Company Quick10K Filing
Kennametal
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 83 $2,541
10-Q 2019-11-06 Quarter: 2019-09-30
10-K 2019-08-13 Annual: 2019-06-30
10-Q 2019-05-07 Quarter: 2019-03-31
10-Q 2019-02-05 Quarter: 2018-12-31
10-Q 2018-11-06 Quarter: 2018-09-30
10-K 2018-08-10 Annual: 2018-06-30
10-Q 2018-05-08 Quarter: 2018-03-31
10-Q 2018-02-06 Quarter: 2017-12-31
10-Q 2017-11-07 Quarter: 2017-09-30
10-K 2017-08-14 Annual: 2017-06-30
10-Q 2017-05-09 Quarter: 2017-03-31
10-Q 2017-02-08 Quarter: 2016-12-31
10-Q 2016-11-07 Quarter: 2016-09-30
10-K 2016-08-11 Annual: 2016-06-30
10-Q 2016-05-06 Quarter: 2016-03-31
10-Q 2016-02-08 Quarter: 2015-12-31
10-Q 2015-11-04 Quarter: 2015-09-30
10-K 2015-08-13 Annual: 2015-06-30
10-Q 2015-05-08 Quarter: 2015-03-31
10-Q 2015-02-03 Quarter: 2014-12-31
10-Q 2014-11-06 Quarter: 2014-09-30
10-K 2014-08-13 Annual: 2014-06-30
10-Q 2014-05-08 Quarter: 2014-03-31
10-Q 2014-02-06 Quarter: 2013-12-31
10-Q 2013-11-07 Quarter: 2013-09-30
10-K 2013-08-13 Annual: 2013-06-30
10-Q 2013-05-09 Quarter: 2013-03-31
10-Q 2013-02-07 Quarter: 2012-12-31
10-Q 2012-11-08 Quarter: 2012-09-30
10-K 2012-08-13 Annual: 2012-06-30
10-Q 2012-05-09 Quarter: 2012-03-31
10-Q 2012-02-08 Quarter: 2011-12-31
10-Q 2011-11-08 Quarter: 2011-09-30
10-K 2011-08-11 Annual: 2011-06-30
10-Q 2011-05-09 Quarter: 2011-03-31
10-Q 2011-02-08 Quarter: 2010-12-31
10-Q 2010-11-05 Quarter: 2010-09-30
10-K 2010-08-12 Annual: 2010-06-30
10-Q 2010-05-05 Quarter: 2010-03-31
10-Q 2010-02-05 Quarter: 2009-12-31
8-K 2019-12-09 Officers
8-K 2019-11-04 Earnings, Exhibits
8-K 2019-10-29 Shareholder Vote
8-K 2019-10-21
8-K 2019-08-05 Earnings, Exhibits
8-K 2019-07-11 Exit Costs, Exhibits
8-K 2019-05-06 Earnings, Exit Costs, Exhibits
8-K 2019-02-04 Earnings, Exhibits
8-K 2018-11-05 Earnings, Exhibits
8-K 2018-10-30 Officers, Shareholder Vote
8-K 2018-09-07 Officers, Exhibits
8-K 2018-08-21 Officers, Other Events, Exhibits
8-K 2018-08-14 Officers, Other Events, Exhibits
8-K 2018-08-06 Earnings, Exhibits
8-K 2018-06-26 Officers, Other Events, Exhibits
8-K 2018-06-21 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-13 Officers, Other Events, Exhibits
8-K 2018-06-04 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-05-22 Officers, Other Events, Exhibits
8-K 2018-05-02 Earnings, Exhibits
8-K 2018-02-01 Earnings, Exhibits
8-K 2018-01-25 Officers, Exhibits
8-K 2018-01-11 Officers, Other Events, Exhibits
KMT 2019-09-30
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 kmt930201910-qex311.htm
EX-31.2 kmt930201910-qex312.htm
EX-32.1 kmt930201910-qex321.htm

Kennametal Earnings 2019-09-30

KMT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
LPL 2,909 33,175,710 18,289,464 0 0 0 0 2,909 0%
BRKS 2,800 1,493 755 587 234 35 103 3,190 40% 30.9 2%
ITGR 2,710 2,374 1,262 1,237 366 188 373 3,557 30% 9.5 8%
ENR 2,692 5,578 5,007 2,233 924 6 330 6,047 41% 18.3 0%
AAON 2,612 342 459 117 50 90 2,598 25% 28.8 15%
KMT 2,541 2,656 1,282 2,375 831 247 453 2,957 35% 6.5 9%
ORBK 2,448 1,304 392 0 0 0 0 2,206 0%
APY 2,443 1,975 944 1,235 434 95 119 3,043 35% 25.5 5%
WBT 2,319 2,191 1,974 1,621 576 71 263 3,678 36% 14.0 3%
AIMC 2,290 4,358 2,473 1,647 566 72 225 3,798 34% 16.9 2%

Document
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Table of Contents

 
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: September 30, 2019
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.)
 
 
 
600 Grant Street
  
 
Suite 5100
 
 
Pittsburgh,
Pennsylvania
 
15219-2706
(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 October 31, 2019, 82,856,908 shares of the Registrant’s Capital Stock, par value $1.25 per share, were outstanding.
 


Table of Contents

KENNAMETAL INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
 
Item No.
Page No.
 
 
 
 
 
 
1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
1.
 
 
 
2.
 
 
 
6.
 
 

2

Table of Contents

FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that do not relate strictly to historical or current facts. You can identify forward-looking statements by the fact they use words such as “should,” “anticipate,” “estimate,” “approximate,” “expect,” “may,” “will,” “project,” “intend,” “plan,” “believe” and other words of similar meaning and expression in connection with any discussion of future operating or financial performance or events. We have also included forward-looking statements in this Quarterly Report on Form 10-Q concerning, among other things, our strategy, goals, plans and projections regarding our financial position, liquidity and capital resources, results of operations, market position and product development. These statements are based on current estimates that involve inherent risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: downturns in the business cycle or the economy; our ability to achieve anticipated benefits 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. 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

Table of Contents




PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
 
 
 
 
Three Months Ended September 30,
(in thousands, except per share amounts)
2019
 
2018
Sales
$
518,088

 
$
586,687

Cost of goods sold
379,108

 
375,595

Gross profit
138,980

 
211,092

Operating expense
114,191

 
123,285

Restructuring and asset impairment charges (Note 6)
4,666

 
1,075

Amortization of intangibles
3,747

 
3,580

Operating income
16,376

 
83,152

Interest expense
7,881

 
8,097

Other income, net
(2,681
)
 
(2,761
)
Income before income taxes
11,176

 
77,816

Provision for income taxes
3,766

 
19,392

Net income
7,410

 
58,424

Less: Net income attributable to noncontrolling interests
944

 
1,725

Net income attributable to Kennametal
$
6,466

 
$
56,699

PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
Basic earnings per share
$
0.08

 
$
0.69

Diluted earnings per share
$
0.08

 
$
0.68

Dividends per share
$
0.20

 
$
0.20

Basic weighted average shares outstanding
82,881

 
82,105

Diluted weighted average shares outstanding
83,487

 
83,194


KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
 
 
Three Months Ended September 30,
(in thousands)
2019
 
2018
Net income
$
7,410

 
$
58,424

Other comprehensive loss, net of tax
 
 
 
Unrealized gain (loss) on derivatives designated and qualified as cash flow hedges
395

 
(262
)
Reclassification of unrealized loss on derivatives designated and qualified as cash flow hedges
181

 
595

Unrecognized net pension and other postretirement benefit gain
2,607

 
318

Reclassification of net pension and other postretirement benefit loss
1,960

 
1,312

Foreign currency translation adjustments
(35,426
)
 
(16,203
)
Total other comprehensive loss, net of tax
(30,283
)
 
(14,240
)
Total comprehensive (loss) income
(22,873
)
 
44,184

Less: comprehensive (loss) income attributable to noncontrolling interests
(449
)
 
493

Comprehensive (loss) income attributable to Kennametal Shareholders
$
(22,424
)
 
$
43,691

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

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Table of Contents

KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
 
 
 
(in thousands, except per share data)
September 30,
2019
 
June 30,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
113,522

 
$
182,015

Accounts receivable, less allowance for doubtful accounts of $10,671 and $10,083, respectively
327,628

 
379,855

Inventories (Note 9)
557,133

 
571,576

Other current assets
67,106

 
57,381

Total current assets
1,065,389

 
1,190,827

Property, plant and equipment:
 
 
 
Land and buildings
349,435

 
351,142

Machinery and equipment
1,825,381

 
1,804,871

Less accumulated depreciation
(1,210,528
)
 
(1,221,118
)
Property, plant and equipment, net
964,288

 
934,895

Other assets:
 
 
 
Goodwill (Note 17)
294,584

 
300,011

Other intangible assets, less accumulated amortization of $153,788 and $158,507, respectively (Note 17)
156,708

 
160,998

Operating lease right-of-use assets (Note 10)
43,824

 

Deferred income taxes
18,921

 
20,507

Other
55,691

 
49,031

Total other assets
569,728

 
530,547

Total assets
$
2,599,405

 
$
2,656,269

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Notes payable to banks
3,528

 
157

Current operating lease liabilities (Note 10)
13,598

 

Accounts payable
198,674

 
212,908

Accrued income taxes
24,156

 
29,223

Accrued expenses
53,702

 
76,616

Other current liabilities
125,061

 
142,822

Total current liabilities
418,719

 
461,726

Long-term debt, less current maturities (Note 11)
592,858

 
592,474

Operating lease liabilities (Note 10)
30,296

 

Deferred income taxes
23,233

 
23,322

Accrued pension and postretirement benefits
167,002

 
174,003

Accrued income taxes
8,921

 
9,038

Other liabilities
20,726

 
21,002

Total liabilities
1,261,755

 
1,281,565

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; 82,833 and 82,421 shares issued, respectively
103,542

 
103,026

Additional paid-in capital
530,695

 
528,827

Retained earnings
1,066,763

 
1,076,862

Accumulated other comprehensive loss
(402,434
)
 
(373,543
)
Total Kennametal Shareholders’ Equity
1,298,566

 
1,335,172

Noncontrolling interests
39,084

 
39,532

Total equity
1,337,650

 
1,374,704

Total liabilities and equity
$
2,599,405

 
$
2,656,269

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

5

Table of Contents

KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
 
 
 
 
 
 
Three Months Ended September 30,
(in thousands)
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
7,410

 
$
58,424

Adjustments for non-cash items:
 
 
 
Depreciation
27,328

 
23,973

Amortization
3,747

 
3,580

Stock-based compensation expense
8,255

 
8,486

Restructuring charges: asset write-down (Note 6)
1,191

 
(288
)
Deferred income tax provision
261

 
20

Other
688

 
257

Changes in certain assets and liabilities:
 
 
 
Accounts receivable
41,606

 
9,009

Inventories
2,661

 
(48,597
)
Accounts payable and accrued liabilities
(47,070
)
 
(52,731
)
Accrued income taxes
(6,680
)
 
9,461

Accrued pension and postretirement benefits
(6,328
)
 
(4,348
)
Other
(5,524
)
 
1,955

Net cash flow provided by operating activities
27,545

 
9,201

INVESTING ACTIVITIES
 
 
 
Purchases of property, plant and equipment
(72,455
)
 
(43,263
)
Disposals of property, plant and equipment
395

 
833

Other
172

 
37

Net cash flow used for investing activities
(71,888
)
 
(42,393
)
FINANCING ACTIVITIES
 
 
 
Net increase (decrease) in notes payable
3,338

 
(16
)
Term debt repayments

 
(400,000
)
Purchase of capital stock
(53
)
 
(54
)
The effect of employee benefit and stock plans and dividend reinvestment
(5,819
)
 
(2,436
)
Cash dividends paid to Shareholders
(16,565
)
 
(16,399
)
Other
(866
)
 
16

Net cash flow used for financing activities
(19,965
)
 
(418,889
)
Effect of exchange rate changes on cash and cash equivalents
(4,185
)
 
(1,988
)
CASH AND CASH EQUIVALENTS
 
 
 
Net decrease in cash and cash equivalents
(68,493
)
 
(454,069
)
Cash and cash equivalents, beginning of period
182,015

 
556,153

Cash and cash equivalents, end of period
$
113,522

 
$
102,084

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


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Table of Contents

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 three months ended September 30, 2019 and 2018 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 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 10 for additional disclosures 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 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 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 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 consolidated financial statements.


7

Table of Contents

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


3.
SUPPLEMENTAL CASH FLOW DISCLOSURES
 
Three Months Ended September 30,
(in thousands)
2019
 
2018
Cash paid during the period for:
 
 
 
Income taxes
$
9,631

 
$
9,911

Interest
6,337

 
9,966

Supplemental disclosure of non-cash information:
 
 
 
Changes in accounts payable related to purchases of property, plant and equipment
200

 
(3,200
)


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.
As of September 30, 2019, the fair values of the Company’s financial assets and financial liabilities are categorized as follows: 
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
644

 
$

 
$
644

Total assets at fair value
$

 
$
644

 
$

 
$
644

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
214

 
$

 
$
214

Total liabilities at fair value
$

 
$
214

 
$

 
$
214

 
As of June 30, 2019, the fair values of the Company’s financial assets and financial liabilities are categorized as follows:
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
152

 
$

 
$
152

Total assets at fair value
$

 
$
152

 
$

 
$
152

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
55

 
$

 
$
55

Total liabilities at fair value
$

 
$
55

 
$

 
$
55

 (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.


8

Table of Contents

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


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, 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)
September 30,
2019
 
June 30,
2019
Derivatives designated as hedging instruments
 
 
 
Other current assets - range forward contracts
$
644

 
$
145

Total derivatives designated as hedging instruments
644

 
145

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

 
8

Other current liabilities - currency forward contracts
(214
)
 
(56
)
Total derivatives not designated as hedging instruments
(214
)
 
(48
)
Total derivatives
$
430

 
$
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. Gains related to derivatives not designated as hedging instruments have been recognized as follows:
 
Three Months Ended September 30,
(in thousands)
2019
 
2018
Other income, net - currency forward contracts
$
102

 
$
78

 
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 September 30, 2019 and June 30, 2019, was $43.6 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 September 30, 2019, we expect to recognize into earnings $0.3 million of income on outstanding derivatives in the next 12 months.
The following represents gains and losses related to cash flow hedges:
 
Three Months Ended September 30,
(in thousands)
2019
 
2018
Gains (losses) recognized in other comprehensive loss, net
$
395

 
$
(262
)
Losses reclassified from accumulated other comprehensive loss into cost of goods sold and other income, net
$
159

 
$
532


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 three months ended September 30, 2019 and 2018.

9

Table of Contents

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


NET INVESTMENT HEDGES
As of September 30, 2019, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of 22.5 million as net investment hedges to hedge the foreign exchange exposure of our net investment in our Euro-based subsidiaries. We recorded a gain of $1.1 million and $0.1 million as a component of foreign currency translation adjustments in other comprehensive loss for the three months ended September 30, 2019 and 2018, respectively.
As of September 30, 2019, 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
28,326

30,871

June 26, 2022
(2) Includes principal and accrued interest.

6.
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 the Company for long-term profitable growth. These actions are expected to be completed in fiscal 2020 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 are expected to be 80 percent Industrial, 15 percent Infrastructure and 5 percent Widia. Total restructuring and related charges since inception of $21.3 million were recorded for this program through September 30, 2019 consisting of: $15.3 million in Industrial, $4.1 million in Infrastructure and $1.9 million in Widia.
FY21 Restructuring Actions
On July 11, 2019, we announced the initiation of restructuring actions in Germany associated with simplification/modernization, which are expected to reduce structural costs. These actions are expected to be completed by 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 $60 million to $75 million, which is expected to be primarily in the Industrial segment. Total restructuring and related charges since inception of $0.9 million were recorded for this program through September 30, 2019 in the Industrial segment.
Restructuring and Related Charges Recorded
We recorded restructuring and related charges of $8.0 million and $1.1 million for the three months ended September 30, 2019 and 2018, respectively. Of these amounts, restructuring charges totaled $4.7 million and $1.1 million for the three months ended September 30, 2019 and 2018, respectively. Restructuring-related charges of $3.3 million were recorded in cost of goods sold for the three months ended September 30, 2019.

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Table of Contents

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


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

 
$
2,030

 
$

 
$
(343
)
 
$
(2,742
)
 
$
7,808

Facilities

 
1,049

 
(1,049
)
 

 

 

Other
35

 
4

 

 
(2
)
 
(7
)
 
30

Total Industrial
$
8,898

 
$
3,083

 
$
(1,049
)
 
$
(345
)
 
$
(2,749
)
 
$
7,838

 
 
 
 
 
 
 
 
 
 
 
 
Widia
 
 
 
 
 
 
 
 
 
 
 
Severance
$
2,306

 
$
140

 
$

 
$
(24
)
 
$
(189
)
 
$
2,233

Facilities

 

 

 

 

 

Other
24

 

 

 

 

 
24

Total Widia
$
2,330

 
$
140

 
$

 
$
(24
)
 
$
(189
)
 
$
2,257

 
 
 
 
 
 
 
 
 
 
 
 
Infrastructure
 
 
 
 
 
 
 
 
 
 
 
Severance
$
7,956

 
$
1,311

 
$

 
$
(221
)
 
$
(1,770
)
 
$
7,276

Facilities

 
142

 
(142
)
 

 

 

Other
28

 
2

 

 
(1
)
 
(4
)
 
25

Total Infrastructure
$
7,984

 
$
1,455

 
$
(142
)
 
$
(222
)
 
$
(1,774
)
 
$
7,301

Total
$
19,212

 
$
4,678

 
$
(1,191
)
 
$
(591
)
 
$
(4,712
)
 
$
17,396



7.
STOCK-BASED COMPENSATION
Stock Options
Changes in our stock options for the three months ended September 30, 2019 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

 
 
 
 
Exercised
(17,152
)
 
21.48

 
 
 
 
Lapsed or forfeited
(33,592
)
 
42.78

 
 
 
 
Options outstanding, September 30, 2019
730,929

 
$
33.80

 
3.5
 
$
1,699

Options vested, September 30, 2019
730,929

 
$
33.80

 
3.5
 
$
1,699

Options exercisable, September 30, 2019
730,929

 
$
33.80

 
3.5
 
$
1,699


As of September 30, 2019, there was no unrecognized compensation cost related to options outstanding.
All options were fully vested as of September 30, 2019. Fair value of options vested during the three months ended September 30, 2018 was $1.0 million. The amount of cash received from the exercise of capital stock options during the three months ended September 30, 2019 and 2018 was $0.1 million and $3.1 million, respectively. The total intrinsic value of options exercised during the three months ended September 30, 2019 and 2018 was $0.2 million and $1.4 million, respectively.

11

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


Restricted Stock Units – Performance Vesting and Time Vesting
Changes in our performance vesting and time vesting restricted stock units for the three months ended September 30, 2019 were as follows:
 
Performance Vesting Stock Units
 
Performance Vesting Weighted Average Fair Value
 
Time Vesting
Stock Units
 
Time Vesting Weighted Average Fair Value
Unvested, June 30, 2019
405,230

 
$
35.58

 
926,927

 
$
36.43

Granted
275,216

 
28.74

 
612,036

 
27.90

Vested
(146,377
)
 
27.08

 
(390,570
)
 
32.87

Performance metric adjustments, net
32,707

 
32.79

 

 

Forfeited
(1,440
)
 
39.26

 
(4,852
)
 
37.68

Unvested, September 30, 2019
565,336

 
$
34.28

 
1,143,541

 
$
33.08

During the three months ended September 30, 2019 and 2018, compensation expense related to time vesting and performance vesting restricted stock units was $7.8 million. As of September 30, 2019, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $33.4 million and is expected to be recognized over a weighted average period of 2.3 years.

8.
PENSION AND OTHER POSTRETIREMENT BENEFITS
The table below summarizes the components of net periodic pension income:
 
Three Months Ended September 30,
(in thousands)
2019
 
2018
Service cost
$
450

 
$
411

Interest cost
6,824

 
7,990

Expected return on plan assets
(13,456
)
 
(13,462
)
Amortization of transition obligation
22

 
23

Amortization of prior service cost (credit)
12

 
(5
)
Recognition of actuarial losses
2,595

 
1,695

Settlement gain
(122
)
 

Net periodic pension income
$
(3,675
)
 
$
(3,348
)

The table below summarizes the components of net periodic other postretirement benefit cost:
 
Three Months Ended September 30,
(in thousands)
2019
 
2018
Interest cost
$
101

 
$
153

Amortization of prior service credit
(69
)
 
(22
)
Recognition of actuarial loss
64

 
62

Net periodic other postretirement benefit cost
$
96

 
$
193



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.


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


9.
INVENTORIES
We used the last-in, first-out (LIFO) method of valuing inventories for 40 percent and 41 percent of total inventories at September 30, 2019 and June 30, 2019, 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)
September 30, 2019
 
June 30, 2019
Finished goods
$
335,437

 
$
311,684

Work in process and powder blends
200,915

 
246,414

Raw materials
84,581

 
95,620

Inventories at current cost
620,933

 
653,718

Less: LIFO valuation
(63,800
)
 
(82,142
)
Total inventories
$
557,133

 
$
571,576



10.
LEASES
At the inception of our contracts we determine if the contract is or contains a lease. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement. For leases that do not have a readily determinable implicit rate, we use a discount rate based on our incremental borrowing rate, which is determined considering factors such as the lease term, our credit rating and the economic environment of the location of the lease as of the commencement date.
We account for non-lease components separately from lease components. These costs often relate to the payments for a proportionate share of real estate taxes, insurance, common area maintenance and other operating costs in addition to base rent. We also do not recognize ROU assets and liabilities for leases with an initial term of 12 months or less. Lease costs associated with leases of less than 12 months were $2.1 million for the three months ended September 30, 2019.
As a lessee, we have various operating lease agreements primarily related to real estate, vehicles and office and plant equipment. The Company’s real estate leases, which are comprised primarily of manufacturing, warehousing, office and administration facilities, represent a majority of our lease liability. Our lease payments are largely fixed. Any variable lease payments, including utilities, common area maintenance and repairs and maintenance, are expensed during the period incurred. Variable lease costs were immaterial for the three months ended September 30, 2019. A majority of our real estate leases include options to extend the lease and options to early terminate the lease. Leases with an early termination option generally involve a termination payment. We review all options to extend, terminate, or purchase the ROU assets at the inception of the lease and account for these options when they are reasonably certain of being exercised. Our lease agreements generally do not contain any material residual value guarantees or materially restrictive covenants. The Company does not have any material leases that have been signed but not commenced, and we did not have any lease transactions with related parties.
The weighted average remaining lease term and discount rate for our operating leases were approximately 8.5 years and 3.3 percent, respectively, at September 30, 2019.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in operating expense on our consolidated statement of income. Operating lease cost was $4.1 million for the three months ended September 30, 2019.
The following table sets forth supplemental cash flow information related to our operating leases:
(in thousands)
 
Three Months Ended September 30, 2019
Operating cash flows from operating leases
 
$
3,840

ROU assets obtained in exchange for new operating lease liabilities
 
$
580



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


The following table sets forth the maturities of our operating lease liabilities and reconciles the respective undiscounted payments to the operating lease liabilities in the condensed consolidated balance sheet as of September 30, 2019:
Year Ended June 30,
(in thousands)
 
September 30, 2019
Remaining nine months of 2020
 
$
11,317

2021
 
10,748

2022
 
6,499

2023
 
3,962

2024
 
2,394

Thereafter
 
16,411

Total undiscounted operating lease payments
 
$
51,331

   Less: discount to net present value
 
7,437

Total operating lease liabilities
 
$
43,894



The following table sets forth the future minimum lease payments for non-cancelable operating leases as of the year ended June 30, 2019:
Year Ended June 30,
(in thousands)
 
June 30, 2019
2020
 
$
17,074

2021
 
12,212

2022
 
6,693

2023
 
4,294

2024
 
2,636

Thereafter
 
17,168

Total future minimum lease payments
 
$
60,077



11.
LONG-TERM DEBT
Our five-year, multi-currency, revolving credit facility, as amended and restated in June 2018 (Credit Agreement), provides for revolving credit loans of up to $700 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the Credit Agreement). We were in compliance with all such covenants as of September 30, 2019. We had no borrowings outstanding under the Credit Agreement as of September 30, 2019 and June 30, 2019. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries. The Credit Agreement matures in June 2023.
Fixed rate debt had a fair market value of $627.6 million and $622.0 million at September 30, 2019 and June 30, 2019, respectively. The Level 2 fair value is determined based on the quoted market prices for similar debt instruments as of September 30, 2019 and June 30, 2019, 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 reserves for certain potential environmental liabilities. At September 30, 2019 and June 30, 2019, the balances of these reserves were $12.2 million and $12.4 million, respectively. These reserves 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 reserves 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 reserves 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 reserved and unreserved liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.
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 September 30, 2019 and 2018 were 33.7 percent and 24.9 percent, respectively. The increase is primarily due to the change in the jurisdictional mix caused by expected restructuring and related charges and the Base Erosion Anti-Abuse Tax (BEAT). The prior year rate includes a discrete charge of $1.0 million related to the one-time tax that was imposed on our unremitted foreign earnings under the Tax Cuts and Jobs Act of 2017 (TCJA).
Swiss tax reform effective January 1, 2020 was enacted in October 2019. We are in the process of evaluating the provisions of this new law and its effect on our tax provision, and will complete this evaluation in the December quarter of fiscal 2020.

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 tables provide the computation of diluted shares outstanding for the three months ended September 30, 2019 and 2018:
 
 
Three Months Ended September 30,
(in thousands)
 
2019
 
2018
Weighted-average shares outstanding during period
 
82,881

 
82,105

Add: Unexercised stock options and unvested restricted stock units
 
606

 
1,089

Number of shares on which diluted earnings per share is calculated
 
83,487

 
83,194

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-dilutive
 
649

 
279




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


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 September 30, 2019 and 2018 is as follows:
 
Kennametal Shareholders’ Equity
 
 
 
 
(in thousands)
Capital
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive loss
 
Non-
controlling
interests
 
Total equity
Balance as of June 30, 2019
$
103,026

 
$
528,827

 
$
1,076,862

 
$
(373,543
)
 
$
39,532

 
$
1,374,704

Net income

 

 
6,466

 

 
944

 
7,410

Other comprehensive loss

 

 

 
(28,891
)
 
(1,392
)
 
(30,283
)
Dividend reinvestment
2

 
51

 

 

 

 
53

Capital stock issued under employee benefit and stock plans(3)
516

 
1,868

 

 

 

 
2,384

Purchase of capital stock
(2
)
 
(51
)
 

 

 

 
(53
)
Cash dividends

 

 
(16,565
)
 


 

 
(16,565
)
Total equity, September 30, 2019
$
103,542

 
$
530,695

 
$
1,066,763

 
$
(402,434
)
 
$
39,084

 
$
1,337,650

 
 
Kennametal Shareholders’ Equity
 
 
 
 
(in thousands)
Capital
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated other comprehensive loss
 
Non-
controlling
interests
 
Total equity
Balance as of June 30, 2018
$
102,058

 
$
511,909

 
$
900,683

 
$
(320,325
)
 
$
36,002

 
$
1,230,327

Net income

 

 
56,699

 

 
1,725

 
58,424

Other comprehensive loss