Company Quick10K Filing
Kennametal
Price30.73 EPS2
Shares83 P/E13
MCap2,566 P/FCF10
Net Debt514 EBIT280
TEV3,080 TEV/EBIT11
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-05
10-Q 2019-12-31 Filed 2020-02-04
10-Q 2019-09-30 Filed 2019-11-06
10-K 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-07
10-Q 2018-12-31 Filed 2019-02-05
10-Q 2018-09-30 Filed 2018-11-06
10-K 2018-06-30 Filed 2018-08-10
10-Q 2018-03-31 Filed 2018-05-08
10-Q 2017-12-31 Filed 2018-02-06
10-Q 2017-09-30 Filed 2017-11-07
10-K 2017-06-30 Filed 2017-08-14
10-Q 2017-03-31 Filed 2017-05-09
10-Q 2016-12-31 Filed 2017-02-08
10-Q 2016-09-30 Filed 2016-11-07
10-K 2016-06-30 Filed 2016-08-11
10-Q 2016-03-31 Filed 2016-05-06
10-Q 2015-12-31 Filed 2016-02-08
10-Q 2015-09-30 Filed 2015-11-04
10-K 2015-06-30 Filed 2015-08-13
10-Q 2015-03-31 Filed 2015-05-08
10-Q 2014-12-31 Filed 2015-02-03
10-Q 2014-09-30 Filed 2014-11-06
10-K 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-08
10-Q 2013-12-31 Filed 2014-02-06
10-Q 2013-09-30 Filed 2013-11-07
10-K 2013-06-30 Filed 2013-08-13
10-Q 2013-03-31 Filed 2013-05-09
10-Q 2012-12-31 Filed 2013-02-07
10-Q 2012-09-30 Filed 2012-11-08
10-K 2012-06-30 Filed 2012-08-13
10-Q 2012-03-31 Filed 2012-05-09
10-Q 2011-12-31 Filed 2012-02-08
10-Q 2011-09-30 Filed 2011-11-08
10-K 2011-06-30 Filed 2011-08-11
10-Q 2011-03-31 Filed 2011-05-09
10-Q 2010-12-31 Filed 2011-02-08
10-Q 2010-09-30 Filed 2010-11-05
10-K 2010-06-30 Filed 2010-08-12
10-Q 2010-03-31 Filed 2010-05-05
10-Q 2009-12-31 Filed 2010-02-05
8-K 2020-06-04
8-K 2020-05-04
8-K 2020-02-03
8-K 2020-01-28
8-K 2019-12-09
8-K 2019-11-04
8-K 2019-10-29
8-K 2019-10-21
8-K 2019-08-05
8-K 2019-07-11
8-K 2019-05-06
8-K 2019-02-04
8-K 2018-11-05
8-K 2018-10-30
8-K 2018-09-07
8-K 2018-08-21
8-K 2018-08-14
8-K 2018-08-06
8-K 2018-06-26
8-K 2018-06-21
8-K 2018-06-13
8-K 2018-06-04
8-K 2018-05-22
8-K 2018-05-02
8-K 2018-02-01
8-K 2018-01-25
8-K 2018-01-11

KMT 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 kmt331202010-qex311.htm
EX-31.2 kmt331202010-qex312.htm
EX-32.1 kmt331202010-qex321.htm

Kennametal Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
3.93.12.31.60.80.02012201420172020
Assets, Equity
0.80.60.30.1-0.2-0.42012201420172020
Rev, G Profit, Net Income
0.50.30.0-0.2-0.5-0.72012201420172020
Ops, Inv, Fin

Document
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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, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
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.)
 
 
 
525 William Penn Place
  
 
Suite 3300
 
 
Pittsburgh,
Pennsylvania
 
15219
(Address of principal executive offices)
  
(Zip Code)
Registrant’s telephone number, including area code: (412248-8000
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 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 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
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 in Rule 12b-2 of the Exchange Act). Yes No
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
As of April 30, 2020, 82,913,959 shares of the Registrant’s Capital Stock, par value $1.25 per share, were outstanding.
 



KENNAMETAL INC.
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2020
TABLE OF CONTENTS
 
Item No.
Page No.
 
 
 
 
 
 
1.
 
 
 
 
 
Three and nine months ended March 31, 2020 and 2019
 
 
 
 
Three and nine months ended March 31, 2020 and 2019
 
 
 
 
March 31, 2020 and June 30, 2019
 
 
 
 
Nine months ended March 31, 2020 and 2019
 
 
 
 
 
 
 
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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements that do not relate strictly to historical or current facts. You can identify forward-looking statements by 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: the duration of the COVID-19 pandemic and its impact on our business operations, financial results and financial position and on the industries in which we operate and the global economy generally; other downturns in the business cycle or the economy; our ability to achieve 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; 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, as updated in Part II, Item 1A of this Form 10-Q, and in other periodic reports we file from time to time with the Securities and Exchange Commission. 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.





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)
2020
 
2019
 
2020
 
2019
Sales
$
483,084

 
$
597,204

 
$
1,506,252

 
$
1,771,285

Cost of goods sold
326,066

 
389,118

 
1,078,236

 
1,153,509

Gross profit
157,018

 
208,086

 
428,016

 
617,776

Operating expense
98,534

 
120,135

 
320,273

 
358,054

Restructuring and asset impairment charges (Notes 7 and 18)
17,187

 
2,440

 
84,182

 
5,061

Loss on divestiture (Note 4)

 

 
6,517

 

Amortization of intangibles
3,404

 
3,640

 
10,413

 
10,780

Operating income
37,893

 
81,871

 
6,631

 
243,881

Interest expense
7,897

 
8,104

 
23,834

 
24,305

Other income, net
(2,438
)
 
(4,993
)
 
(9,330
)
 
(11,775
)
Income (loss) before income taxes
32,434

 
78,760

 
(7,873
)
 
231,351

Provision (benefit) for income taxes
30,193

 
8,632

 
(11,295
)
 
46,553

Net income
2,241

 
70,128

 
3,422

 
184,798

Less: Net (loss) income attributable to noncontrolling interests
(676
)
 
1,578

 
(23
)
 
4,852

Net income attributable to Kennametal
$
2,917

 
$
68,550

 
$
3,445

 
$
179,946

PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
 
 
 
 
Basic earnings per share
$
0.04

 
$
0.83

 
$
0.04

 
$
2.19

Diluted earnings per share
$
0.03

 
$
0.82

 
$
0.04

 
$
2.16

Dividends per share
$
0.20

 
$
0.20

 
$
0.60

 
$
0.60

Basic weighted average shares outstanding
83,106

 
82,479

 
83,022

 
82,305

Diluted weighted average shares outstanding
83,696

 
83,339

 
83,589

 
83,266


KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
 
 
Three Months Ended March 31,
Nine Months Ended March 31,
(in thousands)
2020
 
2019
2020
 
2019
Net income
$
2,241

 
70,128

$
3,422

 
$
184,798

Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges
(1,000
)
 
232

(144
)
 
141

Reclassification of unrealized loss on derivatives designated and qualified as cash flow hedges
518

 
695

306

 
1,552

Unrecognized net pension and other postretirement benefit gain
2,573

 
51

2,123

 
1,246

Reclassification of net pension and other postretirement benefit loss
1,966

 
1,287

5,916

 
3,893

Foreign currency translation adjustments
(38,018
)
 
(1,239
)
(47,691
)
 
(20,845
)
Total other comprehensive (loss) income, net of tax
(33,961
)
 
1,026

(39,490
)
 
(14,013
)
Total comprehensive (loss) income
(31,720
)
 
71,154

(36,068
)
 
170,785

Less: comprehensive (loss) income attributable to noncontrolling interests
(2,659
)
 
1,612

(2,860
)
 
4,154

Comprehensive (loss) income attributable to Kennametal Shareholders
$
(29,061
)
 
69,542

$
(33,208
)
 
$
166,631

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

4


KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
 
 
 
(in thousands, except per share data)
March 31,
2020
 
June 30,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
85,230

 
$
182,015

Accounts receivable, less allowance for doubtful accounts of $10,090 and $10,083, respectively
304,162

 
379,855

Inventories (Note 10)
516,781

 
571,576

Other current assets
60,550

 
57,381

Total current assets
966,723

 
1,190,827

Property, plant and equipment:
 
 
 
Land and buildings
347,490

 
351,142

Machinery and equipment
1,884,545

 
1,804,871

Less accumulated depreciation
(1,216,676
)
 
(1,221,118
)
Property, plant and equipment, net
1,015,359

 
934,895

Other assets:
 
 
 
Goodwill (Note 18)
268,658

 
300,011

Other intangible assets, less accumulated amortization of $133,306 and $158,507, respectively (Note 18)
135,687

 
160,998

Operating lease right-of-use assets (Note 11)
46,747

 

Deferred income taxes
32,196

 
20,507

Other
72,730

 
49,031

Total other assets
556,018

 
530,547

Total assets
$
2,538,100

 
$
2,656,269

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt (Note 12)
$
4,500

 
$

Notes payable to banks

 
157

Current operating lease liabilities (Note 11)
12,935

 

Accounts payable
165,062

 
212,908

Accrued income taxes
10,470

 
29,223

Accrued expenses
51,466

 
76,616

Other current liabilities
138,698

 
142,822

Total current liabilities
383,131

 
461,726

Long-term debt, less current maturities (Note 12)
593,607

 
592,474

Operating lease liabilities (Note 11)
34,290

 

Deferred income taxes
13,504

 
23,322

Accrued pension and postretirement benefits
166,851

 
174,003

Accrued income taxes
9,304

 
9,038

Other liabilities
38,590

 
21,002

Total liabilities
1,239,277

 
1,281,565

Commitments and contingencies

 

EQUITY (Note 16)
 
 
 
Kennametal Shareholders’ Equity:
 
 
 
Preferred stock, no par value; 5,000 shares authorized; none issued

 

Capital stock, $1.25 par value; 120,000 shares authorized; 82,914 and 82,421 shares issued, respectively
103,642

 
103,026

Additional paid-in capital
536,596

 
528,827

Retained earnings
1,030,582

 
1,076,862

Accumulated other comprehensive loss
(410,197
)
 
(373,543
)
Total Kennametal Shareholders’ Equity
1,260,623

 
1,335,172

Noncontrolling interests
38,200

 
39,532

Total equity
1,298,823

 
1,374,704

Total liabilities and equity
$
2,538,100

 
$
2,656,269

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

5


KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
 
 
 
 
 
 
Nine Months Ended March 31,
(in thousands)
2020
 
2019
OPERATING ACTIVITIES
 
 
 
Net income
$
3,422

 
$
184,798

Adjustments for non-cash items:
 
 
 
Depreciation
79,078

 
72,087

Amortization
10,413

 
10,780

Stock-based compensation expense
14,289

 
18,844

Restructuring and asset impairment charges (Notes 7 and 18)
33,792

 
1,905

Deferred income tax provision (benefit)
(23,597
)
 
2,409

Loss on divestiture (Note 4)
6,517

 

Other
2,748

 
2,567

Changes in certain assets and liabilities:
 
 
 
Accounts receivable
60,616

 
(7,595
)
Inventories
29,947

 
(71,814
)
Accounts payable and accrued liabilities
(34,351
)
 
(57,165
)
Accrued income taxes
(21,957
)
 
5,936

Accrued pension and postretirement benefits
(18,163
)
 
(13,862
)
Other
3,305

 
8,575

Net cash flow provided by operating activities
146,059

 
157,465

INVESTING ACTIVITIES
 
 
 
Purchases of property, plant and equipment
(206,061
)
 
(145,942
)
Disposals of property, plant and equipment
2,780

 
3,575

Proceeds from divestiture (Note 4)
23,950

 

Other
(869
)
 
(371
)
Net cash flow used for investing activities
(180,200
)
 
(142,738
)
FINANCING ACTIVITIES
 
 
 
Net decrease in notes payable
(175
)
 
(871
)
Net increase (decrease) in short-term revolving and other lines of credit
4,500

 
(174
)
Term debt repayments

 
(400,000
)
Purchase of capital stock
(158
)
 
(161
)
The effect of employee benefit and stock plans and dividend reinvestment
(5,747
)
 
(5,249
)
Cash dividends paid to Shareholders
(49,725
)
 
(49,268
)
Other
(2,698
)
 
(687
)
Net cash flow used for financing activities
(54,003
)
 
(456,410
)
Effect of exchange rate changes on cash and cash equivalents
(8,641
)
 
(1,873
)
CASH AND CASH EQUIVALENTS
 
 
 
Net decrease in cash and cash equivalents
(96,785
)
 
(443,556
)
Cash and cash equivalents, beginning of period
182,015

 
556,153

Cash and cash equivalents, end of period
$
85,230

 
$
112,597

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


6


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 



1.
BASIS OF PRESENTATION

The condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q, which include our accounts and those of our majority-owned subsidiaries, should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the “2019 Annual Report”). The condensed consolidated balance sheet as of June 30, 2019 was derived from the audited balance sheet included in our 2019 Annual Report. The 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, 2020 and 2019 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 2020 is to the fiscal year ending June 30, 2020. When used in this Quarterly Report on Form 10-Q, unless the context requires otherwise, the terms “the Company,” “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

2.
NEW ACCOUNTING STANDARDS
Adopted
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 substantially all leases. We adopted this ASU on July 1, 2019 using the modified retrospective transition approach with the optional transition relief that allows for a cumulative-effect adjustment in the period of adoption and without a restatement of prior periods. Therefore, prior period amounts were not adjusted and will continue to be reported under the accounting standards in effect for those periods. We determined that there was no cumulative-effect adjustment to beginning retained earnings on the condensed consolidated balance sheet. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward historical lease classification. Adoption of this ASU resulted in the recording of lease liabilities of approximately $49 million with the offset to lease ROU assets of $49 million as of July 1, 2019. The standard did not materially impact our condensed consolidated statement of income and our condensed consolidated statement of cash flows. Refer to Note 11 for additional disclosure regarding the adoption of this new standard.
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. We adopted this ASU on July 1, 2019. Adoption of this guidance did not have a material effect on our condensed 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 was effective for Kennametal on July 1, 2019. We elected not to reclassify the stranded tax effects as permissible under this standard. Adoption of this guidance did not have a material effect on our condensed 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. We adopted this ASU on July 1, 2019. Adoption of this guidance did not have a material effect on our condensed consolidated financial statements.


7


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


3.
SUPPLEMENTAL CASH FLOW DISCLOSURES
 
Nine Months Ended March 31,
(in thousands)
2020
 
2019
Cash paid during the period for:
 
 
 
Income taxes
$
31,523

 
$
38,208

Interest
20,783

 
23,175

Supplemental disclosure of non-cash information:
 
 
 
Changes in accounts payable related to purchases of property, plant and equipment
(16,000
)
 
2,400



4.
DIVESTITURE
During the nine months ended March 31, 2020, we completed the sale of certain assets of the non-core specialty alloys and metals business within the Infrastructure segment located in New Castle, Pennsylvania to Advanced Metallurgical Group N.V. for an aggregate price of $24.0 million.
The net book value of these assets at closing was $29.5 million, and the pre-tax loss on divestiture recognized during the three months ended December 31, 2019 was $6.5 million. Transaction proceeds were primarily used for capital expenditures related to our simplification/modernization efforts.

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.
As of March 31, 2020, the fair values of our financial assets and financial liabilities are categorized as follows: 
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
289

 
$

 
$
289

Total assets at fair value
$

 
$
289

 
$

 
$
289

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
1,878

 
$

 
$
1,878

Total liabilities at fair value
$

 
$
1,878

 
$

 
$
1,878

 

8


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


As of June 30, 2019, the fair values of our financial assets and financial liabilities 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

 (1) Currency and interest rate 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 fair value of derivatives designated and not designated as hedging instruments in the condensed consolidated balance sheet are as follows:
(in thousands)
March 31, 2020
 
June 30,
2019
Derivatives designated as hedging instruments
 
 
 
Other current assets - range forward contracts
$
170

 
$
145

Other assets - forward starting interest rate swap contracts
89

 

Other liabilities - forward starting interest rate swap contracts
(1,614
)
 

Total derivatives designated as hedging instruments
(1,355
)
 
145

Derivatives not designated as hedging instruments
 
 
 
Other current assets - currency forward contracts
30

 
8

Other current liabilities - currency forward contracts
(264
)
 
(56
)
Total derivatives not designated as hedging instruments
(234
)
 
(48
)
Total derivatives
$
(1,589
)
 
$
97


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 income, net. Losses (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)
2020
 
2019
 
2020
 
2019
Other income, net - currency forward contracts
$
220

 
$
(11
)
 
$
231

 
$
65

 

9


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


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 cost of goods sold and 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 March 31, 2020 and June 30, 2019 was $12.1 million and $61.5 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, 2020, we expect to recognize into earnings $0.1 million of income on outstanding derivatives in the next 12 months.
During the third quarter of fiscal 2020, we entered into forward starting interest rate swap contracts to hedge a portion of the interest rate risk related to our anticipated refinancing of the Senior Unsecured Notes due fiscal 2022. We recorded the fair value of these contracts as an asset or a liability, as applicable, in the balance sheet, with the offset to accumulated other comprehensive income, net of tax. The notional amount of the contracts at March 31, 2020 was $200.0 million. As of March 31, 2020, we recorded an asset of $0.1 million and a liability of $1.6 million on these contracts, the net effect of which was recorded as a decrease to other comprehensive income, net of tax.
The following represents gains and losses related to cash flow hedges:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in thousands)
2020
 
2019
 
2020
 
2019
(Losses) gains recognized in other comprehensive (loss) income, net
$
(999
)
 
$
695

 
$
(143
)
 
$
603

Losses reclassified from accumulated other comprehensive loss into cost of goods sold and other income, net
$
457

 
$
403

 
$
1,007

 
$
1,500


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, 2020 and 2019.
NET INVESTMENT HEDGES
As of March 31, 2020, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of 42.5 million as net investment hedges to hedge the foreign exchange exposure of our net investment in our Euro-based subsidiaries. We recorded gains of $1.1 million and $2.3 million as a component of foreign currency translation adjustments in other comprehensive (loss) income for the three months ended March 31, 2020 and 2019, respectively. We recorded gains of $1.0 million and $2.8 million as a component of foreign currency translation adjustments in other comprehensive loss for the nine months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, 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
28,727

$
31,517

June 26, 2022
Foreign currency-denominated intercompany loan payable
20,091

22,043

November 22, 2021
(2) Includes principal and accrued interest.

7.
RESTRUCTURING AND RELATED CHARGES
FY20 Restructuring Actions
In the June quarter of fiscal 2019, we began implementing the current phase of restructuring associated with our simplification/modernization initiative. These actions are expected to reduce structural costs, improve operational efficiency and position us for long-term profitable growth. These actions are expected to be completed in fiscal 2020 and are expected to be primarily cash expenditures.

10


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


The pre-tax charges for these programs are expected to be in the range of $55 million to $60 million, which are expected to be 80 percent Industrial, 15 percent Infrastructure and 5 percent Widia. Total restructuring and related charges since inception of $50.0 million were recorded for this program through March 31, 2020, consisting of: $40.6 million in Industrial; $7.2 million in Infrastructure; and $2.2 million in Widia.
FY21 Restructuring Actions
On July 11, 2019, we announced the initiation of restructuring actions in Germany associated with our simplification/modernization initiative, which are expected to reduce structural costs. We have agreed with local employee representatives to downsize our Essen, Germany operations instead of the previously proposed closure. We are also evaluating the acceleration of other facility closures as part of these restructuring activities. These actions are expected to be completed by the end of fiscal 2021 and are expected to be primarily cash expenditures.
The pre-tax charges for these programs are expected to be in the range of $55 million to $65 million, which is expected to be primarily in the Industrial segment. Total restructuring and related charges since inception of $28.8 million were recorded for this program through March 31, 2020, all of which were recorded in the Industrial segment.
Restructuring and Related Charges Recorded
We recorded restructuring and related charges of $5.8 million and $3.7 million for the three months ended March 31, 2020 and 2019, respectively. Of these amounts, restructuring charges totaled $1.8 million and $2.6 million for the three months ended March 31, 2020 and 2019, respectively, of which $0.2 million were related to inventory and were recorded in cost of goods sold for the three months ended March 31, 2020 and 2019. Restructuring-related charges of $4.0 million and $0.9 million were recorded in cost of goods sold for the three months ended March 31, 2020 and 2019, respectively. Restructuring-related charges of $0.1 million were recorded in operating expense for the three months ended March 31, 2019.
We recorded restructuring and related charges of $65.1 million and $6.8 million for the nine months ended March 31, 2020 and 2019, respectively. Of these amounts, restructuring charges totaled $54.5 million and $5.3 million for the nine months ended March 31, 2020 and 2019, respectively, of which $0.6 million and $0.2 million were related to inventory and were recorded in cost of goods sold for the nine months ended March 31, 2020 and 2019, respectively. Restructuring-related charges of $10.6 million and $1.4 million were recorded in cost of goods sold for the nine months ended March 31, 2020 and 2019, respectively. Restructuring-related charges of $0.1 million were recorded in operating expense for the nine months ended March 31, 2019.

11


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


As of March 31, 2020, $24.7 million and $16.2 million of the restructuring accrual is recorded in other current liabilities and other liabilities, respectively, in our condensed consolidated balance sheet. The restructuring accrual of $19.2 million as of June 30, 2019 is recorded in other current liabilities. The amount attributable to each segment is as follows:
(in thousands)
June 30, 2019
 
Expense
 
Asset Write-Down
 
Translation
 
Cash Expenditures
 
March 31, 2020
Industrial
 
 
 
 
 
 
 
 
 
 
 
Severance
$
8,863

 
$
49,455

 
$

 
$
(780
)
 
$
(25,413
)
 
$
32,125

Facilities

 
1,857

 
(1,857
)
 

 

 

Other
35

 
4

 

 
(1
)
 
(22
)
 
16

Total Industrial
$
8,898

 
$
51,316

 
$
(1,857
)
 
$
(781
)
 
$
(25,435
)
 
$
32,141

 
 
 
 
 
 
 
 
 
 
 
 
Widia
 
 
 
 
 
 
 
 
 
 
 
Severance
$
2,306

 
$
342

 
$

 
$
(28
)
 
$
(321
)
 
$
2,299

Facilities

 
41

 
(41
)
 

 

 

Other
24

 

 

 

 

 
24

Total Widia
$
2,330

 
$
383

 
$
(41
)
 
$
(28
)
 
$
(321
)
 
$
2,323

 
 
 
 
 
 
 
 
 
 
 
 
Infrastructure
 
 
 
 
 
 
 
 
 
 
 
Severance
$
7,956

 
$
2,053

 
$

 
$
(313
)
 
$
(3,225
)
 
$
6,471

Facilities

 
758

 
(758
)
 

 

 

Other
28

 
2

 

 
(1
)
 
(5
)
 
24

Total Infrastructure
$
7,984

 
$
2,813

 
$
(758
)
 
$
(314
)
 
$
(3,230
)
 
$
6,495

Total
$
19,212

 
$
54,512

 
$
(2,656
)
 
$
(1,123
)
 
$
(28,986
)
 
$
40,959



8.
STOCK-BASED COMPENSATION
Stock Options
Changes in our stock options for the nine months ended March 31, 2020 were as follows:
 
Options
 
Weighted
Average
Exercise Price
 
Weighted Average Remaining Life (years)
 
Aggregate
Intrinsic value
(in thousands)
Options outstanding, June 30, 2019
781,673

 
$
33.92