KENNAMETAL INC (Form: 10-Q, Received: 02/04/2020 14:02:37)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-5318
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
  
25-0900168
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
 
 
525 William Penn Place
  
 
Suite 3300
 
 
Pittsburgh,
Pennsylvania
 
15219
(Address of principal executive offices)
  
(Zip Code)
Registrant’s telephone number, including area code: (412248-8000
600 Grant Street
Suite 5100
Pittsburgh,
Pennsylvania
15219-2706
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Capital Stock, par value $1.25 per share
KMT
New York Stock Exchange
Preferred Stock Purchase Rights
 
New York Stock Exchange
As of January 31, 2020, 82,898,074 shares of the Registrant’s Capital Stock, par value $1.25 per share, were outstanding.
 



KENNAMETAL INC.
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
 
Item No.
Page No.
 
 
 
 
 
 
1.
 
 
 
 
 
4
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
2.
25
 
 
 
3.
38
 
 
 
4.
39
 
 
 
1.
40
 
 
 
2.
40
 
 
 
6.
41
 
 
42

2


FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that do not relate strictly to historical or current facts. You can identify forward-looking statements by the fact they use words such as “should,” “anticipate,” “estimate,” “approximate,” “expect,” “may,” “will,” “project,” “intend,” “plan,” “believe” and other words of similar meaning and expression in connection with any discussion of future operating or financial performance or events. We have also included forward-looking statements in this Quarterly Report on Form 10-Q concerning, among other things, our strategy, goals, plans and projections regarding our financial position, liquidity and capital resources, results of operations, market position and product development. These statements are based on current estimates that involve inherent risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: downturns in the business cycle or the economy; our ability to achieve anticipated benefits from our restructuring, simplification and modernization initiatives; risks related to our foreign operations and international markets, such as fluctuations in currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; changes in the regulatory environment in which we operate, including environmental, health and safety regulations; potential for future goodwill and other intangible asset impairment charges; our ability to protect and defend our intellectual property; continuity and security of information technology infrastructure; competition; our ability to retain our management and employees; demands on management resources; availability and cost of the raw materials we use to manufacture our products; product liability claims; integrating acquisitions and achieving the expected savings and synergies; global or regional catastrophic events; demand for and market acceptance of our products; business divestitures; labor relations; and implementation of environmental remediation matters. We provide additional information about many of the specific risks we face in the “Risk Factors” section of our Annual Report on Form 10-K. We can give no assurance that any goal or plan set forth in our forward-looking statements will be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. Except as required by law, we do not intend to release publicly any revisions to forward-looking statements as a result of future events or developments.





3


PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
 
 
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in thousands, except per share amounts)
2019
 
2018
 
2019
 
2018
Sales
$
505,080

 
$
587,394

 
$
1,023,168

 
$
1,174,080

Cost of goods sold
373,062

 
388,796

 
752,170

 
764,389

Gross profit
132,018

 
198,598

 
270,998

 
409,691

Operating expense
107,548

 
114,635

 
221,739

 
237,920

Restructuring and asset impairment charges (Notes 7 and 18)
62,329

 
1,545

 
66,995

 
2,620

Loss on divestiture (Note 4)
6,517

 

 
6,517

 

Amortization of intangibles
3,262

 
3,560

 
7,008

 
7,141

Operating (loss) income
(47,638
)
 
78,858

 
(31,261
)
 
162,010

Interest expense
8,055

 
8,104

 
15,936

 
16,201

Other income, net
(4,211
)
 
(4,022
)
 
(6,891
)
 
(6,782
)
(Loss) income before income taxes
(51,482
)
 
74,776

 
(40,306
)
 
152,591

(Benefit) provision for income taxes
(45,253
)
 
18,529

 
(41,487
)
 
37,921

Net (loss) income
(6,229
)
 
56,247

 
1,181

 
114,670

Less: Net (loss) income attributable to noncontrolling interests
(290
)
 
1,549

 
653

 
3,274

Net (loss) income attributable to Kennametal
$
(5,939
)
 
$
54,698

 
$
528

 
$
111,396

PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
 
 
 
 
Basic (loss) earnings per share
$
(0.07
)
 
$
0.66

 
$
0.01

 
$
1.35

Diluted (loss) earnings per share
$
(0.07
)
 
$
0.66

 
$
0.01

 
$
1.34

Dividends per share
$
0.20

 
$
0.20

 
$
0.40

 
$
0.40

Basic weighted average shares outstanding
83,075

 
82,331

 
82,979

 
82,218

Diluted weighted average shares outstanding
83,075

 
83,310

 
83,618

 
83,233


KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
 
 
Three Months Ended December 31,
Six Months Ended December 31,
(in thousands)
2019
 
2018
2019
 
2018
Net (loss) income
$
(6,229
)
 
$
56,247

$
1,181

 
$
114,670

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
Unrealized gain (loss) on derivatives designated and qualified as cash flow hedges
461

 
170

856

 
(91
)
Reclassification of unrealized (gain) loss on derivatives designated and qualified as cash flow hedges
(393
)
 
262

(212
)
 
857

Unrecognized net pension and other postretirement benefit (loss) gain
(3,056
)
 
871

(449
)
 
1,194

Reclassification of net pension and other postretirement benefit loss
1,990

 
1,298

3,950

 
2,606

Foreign currency translation adjustments
25,751

 
(3,400
)
(9,674
)
 
(19,605
)
Total other comprehensive income (loss), net of tax
24,753

 
(799
)
(5,529
)
 
(15,039
)
Total comprehensive income (loss)
18,524

 
55,448

(4,348
)
 
99,631

Less: comprehensive income (loss) attributable to noncontrolling interests
247

 
2,049

(201
)
 
2,542

Comprehensive income (loss) attributable to Kennametal Shareholders
$
18,277

 
$
53,399

$
(4,147
)
 
$
97,089

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

4


KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
 
 
 
(in thousands, except per share data)
December 31,
2019
 
June 30,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
105,210

 
$
182,015

Accounts receivable, less allowance for doubtful accounts of $10,693 and $10,083, respectively
310,379

 
379,855

Inventories (Note 10)
522,499

 
571,576

Other current assets
97,824

 
57,381

Total current assets
1,035,912

 
1,190,827

Property, plant and equipment:
 
 
 
Land and buildings
350,138

 
351,142

Machinery and equipment
1,886,074

 
1,804,871

Less accumulated depreciation
(1,227,574
)
 
(1,221,118
)
Property, plant and equipment, net
1,008,638

 
934,895

Other assets:
 
 
 
Goodwill (Note 18)
285,826

 
300,011

Other intangible assets, less accumulated amortization of $130,964 and $158,507, respectively (Note 18)
141,398

 
160,998

Operating lease right-of-use assets (Note 11)
50,153

 

Deferred income taxes
33,386

 
20,507

Other
67,720

 
49,031

Total other assets
578,483

 
530,547

Total assets
$
2,623,033

 
$
2,656,269

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Notes payable to banks
2,102

 
157

Current operating lease liabilities (Note 11)
13,993

 

Accounts payable
173,160

 
212,908

Accrued income taxes
8,859

 
29,223

Accrued expenses
45,135

 
76,616

Other current liabilities
165,861

 
142,822

Total current liabilities
409,110

 
461,726

Long-term debt, less current maturities (Note 12)
593,223

 
592,474

Operating lease liabilities (Note 11)
36,415

 

Deferred income taxes
23,283

 
23,322

Accrued pension and postretirement benefits
170,918

 
174,003

Accrued income taxes
9,146

 
9,038

Other liabilities
33,911

 
21,002

Total liabilities
1,276,006

 
1,281,565

Commitments and contingencies

 

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

 

Capital stock, $1.25 par value; 120,000 shares authorized; 82,894 and 82,421 shares issued, respectively
103,618

 
103,026

Additional paid-in capital
536,522

 
528,827

Retained earnings
1,044,247

 
1,076,862

Accumulated other comprehensive loss
(378,219
)
 
(373,543
)
Total Kennametal Shareholders’ Equity
1,306,168

 
1,335,172

Noncontrolling interests
40,859

 
39,532

Total equity
1,347,027

 
1,374,704

Total liabilities and equity
$
2,623,033

 
$
2,656,269

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

5


KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
 
 
 
 
 
 
Six Months Ended December 31,
(in thousands)
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
1,181

 
$
114,670

Adjustments for non-cash items:
 
 
 
Depreciation
53,801

 
47,807

Amortization
7,008

 
7,141

Stock-based compensation expense
13,974

 
13,435

Restructuring and asset impairment charges (Notes 7 and 18)
17,708

 
(257
)
Deferred income tax provision
(13,750
)
 
1,512

Loss on divestiture (Note 4)
6,517

 

Other
350

 
2,109

Changes in certain assets and liabilities:
 
 
 
Accounts receivable
64,546

 
14,026

Inventories
34,329

 
(59,190
)
Accounts payable and accrued liabilities
(28,548
)
 
(82,828
)
Accrued income taxes
(53,020
)
 
7,995

Accrued pension and postretirement benefits
(12,101
)
 
(9,760
)
Other
(4,898
)
 
4,841

Net cash flow provided by operating activities
87,097

 
61,501

INVESTING ACTIVITIES
 
 
 
Purchases of property, plant and equipment
(147,532
)
 
(88,076
)
Disposals of property, plant and equipment
835

 
2,490

Proceeds from divestiture (Note 4)
23,950

 

Other
(922
)
 
89

Net cash flow used for investing activities
(123,669
)
 
(85,497
)
FINANCING ACTIVITIES
 
 
 
Net increase in notes payable
1,927

 
2,473

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

 
(174
)
Term debt repayments

 
(400,000
)
Purchase of capital stock
(106
)
 
(107
)
The effect of employee benefit and stock plans and dividend reinvestment
(5,583
)
 
(2,182
)
Cash dividends paid to Shareholders
(33,143
)
 
(32,820
)
Other
(1,779
)
 
151

Net cash flow used for financing activities
(38,684
)
 
(432,659
)
Effect of exchange rate changes on cash and cash equivalents
(1,549
)
 
(3,222
)
CASH AND CASH EQUIVALENTS
 
 
 
Net decrease in cash and cash equivalents
(76,805
)
 
(459,877
)
Cash and cash equivalents, beginning of period
182,015

 
556,153

Cash and cash equivalents, end of period
$
105,210

 
$
96,276

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


6


KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 



1.
BASIS OF PRESENTATION

The condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q, which include our accounts and those of our majority-owned subsidiaries, should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the "2019 Annual Report"). The condensed consolidated balance sheet as of June 30, 2019 was derived from the audited balance sheet included in our 2019 Annual Report. The interim statements are unaudited; however, we believe that all adjustments necessary for a fair statement of the results of the interim periods were made and all adjustments are normal recurring adjustments. The results for the six months ended December 31, 2019 and 2018 are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. For example, a reference to 2020 is to the fiscal year ending June 30, 2020. When used in this Quarterly Report on Form 10-Q, unless the context requires otherwise, the terms "the Company," “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

2.
NEW ACCOUNTING STANDARDS
Adopted
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, "Leases: Topic 842," which replaces the existing guidance in ASC 840, Leases. The standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for substantially all leases. We adopted this ASU on July 1, 2019 using the modified retrospective transition approach with the optional transition relief that allows for a cumulative-effect adjustment in the period of adoption and without a restatement of prior periods. Therefore, prior period amounts were not adjusted and will continue to be reported under the accounting standards in effect for those periods. We determined that there was no cumulative-effect adjustment to beginning retained earnings on the condensed consolidated balance sheet. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward historical lease classification. Adoption of this ASU resulted in the recording of lease liabilities of approximately $49 million with the offset to lease ROU assets of $49 million as of July 1, 2019. The standard did not materially impact our condensed consolidated statement of income and our condensed consolidated statement of cash flows. Refer to Note 11 for additional disclosures regarding the adoption of this new standard.
In August 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities," which seeks to improve financial reporting and obtain closer alignment with risk management activities, in addition to simplifying the application of hedge accounting guidance and additional disclosures. We adopted this ASU on July 1, 2019. Adoption of this guidance did not have a material effect on our condensed consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which includes amendments allowing the reclassification of the income tax effects of the Tax Cuts and Jobs Act of 2017 (TCJA) to improve the usefulness of information reported to financial statement users. The amendments in this update also require certain disclosures about stranded tax effects. Certain guidance is optional and was effective for Kennametal July 1, 2019. We elected not to reclassify the stranded tax effects as permissible under this standard. Adoption of this guidance did not have a material effect on our condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting," which expands the scope of accounting for stock-based compensation to nonemployees. We adopted this ASU on July 1, 2019. Adoption of this guidance did not have a material effect on our condensed consolidated financial statements.
Issued
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes by eliminating certain exceptions within ASC 740, Income Taxes, and clarifying certain aspects of the current guidance. This standard is effective for Kennametal beginning July 1, 2021, with early adoption permitted. The Company is in the process of assessing the impact the adoption of this guidance may have on our condensed consolidated financial statements.


7


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


3.
SUPPLEMENTAL CASH FLOW DISCLOSURES
 
Six Months Ended December 31,
(in thousands)
2019
 
2018
Cash paid during the period for:
 
 
 
Income taxes
$
24,400

 
$
28,414

Interest
13,953

 
16,745

Supplemental disclosure of non-cash information:
 
 
 
Changes in accounts payable related to purchases of property, plant and equipment
(2,700
)
 
(100
)


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

5.
FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three levels to prioritize the inputs used in valuations, as defined below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Inputs that are unobservable.
As of December 31, 2019, the fair values of our financial assets and financial liabilities are categorized as follows: 
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
211

 
$

 
$
211

Total assets at fair value
$

 
$
211

 
$

 
$
211

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
200

 
$

 
$
200

Total liabilities at fair value
$

 
$
200

 
$

 
$
200

 

8


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


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

 
$
152

 
$

 
$
152

Total assets at fair value
$

 
$
152

 
$

 
$
152

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives (1)
$

 
$
55

 
$

 
$
55

Total liabilities at fair value
$

 
$
55

 
$

 
$
55

 (1) Currency derivatives are valued based on observable market spot and forward rates and are classified within Level 2 of the fair value hierarchy.
There have been no changes in classification and transfers between levels in the fair value hierarchy in the current period.

6.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As part of our financial risk management program, we use certain derivative financial instruments. We do not enter into derivative transactions for speculative purposes and, therefore, hold no derivative instruments for trading purposes. We account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated and qualifies as a hedge of such items. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow. We measure hedge effectiveness by assessing the changes in the fair value or expected future cash flows of the hedged item.
The fair value of derivatives designated and not designated as hedging instruments in the condensed consolidated balance sheet are as follows:
(in thousands)
December 31,
2019
 
June 30,
2019
Derivatives designated as hedging instruments
 
 
 
Other current assets - range forward contracts
$
211

 
$
145

Total derivatives designated as hedging instruments
211

 
145

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

 
8

Other current liabilities - currency forward contracts
(200
)
 
(56
)
Total derivatives not designated as hedging instruments
(200
)
 
(48
)
Total derivatives
$
11

 
$
97


Certain currency forward contracts that hedge significant cross-border intercompany loans are considered as other derivatives and therefore do not qualify for hedge accounting. These contracts are recorded at fair value in the condensed consolidated balance sheet, with the offset to other income, net. (Gains) losses related to derivatives not designated as hedging instruments have been recognized as follows:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in thousands)
2019
 
2018
 
2019
 
2018
Other income, net - currency forward contracts
$
(1
)
 
$
(2
)
 
$
112

 
$
76

 

9


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


CASH FLOW HEDGES
Range forward contracts (a transaction where both a put option is purchased and a call option is sold) are designated as cash flow hedges and hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts are recorded in accumulated other comprehensive loss and are recognized as a component of cost of goods sold and other income, net when the underlying sale of products or services is recognized into earnings. The notional amount of the contracts translated into U.S. dollars at December 31, 2019 and June 30, 2019, was $29.2 million and $61.5 million, respectively. The time value component of the fair value of range forward contracts is excluded from the assessment of hedge effectiveness. Assuming the market rates remain constant with the rates at December 31, 2019, we expect to recognize into earnings $0.1 million of expense on outstanding derivatives in the next 12 months.
The following represents gains and losses related to cash flow hedges:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in thousands)
2019
 
2018
 
2019
 
2018
Gains (losses) recognized in other comprehensive income (loss), net
$
461

 
$
170

 
$
856

 
$
(91
)
Losses reclassified from accumulated other comprehensive loss into cost of goods sold and other income, net
$
391

 
$
565

 
$
550

 
$
1,097


No portion of the gains or losses recognized in earnings was due to ineffectiveness and no amounts were excluded from our effectiveness testing for the six months ended December 31, 2019 and 2018.
NET INVESTMENT HEDGES
As of December 31, 2019, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of €42.5 million as net investment hedges to hedge the foreign exchange exposure of our net investment in our Euro-based subsidiaries. We recorded a loss of $1.2 million and a gain of $0.5 million as a component of foreign currency translation adjustments in other comprehensive loss for the three months ended December 31, 2019 and 2018, respectively. We recorded a loss of $0.1 million and a gain of $0.5 million as a component of foreign currency translation adjustments in other comprehensive loss for the six months ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, the foreign currency-denominated intercompany loans payable designated as net investment hedges consisted of:
Instrument
Notional (EUR in thousands)(2)
Notional (USD in thousands)(2)
Maturity
Foreign currency-denominated intercompany loan payable
28,527

$
32,060

June 26, 2022
Foreign currency-denominated intercompany loan payable
20,028

22,508

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

7.
RESTRUCTURING AND RELATED CHARGES
FY20 Restructuring Actions
In the June quarter of fiscal 2019, we began implementing the current phase of restructuring associated with our simplification/modernization initiative. These actions are expected to reduce structural costs, improve operational efficiency and position us for long-term profitable growth. These actions are expected to be completed in fiscal 2020 and are expected to be primarily cash expenditures.
The pre-tax charges for these programs are expected to be in the range of $55 million to $65 million, which are expected to be 80 percent Industrial, 15 percent Infrastructure and 5 percent Widia. Total restructuring and related charges since inception of $44.5 million were recorded for this program through December 31, 2019, consisting of: $36.6 million in Industrial, $5.8 million in Infrastructure and $2.2 million in Widia.

10


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


FY21 Restructuring Actions
On July 11, 2019, we announced the initiation of restructuring actions in Germany associated with simplification/modernization, which are expected to reduce structural costs. We have agreed with local employee representatives to downsize the Essen, Germany operations instead of the previously proposed closure. We are also evaluating the acceleration of other facility closures as part of these restructuring activities. These actions are expected to be completed by the end of fiscal 2021 and are expected to be primarily cash expenditures.
The pre-tax charges for these programs are expected to be in the range of $55 million to $65 million, which is expected to be primarily in the Industrial segment. Total restructuring and related charges since inception of $28.7 million were recorded for this program through December 31, 2019 in the Industrial segment.
Restructuring and Related Charges Recorded
We recorded restructuring and related charges of $51.3 million and $2.1 million for the three months ended December 31, 2019 and 2018, respectively. Of these amounts, restructuring charges for the three months ended December 31, 2019 totaled $48.0 million, of which $0.3 million were related to inventory and were recorded in cost of goods sold, and restructuring charges for the three months ended December 31, 2018 totaled $1.5 million. Restructuring-related charges of $3.3 million and $0.6 million were recorded in cost of goods sold for the three months ended December 31, 2019 and 2018, respectively.
We recorded restructuring and related charges of $59.3 million and $3.1 million for the six months ended December 31, 2019 and 2018, respectively. Of these amounts, restructuring charges for the six months ended December 31, 2019 totaled $52.7 million, of which $0.3 million were related to inventory and were recorded in cost of goods sold, and restructuring charges for the six months ended December 31, 2018 totaled $2.6 million. Restructuring-related charges of $6.6 million and $0.5 million were recorded in cost of goods sold for the six months ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, $43.5 million and $13.0 million of the restructuring accrual is recorded in other current liabilities and other liabilities, respectively, in our condensed consolidated balance sheet. The restructuring accrual of $19.2 million as of June 30, 2019 is recorded in other current liabilities. The amount attributable to each segment is as follows:
(in thousands)
June 30, 2019
 
Expense
 
Asset Write-Down
 
Translation
 
Cash Expenditures
 
December 31, 2019
Industrial
 
 
 
 
 
 
 
 
 
 
 
Severance
$
8,863

 
$
47,429

 
$

 
$
325

 
$
(10,337
)
 
$
46,280

Facilities

 
2,298

 
(2,298
)
 

 

 

Other
35

 
4

 

 

 
(14
)
 
25

Total Industrial
$
8,898

 
$
49,731

 
$
(2,298
)
 
$
325

 
$
(10,351
)
 
$
46,305

 
 
 
 
 
 
 
 
 
 
 
 
Widia
 
 
 
 
 
 
 
 
 
 
 
Severance
$
2,306

 
$
329

 
$

 
$
(21
)
 
$
(221
)
 
$
2,393

Facilities

 
24

 
(24
)
 

 

 

Other
24

 

 

 

 

 
24

Total Widia
$
2,330

 
$
353

 
$
(24
)
 
$
(21
)
 
$
(221
)
 
$
2,417

 
 
 
 
 
 
 
 
 
 
 
 
Infrastructure
 
 
 
 
 
 
 
 
 
 
 
Severance
$
7,956

 
$
1,870

 
$

 
$
(213
)
 
$
(1,863
)
 
$
7,750

Facilities

 
758

 
(758
)
 

 

 

Other
28

 
2

 

 
(1
)
 
(4
)
 
25

Total Infrastructure
$
7,984

 
$
2,630

 
$
(758
)
 
$
(214
)
 
$
(1,867
)
 
$
7,775

Total
$
19,212

 
$
52,714

 
$
(3,080
)
 
$
90

 
$
(12,439
)
 
$
56,497




11


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


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

 
$
33.92

 
 
 
 
Exercised
(34,525
)
 
26.62

 
 
 
 
Lapsed or forfeited
(42,544
)
 
43.30

 
 
 
 
Options outstanding, December 31, 2019
704,604

 
$
33.71

 
3.3
 
$
3,757

Options vested, December 31, 2019
704,604

 
$
33.71

 
3.3
 
$
3,757

Options exercisable, December 31, 2019
704,604

 
$
33.71

 
3.3
 
$
3,757


As of December 31, 2019, there was no unrecognized compensation cost related to options outstanding.
All options were fully vested as of December 31, 2019. Fair value of options vested during the six months ended December 31, 2018 was $1.2 million. The amount of cash received from the exercise of options during the six months ended December 31, 2019 and 2018 was $0.7 million and $3.9 million, respectively. The total intrinsic value of options exercised during the six months ended December 31, 2019 and 2018 was $0.3 million and $1.8 million, respectively.
Restricted Stock Units – Performance Vesting and Time Vesting
Changes in our performance vesting and time vesting restricted stock units for the six months ended December 31, 2019 were as follows:
 
Performance Vesting Stock Units
 
Performance Vesting Weighted Average Fair Value
 
Time Vesting
Stock Units
 
Time Vesting Weighted Average Fair Value
Unvested, June 30, 2019
405,230

 
$
35.58

 
926,927

 
$
36.43

Granted
275,216

 
28.74

 
619,154

 
27.95

Vested
(146,377
)
 
27.09

 
(435,815
)
 
33.79

Performance metric adjustments, net
32,707

 
32.79

 

 

Forfeited
(1,440
)
 
39.26

 
(8,479
)
 
35.20

Unvested, December 31, 2019
565,336

 
$
34.28

 
1,101,787

 
$
32.72

During the six months ended December 31, 2019 and 2018, compensation expense related to time vesting and performance vesting restricted stock units was $13.4 million and $12.8 million, respectively. As of December 31, 2019, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $28.6 million and is expected to be recognized over a weighted average period of 2.1 years.


12


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


9.
PENSION AND OTHER POSTRETIREMENT BENEFITS
The table below summarizes the components of net periodic pension income:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in thousands)
2019
 
2018
 
2019
 
2018
Service cost
$
445

 
$
407

 
$
895

 
$
818

Interest cost
6,832

 
7,970

 
13,656

 
15,960

Expected return on plan assets
(13,496
)
 
(13,434
)
 
(26,952
)
 
(26,896
)
Amortization of transition obligation
22

 
23

 
44

 
45

Amortization of prior service cost (credit)
13

 
(5
)
 
25

 
(10
)
Recognition of actuarial losses
2,585

 
1,679

 
5,180

 
3,374

Settlement gain

 

 
(122
)
 

Net periodic pension income
$
(3,599
)
 
$
(3,360
)
 
$
(7,274
)
 
$
(6,709
)

The table below summarizes the components of net periodic other postretirement benefit cost:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in thousands)
2019
 
2018
 
2019
 
2018
Interest cost
$
101

 
$
153

 
$
202

 
$
307

Amortization of prior service credit
(69
)
 
(22
)
 
(138
)
 
(45
)
Recognition of actuarial loss
64

 
62

 
128

 
124

Net periodic other postretirement benefit cost
$
96

 
$
193

 
$
192

 
$
386



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

10.
INVENTORIES
We used the last-in, first-out (LIFO) method of valuing inventories for 40 percent and 41 percent of total inventories at December 31, 2019 and June 30, 2019, respectively. Inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year; therefore, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs and are subject to any final year-end LIFO inventory adjustments.
Inventories consisted of the following: 
(in thousands)
December 31, 2019
 
June 30, 2019
Finished goods
$
312,524

 
$
311,684

Work in process and powder blends
194,933

 
246,414

Raw materials
78,892

 
95,620

Inventories at current cost
586,349

 
653,718

Less: LIFO valuation
(63,850
)
 
(82,142
)
Total inventories
$
522,499

 
$
571,576




13


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


11.
LEASES
At the inception of our contracts we determine if the contract is or contains a lease. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement. For leases that do not have a readily determinable implicit rate, we use a discount rate based on our incremental borrowing rate, which is determined considering factors such as the lease term, our credit rating and the economic environment of the location of the lease as of the commencement date.
We account for non-lease components separately from lease components. These costs often relate to the payments for a proportionate share of real estate taxes, insurance, common area maintenance and other operating costs in addition to base rent. We also do not recognize ROU assets and liabilities for leases with an initial term of 12 months or less. Lease costs associated with leases of less than 12 months were $1.9 million and $4.0 million for the three and six months ended December 31, 2019, respectively.
As a lessee, we have various operating lease agreements primarily related to real estate, vehicles and office and plant equipment. Our real estate leases, which are comprised primarily of manufacturing, warehousing, office and administration facilities, represent a majority of our lease liability. Our lease payments are largely fixed. Any variable lease payments, including utilities, common area maintenance and repairs and maintenance, are expensed during the period incurred. Variable lease costs were immaterial for the three and six months ended December 31, 2019. A majority of our real estate leases include options to extend the lease and options to early terminate the lease. Leases with an early termination option generally involve a termination payment. We review all options to extend, terminate, or purchase the ROU assets at the inception of the lease and account for these options when they are reasonably certain of being exercised. Our lease agreements generally do not contain any material residual value guarantees or materially restrictive covenants. We do not have any material leases that have been signed but not commenced, and we did not have any lease transactions with related parties.
The weighted average remaining lease term and discount rate for our operating leases were approximately 8.9 years and 3.4 percent, respectively, at December 31, 2019.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in operating expense on our consolidated statement of income. Operating lease cost was $4.2 million and $8.3 million for the three and six months ended December 31, 2019, respectively.
The following table sets forth supplemental cash flow information related to our operating leases:
(in thousands)
 
Six Months Ended December 31, 2019
Operating cash flows from operating leases
 
$
7,978

ROU assets obtained in exchange for new operating lease liabilities
 
$
5,572


The following table sets forth the maturities of our operating lease liabilities and reconciles the respective undiscounted payments to the operating lease liabilities in the condensed consolidated balance sheet as of December 31, 2019:
Year Ended June 30,
(in thousands)
 
December 31, 2019
Remaining six months of 2020
 
$
8,206

2021
 
13,093

2022
 
8,532

2023
 
5,602

2024
 
3,884

Thereafter
 
19,304

Total undiscounted operating lease payments
 
$
58,621

   Less: discount to net present value
 
8,213

Total operating lease liabilities
 
$
50,408




14


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


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

2021
 
12,212

2022
 
6,693

2023
 
4,294

2024
 
2,636

Thereafter
 
17,168

Total future minimum lease payments
 
$
60,077



12.
LONG-TERM DEBT
Our five-year, multi-currency, revolving credit facility, as amended and restated in June 2018 (Credit Agreement), provides for revolving credit loans of up to $700 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the Credit Agreement). We were in compliance with all such covenants as of December 31, 2019. We had no borrowings outstanding under the Credit Agreement as of December 31, 2019 and June 30, 2019. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries. The Credit Agreement matures in June 2023.
Fixed rate debt had a fair market value of $630.8 million and $622.0 million at December 31, 2019 and June 30, 2019, respectively. The Level 2 fair value is determined based on the quoted market prices for similar debt instruments as of December 31, 2019 and June 30, 2019, respectively.

13.
ENVIRONMENTAL MATTERS
The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain of our locations.
We establish and maintain reserves for certain potential environmental liabilities. At December 31, 2019 and June 30, 2019, the balances of these reserves were $12.0 million and $12.4 million, respectively. These reserves represent anticipated costs associated with potential remedial requirements and are generally not discounted.
The reserves we have established for potential environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the United States Environmental Protection Agency (USEPA), other governmental agencies and by the Potentially Responsible Party (PRP) groups in which we are participating. Although our reserves currently appear to be sufficient to cover these potential environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The reserved and unreserved liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.
Superfund Sites Among other environmental laws, we are subject to the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), under which we have been designated by the USEPA as a PRP with respect to environmental remedial costs at certain Superfund sites. We have evaluated our claims and liabilities associated with these Superfund sites based upon best currently available information. We believe our environmental accruals are adequate to cover our portion of the environmental remedial costs at the Superfund sites where we have been designated a PRP, to the extent these expenses are probable and reasonably estimable.


15


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


14.
INCOME TAXES
Effective tax rates
The effective income tax rates for the three months ended December 31, 2019 and 2018 were 87.9 percent (benefit on a loss) and 24.8 percent (provision on income), respectively. The year-over-year change is primarily due to a discrete $14.5 million benefit for the one-time effect of Swiss tax reform, the impairment of Widia goodwill, the change in the jurisdictional mix caused by expected restructuring and related charges and the increase in tax on global intangible low-taxed income (GILTI) and the base erosion anti-abuse tax (BEAT), which are both components of the U.S. Tax Cuts and Jobs Act of 2017. The prior year rate included a $6.1 million charge related to changes in the indefinite reinvestment assertion on certain foreign subsidiaries' undistributed earnings and a $3.9 million benefit recorded to reflect the finalization of the amount of the one-time tax imposed on our unremitted foreign earnings.
The effective income tax rates for the six months ended December 31, 2019 and 2018 were 102.9 percent (benefit on a loss) and 24.9 percent (provision on income), respectively. The year-over-year change is primarily due to a discrete $14.5 million benefit for the one-time effect of Swiss tax reform, the impairment of Widia goodwill, the change in the jurisdictional mix caused by expected restructuring and related charges, the increase in GILTI and BEAT.
Swiss tax reform
Legislation was effectively enacted during the three months ended December 31, 2019 when the Canton of Schaffhausen approved the Federal Act on Tax Reform and AHV Financing on October 8, 2019 (Swiss tax reform). Significant changes from Swiss tax reform include the abolishment of certain favorable tax regimes and the creation of a ten-year transitional period at both the federal and cantonal levels.
The transitional provisions of Swiss tax reform allow companies to utilize a combination of lower tax rates and tax basis adjustments to fair value, which are used for tax depreciation and amortization purposes resulting in deductions over the transitional period. To reflect the federal and cantonal transitional provisions, as they apply to us, we recorded a deferred tax asset of $14.5 million during the three months ended December 31, 2019. We consider the deferred tax asset from Swiss tax reform to be an estimate based on our current interpretation of the legislation, which is subject to change based on further legislative guidance, review with the Swiss federal and cantonal authorities and modifications to the underlying valuation.

15.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of shares outstanding during the period, while diluted earnings per share is calculated to reflect the potential dilution that would occur related to the issuance of capital stock under stock option grants, performance awards and restricted stock units. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options, performance awards and restricted stock units.
The following tables provide the computation of diluted shares outstanding for the three months ended December 31, 2018 and the six months ended December 31, 2019 and 2018:
 
 
Three Months Ended December 31,
 
Six Months Ended
December 31,
(in thousands)
 
2018
 
2019
 
2018
Weighted-average shares outstanding during period
 
82,331

 
82,979

 
82,218

Add: Unexercised stock options and unvested restricted stock units
 
979

 
639

 
1,015

Number of shares on which diluted earnings per share is calculated
 
83,310

 
83,618

 
83,233

Unexercised stock options with an exercise price greater than the average market price and restricted stock units not included in the computation because they were anti-dilutive
 
469

 
641

 
400


For the three months ended December 31, 2019, the effect of unexercised capital stock options and unvested restricted stock units was anti-dilutive as a result of a net loss in the period and therefore has been excluded from diluted shares outstanding as well as from the diluted earnings per share calculations.

16


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


16.
EQUITY
A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests for the three months ending December 31, 2019 and 2018 is as follows:
 
Kennametal Shareholders’ Equity
 
 
 
 
(in thousands)
Capital
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive loss
 
Non-
controlling
interests
 
Total equity
Balance as of September 30, 2019
$
103,542

 
$
530,695

 
$
1,066,763

 
$
(402,434
)
 
$
39,084

 
$
1,337,650

Net loss

 

 
(5,939
)
 

 
(290
)
 
(6,229
)
Other comprehensive income

 

 

 
24,215

 
538

 
24,753

Dividend reinvestment
2

 
50

 

 

 

 
52

Capital stock issued under employee benefit and stock plans(3)
76

 
5,827

 

 

 

 
5,903

Purchase of capital stock
(2
)
 
(50
)
 

 

 

 
(52
)
Additions to noncontrolling interest

 

 

 

 
1,527

 
1,527

Cash dividends

 

 
(16,577
)
 


 

 
(16,577
)
Total equity, December 31, 2019
$
103,618

 
$
536,522

 
$
1,044,247

 
$
(378,219
)
 
$
40,859

 
$
1,347,027

 
 
Kennametal Shareholders’ Equity
 
 
 
 
(in thousands)
Capital
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated other comprehensive loss
 
Non-
controlling
interests
 
Total equity
Balance as of September 30, 2018
$
102,615

 
$
517,349

 
$
940,983

 
$
(333,333
)
 
$
36,495

 
$
1,264,109

Net income

 

 
54,698

 

 
1,549

 
56,247

Other comprehensive (loss) income

 

 

 
(1,299
)
 
500

 
(799
)
Dividend reinvestment
2

 
52

 

 

 

 
54

Capital stock issued under employee benefit and stock plans(3)
85

 
5,064

 

 

 

 
5,149

Purchase of capital stock
(2
)
 
(52
)
 

 

 

 
(54
)
Cash dividends

 

 
(16,422
)
 

 

 
(16,422
)
Total equity, December 31, 2018
$
102,700

 
$
522,413

 
$
979,259

 
$
(334,632
)
 
$
38,544

 
$
1,308,284




17


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


A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests for the six months ending December 31, 2019 and 2018 is as follows:
 
Kennametal Shareholders’ Equity
 
 
 
 
(in thousands)
Capital
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive loss
 
Non-
controlling
interests
 
Total equity
Balance as of June 30, 2019
$
103,026

 
$
528,827

 
$
1,076,862

 
$
(373,543
)
 
$
39,532

 
$
1,374,704

Net income

 

 
528

 

 
653

 
1,181

Other comprehensive loss

 

 

 
(4,676
)
 
(853
)
 
(5,529
)
Dividend reinvestment
4

 
102

 

 

 

 
106

Capital stock issued under employee benefit and stock plans(3)
592

 
7,695

 

 

 

 
8,287

Purchase of capital stock
(4
)
 
(102
)
 

 

 

 
(106
)
Additions to noncontrolling interest

 

 

 

 
1,527

 
1,527

Cash dividends

 

 
(33,143
)
 

 

 
(33,143
)
Total equity, December 31, 2019
$
103,618

 
$
536,522

 
$
1,044,247

 
$
(378,219
)
 
$
40,859

 
$
1,347,027

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

 
$
511,909

 
$
900,683

 
$
(320,325
)
 
$
36,002

 
$
1,230,327

Net income

 

 
111,396

 

 
3,274

 
114,670

Other comprehensive loss

 

 

 
(14,307
)
 
(732
)
 
(15,039
)
Dividend reinvestment
3

 
104

 

 

 

 
107

Capital stock issued under employee benefit and stock plans(3)
642

 
10,504

 

 

 

 
11,146

Purchase of capital stock
(3
)
 
(104
)
 

 

 

 
(107
)
Cash dividends

 

 
(32,820
)
 

 

 
(32,820
)
Total equity, December 31, 2018
$
102,700

 
$
522,413

 
$
979,259

 
$
(334,632
)
 
$
38,544

 
$
1,308,284

(3) Net of restricted stock units delivered upon vesting to satisfy tax withholding requirements.
The amounts of comprehensive income attributable to Kennametal Shareholders and noncontrolling interests are disclosed in the condensed consolidated statements of comprehensive income.


18


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


17.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of, and changes in, accumulated other comprehensive loss (AOCL) were as follows, net of tax, for the six months ended December 31, 2019:
(in thousands)
Pension and other postretirement benefits
Currency translation adjustment
Derivatives
Total
Attributable to Kennametal:
 
 
 
 
Balance, June 30, 2019
$
(222,270
)
$
(147,595
)
$
(3,678
)
$
(373,543
)
Other comprehensive (loss) income before reclassifications
(449
)
(8,821
)
856

(8,414
)
Amounts reclassified from AOCL
3,950


(212
)
3,738

Net current period other comprehensive
  income (loss)
3,501

(8,821
)
644

(4,676
)
AOCL, December 31, 2019
$
(218,769
)
$
(156,416
)
$
(3,034
)
$
(378,219
)
 
 
 
 
 
Attributable to noncontrolling interests:
 
 
 
 
Balance, June 30, 2019
$

$
(3,450
)
$

$
(3,450
)
Other comprehensive loss before
  reclassifications

(853
)

(853
)
Net current period other comprehensive loss

(853
)

(853
)
AOCL, December 31, 2019
$

$
(4,303
)
$

$
(4,303
)


The components of, and changes in, AOCL were as follows, net of tax, for the six months ended December 31, 2018:
(in thousands)
Pension and other postretirement benefits
Currency translation adjustment
Derivatives
Total
Attributable to Kennametal:
 
 
 
 
Balance, June 30, 2018
$
(187,755
)
$
(127,347
)
$
(5,223
)
$
(320,325
)
Other comprehensive income (loss) before reclassifications
1,194

(18,873
)
(91
)
(17,770
)
Amounts reclassified from AOCL
2,606


857

3,463

Net current period other comprehensive
  income (loss)
3,800

(18,873
)
766

(14,307
)
AOCL, December 31, 2018
$
(183,955
)
$
(146,220
)
$
(4,457
)
$
(334,632
)
 
 
 
 
 
Attributable to noncontrolling interests:
 
 
 
 
Balance, June 30, 2018
$

$
(2,913
)
$

$
(2,913
)
Other comprehensive loss before
  reclassifications

(732
)

(732
)
Net current period other comprehensive loss

(732
)

(732
)
AOCL, December 31, 2018
$

$
(3,645
)
$

$
(3,645
)


19


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


Reclassifications out of AOCL for the three and six months ended December 31, 2019 and 2018 consisted of the following:
 
Three Months Ended December 31,
Six Months Ended December 31,
 
 
(in thousands)
2019
 
2018
2019
 
2018
 
Affected line item in the Income Statement
Gains and losses on cash flow hedges:
 
 
 
 
 
 
 
 
Forward starting interest rate swaps
$
611

 
$
588

$
1,222

 
$
1,176

 
Interest expense
Currency exchange contracts
(1,132
)
 
(241
)
(1,503
)
 
(41
)
 
Cost of goods sold and other income, net
Total before tax
(521
)
 
347

(281
)
 
1,135

 
 
Tax impact
128

 
(85
)
69

 
(278
)
 
(Benefit) provision for income taxes
Net of tax
$
(393
)