Stock-Based Compensation

12 Months Ended

Jun. 30, 2011

NOTE 17 — STOCK-BASED COMPENSATION

Options

The assumptions used in our Black-Scholes valuation related to grants made during 2011, 2010 and 2009 were as follows:


	2011			2010			2009

Risk-free interest rate		1.4	%		2.3	%		3.0	%
Expected life (years) ⁽²⁾		4.5			4.5			4.5
Expected volatility ⁽³⁾		47.0	%		44.0	%		27.7	%
Expected dividend yield		2.0	%		1.8	%		1.3	%


(2)		Expected life is derived from historical experience.

(3)		Expected volatility is based on the implied historical volatility of our stock.

Changes in our stock options for 2011 were as follows:


						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic value
	Options			Exercise Price		Life (years)		(in thousands)

Options outstanding, June 30, 2010		3,582,075		$	25.59
Granted		559,987			27.30
Exercised		(646,567	)		22.25
Lapsed and forfeited		(107,492	)		26.05

Options outstanding, June 30, 2011		3,388,003		$	26.50		6.0	$	53,216

Options vested and expected to vest, June 30, 2011		3,299,431		$	26.54		5.9	$	51,706

Options exercisable, June 30, 2011		1,948,442		$	26.85		4.6	$	29,937

During 2011, 2010 and 2009, compensation expense related to stock options was $5.2 million, $4.3 million and $4.0 million, respectively. As of June 30, 2011, the total unrecognized compensation cost related to options outstanding was $4.6 million and is expected to be recognized over a weighted average period of 2.2 years.

Weighted average fair value of options granted during 2011, 2010 and 2009 was $9.33, $7.32 and $7.15, respectively. Fair value of options vested during 2011, 2010 and 2009 was $4.4 million, $4.1 million and $3.5 million, respectively.

Tax benefits, relating to excess stock-based compensation deductions, are presented in the statement of cash flow as financing cash inflows. Tax benefits resulting from stock-based compensation deductions in excess of amounts reported for financial reporting purposes were $2.9 million, $0.5 million and $0.9 million in 2011, 2010 and 2009, respectively.

The amount of cash received from the exercise of capital stock options during 2011, 2010 and 2009 was $13.6 million, $7.2 million and $2.2 million, respectively. The related tax benefit was $3.2 million, $1.2 million, and $1.1 million for 2011, 2010 and 2009, respectively. The total intrinsic value of options exercised during 2011, 2010 and 2009 was $9.9 million, $4.0 million, and $3.0 million, respectively.

Restricted Stock Awards

Changes in our restricted stock awards for 2011 were as follows:


				Weighted
				Average Fair
	Shares			Value

Unvested restricted stock awards, June 30, 2010		198,701		$	32.71
Vested		(105,847	)		32.56
Forfeited		(3,539	)		33.00

Unvested restricted stock awards, June 30, 2011		89,315		$	32.90

During 2011, 2010 and 2009, compensation expense related to restricted stock awards was $2.1 million, $2.7 million and $4.5 million, respectively. As of June 30, 2011, the total unrecognized compensation cost related to unvested restricted stock awards was

$0.9 million and is expected to be recognized over a weighted average period of 0.9 years.

Restricted Stock Units — Time Vesting and Performance Vesting

In fiscal year 2010, we began granting time vesting restricted stock units under the 2002 Plan in place of restricted stock awards that had been traditionally granted under the plan.

Performance vesting restricted stock units (performance units) were granted to certain individuals in fiscal 2011. These performance units are earned pro rata each year if certain performance goals are met over a 3-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 3-year performance period.

Changes in our time vesting and performance vesting restricted stock units for 2011 were as follows:


				Performance
	Performance			Vesting					Time Vesting
	Vesting			Weighted		Time Vesting			Weighted
	Stock			Average Fair		Stock			Average Fair
	Units			Value		Units			Value

Unvested performance vesting and time vesting restricted stock units, June 30, 2010		—		$	—		546,713		$	24.29
Granted		134,807			26.89		526,153			26.95
Vested		—			—		(84,784	)		23.53
Forfeited		(18,439	)		26.89		(82,000	)		25.47

Unvested performance vesting and time vesting restricted stock units, June 30, 2011		116,368		$	26.89		906,082		$	25.81

During 2011 and 2010, compensation expense related to time vesting and performance vesting restricted stock units was $10.3 million and $2.7 million, respectively. As of June 30, 2011, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $13.1 million and is expected to be recognized over a weighted average period of 2.4 years.

Restricted Stock Units – STEP

On November 26, 2007, the Company adopted a one-time, long-term equity program, the Kennametal Inc. 2008 Strategic Transformational Equity Program, under the 2002 Plan (STEP). The STEP was designed to compensate participating executives for achievement of certain performance conditions during the period which began on October 1, 2007 and ends on September 30, 2011. Each participant was awarded a maximum number of restricted stock units, each representing a contingent right to receive one share of capital stock of the Company to the extent the unit is earned during the performance period and becomes payable under the STEP. The performance conditions are based on the Company’s total shareholder return (TSR), which governs 35 percent of the awarded restricted stock units, and cumulative adjusted earnings per share (EPS), which governs 65 percent of the awarded restricted stock units. As of June 30, 2011, participating executives had been granted awards equal to that number of restricted stock units having a value of $26.0 million. A further amount of $11.3 million remains available under the STEP for additional awards that could be made to other executives; however, the Company has decided that it will not make any further awards under the STEP. No new grants under the STEP were made in 2011. There are no voting rights or dividends associated with restricted stock units under the STEP.

Under the STEP, there are two interim measurement dates, September 30, 2009 and 2010, and a final measurement date, September 30, 2011, at which performance is assessed. Participants may earn up to a cumulative 35 percent of the maximum restricted stock units awarded if certain threshold levels of performance are achieved through the two interim measurement dates. The threshold level of performance for September 30, 2009 and September 30, 2010 were not achieved. Generally, the payment of any restricted stock units under the STEP is also conditioned upon the participants being employed by the Company on the date of distribution and the satisfaction of all other provisions of the STEP. As of June 30, 2011, no restricted stock units have been earned or paid under the STEP.

Changes in the EPS performance-based portion of STEP restricted stock units for 2011 were as follows:


				Weighted
	Stock			Average Fair
	Units			Value

Unvested EPS performance-based restricted stock units, June 30, 2010		502,371		$	35.54
Forfeited		(70,582	)		37.45

Unvested EPS performance-based restricted stock units, June 30, 2011		431,789		$	35.23

As of June 30, 2011, we assumed that none of the EPS performance-based restricted stock units will vest.

Changes in the TSR performance-based STEP restricted stock units for 2011 were as follows:


				Weighted
	Stock			Average Fair
	Units			Value

Unvested TSR performance-based restricted stock units, June 30, 2010		270,501		$	8.35
Forfeited		(38,004	)		9.20

Unvested TSR performance-based restricted stock units, June 30, 2011		232,497		$	8.21

During 2011 and 2010, compensation expense related to STEP restricted stock units was $0.4 million and $0.5 million, respectively. Based on a change in the probability of achieving the performance criteria related to the vesting of the EPS performance-based portion of these restricted stock units, in 2009, we reversed previously recognized compensation expense related to these units. The net credit recognized as compensation expense related to restricted stock units was $0.6 million for 2009. As of June 30, 2011, the total unrecognized compensation cost related to unvested STEP restricted stock units was $0.1 million and is expected to be recognized over a weighted average period of 0.3 years.