10-Q
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 MARCH 31, 2016
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)
Website: www.kennametal.com
Registrant’s telephone number, including area code: (412) 248-8200
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 [X] NO [  ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES [X] NO [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X]
  
Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)
  
Smaller reporting company [  ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [  ] NO [X]
Indicate the number of shares outstanding of each of the issuer’s classes of capital stock, as of the latest practicable date.
 
Title of Each Class
 
Outstanding at April 29, 2016
Capital Stock, par value $1.25 per share     
 
79,689,781
 


Table of Contents


KENNAMETAL INC.
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2016
TABLE OF CONTENTS
 
Item No.
Page No.
 
 
 
 
 
 
1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
 
 
 
2.
 
 
 
6.
 
 

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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: economic recession; our ability to achieve all anticipated benefits of restructuring initiatives; our foreign operations and international markets, such as 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 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. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.



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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)
2016
 
2015
 
2016
 
2015
Sales
$
497,837

 
$
638,970

 
$
1,577,212

 
$
2,009,543

Cost of goods sold
340,484

 
439,500

 
1,127,828

 
1,392,516

Gross profit
157,353

 
199,470

 
449,384

 
617,027

Operating expense
121,004

 
138,025

 
373,827

 
423,972

Restructuring and asset impairment charges (Notes 8 and 18)
7,142

 
175,435

 
128,498

 
565,837

Loss on divestiture (Note 5)
(2,557
)
 

 
130,750

 

Amortization of intangibles
4,429

 
6,402

 
16,315

 
20,361

Operating income (loss)
27,335

 
(120,392
)
 
(200,006
)
 
(393,143
)
Interest expense
7,113

 
7,760

 
20,895

 
23,929

Other (income) expense, net
(1,938
)
 
(378
)
 
(1,582
)
 
32

Income (loss) before income taxes
22,160

 
(127,774
)
 
(219,319
)
 
(417,104
)
Provision (benefit) for income taxes
5,465

 
(82,223
)
 
(61,499
)
 
(23,975
)
Net income (loss)
16,695

 
(45,551
)
 
(157,820
)
 
(393,129
)
Less: Net income attributable to noncontrolling interests
695

 
678

 
1,634

 
1,914

Net income (loss) attributable to Kennametal
$
16,000

 
$
(46,229
)
 
$
(159,454
)
 
$
(395,043
)
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
 
 
 
 
Basic earnings (loss) per share
$
0.20

 
$
(0.58
)
 
$
(2.00
)
 
$
(4.98
)
Diluted earnings (loss) per share
$
0.20

 
$
(0.58
)
 
$
(2.00
)
 
$
(4.98
)
Dividends per share
$
0.20

 
$
0.18

 
$
0.60

 
$
0.54

Basic weighted average shares outstanding
79,871

 
79,389

 
79,814

 
79,282

Diluted weighted average shares outstanding
80,224

 
79,389

 
79,814

 
79,282

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


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KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in thousands)
2016
 
2015
 
2016
 
2015
Net income (loss)
$
16,695

 
$
(45,551
)
 
$
(157,820
)
 
$
(393,129
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges
(637
)
 
3,025

 
165

 
5,738

Reclassification of unrealized loss (gain) on expired derivatives designated and qualified as cash flow hedges
238

 
(705
)
 
(1,946
)
 
(376
)
Unrecognized net pension and other postretirement benefit (loss) gain
(888
)
 
4,293

 
1,561

 
9,858

Reclassification of net pension and other postretirement benefit loss
1,219

 
685

 
3,641

 
2,174

Foreign currency translation adjustments
17,783

 
(79,496
)
 
(24,705
)
 
(161,218
)
Reclassification of foreign currency translation adjustment (gain) loss realized upon sale
(1,940
)
 

 
15,088

 

Total other comprehensive income (loss), net of tax
15,775

 
(72,198
)
 
(6,196
)
 
(143,824
)
Total comprehensive income (loss)
32,470

 
(117,749
)
 
(164,016
)
 
(536,953
)
Less: comprehensive income (loss) attributable to noncontrolling interests
1,222

 
(585
)
 
1,094

 
(1,623
)
Comprehensive income (loss) attributable to Kennametal Shareholders
$
31,248

 
$
(117,164
)
 
$
(165,110
)
 
$
(535,330
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

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KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
 
 
 
(in thousands, except per share data)
March 31,
2016
 
June 30,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
136,564

 
$
105,494

Accounts receivable, less allowance for doubtful accounts of $11,931 and $13,560, respectively
365,827

 
445,373

Inventories (Note 11)
485,390

 
575,531

Deferred income taxes
56,318

 
72,449

Other current assets
55,161

 
59,699

Total current assets
1,099,260

 
1,258,546

Property, plant and equipment:
 
 
 
Land and buildings
356,056

 
401,207

Machinery and equipment
1,529,682

 
1,573,597

Less accumulated depreciation
(1,160,203
)
 
(1,158,979
)
Property, plant and equipment, net
725,535

 
815,825

Other assets:
 
 
 
Investments in affiliated companies
2

 
361

Goodwill (Note 18)
302,109

 
417,389

Other intangible assets, less accumulated amortization of $110,664 and $153,370, respectively (Note 18)
212,709

 
286,669

Deferred income taxes
75,837

 
24,091

Other
76,487

 
46,648

Total other assets
667,144

 
775,158

Total assets
$
2,491,939

 
$
2,849,529

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt and capital leases
$
733

 
$
8,129

Notes payable to banks
3,407

 
7,573

Accounts payable
169,332

 
187,381

Accrued income taxes
29,289

 
25,237

Accrued expenses
66,078

 
75,746

Other current liabilities
152,576

 
178,678

Total current liabilities
421,415

 
482,744

Long-term debt and capital leases, less current maturities (Note 12)
699,750

 
735,885

Deferred income taxes
15,572

 
59,744

Accrued pension and postretirement benefits
153,104

 
163,029

Accrued income taxes
2,247

 
3,002

Other liabilities
25,040

 
29,690

Total liabilities
1,317,128

 
1,474,094

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; 79,679 and 79,375 shares issued, respectively
99,599

 
99,219

Additional paid-in capital
430,692

 
419,829

Retained earnings
863,048

 
1,070,282

Accumulated other comprehensive loss
(249,179
)
 
(243,523
)
Total Kennametal Shareholders’ Equity
1,144,160

 
1,345,807

Noncontrolling interests
30,651

 
29,628

Total equity
1,174,811

 
1,375,435

Total liabilities and equity
$
2,491,939

 
$
2,849,529

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

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KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
 
 
 
 
 
 
Nine Months Ended March 31,
(in thousands)
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net loss
$
(157,820
)
 
$
(393,129
)
Adjustments for non-cash items:
 
 
 
Depreciation
73,297

 
79,281

Amortization
16,315

 
20,361

Stock-based compensation expense
14,705

 
14,252

Restructuring and asset impairment charges (Notes 8 and 18)
111,922

 
543,942

Deferred income tax provision
(85,426
)
 
(51,766
)
Loss on divestiture (Note 5)
130,750

 

Other
239

 
2,632

Changes in certain assets and liabilities:
 
 
 
Accounts receivable
44,125

 
34,287

Inventories
47,778

 
6,582

Accounts payable and accrued liabilities
(16,244
)
 
(21,690
)
Accrued income taxes
(12,989
)
 
(9,874
)
Accrued pension and postretirement benefits
(22,901
)
 
(12,369
)
Other
1,663

 
7,067

Net cash flow provided by operating activities
145,414

 
219,576

INVESTING ACTIVITIES
 
 
 
Purchases of property, plant and equipment
(83,285
)
 
(77,620
)
Disposals of property, plant and equipment
5,102

 
1,300

Proceeds from divestiture (Note 5)
61,100

 

Other
835

 
43

Net cash flow used for investing activities
(16,248
)
 
(76,277
)
FINANCING ACTIVITIES
 
 
 
Net (decrease) increase in notes payable
(4,088
)
 
17,090

Net increase in short-term revolving and other lines of credit

 
3,600

Term debt borrowings
50,070

 
62,950

Term debt repayments
(94,337
)
 
(212,638
)
Purchase of capital stock
(231
)
 
(244
)
Dividend reinvestment and the effect of employee benefit and stock plans
1,713

 
10,977

Cash dividends paid to Shareholders
(47,780
)
 
(42,699
)
Other
(55
)
 
(3,824
)
Net cash flow used for financing activities
(94,708
)
 
(164,788
)
Effect of exchange rate changes on cash and cash equivalents
(3,388
)
 
(10,265
)
CASH AND CASH EQUIVALENTS
 
 
 
Net increase (decrease) in cash and cash equivalents
31,070

 
(31,754
)
Cash and cash equivalents, beginning of period
105,494

 
177,929

Cash and cash equivalents, end of period
$
136,564

 
$
146,175

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


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KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 



1.ORGANIZATION
Kennametal Inc. was incorporated in Pennsylvania in 1943. Kennametal Inc. and its subsidiaries (collectively, Kennametal or the Company) are a leading global manufacturer and supplier of tooling, engineered components and advanced materials consumed in production processes. We believe that our reputation for manufacturing excellence, as well as our technological expertise and innovation we deliver in our products and services, helps us to achieve a leading position in our primary markets. End users of our products include metalworking and machinery manufacturers and suppliers across a diverse array of industries, including the aerospace, defense, transportation, machine tool, light machinery and heavy machinery, as well as producers and suppliers in a number of equipment-intensive industries such as coal mining, road construction and quarrying, as well as oil and gas exploration, refining, production and supply. Our end users' applications range from airframes to mining operations, engines to oil wells and turbochargers to processing. We operate two global business segments consisting of Industrial and Infrastructure.
 
2.BASIS OF PRESENTATION

The condensed consolidated financial statements, which include our accounts and those of our majority-owned subsidiaries, should be read in conjunction with our 2015 Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, 2015 was derived from the audited balance sheet included in our 2015 Annual Report on Form 10-K. These 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, 2016 and 2015 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 2016 is to the fiscal year ending June 30, 2016. When used in this Form 10-Q, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

3.NEW ACCOUNTING STANDARDS
Adopted
In April 2014, the Financial Accounting Standards Board (FASB) issued guidance on reporting discontinued operations and disclosures of disposals of components of an entity. Under the guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Additionally, the guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. The guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This guidance was effective for Kennametal beginning July 1, 2015. The transaction outlined in Note 5 was evaluated under this guidance.
Issued
In April 2016, the FASB issued guidance on identifying performance obligations and licensing as part of Topic 606: Revenue from Contracts with Customers. The amendments in this update clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. This standard is effective for Kennametal beginning July 1, 2018, in conjunction with the adoption of Accounting Standards Update 2014-09, “Revenue from Contracts with Customers: Topic 606.” We are in the process of assessing the impact the adoption of this guidance will have on our condensed consolidated financial statements.


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


In March 2016, the FASB issued guidance intended to simplify equity-based award accounting and presentation. The guidance impacts income tax accounting related to equity-based awards, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. This standard is effective for Kennametal beginning July 1, 2017. We are in the process of assessing the impact the adoption of this guidance will have on our condensed consolidated financial statements.

In March 2016, the FASB issued guidance on principal versus agent considerations in reporting revenue gross versus net. This guidance is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. As this update serves to clarify existing guidance, it is not expected to have a material impact on our condensed consolidated financial statements.

In February 2016, the FASB issued guidance on lease accounting, 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 all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This standard is effective for Kennametal beginning July 1, 2019. We are in the process of assessing the impact the adoption of this guidance will have on our condensed consolidated financial statements.

4.
SUPPLEMENTAL CASH FLOW DISCLOSURES
 
Nine Months Ended March 31,
(in thousands)
2016
 
2015
Cash paid during the period for:
 
 
 
Interest
$
20,056

 
$
23,981

Income taxes
38,429

 
35,700

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

 
6,470


5.
DIVESTITURE

During the nine months ended March 31, 2016, Kennametal completed the transaction to sell all of the outstanding capital stock of: Kennametal Extrude Hone LLC and its wholly owned subsidiaries, Kennametal Stellite S.r.l. (Bellusco, Italy), Kennametal Stellite S.p.A. (Milan, Italy), Kennametal Stellite GmbH (Koblenz, Germany); and all of the assets of the businesses of: Tricon (manufacturing operations in Birmingham, Alabama; Chicago, Illinois; and Elko, Nevada), Landis (manufacturing operation in Waynesboro, Pennsylvania); and all of the assets located at the Biel, Switzerland manufacturing facility ("non-core businesses") to Madison Industries for an aggregate price of $61.1 million cash, net of cash. A portion of the transaction proceeds were used to pay down revolver debt and the remaining balance is being held as cash on hand.

The net book value of these non-core businesses was $191.9 million, which includes the impact of cumulative translation adjustments and a refinement to our estimated working capital adjustment. We recognized a pre-tax loss on the sale of $133.3 million during the three months ended December 31, 2015 which included the impact of estimated working capital adjustments, deal costs and transaction costs. We recorded a pre-tax net gain on divestiture during the three months ended March 31, 2016 of approximately $2.6 million, which consists primarily of the write-off of the currency translation adjustments of a legal entity liquidated in the March quarter, partially offset by a refinement to our estimated working capital adjustment. The pre-tax net loss on divestiture during the nine months ended March 31, 2016 is $130.8 million, of which $127.2 million and $3.6 million were recorded in the Infrastructure and Industrial segments, respectively. The pre-tax income attributable to the non-core businesses was assessed and determined to be immaterial for disclosure for the periods presented.


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


6.FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell 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, 2016, the fair values of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows: 
(in thousands)
Level 1

 
Level 2

 
Level 3

 
Total

Assets:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
155

 
$

 
$
155

Total assets at fair value
$

 
$
155

 
$

 
$
155

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
311

 
$

 
$
311

   Contingent consideration

 

 
8,600

 
8,600

Total liabilities at fair value
$

 
$
311

 
$
8,600

 
$
8,911

 
As of June 30, 2015, the fair value of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows:
(in thousands)
Level 1

 
Level 2

 
Level 3

 
Total

Assets:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
2,678

 
$

 
$
2,678

Total assets at fair value
$

 
$
2,678

 
$

 
$
2,678

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
44

 
$

 
$
44

   Contingent consideration

 

 
10,000

 
10,000

Total liabilities at fair value
$

 
$
44

 
$
10,000

 
$
10,044

 (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. The fair value of contingent consideration payable that was classified as Level 3 relates to our probability assessments of expected future milestone targets, primarily associated with product delivery, related to a previous acquisition. The contingent consideration is to be paid over the next 9 months and is recorded in other current liabilities in our condensed consolidated balance sheet. The Company reassessed this contingent consideration and determined that an adjustment of $1.4 million to reduce the fair value of the remaining contingent consideration was necessary during the nine months ended March 31, 2016 due to a return of inventory to the seller during the period. No other changes in the expected outcome have occurred during the nine months ended March 31, 2016.
 

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


7.
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 ineffective portions are recorded in other (income) expense, net.
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,
2016
 
June 30,
2015
Derivatives designated as hedging instruments
 
 
 
Other current assets - range forward contracts
$
12

 
$
2,626

Other current liabilities - range forward contracts
(285
)
 

Other liabilities - range forward contracts
(7
)
 

Total derivatives designated as hedging instruments
(280
)
 
2,626

Derivatives not designated as hedging instruments
 
 
 
Other current assets - currency forward contracts
143

 
52

Other current liabilities - currency forward contracts
(19
)
 
(44
)
Total derivatives not designated as hedging instruments
124

 
8

Total derivatives
$
(156
)
 
$
2,634

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) expense, net. 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)
2016
 
2015
 
2016
 
2015
Other (income) expense, net - currency forward contracts
$
(182
)
 
$
3,386

 
$
(116
)
 
$
(3,783
)
 
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 at maturity are recorded in accumulated other comprehensive loss and are recognized as a component of other (income) expense, 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, 2016 and June 30, 2015, was $63.8 million and $53.8 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, 2016, we expect to recognize into earnings in the next 12 months $0.4 million of income on outstanding derivatives.
The following represents gains and losses related to cash flow hedges:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in thousands)
2016
 
2015
 
2016
 
2015
(Losses) gains recognized in other comprehensive loss, net
$
(914
)
 
$
3,025

 
$
(637
)
 
$
5,738

Losses (gains) reclassified from accumulated other comprehensive loss into other (income) expense, net
$
629

 
$
(48
)
 
$
293

 
$
453


11

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


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, 2016 and 2015.

8.
RESTRUCTURING AND RELATED CHARGES
Phase 1
We are implementing restructuring actions in conjunction with our Phase 1 restructuring program to achieve synergies across Kennametal as a result of the Tungsten Materials Business (TMB) acquisition by consolidating operations among both organizations, reducing administrative overhead and leveraging the supply chain. These restructuring actions are expected to be completed by the end of fiscal 2016 and are anticipated to be mostly cash expenditures.
The total pre-tax charges for Phase 1 programs are expected to be up to $60 million, which is expected to be approximately 50 percent Industrial, 45 percent Infrastructure and 5 percent Corporate. Total restructuring and related charges since inception of $58.3 million have been recorded for these Phase 1 programs through March 31, 2016: $30.4 million in Industrial, $25.5 million in Infrastructure and $2.4 million in Corporate.
Phase 2
We are implementing restructuring actions in conjunction with Phase 2 to streamline the Company's cost structure. These initiatives are expected to enhance operational efficiencies through the rationalization of certain manufacturing facilities as well as other employment and cost reduction programs. These restructuring actions are expected to be completed by December of fiscal 2019 and are anticipated to be mostly cash expenditures.
The total pre-tax charges for Phase 2 programs are expected to be in the range of $90 million to $100 million, which is expected to be approximately 85 percent Industrial, 10 percent Infrastructure and 5 percent Corporate. Total restructuring and related charges since inception of $42.3 million have been recorded for these Phase 2 programs through March 31, 2016: $25.3 million in Industrial, $11.8 million in Infrastructure and $5.2 million in Corporate.
Phase 3
We are implementing restructuring actions in conjunction with Phase 3. These initiatives are expected to enhance operational efficiencies through an enterprise-wide cost reduction program as well as the consolidation of certain manufacturing facilities. These restructuring actions are expected to be completed by March of fiscal 2017 and are anticipated to be mostly cash expenditures.
The total pre-tax charges for Phase 3 programs are expected to be in the range of $40 million to $45 million, which is expected to be approximately 55 percent Industrial, 40 percent Infrastructure and 5 percent Corporate. Total restructuring and related charges since inception of $14.5 million have been recorded for these Phase 3 programs through March 31, 2016: $8.4 million in Industrial, $4.5 million in Infrastructure and $1.6 million in Corporate.
Combined
We have recorded restructuring and related charges of $14.0 million and $16.7 million for the three months ended March 31, 2016 and 2015, respectively. Of these amounts, restructuring charges totaled $7.5 million and $15.7 million, respectively. Restructuring charges of $0.4 million during the three months ended March 31, 2016 were charges related to inventory and were recorded in cost of goods sold. Restructuring-related charges of $1.1 million and $0.3 million were recorded in cost of goods sold and $5.4 million and $0.7 million in operating expense for the three months ended March 31, 2016 and 2015, respectively.
We have recorded restructuring and related charges of $38.0 million and $37.1 million for the nine months ended March 31, 2016 and 2015, respectively. Of these amounts, restructuring charges totaled $20.1 million and $24.4 million, of which $0.1 million and $0.3 million were charges related to inventory and were recorded in cost of goods sold, respectively. Restructuring-related charges of $4.7 million and $6.5 million were recorded in cost of goods sold and $13.2 million and $6.2 million in operating expense for the nine months ended March 31, 2016 and 2015, respectively.

12

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


The restructuring accrual is recorded in other current liabilities in our condensed consolidated balance sheet and the amount attributable to each segment is as follows:
(in thousands)
June 30, 2015
 
Expense
 
Asset Write-Down
 
Translation
 
Cash Expenditures
 
March 31, 2016
Industrial
 
 
 
 
 
 
 
 
 
 
 
Severance
$
13,456

 
$
12,158

 
$

 
$
58

 
$
(17,659
)
 
$
8,013

Facilities

 
930

 
(780
)
 

 
(146
)
 
4

Other
28

 
156

 

 
(1
)
 
(12
)
 
171

Total Industrial
$
13,484

 
$
13,244

 
$
(780
)
 
$
57

 
$
(17,817
)
 
$
8,188

 
 
 
 
 
 
 
 
 
 
 
 
Infrastructure
 
 
 
 
 
 
 
 
 
 
 
Severance
$
7,173

 
$
4,053

 
$

 
$
19

 
$
(5,886
)
 
$
5,359

Facilities
131

 
2,775

 
(2,775
)
 

 
(101
)
 
30

Other

 
52

 

 

 
3

 
55

Total Infrastructure
$
7,304

 
$
6,880

 
$
(2,775
)
 
$
19

 
$
(5,984
)
 
$
5,444

Total
$
20,788

 
$
20,124

 
$
(3,555
)
 
$
76

 
$
(23,801
)
 
$
13,632

(in thousands)
June 30, 2014
 
Expense
 
Asset Write-Down
 
Other (2)
 
Translation
 
Cash Expenditures
 
March 31, 2015
Industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
Severance
$
5,815

 
$
11,565

 
$

 
$

 
$
(364
)
 
$
(7,312
)
 
$
9,704

Facilities
444

 
1,307

 
(1,261
)
 

 
(31
)
 
(459
)
 

Other
67

 
37

 

 

 
(2
)
 
(102
)
 

Total Industrial
$
6,326

 
$
12,909

 
$
(1,261
)
 
$

 
$
(397
)
 
$
(7,873
)
 
$
9,704

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Infrastructure
 
 
 
 
 
 
 
 
 
 
 
 
 
Severance
$
2,458

 
$
10,813

 
$

 
$
(459
)
 
$
(350
)
 
$
(6,749
)
 
$
5,713

Facilities
190

 
661

 
(522
)
 

 
(16
)
 
(279
)
 
34

Other
28

 
6

 

 

 
(3
)
 
(31
)
 

Total Infrastructure
$
2,676

 
$
11,480

 
$
(522
)
 
$
(459
)
 
$
(369
)
 
$
(7,059
)
 
$
5,747

Total
$
9,002

 
$
24,389

 
$
(1,783
)
 
$
(459
)
 
$
(766
)
 
$
(14,932
)
 
$
15,451

(2) Special termination benefit charge for one of our U.S.-based benefit pension plans resulting from a plant closure - see Note 10.

9.
STOCK-BASED COMPENSATION
Stock Options
The assumptions used in our Black-Scholes valuation related to grants made during the nine months ended March 31, 2016 and 2015 were as follows:
 
2016
 
2015
Risk-free interest rate
1.4
%
 
1.5
%
Expected life (years) (3)
4.5

 
4.5

Expected volatility (4)
31.7
%
 
32.5
%
Expected dividend yield
2.1
%
 
1.7
%
(3) Expected life is derived from historical experience.
(4) Expected volatility is based on the implied historical volatility of our stock.
 

13

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


Changes in our stock options for the nine months ended March 31, 2016 were as follows:
 
Options

 
Weighted
Average
Exercise Price

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

Options outstanding, June 30, 2015
2,094,037

 
$
36.08

 
 
 
 
Granted
885,403

 
28.29

 
 
 
 
Exercised
(38,569
)
 
25.02

 
 
 
 
Lapsed or forfeited
(369,945
)
 
34.95

 
 
 
 
Options outstanding, March 31, 2016
2,570,926

 
$
33.72

 
5.1
 
$
740

Options vested and expected to vest, March 31, 2016
2,512,561

 
$
33.80

 
5.0
 
$
720

Options exercisable, March 31, 2016
1,648,381

 
$
35.36

 
2.9
 
$
145

During the nine months ended March 31, 2016 and 2015, compensation expense related to stock options was $2.8 million and $3.0 million, respectively. As of March 31, 2016, the total unrecognized compensation cost related to options outstanding was $2.9 million and is expected to be recognized over a weighted average period of 2.1 years.
Weighted average fair value of options granted during the nine months ended March 31, 2016 and 2015 was $6.45 per option and $10.16 per option, respectively. Fair value of options vested during the nine months ended March 31, 2016 and 2015 was $2.3 million and $7.4 million, respectively.
Tax benefits relating to excess stock-based compensation deductions are presented in the condensed consolidated statements of cash flow as financing cash inflows. Tax benefits resulting from stock-based compensation deductions were less than amounts reported for financial reporting purposes by $1.8 million for the nine months ended March 31, 2016 and exceeded amounts reported for financial reporting purposes by $1.6 million for the nine months ended March 31, 2015.
The amount of cash received from the exercise of capital stock options during the nine months ended March 31, 2016 and 2015 was $1.0 million and $8.3 million, respectively. The related tax benefit was immaterial for the nine months ended March 31, 2016 and was $1.6 million during the nine months ended March 31, 2015. The total intrinsic value of options exercised was immaterial during the nine months ended March 31, 2016 and was $4.3 million during the nine months ended March 31, 2015.
Under the provisions of the Kennametal Inc. Stock and Incentive Plan of 2010 as amended and restated on October 22, 2013, plan participants may deliver stock, owned by the holder for at least six months, in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. The fair market value of shares delivered during both the nine months ended March 31, 2016 and 2015 was immaterial.

Restricted Stock Units – Time Vesting and Performance Vesting
Performance vesting restricted stock units are earned pro rata each year if certain performance goals are met over a three-year period and are also subject to a service condition that requires the individual to be employed by the Company at the payment date after the three-year performance period, with the exception of retirement eligible grantees, who upon retirement are entitled to receive payment for any units that have been earned, including a prorated portion in the partially completed fiscal year in which the retirement occurs. Time vesting stock units are valued at the market value of the stock on the grant date. Performance vesting stock units with a market condition are valued using a Monte Carlo model.

14

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


Changes in our time vesting and performance vesting restricted stock units for the nine months ended March 31, 2016 were as follows:
 
Performance Vesting Stock Units

 
Performance Vesting Weighted Average Fair Value

 
Time Vesting
Stock Units

 
Time Vesting Weighted Average Fair Value

Unvested performance vesting and time vesting restricted stock units, June 30, 2015
101,245

 
$
43.00

 
689,268

 
$
41.53

Granted
117,589

 
31.60

 
755,787

 
27.49

Vested

 

 
(284,778
)
 
40.80

Performance metric not achieved
(42,697
)
 
31.60

 

 

Forfeited
(60,670
)
 
32.70

 
(127,995
)
 
35.79

Unvested performance vesting and time vesting restricted stock units, March 31, 2016
115,467

 
$
36.96

 
1,032,282

 
$
32.13

During the nine months ended March 31, 2016 and 2015, compensation expense related to time vesting and performance vesting restricted stock units was $11.7 million and $11.1 million, respectively. As of March 31, 2016, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $16.7 million and is expected to be recognized over a weighted average period of 2.2 years.

10.
BENEFIT PLANS
We sponsor several defined benefit pension plans. Additionally, we provide varying levels of postretirement health care and life insurance benefits to some U.S. employees.
The table below summarizes the components of net periodic pension (income):
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in thousands)
2016
 
2015
 
2016
 
2015
Service cost
$
1,154

 
$
1,349

 
$
3,473

 
$
4,148

Interest cost
9,375

 
9,575

 
28,299

 
29,256

Expected return on plan assets
(14,560
)
 
(14,797
)
 
(43,924
)
 
(44,744
)
Amortization of transition obligation
19

 
18

 
61

 
58

Amortization of prior service credit
(104
)
 
(72
)
 
(313
)
 
(213
)
Recognition of actuarial losses
1,805

 
871

 
5,452

 
2,809

Curtailment loss

 

 

 
358

Special termination benefit charge

 

 
214

 
459

Net periodic pension (income)
$
(2,311
)
 
$
(3,056
)
 
$
(6,738
)
 
$
(7,869
)

The special termination benefit charge of $0.2 million during the nine months ended March 31, 2016 is the result of lump sum payments to several terminated Executive Retirement Plan participants.
During the three months ended March 31, 2015 we recognized a special termination benefit charge of $0.5 million and a curtailment loss of $0.4 million for one of our U.S.-based defined benefit pension plans resulting from a plant closure. The special termination benefit charge was recognized in restructuring expense.


15

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


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)
2016
 
2015
 
2016
 
2015
Service cost
$

 
$
27

 
$

 
$
81

Interest cost
210

 
259

 
630

 
778

Amortization of prior service credit
(6
)
 
(28
)
 
(16
)
 
(83
)
Recognition of actuarial loss
81

 
207

 
242

 
621

Curtailment gain

 

 

 
(221
)
Net periodic other postretirement benefit cost
$
285

 
$
465

 
$
856

 
$
1,176


The curtailment gain of $0.2 million recognized during the nine months ended March 31, 2015 was a result of the plant closure discussed above.

11.
INVENTORIES
We used the last-in, first-out (LIFO) method of valuing inventories for 45 percent and 47 percent of total inventories at March 31, 2016 and June 30, 2015, respectively. Since inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs. Therefore, the interim financial results are subject to any final year-end LIFO inventory adjustments.
 
Inventories consisted of the following: 
(in thousands)
March 31, 2016
 
June 30, 2015
Finished goods
$
300,941

 
$
324,840

Work in process and powder blends
180,854

 
249,629

Raw materials
67,511

 
100,881

Inventories at current cost
549,306

 
675,350

Less: LIFO valuation
(63,916
)
 
(99,819
)
Total inventories
$
485,390

 
$
575,531


12.
LONG-TERM DEBT
Our $600 million five-year, multi-currency, revolving credit facility, as amended and restated in April 2013 (Credit Agreement) requires us to comply with various affirmative and negative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the agreement). We were in compliance with all covenants as of March 31, 2016. We had no borrowings and $42.8 million of borrowings outstanding under the Credit Agreement as of March 31, 2016 and June 30, 2015, respectively. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries.

On April 15, 2016, we entered into an amendment to our Credit Agreement that extends the tenor for a new five-year term to April 2021. The prior maturity was scheduled for April 2018. The maximum leverage ratio was increased for a defined, limited period under the new amendment in order to enhance liquidity and increase operating flexibility. Further, the earnings before interest, taxes, depreciation and amortization (EBITDA) definition was amended to allow for up to $120 million of aggregate cash restructuring payment add-backs through December 31, 2017. Other material provisions, including the minimum consolidated interest coverage ratio, remain unchanged.

Fixed rate debt had a fair market value of $665.0 million and $698.0 million at March 31, 2016 and June 30, 2015, respectively. The Level 2 fair value is determined based on the quoted market price of this debt as of March 31, 2016 and June 30, 2015, respectively.


16

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


13.
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.
Superfund Sites We are involved as a potentially responsible party (PRP) at various sites designated by the United States Environmental Protection Agency (USEPA) as Superfund sites. For certain of these sites, we have evaluated the claims and potential liabilities and have determined that neither are material, individually or in the aggregate. For certain other sites, proceedings are in the very early stages and have not yet progressed to a point where it is possible to estimate the ultimate cost of remediation, the timing and extent of remedial action that may be required by governmental authorities or the amount of our liability alone or in relation to that of any other PRPs.
Other Environmental Matters We establish and maintain reserves for other potential environmental issues. At March 31, 2016 and June 30, 2015, the balances of these reserves were $12.5 million and $12.6 million. These reserves represent anticipated costs associated with the remediation of these issues.
The reserves we have established for 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 USEPA, other governmental agencies and by the PRP groups in which we are participating. Although the reserves currently appear to be sufficient to cover these 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.
We maintain a Corporate Environmental Health and Safety (EHS) Department to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS coordinators who are responsible for each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EHS Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly basis, we review financial provisions and reserves for environmental contingencies and adjust these reserves when appropriate.

14.
INCOME TAXES
The effective income tax rates for the three months ended March 31, 2016 and 2015 were 24.7 percent (provision on income) and 64.4 percent (benefit on a loss), respectively. The effective income tax rates for the nine months ended March 31, 2016 and 2015 were 28.0 percent (benefit on a loss) and 5.7 percent (benefit on a loss), respectively. The change in both periods was primarily driven by the asset impairment charges recorded in the current and prior fiscal years, the tax impact on the sale of certain non-core businesses, lower relative U.S. current year earnings compared with the rest of the world in the current periods where the tax rates are generally lower and a favorable impact in the current quarter related to a U.S. provision to return adjustment. The effective income tax rate for the nine months ended March 31, 2016 also includes the favorable effects of the permanent extension of the credit for increasing research activities contained in the Protecting Americans from Tax Hikes Act of 2015 which occurred in the second quarter of this fiscal year.

15.
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 and restricted stock units. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options and restricted stock units.


17

Table of Contents

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


For purposes of determining the number of diluted shares outstanding, weighted average shares outstanding for basic earnings per share calculations were increased due solely to the dilutive effect of unexercised capital stock options, unvested restricted stock awards and unvested restricted stock units by 0.4 million shares for the three months ended March 31, 2016. Unexercised capital stock options, restricted stock units and restricted stock awards for the three months ended March 31, 2016 of 3.1 million shares were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price, and therefore the inclusion would have been anti-dilutive. For the nine months ended March 31, 2016 and for the three and nine months ended March 31, 2015, the effect of unexercised capital stock options and unvested restricted stock units was anti-dilutive as a result of a net loss in the periods and therefore has been excluded from diluted shares outstanding as well as from the diluted earnings per share calculation.

16.
EQUITY
A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests as of March 31, 2016 and 2015 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, 2015
$
99,219

 
$
419,829

 
$
1,070,282

 
$
(243,523
)
 
$
29,628

 
$
1,375,435

Net (loss) income

 

 
(159,454
)
 

 
1,634

 
(157,820
)
Other comprehensive loss

 

 

 
(5,656
)
 
(540
)
 
(6,196
)
Dividend reinvestment
12

 
219

 

 

 

 
231

Capital stock issued under employee benefit and stock plans
380

 
10,863

 

 

 

 
11,243

Purchase of capital stock
(12
)
 
(219
)
 

 

 

 
(231
)
Cash dividends paid

 

 
(47,780
)
 

 
(71
)
 
(47,851
)
Balance as of March 31, 2016
$
99,599

 
$
430,692

 
$
863,048

 
$
(249,179
)
 
$
30,651

 
$
1,174,811

 
 
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, 2014
$
98,340

 
$
395,890

 
$
1,501,157

 
$
(66,131
)
 
$
32,352

 
$
1,961,608

Net (loss) income

 

 
(395,043
)
 

 
1,914

 
(393,129
)
Other comprehensive loss

 

 

 
(140,287
)
 
(3,537
)
 
(143,824
)
Dividend reinvestment
7

 
237

 

 

 

 
244

Capital stock issued under employee benefit and stock plans
740

 
19,210

 

 

 

 
19,950

Purchase of capital stock
(7
)
 
(237
)
 

 

 

 
(244
)
Cash dividends paid

 

 
(42,699
)
 

 
(47
)
 
(42,746
)
Balance as of March 31, 2015
$
99,080

 
$
415,100

 
$
1,063,415

 
$
(206,418
)
 
$
30,682

 
$
1,401,859


The amounts of comprehensive loss attributable to Kennametal Shareholders and noncontrolling interests are disclosed in the condensed consolidated statements of comprehensive income.


18

Table of Contents

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


17.
ACCUMULATED OTHER COMPREHENSIVE LOSS

Total accumulated other comprehensive loss (AOCL) consists of net income (loss) and other changes in equity from transactions and other events from sources other than shareholders. It includes postretirement benefit plan adjustments, currency translation adjustments and unrealized gains and losses from derivative instruments designated as cash flow hedges.

The components of, and changes in, AOCL were as follows (net of tax) for the three months ended March 31, 2016 (in thousands):
Attributable to Kennametal:
Postretirement benefit plans
Currency translation adjustment
Derivatives
Total
Balance, December 31, 2015
$
(133,922
)
$
(121,702
)
$
(8,803
)
$
(264,427
)
Other comprehensive loss before
  reclassifications
(888
)
17,256

(637
)
15,731

Amounts reclassified from AOCL
1,219

(1,940
)
238

(483
)
Net current period other comprehensive
  loss
331

15,316

(399
)
15,248

AOCL, March 31, 2016
$
(133,591
)
$
(106,386
)
$
(9,202
)
$
(249,179
)
 
 
 
 
 
Attributable to noncontrolling interests:
 
 
 
 
Balance, December 31, 2015
$

$
(3,325
)
$

$
(3,325
)
Other comprehensive loss before
  reclassifications

527


527

Net current period other comprehensive
  loss

527


527

AOCL, March 31, 2016
$

$
(2,798
)
$

$
(2,798
)

The components of, and changes in, AOCL were as follows (net of tax) for the nine months ended March 31, 2016 (in thousands):
Attributable to Kennametal:
Postretirement benefit plans
Currency translation adjustment
Derivatives
Total
Balance, June 30, 2015
$
(138,793
)
$
(97,309
)
$
(7,421
)
$
(243,523
)
Other comprehensive loss before
  reclassifications
1,561

(24,165
)
165

(22,439
)
Amounts reclassified from AOCL
3,641

15,088

(1,946
)
16,783

Net current period other comprehensive
  loss
5,202

(9,077
)
(1,781
)
(5,656
)
AOCL, March 31, 2016
$
(133,591
)
$
(106,386
)
$
(9,202
)
$
(249,179
)
 
 
 
 
 
Attributable to noncontrolling interests:
 
 
 
 
Balance, June 30, 2015
$

$
(2,258
)
$

$
(2,258
)
Other comprehensive loss before
  reclassifications

(540
)

(540
)
Net current period other comprehensive
  loss

(540
)

(540
)
AOCL, March 31, 2016
$

$
(2,798
)
$

$
(2,798
)


19

Table of Contents

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


The components of, and changes in, AOCL were as follows (net of tax) for the three months ended March 31, 2015 (in thousands):
Attributable to Kennametal:
Postretirement benefit plans
Currency translation adjustment
Derivatives
Total
Balance, December 31, 2014
$
(86,688
)
$
(40,637
)
$
(8,158
)
$
(135,483
)
Other comprehensive (loss) income before reclassifications
4,293

(78,233
)
3,025

(70,915
)
Amounts reclassified from AOCL
685


(705
)
(20
)
Net current period other comprehensive
  (loss) income
4,978

(78,233
)
2,320

(70,935
)
AOCL, March 31, 2015
$
(81,710
)
$
(118,870
)
$
(5,838
)
$
(206,418
)
 
 
 
 
 
Attributable to noncontrolling interests:
 
 
 
 
Balance, December 31, 2014
$

$
(1,187
)
$

$
(1,187
)
Other comprehensive income before
  reclassifications

(1,263
)

(1,263
)
Net current period other comprehensive
  income

(1,263
)

(1,263
)
AOCL, March 31, 2015
$

$
(2,450
)
$

$
(2,450
)

The components of, and changes in, AOCL were as follows (net of tax) for the nine months ended March 31, 2015 (in thousands):
Attributable to Kennametal:
Postretirement benefit plans
Currency translation adjustment
Derivatives
Total
Balance, June 30, 2014
$
(93,742
)
$
38,811

$
(11,200
)
$
(66,131
)
Other comprehensive loss before
  reclassifications
9,858

(157,681
)
5,738

(142,085
)
Amounts reclassified from AOCL
2,174


(376
)
1,798

Net current period other comprehensive
  loss
12,032

(157,681
)
5,362

(140,287
)
AOCL, March 31, 2015
$
(81,710
)
$
(118,870
)
$
(5,838
)
$
(206,418
)
 
 
 
 
 
Attributable to noncontrolling interests:
 
 
 
 
Balance, June 30, 2014
$

$
1,087

$

$
1,087

Other comprehensive loss before
  reclassifications

(3,537
)

(3,537
)
Net current period other comprehensive
  loss

(3,537
)

(3,537
)
AOCL, March 31, 2015
$

$
(2,450
)
$

$
(2,450
)


20

Table of Contents

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


Reclassifications out of AOCL for the three and nine months ended March 31, 2016 and 2015 consisted of the following (in thousands):
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
Details about AOCL components
2016
 
2015
 
2016
 
2015
Affected line item in the Income Statement
Gains and losses on cash flow hedges:
 
 
 
 
 
 
 
 
Forward starting interest rate swaps
$
525

 
$
505

 
$
1,574

 
$
1,515

Interest expense
Currency exchange contracts
(141
)
 
(1,653
)
 
(4,713
)
 
(2,127
)
Other (income) expense, net
Total before tax
384

 
(1,148
)
 
(3,139
)
 
(612
)
 
Tax (benefit) expense
(146
)
 
443

 
1,193

 
236

Provision (benefit) for income taxes
Net of tax
$
238

 
$
(705
)
 
$
(1,946
)
 
$
(376
)
 
 
 
 
 
 
 
 
 
 
Postretirement benefit plans:
 
 
 
 
 
 
 
 
Amortization of transition obligations
$
19

 
$
18

 
$
61

 
$
58

See note 10 for further details
Amortization of prior service credit
(110
)
 
(100
)
 
(329
)
 
(296
)
See note 10 for further details
Recognition of actuarial losses
1,886

 
1,078

 
5,694

 
3,430

See note 10 for further details
Total before taxes
1,795

 
996

 
5,426

 
3,192

 
Tax (benefit)
(576
)
 
(311
)
 
(1,785
)
 
(1,018
)
Provision (benefit) for income taxes
Net of tax
$
1,219

 
$
685

 
$
3,641

 
$
2,174

 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
Released due to divestiture
$
(1,940
)
 
$

 
$
15,088

 
$

Loss on divestiture
Total before taxes
(1,940
)
 

 
15,088

 

 
Tax benefit

 

 

 

Provision (benefit) for income taxes
Net of tax
$
(1,940
)
 
$

 
$
15,088

 
$

 

The amount of income tax allocated to each component of other comprehensive income (loss) for the three months ended March 31, 2016 and 2015:
 
 
2016
 
 
 
 
2015
 
(in thousands)
Pre-tax
Tax impact
Net of tax
 
 
Pre-tax
Tax impact
Net of tax
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges
$
(1,027
)
$
390

$
(637
)
 
 
$
4,927

$
(1,902
)
$
3,025

Reclassification of unrealized loss (gain) on expired derivatives designated and qualified as cash flow hedges
384

(146
)
238

 
 
(1,148
)
443

(705
)
Unrecognized net pension and other postretirement benefit (loss) gain
(1,332
)
444

(888
)
 
 
5,895

(1,602
)
4,293

Reclassification of net pension and other postretirement benefit loss
1,795

(576
)
1,219

 
 
996

(311
)
685

Foreign currency translation adjustments
19,432

(1,649
)
17,783

 
 
(83,881
)
4,385

(79,496
)
Reclassification of foreign currency translation adjustment loss realized upon sale
(1,940
)

(1,940
)
 
 



Other comprehensive income (loss)
$
17,312

$
(1,537
)
$
15,775

 
 
$
(73,211
)
$
1,013