Stock-Based Compensation

3 Months Ended

Sep. 30, 2011

Stock Based Compensation [Abstract]

STOCK-BASED COMPENSATION

8. STOCK-BASED COMPENSATION

On October 26, 2010, the Company’s shareowners approved the Kennametal Inc., Stock and Incentive Plan of 2010 (the 2010 Plan). The 2010 Plan authorizes the issuance of up to 3,500,000 shares of the Company’s common stock plus the remaining shares from the Kennametal Inc., Stock Incentive Plan of 2002, as amended (the 2002 Plan). Shares can be issued in the form of incentive stock options, non-statutory stock options, stock appreciation rights, performance share awards, performance unit awards, restricted stock awards, restricted unit awards and share awards.

Stock Options

The assumptions used in our Black-Scholes valuation related to grants made during the three months ended September 30, 2011 and 2010 were as follows:

	2011		2010
Risk-free interest rate		1.2%		1.4%
Expected life (years) (2)		4.5		4.5
Expected volatility (3)		47.5%		47.0%
Expected dividend yield		1.5%		2.0%

⁽²⁾  Expected life is derived from historical experience.

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

Changes in our stock options for the three months ended September 30, 2011 were as follows:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Life (years)		Aggregate Intrinsic value (in thousands)
Options outstanding, June 30, 2011		3,388,003		$	26.50
Granted		354,618			38.95
Exercised		(129,475	)		27.70
Lapsed and forfeited		(16,833	)		30.42
Options outstanding, September 30, 2011		3,596,313		$	27.67		6.3	$	22,776
Options vested and expected to vest, September 30, 2011		3,489,292		$	27.61		6.2	$	22,235
Options exercisable, September 30, 2011		2,353,830		$	26.89		5.1	$	16,021

During the three months ended September 30, 2011 and 2010, compensation expense related to stock options was $2.4 million and $2.0 million, respectively. As of September 30, 2011, the total unrecognized compensation cost related to options outstanding was $6.5 million and is expected to be recognized over a weighted average period of 2.4 years.

Weighted average fair value of options granted during the three months ended September 30, 2011 and 2010 was $13.84 and $9.18, respectively. Fair value of options vested during the three months ended September 30, 2011 and 2010 was $4.3 million and $4.1 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 exceeded amounts reported for financial reporting purposes by $1.3 million and were immaterial for the three months ended September 30, 2011 and 2010, respectively.

The amount of cash received from the exercise of capital stock options during the three months ended September 30, 2011 and 2010 was $3.6 million and $0.5 million, respectively. The related tax benefit for the three months ended September 30, 2011 and 2010 was $0.5 million and $0.1 million, respectively. The total intrinsic value of options exercised during the three months ended September 30, 2011 and 2010 was $1.9 million and $0.3 million, respectively.

Under the provisions of the 2010 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 three months ended September 30, 2011 and 2010 was immaterial.

Restricted Stock Awards

Changes in our restricted stock awards for the three months ended September 30, 2011 were as follows:

	Shares		Weighted Average Fair Value
Unvested restricted stock awards, June 30, 2011		89,315	$	32.90
Vested		(45,596)		33.79
Forfeited		(291)		29.60
Unvested restricted stock awards, September 30, 2011		43,428	$	31.99

During the three months ended September 30, 2011 and 2010, compensation expense related to restricted stock awards was $0.3 million and $0.6 million, respectively. As of September 30, 2011, the total unrecognized compensation cost related to unvested restricted stock awards was $0.6 million and is expected to be recognized over a weighted average period of 0.8 years.

Restricted Stock Units – Time Vesting and Performance Vesting

Performance vesting restricted stock units (performance units) were granted to certain individuals. 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 the three months ended September 30, 2011 were as follows:

	Performance Vesting Stock Units		Performance Vesting Weighted Average Fair Value		Time Vesting Stock Units		Time Vesting Weighted Average Fair Value
Unvested performance vesting and time vesting restricted stock units, June 30, 2011		116,368	$	26.89		906,082	$	25.81
Granted		129,977		38.95		333,595		38.95
Vested		-		-		(197,315)		25.60
Forfeited		-		-		(4,493)		31.27
Unvested performance vesting and time vesting restricted stock units, September 30, 2011		246,345	$	31.27		1,037,869	$	30.05

During the three months ended September 30, 2011 and 2010, compensation expense related to time vesting and performance vesting restricted stock units was $5.2 million and $3.6 million, respectively. As of September 30, 2011, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $23.3 million and is expected to be recognized over a weighted average period of 2.7 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 ended 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 was earned during the performance period and would have become payable under the STEP. The performance conditions were based on the Company’s total shareholder return (TSR) which governed 35 percent of the awarded restricted stock units, and cumulative adjusted earnings per share (EPS), which governed 65 percent of the awarded restricted stock units. The performance period for the STEP ended on September 30, 2011 and the minimum threshold levels of performance were not achieved. Therefore, all outstanding restricted stock units were forfeited by participating executives. As of September 30, 2011, no restricted stock units had been earned or paid under the STEP. There were no voting rights or dividends associated with restricted stock units under the STEP.

Changes to the EPS performance-based portion of the STEP restricted stock units for the three months ended September 30, 2011 were as follows:

	Stock Units		Weighted Average Fair Value
Unvested EPS performance-based restricted stock units, June 30, 2011		431,789	$	35.23
Forfeited		(431,789)		35.23
Unvested EPS performance-based restricted stock units, September 30, 2011		-	$	-

Changes to the TSR performance-based portion of the STEP restricted stock units for the three months ended September 30, 2011 were as follows:

	Stock Units		Weighted Average Fair Value
Unvested TSR performance-based restricted stock units, June 30, 2011		232,497	$	8.21
Forfeited		(232,497)		8.21
Unvested TSR performance-based restricted stock units, September 30, 2011		-	$	-

During the three months ended September 30, 2011 and 2010, compensation expense related to STEP restricted stock units was $0.2 million in both periods.