contingencies
 
 
 
EQUITY (Note 15)
 
 
 
Kennametal Shareholders’ Equity:
 
 
 
Preferred stock, no par value; 5,000 shares authorized; none issued

 

Capital stock, $1.25 par value; 120,000 shares authorized; 81,626 and 80,665 shares issued, respectively
102,032

 
100,832

Additional paid-in capital
506,902

 
474,547

Retained earnings
848,485

 
765,607

Accumulated other comprehensive loss
(270,094
)
 
(323,692
)
Total Kennametal Shareholders’ Equity
1,187,325

 
1,017,294

Noncontrolling interests
38,829

 
35,359

Total equity
1,226,154

 
1,052,653

Total liabilities and equity
$
2,617,862

 
$
2,415,496

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

6


KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
 
 
 
 
 
 
Nine Months Ended March 31,
(in thousands)
2018
 
2017
OPERATING ACTIVITIES
 
 
 
Net income
$
134,907

 
$
26,368

Adjustments for non-cash items:
 
 
 
Depreciation
69,994

 
68,369

Amortization
11,028

 
12,665

Stock-based compensation expense
16,225

 
17,285

Restructuring and asset impairment charges (Note 7)
4,267

 
1,224

Deferred income tax provision
6,911

 
1,300

Other
3,384

 
(2,711
)
Changes in certain assets and liabilities:
 
 
 
Accounts receivable
(14,761
)
 
(12,736
)
Inventories
(32,861
)
 
(38,110
)
Accounts payable and accrued liabilities (Note 3)
(15,703
)
 
28,561

Accrued income taxes
20,206

 
1,087

Accrued pension and postretirement benefits
(19,973
)
 
(18,799
)
Other
(3,038
)
 
(1,710
)
Net cash flow provided by operating activities
180,586

 
82,793

INVESTING ACTIVITIES
 
 
 
Purchases of property, plant and equipment
(128,310
)
 
(94,095
)
Disposals of property, plant and equipment
2,196

 
3,852

Other
321

 
111

Net cash flow used for investing activities
(125,793
)
 
(90,132
)
FINANCING ACTIVITIES
 
 
 
Net increase in notes payable
791

 
333

Term debt borrowings

 
25,298

Term debt repayments
(190
)
 
(25,830
)
Purchase of capital stock
(163
)
 
(188
)
Dividend reinvestment and the effect of employee benefit and stock plans (Note 3)
17,493

 
4,285

Cash dividends paid to Shareholders
(48,773
)
 
(48,013
)
Other
(415
)
 
(6,439
)
Net cash flow used for financing activities
(31,257
)
 
(50,554
)
Effect of exchange rate changes on cash and cash equivalents
7,741

 
(2,869
)
CASH AND CASH EQUIVALENTS
 
 
 
Net increase (decrease) in cash and cash equivalents
31,277

 
(60,762
)
Cash and cash equivalents, beginning of period
190,629

 
161,579

Cash and cash equivalents, end of period
$
221,906

 
$
100,817

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


7


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 



1.ORGANIZATION
Kennametal Inc. was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling. From this beginning, Kennametal Inc. and its subsidiaries (collectively, Kennametal or the Company) has grown into a global leader in the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and mission-critical wear applications to combat extreme conditions associated with wear fatigue, corrosion and high temperatures. The Company's reputation for material technology, metal cutting application knowledge, as well as expertise and innovation in the development of custom solutions and services, contributes to its leading position in its primary markets.
Our product offering includes a wide selection of standard and customized technologies for metalworking applications, such as turning, milling, hole making, tooling systems and services. 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.
We also produce specialized wear components and metallurgical powders that are used for custom-engineered and challenging applications. End users of the Company's products include producers and suppliers in equipment-intensive operations such as coal mining, road construction, quarrying, and oil and gas exploration, refining, production and supply.
 
2.BASIS OF PRESENTATION

The condensed consolidated financial statements, which include our accounts and those of our majority-owned subsidiaries, should be read in conjunction with our 2017 Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, 2017 was derived from the audited balance sheet included in our 2017 Annual Report on Form 10-K. These interim statements are unaudited; however, we believe that all adjustments necessary for a fair statement of the results of the interim periods were made and all adjustments are normal recurring adjustments. The results for the nine months ended March 31, 2018 and 2017 are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. For example, a reference to 2018 is to the fiscal year ending June 30, 2018. When used in this Quarterly Report on Form 10-Q, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

3.NEW ACCOUNTING STANDARDS
Adopted
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," which is intended to simplify equity-based award accounting and presentation. The guidance impacts income tax accounting related to equity-based awards, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. We adopted this guidance July 1, 2017. The adoption of this guidance resulted in three changes: (1) the increase to deferred tax assets of $1.4 million related to cumulative excess tax benefits previously unrecognized was offset by a valuation allowance, due to the valuation allowance position of our U.S. entity at the time of adoption of this standard; (2) excess tax benefits, previously reported in the financing activities section of the condensed consolidated statements of cash flow, is now reported in the operating activities section, adopted on a prospective basis; therefore, prior period statements of cash flow were not retrospectively adjusted for this provision; and (3) employee taxes paid when Kennametal withholds shares for tax withholding purposes, previously reported in the operating activities section of the condensed consolidated statement of cash flows, are now reported in the financing activities section, adopted on a retrospective basis; therefore, prior period statements of cash flow were retrospectively adjusted for this provision. Cash flow provided by operating activities and cash flow used for financing activities increased by $2.8 million for the nine months ended March 31, 2017.
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory," which requires that inventory other than LIFO be subsequently measured at the lower of cost and net realizable value, as opposed to the previous practice of lower of cost or market. Subsequent measurement is unchanged for inventory measured using LIFO. We adopted this guidance July 1, 2017. Adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

8


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


Issued
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 related to 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. This guidance is effective for us July 1, 2019, although early adoption is permitted. We are in the process of assessing the impact the adoption of this guidance may have on our condensed consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. It also requires additional disclosures. We will adopt this standard on July 1, 2018 using the modified retrospective approach. We have a project team that has performed a detailed review of the terms and provisions in customer contracts, tentatively concluding that the new standard will not affect the timing and measurement of revenue for these contracts in comparison to the results of historical accounting policies and practices. Under the provisions of this ASU, we believe certain costs currently reported in operating expense may be reclassified to cost of goods sold on the condensed consolidated statement of income, as they represent costs incurred in satisfaction of performance obligations. Although we have not yet finalized our assessment of the impact of adoption of this guidance, we do not expect it to have a material impact on our condensed consolidated financial statements other than additional disclosures.

4.
SUPPLEMENTAL CASH FLOW DISCLOSURES
 
Nine Months Ended March 31,
(in thousands)
2018
 
2017
Cash paid during the period for:
 
 
 
Income taxes
$
24,087

 
$
20,013

Interest
21,091

 
20,725

Supplemental disclosure of non-cash information:
 
 
 
Changes in accounts payable related to purchases of property, plant and equipment
11,477

 
15,404


5.FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received on the sale of 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.

9


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


As of March 31, 2018, the fair values of the Company’s financial assets and financial liabilities are categorized as follows: 
(in thousands)
Level 1

 
Level 2

 
Level 3

 
Total

Assets:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
44

 
$

 
$
44

Total assets at fair value
$

 
$
44

 
$

 
$
44

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
1,289

 
$

 
$
1,289

Total liabilities at fair value
$

 
$
1,289

 
$

 
$
1,289

 
As of June 30, 2017, the fair values of the Company’s financial assets and financial liabilities are categorized as follows:
(in thousands)
Level 1

 
Level 2

 
Level 3

 
Total

Assets:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
359

 
$

 
$
359

Total assets at fair value
$

 
$
359

 
$

 
$
359

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
910

 
$

 
$
910

Total liabilities at fair value
$

 
$
910

 
$

 
$
910

 (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.
 
6.
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 account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated and qualifies as a hedge of such items. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow. 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 expense, net.
The fair value of derivatives designated and not designated as hedging instruments in the condensed consolidated balance sheet are as follows:
(in thousands)
March 31,
2018
 
June 30,
2017
Derivatives designated as hedging instruments
 
 
 
Other current assets - range forward contracts
$

 
$
1

Other current liabilities - range forward contracts
(1,262
)
 
(671
)
Other liabilities - range forward contracts

 
(101
)
Total derivatives designated as hedging instruments
(1,262
)
 
(771
)
Derivatives not designated as hedging instruments
 
 
 
Other current assets - currency forward contracts
44

 
358

Other current liabilities - currency forward contracts
(27
)
 
(138
)
Total derivatives not designated as hedging instruments
17

 
220

Total derivatives
$
(1,245
)
 
$
(551
)

10


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


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 condensed consolidated balance sheet, with the offset to other expense, net. Gains related to derivatives not designated as hedging instruments have been recognized as follows:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in thousands)
2018
 
2017
 
2018
 
2017
Other expense (income), net - currency forward contracts
$
182

 
$
538

 
$
(26
)
 
$
161

 
CASH FLOW HEDGES
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 expense, 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 March 31, 2018 and June 30, 2017, was $61.6 million and $75.3 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 March 31, 2018, we expect to recognize into earnings $1.5 million of expense on outstanding derivatives in the next 12 months.
The following represents gains and losses related to cash flow hedges:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in thousands)
2018
 
2017
 
2018
 
2017
(Losses) gains recognized in other comprehensive loss, net
$
(782
)
 
$
(866
)
 
$
(1,688
)
 
$
615

Losses reclassified from accumulated other comprehensive loss into other expense, net
$
761

 
$
390

 
$
2,024

 
$
1,158

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 nine months ended March 31, 2018 and 2017.
NET INVESTMENT HEDGES
As of March 31, 2018, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of €33.0 million as net investment hedges to hedge the foreign exchange exposure of our net investment in Euro-based subsidiaries. Losses of $1.1 million and $2.9 million were recorded as a component of foreign currency translation adjustments in other comprehensive income (loss) for the three and nine months ended March 31, 2018, respectively, compared to a loss of $0.5 million recorded for the three and nine months ended March 31, 2017.

As of March 31, 2018, 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
27,126

$
33,414

June 26, 2022
Foreign currency-denominated intercompany loan payable
8,687

10,700

November 20, 2018
Foreign currency-denominated intercompany loan payable
2,009

2,475

October 11, 2019
(2) Includes principal and accrued interest.

7.
RESTRUCTURING AND RELATED CHARGES
In prior years, we implemented restructuring actions` to streamline the Company's cost structure. The purpose of these initiatives was to improve the alignment of our cost structure with the current operating environment through employee reductions, as well as rationalization and consolidation of certain manufacturing facilities. These restructuring actions were substantially completed in the first quarter of fiscal 2018 and were mainly cash expenditures.

11


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


Total restructuring and related charges since inception of $157.7 million have been recorded for these programs through March 31, 2018: $85.6 million in Industrial, $50.9 million in Infrastructure, $13.9 million in Widia and $7.3 million in Corporate.
We recorded restructuring and related charges of $1.7 million and $9.6 million for the three months ended March 31, 2018 and 2017, respectively. Of these amounts, restructuring charges totaled $1.1 million and $7.1 million for the three months ended March 31, 2018 and 2017, respectively, of which benefit of $0.2 million was related to inventory and was recorded in cost of goods sold for the three months ended March 31, 2018. Restructuring-related charges of $0.9 million and $1.7 million were recorded in cost of goods sold and $0.3 million of benefit and $0.8 million of expense were recorded in operating expense for the three months ended March 31, 2018 and 2017, respectively.
We recorded restructuring and related charges of $10.0 million and $53.1 million for the nine months ended March 31, 2018 and 2017, respectively. Of these amounts, restructuring charges totaled $6.7 million and $44.5 million, of which benefit of $0.2 million and expense of $0.3 million were related to inventory and were recorded in cost of goods sold for the nine months ended March 31, 2018 and 2017, respectively. Restructuring-related charges of $3.3 million and $5.8 million were recorded in cost of goods sold and $0.1 million and $2.8 million in operating expense for the nine months ended March 31, 2018 and 2017, respectively.
As of March 31, 2018 and June 30, 2017, property, plant, and equipment of $5.8 million and $7.0 million, respectively, for certain closed manufacturing locations that are part of our restructuring programs met held for sale criteria. We expect to sell these assets within one year from the balance sheet date. These assets are recorded at the lower of carrying amount or fair value less cost to sell. We have also ceased depreciating these assets.
As of March 31, 2018 and June 30, 2017, $11.8 million and $27.3 million of the restructuring accrual is recorded in other current liabilities and $0.5 million and $2.5 million is recorded in other liabilities, respectively, in our condensed consolidated balance sheet. The amount attributable to each segment is as follows:
(in thousands)
June 30, 2017
 
Expense
 
Asset Write-Down
 
Translation
 
Cash Expenditures
 
March 31, 2018
Industrial
 
 
 
 
 
 
 
 
 
 
 
Severance
$
17,639

 
$
1,804

 
$

 
$
1,171

 
$
(15,099
)
 
$
5,515

Facilities

 
3,084

 
(3,084
)
 

 

 

Other
94

 
(29
)
 

 
3

 
(38
)
 
30

Total Industrial
$
17,733

 
$
4,859

 
$
(3,084
)
 
$
1,174

 
$
(15,137
)
 
$
5,545

 
 
 
 
 
 
 
 
 
 
 
 
Widia
 
 
 
 
 
 
 
 
 
 
 
Severance
$
2,434

 
$
384

 
$

 
$
249

 
$
(3,067
)
 
$

Facilities

 
747

 
(747
)
 

 

 

Other

 
(6
)
 

 
1

 
8

 
3

Total Widia
$
2,434

 
$
1,125

 
$
(747
)
 
$
250

 
$
(3,059
)
 
$
3

 
 
 
 
 
 
 
 
 
 
 
 
Infrastructure
 
 
 
 
 
 
 
 
 
 
 
Severance
$
9,573

 
$
422

 
$

 
$
273

 
$
(3,501
)
 
$
6,767

Facilities
21

 
265

 
(265
)
 

 
(21
)
 

Other
45

 
(7
)
 

 

 
(21
)
 
17

Total Infrastructure
$
9,639

 
$
680

 
$
(265
)
 
$
273

 
$
(3,543
)
 
$
6,784

Total
$
29,806

 
$
6,664

 
$
(4,096
)
 
$
1,697

 
$
(21,739
)
 
$
12,332


8.
STOCK-BASED COMPENSATION
Stock Options
There were no grants made during the nine months ended March 31, 2018 and 2017.


12


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


Changes in our stock options for the nine months ended March 31, 2018 were as follows:
 
Options
 
Weighted
Average
Exercise Price
 
Weighted Average Remaining Life (years)
 
Aggregate
Intrinsic value
(in thousands)
Options outstanding, June 30, 2017
1,726,791

 
$
34.08

 
 
 
 
Granted

 

 
 
 
 
Exercised
(609,230
)
 
35.68

 
 
 
 
Lapsed or forfeited
(94,292
)
 
34.06

 
 
 
 
Options outstanding, March 31, 2018
1,023,269

 
$
33.12

 
5.2
 
$
8,168

Options vested and expected to vest, March 31, 2018
1,020,522

 
$
33.13

 
5.2
 
$
8,141

Options exercisable, March 31, 2018
845,436

 
$
33.98

 
4.7
 
$
6,159

During the nine months ended March 31, 2018 and 2017, compensation expense related to stock options was $0.6 million and $1.3 million, respectively. As of March 31, 2018, the total unrecognized compensation cost related to options outstanding was $0.2 million and is expected to be recognized over a weighted average period of 0.5 years.
Fair value of options vested during the nine months ended March 31, 2018 and 2017 was $1.9 million and $3.3 million, respectively.
Tax benefits relating to excess stock-based compensation deductions are presented in the operating activities section of the condensed consolidated statements of cash flow for the nine months ended March 31, 2018. Tax benefits resulting from stock-based compensation deductions were greater than the amounts reported for financial reporting purposes by $0.1 million for the nine months ended March 31, 2018, and no tax benefits were realized for the nine months ended March 31, 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 the nine months ended March 31, 2018 and 2017 was $21.7 million and $7.2 million, respectively. The related tax benefit was $1.4 million for the nine months ended March 31, 2018, and there was no related tax benefit realized for the nine months ended March 31, 2017 due to the valuation allowance on U.S. deferred tax assets. The total intrinsic value of options exercised during the nine months ended March 31, 2018 and 2017 was $6.4 million and $1.6 million, respectively.
Under the provisions of the Kennametal Inc. Stock and Incentive Plan of 2010, as amended and restated on October 22, 2013 and as further amended January 27, 2015, and the Kennametal Inc. 2016 Stock and Incentive Plan, 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 the nine months ended March 31, 2018 and 2017 was immaterial.

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 vesting date after the three-year performance period has ended, with the exception of retirement eligible grantees, who upon retirement are entitled to vest in any units that have been earned, including a prorated portion for 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.

13


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


Changes in our time vesting and performance vesting restricted stock units for the nine months ended March 31, 2018 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, 2017
280,250

 
$
27.62

 
1,153,444

 
$
27.66

Granted
158,397

 
38.81

 
434,391

 
37.87

Vested
(10,031
)
 
42.83

 
(417,712
)
 
30.27

Performance metric adjustments, net
16,766

 
25.88

 

 

Forfeited
(36,085
)
 
30.91

 
(66,507
)
 
30.98

Unvested, March 31, 2018
409,297

 
$
31.22

 
1,103,616

 
$
30.47

During the nine months ended March 31, 2018 and 2017, compensation expense related to time vesting and performance vesting restricted stock units was $15.0 million and $15.8 million, respectively. As of March 31, 2018, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $18.1 million and is expected to be recognized over a weighted average period of 2.0 years.

9.
BENEFIT PLANS
We sponsor several defined benefit pension plans. Additionally, we provide varying levels of postretirement health care and life insurance benefits to some U.S. employees.
The table below summarizes the components of net periodic pension income:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in thousands)
2018
 
2017
 
2018
 
2017
Service cost
$
414

 
$
720

 
$
1,224

 
$
2,180

Interest cost
7,716

 
7,756

 
23,051

 
23,335

Expected return on plan assets
(14,188
)
 
(14,659
)
 
(42,410
)
 
(44,088
)
Amortization of transition obligation
24

 
22

 
70

 
67

Amortization of prior service (credit) cost
(42
)
 
(113
)
 
90

 
(339
)
Recognition of actuarial losses
1,746

 
2,066

 
5,174

 
6,266

Settlement gain

 
(320
)
 

 
(320
)
Net periodic pension income
$
(4,330
)
 
$
(4,528
)
 
$
(12,801
)
 
$
(12,899
)
The settlement gain of $0.3 million during the three and nine months ended March 31, 2017 is the result of income from the settlement with several terminated Executive Retirement Plan participants.
The table below summarizes the components of net periodic other postretirement benefit cost:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in thousands)
2018
 
2017
 
2018
 
2017
Interest cost
$
157

 
$
168

 
$
471

 
$
505

Amortization of prior service credit
(6
)
 
(6
)
 
(16
)
 
(16
)
Recognition of actuarial loss
70

 
89

 
210

 
266

Net periodic other postretirement benefit cost
$
221

 
$
251

 
$
665

 
$
755



14


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


10.
INVENTORIES
We used the last-in, first-out (LIFO) method of valuing inventories for 39 percent and 43 percent of total inventories at March 31, 2018 and June 30, 2017, respectively. Since inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs. Therefore, the interim financial results are subject to any final year-end LIFO inventory adjustments.
Inventories consisted of the following: 
(in thousands)
March 31, 2018
 
June 30, 2017
Finished goods
$
304,313

 
$
290,817

Work in process and powder blends
217,659

 
166,857

Raw materials
88,792

 
87,627

Inventories at current cost
610,764

 
545,301

Less: LIFO valuation
(73,559
)
 
(57,620
)
Total inventories
$
537,205

 
$
487,681


11.
LONG-TERM DEBT
Our five-year, multi-currency, revolving credit facility, as amended and restated in April 2016 (Credit Agreement), provides for revolving credit loans of up to $600 million for working capital, capital expenditures and general corporate purposes. 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 such covenants as of March 31, 2018. We had no borrowings outstanding under the Credit Agreement as of March 31, 2018 and June 30, 2017. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries. The Credit Agreement matures in April 2021.
Fixed rate debt had a fair market value of $700.3 million and $704.0 million at March 31, 2018 and June 30, 2017, respectively. The Level 2 fair value is determined based on the quoted market price of this debt as of March 31, 2018 and June 30, 2017, respectively.

12.
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.
Superfund Sites Among other environmental laws, we are subject to the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), under which we have been designated by the United States Environmental Protection Agency (USEPA) as a Potentially Responsible Party (PRP) with respect to environmental remedial costs at certain Superfund sites. We have evaluated our claims and liabilities associated with these Superfund sites based upon best currently available information. We believe our environmental accruals are adequate to cover our portion of the environmental remedial costs at the Superfund sites where we have been designated a PRP, to the extent these expenses are probable and reasonably estimable.
Other Environmental Matters We establish and maintain reserves for other potential environmental issues. At March 31, 2018 and June 30, 2017, the balances of these reserves were $12.8 million and $12.4 million, respectively. These reserves represent anticipated costs associated with the remediation of these issues.

15


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


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 USEPA, other governmental agencies and by the 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.
We maintain a Corporate Environmental Health and Safety (EHS) Department to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS analysts who are responsible for each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EHS Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly basis, we review financial provisions and reserves for environmental contingencies and adjust these reserves when appropriate.

13.
INCOME TAXES
On December 22, 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 reduces the federal tax rate from a maximum of 35.0 percent to a flat 21.0 percent rate and transitions from a worldwide tax system to a territorial tax system. TCJA also adds 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). We are assessing the impact of certain provisions, including the tax on GILTI, the BEAT and the deduction for FDII, which do not apply to the Company until fiscal 2019. This assessment includes the evaluation of our accounting election relative to GILTI as either a period cost or an adjustment to deferred tax assets or liabilities of our foreign subsidiaries for the new tax. The two material items that effect the Company for fiscal 2018 are the reduction in the tax rate and a one-time tax that is imposed on our unremitted foreign earnings (toll tax).
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (SAB 118) that includes additional guidance allowing companies to use a measurement period, similar to that used in business combinations, to account for the impacts of TCJA in their financial statements. We have accounted for the impacts of TCJA to the extent a reasonable estimate could be made during the three and nine months ended March 31, 2018. We will continue to refine our estimates throughout the measurement period, which will not extend beyond 12 months from the enactment of TCJA, or until the accounting is complete.
The U.S. federal tax rate reduction is effective as of January 1, 2018. As a June 30 fiscal year-end taxpayer, our 2018 fiscal year U.S. federal statutory tax rate is expected to be a blended rate of 28.1 percent. We expect our U.S. federal statutory tax rate to be 21.0 percent in 2019.
As a result of the reduction in the U.S. corporate income tax rate from 35.0 percent to 21.0 percent under TCJA, we recorded a provisional reduction to our net deferred tax assets during the three months ended December 31, 2017 with a corresponding decrease to the valuation allowance prior to its release on December 31, 2017. The result of this reduction had no impact on our condensed consolidated statement of income for the six months ended December 31, 2017. The revaluation of our deferred tax assets and liabilities are subject to further adjustments during the measurement period due to the complexity of determining our net deferred tax liability as of the enactment date. Some of the information necessary to determine the accounting effects of the tax rate change includes finalizing the assessment of which existing deferred balances at the enactment date reverse in 2018 at the 28.1 percent tax rate and which deferred balances will reverse after 2018 at the 21.0 percent tax rate.

16


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


During the three months ended December 31, 2017, we estimated the toll tax charge to be $77 million after available foreign tax credits. We recorded an adjustment to this estimate during the three months ended March 31, 2018, primarily related to consideration of Internal Revenue Service notices issued during the March quarter. The adjustment resulted in an additional $6 million of expense, increasing the total estimated toll tax charge to $83 million as of March 31, 2018. The toll tax charge consumed our entire U.S. federal net operating loss carryforward and other credit carryforwards, which represent a significant portion of our previously available deferred tax assets, and was offset by the release of the valuation allowance associated with these assets. As a result of the March quarter adjustment, we estimate a cash payment of $6.4 million associated with the toll charge which will be paid over eight years, of which $5.9 million is classified as long-term accrued income taxes in our condensed consolidated balance sheet as of March 31, 2018. The toll tax charge is preliminary, and subject to finalization of collecting all information, applying any additional regulatory guidance issued after March 31, 2018, considering changes in interpretations and assumptions and analyzing the calculation, along with foreign taxes and the related gross-up, in reasonable detail to complete the accounting.
During the three months ended December 31, 2017, we released a valuation allowance of $3.9 million that was previously recorded against our net deferred tax assets in the U.S. 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. Along with expected full-year income in the U.S. in fiscal 2018, we anticipate our domestic deferred taxes to be in a net liability position by June 30, 2018.
We consider substantially all of the unremitted earnings of our non-U.S. subsidiaries that have not previously been taxed in the U.S. to be permanently reinvested. As a result of TCJA, which among other provisions allows for a 100% dividends received deduction from controlled foreign subsidiaries, we will re-evaluate our assertion with respect to permanent reinvestment. As part of this evaluation, we will consider our global working capital and capital investment requirements, among other considerations, including the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent. If we determine that an entity should no longer remain subject to the permanent reinvestment assertion, we will accrue additional tax charges, including but not limited to state income taxes, withholding taxes and other relevant foreign taxes in the period the conclusion is determined. In accordance with SAB 118, we expect to complete our evaluation by December 22, 2018.
The effective income tax rates for the three months ended March 31, 2018 and 2017 were 31.2 percent and 19.0 percent, respectively. The change is primarily driven by the discrete tax charge of $6 million recorded in the current quarter for adjustment to the toll tax charge and prior year U.S. income not being tax-effected and current year U.S. income being subject to tax. This is the result of the valuation allowance, originally recorded in the fourth quarter of fiscal 2016, being released in the December quarter of fiscal 2018.
The effective income tax rates for the nine months ended March 31, 2018 and 2017 were 27.5 percent and 45.9 percent, respectively. The change is primarily driven by restructuring and related charges, and to a lesser extent the net discrete tax charges recorded in the current year associated with TCJA and prior year U.S. loss not being tax-effected and current year U.S. income being subject to tax as a result of the aforementioned timing of release of the valuation allowance.
During the three months ended December 31, 2017, 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 the December quarter of fiscal 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 for the three months ended December 31, 2017. The remaining balance related to this item was reclassified and included in other current assets. The impact to the effective tax rate was 2.8 percent for the nine months ended March 31, 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 estimated results of fiscal year 2018.

14.
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.

17


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


For purposes of determining the number of diluted shares outstanding, weighted average shares outstanding for basic earnings per share calculations were increased due solely to the dilutive effect of unexercised capital stock options, unvested performance awards and unvested restricted stock units by 1.3 million shares and 1.0 million shares for the three months ended March 31, 2018 and 2017, respectively, and 1.2 million shares and 0.7 million shares for the nine months ended March 31, 2018 and 2017, respectively. Unexercised capital stock options, unvested performance awards and unvested restricted stock units of 1.2 million shares for the three months ended March 31, 2017 and 0.4 million shares and 1.8 million shares for the nine months ended March 31, 2018 and 2017, respectively, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price, and therefore the inclusion would have been anti-dilutive. The amount of shares of unexercised capital stock options, unvested performance awards and unvested restricted stock units for the three months ended March 31, 2018 that were not included in the computation of diluted earnings per share was immaterial.

15.
EQUITY
A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests as of March 31, 2018 and 2017 is as follows:
 
Kennametal Shareholders’ Equity
 
 
 
 
(in thousands)
Capital
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive loss
 
Non-
controlling
interests
 
Total equity
Balance as of June 30, 2017
$
100,832

 
$
474,547

 
$
765,607

 
$
(323,692
)
 
$
35,359

 
$
1,052,653

Net income

 

 
131,651

 

 
3,256

 
134,907

Other comprehensive income

 

 

 
53,598

 
1,443

 
55,041

Dividend reinvestment
5

 
158

 

 

 

 
163

Capital stock issued under employee benefit and stock plans(3)
1,200

 
32,355

 

 

 

 
33,555

Purchase of capital stock
(5
)
 
(158
)
 

 

 

 
(163
)
Cash dividends

 

 
(48,773
)
 

 
(1,229
)
 
(50,002
)
Balance as of March 31, 2018
$
102,032

 
$
506,902

 
$
848,485

 
$
(270,094
)
 
$
38,829

 
$
1,226,154

 
 
Kennametal Shareholders’ Equity
 
 
 
 
(in thousands)
Capital
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
loss
 
Non-
controlling
interests
 
Total equity
Balance as of June 30, 2016
$
99,618

 
$
436,617

 
$
780,597

 
$
(352,509
)
 
$
31,478

 
$
995,801

Net income

 

 
24,495

 

 
1,873

 
26,368

Other comprehensive (loss) income

 

 

 
(16,228
)
 
330

 
(15,898
)
Dividend reinvestment
7

 
181

 

 

 

 
188

Capital stock issued under employee benefit and stock plans(3)
697

 
20,688

 

 

 

 
21,385

Purchase of capital stock
(7
)
 
(181
)
 

 

 

 
(188
)
Cash dividends

 

 
(48,013
)
 

 
(72
)
 
(48,085
)
Balance as of March 31, 2017
$
100,315

 
$
457,305

 
$
757,079

 
$
(368,737
)
 
$
33,609

 
$
979,571

(3) Net of restricted stock units delivered upon vesting to satisfy tax withholding requirements.

The amounts of comprehensive income (loss) attributable to Kennametal Shareholders and noncontrolling interests are disclosed in the condensed consolidated statements of comprehensive income.

18


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 



16.
ACCUMULATED OTHER COMPREHENSIVE LOSS

Total accumulated other comprehensive loss (AOCL) consists of net income and other changes in equity from transactions and other events from sources other than shareholders. It includes postretirement benefit plan adjustments, currency translation adjustments and unrealized gains and losses from derivative instruments designated as cash flow hedges.

The components of, and changes in, AOCL were as follows, net of tax, for the nine months ended March 31, 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 income (loss) before reclassifications
(4,339
)
52,632

(1,688
)
46,605

Amounts reclassified from AOCL
4,692


2,301

6,993

Net current period other comprehensive
  income
353

52,632

613

53,598

AOCL, March 31, 2018
$
(188,685
)
$
(73,974
)
$
(7,435
)
$
(270,094
)
 
 
 
 
 
Attributable to noncontrolling interests:
 
 
 
 
Balance, June 30, 2017
$

$
(2,164
)
$

$
(2,164
)
Other comprehensive income before
  reclassifications

1,443


1,443

Net current period other comprehensive
  income

1,443


1,443

AOCL, March 31, 2018
$

$
(721
)
$

$
(721
)

The components of, and changes in, AOCL were as follows, net of tax, for the nine months ended March 31, 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 (loss) before reclassifications
3,376

(26,810
)
614

(22,820
)
Amounts reclassified from AOCL
5,434


1,158

6,592

Net current period other comprehensive
  income (loss)
8,810

(26,810
)
1,772

(16,228
)
AOCL, March 31, 2017
$
(203,353
)
$
(158,022
)
$
(7,362
)
$
(368,737
)
 
 
 
 
 
Attributable to noncontrolling interests:
 
 
 
 
Balance, June 30, 2016
$

$
(3,446
)
$

$
(3,446
)
Other comprehensive income before
  reclassifications

330


330

Net current period other comprehensive
  income

330


330

AOCL, March 31, 2017
$

$
(3,116
)
$

$
(3,116
)


19


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


Reclassifications out of AOCL for the three and nine months ended March 31, 2018 and 2017 consisted of the following (in thousands):
 
Three Months Ended March 31,
Nine Months Ended March 31,
 
 
Details about AOCL components
2018
 
2017
2018
 
2017
 
Affected line item in the Income Statement
Gains and losses on cash flow hedges:
 
 
 
 
 
 
 
 
Forward starting interest rate swaps
$
566

 
$
545

$
1,698

 
$
1,635

 
Interest expense
Currency exchange contracts
623

 
(156
)
1,350

 
(477
)
 
Other expense, net
Total before tax
1,189

 
389

3,048

 
1,158

 
 
Tax impact
(291
)
 

(747
)
 

 
Provision for income taxes
Net of tax
$
898

 
$
389

$
2,301

 
$
1,158

 
 
 
 
 
 
 
 
 
 
 
Postretirement benefit plans:
 
 
 
 
 
 
 
 
Amortization of transition obligations
$
24

 
$
22

$
70

 
$
67

 
See note 9 for further details
Amortization of prior service (credit) cost
(48
)
 
(119
)
74

 
(355
)
 
See note 9 for further details
Recognition of actuarial losses
1,816

 
2,155

5,384

 
6,532

 
See note 9 for further details
Total before tax
1,792

 
2,058

5,528

 
6,244

 
 
Tax impact
(448
)
 
(254
)
(836
)
 
(810
)
 
Provision for income taxes
Net of tax
$
1,344

 
$
1,804

$
4,692

 
$
5,434

 
 

The amount of income tax allocated to each component of other comprehensive income for the three months ended March 31, 2018 and 2017:
 
 
2018
 
 
 
 
2017
 
(in thousands)
Pre-tax
Tax impact
Net of tax
 
 
Pre-tax
Tax impact
Net of tax
Unrealized loss on derivatives designated and qualified as cash flow hedges
$
(1,037
)
$
254

$
(783
)
 
 
$
(866
)
$

$
(866
)
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges
1,189

(291
)
898

 
 
389


389

Unrecognized net pension and other postretirement benefit loss
(2,271
)
522

(1,749
)
 
 
(970
)
245

(725
)
Reclassification of net pension and other postretirement benefit loss
1,792

(448
)
1,344

 
 
2,058

(254
)
1,804

Foreign currency translation adjustments
20,437

(155
)
20,282

 
 
13,706

79

13,785

Other comprehensive income
$
20,110

$
(118
)
$
19,992

 
 
$
14,317

$
70

$
14,387


20


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 



The amount of income tax allocated to each component of other comprehensive income (loss) for the nine months ended March 31, 2018 and 2017:
 
 
2018
 
 
 
 
2017
 
(in thousands)
Pre-tax
Tax impact
Net of tax
 
 
Pre-tax
Tax impact
Net of tax
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges
$
(2,236
)
$
548

$
(1,688
)
 
 
$
614

$

$
614

Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges
3,048

(747
)
2,301

 
 
1,158


1,158

Unrecognized net pension and other postretirement benefit (loss) gain
(5,705
)
1,366

(4,339
)
 
 
4,431

(1,055
)
3,376

Reclassification of net pension and other postretirement benefit loss
5,528

(836
)
4,692

 
 
6,244

(810
)
5,434

Foreign currency translation adjustments
54,495

(420
)
54,075

 
 
(26,559
)
79

(26,480
)
Other comprehensive income (loss)
$
55,130

$
(89
)
$
55,041

 
 
$
(14,112
)
$
(1,786
)
$
(15,898
)

17.
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. 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.
Identifiable assets with finite lives are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable.
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 the nine months ended March 31, 2018:
 
 
 
 
 
 
 
Change in gross goodwill due to translation
7,611

 
455

 

 
8,066

 
 
 
 
 
 
 
 
Gross goodwill
418,305

 
41,970

 
633,211

 
1,093,486

Accumulated impairment losses
(137,204
)
 
(13,638
)
 
(633,211
)
 
(784,053
)
Balance as of March 31, 2018
$
281,101

 
$
28,332

 
$

 
$
309,433


21


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


The components of our other intangible assets were as follows:
 
Estimated
Useful Life
(in years)
 
March 31, 2018
June 30, 2017
(in thousands)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
 
Gross Carrying
Amount
 
Accumulated
Amortization
Contract-based
3 to 15
 
$
7,066

 
$
(7,036
)
 
 
$
7,064

 
$
(7,014
)
Technology-based and other
4 to 20
 
47,357

 
(31,244
)
 
 
46,461

 
(29,061
)
Customer-related
10 to 21
 
208,107

 
(84,114
)
 
 
205,502

 
(74,669
)
Unpatented technology
10 to 30
 
32,071

 
(12,566
)
 
 
31,754

 
(10,589
)
Trademarks
5 to 20
 
12,600

 
(9,052
)
 
 
12,401

 
(8,648
)
Trademarks
Indefinite
 
18,487

 

 
 
17,326

 

Total
 
 
$
325,688

 
$
(144,012
)
 
 
$
320,508

 
$
(129,981
)
During the nine months ended March 31, 2018 and 2017, we recorded amortization expense of $11.0 million and $12.7 million, respectively, related to our other intangible assets.

18.
SEGMENT DATA
Kennametal delivers productivity to customers seeking peak performance in demanding environments by providing innovative custom and standard wear-resistant solutions. To provide these solutions, we harness our knowledge of advanced materials and application development with a commitment to environmental sustainability. Our product offering includes a wide selection of standard and customized technologies for metalworking, such as sophisticated metal cutting tools, tooling systems and services, as well as advanced, high-performance materials, such as cemented tungsten carbide products, super alloys, coatings and investment castings to address customer demands. We offer these products through a variety of channels to meet customer-specified needs.
Our reportable operating segments have been determined in accordance with our 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, our Board of Directors and strategic initiatives, as well as certain other costs and report them in Corporate. None of our three reportable operating segments represent the aggregation of two or more operating segments.
The Industrial segment generally serves customers that operate in industrial end markets such as transportation, general engineering, aerospace and defense market sectors, as well as the machine tool industry, delivering high performance metalworking tools for specified purposes. Our customers in these end markets use our products and services in the manufacture of engines, airframes, automobiles, trucks, ships and other various types of industrial equipment. The technology and customization requirements we provide vary by customer, application and industry. Industrial goes to market under the Kennametal® brand through its direct sales force, a network of independent and national chain 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.
The Widia segment offers a focused assortment of standard 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.
The Infrastructure segment generally serves customers that operate in the energy and earthworks market sectors that support primary industries such as oil and gas, power generation and chemicals; underground, surface and hard-rock mining; highway construction and road maintenance; and process industries such as food and feed. Our success is determined by our ability to gain an in-depth understanding of our customers’ engineering and development needs, to provide complete system solutions and high-performance capabilities to optimize and add value to their operations. Infrastructure markets its products primarily under the Kennametal® brand and sells through a direct sales force as well as distributors.

22


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 
 


Our sales and operating income (loss) by segment are as follows:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in thousands)
2018
 
2017
 
2018
 
2017
Sales:
 
 
 
 
 
 
 
Industrial
$
333,012

 
$
289,455

 
$
942,922

 
$
825,990

Widia
52,217

 
46,297

 
145,204

 
130,186

Infrastructure
222,707

 
192,878

 
633,608

 
537,167

Total sales
$
607,936

 
$
528,630

 
$
1,721,734

 
$
1,493,343

Operating income (loss):
 
 
 
 
 
 
 
Industrial
$
53,029

 
$
38,535

 
$
131,132

 
$
62,138

Widia
1,638

 
606

 
2,556

 
(7,797
)
Infrastructure
31,767

 
19,770

 
79,347

 
22,457

Corporate
(1,078
)
 
(999
)
 
(3,030
)
 
(4,084
)
Total operating income
85,356

 
57,912

 
210,005

 
72,714

Interest expense
7,468

 
7,331

 
21,848

 
21,475

Other expense, net
647

 
1,626

 
2,046

 
2,470

Income from continuing operations before income taxes
$
77,241

 
$
48,955

 
$
186,111

 
$
48,769



23


Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)