10-Q 1 kmt-20220331.htm 10-Q kmt-20220331
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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, 2022
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,Pennsylvania15219
(Address of principal executive offices)  (Zip Code)
Registrant’s telephone number, including area code: (412248-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Capital Stock, par value $1.25 per shareKMTNew York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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 filerAccelerated filer
Non-accelerated filerSmaller 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

As of April 29, 2022 82,638,419 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, 2022
TABLE OF CONTENTS
 
Item No.Page No.
1.
Three and nine months ended March 31, 2022 and 2021
Three and nine months ended March 31, 2022 and 2021
March 31, 2022 and June 30, 2021
Nine months ended March 31, 2022 and 2021
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: uncertainties related to changes in macroeconomic and/or global conditions, including as a result of Russia's invasion of Ukraine and the imposition of sanctions; uncertainties related to the effects of the ongoing COVID-19 pandemic, including the emergence of more contagious or virulent strains of the virus, its impacts on our business operations, financial results and financial position and on the industries in which we operate and the global economy generally, including as a result of travel restrictions, business and workforce disruptions associated with the pandemic; other economic recession; our ability to achieve all anticipated benefits of restructuring, simplification and modernization initiatives; our foreign operations and international markets, such as currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability, including the conflict in Ukraine; 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 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; energy costs; commodity prices; 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 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)2022202120222021
Sales$512,259 $484,658 $1,482,441 $1,325,470 
Cost of goods sold347,639 334,483 1,004,116 948,693 
Gross profit164,620 150,175 478,325 376,777 
Operating expense107,075 108,113 316,423 299,211 
Restructuring charges (benefits) and asset impairment charges (Note 6)947 (822)(2,323)26,145 
Gain on divestiture (Note 3)  (1,001) 
Amortization of intangibles3,234 3,362 9,751 10,043 
Operating income53,364 39,522 155,475 41,378 
Interest expense6,436 20,928 19,217 39,823 
Other income, net(4,528)(2,692)(11,129)(10,568)
Income before income taxes51,456 21,286 147,387 12,123 
Provision for (benefit from) income taxes14,578 (1,699)40,031 (10,252)
Net income36,878 22,985 107,356 22,375 
Less: Net income attributable to noncontrolling interests1,583 1,364 4,443 3,042 
Net income attributable to Kennametal$35,295 $21,621 $102,913 $19,333 
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
Basic earnings per share$0.42 $0.26 $1.23 $0.23 
Diluted earnings per share$0.42 $0.26 $1.22 $0.23 
Basic weighted average shares outstanding83,084 83,719 83,538 83,539 
Diluted weighted average shares outstanding83,807 84,588 84,268 84,184 

KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 Three Months Ended March 31,Nine Months Ended March 31,
(in thousands)2022202120222021
Net income$36,878 $22,985 $107,356 $22,375 
Other comprehensive income (loss), net of tax
Unrealized gain on derivatives designated and qualified as cash flow hedges 4,771  9,272 
Reclassification of unrealized gain on derivatives designated and qualified as cash flow hedges(192)(1,148)(577)(210)
Unrecognized net pension and other postretirement benefit gain (loss)1,511 2,032 4,291 (5,489)
Reclassification of net pension and other postretirement benefit loss2,185 2,579 6,601 7,758 
Foreign currency translation adjustments(8,068)(25,536)(34,626)49,012 
Total other comprehensive (loss) income, net of tax (4,564)(17,302)(24,311)60,343 
Total comprehensive income32,314 5,683 83,045 82,718 
Less: comprehensive income attributable to noncontrolling interests1,127 634 3,080 4,947 
Comprehensive income attributable to Kennametal Shareholders$31,187 $5,049 $79,965 $77,771 
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, 2022
June 30, 2021
ASSETS
Current assets:
Cash and cash equivalents$99,982 $154,047 
Accounts receivable, less allowance for doubtful accounts of $10,368 and $9,734, respectively
311,635 302,945 
Inventories (Note 9)562,042 476,345 
Other current assets69,582 71,470 
Total current assets1,043,241 1,004,807 
Property, plant and equipment:
Land and buildings413,760 413,865 
Machinery and equipment1,940,497 1,959,176 
Less accumulated depreciation(1,341,997)(1,317,906)
Property, plant and equipment, net1,012,260 1,055,135 
Other assets:
Goodwill (Note 17)271,268 277,615 
Other intangible assets, less accumulated amortization of $160,278 and $153,972, respectively (Note 17)
110,029 120,041 
Operating lease right-of-use assets46,175 50,341 
Deferred income taxes55,744 58,742 
Other120,796 99,080 
Total other assets604,012 605,819 
Total assets$2,659,513 $2,665,761 
LIABILITIES
Current liabilities:
Revolving and other lines of credit and notes payable (Note 11)$28,736 $8,365 
Current operating lease liabilities13,127 14,220 
Accounts payable197,687 177,659 
Accrued income taxes36,910 18,059 
Accrued expenses50,672 61,489 
Other current liabilities 133,233 157,602 
Total current liabilities460,365 437,394 
Long-term debt, less current maturities (Note 10)593,138 592,108 
Operating lease liabilities33,635 36,800 
Deferred income taxes23,760 23,710 
Accrued pension and postretirement benefits158,940 171,067 
Accrued income taxes3,655 4,246 
Other liabilities24,218 32,231 
Total liabilities1,297,711 1,297,556 
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; 82,638 and 83,614 shares issued, respectively
103,298 104,518 
Additional paid-in capital524,657 562,820 
Retained earnings1,045,445 992,597 
Accumulated other comprehensive loss(353,275)(330,327)
Total Kennametal Shareholders’ Equity1,320,125 1,329,608 
Noncontrolling interests41,677 38,597 
Total equity1,361,802 1,368,205 
Total liabilities and equity$2,659,513 $2,665,761 
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)20222021
OPERATING ACTIVITIES
Net income$107,356 $22,375 
Adjustments to reconcile to cash from operations:
Depreciation87,984 83,677 
Amortization9,751 10,043 
Stock-based compensation expense18,024 19,381 
Restructuring (benefits) charges and asset impairment charges (Note 6)(2,444)2,805 
Deferred income taxes 593 (14,418)
Debt refinancing charge (Note 10) 9,071 
Gain on divestiture (Note 3)(1,001) 
Other703 4,567 
Changes in certain assets and liabilities:
Accounts receivable(17,757)(56,454)
Inventories(99,486)58,109 
Accounts payable and accrued liabilities(11,416)28,086 
Accrued income taxes14,733 (20,926)
Accrued pension and postretirement benefits(20,318)(21,142)
Other6,301 14,023 
Net cash flow provided by operating activities93,023 139,197 
INVESTING ACTIVITIES
Purchases of property, plant and equipment(60,151)(94,066)
Disposals of property, plant and equipment765 1,216 
Proceeds from divestiture (Note 3)1,001  
Other62 112 
Net cash flow used for investing activities(58,323)(92,738)
FINANCING ACTIVITIES
Net (decrease) increase in notes payable(7,111)1,008 
Net increase (decrease) in revolving and other lines of credit27,500 (490,000)
Term debt borrowings 297,867 
Term debt repayments (300,000)
Make-whole premium on early extinguishment of debt (Note 10) (9,639)
Settlement of interest rate swap agreement 10,198 
Purchase of capital stock(50,522)(149)
The effect of employee benefit and stock plans and dividend reinvestment(6,889)(150)
Cash dividends paid to Shareholders(50,062)(50,016)
Other(682)(4,581)
Net cash flow used for financing activities(87,766)(545,462)
Effect of exchange rate changes on cash and cash equivalents(999)6,626 
CASH AND CASH EQUIVALENTS
Net decrease in cash and cash equivalents(54,065)(492,377)
Cash and cash equivalents, beginning of period154,047 606,684 
Cash and cash equivalents, end of period$99,982 $114,307 
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 subsidiaries in which we have a controlling interest, 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, 2021 (the “2021 Annual Report”). The condensed consolidated balance sheet as of June 30, 2021 was derived from the audited balance sheet included in our 2021 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, 2022 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 2022 is to the fiscal year ending June 30, 2022. 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.SUPPLEMENTAL CASH FLOW DISCLOSURES
Nine Months Ended March 31,
(in thousands)20222021
Cash paid during the period for:
Interest (Note 10)$17,519 $36,456 
Income taxes24,705 28,715 
Supplemental disclosure of non-cash information:
Changes in accounts payable related to purchases of property, plant and equipment2,502 (14,700)
Changes in notes payable related to purchases of property, plant and equipment— 7,254 

3.     DIVESTITURE
During the year ended June 30, 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 year ended June 30, 2020 was $6.5 million. Transaction proceeds were primarily used for capital expenditures related to our simplification/modernization efforts. During the nine months ended March 31, 2022, we recorded a gain of $1.0 million on the New Castle divestiture due to proceeds held in escrow until November 2021.

4.     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.
7


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

As of March 31, 2022, the fair values of our financial assets and financial liabilities are categorized as follows: 
(in thousands)Level 1Level 2Level 3Total
Assets:
Derivatives (1)
$— $513 $— $513 
Total assets at fair value$— $513 $— $513 
Liabilities:
Derivatives (1)
$— $14 $— $14 
Total liabilities at fair value$— $14 $— $14 
 
As of June 30, 2021, the fair values of our financial assets and financial liabilities are categorized as follows:
(in thousands)Level 1Level 2Level 3Total
Assets:
Derivatives (1)
$— $36 $— $36 
Total assets at fair value$— $36 $— $36 
Liabilities:
Derivatives (1)
$— $87 $— $87 
Total liabilities at fair value$— $87 $— $87 
 (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.

5.    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, we do not hold any 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.
There were no derivatives designated as hedging instruments as of March 31, 2022 and June 30, 2021. The fair value of derivatives not designated as hedging instruments in the condensed consolidated balance sheets are as follows:
(in thousands)March 31, 2022
June 30, 2021
Derivatives not designated as hedging instruments
Other current assets - currency forward contracts$513 $36 
Other current liabilities - currency forward contracts(14)(87)
Total derivatives not designated as hedging instruments499 (51)
Total derivatives$499 $(51)
Certain currency forward contracts that hedge significant cross-border intercompany loans are considered as other derivatives and therefore do not qualify for hedge accounting. These contracts are recorded at fair value in the condensed consolidated balance sheet, with the offset to other income, net. (Gains) losses related to derivatives not designated as hedging instruments have been recognized as follows:
Three Months Ended March 31,Nine Months Ended March 31,
(in thousands)2022202120222021
Other income, net - currency forward contracts$(541)$1,428 $(535)$20 
 
8


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

NET INVESTMENT HEDGES
As of March 31, 2022 and June 30, 2021, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of €5.3 million and €5.2 million, respectively, designated as net investment hedges to hedge the foreign exchange exposure of our net investment in our Euro-based subsidiaries. Gains of $0.1 million and $1.5 million were recorded as a component of foreign currency translation adjustments in other comprehensive income for the three months ended March 31, 2022 and 2021, respectively. Gains of $1.5 million and an immaterial amount were recorded as a component of foreign currency translation adjustments in other comprehensive loss for the nine months ended March 31, 2022 and 2021, respectively.
As of March 31, 2022, 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 payable5,310 $5,896 June 26, 2022
(2) Includes principal and accrued interest.

6.    RESTRUCTURING AND RELATED CHARGES
FY21 Restructuring Actions
In the September quarter of fiscal 2020, we announced the initiation of restructuring actions in Germany associated with our simplification/modernization initiative to reduce structural costs. Subsequently, we also announced the acceleration of our other structural cost reduction plans including the closure of the Johnson City, Tennessee facility. As of March 31, 2022, the FY21 Restructuring Actions are considered substantially complete. In line with our target of approximately $85 million, total restructuring and related charges since inception of $84.8 million were recorded for this program through March 31, 2022, consisting of: $77.1 million in Metal Cutting and $7.7 million in Infrastructure.
Restructuring and Related Charges Recorded
We recorded restructuring and related charges of $3.0 million for the three months ended March 31, 2022, which consisted of charges of $3.0 million in Metal Cutting and an immaterial amount in Infrastructure. Of this amount, restructuring charges were $0.9 million and restructuring-related charges were $2.1 million (included in cost of goods sold) for the three months ended March 31, 2022. For the three months ended March 31, 2021, we recorded restructuring and related charges of $2.1 million, which consisted of charges of $2.5 million in Metal Cutting offset by a benefit from the reversal of charges of $0.4 million in Infrastructure. Of this amount, restructuring benefits from the reversal of charges were $0.9 million of which $0.1 million was included in cost of goods sold for the three months ended March 31, 2021. Restructuring-related charges of $3.0 million were recorded in cost of goods sold for the three months ended March 31, 2021.
We recorded restructuring and related charges of $2.6 million for the nine months ended March 31, 2022, which consisted of charges of $2.6 million in Metal Cutting and an immaterial amount in Infrastructure. Of this amount, restructuring benefits were $2.3 million and restructuring-related charges were $4.9 million (included in cost of goods sold) for the nine months ended March 31, 2022. For the nine months ended March 31, 2021, we recorded restructuring and related charges of $34.9 million, which consisted of charges of $32.0 million in Metal Cutting and $2.9 million in Infrastructure. Of this amount, restructuring charges were $26.5 million of which $0.3 million was included in cost of goods sold. Restructuring-related charges of $8.5 million were recorded in cost of goods sold for the nine months ended March 31, 2021.
9


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

As of March 31, 2022, $7.8 million and $3.6 million of the restructuring accrual was recorded in other current liabilities and other liabilities, respectively, in our condensed consolidated balance sheet. As of June 30, 2021, $19.9 million and $9.9 million of the restructuring accrual was recorded in other current liabilities and other liabilities, respectively. The amounts are as follows:
(in thousands)
June 30, 2021
ExpenseAsset Write-DownTranslationCash ExpendituresMarch 31, 2022
Severance$29,723 $(3,903)$ $(1,224)$(13,144)$11,452 
Facilities 1,580 (1,580)   
Other      
Total$29,723 $(2,323)$(1,580)$(1,224)$(13,144)$11,452 

7.    STOCK-BASED COMPENSATION
Stock Options
Changes in our stock options for the nine months ended March 31, 2022 were as follows:
OptionsWeighted Average Exercise PriceWeighted Average Remaining Life (years)Aggregate Intrinsic value (in thousands)
Options outstanding, June 30, 2021315,012 $37.83 
Exercised(6,916)31.69 
Lapsed or forfeited(36,253)41.84   
Options outstanding, March 31, 2022271,843 $37.45 2.2$108 
Options vested, March 31, 2022271,843 $37.45 2.2$108 
Options exercisable, March 31, 2022271,843 $37.45 2.2$108 
As of March 31, 2022 and June 30, 2021, there was no unrecognized compensation cost related to options outstanding, and all options were fully vested as of March 31, 2022 and 2021.
The amount of cash received from the exercise of options during the nine months ended March 31, 2022 and 2021 was $0.2 million and $5.6 million, respectively. The total intrinsic value of options exercised was $0.1 million and $2.2 million during the nine months ended March 31, 2022 and 2021, respectively.
Restricted Stock Units – Performance Vesting and Time Vesting
Changes in our performance vesting and time vesting restricted stock units for the nine months ended March 31, 2022 were as follows:
Performance Vesting Stock UnitsPerformance Vesting Weighted Average Fair ValueTime Vesting Stock UnitsTime Vesting Weighted Average Fair Value
Unvested, June 30, 2021500,477 $32.53 1,332,740 $31.72 
Granted108,234 36.70 528,529 36.58 
Vested(36,455)40.10 (525,184)32.13 
Performance metric adjustments, net(150,711)31.18   
Forfeited(20,581)32.42 (67,660)32.29 
Unvested, March 31, 2022400,964 $33.49 1,268,425 $33.55 
During the nine months ended March 31, 2022 and 2021, compensation expense related to time vesting and performance vesting restricted stock units was $17.2 million and $18.7 million, respectively. Certain performance metrics were not met, resulting in an adjustment of 150,711 performance vesting stock units during the nine months ended March 31, 2022. As of March 31, 2022, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $28.1 million and is expected to be recognized over a weighted average period of 1.9 years.
10


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


8.    PENSION AND OTHER POSTRETIREMENT BENEFITS
The table below summarizes the components of net periodic pension income:
Three Months Ended March 31,Nine Months Ended March 31,
(in thousands)2022202120222021
Service cost$279 $429 $846 $1,264 
Interest cost5,631 5,815 16,931 17,371 
Expected return on plan assets(12,985)(13,459)(39,020)(40,171)
Amortization of transition obligation23 24 71 70 
Amortization of prior service cost3 8 9 25 
Recognition of actuarial losses2,918 3,431 8,829 10,190 
Net periodic pension income$(4,131)$(3,752)$(12,334)$(11,251)
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)2022202120222021
Interest cost$72 $76 $216 $230 
Amortization of prior service credit(69)(69)(207)(207)
Recognition of actuarial loss74 77 223 230 
Net periodic other postretirement benefit cost$77 $84 $232 $253 

The service cost component of net periodic pension income is reported as a component of cost of goods sold and operating expense. All other components of net periodic pension income and net periodic other postretirement benefit cost are reported as a component of other income, net.

9.    INVENTORIES
We used the last-in, first-out (LIFO) method of valuing inventories for 38 percent and 39 percent of total inventories at March 31, 2022 and June 30, 2021, respectively. Inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year; therefore, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs and are subject to any final year-end LIFO inventory adjustments.
Inventories consisted of the following: 
(in thousands)March 31, 2022
June 30, 2021
Finished goods$331,467 $302,524 
Work in process and powder blends207,276 173,671 
Raw materials100,721 72,551 
Inventories at current cost639,464 548,746 
Less: LIFO valuation(77,422)(72,401)
Total inventories$562,042 $476,345 

11


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

10.    LONG-TERM DEBT
Fixed rate debt had a fair market value of $586.0 million and $644.2 million at March 31, 2022 and June 30, 2021, respectively. The Level 2 fair value is determined based on the quoted market prices for similar debt instruments as of March 31, 2022 and June 30, 2021, respectively.
Senior Unsecured Notes In February 2021, we issued $300.0 million of 2.800 percent Senior Unsecured Notes with a maturity date of March 1, 2031. Interest will be paid semi-annually on March 1 and September 1 of each year. We settled forward starting interest rate swap contracts for a gain of $10.2 million related to the bond issuance. In March 2021, we used the net proceeds from the bond issuance, plus cash on hand, for the early extinguishment of our $300.0 million of 3.875 percent Senior Unsecured Notes due 2022 (the 2022 Notes). Due to the early extinguishment, interest expense during the three and nine months ended March 31, 2021 includes a make-whole premium of $9.6 million and the acceleration of a loss in the amount of $2.6 million from other comprehensive loss related to forward starting interest rate contracts that were used to hedge the interest payments of the 2022 Notes. A stranded tax benefit associated with the termination of this hedge was also recognized during the three and nine months ended March 31, 2021.

11.    REVOLVING AND OTHER LINES OF CREDIT AND NOTES PAYABLE

During the three months ended September 30, 2020, we entered into the First Amendment (the Amendment) to the Fifth Amended and Restated Credit Agreement dated as of June 21, 2018 (as amended by the Amendment, the Credit Agreement). The Credit Agreement is a five-year, multi-currency, revolving credit facility that we use to augment our cash from operations and as an additional source of funds. The Credit Agreement provides for revolving credit loans of up to $700.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement allows for borrowings in U.S. dollars, euros, Canadian dollars, pounds sterling and Japanese yen. Interest payable under the Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR (or beginning January 1, 2022, a successor rate of Euro Interbank Offered Rate (EURIBOR), Sterling Overnight Index Average (SONIA), and Tokyo Interbank Offered Rate (TIBOR) for any borrowings in euros, pounds sterling and yen, respectively) plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us. The Credit Agreement matures in June 2023.
The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: (1) a maximum leverage ratio where debt, net of domestic cash in excess of $25 million and, as added by the Amendment, sixty percent of the unrestricted cash held outside of the United States, must be less than or equal to 3.5 times trailing twelve months EBITDA (temporarily increased by the Amendment to 4.25 times trailing twelve months EBITDA during the period from September 30, 2020 through and including December 31, 2021), adjusted for certain non-cash expenses, and which may be further adjusted, at our discretion, to include up to $120 million (increased from $80 million pursuant to the Amendment) of cash restructuring charges through December 31, 2021; and (2) a minimum consolidated interest coverage ratio of EBITDA to interest of 3.5 times (as the aforementioned terms are defined in the Credit Agreement). Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries.
As of March 31, 2022, we were in compliance with all the covenants of the Credit Agreement and we had $27.5 million of borrowings outstanding and $672.5 million of additional availability. There were no borrowings outstanding as of June 30, 2021.
Other lines of credit and notes payable were $1.2 million and $8.4 million at March 31, 2022 and June 30, 2021, 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.
We establish and maintain accruals for certain potential environmental liabilities. At March 31, 2022, the balance of these accruals was $12.9 million, of which $2.4 million was current. At June 30, 2021, the balance was $14.7 million, of which $2.6 million was current. These accruals represent anticipated costs associated with potential remedial requirements and are generally not discounted.
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The accruals we have established for potential environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the United States Environmental Protection Agency (USEPA), other governmental agencies and by the Potentially Responsible Party (PRP) groups in which we are participating. Although our accruals currently appear to be sufficient to cover these potential 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 accrued 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.
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 USEPA as a 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.

13.     INCOME TAXES
The effective income tax rates for the three months ended March 31, 2022 and 2021 were 28.3 percent (provision on income) and 8.0 percent (benefit on income), respectively. The year-over-year change is due primarily to higher pretax income in the current year, discrete tax benefits recorded in the prior year quarter related to a provision to return adjustment and the recognition of a stranded deferred tax balance in accumulated other comprehensive loss arising from valuation allowance adjustments and enacted tax rate changes associated with the termination of forward starting interest rate cash flow hedges, and geographical mix.
The effective income tax rates for the nine months ended March 31, 2022 and 2021 were 27.2 percent (provision on income) and 84.6 percent (benefit on income), respectively. The year-over-year change is due primarily to higher pretax income in the current year, discrete tax benefits recorded in the prior year related to a favorable provision to return adjustment and the recognition of a stranded deferred tax balance in accumulated other comprehensive loss arising from valuation allowance adjustments and enacted tax rate changes associated with the termination of forward starting interest rate cash flow hedges, and geographical mix.
As of March 31, 2022, we have $25.2 million of U.S. net deferred tax assets, of which $56.0 million is related to net operating loss, tax credit, and other carryforwards that can be used to offset future U.S. taxable income. Certain of these carryforwards will expire if they are not used within a specified timeframe. At this time, we consider it more likely than not that we will have sufficient U.S. taxable income in the future that will allow us to realize these net deferred tax assets. However, it is possible that some or all of these tax attributes could ultimately expire unused, especially if our end markets do not continue to recover from the COVID-19 global pandemic. Therefore, if we are unable to generate sufficient U.S. taxable income from our operations, a valuation allowance to reduce the U.S. net deferred tax assets may be required, which would materially increase income tax expense in the period in which the valuation allowance is recorded.
Swiss tax reform
Swiss tax reform legislation was effectively enacted during the December quarter of fiscal 2020 when the Canton of Schaffhausen approved the Federal Act on Tax Reform and AHV Financing on October 8, 2019 (Swiss tax reform). Significant changes from Swiss tax reform include the abolishment of certain favorable tax regimes and the creation of a multi-year transitional period at both the federal and cantonal levels. The transitional provisions of Swiss tax reform allow companies to utilize a combination of lower tax rates and tax basis adjustments to fair value, which are used for tax depreciation and amortization purposes resulting in deductions over the transitional period. To reflect the federal and cantonal transitional provisions, as they apply to us, we recorded a deferred tax asset of $14.5 million during the three months ended December 31, 2020. We consider the deferred tax asset from Swiss tax reform to be an estimate based on our current interpretation of the legislation, which is subject to change based on further legislative guidance, review with the Swiss federal and cantonal authorities, and modifications to the underlying valuation. We anticipate finalization of the deferred tax asset within the next six months.

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

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.
The following table provides the computation of diluted shares outstanding for the three and nine months ended March 31, 2022 and 2021:
Three Months Ended March 31,Nine Months Ended March 31,
(in thousands)2022202120222021
Weighted-average shares outstanding during period
83,084 83,719 83,538 83,539 
Add: Unexercised stock options and unvested restricted stock units723 869 730 645 
Number of shares on which diluted earnings per share is calculated
83,807 84,588 84,268 84,184 
Unexercised stock options with an exercise price greater than the average market price and restricted stock units not included in the computation because they were anti-dilutive372 217 340 321 

15.    EQUITY
A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests for the three months ending March 31, 2022 and 2021 is as follows:
 Kennametal Shareholders’ Equity  
(in thousands, except per share amounts)Capital stockAdditional paid-in capitalRetained earningsAccumulated other comprehensive lossNon-controlling interestsTotal equity
Balance as of December 31, 2021$103,842 $534,592 $1,026,756 $(349,168)$40,551 $1,356,573 
Net income— — 35,295 — 1,583 36,878 
Other comprehensive loss— — — (4,107)(457)(4,564)
Dividend reinvestment2 45 — — — 47 
Capital stock issued under employee benefit and stock plans(3)
31 4,457 — — — 4,488 
Purchase of capital stock(577)(14,437)— — — (15,014)
Cash dividends ($0.20 per share)
— — (16,606)— — (16,606)
Total equity, March 31, 2022$103,298 $524,657 $1,045,445 $(353,275)$41,677 $1,361,802 
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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 Kennametal Shareholders’ Equity  
(in thousands, except per share amounts)Capital stockAdditional paid-in capitalRetained earningsAccumulated other comprehensive lossNon-controlling interestsTotal equity
Balance as of December 31, 2020$104,330 $547,754 $969,301 $(342,231)$40,535 $1,319,689 
Net income— — 21,621 — 1,364 22,985 
Other comprehensive loss— — — (16,572)(730)(17,302)
Dividend reinvestment2 48 — — — 50 
Capital stock issued under employee benefit and stock plans(3)
148 8,768 — — — 8,916 
Purchase of capital stock(2)(48)— — — (50)
Cash dividends ($0.20 per share)
— — (16,707)— — (16,707)
Total equity, March 31, 2021$104,478 $556,522 $974,215 $(358,803)$41,169 $1,317,581 
(3) Net of restricted stock units delivered upon vesting to satisfy tax withholding requirements.
A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests for the nine months ending March 31, 2022 and 2021 is as follows:
 Kennametal Shareholders’ Equity  
(in thousands, except per share amounts)Capital stockAdditional paid-in capitalRetained earningsAccumulated other comprehensive lossNon-controlling interestsTotal equity
Balance as of June 30, 2021$104,518 $562,820 $992,597 $(