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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2017
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: (412) 248-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Capital Stock, par value $1.25 per share
 
New York Stock Exchange
Preferred Stock Purchase Rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [  ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 [X]
 
 
  
Accelerated filer [  ]
 
 
Non-accelerated filer [  ]  (Do not check if smaller reporting company)
  
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 by Rule 12b-2 of the Exchange Act). Yes [  ] No [X]
As of December 31, 2016, the aggregate market value of the registrant’s Capital Stock held by non-affiliates of the registrant, estimated solely for the purposes of this Form 10-K, was approximately $1,840,200,000. For purposes of the foregoing calculation only, all directors and executive officers of the registrant and each person who may be deemed to own beneficially more than 5% of the registrant’s Capital Stock have been deemed affiliates.
As of July 31, 2017, there were 80,672,938 of the Registrant’s Capital Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2017 Annual Meeting of Shareholders are incorporated by reference into Part III.
 


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FORWARD-LOOKING INFORMATION
Statements and financial discussion and analysis contained herein and in the documents incorporated by reference herein that are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For example, statements about Kennametal's outlook for earnings, sales volumes, cash flow, and capital expenditures for its fiscal year 2018, its expectations regarding future growth and any statements regarding future operating or financial performance or events are forward-looking. We have also included forward looking statements in this Form 10-K 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. Forward-looking statements are based on management's beliefs, assumptions and estimates using information available to us at the time. These statements are not guarantees of future events or performance and are subject to various risks and uncertainties that are difficult to predict. 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 economic downturns; our ability to achieve all anticipated benefits of our restructuring 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 this 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. 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.

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PART I

ITEM 1 - BUSINESS
OVERVIEW Kennametal Inc. was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling. From this beginning, the Company has grown into a global leader in the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and mission-critical wear applications to combat extreme conditions associated with wear fatigue, corrosion and high temperatures. The Company's reputation for material technology, metal cutting application knowledge, as well as expertise and innovation in the development of custom solutions and services, contributes to its leading position in its primary markets.
Our product offering includes a wide selection of standard and customized technologies for metalworking applications, such as turning, milling, hole making, tooling systems and services. End users of the Company's metalworking products include manufacturers engaged in a diverse array of industries including: the manufacturers of transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation.
In addition, we produce specialized wear components and metallurgical powders that are used for custom-engineered and challenging applications. End users of the Company's products include producers and suppliers in equipment-intensive operations such as coal mining, road construction, quarrying, oil and gas exploration, refining, production and supply.
Unless otherwise specified, any reference to a “year” refers to our fiscal year ending on June 30.
BUSINESS SEGMENT REVIEW The Company's reportable operating segments have been determined in accordance with the Company's internal management structure, which is organized based on operating activities, the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results. Sales and operating income by segment are presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 of this annual report on Form 10-K (MD&A). Additional segment data is provided in Note 20 of our consolidated financial statements set forth in Item 8 of this annual report on Form 10-K (Item 8) which is incorporated herein by reference.
In order to take advantage of the growth opportunities of our WIDIA brand, we implemented a new operating structure at the beginning of fiscal 2017. A key attribute of the new structure is the establishment of the Widia operating segment, which we separated out from our 2016 Industrial segment. In order to better leverage the opportunities in our Widia business, and be more agile and competitive in the marketplace, we are placing higher levels of focus, determination and leadership in this business. Beginning in fiscal 2017, we had three global reportable operating segments: Industrial, Widia and Infrastructure.
INDUSTRIAL In the Industrial segment, we focus on customers in the transportation, general engineering, aerospace and defense market sectors, as well as the machine tool industry, delivering high performance metalworking tools for specified purposes. Our customers in these end markets use our products and services in the manufacture of engines, airframes, automobiles, trucks, ships and other various types of industrial equipment. The technology and customization requirements we provide vary by customer, application and industry. Industrial goes to market under the Kennametal® brand through its direct sales force, a network of independent and national chain distributors, integrated supplier channels and via the Internet. Application engineers and technicians are critical to the sales process and directly assist our customers with specified product design, selection, application and support.
WIDIA In the Widia segment, we offer a focused assortment of standard and custom metal cutting solutions to general engineering, aerospace, energy and transportation customers. We serve our customers primarily through a network of value added resellers, integrated supplier channels and via the Internet. Widia markets its products under the WIDIA®, WIDIA Hanita® and WIDIA GTD® brands.
INFRASTRUCTURE In the Infrastructure segment, we focus on customers in the energy and earthworks market sectors that support primary industries such as oil and gas, power generation and chemicals; underground, surface and hard-rock mining; highway construction and road maintenance; and process industries such as food and feed. Our success is determined by our ability to gain an in-depth understanding of our customers’ engineering and development needs, to provide complete system solutions and high-performance capabilities to optimize and add value to their operations. Infrastructure markets its products primarily under the Kennametal® brand and sells through a direct sales force as well as distributors.

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INTERNATIONAL OPERATIONS During 2017, we generated 56 percent of our sales in markets outside of the United States of America (U.S.), with principal international operations in Western Europe, Asia and Canada. In addition, we operate additional manufacturing and distribution facilities in Israel, Latin America and South Africa, while serving customers through sales offices, agents and distributors in Eastern Europe and other parts of the world. While geographic diversification helps to minimize the sales and earnings impact of demand changes in any one particular region, our international operations are subject to normal risks of doing business globally, including fluctuations in currency exchange rates and changes in social, political and economic environments.
Our international assets and sales are presented in Note 20 of the Company’s consolidated financial statements, set forth in Item 8 and are incorporated herein by reference. Further information about the effects and risks of currency exchange rates is presented in the Quantitative and Qualitative Disclosures About Market Risk section, as set forth in Item 7A of this annual report on Form 10-K (Item 7A).
STRATEGY AND GENERAL DEVELOPMENT OF BUSINESS Fiscal 2017 was a year of substantial change on many levels. Early in 2017 we outlined initiatives to transform the Company through improving sales execution, simplification and lowering costs through a reduction in workforce in addition to modernization of our manufacturing plants. While each of these will continue during the coming years, we have made significant achievements in each of these areas.
Commercial execution
Transitioned approximately 4,100 customers to date from the direct to indirect channel to both improve customer service and refocus our direct sales force on larger accounts
Implementing customer classification and customer relationship management (CRM) software to improve sales efficiency
Reorganized the Infrastructure business around strategic business units
Simplifying the organization
Reduced the number of stock keeping units by 8 percent and powder formulations and coatings by 48 percent and 30 percent, respectively, to reduce manufacturing and supply chain complexity
Implemented minimum order quantities and economic order quantities to improve manufacturing efficiency
Lowering costs to improve margins
Reduced run-rate employment costs by approximately $80 million by reducing employment levels across all levels of our organization
Launched modernization and End-to-End process improvement programs for our manufacturing facilities, which we anticipate will generate $200 million to $300 million of additional annual savings in the next two to three years
Markets were more positive than in the prior year and exceeded our original expectations set when we embarked on fiscal 2017. Total year organic growth was 4 percent with year-over-year growth in all segments reflecting not only improving end market conditions but improving commercial execution.
Beyond these factors having a beneficial impact on our performance for the year, market forces also added some complexity to our decision-making regarding balancing between constraining our operating expenses, while also ensuring that we serve our customers appropriately in the light of increasing demand.
Our cost reduction achievements were significant, and we are well-positioned to improve further as we move steadily forward with our multi-year plans. In 2017, all restructuring programs delivered incremental benefits of approximately $72 million. Estimated ongoing annualized savings for these programs at completion by December 31, 2018 are expected to be between $165 and $180 million.
The cost savings we achieved in fiscal 2017 include only a small amount of the anticipated benefits from the modernization and End-to-End initiatives that we have planned, and the benefits from our ongoing product and process simplification initiatives. The results of those programs are anticipated to accrue to the Company over the next two to three years. At the same time, we continue to focus on cash flow and liquidity to support our planned investments. Further discussion and analysis of the development of our business is set forth in MD&A.
ACQUISITIONS AND DIVESTITURES We continue to evaluate new opportunities for the expansion of existing product lines into new market areas where appropriate. We also continue to evaluate opportunities for the introduction of new and/or complementary product offerings into new and/or existing market areas where appropriate. Rather than evaluating potential acquisitions in the near term, we expect to continue to grow our business and further enhance our market position through the investment opportunities that exist within our core businesses.

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RAW MATERIALS AND SUPPLIES Our major metallurgical raw materials consist of tungsten ore concentrates and oxides, compounds and secondary materials such as cobalt, tantalum, titanium and niobium. Although an adequate supply of these raw materials currently exists, our major sources for raw materials are located abroad and prices fluctuate at times. We have entered into extended raw material supply agreements and will implement product price increases as deemed necessary to mitigate rising costs. For these reasons, we exercise great care in selecting, purchasing and managing availability of raw materials. We also purchase steel bars and forgings for making toolholders and other tool parts, as well as for producing rotary cutting tools and accessories. We obtain products purchased for use in manufacturing processes and for resale from thousands of suppliers located in the U.S. and abroad. Our internal capabilities help mitigate our reliance on third parties for raw materials as they provide access to additional sources of raw materials and offer tungsten carbide recycling capabilities.
RESEARCH AND DEVELOPMENT Our product development efforts focus on providing solutions to our customers’ manufacturing challenges and productivity requirements. Our product development program provides discipline and focus for the product development process by establishing “gateways,” or sequential tests, during the development process to remove inefficiencies and accelerate improvements. This program speeds and streamlines development into a series of actions and decision points, combining efforts and resources to produce new and enhanced products faster. This program is designed to assure a strong link between customer requirements and corporate strategy, and to enable us to gain full benefit from our investment in new product development.
We hold a number of patents and trademarks which, in the aggregate, are material to the operation of our businesses.
Research and development expenses included in operating expense totaled $38.0 million, $39.4 million and $45.1 million in 2017, 2016 and 2015, respectively.
SEASONALITY Our business is affected by seasonal variations to varying degrees by traditional summer vacation shutdowns of customers’ plants and holiday shutdowns that affect our sales levels during the first and second quarters of our fiscal year.
BACKLOG Our backlog of orders generally is not significant to our operations.
COMPETITION As one of the world’s leading producers of metalworking tools and specialty wear-resistant components and coating solutions, we maintain a leading competitive position in major markets worldwide. We continually strengthen our competitive position by developing new and innovative metalworking and earth cutting products and services, innovative surface and wear solutions and innovative products for mining, construction and road milling applications among many others. We actively compete in the sale of all our products with several large global competitors and with many smaller niche businesses offering various capabilities to customers around the world. While several of our competitors are divisions of larger corporations, our industry remains largely fragmented, containing several hundred fabricators, toolmakers and niche specialty coating businesses. Many of our competitors operate relatively small facilities, producing a limited selection of tools while buying cemented tungsten carbide components from original producers of cemented tungsten carbide products, including Kennametal. We also supply coating solutions and other engineered wear-resistant products to both larger corporations and smaller niche businesses. Given the fragmentation, opportunities for consolidation exist from both U.S.-based and internationally-based firms, as well as among thousands of industrial supply distributors.
The principal competitive differentiators in our businesses include customer focused support and application expertise, custom and standard product innovation, product performance, quality and availability, as well as service, pricing and productivity delivered ascribed to our brands. We derive competitive advantage from our premium brand positions, global presence, application expertise and ability to address unique customer needs with new and improved tools, innovative surface and wear solutions, highly engineered components, consistent quality, traditional and digital customer service and technical assistance capabilities, state-of-the-art manufacturing and multiple sales channels. With these strengths, we are able to sell products based on the value-added productivity we deliver to our customers, rather than competing solely on price.
REGULATION From time to time, we are a party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible, or intellectual property. While we currently believe that the amount of ultimate liability, if any, with respect to these actions will not materially affect our financial position, results of operations or liquidity, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur or if protracted litigation were to ensue, the impact could be material to us.
Compliance with government laws and regulations pertaining to the discharge of materials or pollutants into the environment or otherwise relating to the protection of the environment did not have a material effect on our capital expenditures or competitive position for the years covered by this report, nor is such compliance expected to have a material effect in the future.

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Among other environmental laws, we are subject to the Comprehensive Environmental Response Compensation and Liability Act of 1980 (Superfund), under which we have been designated by the United States Environmental Protection Agency (USEPA) as a potentially responsible party (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.
Reserves for other potential environmental issues at June 30, 2017 and 2016 were $12.4 million and $12.5 million, respectively. The reserves that 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 take 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 U.S. 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 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.
EMPLOYEES We employed approximately 10,700 people at June 30, 2017, of which approximately 3,500 were located in the U.S. and 7,200 in other parts of the world, principally Europe, Asia Pacific and India. At June 30, 2017, approximately 2,700 of the above employees were represented by labor unions. We consider our labor relations to be generally good.
AVAILABLE INFORMATION Our Internet address is www.kennametal.com. On the SEC Filings page of our Web Site, which is accessible under the "About Us" tab, under Investor Relations, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): our annual report on Form 10-K, our annual proxy statement, our annual conflict minerals disclosure and report on Form SD, our annual reports on Form 11-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act). Our SEC Filings page of our Web Site also includes Forms 3, 4 and 5 filed pursuant to Section 16(a) of the Exchange Act. All filings posted on our SEC Filings page of our Web Site are available to be viewed on the Web page free of charge. On the Corporate Governance page of our Web Site, which is under the "About Us" tab, under Investor Relations, we post the following charters and guidelines: Audit Committee Charter, Compensation Committee Charter, Nominating/Corporate Governance Committee Charter, Kennametal Inc. Corporate Governance Guidelines and Kennametal Inc. Stock Ownership Guidelines. On the Ethics and Compliance page of our Web Site, which is under the "About Us" tab, under Company Profile, we post our Code of Conduct and our Conflict Minerals Statement. All charters and guidelines posted on our Web pages are available to be viewed on our Web page free of charge. Information contained on our Web site is not part of this annual report on Form 10-K or our other filings with the SEC. Copies of this annual report on Form 10-K and those items disclosed on the Corporate Governance and Ethics and Compliance pages of our Web Site are available without charge upon written request to: Investor Relations, Kennametal Inc., 600 Grant Street, Suite 5100, Pittsburgh, Pennsylvania 15219-2706.


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ITEM 1A – RISK FACTORS
This section describes material risks to our business that are currently known to us. Our business, financial condition or results of operations may be materially affected by a number of factors. Our management regularly monitors the risks inherent in our business, with input and assistance from our Enterprise Risk Management department. In addition to real time monitoring, we periodically conduct a formal enterprise-wide risk assessment to identify factors and circumstances that might present significant risk to the Company. Many of these factors are discussed throughout this report. The risks below, however, are not exhaustive. We operate in a rapidly changing environment. Other risks that we currently believe to be immaterial could become material in the future. We also are subject to legal and regulatory change. New factors can emerge, and it is not possible to predict the outcome of all other factors on our business, financial condition or results of operations. The following discussion details the material factors and uncertainties that we believe could cause Kennametal’s actual results to differ materially from those projected in any forward-looking statements:
Downturns in the business cycle could adversely affect our sales and profitability. Our business has historically been cyclical and subject to significant impact from economic downturns. Global economic downturn coupled with global financial and credit market disruptions have had a negative impact on our sales and profitability historically. These events could contribute to weak end markets, a sharp drop in demand and higher costs of borrowing and/or diminished credit availability. Although we believe that the long-term prospects for our business remain positive, we are unable to predict the future course of industry variables or the strength, pace or sustainability of economic recovery and the effects of government intervention.
Our restructuring efforts may not have the intended effects. We are in the process of implementing multi-year restructuring and other actions to improve our manufacturing costs and operating expenses. However, there is no assurance that these actions, or any others that we have taken or may take, will be sufficient to counter any future economic or industry disruptions. We cannot provide assurance that we will not incur additional restructuring charges or impairment charges, or that we will achieve all of the anticipated benefits from restructuring actions we have taken or plan to take in the future. If we are unable to effectively restructure our operations in the light of evolving market conditions, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our factory modernization and End-to-End initiatives began in fiscal 2017. The purpose of these programs are to invest in our plants, equipments and processes to automate and lower our overall labor cost, and to configure equipment in our plants so that we gain efficiency through an end-to-end process. These capital investments are expected to result in substantial savings from reduced labor, maintenance and supply costs while at the same time improving the quality of our products. We cannot provide assurance that we will achieve all of the anticipated savings from these planned actions. These initiatives are expected to put pressure on cash flows in the near-term. Further, as the business has shown more rapid improvements than initially expected, it is possible that we may not be able to modernize fast enough to keep up with demand in select locations, causing us to keep direct hourly employment in certain circumstances somewhat higher than previously anticipated. If we are unable to effectively execute our plans, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our international operations pose certain risks that may adversely impact sales and earnings. We have manufacturing operations and assets located outside of the U.S., including but not limited to those in Western Europe, Brazil, Canada, China, India, Israel and South Africa. We also sell our products to customers and distributors located outside of the U.S. During the year ended June 30, 2017, 56 percent of our consolidated sales were derived from non-U.S. markets. These international operations are subject to a number of special risks, in addition to the risks of our domestic business, including currency exchange rate fluctuations, differing protections of intellectual property, trade barriers, exchange controls, regional economic uncertainty, differing (and possibly more stringent) labor regulations, labor unrest, risk of governmental expropriation, domestic and foreign customs and tariffs, current and changing regulatory environments (including, but not limited to, the risks associated with the importation and exportation of products and raw materials), risk of failure of our foreign employees to comply with both U.S. and foreign laws, including antitrust laws, trade regulations and the Foreign Corrupt Practices Act, difficulty in obtaining distribution support, difficulty in staffing and managing widespread operations, differences in the availability and terms of financing, political instability and unrest and risks of increases in taxes. Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met. To the extent we are unable to effectively manage our international operations and these risks, our international sales may be adversely affected, we may be subject to additional and unanticipated costs, and we may be subject to litigation or regulatory action. As a consequence, our business, financial condition and results of operations could be seriously harmed.

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Changes in the regulatory environment, including environmental, health and safety regulations, could subject us to increased compliance and manufacturing costs, which could have a material adverse effect on our business.
Health and Safety Regulations. Certain of our products contain hard metals, including tungsten and cobalt. Hard metal dust is being studied for potential adverse health effects by organizations in several regions throughout the world, including the U.S., Europe and Japan. Future studies on the health effects of hard metals may result in our products being classified as hazardous to human health, which could lead to new regulations in countries in which we operate that may restrict or prohibit the use of, and/or exposure to, hard metal dust. New regulation of hard metals could require us to change our operations, and these changes could affect the quality of our products and materially increase our costs.
Environmental Regulations. We are subject to various environmental laws, and any violation of, or our liabilities under, these laws could adversely affect us. Our operations necessitate the use and handling of hazardous materials and, as a result, we are subject to various federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. These laws impose penalties, fines and other sanctions for noncompliance and liability for response costs, property damages and personal injury resulting from past and current spills, disposals or other releases of, or exposure to, hazardous materials. We could incur substantial costs as a result of noncompliance with or liability for cleanup or other costs or damages under these laws. We may be subject to more stringent environmental laws in the future. If more stringent environmental laws are enacted in the future, these laws could have a material adverse effect on our business, financial condition and results of operations.
Regulations affecting the mining and drilling industries or utilities industry. Some of our principal customers are mining and drilling and utility companies. Many of these customers supply coal, oil, gas or other fuels as a source for the production of utilities in the U.S. and other industrialized regions. The operations of these mining and drilling companies are geographically diverse and are subject to or affected by a wide array of regulations in the jurisdictions where they operate, such as applicable environmental laws and regulations governing the operations of utilities. As a result of changes in regulations and laws relating to such industries, our customers’ operations could be disrupted or curtailed by governmental authorities. The high cost of compliance with mining, drilling and environmental regulations may also induce customers to discontinue or limit their operations, and may discourage companies from developing new opportunities. As a result of these factors, demand for our mining- and drilling-related products could be substantially affected by regulations adversely impacting the mining and drilling industries or altering the consumption patterns of utilities.
Impairment of goodwill and other intangible assets with indefinite lives could result in a negative impact on our financial condition and results of operations. At June 30, 2017, goodwill and other indefinite-lived intangible assets totaled $318.7 million, or 13% of our total assets. Goodwill results from acquisitions, representing the excess of cost over the fair value of the net tangible and other identifiable intangible assets we have acquired. At a minimum, we assess annually whether there has been impairment in the value of our intangible assets. If future operating performance at one or more of our reporting units were to fall significantly below current levels, we could record, under current applicable accounting rules, a non-cash impairment charge for goodwill or other intangible asset impairment. Any determination requiring the impairment of a significant portion of goodwill or other intangible assets would negatively affect our financial condition and results of operations.
Our continued success depends on our ability to protect and defend our intellectual property. Our future success depends in part upon our ability to protect and defend our intellectual property. We rely principally on nondisclosure agreements and other contractual arrangements and trade secret laws and, to a lesser extent, trademark and patent laws, to protect our intellectual property. However, these measures may be inadequate to protect our intellectual property from infringement by others or prevent misappropriation of our proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do U.S. laws. If one of our patents is infringed upon by a third party, we may need to devote significant time and financial resources to attempt to halt the infringement. We may not be successful in defending the patents involved in such a dispute. Similarly, while we do not knowingly infringe on patents, copyrights or other intellectual property rights owned by other parties, we may be required to spend a significant amount of time and financial resources to resolve any infringement claims against us. We may not be successful in defending our position or negotiating an alternative remedy. Our inability to protect our proprietary information and enforce or defend our intellectual property rights in proceedings initiated by or against us could have a material adverse effect on our business, financial condition and results of operations.
Failure of, or a breach in security of, our information technology systems could adversely affect our business. We rely on information technology infrastructure to achieve our business objectives. Any disruption of this infrastructure could negatively impact our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.

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A security breach of our information technology could also interrupt or damage our operations or harm our reputation. In addition, we could be subject to liability if confidential information relating to customers, suppliers, employees or other parties is misappropriated from our computer system. Despite the implementation of security measures, these systems may be vulnerable to physical break-ins, computer viruses, programming errors or similar disruptive problems.
We operate in a highly competitive environment. Our domestic and foreign operations are subject to significant competitive pressures. We compete directly and indirectly with other manufacturers and suppliers of metalworking tools, engineered components and advanced materials. Some of our competitors are larger than we are and may have greater access to financial resources or be less leveraged than us. In addition, the industry in which our products are used is a large, fragmented industry that is highly competitive.
If we are unable to retain our qualified management and employees, our business may be negatively affected. Our ability to provide high quality products and services depends in part on our ability to retain our skilled personnel in the areas of management, product engineering, servicing and sales. Competition for such personnel is intense, and our competitors can be expected to attempt to hire our management and skilled employees from time to time. In addition, our restructuring activities and strategies for growth have placed, and are expected to continue to place, increased demands on our management’s skills and resources. Additionally, we have not yet completed the headcount reduction initiative associated with our restructuring programs. If we are unable to retain our management team and professional personnel, our customer relationships and level of technical expertise could be negatively affected, which may materially and adversely affect our business.
Any interruption of our workforce, including interruptions due to our restructuring initiatives, unionization efforts, changes in labor relations or shortages of appropriately skilled individuals could impact our business.
Our future operating results may be affected by fluctuations in the prices and availability of raw materials. The raw materials we use for our products include ore concentrates, compounds and secondary materials containing tungsten, tantalum, titanium, niobium and cobalt. A significant portion of our raw materials is supplied by sources outside of the U.S. The raw materials industry as a whole is highly cyclical and at times pricing and supply can be volatile due to a number of factors beyond our control, including natural disasters, general economic and political conditions, labor costs, competition, import duties, tariffs and currency exchange rate fluctuations. This volatility can significantly affect our raw material costs. In an environment of increasing raw material prices, competitive conditions can affect how much of the price increases in raw materials that we can recover in the form of higher sales prices for our products. To the extent we are unable to pass on any raw material price increases to our customers, our profitability could be adversely affected. Furthermore, restrictions in the supply of tungsten, cobalt and other raw materials could adversely affect our operating results. If the prices for our raw materials increase or we are unable to secure adequate supplies of raw materials on favorable terms, our profitability could be impaired. If the prices for our raw materials decrease, we could face product pricing challenges.
Product liability claims could have a material adverse effect on our business. The sale of metalworking, mining, highway construction and other tools and related products as well as engineered components and advanced materials entails an inherent risk of product liability claims. We cannot give assurance that the coverage limits of our insurance policies will be adequate or that our policies will cover any particular loss. Insurance can be expensive, and we may not always be able to purchase insurance on commercially acceptable terms, if at all. Claims brought against us that are not covered by insurance or that result in recoveries in excess of our insurance coverage could have a material adverse affect on our business, financial condition and results of operations.
We may not be able to complete, manage or integrate acquisitions successfully. In the past, we have acquired companies and we may continue to evaluate acquisition opportunities that have the potential to support and strengthen our business. We can give no assurances, however, that any acquisition opportunities will arise or if they do, that they will be consummated, or that additional financing, if needed, will be available on satisfactory terms. In addition, acquisitions involve inherent risks that the businesses acquired will not perform in accordance with our expectations. We may not be able to achieve the synergies and other benefits we expect from the integration of acquisitions as successfully or rapidly as projected, if at all. Our failure to consummate an acquisition or effectively integrate newly acquired operations could prevent us from realizing our expected strategic growth and rate of return on an acquired business and could have a material and adverse effect on our results of operations and financial condition.
Natural disasters or other global or regional catastrophic events could disrupt our operations and adversely affect results. Despite our concerted effort to minimize risk to our production capabilities and corporate information systems and to reduce the effect of unforeseen interruptions to us through business continuity planning, we still may be exposed to interruptions due to catastrophe, natural disaster, pandemic, terrorism or acts of war, which are beyond our control. Disruptions to our facilities or systems, or to those of our key suppliers, could also interrupt operational processes and adversely impact our ability to manufacture our products and provide services and support to our customers. As a result, our business, our results of operations, financial position, cash flows and stock price could be adversely affected.

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ITEM 1B – UNRESOLVED STAFF COMMENTS
None.

ITEM 2 – PROPERTIES
Our principal executive offices are located at 600 Grant Street, Suite 5100, Pittsburgh, Pennsylvania, 15219. Our corporate center and Technology Center are located at 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania, 15650. A summary of our principal manufacturing facilities and other materially important properties is as follows:
Location
 
Owned/Leased
Principal Products
Primary Segment
United States:
 
 
 
Gurley, Alabama
Owned
Metallurgical Powders
Infrastructure
Huntsville, Alabama
Owned
Metallurgical Powders
Infrastructure
Madison, Alabama
Owned
Tungsten Heavy Alloy
Infrastructure
Rogers, Arkansas
Owned/Leased
Carbide Products, Pelletizing Die Plates and Downhole Drilling Carbide Components
Infrastructure
Rockford, Illinois
Owned
Indexable Tooling
Industrial
Goshen, Indiana
Leased
Powders; Welding Rods, Wires and Machines
Infrastructure
New Albany, Indiana
Leased
High Wear Coating for Steel Parts
Infrastructure
Greenfield, Massachusetts
Owned
High-Speed Steel Taps
Widia
Traverse City, Michigan
Owned
Wear Parts
Infrastructure
Fallon, Nevada
Owned
Metallurgical Powders
Infrastructure
Asheboro, North Carolina
Owned
Carbide Round Tools
Industrial
Henderson, North Carolina
Owned
Metallurgical Powders
Infrastructure
Roanoke Rapids, North Carolina
Owned
Metalworking Inserts
Industrial
Cleveland, Ohio
Leased
Distribution
Industrial
Orwell, Ohio
Owned
Metalworking Inserts
Industrial
Solon, Ohio
Owned
Metalworking Toolholders
Industrial
Whitehouse, Ohio
Owned
Metalworking Inserts and Round Tools
Industrial
Bedford, Pennsylvania
Owned/Leased
Mining and Construction Tools, Wear Parts and Distribution
Infrastructure
Irwin, Pennsylvania
Owned
Carbide Wear Parts
Infrastructure
New Castle, Pennsylvania
Owned/Leased
Specialty Metals and Alloys
Infrastructure
Johnson City, Tennessee
Owned
Metalworking Inserts
Industrial
La Vergne, Tennessee
Owned
Metalworking Inserts
Industrial
New Market, Virginia
Owned
Metalworking Toolholders
Industrial
International:
 
 
 
La Paz, Bolivia
Owned
Tungsten Concentrate
Infrastructure
Indaiatuba, Brazil
Leased
Metalworking Carbide Drills and Toolholders
Industrial
Belleville, Canada
Owned
Casting Components, Coatings and Powder Metallurgy Components
Infrastructure
Victoria, Canada
Owned
Wear Parts
Infrastructure
Fengpu, China
Owned
Intermetallic Composite Ceramic Powders and Parts
Infrastructure
Shanghai, China
Owned
Powders, Welding Rods and Wires and Casting Components
Infrastructure
Shanghai, China
Owned
Distribution
Industrial
Tianjin, China
Owned
Metalworking Inserts and Carbide Round Tools
Industrial
Xuzhou, China
Leased
Mining Tools
Infrastructure
Ebermannstadt, Germany
Owned
Metalworking Inserts
Industrial
Essen, Germany
Owned
Metalworking Inserts, Metallurgical Powders and Wear Parts
Industrial
Königsee, Germany
Leased
Metalworking Carbide Drills
Industrial
Lichtenau, Germany
Owned
Metalworking Toolholders
Industrial

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Location
 
Owned/Leased
Principal Products
Primary Segment
Mistelgau, Germany
Owned
Metallurgical Powders, Metalworking Inserts and Wear Parts
Infrastructure
Nabburg, Germany
Owned
Metalworking Toolholders and Metalworking Round Tools, Drills and Mills
Industrial
Neunkirchen, Germany
Owned
Distribution
Industrial
Schongau, Germany
Owned
Ceramic Vaporizer Boats
Infrastructure
Vohenstrauss, Germany
Owned
Metalworking Carbide Drills
Industrial
Bangalore, India
Owned
Metalworking Inserts and Toolholders and Wear Parts
Industrial
Shlomi, Israel
Owned
High-Speed Steel and Carbide Round Tools
Widia
San Giuliano Milanese, Italy
Leased
Indexable Inserts
Industrial
Zory, Poland
Leased
Mining and Construction Conicals
Infrastructure
Boksburg, South Africa
Leased
Mining and Construction Conicals
Infrastructure
Barcelona, Spain
Leased
Metalworking Cutting Tools
Industrial
Kingswinford, United Kingdom
Leased
Distribution
Industrial
Newport, United Kingdom
Owned
Intermetallic Composite Powders
Infrastructure
We also have a network of warehouses and customer service centers located throughout North America, Europe, India, Asia Pacific and Latin America, a significant portion of which are leased. The majority of our research and development efforts are conducted at a corporate technology center located in Latrobe, Pennsylvania, U.S., as well as at our facilities in Rogers, Arkansas, U.S.; Fürth, Germany and Bangalore, India.
We use all of our significant properties in the businesses of powder metallurgy, tools, tooling systems, engineered components and advanced materials. Our production capacity is adequate for our present needs. We believe that our properties have been adequately maintained, are generally in good condition and are suitable for our business as presently conducted.

ITEM 3 - LEGAL PROCEEDINGS

The information set forth in Part I, Item 1, of this annual report on Form 10-K under the caption “Regulation” is incorporated into this Item 3. From time to time, we are party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible or intellectual property. Although certain of these actions are currently pending, we do not believe that any individual proceeding is material or that our pending legal proceedings in the aggregate are material to Kennametal.

ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference into this Part I is the information set forth in Part III, Item 10 under the caption “Executive Officers of the Registrant” of this annual report on Form 10-K.


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PART II
ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Capital Stock is traded on the New York Stock Exchange (symbol KMT). The number of shareholders of record as of July 31, 2017 was 1,595. Stock price ranges and dividends declared and paid were as follows:
Quarter ended
 
September 30

 
December 31

 
March 31

 
June 30

Fiscal 2017
 
 
 
 
 
 
 
 
High
 
$
29.35

 
$
35.66

 
$
39.94

 
$
43.09

Low
 
20.40

 
26.79

 
31.28

 
36.14

Dividends
 
0.20

 
0.20

 
0.20

 
0.20

Fiscal 2016
 
 
 
 
 
 
 
 
High
 
$
34.61

 
$
29.45

 
$
23.61

 
$
26.24

Low
 
23.77

 
17.71

 
15.11

 
20.98

Dividends
 
0.20

 
0.20

 
0.20

 
0.20

The information incorporated by reference in Part III, Item 12 of this annual report on Form 10-K from our 2017 Proxy Statement under the heading “Equity Compensation Plans – Equity Compensation Plan Information” is hereby incorporated by reference into this Item 5.
PERFORMANCE GRAPH
The following graph compares cumulative total shareholder return on our capital stock with the cumulative total shareholder return on the common stock of the companies in the Standard & Poor’s Mid-Cap 400 Market Index (S&P Midcap 400), the Standard & Poor’s 400 Capital Goods (S&P 400 Capital Goods), the Standard & Poor's Global 1200 Industrials Index (S&P Global 1200 Industrials) and the peer groups of companies determined by us (New Peer Group and Old Peer Group) for the period from July 1, 2012 to June 30, 2017.
In fiscal 2017, we established a New Peer Group to better align with how we evaluate our executive compensation, and we believe this group is more representative of Kennametal's peers. We have included both this New Peer Group as well as the Old Peer Group in the comparisons below. The peer groups were created to benchmark our sales and earnings growth, return on invested capital, profitability and asset management.
The New Peer Group consists of the following companies: Actuant Corporation; Allegheny Technologies Incorporated; Ametek, Inc.; Barnes Group Inc.; Carpenter Technology Corporation; Crane Co.; Donaldson Company, Inc.; Flowserve Corporation; Graco Inc.; Harsco Corporation; IDEX Corporation; ITT Inc.; Lincoln Electric Holdings, Inc.; The Manitowoc Company, Inc.; Nordson Corporation; Rexnord Corporation; Sandvik AB, Corp.; SPX Corporation; SPX FLOW, Inc.; The Timken Company; and Woodward, Inc.
The Old Peer Group consists of the following companies: Actuant Corporation; Allegheny Technologies Incorporated; Ametek, Inc.; Carpenter Technology Corporation; Crane Co.; Donaldson Company, Inc.; Flowserve Corporation; Greif; Harsco Corporation; IDEX Corporation; Joy Global Inc.; Lincoln Electric Holdings, Inc.; Parker Hannifin Corporation; Sandvik AB, Corp.; Teleflex Incorporated; The Timken Company; and Woodward, Inc.

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performancegrapha13.jpg
Assumes $100 Invested on July 1, 2012 and All Dividends Reinvested
 
2012
2013
2014
2015
2016
2017
Kennametal
$
100.00

$
119.09

$
144.21

$
108.31

$
72.58

$
125.87

New Peer Group Index
100.00

119.24

156.74

132.62

121.53

169.52

Old Peer Group Index
100.00

116.52

149.79

129.46

119.70

166.71

S&P Midcap 400
100.00

125.18

156.78

166.81

169.03

200.41

S&P 400 Capital Goods
100.00

134.53

178.41

172.21

173.65

224.62

S&P Global 1200 Industrials
100.00

121.24

153.58

151.56

153.55

191.02


ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number
of Shares Purchased(1) 

 
Average Price
Paid per Share

 
Total Number of 
Shares Purchased as Part of Publicly Announced Plans or Programs

 
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs (2) 

April 1 through April 30, 2017
316

 
$
41.58

 

 
10,100,100

May 1 through May 31, 2017
6,443

 
40.56

 

 
10,100,100

June 1 through June 30, 2017
1,257

 
41.03

 

 
10,100,100

Total
8,016

 
$
40.68

 

 
 

(1) 
During the fourth quarter of 2017, 1,462 shares were purchased on the open market on behalf of Kennametal to fund the Company’s dividend reinvestment program. Also, during the current period employees delivered 6,554 shares of restricted stock to Kennametal, upon vesting, to satisfy tax withholding requirements.
(2) 
On July 25, 2013, the Company publicly announced an open-ended, amended repurchase program for up to 17 million shares of its outstanding capital stock outside of the Company's dividend reinvestment program.

UNREGISTERED SALES OF EQUITY SECURITIES
None.


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ITEM 6 - SELECTED FINANCIAL DATA
 
 
2017
2016
2015
2014
2013
OPERATING RESULTS (in thousands)
 
 
 
Sales
 
$
2,058,368

$
2,098,436

$
2,647,195

$
2,837,190

$
2,589,373

Cost of goods sold
 
1,400,661

1,482,369

1,841,202

1,940,187

1,744,369

Operating expense
 
463,167

494,975

554,895

589,768

527,850

Restructuring and asset impairment charges
(1
)
65,018

143,810

582,235

17,608


Loss on divestiture
(2
)

131,463




Interest expense
 
28,842

27,752

31,466

32,451

27,472

Provision (benefit) for income taxes
 
29,895

25,313

(16,654
)
66,611

59,693

Income (loss) from continuing operations attributable to Kennametal
 
49,138

(225,968
)
(373,896
)
158,366

203,265

Net income (loss) attributable to Kennametal
 
49,138

(225,968
)
(373,896
)
158,366

203,265

FINANCIAL POSITION (in thousands)
 
 
 
 
 
 
Working capital
 
$
652,423

$
648,066

$
775,802

$
962,440

$
1,031,880

Total assets
(3
)
2,415,496

2,362,783

2,843,655

3,860,726

3,292,192

Long-term debt, including capital leases, excluding current maturities
(3
)
694,991

693,548

730,011

974,306

694,779

Total debt, including capital leases and notes payable
(3
)
695,916

695,443

745,713

1,054,423

739,098

Total Kennametal shareholders' equity
 
1,017,294

964,323

1,345,807

1,929,256

1,781,826

PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
 
 
Basic earnings (loss) from continuing operations
(4
)
$
0.61

$
(2.83
)
$
(4.71
)
$
2.01

$
2.56

Basic earnings (loss)
(4
)
0.61

(2.83
)
(4.71
)
2.01

2.56

Diluted earnings (loss) from continuing operations
(4
)
0.61

(2.83
)
(4.71
)
1.99

2.52

Diluted earnings (loss)
(4
)
0.61

(2.83
)
(4.71
)
1.99

2.52

Dividends
 
0.80

0.80

0.72

0.72

0.64

Book value (at June 30)
 
12.61

12.10

16.96

24.52

22.89

Market Price (at June 30)
 
37.42

22.11

34.12

46.28

38.83

OTHER DATA (in thousands, except number of employees)
 
 
 
Capital expenditures
 
$
118,018

$
110,697

$
100,939

$
117,376

$
82,835

Number of employees (at June 30)
 
10,744

11,178

12,718

13,521

12,648

Basic weighted average shares outstanding
80,351

79,835

79,342

78,678

79,463

Diluted weighted average shares outstanding
81,169

79,835

79,342

79,667

80,612

KEY RATIOS
 
 
 
 
 
 
Sales (decline) growth
(5
)
(1.9
)%
(20.7
)%
(6.7
)%
9.6
%
(5.4
)%
Gross profit margin
 
32.0

29.4

30.4

31.6

32.6

Operating margin
(6
)
5.5

(8.3
)
(13.5
)
9.3

11.4

(1)
In 2017 & 2014, all charges were related to restructuring. In 2016, the charges related to intangible asset impairment charges of $108.5 million, restructuring charges of $30.0 million & fixed asset disposal charges of $5.4 million. In 2015, the charges related to intangible asset impairment charges of $541.7 million & restructuring charges of $40.5 million.
(2)
In 2016, the charge related to the loss on divestiture of non-core businesses.
(3)
Comparative prior periods restated to reflect adoption of FASB guidance on debt issuance costs. Debt issuance costs of $4.7 million, $6.0 million, $5.9 million, $7.4 million & $8.8 million are reported as direct reductions of the carrying amounts of debt liabilities in the balance sheet as of June 30, 2017, 2016, 2015, 2014 & 2013, respectively.
(4)
2017 included restructuring & related charges of $0.89 & Australia deferred tax valuation allowance of $0.02. 2016 included U.S. deferred tax valuation allowance of $1.02, divestiture & related charges of $1.39, intangible asset impairment charges of $0.96, restructuring & related charges of $0.50, fixed asset disposal charges of $0.05 & operations of divested businesses of $0.02. 2015 included intangible asset impairment charges of $6.13 & restructuring & related charges of $0.56.
(5)
Divestiture impact of sales decline was negative 4 percent & negative 5 percent in 2017 & 2016, respectively.
(6)
Included restructuring & related charges of $76.2 million, $53.5 million & $58.1 million in 2017, 2016 & 2015, respectively. Included intangible asset impairment charges of $108.5 million & $541.7 million in 2016 & 2015, respectively. Included divestiture & related charges of $131.5 million in 2016.

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Table of Contents


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in connection with the consolidated financial statements of Kennametal Inc. and the related financial statement notes. Unless otherwise specified, any reference to a “year” is to our fiscal year ended June 30. Additionally, when used in this annual report on Form 10-K, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
OVERVIEW Kennametal Inc. was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling. From this beginning, the Company has grown into a global leader in the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and mission-critical wear applications to combat extreme conditions associated with wear fatigue, corrosion and high temperatures. The Company's reputation for material technology, metal cutting application knowledge, as well as expertise and innovation in the development of custom solutions and services, contributes to its leading position in its primary markets.
Our product offering includes a wide selection of standard and customized technologies for metalworking applications, such as turning, milling, hole making, tooling systems and services. End users of the Company's metalworking products include manufacturers engaged in a diverse array of industries including: the manufacturers of transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation.
In addition, we produce specialized wear components and metallurgical powders that are used for custom-engineered and challenging applications. End users of the Company's products include producers and suppliers in equipment-intensive operations such as coal mining, road construction, quarrying, oil and gas exploration, refining, production and supply.
Fiscal 2017 was a year of substantial change on many levels. After re-organizing the company to allow positive transformation, we focused on simplifying the company, improving sales execution and cost reduction. We have made significant achievements in each of these areas. The markets improved steadily through the year. Total year organic growth was 4 percent, with year-over-year organic growth in all segments. Furthermore, our cost reduction achievements were significant and we believe we are well-positioned to improve further as we move steadily forward with our multi-year plans.
For 2017, sales were $2,058.4 million, a decrease of 2 percent compared to prior year sales of $2,098.4 million, driven by prior year divestiture impact and unfavorable currency exchange, partially offset by organic sales growth. Operating income was $112.9 million compared to an operating loss of $174.9 million in the prior year. The year-over-year change was driven primarily by the loss on divestiture and goodwill and other intangible asset impairment charges in the prior year. Other drivers include incremental restructuring benefits, better absorption and productivity, organic sales growth, lower raw material costs and prior year fixed asset disposal charges and the impact of divestiture, partially offset by higher restructuring and related charges, unfavorable mix and higher employment-related costs. The Company reported earnings per diluted share of $0.61 in 2017.
The permanent savings that we are realizing from restructuring are the result of all programs that we have undertaken over the past 30 months. Pre-tax benefits from these restructuring actions were approximately $110 million in 2017, of which $72 million were incremental to the prior year. All restructuring actions are currently anticipated to deliver annual ongoing pre-tax savings of $165 million to $180 million once completed. Of this total amount, $90 million of annualized savings are associated with our headcount reduction initiative, and we anticipate reaching that run rate by December 31, 2017. The remaining $75 million to $90 million relates to our other restructuring programs, which we expect to complete by December 31, 2018. Refer to the Results of Continuing Operations section of Item 7 for further discussion and analysis of our restructuring programs.
The cost savings we achieved in fiscal 2017 include only a small amount of the anticipated benefits from the modernization and End-to-End initiatives that we have planned, and the benefits from our ongoing product and process simplification initiatives. The results of those programs are anticipated to accrue to the Company over the next two to three years.
We generated cash flow from operating activities of $192.2 million in the current year, driven primarily by cash earnings. We have actively managed our capital structure and returned $64.1 million to shareholders through dividends. In addition, we made capital expenditures of $118.0 million during the year.
We invested further in technology and innovation to continue delivering a high level of new products to our customers. Research and development expenses included in operating expense totaled $38.0 million for 2017.

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Table of Contents


Throughout the MD&A, we refer to measures used by management to evaluate performance. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth (decline). The explanation at the end of the MD&A provides the definition of this non-GAAP measures as well as details on the use and the derivation of these measures.
NEW OPERATING STRUCTURE IMPLEMENTED IN FISCAL 2017 In order to take advantage of the growth opportunities of our WIDIA brand, we implemented a new operating structure in fiscal 2017.
A key attribute of the new structure is the establishment of the Widia operating segment, which we separated out from our 2016 Industrial segment. In order to better leverage the opportunities in our Widia business, and be more agile and competitive in the marketplace, we are placing higher levels of focus, determination and leadership in this business. Beginning in fiscal 2017, we had three global reportable operating segments: Industrial, Widia and Infrastructure. We restated our segment financial information for the years ended June 30, 2016 and 2015, respectively, to reflect the change in reportable operating segments.

RESULTS OF CONTINUING OPERATIONS
SALES Sales of $2,058.4 million in 2017 decreased 2 percent from $2,098.4 million in 2016 reflecting a 4 percent divestiture impact and a 2 percent unfavorable currency exchange impact, partially offset by 4 percent organic sales growth. Sales increased by 4 percent in the Widia segment and 3 percent in the Industrial segment, while sales decreased by 9 percent in the Infrastructure segment. Drivers of the organic sales growth were increases of approximately 9 percent in energy, 6 percent in general engineering, 4 percent in aerospace and defense and 2 percent in transportation, offset partially by a decrease of 4 percent in earthworks.
Sales of $2,098.4 million in 2016 decreased 21 percent from $2,647.2 million in 2015 reflecting an 11 percent organic sales decline, a 5 percent divestiture impact and a 5 percent unfavorable currency exchange impact. Sales decreased by 30 percent in the Infrastructure segment, 13 percent in the Industrial segment and 11 percent in the Widia segment. Drivers of the organic sales decrease were decreases of approximately 28 percent in energy, 15 percent in earthworks, 11 percent in general engineering and 4 percent in transportation, while aerospace and defense remained flat.
GROSS PROFIT Gross profit increased $41.6 million to $657.7 million in 2017 from $616.1 million in 2016. This increase was primarily due to incremental restructuring benefits of approximately $36 million, better absorption and productivity, organic sales growth and lower raw material costs, partially offset by unfavorable currency exchange impact of $12.6 million, unfavorable business mix and divestiture impact of $11.4 million. The gross profit margin for 2017 was 32.0 percent compared to 29.4 percent in 2016.
Gross profit decreased $189.9 million to $616.1 million in 2016 from $806.0 million in 2015. The decrease was primarily due to organic sales decline, unfavorable business mix, lower fixed cost absorption, unfavorable currency exchange and divestiture impact, offset partially by lower raw material costs and restructuring benefits. The gross profit margin for 2016 was 29.4 percent compared to 30.4 percent in 2015.
OPERATING EXPENSE Operating expense in 2017 was $463.2 million, a decrease of $31.8 million, or 6.4 percent, compared to $495.0 million in 2016. The decrease is primarily due to incremental restructuring benefits of approximately $36 million, divestiture impact of $10.5 million, $12.7 million less in restructuring-related charges and favorable foreign currency exchange impacts of $5.1 million, offset partially by higher performance-based compensation.
Operating expense in 2016 was $495.0 million, a decrease of $59.9 million, or 10.8 percent, compared to $554.9 million in 2015. The decrease is primarily due to divestiture impact of $18.6 million, favorable foreign currency exchange impacts of $23.3 million, restructuring benefits and the impact of cost reduction initiatives, offset partially by $8.3 million higher restructuring related charges.
RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES
Restructuring and Related Charges
During 2017, we recognized total restructuring and related charges of $76.2 million. Of this amount, restructuring charges totaled $65.6 million, of which $0.6 million were charges related to inventory and were recorded in cost of goods sold. Restructuring-related charges of $7.1 million were recorded in cost of goods sold and $3.5 million in operating expense during 2017. Total restructuring and related charges since the inception of our restructuring plans through 2017 were $147.7 million. See Note 15 in our consolidated financial statements set forth in Item 8 (Note 15).
During 2016, we recognized total restructuring and related charges of $53.5 million. Of this amount, restructuring charges totaled $30.0 million. Restructuring-related charges of $7.3 million were recorded in cost of goods sold and $16.2 million in operating expense during 2016.

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During 2015, we recognized total restructuring and related charges of $58.1 million. Of this amount, restructuring charges totaled $42.1 million, of which $1.5 million were charges related to inventory and were recorded in cost of goods sold. Restructuring-related charges of $8.2 million were recorded in cost of goods sold and $7.8 million in operating expense during 2015.
We are implementing restructuring actions to streamline the Company's cost structure. These initiatives are expected to improve the alignment of our cost structure with the current operating environment through headcount reductions, as well as rationalization and consolidation of certain manufacturing facilities. These restructuring actions are currently anticipated to deliver annual ongoing pre-tax savings of $165 million to $180 million once completed by December 31, 2018 and are anticipated to be mostly cash expenditures. The total pre-tax charges for these programs are expected to be in the range of $165 million to $195 million, which is expected to be approximately 60 percent Industrial, 5 percent Widia, 30 percent Infrastructure and 5 percent Corporate. Total restructuring and related charges since inception of $147.7 million have been recorded for these programs through June 30, 2017: $80.5 million in Industrial, $12.9 million in Widia, $47.0 million in Infrastructure and $7.3 million in Corporate.
Asset Impairment Charges
During 2016 and 2015, we recorded non-cash pre-tax goodwill and other intangible asset impairment charges of $108.5 million and $541.7 million, respectively. There were no asset impairment charges during 2017. See Note 2 in our consolidated financial statements set forth in Item 8 (Note 2).
During 2016, we identified specific machinery and equipment that was no longer being utilized in the manufacturing organization which we disposed of by abandonment. As a result of this review, we recorded property, plant, and equipment impairment charges of $5.4 million during 2016, which has been presented as restructuring and asset impairment charges in our consolidated statement of income.
LOSS ON DIVESTITURE We recognized a pre-tax loss on the sale of non-core businesses of $131.5 million in 2016, which includes the impact of estimated working capital adjustments, deal costs and transaction costs. Of this amount, $127.9 million and $3.6 million were recorded in the Infrastructure and Industrial segments, respectively. See Note 4 in our consolidated financial statements set forth in Item 8 (Note 4).
AMORTIZATION OF INTANGIBLES Amortization expense was $16.6 million, $20.8 million and $26.7 million in 2017, 2016 and 2015, respectively. The decrease of $4.2 million from 2016 to 2017 and the decrease of $5.9 million from 2015 to 2016 were driven primarily by the impact of divestiture.
INTEREST EXPENSE Interest expense increased $1.1 million to $28.8 million in 2017, compared with $27.8 million in 2016 due to higher average borrowings and a higher credit facility fee. The portion of our debt subject to variable rates of interest was less than 1 percent at June 30, 2017 and 2016.
Interest expense decreased $3.7 million to $27.8 million in 2016, compared with $31.5 million in 2015 due to lower average borrowings in 2016. The portion of our debt subject to variable rates of interest was less than 1 percent and approximately 7 percent at June 30, 2016 and 2015, respectively. The decrease in the portion of our debt subject to variable rates was due to the decrease in the balance outstanding on our revolving credit facility.
OTHER EXPENSE (INCOME), NET In 2017, other expense, net was $2.2 million compared to other income, net of $4.1 million in 2016. The year-over-year change was due primarily to foreign currency transaction losses and the prior year reduction of a contingent liability associated with a past acquisition that did not repeat in the current year, partially offset by a prior year loss on sale of assets and income from transition services provided to the acquirer of our non-core businesses.
In 2016, other income, net was $4.1 million compared to other income, net of $1.7 million in 2015. The year-over-year increase is due primarily to the reduction of a contingent liability associated with a prior acquisition and income from transition services provided to the acquirer of our non-core businesses, partially offset by a loss on sale of assets and lower interest income.
INCOME TAXES The effective tax rate for 2017 was 36.5 percent (provision on income) compared to 12.7 percent (provision on a loss) for 2016. The change was primarily driven by the 2016 discrete tax charge for a valuation allowance recorded against our net deferred tax assets in the U.S., primarily related to asset impairment charges and the loss on divestiture in the prior year.
The effective tax rate for 2016 was 12.7 percent (provision on a loss) compared to 4.3 percent (benefit on a loss) for 2015. The change in the effective rate from 2015 to 2016 was primarily driven by a 2016 discrete tax charge for a valuation allowance recorded against our net deferred tax assets in the U.S., primarily related to asset impairment charges and restructuring charges in both periods and the loss on divestiture in 2016, as well as an overall decrease in demand in U.S. operations.

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In 2012, we received an assessment from the Italian tax authority that denied certain tax deductions primarily related to our 2008 tax return. Attempts at negotiating a reasonable settlement with the tax authority were unsuccessful; and as a result, we decided to litigate the matter. The outcome of the litigation is still pending; however, we continue to believe that the assessment is baseless, and do not anticipate making a payment in connection with this assessment. Accordingly, no income tax liability has been recorded in connection with this assessment in any period. However, if the Italian tax authority were to be successful in litigation, settlement of the amount alleged by the Italian tax authority at its face value would result in an approximate €22 million, or $25 million, increase to income tax expense.
INCOME (LOSS) ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS Income attributable to Kennametal Shareholders was $49.1 million, or $0.61 earnings per diluted share, in 2017, compared to a loss of $226.0 million, or $2.83 loss per diluted share, in 2016. The year-over-year change is a result of the factors previously discussed.
Loss from continuing operations attributable to Kennametal Shareholders was $226.0 million or $2.83 per diluted share, in 2016, compared to $373.9 million, or $4.71 per diluted share, in 2015. The decrease in loss from continuing operations is a result of the factors previously discussed.

BUSINESS SEGMENT REVIEW We operate three reportable operating segments consisting of Industrial, Widia and Infrastructure. Corporate expenses that are not allocated are reported in Corporate. Segment determination is based upon internal organizational structure, the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results.
Amounts for 2016 and 2015 for Industrial and Widia have been restated to reflect the change in reportable operating segments.
INDUSTRIAL
(in thousands)
 
2017
 
2016
 
2015
Sales
 
$
1,126,309

 
$
1,098,439

 
$
1,269,786

Operating income
 
82,842

 
90,324

 
165,434

Sales growth (decline), in percentages
 
2017
 
2016
Organic
 
5
 %
 
(7
)%
Currency exchange
 
(2
)
 
(6
)
Divestiture
 

 

Business days
 

 

Total
 
3
 %
 
(13
)%
By region (1):
 
 
 
 
Asia
 
11
 %
 
(9
)%
Americas
 
5

 
(11
)
Europe
 
2

 
(2
)
By end market (1):
 
 
 
 
General engineering
 
7
 %
 
(8
)%
Aerospace and defense
 
6

 
1

Energy
 
5

 
(27
)
Transportation
 
2

 
(4
)
(1)
Excluding the impact of currency exchange and divestiture

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In 2017, Industrial sales of $1,126.3 million increased by $27.9 million, or 3 percent, from 2016. General engineering sales have benefited globally from growth in the indirect channel, supported by increasing demand in the U.S. energy markets and China transportation markets, and to a lesser extent the addition of new distributors. Sales to airplane engine manufacturers globally was the primary driver of the sales growth in aerospace. In addition, we experienced growth in frame-related sales in Europe and Asia that were offset by declines in the Americas. Oil and gas drilling and power generation in the Americas contributed to the growth in energy sales while energy-related sales were down in Europe and Asia. Transportation performance was mixed for the fiscal year with overall growth coming from Asia. Sales to tier suppliers were up, as strong Asia growth was offset by declines in Europe and the Americas. Similarly, growth in sales to OEMs in Asia was offset by declines in the other regions. In addition, railroad-related sales declined primarily in the Americas. The sales increase in Asia was driven by transportation, general engineering and aerospace and defense. The sales increase in the Americas was driven by general engineering and energy and to a lesser extent aerospace and defense, offset partially by decreases in transportation. The sales increase in Europe was driven by general engineering and aerospace and defense, offset partially by decreases in transportation and energy.
In 2017, Industrial operating income was $82.8 million, a $7.5 million decrease from 2016. The primary drivers of the decrease in operating income were $20.6 million more in restructuring charges, unfavorable currency exchange, unfavorable business mix, higher performance-based compensation and higher raw material costs, partially offset by $40 million incremental restructuring benefits, organic sales growth and prior period loss on divestiture and fixed asset disposal charges of $3.6 million and $2.6 million, respectively. Industrial operating margin was 7.4 percent compared with 8.2 percent in the prior year.
In 2016, Industrial sales of $1,098.4 million decreased by $171.3 million, or 13 percent, from 2015. Industrial sales growth was impacted by the oil and gas downturn, which caused a decline in the energy market, most acutely in the Americas, where there was spillover into the broader general engineering market. The downturn was somewhat amplified as inventory levels in the indirect channel were lowered. Sales in the transportation market benefited from strong global unit sales offset by lower sales in Asia in part due to fewer tooling package sales in the current year. Aerospace sales increased modestly as favorable developments in Europe and Asia where somewhat offset by our decision to exit certain low margin business. The sales decrease in the Americas was driven by general engineering and energy and to a lesser extent transportation. The sales decrease in Asia was driven by transportation, general engineering and energy, offset partially by an increase in aerospace and defense. The sales decrease in Europe was driven by energy and aerospace and defense, offset partially by an increase in transportation.
In 2016, Industrial operating income was $90.3 million and decreased by $75.1 million from 2015. The primary drivers of the decrease in operating income were organic sales decline, unfavorable currency exchange, lower fixed cost absorption, unfavorable business mix, loss on divestiture of $3.6 million and fixed asset disposal charges of $2.6 million, offset partially by incremental restructuring program benefits of approximately $17 million and lower raw material costs. Industrial operating margin was 8.2 percent compared with 13.0 percent in the prior year.

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WIDIA
(in thousands)
 
2017
 
2016
 
2015
Sales
 
$
177,662

 
$
170,723

 
$
191,958

Operating loss
 
(9,606
)
 
(9,081
)
 
(4,540
)
Sales growth (decline), in percentages
 
2017
 
2016
Organic
 
6
 %
 
(6
)%
Business days
 
(2
)
 

Currency exchange
 

 
(5
)
Divestiture
 

 

Total
 
4
 %
 
(11
)%
By region (2):
 
 
 
 
Asia
 
12
 %
 
(11
)%
Americas
 
4

 
(11
)
Europe
 
(2
)
 
4

By end market (2):
 
 
 
 
General Engineering
 
6
 %
 
(6
)%
(2)
Excluding the impact of currency exchange
In 2017, Widia sales of $177.7 million increased by $6.9 million, or 4 percent, from 2016. Sales have benefited globally from growth in the indirect channel, supported by increasing demand in the U.S. energy markets and China transportation markets, and to a lesser extent the addition of new distributors. Unlike the prior year, for those indirect lines where we have visibility, we believe that we did not experience destocking in the indirect channel, as sales were generally consistent with end-user purchases.
In 2017, Widia operating loss was $9.6 million and increased by $0.5 million from 2016. The primary drivers of the increase in operating loss were $3.6 million higher restructuring and related charges, unfavorable mix and unfavorable currency exchange, partially offset by incremental restructuring benefits of approximately $6 million, organic sales growth, a prior period other intangible asset impairment charge of $2.3 million, lower raw material costs, higher absorption and productivity and prior period fixed asset disposal charges of $0.7 million. Widia operating loss margin was 5.4 percent compared with 5.3 percent in the prior year.
In 2016, Widia sales of $170.7 million decreased by $21.2 million, or 11 percent, from 2015. Widia sales were impacted by the oil and gas downturn, which caused a decline in the energy market, most acutely in the Americas, where there was spillover into the broader general engineering market which Widia serves. Widia also experienced challenges in the supply chain, which led to more instances of quality and delivery issues that had an unfavorable impact on sales.
In 2016, Widia operating loss was $9.1 million and increased by $4.5 million from 2015. The primary drivers of the increase in operating loss were organic sales decline, intangible asset impairment of $2.3 million and fixed asset disposal charges of $0.7 million, offset partially by $2.2 million less restructuring and related charges and incremental restructuring program benefits of approximately $2 million. Widia operating loss margin was 5.3 percent compared with 2.4 percent in the prior year.
INFRASTRUCTURE
(in thousands)
 
2017
 
2016
 
2015
Sales
 
$
754,397

 
$
829,274

 
$
1,185,451

Operating income (loss)
 
40,011

 
(246,306
)
 
(509,381
)

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Sales growth (decline), in percentages
 
2017
 
2016
Divestiture
 
(9
)%
 
(11
)%
Currency exchange
 
(1
)
 
(3
)
Organic
 
1

 
(16
)
Business days
 

 

Total
 
(9
)%
 
(30
)%
By region (1):
 
 
 
 
Americas
 
3
 %
 
(25
)%
Asia
 
2

 
(10
)
Europe
 
(6
)
 
(1
)
By end market (1):
 
 
 
 
Energy
 
11
 %
 
(28
)%
General Engineering
 
6

 
(21
)
Earthworks
 
(6
)
 
(15
)
(1)
Excluding the impact of divestiture and currency exchange
In 2017, Infrastructure sales of $754.4 million decreased by $74.9 million, or 9 percent, from 2016. Excluding the impact of divestiture and unfavorable currency exchange, sales grew 1 percent organically. Beginning in 2017, the segment reported year-over-year quarterly sales declines. However, during the year, sales improved sequentially and the year ended with two consecutive quarters of organic sales growth after two and a half years of organic sales declines. For the year, sales were positively impacted by the energy markets which have continued to strengthen during 2017. Challenging conditions in underground mining continued to drive sales declines, particularly in North America and Asia, and construction sales primarily in in Europe. The sales increase in the Americas was driven by oil and gas and general engineering, partially offset by a decrease in earthworks. The sales increase in Asia was driven by general engineering and to a lesser extent energy, partially offset by a decrease in earthworks. The sales decrease in Europe was driven primarily by a decrease in construction, offset partially by an increase in mining.
In 2017, Infrastructure operating income in 2017 was $40.0 million, compared to operating loss of $246.3 million in 2016. The year-over-year change in operating results was due primarily to a prior period $127.9 million loss on divestiture and prior period goodwill and other intangible asset impairment charges of $106.1 million. Additionally, comparative operating results were impacted by incremental restructuring benefits of approximately $26 million, lower raw material costs, higher absorption and productivity and prior year divestiture impact of $1.9 million, offset partially by $4.2 million increase in restructuring and related charges and the negative impacts of unfavorable price and mix.
In 2016, Infrastructure sales of $829.3 million decreased by $356.2 million, or 30 percent, from 2015. Infrastructure sales decline was impacted by persistent weak demand in oil and gas, mining, industrial applications and processing end markets in 2016. The sales decrease in the Americas was driven by energy, earthworks and general engineering. The sales decrease in Asia was driven by earthworks and general engineering, offset partially by an increase in energy. The sales decrease in Europe was driven primarily by energy, while general engineering remained flat and earthworks increased.
In 2016, Infrastructure operating loss in 2016 was $246.3 million, a decrease of $263.1 million from 2015 operating income of $509.4 million. The decrease in operating loss was primarily driven by lower impairment charges in 2016 compared to 2015. See Note 2 and see Note 8 in our consolidated financial statements set forth in Item 8 (Note 8). Year 2016 also includes a loss on divestiture for the sale of non-core businesses of $127.9 million, see Note 4. In addition to the aforementioned impairment charge and loss on divestiture, operating results for 2016 were negatively impacted by lower organic sales, lower fixed cost absorption and unfavorable mix, offset partially by an increase in lower raw material costs and incremental restructuring program benefits of approximately $18 million.
CORPORATE 
(in thousands)
 
2017
 
2016
 
2015
Corporate unallocated expense
 
$
(303
)
 
$
(9,880
)
 
$
(9,336
)
In 2017, Corporate unallocated expense decreased $9.6 million, or 96.9 percent, from 2016, primarily due to $5.7 million lower restructuring-related charges during this year and lower professional fees. In 2016, Corporate unallocated expense increased $0.5 million, or 5.8 percent, from 2015, primarily due to higher restructuring-related charges in 2016 compared to 2015.

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LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the primary source of funding for our capital expenditures and organic growth. During the year ended June 30, 2017, cash flow provided by operating activities was $192.2 million.
Our five-year, multi-currency, revolving credit facility, as amended and restated in April 2016 (Credit Agreement) is used to augment cash from operations and as an additional source of funds. The Credit Agreement permits revolving credit loans of up to $600.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement allows for borrowings in U.S. dollars, euro, Canadian dollars, pound sterling and Japanese yen. Interest payable under the Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin or (3) fixed as negotiated by us. The Credit Agreement matures in April 2021. We had no outstanding borrowings on our Credit Agreement as of June 30, 2017.
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 agreement). We were in compliance with all covenants as of June 30, 2017. For the year ended June 30, 2017, average daily borrowings outstanding under the Credit Agreement were approximately $29.1 million. We had no borrowings outstanding under the Credit Agreement as of June 30, 2017 and 2016. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries.
Additionally, we obtain local financing through credit lines with commercial banks in the various countries in which we operate. At June 30, 2017, these borrowings amounted to $0.7 million of notes payable and $0.2 million of capital leases. We believe that cash flow from operations and the availability under our credit lines will be sufficient to meet our cash requirements over the next 12 months.
Based upon our debt structure at June 30, 2017 and 2016, less than 1 percent of our debt was exposed to variable rates of interest.
We consider substantially all of the unremitted earnings of our non-U.S. subsidiaries that have not previously been taxed in the U.S. to be permanently reinvested. As of June 30, 2017, cash and cash equivalents of $115.4 million would not be available for use in the U.S. on a long-term basis without incurring U.S. federal and state income tax consequences. We have not repatriated, nor do we anticipate the need to repatriate, funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business or associated with our domestic debt service requirements. The undistributed earnings of our foreign subsidiaries continue to be indefinitely reinvested and would not be available for use in the U.S. on a long term basis without incurring U.S. federal and state income tax consequences.
At June 30, 2017, we had cash and cash equivalents of $190.6 million. Total Kennametal Shareholders’ equity was $1,017.3 million and total debt was $695.9 million. Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers.

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The following is a summary of our contractual obligations and other commercial commitments as of June 30, 2017 (in thousands): 
Contractual Obligations
 
  
 
Total
 
2018
 
2019-2020
 
2021-2022
 
Thereafter
Long-term debt
 
(3
)
 
$
789,925

 
$
22,225

 
$
444,450

 
$
323,250

 
$

Notes payable
 
(4
)
 
835

 
835

 

 

 

Pension benefit payments
 
 
 
(5)
 
47,497

 
99,002

 
103,498

 
(5)
Postretirement benefit payments
 
 
 
(5)
 
1,876

 
3,430

 
3,067

 
(5)
Capital leases
 
(6
)
 
199

 
199

 

 

 

Operating leases
 
 
 
76,686

 
19,340

 
26,332

 
15,725

 
15,289

Purchase obligations
 
(7
)
 
180,043

 
85,139

 
57,313

 
37,591

 

Unrecognized tax benefits
 
(8
)
 
3,232

 
596

 
2,221

 

 
415

Total
 
 
 
 
 
$
177,707

 
$
632,748

 
$
483,131

 


(3)
Long-term debt includes interest obligations of $89.9 million and excludes debt issuance costs of $4.7 million. Interest obligations were determined assuming interest rates as of June 30, 2017 remain constant.
(4)
Notes payable includes interest obligations of $0.1 million. Interest obligations were determined assuming interest rates as of June 30, 2017 remain constant.
(5)
Annual payments are expected to continue into the foreseeable future at the amounts noted in the table.
(6)
Capital leases include interest obligations of an immaterial amount.
(7)
Purchase obligations consist of purchase commitments for materials, supplies and machinery and equipment as part of the ordinary conduct of business. Purchase obligations with variable price provisions were determined assuming market prices as of June 30, 2017 remain constant.
(8)
Unrecognized tax benefits are positions taken or expected to be taken on an income tax return that may result in additional payments to tax authorities. These amounts include interest of $0.5 million and penalty of $0.1 million accrued related to such positions as of June 30, 2017. Positions for which we are not able to reasonably estimate the timing of potential future payments are included in the ‘Thereafter’ column. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary.
Other Commercial Commitments
 
Total
 
2018
 
2019-2020
 
2021-2022
 
Thereafter
Standby letters of credit
 
$
4,176

 
$
1,326

 
$
2,850

 
$

 
$

Guarantees
 
20,845

 
14,535

 
1,173

 
234

 
4,903

Total
 
$
25,021

 
$
15,861

 
$
4,023

 
$
234

 
$
4,903

The standby letters of credit relate to insurance and other activities. The guarantees are non-debt guarantees with financial institutions, which are required primarily for security deposits, product performance guarantees and advances.
Cash Flow Provided by Operating Activities
During 2017, cash flow provided by operating activities was $192.2 million, compared to $219.3 million in 2016. During 2017, cash flow provided by operating activities consisted of net income and non-cash items amounting to $188.9 million and changes in certain assets and liabilities netting to $3.3 million. Contributing to the changes in certain assets and liabilities were an increase in accounts payable and accrued liabilities of $51.4 million and an increase in accrued income taxes of $6.9 million. Partially offsetting these inflows were a decrease in accrued pension and postretirement benefits of $27.8 million, an increase in inventories of $24.3 million and an increase in accounts receivable of $7.6 million. The increases in inventories, accounts payable and accounts receivable is due in part to higher demand trends in most of our end markets.
During 2016, cash flow provided by operating activities was $219.3 million, compared to $351.4 million in 2015. Cash flow provided by operating activities consisted of net income and non-cash items amounting to $163.8 million and changes in certain assets and liabilities netting to $55.5 million. These changes were primarily driven by a decrease in inventory of $69.6 million due to our continued focus on working capital management and a decrease in accounts receivable of $32.7 million due to lower sales volume. Partially offsetting these inflows were a decrease in accrued income taxes of $25.2 million driven by payment of a capital gains tax related to a prior period tax reorganization and a decrease in accounts payable and accrued liabilities of $2.2 million.
During 2015, cash flow provided by operating activities was $351.4 million. Cash flow provided by operating activities consisted of net income and non-cash items amounting to $279.1 million, offset by changes in certain assets and liabilities netting to $72.4 million. These changes were primarily driven by a decrease in inventory of $70.9 million due to improved working capital management, a decrease in accounts receivable of $46.6 million due to lower sales volumes and a decrease in accounts payable and accrued liabilities of $8.2 million.

24

Table of Contents


Cash Flow Used for Investing Activities
Cash flow used for investing activities was $112.7 million for 2017, an increase of $64.8 million, compared to $47.9 million in 2016. During 2017, cash flow used for investing activities included capital expenditures, net of $113.0 million, which consisted primarily of equipment upgrades.
Cash flow used for investing activities was $47.9 million for 2016, a decrease of $36.6 million, compared to $84.6 million in 2015. During 2016, cash flow used for investing activities included capital expenditures, net of $104.7 million, which consisted primarily of equipment upgrades. Partially offsetting this outflow was an inflow of $56.1 million of proceeds from the divestiture of non-core businesses.
Cash flow used for investing activities was $84.6 million for 2015. During 2015, cash flow used for investing activities included capital expenditures, net of $84.8 million, which consisted primarily of equipment upgrades.
Cash Flow Used for Financing Activities
Cash flow used for financing activities was $50.1 million for 2017, compared to $110.5 million in 2016. During 2017, cash flow used for financing activities included $64.1 million of cash dividends paid to Shareholders, a $6.6 million payment on the remaining contingent consideration related to a prior acquisition and $0.9 million net decrease in borrowings, partially offset by $21.5 million of dividend reinvestment and the effect of employee benefit and stock plans.
Cash flow used for financing activities was $110.5 million for 2016, compared to $333.0 million in 2015. During 2016, cash flow used for financing activities included $63.7 million of cash dividends paid to Shareholders and $50.8 million net decrease in borrowings, partially offset by $4.5 million of dividend reinvestment and the effect of employee benefit and stock plans.
Cash flow used for financing activities was $333.0 million in 2015. During 2015, cash flow used for financing activities included $282.5 million net decrease in borrowings and $57.0 million of cash dividends paid to Shareholders, partially offset by $13.8 million of dividend reinvestment and the effect of employee benefit and stock plans.

FINANCIAL CONDITION At June 30, 2017, total assets were $2,415.5 million, an increase of $52.7 million from $2,362.8 million at June 30, 2016. Total liabilities decreased $4.1 million from $1,367.0 million at June 30, 2016 to $1,362.8 million at June 30, 2017.
Working capital was $652.4 million at June 30, 2017, an increase of $4.4 million from $648.1 million at June 30, 2016. Cash and cash equivalents increased $29.1 million, inventory increased $28.9 million and accounts receivable increased $9.5 million due to higher demand trends, accrued income taxes decreased $10.4 million due primarily to reduced taxable income in tax-paying jurisdictions from higher restructuring and related charges, and accrued vacation pay decreased $6.6 million. Partially offsetting these items were an increase in accounts payable of $33.7 million due to higher demand trends, a decrease in deferred income taxes of $26.7 million due to the impact of prospective adoption of a new accounting standard requiring all deferred tax assets and liabilities to be classified as long-term and an increase in accrued payroll of $17.8 million due to timing of payroll. Currency exchange rate effects accounted for $3.7 million of the increase in working capital, the impact of which is included in the aforementioned changes.
Property, plant and equipment, net increased $13.7 million from $730.6 million at June 30, 2016 to $744.4 million at June 30, 2017, primarily due to capital expenditures of $118.0 million, which includes a net $3.9 million change which was included in accounts payable at June 30, 2017 related to purchases of property, plant and equipment, and favorable currency exchange impacts of $4.2 million. This increase was partially offset by depreciation expense of $91.1 million and capital disposals of $5.0 million.
At June 30, 2017, other assets were $557.2 million, an increase of $0.4 million from $556.8 million at June 30, 2016. The primary driver for the increase was an increase in deferred income taxes of $13.9 million due in part to the impact of prospective adoption of a new accounting standard requiring all deferred tax assets and liabilities to be classified as long-term, an increase in assets held for sale of $7.0 million due to certain properties meeting held for sale criteria at June 30, 2017 and an increase in goodwill of $2.9 million due to favorable currency exchange effects. This increase was offset by a decrease in other intangible assets of $16.7 million which was primarily due to amortization expense of $16.6 million.
Long-term debt and capital leases increased $1.4 million to $695.0 million at June 30, 2017 from $693.5 million at June 30, 2016, and accrued pension benefits decreased $38.6 million to $144.0 million, driven primarily by net periodic pension income.
Kennametal Shareholders’ equity was $1,017.3 million at June 30, 2017, an increase of $53.0 million from $964.3 million in the prior year. The increase was primarily due to net income attributable to Kennametal of $49.1 million, capital stock issued under employee benefit and stock plans of $39.1 million, unrecognized net pension and other postretirement benefit gain of $15.6 million, reclassification of net pension and other postretirement benefit loss of $7.6 million and favorable currency exchange of $4.6 million, partially offset by cash dividends paid to Shareholders of $64.1 million.

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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 locations in the countries in which we operate.
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 United States Environmental Protection Agency (USEPA) as a Potentially Responsible Party (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.
Other Environmental Issues We establish and maintain reserves for other potential environmental issues. At June 30, 2017 and 2016, the total of accruals for these reserves was $12.4 million and $12.5 million, respectively. 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 EHS Department to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS analysts 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.

EFFECTS OF INFLATION Despite modest inflation in recent years, rising costs, including the cost of certain raw materials, continue to affect our operations throughout the world. We strive to minimize the effects of inflation through cost containment, productivity improvements and price increases.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES In preparing our financial statements in conformity with accounting principles generally accepted in the U.S., we make judgments and estimates about the amounts reflected in our financial statements. As part of our financial reporting process, our management collaborates to determine the necessary information on which to base our judgments and develops estimates used to prepare the financial statements. We use historical experience and available information to make these judgments and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in our financial statements. Our significant accounting policies are described in Note 2. We believe that the following discussion addresses our critical accounting policies.
Revenue Recognition We recognize revenue for our products and assembled machines when title and all risks of loss and damages pass to the buyer. Our general conditions of sale explicitly state that the delivery of our products and assembled machines is freight on board shipping point and that title and all risks of loss and damages pass to the buyer upon delivery of the sold products or assembled machines to the common carrier.
Our general conditions of sale explicitly state that acceptance of the conditions of shipment is considered to have occurred unless written notice of objection is received by Kennametal within 10 calendar days of the date specified on the invoice. We do not ship products or assembled machines unless we have documentation authorizing shipment to our customers. Our products are consumed by our customers in the manufacture of their products. Historically, we have experienced very low levels of returned products and assembled machines and do not consider the effect of returned products and assembled machines to be material. We have recorded an estimated returned goods allowance to provide for any potential returns.

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We warrant that products and services sold are free from defects in material and workmanship under normal use and service when correctly installed, used and maintained. This warranty terminates 30 days after delivery of the product to the customer and does not apply to products that have been subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be returned to Kennametal only after inspection and approval by Kennametal and upon receipt by the customer of shipping instructions from Kennametal. We have included an estimated allowance for warranty returns in our returned goods allowance discussed above.
We recognize revenue related to the sale of specialized assembled machines upon customer acceptance and installation, as installation is deemed essential to the functionality of a specialized assembled machine. Sales of specialized assembled machines were immaterial for 2017, 2016 and 2015.
Stock-Based Compensation We recognize stock-based compensation expense for all stock options, restricted stock awards and restricted stock units over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service (substantive vesting period). We utilize the Black-Scholes valuation method to establish the fair value of all stock option awards. 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.
Accounting for Contingencies We accrue for contingencies when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment in both assessing whether or not a liability or loss has been incurred and estimating the amount of probable loss. The significant contingencies affecting our financial statements include environmental, health and safety matters and litigation.
Long-Lived Assets We evaluate the recoverability of property, plant and equipment and intangible assets that are amortized whenever events or changes in circumstances indicate the carrying amount of such assets may not be fully recoverable. Changes in circumstances include technological advances, changes in our business model, capital structure, economic conditions or operating performance. Our evaluation is based upon, among other things, our assumptions about the estimated future undiscounted cash flows these assets are expected to generate. When the sum of the undiscounted cash flows is less than the carrying value, we will recognize an impairment loss to the extent that carrying value exceeds fair value. We apply our best judgment when performing these evaluations to determine if a triggering event has occurred, the undiscounted cash flows used to assess recoverability and the fair value of the asset.
Goodwill and Indefinite-Lived Intangible Assets We evaluate the recoverability of goodwill of each of our reporting units by comparing the fair value of each reporting unit with its carrying value. The fair values of our reporting units are determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit. We evaluate the recoverability of indefinite-lived intangible assets using a discounted cash flow analysis based on projected financial information. We perform our annual impairment tests during the June quarter in connection with our annual planning process, unless there are impairment indicators based on the results of an ongoing cumulative qualitative assessment that warrant a test prior to that.
The $273.5 million of goodwill allocated to the Industrial reporting unit and the $27.9 million of goodwill allocated to the Widia reporting unit are not at risk of failing Step 1 of the impairment test since fair value substantially exceeded the carrying value as of the date of the last impairment test. There is no goodwill allocated to the Infrastructure reporting unit.
Pension and Other Postretirement Benefits We sponsor pension and other postretirement benefit plans for certain employees and retirees. Accounting for the cost of these plans requires the estimation of the cost of the benefits to be provided well into the future and attributing that cost over either the expected work life of employees or over average life of participants participating in these plans, depending on plan status and on participant population. This estimation requires our judgment about the discount rate used to determine these obligations, expected return on plan assets, rate of future compensation increases, rate of future health care costs, withdrawal and mortality rates and participant retirement age. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans.
In the valuation of our pension and other postretirement benefit liabilities, management utilizes various assumptions. Our discount rates are derived by identifying a theoretical settlement portfolio of high quality corporate bonds sufficient to provide for a plan’s projected benefit payments. This rate can fluctuate based on changes in the corporate bond yields. At June 30, 2017, a hypothetical 25 basis point increase in our discount rates would increase our pre-tax income by approximately $0.1 million, and a hypothetical 25 basis point decrease in our discount rates would decrease our pre-tax income by approximately $0.1 million.

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The long-term rate of return on plan assets is estimated based on an evaluation of historical returns for each asset category held by the plans, coupled with the current and short-term mix of the investment portfolio. The historical returns are adjusted for expected future market and economic changes. This return will fluctuate based on actual market returns and other economic factors.
The rate of future health care cost increases is based on historical claims and enrollment information projected over the next fiscal year and adjusted for administrative charges. This rate is expected to decrease until 2027. At June 30, 2017, a hypothetical 1 percent increase or decrease in our health care cost trend rates would be immaterial to our pre-tax income.
Future compensation rates, withdrawal rates and participant retirement age are determined based on historical information. These assumptions are not expected to significantly change. Mortality rates are determined based on a review of published mortality tables.
We expect to contribute approximately $7.9 million and $1.9 million to our pension and other postretirement benefit plans, respectively, in 2018.
In 2016, substantially all plan participants of the U.S. Retirement Income Plan (RIP) became inactive. As a result, the average remaining life expectancy of the inactive participants was used to amortize the unrecognized net gain or loss instead of the average remaining service period of active plan participants in future periods.
Allowance for Doubtful Accounts We record allowances for estimated losses resulting from the inability of our customers to make required payments. We assess the creditworthiness of our customers based on multiple sources of information and analyze additional factors such as our historical bad debt experience, industry and geographic concentrations of credit risk, current economic trends and changes in customer payment terms. This assessment requires significant judgment. If the financial condition of our customers was to deteriorate, additional allowances may be required, resulting in future operating losses that are not included in the allowance for doubtful accounts at June 30, 2017.
Inventories Inventories are stated at the lower of cost or market. We use the last-in, first-out method for determining the cost of a significant portion of our U.S. inventories. The cost of the remainder of our inventories is measured using approximate costs determined on the first-in, first-out basis or using the average cost method. When market conditions indicate an excess of carrying costs over market value, a lower-of-cost-or-market provision is recorded. Excess and obsolete inventory reserves are established based upon our evaluation of the quantity of inventory on hand relative to demand.
Income Taxes Realization of our deferred tax assets is primarily dependent on future taxable income, the timing and amount of which are uncertain, in part, due to the expected profitability of certain foreign subsidiaries. A valuation allowance is recognized if it is “more likely than not” that some or all of a deferred tax asset will not be realized. As of June 30, 2017, the deferred tax assets net of valuation allowances relate primarily to net operating loss carryforwards, pension benefits, accrued employee benefits and inventory reserves. In the event that we were to determine that we would not be able to realize our deferred tax assets in the future, an increase in the valuation allowance would be required. In the event we were to determine that we are able to use our deferred tax assets and a valuation allowance had been recorded against the deferred tax assets, a decrease in the valuation allowance would be required.

NEW ACCOUNTING STANDARDS
Adopted
In January 2017, the Financial Accounting Standards Board (FASB) issued guidance to simplify the test for goodwill impairment by removing step two of the test. Step two measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The new guidance requires an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. This standard is effective for Kennametal beginning July 1, 2020; however, early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company has chosen to early adopt this guidance effective with the annual goodwill impairment test for 2017. The adoption did not have a material impact on our consolidated financial position, results of operations and cash flows.
In November 2015, the FASB issued guidance on balance sheet classification of deferred taxes. The amendments in this guidance require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position, in comparison to the previous practice of separating deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. We adopted this guidance July 1, 2016 on a prospective basis. Therefore, prior period balance sheets were not retrospectively adjusted. Current deferred tax assets of $26.7 million and current deferred tax liabilities of $0.6 million are reported in the June 30, 2016 balance sheet.

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In May 2015, the FASB issued guidance on disclosures for investments measured using the net asset value per share practical expedient. The guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. This guidance was effective for Kennametal for 2017 and was applied retrospectively. See Note 13 in our consolidated financial statements set forth in Item 8.
In April 2015, the FASB issued guidance on the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance was effective for Kennametal beginning July 1, 2016 and was retrospectively applied to all periods presented. Debt issuance costs of $4.7 million and $6.0 million are reported as direct reductions of the carrying amounts of debt liabilities in the balance sheet as of June 30, 2017 and 2016, respectively.
In April 2015, the FASB issued guidance on accounting for fees paid in a cloud computing arrangement. The amendments in this update provide guidance to customers about treatment of costs as either capitalized and amortized as an intangible asset or expensed as incurred as a service contract. The amendments provide clarification that costs in arrangements that include software license should be capitalized and amortized, and costs in arrangements that do not include a software license should be expensed as incurred. This standard was effective for Kennametal beginning July 1, 2016 and was applied prospectively. The adoption of this guidance did not have a material impact on our condensed consolidated financial position, results of operations and cash flows.
Issued
In May 2017, the FASB issued guidance which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This guidance is effective for Kennametal beginning July 1, 2018. We are in the process of assessing the impact the adoption of this guidance will have on our condensed consolidated financial statements.
In March 2017, the FASB issued guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost. The guidance requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This guidance is effective for Kennametal beginning July 1, 2018. We are in the process of assessing the impact the adoption of this guidance will have on our condensed consolidated financial statements.
In October 2016, the FASB issued guidance on the accounting for income tax consequences of intra-entity transfers of assets other than inventory. The guidance clarifies that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for Kennametal beginning July 1, 2018. We are in the process of assessing the impact the adoption of this guidance will have on our condensed consolidated financial statements.
In August 2016, the FASB issued guidance on classification of certain cash receipts and cash payments in the statement of cash flow. The guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This guidance is effective for Kennametal beginning July 1, 2018. We are in the process of assessing the impact the adoption of this guidance will have on our condensed consolidated financial statements.
In June 2016, the FASB issued guidance on measurement of credit losses on financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The scope of this amendment includes valuation of trade receivables. This standard is effective for Kennametal beginning July 1, 2020. We are in the process of assessing the impact the adoption of this guidance will have on our consolidated financial statements.
In May 2016, the FASB issued guidance on narrow scope improvements and practical expedients as part of Topic 606: Revenue from Contracts with Customers. The amendments address collectability criterion and accounting for contracts that do not meet the criteria, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition and completed contracts at transition, in addition to a technical correction. 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 consolidated financial statements.

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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 consolidated financial statements.
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. We will adopt the standard effective July 1, 2017. The increase to deferred tax assets of $1.4 million related to cumulative excess tax benefits previously unrecognized will be offset by valuation allowance, due to the valuation allowance position of our U.S. entity. We will also reclassify excess tax benefits on the statement of cash flows from financing activities to operating activities, and employee taxes paid when Kennametal withholds shares for tax withholding purposes from operating activities to financing activities, on the consolidated statement of cash flows. See Note 12 in our consolidated financial statements set forth in Item 8.
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 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 consolidated financial statements.
In August 2015, the FASB issued guidance that defers the effective date of previously issued ASU 2014-09, “Revenue from Contracts with Customers: Topic 606.” Under this guidance, the effective date for Kennametal was deferred from July 1, 2017 to July 1, 2018. We are in the process of assessing the impact the adoption of this ASU will have on our consolidated financial statements.
In July 2015, the FASB issued guidance on subsequent measurement of inventory. The amendments in this update require that inventory other than LIFO be subsequently measured at the lower of cost and net realizable value, as opposed to the current practice of lower of cost or market. Subsequent measurement is unchanged for inventory measured using LIFO. This standard is effective for Kennametal beginning July 1, 2017. We do not expect this guidance to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. This standard is effective for Kennametal July 1, 2018. Currently, we are analyzing the standard's impact on our customer arrangements and evaluating the new standard against our historical accounting policies and practices, including the timing of revenue recognition. In particular, we are assessing the identification of performance obligations and the impact of variable consideration on the transaction price determination. We have not determined the complete impact of adoption on our condensed consolidated financial statements.

RECONCILIATION OF MEASURES NOT DEFINED BY U.S. GAAP In accordance with the SEC's Regulation G, the following provides definitions of the non-GAAP measures and the reconciliation to the most closely related GAAP measure. We believe that these measures provide useful perspective on underlying business trends and results and provide a supplemental measure of year-over-year results. The non-GAAP measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes. These measures may be useful to investors as they provide supplemental information about business performance and provide investors a view of our business results through the eyes of management. These non-GAAP measures are not intended to be considered by the user in place of the related GAAP measure, but rather as supplemental information to our business results. These non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted.

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Organic sales growth (decline) Organic sales growth (decline) is a non-GAAP measure of sales growth (decline) excluding the impacts of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. Management believes this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth (decline) on a consistent basis.
Reconciliations of organic sales growth (decline) to the most closely related GAAP measure, sales growth (decline), is as follows:
Year ended June 30, 2017
 
Sales Growth (Decline)
 
Foreign Currency Exchange Impact
 
Divestiture Impact
 
Business Days Impact
 
Organic Sales Growth
Industrial
 
3%
 
(2)%
 
—%
 
—%
 
5%
Widia
 
4%
 
—%
 
—%
 
(2)%
 
6%
Infrastructure
 
(9)%
 
(1)%
 
(9)%
 
—%
 
1%
Total Kennametal
 
(2)%
 
(2)%
 
(4)%
 
—%
 
4%
Year ended June 30, 2016
 
Sales Decline
 
Foreign Currency Exchange Impact
 
Divestiture Impact
 
Business Days Impact
 
Organic Sales Decline
Industrial
 
(13)%
 
(6)%
 
—%
 
—%
 
(7)%
Widia
 
(11)%
 
(5)%
 
—%
 
—%
 
(6)%
Infrastructure
 
(30)%
 
(3)%
 
(11)%
 
—%
 
(16)%
Total Kennametal
 
(21)%
 
(5)%
 
(5)%
 
—%
 
(11)%
Total Kennametal, three months ended June 30,
 
Sales Growth (Decline)
 
Foreign Currency Exchange Impact
 
Divestiture Impact
 
Business Days Impact
 
Organic Sales Growth (Decline)
2017
 
8%
 
(2)%
 
—%
 
(2)%
 
12%
2016
 
(18)%
 
(1)%
 
(9)%
 
1%
 
(9)%

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK We are exposed to certain market risks arising from transactions that are entered into in the normal course of business. As part of our financial risk management program, we use certain derivative financial instruments to manage these risks. We do not enter into derivative transactions for speculative purposes and, therefore, hold no derivative instruments for trading purposes. We use derivative financial instruments to provide predictability to the effects of changes in foreign exchange rates on our consolidated results and to achieve our targeted mix of fixed and floating interest rates on our outstanding debt. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow, allowing us to focus more of our attention on business operations. With respect to interest rate management, these derivative instruments allow us to achieve our targeted fixed-to-floating interest rate mix as a separate decision from funding arrangements in the bank and public debt markets. 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 expense (income), net. See Notes 2 and 16 of our consolidated financial statements set forth in Item 8.
We are exposed to counterparty credit risk for nonperformance of derivative contracts and, in the event of nonperformance, to market risk for changes in interest and currency exchange rates, as well as settlement risk. We manage exposure to counterparty credit risk through credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. We do not anticipate nonperformance by any of the counterparties.
The following provides additional information on our use of derivative instruments. Included below is a sensitivity analysis that is based upon a hypothetical 10 percent weakening or strengthening in the U.S. dollar and its effects on the June 30, 2017 currency exchange rates and the effective interest rates under our current borrowing arrangements. We compared our contractual derivative and borrowing arrangements in effect at June 30, 2017 to the hypothetical foreign exchange or interest rates in the sensitivity analysis to determine the effect on interest expense, pre-tax income and accumulated other comprehensive (loss) income. Our analysis takes into consideration the different types of derivative instruments and the applicability of hedge accounting.

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CASH FLOW HEDGES Currency A portion of our operations consists of investments in foreign subsidiaries. Our exposure to market risk from changes in foreign exchange rates arises from these investments, intercompany loans utilized to finance these subsidiaries, trade receivables and payables and firm commitments arising from international transactions. We manage our foreign exchange transaction risk to reduce the volatility of cash flows caused by currency exchange rate fluctuations through natural offsets where appropriate and through foreign exchange contracts. These contracts are designated as hedges of forecasted transactions that will settle in future periods and that would otherwise expose us to currency risk.
Our foreign exchange hedging program is intended to mitigate our exposure to currency exchange rate movements. This exposure arises largely from anticipated cash flows from cross-border intercompany sales of products and services. This program utilizes range forwards and forward contracts primarily to sell foreign currency. The notional amounts of the contracts translated into U.S. dollars at June 30, 2017 and 2016 were $75.3 million and $53.3 million, respectively. We would have paid $0.8 million and would have received $0.3 million at June 30, 2017 and 2016, respectively, to settle these contracts representing the fair value of these agreements. At June 30, 2017, a hypothetical 10 percent strengthening or weakening of the U.S. dollar would have changed accumulated other comprehensive (loss) income, net of tax, by $2.4 million.
In addition, we may enter into forward contracts to hedge transaction exposures or significant cross-border intercompany loans by either purchasing or selling specified amounts of foreign currency at a specified date. At June 30, 2017 and 2016, we had outstanding forward contracts to purchase and sell foreign currency with notional amounts, translated into U.S. dollars at June 30, 2017 and 2016 rates, of $13.7 million in a sell position and $57.5 million in a buy position, respectively. At June 30, 2017, a hypothetical 10 percent change in the year-end exchange rates would have resulted in a $4.1 million increase or decrease in pre-tax income and a $1.2 million increase or decrease in accumulated other comprehensive (loss) income, net of tax, related to these positions.
Interest Rate Our exposure to market risk for changes in interest rates relates primarily to our long-term debt obligations. We seek to manage our interest rate risk in order to balance our exposure between fixed and floating rates, while attempting to minimize our borrowing costs. To achieve these objectives, we primarily use interest rate swap contracts to manage exposure to interest rate changes related to these borrowings. We had no swaps in place as of June 30, 2017 and 2016.
DEBT AND NOTES PAYABLE At June 30, 2017 and 2016, we had $695.9 million and $695.4 million, respectively, of outstanding debt, including capital leases and notes payable. Effective interest rates as of June 30, 2017 and 2016 were 3.5 percent and 3.6 percent, respectively. A hypothetical change of 10 percent in market interest rates from June 30, 2017 levels would have an immaterial impact on our interest expense.
CURRENCY EXCHANGE RATE FLUCTUATIONS Currency exchange rate fluctuations decreased diluted earnings per share by $0.08 in 2017, increased diluted earnings per share by $0.08 in 2016 and did not have a material impact in 2015. Currency exchange rate fluctuations may have a material impact on future earnings in the short term and long term.

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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management has conducted an assessment of the Company’s internal controls over financial reporting as of June 30, 2017 using the criteria in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of June 30, 2017, based on the criteria in Internal Control – Integrated Framework (2013) issued by the COSO. The effectiveness of the Company’s internal control over financial reporting as of June 30, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in this Annual Report on Form 10-K.

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Report of Independent Registered Public Accounting Firm
    
To the Shareholders of Kennametal Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, cash flow and shareholders' equity present fairly, in all material respects, the financial position of Kennametal Inc. and its subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for the presentation of deferred income taxes and debt issuance costs in fiscal year 2017.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
August 14, 2017


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Table of Contents


CONSOLIDATED STATEMENTS OF INCOME
Year ended June 30 (in thousands, except per share data)
2017
 
2016
 
2015
Sales
$
2,058,368

 
$
2,098,436

 
$
2,647,195

Cost of goods sold
1,400,661

 
1,482,369

 
1,841,202

Gross profit
657,707

 
616,067

 
805,993

Operating expense
463,167

 
494,975

 
554,895

Restructuring and asset impairment charges (Notes 2 and 15)
65,018

 
143,810

 
582,235

Loss on divestiture (Note 4)

 
131,463

 

Amortization of intangibles
16,578

 
20,762

 
26,686

Operating income (loss)
112,944

 
(174,943
)
 
(357,823
)
Interest expense
28,842

 
27,752

 
31,466

Other expense (income), net
2,227

 
(4,124
)
 
(1,674
)
Income (loss) before income taxes
81,875

 
(198,571
)
 
(387,615
)
Provision (benefit) for income taxes
29,895

 
25,313

 
(16,654
)
Net income (loss)
51,980

 
(223,884
)
 
(370,961
)
Less: Net income attributable to noncontrolling interests
2,842

 
2,084

 
2,935

Net income (loss) attributable to Kennametal
$
49,138

 
$
(225,968
)
 
$
(373,896
)
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
 
 
Basic earnings (loss) per share
$
0.61

 
$
(2.83
)
 
$
(4.71
)
Diluted earnings (loss) per share
$
0.61

 
$
(2.83
)
 
$
(4.71
)
Dividends per share
$
0.80

 
$
0.80

 
$
0.72

Basic weighted average shares outstanding
80,351

 
79,835

 
79,342

Diluted weighted average shares outstanding
81,169

 
79,835

 
79,342


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
2017
 
2016
 
2015
Net income (loss)
 
$
51,980

 
$
(223,884
)
 
$
(370,961
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges
 
(471
)
 
(150
)
 
6,652

Reclassification of unrealized loss (gain) on expired derivatives designated and qualified as cash flow hedges
 
1,557

 
(1,563
)
 
(2,873
)
Unrecognized net pension and other postretirement benefit gain (loss)
 
15,559

 
(78,295
)
 
(47,982
)
Reclassification of net pension and other postretirement benefit loss
 
7,566

 
4,925

 
2,931

Foreign currency translation adjustments
 
5,888

 
(52,695
)
 
(139,465
)
Reclassification of foreign currency translation adjustment loss realized upon sale
 

 
15,088

 

Total other comprehensive income (loss), net of tax
 
30,099

 
(112,690
)
 
(180,737
)
Total comprehensive income (loss)
 
82,079

 
(336,574
)
 
(551,698
)
Less: comprehensive income (loss) attributable to noncontrolling interests
 
4,124

 
896

 
(410
)
Comprehensive income (loss) attributable to Kennametal Shareholders
 
$
77,955

 
$
(337,470
)
 
$
(551,288
)
The accompanying notes are an integral part of these consolidated financial statements.


35

Table of Contents


CONSOLIDATED BALANCE SHEETS
 As of June 30 (in thousands, except per share data)
2017
 
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
190,629

 
$
161,579

Accounts receivable, less allowance for doubtful accounts of $13,693 and $12,724 respectively
380,425

 
370,916

Inventories (Note 7)
487,681

 
458,830

Deferred income taxes (Notes 2 and 12)

 
26,713

Other current assets
55,166

 
57,303

Total current assets
1,113,901

 
1,075,341

Property, plant and equipment:
 
 
 
Land and buildings
350,002

 
353,789

Machinery and equipment
1,577,776

 
1,511,462

Less accumulated depreciation
(1,183,390
)
 
(1,134,611
)
Property, plant and equipment, net
744,388

 
730,640

Other assets:
 
 
 
Assets held for sale (Note 15)
6,980

 

Goodwill (Notes 2 and 8)
301,367

 
298,487

 Other intangible assets, less accumulated amortization of $129,981 and $114,093, respectively (Notes 2 and 8)
190,527

 
207,208

Deferred income taxes (Notes 2 and 12)
28,349

 
14,459

Other
29,984

 
36,648

Total other assets
557,207

 
556,802

Total assets
$
2,415,496

 
$
2,362,783

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt and capital leases (Note 10)
$
190

 
$
732

Notes payable to banks (Note 11)
735

 
1,163

Accounts payable
215,722

 
182,039

Accrued income taxes
6,202

 
16,602

Accrued vacation pay
18,108

 
24,709

Accrued payroll
67,574

 
49,761

Other current liabilities (Note 9)
152,947

 
152,269

Total current liabilities
461,478

 
427,275

Long-term debt and capital leases, less current maturities (Note 10)
694,991

 
693,548

Deferred income taxes (Notes 2 and 12)
14,883

 
17,126

Accrued postretirement benefits (Note 13)
16,906

 
18,876

Accrued pension benefits (Note 13)
143,954

 
182,597

Accrued income taxes
2,636

 
3,100

Other liabilities
27,995

 
24,460

Total liabilities
1,362,843

 
1,366,982

Commitments and contingencies (Note 19)

 

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

 

Capital stock, $1.25 par value; 120,000 shares authorized; 80,665 and 79,694 shares issued, respectively
100,832

 
99,618

Additional paid-in capital
474,547

 
436,617

Retained earnings
765,607

 
780,597

Accumulated other comprehensive loss (Note 14)
(323,692
)
 
(352,509
)
Total Kennametal Shareholders’ Equity
1,017,294

 
964,323

Noncontrolling interests
35,359

 
31,478

Total equity
1,052,653

 
995,801

Total liabilities and equity
$
2,415,496

 
$
2,362,783

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

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Table of Contents


CONSOLIDATED STATEMENTS OF CASH FLOW
Year ended June 30 (in thousands)
2017
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
 
 
Net income (loss)
$
51,980

 
$
(223,884
)
 
$
(370,961
)
Adjustments for non-cash items:
 
 
 
 
 
Depreciation
91,078

 
96,704

 
104,978

Amortization
16,578

 
20,762

 
26,686

Stock-based compensation expense
21,065

 
18,129

 
16,827

Restructuring and asset impairment charges (Notes 2 and 15)
1,802

 
118,779

 
548,028

Loss on divestiture (Note 4)

 
131,124

 

Deferred income tax provision
6,267

 
8,328

 
(48,575
)
Other
94

 
(6,113
)
 
2,098

Changes in certain assets and liabilities:
 
 
 
 
 
Accounts receivable
(7,606
)
 
32,661

 
46,552

Inventories
(24,300
)
 
69,552

 
70,874

Accounts payable and accrued liabilities
51,418

 
(2,180
)
 
(8,218
)
Accrued income taxes
6,873

 
(25,247
)
 
(10,163
)
Accrued pension and postretirement benefits
(27,818
)
 
(15,013
)
 
4,863

Other
4,771

 
(4,280
)
 
(31,552
)
Net cash flow provided by operating activities
192,202

 
219,322

 
351,437

INVESTING ACTIVITIES
 
 
 
 
 
Purchases of property, plant and equipment
(118,018
)
 
(110,697
)
 
(100,939
)
Disposals of property, plant and equipment
5,023

 
5,978

 
16,122

Proceeds from divestiture (Note 4)

 
56,127

 

Other
247

 
659

 
263

Net cash flow used for investing activities
(112,748
)
 
(47,933
)
 
(84,554
)
FINANCING ACTIVITIES
 
 
 
 
 
Net decrease in notes payable
(317
)
 
(6,288
)
 
(63,647
)
Net increase in short-term revolving and other lines of credit

 

 
200

Term debt borrowings
25,298

 
50,070

 
89,712

Term debt repayments
(25,899
)
 
(94,577
)
 
(308,736
)
Purchase of capital stock
(241
)
 
(295
)
 
(318
)
Dividend reinvestment and the effect of employee benefit and stock plans
21,455

 
4,519

 
13,844

Cash dividends paid to Shareholders
(64,128
)
 
(63,717
)
 
(56,979
)
Other
(6,317
)
 
(181
)
 
(7,039
)
Net cash flow used for financing activities
(50,149
)
 
(110,469
)
 
(332,963
)
Effect of exchange rate changes on cash and cash equivalents
(255
)
 
(4,835
)
 
(6,355
)
CASH AND CASH EQUIVALENTS
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
29,050

 
56,085

 
(72,435
)
Cash and cash equivalents, beginning of year
161,579

 
105,494

 
177,929

Cash and cash equivalents, end of year
$
190,629

 
$
161,579

 
$
105,494

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


37

Table of Contents


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
2017
 
2016
 
2015
Year ended June 30 (in thousands)
Shares

 
Amount

 
Shares

 
Amount

 
Shares

 
Amount

CAPITAL STOCK
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
79,694

 
$
99,618

 
79,375

 
$
99,219

 
78,672

 
$
98,340

Dividend reinvestment
7

 
9

 
12

 
15

 
7

 
9

Capital stock issued under employee benefit and stock plans
971

 
1,214

 
319

 
399

 
703

 
879

Purchase of capital stock
(7
)
 
(9
)
 
(12
)
 
(15
)
 
(7
)
 
(9
)
Balance at end of year
80,665

 
100,832

 
79,694

 
99,618

 
79,375

 
99,219

ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
 
436,617

 
 
 
419,829

 
 
 
395,890

Dividend reinvestment
 
 
235

 
 
 
279

 
 
 
311

Capital stock issued under employee benefit and stock plans
 
 
37,930

 
 
 
14,271

 
 
 
23,939

Sale of subsidiary stock to noncontrolling interests
 
 

 
 
 
2,517

 
 
 

Purchase of capital stock
 
 
(235
)
 
 
 
(279
)
 
 
 
(311
)
Balance at end of year
 
 
474,547

 
 
 
436,617

 
 
 
419,829

RETAINED EARNINGS
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
 
780,597

 
 
 
1,070,282

 
 
 
1,501,157

Net income (loss)
 
 
49,138

 
 
 
(225,968
)
 
 
 
(373,896
)
Cash dividends paid to Shareholders
 
 
(64,128
)
 
 
 
(63,717
)
 
 
 
(56,979
)
Balance at end of year
 
 
765,607

 
 
 
780,597

 
 
 
1,070,282

ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
 
(352,509
)
 
 
 
(243,523
)
 
 
 
(66,131
)
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges
 
 
(471
)
 
 
 
(150
)