UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNEJune 30, 20172022
OR
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| ☐ | 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) |
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| Pennsylvania | | 25-0900168 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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600 Grant Street525 William Penn Place | | |
Suite 51003300 | | |
Pittsburgh, Pennsylvania | Pennsylvania | 15219-2706 | 15219 |
| (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:
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| 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 |
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 [ ]Yes ☒ 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. |
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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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒
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, 2016,2021, 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.$1,725,400,000. 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, 2017,29, 2022, there were 80,672,93881,338,696 shares of the Registrant’s Capital Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20172022 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 2018,2023, its expectations regarding future growth and any statements regarding future operating or financial performance or events are forward-looking. We have also included forward lookingforward-looking statements in this Annual Report on Form 10-K ("Annual Report") 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-lookingAny forward-looking statements are based on management's beliefs, assumptionscurrent knowledge, expectations and estimates using information available to us at the time. These statements are not guarantees of future events or performance and are subject to variousthat involve inherent risks and uncertainties that are difficult to predict.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: downturnsuncertainties related to changes in macroeconomic and/or global conditions, including as a result of increased inflation and Russia's invasion of Ukraine and the resulting sanctions on Russia; uncertainties related to the effects of the ongoing COVID-19 pandemic, including the emergence of more contagious or virulent strains of the virus, its impacts on our business cycle oroperations, financial results and financial position and on the industries in which we operate and the global economy generally, including as a result of travel restrictions, business and workforce disruptions associated with the pandemic; other economic downturns;recession; our ability to achieve all anticipated benefits of 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;instability, including the conflict in Ukraine; changes in the regulatory environment in which we operate, including environmental, health and safety regulations; potential for future goodwill and other intangible asset impairment charges; our ability to protect and defend our intellectual property; continuity 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; energy costs; commodity prices; labor relations; and implementation of environmental remediation matters. We provide additional information about many of the specific risks we face in the “Risk Factors” Section"Risk Factors" section of this Annual Report on Form 10-K.Report. 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 intendWe undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.
PART I
ITEM 1 - BUSINESS
OVERVIEWWith more than 80 years of materials expertise, Kennametal Inc. (the Company) is a global industrial technology leader, that helps customers across the aerospace, earthworks, energy, general engineering and transportation end markets build their products with precision and efficiency. The Company was founded based on a tungsten carbide technology breakthrough in 1938 and was incorporated in Pennsylvania in 19431934 as a manufacturer of tungsten carbide metal cutting tooling. From this beginning,In 1967, it was listed on the Company has grown into a global leader inNew York Stock Exchange (NYSE) with the stock ticker KMT.
The Company's core expertise includes the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and mission-criticalextreme wear applications to combat extremekeep customers up and running longer against conditions associated with wear fatigue,such as corrosion and high temperatures. The Company's reputation forWe bring together material technology,science, technical expertise, innovation and customer service in a way that allows us to anticipate customers' needs and help them overcome problems and achieve their manufacturing objectives.
Our standard and custom product offering spans 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 metalworkingwear applications such asincluding turning, milling, hole making, tooling systems and services.services, as well as specialized wear components and metallurgical powders. End users of the Company's metalworkingmetal cutting 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 The Company’s wear components and metallurgical powders that are used for custom-engineered and challenging applications. End users of the Company's products includeby producers and suppliers in equipment-intensive operations such as coal mining, road construction, mining, quarrying, and 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. Unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
BUSINESS SEGMENT REVIEW Kennametal operates in two segments: Metal Cutting and Infrastructure. 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-KAnnual Report (MD&A). Additional segment data is provided in Note 2021 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.Annual Report.
In orderMETAL CUTTING The Metal Cutting segment develops and manufactures high performance tooling and metal cutting products and services and offers an assortment of standard and custom metal cutting solutions 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,diverse end markets, including aerospace, general engineering, aerospaceenergy 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 ourtransportation. The products include milling, hole making, turning, threading and servicestoolmaking systems used in the manufacture of airframes, aero engines, airframes,trucks and automobiles, trucks, ships and other various types of industrial equipment. The technologyWe leverage advanced manufacturing capabilities in combination with varying levels of customization to solve our customers’ toughest challenges and customization requirements we provide vary by customer, application and industry. Industrial goes to marketdeliver improved productivity for a wide range of applications.Metal Cutting markets its products under the Kennametal® brandKennametal®, WIDIA®, WIDIA Hanita® and WIDIA GTD® brands through its direct sales force, a network of independent and national chain distributors, integrated supplier channels and via the Internet.digitally. Application engineers and technicians are critical to the sales process and directly assist our customers with specified product design, selection, application and support.
WIDIA InINFRASTRUCTURE Our Infrastructure segment produces engineered tungsten carbide and ceramic components, earth-cutting tools, and advanced metallurgical powders, primarily for the Widia segment, we offer a focused assortment of standardenergy, earthworks and general engineering end markets. These wear-resistant products include compacts, nozzles, frac seats 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 customerscomponents used in the energy and earthworks market sectors that support primary industries such as oil and gas power generation and chemicals;petrochemical industries; rod blanks and abrasive water jet nozzles for general industries; earth cutting tools and systems used in underground surfacemining, trenching and hard-rock mining; highway constructionfoundation drilling and road maintenance;milling; tungsten carbide powders for the oil and gas, aerospace and process industriesindustries; and ceramics used by the packaging industry for metallization of films and papers. We combine deep metallurgical and engineering expertise with advanced manufacturing capabilities, such as food and feed. Our success is determined by3D printing, to deliver solutions that drive improved productivity for 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.customers. Infrastructure markets its products primarily under the Kennametal®Kennametal® brand and sells through a direct sales force as well as through distributors.
INTERNATIONAL OPERATIONS During 2017,2022, we generated 5660 percent of our consolidated sales in markets outside of the United States of America (U.S.), with principal international operations in Western Europe, AsiaChina and Canada. In addition, weIndia. We also operate additional manufacturing and distribution facilities in Israel, Latin America, and South Africa and Vietnam, 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 impacteffect 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 assetssales and saleslong-lived assets are presented in Note 2021 of the Company’s consolidated financial statements, set forth in Item 8 and are incorporated herein by reference.of this Annual Report. Further information about the effects and risks of currency exchange rates isare 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).Annual Report.
STRATEGY AND GENERAL DEVELOPMENT OF BUSINESS Fiscal 2017 was a year of substantial change We continued to make progress on many levels. Early in 2017 we outlinedour growth 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 achievedfollowing areas in fiscal 2017 include only2022.
Growth
•We launched more than 20 new products, including Infrastructure's PCD Roof Tool and Road King Diamond Flex, and Metal Cutting's new 4-flute solid carbide endmill and product line extensions for KOR5 and H1TE.
•We further cemented our position as a small amounttechnology and commercial leader in tungsten carbide additive manufacturing through the introduction of the anticipated benefitsnew powder grades for component production, and strategic industry partnerships to advance tungsten carbide binder jet printing.
Sales in 2022 of $2,012.5 million increased from the modernization and End-to-End initiatives that we have planned, and the benefits$1,841.4 million in 2021, reflecting a 9 percent increase of which 11 percent was due to organic sales growth, partially offset by 2 percent 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.an unfavorable currency exchange effect.
ACQUISITIONS AND DIVESTITURES We continue tocontinually evaluate new opportunities for the expansion of existing product linesto expand into new market areas, where appropriate. We also continueand to evaluate opportunities for the introduction ofintroduce new and/or complementary product offerings into new and/or existing market areas where appropriate. Rather than evaluating potential acquisitions in the near term, weWe expect to continue to grow our business and further enhance our market position through the investment opportunities that exist within our core businesses.businesses, including potential acquisitions in the near term.
RAW MATERIALS AND SUPPLIES Our major metallurgical raw materials consist of tungsten ore concentrates and oxides,scrap carbide, which are used to make tungsten oxide, as well as compounds and secondary materials such as cobalt, tantalum, titanium and niobium.cobalt. 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 the availability of raw materials.materials utilizing a mix of long-term supply agreements coupled with spot purchases. Additionally, our internal tungsten recycling capability provides us access to additional sources of tungsten, and therefore, helps to mitigate our reliance on third parties. We also purchase steel bars and forgings for making toolholders and other tool parts, as well as for producing mining tools, rotary cutting tools and accessories. We obtainpurchase 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 (R&D) Our product developmentR&D efforts focus on providingdelivering innovations to our customers from both new product and process technology development. New product development provides solutions to our customers’ manufacturing challenges and productivity requirements. OurNew process technology is developed and implemented in support of operational excellence to enhance product development program provides disciplinequality and focus for the product development process by establishing “gateways,efficiency at our plant sites. We use a disciplined framework, and have established “stage-gates,” or sequential tests during the development process to remove inefficiencies and accelerate improvements.commercial success. This program speedsframework is designed to accelerate and streamlinesstreamline development into a series of actions and decision points, combining efforts and resourcesintegrating resource tasks to produceimplement new and enhanced products and process technologies faster. This program is designed to assureOur stage-gate process ensures a strong linklinkage between verified customer requirements and corporate strategy, and to enableenables us to gain the full benefit frombenefits of our investment in new product development.development work.
We hold a number of patents and trademarks which, in the aggregate, are material to the operation of our businesses. The duration of our patent protection varies throughout the world by jurisdiction.
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 summer road construction, 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 standard orders generally is not significant to our operations.
COMPETITION As one of the world’s leading producers of metalworking toolstooling and metal cutting products, specialty wear-resistant components and coating solutions,ceramics, earth cutting tools and advanced metallurgical powders, 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 coatingcoated 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 and quality and availability, as well as service, pricing and productivity delivered ascribed to our brands.brand recognition. 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 wearwear-resistant 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.property assets. While we currently believe that the amount of ultimate liability, if any, we may face 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 impacteffect on us could be material to us.material.
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,Annual Report, nor is such compliance expected to have a material effect on us in the future.
Among other environmental laws, we are subjectour business has exposed us to the Comprehensive Environmental Response Compensationcertain liabilities 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 respectcompliance costs related to environmental remedial costsmatters. We are involved in various environmental cleanup and remediation activities at certain Superfund sites. We have evaluated our claims and liabilitiessites associated with these Superfund sites based upon best currently available information. our current or former operations.
We believe our environmentalestablish and maintain 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 othercertain potential environmental issues atobligations. At June 30, 20172022 and 20162021, the balances of these accruals were $12.4$12.5 million and $12.5$14.7 million, respectively. These accruals represent anticipated costs associated with the remediation of these issues and are generally not discounted.
The reserves thataccruals we have established for environmental liabilitiesobligations represent our best current estimate of the probable and reasonably estimable costs of addressing all identified environmental situations, based on our review of currently available evidence, and taketaking into consideration our prior experience in remediation and that of other companies, as well as public information released by the USEPA,United States Environmental Protection Agency (USEPA), other governmental agencies and by the PRPPotentially Responsible Party (PRP) groups in which we are participating. Although the reservesaccruals currently appear to be sufficient to cover these environmental liabilities,obligations, 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 reservedrecorded and unreservedunrecorded 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 CorporateAmong other environmental laws, we are subject to the Comprehensive Environmental HealthResponse Compensation and Safety (EHS) Department to monitor compliance with environmental regulations and to oversee remediation activities. In addition,Liability Act of 1980, under which we have designated EHS coordinators who are responsible for each ofbeen identified by the USEPA or other third party as a PRP with respect to environmental remedial costs at certain sites. We have evaluated our manufacturing facilities. Our financial management team periodically meetsclaims and potential liability associated with membersthese sites based upon the best information currently available to us. We believe our environmental accruals will be adequate to cover our portion of the Corporate EHS Departmentenvironmental remedial costs at those sites where we have been designated a PRP, to the extent these expenses are probable 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.reasonably estimable.
EMPLOYEESHUMAN CAPITAL RESOURCES
Employee Profile
We employed 8,732 people, including approximately 10,700 people at8,600 full-time employees, as of June 30, 2017, of which approximately 3,5002022. Approximately 2,900 employees were located in the U.S. and 7,2005,800 were located in other parts of the world, principally Europe, Asia PacificGermany, India and India.China. At June 30, 2017,2022, approximately 2,7002,500 of the aboveour employees were represented by labor unions. We consider our labor relations to be generally good.
Diversity and Inclusion
We value diversity in all forms and are fully committed to inclusionin the workplace.
We continue to deploy our strategy and supporting infrastructure to elevate and advance diversity and inclusion (D&I) across our global organization and instill accountability for our performance. The enhanced D&I strategy focuses on four strategic pillars – awareness, acquisition, development and community. To drive action and accountability, each pillar is led by a senior Kennametal executive who is known as an accountability partner and is responsible for developing strategic initiatives in partnership with our People & Culture team.
Our Global Inclusion Council, which consists of cross-functional global leaders, champions the strategic initiatives and provides guidance and support. Four regional inclusion councils covering the Americas, Asia Pacific, EMEA and India execute the strategies and provide a global perspective.
As part of our awareness initiatives in 2022, we continued to enhance the D&I sections of the Company’s intranet and our external website. We expanded our Employee Resource Groups (ERGs) to foster communication and mentorship among diverse groups within the Company, such as the APAC Women’s Club, U.S. Women’s Mentoring, and U.S. Young Professionals groups. Our facilities around the world held events in March 2022 to celebrate International Women’s Day and recognize the achievements of female colleagues and participate in activities and discussions.
The tables below show the percentage of our employees who are women and the percentage of leadership roles at the Company held by women as of the dates indicated.
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| Number of Employees | | | | | |
| Female | Male | | | |
| As of June 30 | Number | Percent | Number | Percent | Total | | |
| 2022 | 1,582 | 18.1 | % | 7,150 | 81.9 | % | 8,732 | | |
| 2021 | 1,485 | 17.2 | | 7,150 | 82.8 | | 8,635 | | |
| | | | | | | | | | | | | | | | |
| Women in Leadership Roles (in percentages) | | | | |
| As of June 30 | Board of Directors | Executive | Leadership | Senior Management | | |
| 2022 | 22.2 | % | 42.9 | % | 27.3 | % | 12.4 | % | | |
| 2021 | 22.2 | | 42.9 | | 24.0 | | 11.5 | | | |
Health and Safety
Safety, including the health of our employees, is one of our core values and a priority across our global operations. We are committed to developing a world-class health and safety culture to target zero injuries and illnesses. Our health and safety strategy is designed to focus all employees on proactively identifying, mitigating and eliminating high-risk conditions that could result in a serious injury or fatality. The strategy consists of three pillars – fatality and serious injury (FSI) prevention, incident prevention, and leadership development and compliance culture.
Our recordable cases and total recordable incident rate (TRIR) decreased 14 percent to 0.32 in 2022 compared to 0.37 in 2021.
In fiscal 2022, we launched an enhanced electronic Environmental, Health and Safety (EHS) Management System, including an extensive list of apps to enable streamlined collection, tracking and dissemination of key data. The apps include incident management, internal corporate EHS verification/audit and self-assessment, action tracking, compliance calendar, inspection tool, job safety analysis, FSI risk assessment, industrial hygiene and sustainability data collection. There are additional apps planned for fiscal 2023 including management of change and document control.
As part of our commitment to continuous improvement of our EHS programs, Kennametal has focused on the creation of new company-wide Global EHS Standards to strengthen our compliance management across the organization. These standards include:
•FSI prevention;
•Contractor safety;
•Powered industrial vehicles;
•Molten metal personal protective equipment (PPE);
•Lock/tag/verify;
•Fall control;
•Machine guarding and robotics safety; and
•Electrical safety.
Along with each standard, we have developed a self-assessment used to evaluate performance and develop action plans needed to meet tier levels aligning with the EHS roadmap. As discussed above, in 2022 we launched a new app as part of our EHS Management System to process electronic self-assessments, which capture each location’s level of compliance and create action plans.
Employee Development and Training
For the Company to grow, our employees must grow and develop continuously. We offer learning and development opportunities for all employees. In 2022, this included training for senior, mid-level and emerging leaders in role- and function-specific skills, such as project management, process improvement and sales effectiveness. We also offered our operational employees technical training through the Kennametal Knowledge Center.
Supporting our learning and development efforts is our OneTeam learning management system. Available in multiple languages, OneTeam offers more than 10,000 online courses in an easy-to-use interface. While this is not the only training delivery platform we use, our employees completed over 4,000 hours of training using this system in 2022.
We also continue to design and deliver development programs, focusing on the following:
•Individual development;
•Leadership development;
•Business- and operations-focused content;
•Sales-focused content; and
•Diversity and inclusion content.
Employee Engagement
As a follow up to the June 2021 employee engagement survey, targeted action plans were put in place focusing on one or two important team engagement goals. We conducted three short pulses during 2022 to check on progress. We then conducted another employee engagement survey that was launched in May 2022. With a response rate of 75 percent, the May 2022 survey indicated that we continue to make progress in employee engagement, with an increased average engagement score of 68, while our percent favorable increased to 63 percent.
AVAILABLE INFORMATION Our Internetinternet address is www.kennametal.com. On the SEC Filings page of our Web Site,Website, which is accessible under the "About Us" tab, under Investor Relations and then the "Financials" tab, 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 reportreports on Form 10-K, our annual proxy statement,statements, our annual conflict minerals disclosure and reportreports 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 thosethese reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act). OurAct. The SEC Filings page of our Web SiteWebsite 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 pageour Website free of charge. On the Corporate Governance page of our Web Site,Website, which is accessible 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,Website, which is under the "About Us" tab, under Company Profile, we post our Code of Conduct and our Conflict Minerals Statement.Conduct. All charters and guidelines posted on our Web pagesWebsite are available to be viewed on our Web page free of charge. Information contained on our Web siteWebsite is not part of this annual report on Form 10-KAnnual Report or our other filings with the SEC. Copies of this annual report on Form 10-KAnnual Report and those items disclosed on the Corporate Governance and Ethics and Compliance pages of our Web SiteWebsite are available without charge upon written request to: Investor Relations, Kennametal Inc., 600 Grant Street,525 William Penn Place, Suite 5100,3300, Pittsburgh, Pennsylvania 15219-2706. The SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers, including Kennametal that file electronically with the SEC.
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.process. 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 factorsrisks 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 are also are subject to legal and regulatory change.changes. New factors cancould emerge, and it is not possible to predict the outcome of all othersuch risk factors on our business, financial condition or results of operations. The following discussion details the material risk factors and uncertainties that we believe could cause Kennametal’s actual results to differ materially from those projected in any forward-looking statements:statements.
Global Operational Risks:
Russia’s invasion of Ukraine, the sanctions and actions taken against Russia and Russia's response to such actions could adversely affect our business. While our sales in Russia and Ukraine are not material to our overall business, the Russian invasion of Ukraine and the resulting sanctions and actions taken against Russia by the United States, the United Kingdom, the European Union, Switzerland and others have restricted our ability to sell certain products in Russia and Ukraine. It is also unclear what actions Russia may take in responding to these sanctions and actions. A significant escalation or expansion of the conflict beyond its current geographic, political and economic scope and scale could have a material adverse effect on our business, results of operations and financial condition and could exacerbate other risks. Such risks include, but are not limited to: an energy shortage in Europe as Russia has begun to limit natural gas and other supplies into Europe, an increase in the frequency and severity of the cybersecurity threats we and various third parties with whom we do business experience, unfavorable changes in exchange rates, further shortages, delivery delays and price inflation in a wide variety of raw materials and components, widespread reductions in customer demand and increased logistical challenges. In 2022, the Company ceased operations in Russia and subsequently decided to liquidate its legal entity in Russia.
Public health threats or outbreaks of communicable diseases could have a material adverse effect on our operations and financial results. We face risks related to public health threats or outbreaks of communicable diseases. A widespread healthcare crisis, such as an outbreak of a communicable disease could adversely affect the global economy and our business, our suppliers and our customers’ ability to conduct business for an indefinite period of time. For example, the ongoing global Coronavirus Disease 2019 (COVID-19) pandemic has negatively affected the global economy, disrupted financial markets and international trade and significantly affected global supply chains since its emergence in 2019, all of which have and may continue to have an effect on the Company and our end markets. The extent to which the COVID-19 pandemic may affect our business, operating results, financial condition, or liquidity in the future will depend on future developments, including the duration of the pandemic, the emergence of more contagious or virulent strains of the virus, travel restrictions, business and workforce disruptions, the availability, uptake and efficacy of vaccines, and the effectiveness of actions taken to contain and treat the disease. It is not possible to accurately predict with any degree of certainty the impact COVID-19 will have on our operations going forward and it could have a material adverse effect on our results of operations, financial condition, and liquidity. In particular, the continued spread of COVID-19 and any existing or future variants and efforts to contain them may:
•continue to affect customer demand across our end markets and geographical regions;
•affect our ability to conduct business in certain jurisdictions in which we operate where nationwide, regional or local lockdowns are currently implemented or may be implemented in the future;
•cause us to experience an increase in costs related to the emergency measures we have taken, delayed payments from customers and uncollectible accounts;
•cause delays and disruptions in our supply chain resulting in disruptions in the commencement dates of certain planned projects;
•affect the availability of qualified personnel;
•affect our ability to fund operations and maintain covenant compliance;
•affect our access to financial markets;
•affect our ability to accurately forecast; and
•cause other unpredictable events.
Downturns in the business cycle could adversely affect our sales and profitability. Our business has historically been cyclical and subject to significant impacteffect from economic downturns. Global economic downturndownturns coupled with global financial and credit market disruptions have had a negative impacteffect on our sales and profitability historically. These events could contribute to weak end markets, a sharp drop in demand for our products and services, higher energy costs and commodity prices, 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 and pace or sustainability of economic recovery and the effects of government intervention.development.
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 impactaffect 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, South Africa and South Africa.Vietnam. We also sell our products to customers and distributors located outside of the U.S. During the year ended June 30, 2017, 562022, 60 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 ofthat affect our domestic business,operations, including currency exchange rate fluctuations, differing protections of intellectual property, trade barriers, exchange controls, regional economic uncertainty, overlap of different tax regimens, 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, social and political instability and unrest and risks of increases in taxes.increased taxes and/or adverse tax consequences. 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.
Additional tax expense or exposures could affect our financial condition and results of operations. We are subject to various taxes in the U.S. and numerous other jurisdictions. Our future results of operations could be adversely affected by changes in our effective tax rate as a result of a change in the mix of earnings between U.S. and non-U.S. jurisdictions or among jurisdictions with differing statutory tax rates, changes in tax laws or treaties or in their application or interpretation, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, changes in the amount of earnings indefinitely reinvested in certain non-U.S. jurisdictions, and the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures.
Implementation of tariffs and changes to or uncertainties related to tariffs and trade agreements could adversely affect our business.The U.S. government has imposed tariffs on certain foreign goods from a variety of countries and regions, most notably China, that it perceives as engaging in unfair trade practices, and previously raised the possibility of imposing significant, additional tariff increases or expanding the tariffs to capture other types of goods from other countries. In response, many of these foreign governments have imposed retaliatory tariffs on goods that their countries import from the U.S. Uncertainties with respect to tariffs, trade agreements or any potential trade wars could negatively affect the global economy and could affect demand for our products and could have a material adverse effect on our financial condition, results of operations and cash flows. Changes in tariffs and trade barriers could also result in adverse changes in the cost and availability of our raw materials, and our ability to manufacture globally to support global sales which could lead to increased costs that we may not be able to effectively pass on to customers, each of which could materially adversely affect our operating margins, results of operations and cash flows.
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 affect 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.
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.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.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, utilities industry or utilities industry.the use of fossil fuels. Some of our principal customers are mining and drilling and utility companies. Many of these customerscompanies that supply coal, oil, gas or other fuels as a source of energy to utility companies or for the production of utilities in the U.S. and other industrialized regions.transportation. 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.operate. As a result of changes in regulations and laws relating to suchthese industries, including, without limitation, actions to limit or reduce greenhouse gas emissions from the use of fossil fuels, our customers’ operations could be disrupted or curtailed by governmental authorities. The high cost of compliance with mining, drilling and environmentalthese 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 impactingaffecting the mining and drilling industries or altering the consumptionfuel choices of utilities or in transportation. Our principal customers also include transportation original equipment manufacturers and tier suppliers engaged in the production of internal combustion engines. As a result of breakthrough technologies, changing consumer preferences or regulations designed to limit or reduce greenhouse gas emissions from the use of fossil fuels in transportation, demand for our products could be negatively affected.
Climate change and resulting legal or regulatory responses. There is growing concern that a gradual increase in global average temperatures may cause significant changes in weather patterns around the globe and an increase in the frequency and severity of utilities.
Impairmentnatural disasters. Such climate change may impair our production capabilities, disrupt our supply chain or impact demand for our products. Growing concern over climate change also may result in additional legal or regulatory requirements designed to reduce or mitigate the effects of goodwillcarbon dioxide and other intangible assetsgreenhouse gas emissions on the environment. Increased energy or compliance costs and expenses as a result of increased legal or regulatory requirements may cause disruptions in, or an increase in the costs associated with, indefinite livesthe manufacturing and distribution of our products. The impacts of climate change and legal or regulatory initiatives to address climate change could result inhave a negativelong-term adverse impact on our financial conditionbusiness 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.
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,metal cutting, 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 assuranceany assurances 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 affecteffect on our business, financial condition and results of operations.
Business Strategy Risks:
Our restructuring efforts may not have the intended effects. From time to time, we implement restructuring and other actions to reduce structural costs, improve operational efficiency and position the Company for long-term profitable growth. However, there is no assurance that these efforts, or that any other actions that we have taken or may take in the future, will be sufficient to counter any future economic or industry disruptions. We cannot provide assurance that we will not incur future restructuring charges or impairment charges, or that we will achieve all of the anticipated benefits from the restructuring actions we have taken or plan to take in the future.
We may not be able to complete, manage or integrate acquisitions successfully. In the past, we have acquired companies and we We may continue to evaluate acquisition opportunities that have the potential to support and strengthen or expand 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 disastersImpairment of goodwill and other intangible assets with indefinite lives could result in a negative effect on our financial condition and results of operations. At June 30, 2022, goodwill and other indefinite-lived intangible assets totaled $274.6 million, or 11 percent 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. We assess at least annually whether there has been impairment in the value of our goodwill and indefinite-lived intangible asset. If future operating performance at our Metal Cutting reporting unit were to fall significantly below current levels, we could record, under current applicable accounting rules, a non-cash impairment charge for goodwill. Any determination requiring the impairment of a significant portion of goodwill or other globalintangible 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 regional catastrophic eventsprevent 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 defend our rights with respect to such patent. We may not be successful in defending our patents. Similarly, while we do not knowingly infringe on the patents, copyrights or other intellectual property rights of others, we may be required to spend a significant amount of time and financial resources to resolve any infringement claims against us, and we may not be successful in defending our position or negotiating alternative remedies. Our inability to protect our proprietary information and enforce or defend our intellectual property rights in proceedings initiated by us or brought against us could disrupthave a material adverse effect on our operationsbusiness, financial condition and results of operations.
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. 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 results. Despite our concerted effort to minimize risk tobusiness.
Any interruption of 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 toworkforce, including interruptions due to catastrophe, natural disaster, pandemic, terrorismour restructuring initiatives, unionization efforts, changes in labor relations or actsshortages of war, whichappropriately skilled individuals could affect our business.
We operate in a highly competitive environment. Our domestic and foreign operations are beyond our control. Disruptionssubject to our facilities or systems, or to thosesignificant competitive pressures. We compete directly and indirectly with other manufacturers and suppliers of metal cutting tools, engineered components and advanced materials. Some of our key suppliers,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.
Cybersecurity Risks:
Failure of, or a breach in security of, our information technology systems could also interrupt operational processesadversely affect our business. We rely on information technology infrastructure (both on-premises and adversely impactthird-party managed) to achieve our business objectives. Despite security measures taken by us, our information technology systems may be vulnerable to computer viruses or attacks by hackers or breached due to employee error, supplier error, programming errors, malfeasance or other disruptions. Any disruption of our infrastructure could negatively affect our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any disruption could cause us to lose customers or revenue and could require us to incur significant expense to remediate. Increased global information technology threats, vulnerabilities, and a rise in sophisticated and targeted international computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Any such breach in security could expose the Company and its employees, customers and suppliers to risks of misuse of confidential information, manipulation and destruction of data, production downtimes, litigation and operational disruptions, which in turn could adversely affect the Company's reputation, competitive position, business or results of operations.
In addition, we could be subject to liability if confidential information relating to customers, employees, vendors and the extended supply chain or other parties is misappropriated from our computer system. We cannot assure that our ongoing focus on system improvements will be sufficient to prevent or limit the damage from any cyber attack or network disruption. We do not believe we have been the target of a material successful cyber attack.
Raw Material Risks:
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 tungsten ore concentrates and provide servicesscrap carbide, which are used to make tungsten oxide, as well as compounds and supportsecondary materials such as cobalt. We also purchase steel bars and forgings for making toolholders and other tool parts, as well as for producing mining tools, rotary cutting tools and accessories. A significant portion of our raw materials is supplied by sources outside of the U.S. The raw materials extraction industry is highly cyclical and at times pricing and supply can be volatile due to a number of factors beyond our control, including natural disasters, pandemics or public health issues, 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 these price increases 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. As a result,customers, our business, our results of operations, financial position, cash flows and stock priceprofitability 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.
Capital and Credit-Related Risks:
TableRestrictions contained in our revolving credit facility and other debt agreements may limit our ability to incur additional indebtedness. Our existing revolving credit facility and other debt agreements (each a “Debt Facility” and collectively, “Debt Facilities”) contain restrictive covenants, including restrictions on our ability to incur indebtedness. These restrictions could limit our ability to effectuate future acquisitions, limit our ability to pay dividends, limit our ability to make capital expenditures or restrict our financial flexibility. Our revolving credit facility contains covenants requiring us to achieve certain financial and operating results and maintain compliance with a specified financial ratio. Our ability to meet the financial covenant or requirements in our revolving credit facility may be affected by events beyond our control, and we may not be able to satisfy such covenants and requirements. A breach of Contentsthese covenants or our inability to comply with the financial ratio, tests or other restrictions contained in a Debt Facility could result in an event of default under one or more of our other Debt Facilities. Upon the occurrence of an event of default under a Debt Facility, and the expiration of any grace periods, the lenders could elect to declare all amounts outstanding under one or more of our other Debt Facilities, together with accrued interest, to be immediately due and payable. If this were to occur, our assets may not be sufficient to fully repay the amounts due under our Debt Facilities or our other indebtedness.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
ITEM 2 – PROPERTIES
Our principal executive offices are located at 600 Grant Street,525 William Penn Place, Suite 5100,3300, Pittsburgh, Pennsylvania, 15219. We also have corporate offices in Neuhausen, Switzerland, Bangalore, India and Singapore. Our corporatetechnology center and Technology Center areis 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:
| | | | | | | | | | | | | | | | | |
| | | | Primary Segment |
| Location | | Owned/Leased | Principal Products | Primary SegmentMC(1) | INF(2) |
| United States: | | | | |
| Gurley, Alabama | Owned | Metallurgical Powders | Infrastructure | X |
| Huntsville, Alabama | Owned | Metallurgical Powders | Infrastructure | X |
Madison, Alabama | Owned | Tungsten Heavy Alloy | Infrastructure |
| Rogers, Arkansas | Owned/Leased | Carbide Products, Pelletizing Die Plates and Downhole Drilling Carbide Components | Infrastructure | X |
Rockford, Illinois | Owned | Indexable Tooling | Industrial |
| Goshen, Indiana | Leased | Powders; Welding Rods, Wires and Machines | Infrastructure | X |
| New Albany, Indiana | Leased | High Wear Coating for Steel Parts | Infrastructure | X |
| Greenfield, Massachusetts | Owned | High-Speed Steel Taps | WidiaX | |
| | | | | | | | | | | | | | | | | |
| | | | Primary Segment |
| Location | | Owned/Leased | Principal Products | MC(1) | INF(2) |
| Traverse City, Michigan | Owned | Wear Parts | Infrastructure | X |
| Fallon, Nevada | Owned | Metallurgical Powders | Infrastructure | X |
| Asheboro, North Carolina | Owned | Carbide Round Tools | IndustrialX | |
| Henderson, North Carolina | Owned | Metallurgical Powders | Infrastructure | X |
| Roanoke Rapids, North Carolina | Owned | MetalworkingMetal Cutting Inserts | IndustrialX | |
| Cleveland, Ohio | Leased | Distribution | IndustrialX | |
| Orwell, Ohio | Owned | MetalworkingMetal Cutting Inserts | IndustrialX | |
| Solon, Ohio | Owned | MetalworkingMetal Cutting Toolholders | IndustrialX | |
| Whitehouse, Ohio | OwnedOwned/Leased | MetalworkingMetal Cutting Inserts and Round Tools | IndustrialX | |
| Bedford, Pennsylvania | Owned/Leased | Mining and Construction Tools, Wear Parts and Distribution | Infrastructure | X |
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 | MetalworkingMetal Cutting Inserts | IndustrialX | |
| New Market, Virginia | Owned | MetalworkingMetal Cutting Toolholders | IndustrialX | |
| International: | | | | |
| La Paz, Bolivia | Owned | Tungsten Concentrate | Infrastructure | X |
| Indaiatuba, Brazil | Leased | MetalworkingMetal Cutting Carbide Drills and Toolholders | IndustrialX | |
| Belleville, Canada | Owned | Casting Components, Coatings and Powder Metallurgy Components | Infrastructure | X |
| Victoria, Canada | Owned | Wear Parts | Infrastructure | X |
| Fengpu, China | Owned | Intermetallic Composite Ceramic Powders and Parts | Infrastructure | X |
| Shanghai, China | Owned | Powders, Welding Rods and Wires and CastingCast Components | Infrastructure | X |
| Shanghai, China | OwnedLeased | Distribution | IndustrialX | |
| Tianjin, China | Owned | MetalworkingMetal Cutting Inserts, Carbide Round Tools and Metallurgical Powders | X | X |
| Xuzhou, China | Leased | Mining Tools | | X |
| Ebermannstadt, Germany | Owned | Metal Cutting Inserts | X | |
| Essen, Germany | Owned/Leased | Metal Cutting Inserts | X | |
| Königsee, Germany | Leased | Metal Cutting Carbide Drills | X | |
| Mistelgau, Germany | Owned | Wear Parts and Metallurgical Powders | | X |
| Nabburg, Germany | Owned | Metal Cutting Toolholders and Metal Cutting Round Tools, Drills and Mills | X | |
| Schongau, Germany | Owned | Ceramic Vaporizer Boats | | X |
| Vohenstrauss, Germany | Owned | Metal Cutting Carbide Drills | X | |
| Bangalore, India | Owned | Metal Cutting Inserts, Toolholders and Wear Parts | X | X |
| Shlomi, Israel | Owned | High-Speed Steel and Carbide Round Tools | IndustrialX | |
Xuzhou, ChinaZory, Poland | Leased | Mining ToolsMetal Cutting Carbide Drills | InfrastructureX | |
Ebermannstadt, GermanyBoksburg, South Africa | OwnedLeased | Metalworking InsertsMining and Construction Conicals | Industrial | X |
Essen, GermanyBarcelona, Spain | OwnedLeased | Metalworking Inserts, Metallurgical Powders and Wear PartsMetal Cutting Tools | IndustrialX |
Königsee, Germany | Leased | Metalworking Carbide Drills | Industrial |
Lichtenau, Germany | Owned | Metalworking Toolholders | Industrial |
|
| | | | |
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 | IndustrialX | |
| Newport, United Kingdom | Owned | Intermetallic Composite Powders | Infrastructure | X |
| Hanoi, Vietnam | Owned/Leased | Carbide and PCD Round Tools | X | |
(1)Metal Cutting segment
(2)Infrastructure segment
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 corporateour 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-KAnnual Report under the caption “Regulation” is incorporated by reference 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.property assets. Although certainwe currently believe that the amount of ultimate liability, if any, we may face with respect to these actions are currently pending, we dowill not believe thatmaterially affect our financial position, results of operations or liquidity, the ultimate outcome of any individual proceedinglitigation is materialuncertain. Were an unfavorable outcome to occur or that our pending legal proceedings inif protracted litigation were to ensue, the aggregate are material to Kennametal.effect on us could be material.
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 of this Annual Report under the caption “Executive Officers of the Registrant” of this annual report on Form 10-K.“Information About Our Executive Officers.”
PART II
ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Capital Stockcapital stock is traded on the New York Stock Exchange (symbol KMT).under the symbol "KMT." The number of shareholders of record as of July 31, 201729, 2022 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 ininto Part III, Item 12 of this annual report on Form 10-KAnnual Report from our 20172022 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 groupsgroup of companies determined by us (New Peer Group and Old Peer(Peer Group) for the period from July 1, 2012June 30, 2017 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.2022.
The New Peer Group consists of the following companies: Actuant Corporation; Allegheny Technologies Incorporated; Ametek, Inc.Altra Industrial Motion Corp.; Barnes Group Inc.; Carpenter Technology Corporation; Crane Co.; Donaldson Company,Curtiss-Wright Corporation; Enovis Corp.; EnPro Industries, 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.Simpson Manufacturing Co., Inc.; SPX Corporation; SPX FLOW, Inc.; The Timken Company; andWatts Water Technologies, Inc.; Woodward, Inc.; and Zurn Water Solutions Corporation.
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.
Assumes $100 Invested on July 1, 20122017 and All Dividends Reinvested | | | | | | | | | | | | | | | | | | | | |
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
| Kennametal | $ | 100.00 | | $ | 97.90 | | $ | 103.08 | | $ | 82.25 | | $ | 105.29 | | $ | 69.76 | |
| Peer Group Index | 100.00 | | 108.92 | | 122.08 | | 111.17 | | 169.45 | | 137.00 | |
| S&P Composite 1500 Index | 100.00 | | 114.50 | | 125.16 | | 132.77 | | 188.70 | | 167.91 | |
| S&P Midcap 400 | 100.00 | | 113.50 | | 115.05 | | 107.35 | | 164.49 | | 140.41 | |
| S&P 400 Capital Goods | 100.00 | | 110.74 | | 124.01 | | 116.34 | | 189.71 | | 155.47 | |
| S&P Global 1200 Industrials | 100.00 | | 106.73 | | 113.97 | | 105.78 | | 154.66 | | 127.45 | |
|
| | | | | | | | | | | | | | | | | | |
| | 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 | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
| April 1 through April 30, 2022 | 142 | | | $ | 28.21 | | | — | | | $ | 149,700,000 | |
| May 1 through May 31, 2022 | 676,647 | | | 26.29 | | | 672,333 | | | 132,000,000 | |
| June 1 through June 30, 2022 | 639,385 | | | 27.09 | | | 638,580 | | | 114,700,000 | |
| Total | 1,316,174 | | | $ | 26.68 | | | 1,310,913 | | | |
|
| | | | | | | | | | | | |
| 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 |
| | — |
| | |
(2)On July 27, 2021, the Board of Directors of the Company approved a share repurchase program authorizing the Company to purchase up to $200 million of the Company's common stock over a three-year period outside of the Company's dividend reinvestment program.
| |
(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.
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.
|
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.notes included in Item 8 of this Annual Report. 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,Annual Report, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
OVERVIEW Kennametal Inc. was founded based on a tungsten carbide technology breakthrough in 1938. The Company was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling. From this beginning,tooling, and was listed on the New York Stock Exchange (NYSE) in 1967. With more than 80 years of materials expertise, the Company has grown intois a global industrial technology leader, inhelping customers across the aerospace, earthworks, energy, general engineering and transportation industries manufacture with precision and efficiency. This expertise includes the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and mission-criticalextreme wear applications to combat extremekeep customers up and running longer against conditions associated with wear fatigue,such as corrosion and high temperatures. The Company's reputation for material technology,
Our standard and custom product offering spans 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 metalworkingwear applications such asincluding turning, milling, hole making, tooling systems and services.services, as well as specialized wear components and metallurgical powders. End users of the Company's metalworkingmetal cutting 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 The Company’s wear components and metallurgical powders that are used for custom-engineered and challenging applications. End users of the Company's products includeby producers and suppliers in equipment-intensive operations such as coal mining, road construction, mining, quarrying, and oil and gas exploration, refining, production and supply.
Fiscal 2017 was a yearThroughout Management's Discussion and Analysis of substantial change on many levels. After re-organizing the company to allow positive transformation, we focused on simplifying the company, improving sales executionFinancial Condition 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.
Throughout the(the MD&A,&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, constant currency regional sales growth (decline) and constant currency end market sales growth (decline). The explanation at the end of the MD&A provides the definition of thisthese non-GAAP financial measures as well as details on thetheir use and a reconciliation to the derivation of thesemost directly comparable GAAP financial measures.
NEW OPERATING STRUCTURE IMPLEMENTED IN FISCAL 2017 In order to take advantageOur sales 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$2,012.5 million for the yearsyear ended June 30, 20162022 increased 9 percent year-over-year, reflecting 11 percent organic sales growth, partially offset by a 2 percent unfavorable currency exchange effect.
Operating income was $218.1 million in 2022 compared to $102.2 million in the prior year. The increase in operating income was due primarily to organic sales growth, restructuring and 2015, respectively,related charges of $4 million compared to reflect$40 million in the changeprior year, favorable pricing in reportableexcess of raw material costs, lower incentive compensation costs, favorable product mix and approximately $14 million of incremental simplification/modernization benefits, partially offset by higher raw material costs of approximately $49 million, certain manufacturing inefficiencies including higher depreciation and approximately $25 million due to the restoration of salaries and other cost-control measures that were taken in the prior year. Operating margin in 2022 was 10.8 percent compared to 5.5 percent in the prior year. In 2022, the Metal Cutting and Infrastructure segments had operating segments.margins of 9.9 percent and 12.6 percent, respectively.
In July 2021, the Board of Directors of the Company approved a share repurchase program authorizing the Company to purchase up to $200 million of the Company's common stock over a three-year period. During 2022, the Company repurchased a total of 2.7 million shares of common stock for $85 million.
On March 11, 2020, the World Health Organization declared the Coronavirus Disease 2019 (COVID-19) a pandemic bringing significant uncertainty in our end markets and operations. Since then, national, regional and local governments have taken steps at various times during the course of the continuing pandemic to limit the spread of the virus through stay-at-home, social distancing, and various other orders and guidelines. Although some jurisdictions have relaxed these measures, particularly as more and more people are vaccinated, others have not or have reinstated them at times when COVID-19 cases are surging or new variants emerge. The imposition of these measures, including the lockdowns in China, has created significant operating constraints on our business. Throughout the pandemic we have deployed safety protocols and processes to keep our employees safe while continuing to serve our customers, based on the guidance provided by the U.S. Centers for Disease Control and other relevant authorities. Late in the March quarter of 2022, our manufacturing and distribution operations in Shanghai were affected by COVID-19 lockdowns and have since reopened. The extent to which the ongoing COVID-19 pandemic may continue to affect our business, operating results or financial condition in the future will depend on a number of factors, including the duration and spread of the pandemic, the emergence and spread of more contagious or virulent strains of the virus, travel restrictions, business and workforce disruptions associated with the pandemic, including the availability of critical materials and resources, the success of preventative measures to contain or mitigate the spread of the virus and emerging variants, and the effectiveness of the distribution and acceptance of COVID-19 vaccines.
Russia's invasion of Ukraine in February 2022 has resulted in the imposition of economic sanctions on Russia by the United States, Canada, the European Union and other countries. We are monitoring and evaluating the broader economic impact, including the sanctions imposed, the potential for additional sanctions and any responses from Russia, including limiting the supply of natural gas and other resources to Europe, which could directly affect the Company's operations, business partners, customers or supply chain. To date, the conflict between Russia and Ukraine has not had a material impact on the Company's financial condition or results of operations. During the March quarter of 2022, the Company ceased operations in Russia and subsequently decided to liquidate its legal entity in Russia. Total charges of $2.7 million were recorded in 2022 related to liquidation activities, the expected risk of loss related to accounts receivables and the impairment of inventory associated with the Company's Russian and Ukrainian operations.
The Company's cost structure benefited from its simplification/modernization initiative including the FY21 Restructuring Actions which have resulted in annualized savings of $71.0 million and pre-tax charges of $86.4 million inception to date. We recorded $4.2 million of pre-tax restructuring and related charges in 2022.
We reported earnings per diluted share (EPS) of $1.72 for 2022. EPS for the year was unfavorably affected by restructuring and related charges of $0.03 per share and charges related to Russian and Ukrainian operations of $0.03 per share. EPS in the prior year of $0.65 was unfavorably affected by restructuring and related charges of $0.40 per share, the effects from the early extinguishment of debt of $0.08 per share and the partial annuitization of the Canadian pension plans of $0.02 per share, partially offset by a discrete tax benefit of $0.11 per share.
We generated cash flow from operating activities of $181.4 million in 2022 compared to $235.7 million during the prior year. Capital expenditures were $96.9 million and $127.3 million during 2022 and 2021, respectively. During 2022, the Company returned a total of $152 million to the shareholders through $85.4 million in share repurchases under the three-year share repurchase program and $66.6 million in dividends. In 2021, the Company returned $66.7 million to shareholders through dividends.
For a discussion related to the results of operations, changes in financial condition and liquidity and capital resources for fiscal 2020 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2021 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commission on August 10, 2021.
RESULTS OF CONTINUING OPERATIONS
SALES Sales in 2022 were $2,012.5 million, a 9 percent increase from $1,841.4 million in 2021. The increase was primarily due to organic sales growth of $2,058.4 million in 2017 decreased 211 percent, from $2,098.4 million in 2016 reflecting a 4 percent divestiture impact andpartially offset by 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 organiceffect.
Our sales growth were increases(decline) by end market and region are as follows:
| | | | | | | | | | |
| 2022 | |
| (in percentages) | As Reported | Constant Currency | | |
| End market sales growth (decline): | | | | |
| Aerospace | 21% | 23% | | |
| Energy | 19 | 20 | | |
| General engineering | 10 | 12 | | |
| Earthworks | 10 | 9 | | |
| Transportation | (3) | (1) | | |
| Regional sales growth: | | | | |
| Americas | 16% | 16% | | |
| Europe, the Middle East and Africa (EMEA) | 5 | 10 | | |
| Asia Pacific | 2 | 2 | | |
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$95.5 million to $657.7 million in 2017 from $616.1$648.0 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 $616.12022 from $552.5 million in 2016 from $806.0 million in 2015.2021. The decreaseincrease was primarily due to organic sales decline, unfavorable business mix, lower fixed cost absorption, unfavorable currency exchange and divestiture impact, offset partially by lowergrowth, favorable pricing in excess of raw material costs, favorable product mix, incremental simplification/modernization benefits of approximately $11 million and restructuring benefits.restructuring-related charges included in cost of goods sold of $6 million compared to $11 million in the prior year, partially offset by higher raw material costs of approximately $49 million, certain manufacturing inefficiencies including higher depreciation, and the restoration of salaries and other cost control measures that were taken in the prior year. The gross profit margin for 20162022 was 29.432.2 percent compared to 30.430.0 percent in 2015.2021.
OPERATING EXPENSE Operating expense in 20172022 was $463.2$419.1 million,, a decrease an increase of $31.8$11.8 million, or 6.42.9 percent, compared to $495.0from $407.2 million in 2016.2021. The decrease isincrease was primarily due to incremental restructuring benefitsthe restoration of approximately $36previously reduced salaries and other cost-control measures that were taken in the prior year, partially offset by lower incentive compensation costs in 2022.
We invested further in technology and innovation to continue delivering high quality products to our customers. Research and development expenses included in operating expense totaled $42.1 million divestiture impact of $10.5and $39.5 million $12.7 million less in restructuring-related chargesfor 2022 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.2021, respectively.
RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES
FY21 Restructuring Actions
In the September quarter of fiscal 2020, we announced the initiation of restructuring actions in Germany associated with our simplification/modernization initiative to reduce structural costs. Subsequently, we agreed with local employee representatives to downsize our Essen, Germany operations instead of the previously proposed closure. During the fourth quarter of fiscal 2020, we also announced the acceleration of our other structural cost reduction plans.
Total restructuring and Relatedrelated charges since inception of $86.4 million, compared to a target of approximately $85 million, were recorded for this program through June 30, 2022, consisting of: $78.1 million in Metal Cutting and $8.3 million in Infrastructure. Inception to date, we have achieved annualized savings of approximately $71 million. The FY21 Restructuring Actions are considered substantially complete.
Annual Restructuring Charges
During 2017,2022, we recognized totalrecorded restructuring and related charges of $76.2 million.$4.2 million, which consisted of $3.6 million in Metal Cutting and $0.6 million in Infrastructure. Of this amount, a net benefit from the reversal of restructuring charges totaled $1.2 million and restructuring-related charges of $5.5 million were included in cost of goods sold.
During 2021, we recorded restructuring and related charges of $40.4 million, which consisted of $35.6 million in Metal Cutting and $4.8 million in Infrastructure. Of this amount, restructuring charges totaled $65.6$29.6 million, of which $0.6$0.5 million were chargeswas related to inventory and werewas recorded in cost of goods sold. Restructuring-related charges of $7.1$10.8 million were recordedincluded in cost of goods soldsold.
GAIN ON DIVESTITURE During the year ended June 30, 2020, we completed the sale of certain assets of the non-core specialty alloys and $3.5metals business within the Infrastructure segment located in New Castle, Pennsylvania to Advanced Metallurgical Group N.V. for an aggregate price of $24.0 million.
The net book value of these assets at closing was $29.5 million, and the pre-tax loss on divestiture recognized during the year ended June 30, 2020 was $6.5 million. Transaction proceeds were primarily used for capital expenditures related to our simplification/modernization efforts. During the year ended June 30, 2022, we recorded a pre-tax gain of $1.0 million on the New Castle divestiture due to proceeds held in escrow until November 2021.
AMORTIZATION OF INTANGIBLES Amortization expense was $13.0 million and $14.0 million in operating2022 and 2021, respectively.
INTEREST EXPENSE Interest expense during 2017. Total restructuringin 2022 was $25.9 million, a decrease of $20.5 million, compared to $46.4 million in 2021. The decrease was primarily due to the early extinguishment of the $300.0 million of 3.875 percent Senior Unsecured Notes due 2022 (the 2022 Senior Notes) in the prior period, which includes a make-whole premium of $9.6 million and the acceleration of a loss in the amount of $2.6 million from other comprehensive loss related charges sinceto forward starting interest rate contracts that were used to hedge the inceptioninterest payments of our restructuring plans through 2017 were $147.7 million.the 2022 Senior Notes, as well as achieving a lower interest rate with the $300.0 million of 2.800 percent Senior Unsecured Notes due 2031 (the 2031 Senior Notes). See Note 1511 "Long-Term Debt" in ourthe 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.
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.further details. The portion of our debt subject to variable rates of interest was 3 percent at June 30, 2022 and less than 1 percent at June 30, 2017 and 2016.
Interest expense decreased $3.72021. There were $19.0 million to $27.8 million in 2016, compared with $31.5 million in 2015 due to lower averageof borrowings in 2016. The portionoutstanding under the Credit Agreement as 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.2022.
OTHER EXPENSE (INCOME),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 2016,2022, other income, net was $4.1$14.5 million, compared to other income, netan increase of $1.7$5.6 million from $8.9 million in 2015.2021. The year-over-year increase iswas primarily due primarily to the reductionhigher net periodic pension income and a foreign currency effect of a contingent liability associated with a prior acquisition and income from transition services provided to the acquirer$0.8 million in 2022.
INCOME TAXESThe effective tax rate for 20172022 was 36.527.3 percent (provision on income) compared to 12.79.7 percent (provision onfor 2021. The year-over-year change in the effective tax rate is primarily due to higher pretax income in the current year, non-recurring adjustments in the prior year including (i) a loss) for 2016. The change was primarily driven bytax benefit from a provision to return adjustment related to our fiscal 2020 U.S. income tax return that included an election pursuant to Global Intangible Low-Taxed Income (GILTI) tax regulations issued during fiscal 2021, (ii) a tax benefit from the 2016 discreterecognition of a stranded deferred tax balance in accumulated other comprehensive loss associated with the forward starting interest rate swaps that were terminated during fiscal 2021, and (iii) a tax charge forrelated to enacted tax rate changes in the U.K., and geographical mix.
As of June 30, 2022, we have $25.9 million of U.S. net deferred tax assets. Within this amount is $46.2 million related to net operating loss, tax credit, and other carryforwards that can be used to offset future U.S. taxable income. Certain of these carryforwards will expire if they are not used within a specified timeframe. At this time, we consider it more likely than not that we will have sufficient U.S. taxable income in the future that will allow us to realize these net deferred tax assets. However, it is possible that some or all of these tax attributes could ultimately expire unused. Therefore, if we are unable to generate sufficient U.S. taxable income from our operations, a valuation allowance recorded against ourto reduce the U.S. net deferred tax assets may be required, which would materially increase income tax expense in the U.S., primarily related to asset impairment charges andperiod in which 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.
is recorded.
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. TheWhile the outcome of the litigation is still pending; however,pending, the tax authority served notice in the September quarter of fiscal 2020 requiring payment in the amount of €36.0 million. Accordingly, we requested and were granted a stay and are not currently required to make a payment in connection with this assessment. We continue to believe that the assessment is baseless and do not anticipate making a payment in connection with this assessment. Accordingly,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.expense for as much as €36.6 million, or $38.0 million, of which penalties and interest is €21.8 million, or $22.7 million.
NET INCOME (LOSS) ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS IncomeNet income attributable to Kennametal Shareholders was $49.1$144.6 million, or $0.61$1.72 of earnings per diluted share (EPS) in 2017,2022, compared to a loss of $226.0$54.4 million, or $2.83 loss per diluted share,EPS of $0.65 in 2016.2021. The year-over-year changeincrease 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 threein two reportable operating segments consisting of Industrial, WidiaMetal Cutting 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 |
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.
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 | ) |
|
| | | | | | |
| 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 in21 of our consolidated financial statements set forth in Item 8 (Note 8). Year 2016 also includes a lossof this Annual Report.
Our sales and operating income by segment are as follows:
| | | | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 | | |
| Sales: | | | | | |
| Metal Cutting | $ | 1,227,273 | | | $ | 1,150,746 | | | |
| Infrastructure | 785,183 | | | 690,695 | | | |
| Total sales | $ | 2,012,456 | | | $ | 1,841,441 | | | |
| Operating income: | | | | | |
| Metal Cutting | $ | 121,386 | | | $ | 45,855 | | | |
| Infrastructure | 98,871 | | | 59,461 | | | |
| Corporate | (2,117) | | | (3,148) | | | |
| Total operating income | 218,140 | | | 102,168 | | | |
| Interest expense | 25,914 | | | 46,375 | | | |
| Other income, net | (14,507) | | | (8,867) | | | |
| Income before income taxes | $ | 206,733 | | | $ | 64,660 | | | |
METAL CUTTING
| | | | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 | | |
| Sales | $ | 1,227,273 | | | $ | 1,150,746 | | | |
| Operating income | 121,386 | | | 45,855 | | | |
| Operating margin | 9.9 | % | | 4.0 | % | | |
| | | | | | | |
| (in percentages) | 2022 | | |
| Organic sales growth | 9% | | |
| Foreign currency exchange effect | (2) | | |
| | | |
| | | |
| | | |
| Sales growth | 7% | | |
| | | | | | | | | | | | | | | |
| 2022 | | |
| (in percentages) | As Reported | | Constant Currency | | | | |
| End market sales growth (decline): | | | | | | | |
| Aerospace | 21% | | 23% | | | | |
| General engineering | 10 | | 13 | | | | |
| Energy | 5 | | 6 | | | | |
| Transportation | (3) | | (1) | | | | |
| Regional sales growth (decline): | | | | | | | |
| Americas | 14% | | 14% | | | | |
| EMEA | 4 | | 10 | | | | |
| Asia Pacific | (2) | | (2) | | | | |
In 2022, Metal Cutting sales of $1,227.3 million increased by $76.5 million, or 7 percent, from 2021. Aerospace end market sales increased in all regions as global travel levels and airplane manufacturing continue to recover, despite increasing supply chain issues on divestiture forcertain components. Energy sales increased in the sale of non-core businesses of $127.9 million, see Note 4. In additionAmericas and EMEA as oil and gas drilling and power generation improved as countries develop alternative supply chains in response to the aforementioned impairment chargeRussia sanctions, partially offset by declines in Asia Pacific and loss on divestiture, operating results for 2016 were negatively impactedthe impact of COVID-19 lockdowns. Sales in our general engineering end market increased in all regions, as manufacturing activity continues to recover from the COVID-19 pandemic and strong underlying demand continues, though inflation and supply chain challenges mitigated growth. Transportation end market sales increased in the Americas due to improved automotive manufacturing levels and continued strong underlying demand. The increase was more than offset by lower organicdeclines in EMEA and Asia Pacific driven by ongoing supply chain challenges accelerated by Russia's conflict in Ukraine and COVID-19 lockdowns in China. On a regional basis, the sales lower fixed cost absorptionincrease in the Americas was driven by increases in all end markets supported by the easing of COVID-19 restrictions and unfavorable mix,strong underlying demand. The sales increase in EMEA was driven by the general engineering, aerospace, and energy end markets, partially offset by a decline in the transportation end market. The sales decrease in Asia Pacific was driven by declines in the energy and transportation end markets, partially offset by an increase in lowersales in the general engineering and aerospace end markets.
In 2022, Metal Cutting operating income was $121.4 million, a $75.5 million increase from 2021. The primary drivers for the increase were organic sales growth, favorable pricing in excess of raw material costs, restructuring and related charges of $4 million compared to $34 million in the prior year, incremental restructuring programsimplification/modernization benefits of approximately $18$12 million, lower incentive compensation costs and favorable product mix. These benefits were partially offset by certain manufacturing inefficiencies including higher depreciation, the restoration of salaries and other cost-control measures of approximately $19 million that were taken in the prior year and higher raw material costs of approximately $9 million.
CORPORATEINFRASTRUCTURE | | | | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 | | |
| Sales | $ | 785,183 | | | $ | 690,695 | | | |
| Operating income | 98,871 | | | 59,461 | | | |
| Operating margin | 12.6 | % | | 8.6 | % | | |
|
| | | | | | | | | | | | |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Corporate unallocated expense | | $ | (303 | ) | | $ | (9,880 | ) | | $ | (9,336 | ) |
| | | | | | | |
| (in percentages) | 2022 | | |
| Organic sales growth | 14% | | |
| Foreign currency exchange effect | — | | |
| | | |
| | | |
| | | |
| Sales growth | 14% | | |
| | | | | | | | | | | | | | | |
| 2022 | | |
| (in percentages) | As Reported | | Constant Currency | | | | |
| End market sales growth: | | | | | | | |
| Energy | 27% | | 27% | | | | |
| Earthworks | 10 | | 9 | | | | |
| General engineering | 9 | | 10 | | | | |
| Regional sales growth: | | | | | | | |
| Americas | 18% | | 18% | | | | |
| Asia Pacific | 9 | | 7 | | | | |
| EMEA | 7 | | 10 | | | | |
In 2017, Corporate unallocated expense decreased $9.62022, Infrastructure sales of $785.2 million increased by $94.5 million, or 96.914 percent, from 2016,2021. Energy end market sales increased as U.S. oil and gas contributed to the year-over-year increase and as land rig counts continue to increase. Earthworks end market sales increased primarily due to $5.7growth in underground and surface mining. General engineering end market sales increased driven primarily by strong demand across all regions.On a regional basis, the sales increase in the Americas was driven by growth primarily in the energy and earthworks end markets, and to a lesser extent the general engineering end market. The sales increase in EMEA was primarily driven by the general engineering and earthworks end market. The sales increase in Asia Pacific was driven by growth in all end markets.
In 2022, Infrastructure operating income was $98.9 million, lower restructuring-relateda $39.4 million increase from 2021. The primary drivers for the increase were organic sales growth, favorable pricing in excess of raw material costs, favorable product mix and restructuring and related charges during thisof $1 million compared to $5 million in the prior year. These benefits were partially offset by higher raw material costs of approximately $41 million, the restoration of salaries and other cost-control measures of approximately $5 million taken in the prior year and lower professional fees. certain manufacturing inefficiencies including higher depreciation.
CORPORATE
| | | | | | | | | | | | | | | | |
| (in thousands) | | 2022 | | 2021 | | |
| Corporate expense | | $ | (2,117) | | | $ | (3,148) | | | |
In 2016,2022, Corporate unallocated expense increased $0.5decreased $1.0 million or 5.8 percent, from 2015, primarily due to higher restructuring-related charges in 2016 compared to 2015.2021.
LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the primary source of funding for working capital requirements, reinvesting in our business through capital expenditures and organic growth.returning value to shareholders through dividends and share repurchases. During the year ended June 30, 2017,2022, cash flow provided by operating activities was $192.2 million.$181.4 million.
OurCredit Agreement During fiscal 2022, we entered into the Sixth Amended and Restated Credit Agreement dated as of June 14, 2022 (the Credit Agreement). The Credit Agreement is a five-year, multi-currency, revolving credit facility, as amended and restated in April 2016 (Credit Agreement) is usedwhich we use to augment cash from operations and as an additional source of funds. The Credit Agreement permitsprovides for revolving credit loans of up to $600.0$700.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement allows for borrowings in U.S. dollars, euro,euros, Canadian dollars, poundpounds sterling and Japanese yen. Interest payable under the Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOREuro Interbank Offered Rate (EURIBOR), Sterling Overnight Index Average (SONIA), Tokyo Interbank Offered Rate (TIBOR), Secured Overnight Financing Rate (SOFR), and Canadian Dollar Offered Rate (CDOR) for any borrowings in euros, pounds sterling, yen, U.S. dollars, and Canadian dollars, respectively, plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us. The Credit Agreement matures in April 2021. We had no outstanding borrowings on our Credit Agreement as of June 30, 2017.2027.
The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including twoone financial covenants:covenant: a maximum leverage ratio where debt, net of domestic cash in excess of $25 million and a minimum consolidated interest coverage ratio (as those terms are defined insixty percent of the agreement). Weunrestricted cash held outside of the United States, must be less than or equal to 3.75 times trailing twelve months EBITDA, adjusted for certain non-cash expenses.
As of June 30, 2022, we were in compliance with all covenants of the Credit Agreement and we had $19.0 million of borrowings outstanding and $681.0 million of availability. There were no borrowings outstanding as of June 30, 2017. For the year ended2021.
Borrowings on other lines of credit and notes payable were $2.2 million and $8.4 million at June 30, 2017, average daily2022 and 2021, respectively. The lines of credit represented short-term 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. AtThe availability of the credit lines, translated into U.S. dollars at June 30, 2017, these2022 exchange rates, totaled $60.7 million.
For the year ended June 30, 2022, average daily borrowings amounted to $0.7 million of notes payable and $0.2 million of capital leases. We believe that cash flow from operations andoutstanding under the availabilityCredit Agreement were approximately $24.0 million. The weighted average interest rate on borrowings under our credit lines will be sufficient to meet our cash requirements over the next 12 months.Credit Agreement was 1.4 percent for the year ended June 30, 2022.
Based upon our debt structure at June 30, 2017 and 2016, less than 12022, 3 percent of our debt was exposed to variable rates of interest. At June 30, 2021, less than 1 percent was exposed to variable rates of interest.
We consider substantially allthe majority of the $1.5 billion 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. WeWith regard to these unremitted earnings, 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, orincluding liquidity needs associated with our domestic debt service requirements. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested earnings is not practicable due to our legal entity structure and the complexity of U.S. and local tax laws. With regard to the small portion of unremitted earnings that are not indefinitely reinvested, we maintain a deferred tax liability for foreign withholding and U.S. state income taxes. The undistributeddeferred tax liability associated with unremitted earnings of our foreignnon-U.S. subsidiaries continue to be indefinitelynot permanently 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.is $7.2 million as of June 30, 2022.
At June 30, 2017,2022, we had cash and cash equivalents of $190.6$85.6 million. Total Kennametal Shareholders’ equity was $1,017.3$1,252.6 million and total debt was $695.9$615.6 million. Our current senior credit ratings are atconsidered investment grade levels.grade. 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.
Cash generated from operations is expected to meet our planned capital expenditures of approximately $100 million to $120 million and expected dividend payments of approximately $67 million in fiscal 2023. There can be no assurance, however, that we will generate cash from operations in line with our expectations, or that these projections will remain constant throughout fiscal 2023. If cash generated from operations is not sufficient to support these activities, we may be required to use existing cash and cash equivalents, reduce capital expenditures or borrow under the Credit Agreement. We believe that our cash and cash equivalents, cash flow from operations, and available borrowings are sufficient to meet both the short-term and long-term capital needs of the Company.
The following is a summary of our contractual obligations and other commercial commitments as of June 30, 2017 (in thousands):2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contractual Obligations (in thousands) | | | | Total | | 2023 | | 2024-2025 | | 2026-2027 | | Thereafter |
| Long-term debt, including current maturities | | (1) | | | $ | 758,578 | | | $ | 22,275 | | | $ | 44,550 | | | $ | 44,550 | | | $ | 647,203 | |
| Borrowings under Credit Agreement | | | | 19,000 | | | 19,000 | | | — | | | — | | | — | |
| Other lines of credit and notes payable | | | | 2,299 | | | 2,299 | | | — | | | — | | | — | |
| Pension benefit payments | | | | (2) | | 53,208 | | | 109,269 | | | 108,945 | | | (2) |
| Postretirement benefit payments | | | | (2) | | 1,197 | | | 2,106 | | | 1,783 | | | (2) |
| Operating leases | | | | 54,763 | | | 13,383 | | | 17,569 | | | 7,782 | | | 16,029 | |
| Purchase obligations | | (3) | | | 155,581 | | | 139,316 | | | 16,265 | | | — | | | — | |
| Unrecognized tax benefits | | (4) | | | 8,975 | | | 2,606 | | | 6,369 | | | — | | | — | |
| Total | | | | | | $ | 253,284 | | | $ | 196,128 | | | $ | 163,060 | | | |
(1)Long-term debt includes interest obligations of $158.9 million and excludes debt issuance costs of $4.2 million.
(2)Annual payments are expected to continue into the foreseeable future at the amounts noted in the table.
(3)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, 2022 remain constant.
(4)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 $1.4 million accrued related to such positions as of June 30, 2022. 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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| Other Commercial Commitments (in thousands) | | Other Commercial Commitments (in thousands) | | Total | | 2023 | | 2024-2025 | | 2026-2027 | | Thereafter |
| Standby letters of credit | | $ | 4,176 |
| | $ | 1,326 |
| | $ | 2,850 |
| | $ | — |
| | $ | — |
| Standby letters of credit | | $ | 5,735 | | | $ | 4,483 | | | $ | 1,252 | | | $ | — | | | $ | — | |
| Guarantees | | 20,845 |
| | 14,535 |
| | 1,173 |
| | 234 |
| | 4,903 |
| Guarantees | | 12,774 | | | 9,191 | | | 143 | | | 10 | | | 3,430 | |
| Total | | $ | 25,021 |
| | $ | 15,861 |
| | $ | 4,023 |
| | $ | 234 |
| | $ | 4,903 |
| Total | | $ | 18,509 | | | $ | 13,674 | | | $ | 1,395 | | | $ | 10 | | | $ | 3,430 | |
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.
Share Repurchase Program In July 2021, the Board of Directors of the Company approved a share repurchase program authorizing the Company to purchase up to $200 million of the Company's common stock over a three-year period. During 2022, the Company repurchased 2.7 million shares of common stock for $85 million.
Dividends In fiscal 2022, the Board of Directors of the Company declared a dividend of $0.20 per share in each quarter for a total of $67 million in dividends returned to the shareholders.
Cash Flow Provided by Operating Activities
During 2017,2022, cash flow provided by operating activities was $192.2$181.4 million,, compared to $219.3$235.7 million in 2016.2021. During 2017,2022, cash flow provided by operating activities consisted of net income and non-cash items amounting to $188.9$310.2 million and changes in certain assets and liabilities netting to $3.3an outflow of $128.7 million. Contributing to the change in certain assets and liabilities were an increase in inventories of $127.4 million in part due to increased safety stock for potential supply chain disruptions and higher raw material costs, a decrease in accrued pension and postretirement benefits of $24.2 million and an increase in accounts receivable of $14.4 million, partially offset by an increase in accounts payable and accrued liabilities of $32.0 million and an increase in accrued income taxes of $10.2 million.
Cash flow provided by operating activities was $235.7 million for 2021. During 2021, cash flow provided by operating activities consisted of net income and non-cash items amounting to $210.0 million and changes in certain assets and liabilities netting to an inflow of $25.7 million. Contributing to the changes in certain assets and liabilities were an increase in accounts payable and accrued liabilities of $51.4$46.8 million and a decrease in inventories of $61.3 million, partially offset by an increase in accrued income taxesaccounts receivable of $6.9 million. Partially offsetting these inflows were$53.3 million, a decrease in accrued pension and postretirement benefits of $27.8$31.6 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$18.3 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.
Cash Flow Used for Investing Activities
Cash flow used for investing activities was $112.7$94.9 million for 2017, an increase2022, a decrease of $64.8$28.0 million, compared to $47.9$123.0 million in 2016.2021. During 2017,2022, cash flow used for investing activities included capital expenditures, net of $113.0$96.0 million, which consisted primarily of equipment upgrades.upgrades, partially offset by proceeds of $1.0 million from the New Castle divestiture.
Cash flow used for investing activities was $47.9$123.0 million for 2016, a decrease of $36.6 million, compared to $84.6 million in 2015.2021. During 2016,2021, cash flow used for investing activities included capital expenditures, net of $104.7$122.9 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.related to our simplification/modernization initiatives.
Cash Flow Used for Financing Activities
Cash flow used for financing activities was $50.1$150.7 million for 2017,2022, compared to $110.5$574.2 million in 2016.2021. During 2017,2022, cash flow used for financing activities included $64.1$85.5 million in common shares repurchased, primarily under the share repurchase program, $66.6 million of cash dividends paid to Shareholders, a $6.6shareholders, $6.9 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.plans and dividend reinvestment and $6.1 million of a decrease in notes payable, partially offset by $19.0 million from borrowings under the Credit Agreement.
Cash flow used for financing activities was $110.5$574.2 million for 2016, compared to $333.0 million in 2015.2021. During 2016,2021, cash flow used for financing activities included $63.7$500.0 million of a net decrease in the revolving and other lines of credit, the debt refinancing (see Note 11. "Long-Term Debt" to our consolidated financial statements set forth in Part II, Item 8 of this Annual Report on Form 10-K for further discussion) and $66.7 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.shareholders.
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, 2017,2022, total assets were $2,415.5$2,573.5 million,, an increase a decrease of $52.7$92.2 million from $2,362.8$2,665.8 million at June 30, 2016.2021. Total liabilities decreased $4.1$15.3 million from $1,367.0$1,297.6 million at June 30, 20162021 to $1,362.8$1,282.3 million at June 30, 2017.2022.
Working capital was $652.4$539.1 million at June 30, 2017, an increase2022, a decrease of $4.4$28.4 million from $648.1$567.4 million at June 30, 2016. Cash and2021. The decrease in working capital was primarily driven by a decrease in cash equivalents increased $29.1of $68.5 million, inventory increased $28.9an increase in accounts payable of $50.2 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 incomean increase in tax-paying jurisdictions from higher restructuringrevolving and related charges,other lines of credit and accrued vacation pay decreased $6.6notes payable of $12.8 million. Partially offsetting these items were an increase in accounts payableinventories of $33.7$94.5 million due to higher demand trends,and a decrease in deferred income taxesother current liabilities 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.$19.2 million. Currency exchange rate effects accounted for $3.7 million of the increase indecreased working capital by a total of approximately $48.0 million, the impacteffects of which isare included in the aforementioned changes.
Property, plant and equipment, net increased $13.7decreased $53.1 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$1,055.1 million at June 30, 2017 from $693.52021 to $1,002.0 million at June 30, 2016,2022, primarily due to depreciation of $118.7 million and accruedan unfavorable currency exchange effect of approximately $36.3 million, partially offset by capital additions of $96.9 million.
At June 30, 2022, other assets were $546.8 million, a decrease of $59.0 million from $605.8 million at June 30, 2021. The primary drivers for the decrease were an unfavorable currency exchange effect, a decrease in long-term prepaid pension benefits decreased $38.6benefit of $22.8 million to $144.0 million, driven primarily by net periodic pension income.as well as amortization of $13.0 million.
Kennametal Shareholders’ equity was $1,017.3$1,252.6 million at June 30, 2017, an increase2022, a decrease of $53.0$77.0 million from $964.3$1,329.6 million in the prior year. The increasedecrease was primarily due to the repurchase of capital stock of $85.5 million primarily under the share repurchase program that was initiated during fiscal 2022, cash dividends paid to Kennametal Shareholders of $66.6 million, and other comprehensive loss of $87.2 million, partially offset by 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$144.6 million.
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 Rising costs, including the cost of certain raw materials, continue to affect our operations throughout the world. We experienced higher levels of inflation in 2022 and expect inflation will continue to be a challenge in fiscal 2023. We will strive to minimize the effects of inflation through cost containment, productivity improvements and price increases.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the U.S., we make judgments and estimates about the amounts reflected in our consolidated 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 consolidated financial statements. We use historical experience andrelevant information available informationat the end of each period 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 2.2 of our consolidated financial statements, which are included in Item 8 of this Annual Report. We believe that the following discussion addresses our critical accounting policies.
Revenue Recognition The Company's contracts with customers are comprised of purchase orders, and for larger customers, may also include long-term agreements. We recognize revenueaccount for our productsa contract when it has approval and assembled machines when titlecommitment from both parties, the rights of the parties and all riskspayment terms are identified, the contract has commercial substance and collectability of loss and damages passconsideration is probable. These contracts with customers typically relate to the buyer. Our general conditionsmanufacturing of sale explicitly stateproducts, which represent single performance obligations that are satisfied when control of the delivery of our products and assembled machines is freight on board shipping point and that title and all risks of loss and damages passproduct passes to the buyer upon deliverycustomer. The Company considers the timing of the sold products or assembled machinesright to payment, transfer of risk and rewards, transfer of title, transfer of physical possession and customer acceptance when determining when control transfers to the common carrier.
Our general conditionscustomer. As a result, revenue is generally recognized at a point in time - either upon shipment or delivery - based on the specific shipping terms in the contract. The shipping terms vary across all businesses and depend on the product, customary local commercial terms and the type of sale explicitly state that acceptance oftransportation. Shipping and handling activities are accounted for as activities to fulfill a promise to transfer a product to a customer and as such, costs incurred are recorded when the conditions ofrelated revenue is recognized. Payment for products is due within a limited time period after shipment is consideredor delivery, typically within 30 to have occurred unless written notice of objection is received by Kennametal within 1090 calendar days of the date specifiedrespective invoice dates. The Company does not generally offer extended payment terms.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Amounts billed and due from our customers are classified as accounts receivable, less allowance for doubtful accounts on the invoice. We do not ship products or assembled machines unless weconsolidated balance sheets. Certain contracts with customers, primarily distributor customers, have documentation authorizing shipmentan element of variable consideration that is estimated when revenue is recognized under the contract. Variable consideration primarily includes volume incentive rebates, which are based on achieving a certain level of purchases and other performance criteria as established by our distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned. The majority of our customers. Our products are consumed by our customers or end users 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.
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 revenueThe Company records a contract asset when it has a right to payment from a customer that is conditioned on events that have occurred other than the passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material remaining performance obligations, contract assets or liabilities as of June 30, 2022 and 2021.
The Company pays sales commissions related to certain contracts, which qualify as incremental costs of obtaining a contract. However, the saleCompany applies the practical expedient that allows an entity to recognize incremental costs of specialized assembled machines upon customer acceptance and installation,obtaining a contract as installationan expense when incurred if the amortization period of the asset that would have been recognized is deemed essential to the functionalityone year or less. These costs are recorded within operating expense in our consolidated statements of a specialized assembled machine. Sales of specialized assembled machines were immaterial for 2017, 2016 and 2015.income.
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). Forfeitures are recorded as incurred. 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 consolidated financial statements include environmental, health and safety matters and litigation.
Long-Lived Assets We evaluate the recoverability of property, plant and equipment, operating lease right-of-use (ROU) assets 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 performed at the asset group level, 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.asset group.
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.that quarter. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit. The discounted cash flow method was used to measure the fair value of our equity under the income approach. A terminal value utilizing a constant growth rate of cash flows was used to calculate a terminal value after the explicit projection period. The estimates and assumptions used in our calculations include revenue and gross margin growth rates, expected capital expenditures to determine projected cash flows, expected tax rates and an estimated discount rate to determine present value of expected cash flows. These estimates are based on historical experiences, our projections of future operating activity and our weighted average cost of capital (WACC). In order to determine the discount rate, the Company uses a market perspective WACC approach. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an effect on future calculations of estimated fair value.
The $273.5 millionAs of June 30, 2022, there is no goodwill allocated to the IndustrialInfrastructure reporting unit and the $27.9unit. As of June 30, 2022, $264.2 million of goodwill was allocated to the WidiaMetal Cutting reporting unit. We completed an annual quantitative test of goodwill impairment and determined that the fair value of the reporting unit are not at risksubstantially exceeded the carrying value and, therefore, no impairment was recorded during 2022.
Further, an indefinite-lived trademark intangible asset of $10.4 million in the impairment test sinceMetal Cutting reporting unit had a fair value substantiallythat exceeded theits carrying value as of the date of the lastannual impairment test. There istest and, therefore, no impairment was recorded during 2022. To determine fair value, we assumed revenue growth rates inclusive of macroeconomic uncertainties and a residual period growth rate of 3 percent. We assumed a royalty rate of 1 percent, and the future period cash flows were discounted at 20 percent per annum.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill allocatedand indefinite-lived intangible impairment test will prove to be an accurate prediction of the future. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately affect the estimated fair values of the Metal Cutting reporting unit and of the indefinite-lived trademark may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures, including those related to the Infrastructure reporting unit.COVID-19 pandemic and the broader economic effects from Russia's conflict in Ukraine, adversely affecting our long-term sales trends and (ii) inability to achieve the sales from our strategic growth initiatives.
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 the 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, 2017,2022, 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 pointor decrease in our discount rates would decreasebe immaterial to our pre-tax income by approximately $0.1 million.
income.
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, 2017,2022, 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$8 million and $1.9$1 million to our pension and other postretirement benefit plans, respectively, in 2018.2023. Expected pension contributions in 2023 are primarily for international plans.
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.terms and forward-looking information. 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, 2017.2022.
Inventories Inventories are stated at the lower
Inventories We use the last-in, first-out method for determining the cost of a significant portion of our U.S. inventories.inventories, and they are stated at the lower of cost or market. 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.method, and are stated at the lower of cost or net realizable value. When market conditions indicate an excess of carrying costs over market value, a lower-of-cost-or-marketlower of cost or net realizable value provision or a lower of cost or market provision, as applicable, is recorded. ExcessOnce inventory is determined to be excess or obsolete, a new cost basis is established that is not subsequently written back up in future periods.
Income Taxes The Company’s provision for income taxes is calculated based on income and obsolete inventory reserves are established based upon our evaluationstatutory tax rates in the various jurisdictions in which the Company operates and requires the use of management’s estimates and judgments. Management judgment is required in determining the quantity of inventoryCompany’s worldwide provision for income taxes and recording the related assets and liabilities, including accruals for unrecognized tax benefits and assessing the need for valuation allowances on hand relative to demand.
Income Taxesdeferred tax assets. 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.uncertain. 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, 2017,2022, the deferred tax assets net of valuation allowances relate primarily to net operating loss and other carryforwards, pension benefits, accrued employee benefits and inventory reserves.inventory. 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 andfor which a valuation allowance had beenis recorded, against the deferred tax assets, a decrease in the valuation allowance would be required.
Swiss tax reform
Legislation was effectively enacted during the December quarter of fiscal 2020 when the Canton of Schaffhausen approved the Federal Act on Tax Reform and AHV Financing on October 8, 2019 (Swiss tax reform). Significant changes from Swiss tax reform include the abolishment of certain favorable tax regimes and the creation of a multi-year transitional period at both the federal and cantonal levels.
The transitional provisions of Swiss tax reform allow companies to utilize a combination of lower tax rates and tax basis adjustments to fair value, which are used for tax depreciation and amortization purposes resulting in deductions over the transitional period. To reflect the federal and cantonal transitional provisions, as they apply to us, we recorded a deferred tax asset of $14.5 million during the December quarter of fiscal 2020. We consider the deferred tax asset from Swiss tax reform to be an estimate based on our current interpretation of the legislation, which is subject to change based on further legislative guidance, review with the Swiss federal and cantonal authorities and modifications to the underlying valuation. We anticipate finalization of the deferred tax asset within the next six months.
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 adopt any new accounting standards during 2022 that 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 millionhad or are reported in the June 30, 2016 balance sheet.
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.
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 ourthe Company's consolidated financial statements.statements or disclosures.
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 FINANCIAL MEASURES NOT DEFINED BY U.S. GAAP In accordance with the SEC's Regulation G, the following provides definitionsSEC rules, we are providing descriptions of the non-GAAP financial measures included in this Annual Report and the reconciliationreconciliations to the most closely related GAAP measure.financial measures. 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 financial measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes. These measurespurposes and may, therefore, also be useful to investors as they provide supplemental information about business performance and provide investorsare a view of our business results through the eyes of management. These non-GAAP financial measures are not intended to be considered by the user in place of the related GAAP financial measure, but rather as supplemental information to our business results. These non-GAAP financial 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.
Organic sales growth (decline)Organic sales growth (decline) is a non-GAAP financial measure of sales growth (decline)(which is the most directly comparable GAAP measure) excluding the impactseffects of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. Management believesWe believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. We report organic sales growth at the consolidated and segment levels.
Constant currency end market sales growth (decline) Constant currency end market sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by end market excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth, constant currency end market sales growth (decline) does not exclude the effect of business days. We believe this measure provides investors with a supplemental understanding of underlying end market trends by providing end market sales decline on a consistent basis. We report constant currency end market sales growth (decline) at the consolidated and segment levels.
Constant currency regional sales growth (decline) Constant currency regional sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by region excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth (decline), constant currency regional sales growth (decline) does not exclude the effect of business days. We believe this measure provides investors with a supplemental understanding of underlying regional trends by providing regional sales growth (decline) on a consistent basis. We report constant currency regional sales growth (decline) at the consolidated and segment levels.
Reconciliations of organic sales growth to sales growth are as follows:
| | | | | | | | | | | | | | | | | | | | |
| Year ended June 30, 2022 | | Metal Cutting | | Infrastructure | | Total |
| Organic sales growth | | 9% | | 14% | | 11% |
Foreign currency exchange effect(6) | | (2) | | — | | (2) |
| | | | | | |
| | | | | | |
| | | | | | |
| Sales growth | | 7% | | 14% | | 9% |
Reconciliations of constant currency end market sales growth (decline) to the most closely related GAAP measure,end market sales growth (decline), isare as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Metal Cutting | | | | | | | | |
| Year ended June 30, 2022 | | General engineering | | Transportation | | Aerospace | | Energy |
| Constant currency end market sales growth (decline) | | 13% | | (1)% | | 23% | | 6% |
Foreign currency exchange effect(6) | | (3) | | (2) | | (2) | | (1) |
| | | | | | | | |
| | | | | | | | |
End market sales growth (decline)(7) | | 10% | | (3)% | | 21% | | 5% |
| | | | | | | | | | | | | | | | | | | | |
| Infrastructure | | | | | | |
| Year ended June 30, 2022 | | Energy | | Earthworks | | General engineering |
| Constant currency end market sales growth | | 27% | | 9% | | 10% |
Foreign currency exchange effect(6) | | — | | 1 | | (1) |
| | | | | | |
| | | | | | |
End market sales growth(7) | | 27% | | 10% | | 9% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | |
| Year ended June 30, 2022 | | General engineering | | Transportation | | Aerospace | | Energy | | Earthworks |
| Constant currency end market sales growth (decline) | | 12% | | (1)% | | 23% | | 20% | | 9% |
Foreign currency exchange effect(6) | | (2) | | (2) | | (2) | | (1) | | 1 |
| | | | | | | | | | |
| | | | | | | | | | |
End market sales growth(7) | | 10% | | (3)% | | 21% | | 19% | | 10% |
|
| | | | | | | | | | |
| 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, 2022 | | |
| | Americas | | EMEA | | Asia Pacific | | | | | | |
| Metal Cutting | | | | | | | | | | | | |
| Constant currency regional sales growth (decline) | | 14% | | 10% | | (2)% | | | | | | |
Foreign currency exchange effect(6) | | — | | (6) | | — | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth (decline)(8) | | 14% | | 4% | | (2)% | | | | | | |
| | | | | | | | | | | | |
| Infrastructure | | | | | | | | | | | | |
| Constant currency regional sales growth | | 18% | | 10% | | 7% | | | | | | |
Foreign currency exchange effect(6) | | — | | (3) | | 2 | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth(8) | | 18% | | 7% | | 9% | | | | | | |
| | | | | | | | | | | | |
| Total | | | | | | | | | | | | |
| Constant currency regional sales growth | | 16% | | 10% | | 2% | | | | | | |
Foreign currency exchange effect(6) | | — | | (5) | | — | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth(8) | | 16% | | 5% | | 2% | | | | | | |
|
| | | | | | | | | | |
| 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)% |
(7) Aggregate sales for all end markets sum to the sales amount presented on Kennametal's consolidated financial statements. |
| | | | | | | | | | |
| 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 may 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.results. 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-floatingwe use forward-starting interest rate mix as a separate decision from funding arrangementsswaps to effectively hedge the variability in the bank and public debt markets. We measure hedge effectiveness by assessing thefuture benchmark interest payments attributable to changes in the fair value or expected future cash flowsinterest rates on forecasted issuances of the hedged item. The ineffective portions are recorded in other expense (income), net.fixed-rate debt. See Notes 2 and 1617 of our consolidated financial statements set forth in Item 8.8 of this Annual Report.
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 effectschange on the June 30, 2017 currency exchange rates and the effective interest rates under our current borrowing arrangements.arrangements as of June 30, 2022. We compared our contractual derivative and borrowing arrangements in effect at June 30, 20172022 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.loss.
CASH FLOW HEDGESCurrency 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.DEBT, REVOLVING AND OTHER LINES OF CREDIT AND NOTES PAYABLE 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, 20172022 and 2016,2021, 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$615.6 million and $695.4$600.5 million, respectively, of outstanding debt, including capital leasesrevolving and other lines of credit and notes payable. EffectiveThe effective interest ratesrate was 3.7 percent as of June 30, 20172022 and 2016 were 3.5 percent and 3.6 percent, respectively.2021. A hypothetical change of 10 percent in market interest rates from June 30, 20172022 levels would have an immaterial impact on our interest expense.be immaterial.
CURRENCY EXCHANGE RATE FLUCTUATIONS Currency exchange rate fluctuations decreased diluted earnings per share by $0.08$0.10 in 2017, increased2022 and decreased diluted earnings per share by $0.08$0.03 in 2016 and did not have a material impact in 2015.2021. Currency exchange rate fluctuations may have a material impacteffect on future earnings in the short term and long term.
ITEM 8 -NEW ACCOUNTING STANDARDS
The Company did not adopt any new accounting standards during 2022 that have had or are expected to have a material impact on the Company's consolidated financial statements or disclosures.
RECONCILIATION OF 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 assessmentMEASURES NOT DEFINED BY U.S. GAAP In accordance with SEC rules, we are providing descriptions of the Company’s internal controls overnon-GAAP 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 ismeasures included in this Annual Report and reconciliations to the most closely related GAAP financial measures. We believe that these measures provide useful perspective on Form 10-K.underlying business trends and results and a supplemental measure of year-over-year results. The non-GAAP financial measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes and may, therefore, also be useful to investors as they are a view of our business results through the eyes of management. These non-GAAP financial measures are not intended to be considered by the user in place of the related GAAP financial measure, but rather as supplemental information to our business results. These non-GAAP financial 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.
Organic sales growth Organic sales growth is a non-GAAP financial measure of sales growth (which is the most directly comparable GAAP measure) excluding the effects of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. We report organic sales growth at the consolidated and segment levels.
ReportConstant currency end market sales growth (decline) Constant currency end market sales growth (decline) is a non-GAAP financial measure of Independent Registered Public Accounting Firm
Tosales growth (decline) (which is the Shareholdersmost directly comparable GAAP measure) by end market excluding the effects of Kennametal Inc.
In our opinion,acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth, constant currency end market sales growth (decline) does not exclude the accompanying consolidated balance sheets and the related consolidated statementseffect of income, comprehensive income, cash flow and shareholders' equity present fairly, in all material respects, the financial positionbusiness days. We believe this measure provides investors with a supplemental understanding 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) issuedunderlying end market trends 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,providing end market sales decline on a test basis, evidence supportingconsistent basis. We report constant currency end market sales growth (decline) at the amountsconsolidated and disclosures insegment levels.
Constant currency regional sales growth (decline) Constant currency regional sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the financial statements, assessingmost directly comparable GAAP measure) by region excluding the accounting principles usedeffects of acquisitions, divestitures and significant estimates made by management, and evaluatingforeign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth (decline), constant currency regional sales growth (decline) does not exclude the overall financial statement presentation. Our auditeffect of internal control over financial reporting included obtaining anbusiness days. We believe this measure provides investors with a supplemental understanding of internal control over financial reporting, assessing the risk thatunderlying regional trends by providing regional sales growth (decline) on 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.consistent basis. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 toreport constant currency regional sales growth (decline) at the consolidated financial statements, the Company changed the manner in which it accounts for the presentationand segment levels.
Reconciliations of deferred income taxes and debt issuance costs in fiscal year 2017.organic sales growth to sales growth are as follows:
| | | | | | | | | | | | | | | | | | | | |
| Year ended June 30, 2022 | | Metal Cutting | | Infrastructure | | Total |
| Organic sales growth | | 9% | | 14% | | 11% |
Foreign currency exchange effect(6) | | (2) | | — | | (2) |
| | | | | | |
| | | | | | |
| | | | | | |
| Sales growth | | 7% | | 14% | | 9% |
A company's internal control over financial reporting is a process designedReconciliations of constant currency end market sales growth (decline) 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 transactionsend market sales growth (decline), 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.follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Metal Cutting | | | | | | | | |
| Year ended June 30, 2022 | | General engineering | | Transportation | | Aerospace | | Energy |
| Constant currency end market sales growth (decline) | | 13% | | (1)% | | 23% | | 6% |
Foreign currency exchange effect(6) | | (3) | | (2) | | (2) | | (1) |
| | | | | | | | |
| | | | | | | | |
End market sales growth (decline)(7) | | 10% | | (3)% | | 21% | | 5% |
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
| | | | | | | | | | | | | | | | | | | | |
| Infrastructure | | | | | | |
| Year ended June 30, 2022 | | Energy | | Earthworks | | General engineering |
| Constant currency end market sales growth | | 27% | | 9% | | 10% |
Foreign currency exchange effect(6) | | — | | 1 | | (1) |
| | | | | | |
| | | | | | |
End market sales growth(7) | | 27% | | 10% | | 9% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | |
| Year ended June 30, 2022 | | General engineering | | Transportation | | Aerospace | | Energy | | Earthworks |
| Constant currency end market sales growth (decline) | | 12% | | (1)% | | 23% | | 20% | | 9% |
Foreign currency exchange effect(6) | | (2) | | (2) | | (2) | | (1) | | 1 |
| | | | | | | | | | |
| | | | | | | | | | |
End market sales growth(7) | | 10% | | (3)% | | 21% | | 19% | | 10% |
Reconciliations of constant currency regional sales growth (decline) to reported regional sales growth (decline), are as follows:
CONSOLIDATED STATEMENTS OF INCOME | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30, 2022 | | |
| | Americas | | EMEA | | Asia Pacific | | | | | | |
| Metal Cutting | | | | | | | | | | | | |
| Constant currency regional sales growth (decline) | | 14% | | 10% | | (2)% | | | | | | |
Foreign currency exchange effect(6) | | — | | (6) | | — | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth (decline)(8) | | 14% | | 4% | | (2)% | | | | | | |
| | | | | | | | | | | | |
| Infrastructure | | | | | | | | | | | | |
| Constant currency regional sales growth | | 18% | | 10% | | 7% | | | | | | |
Foreign currency exchange effect(6) | | — | | (3) | | 2 | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth(8) | | 18% | | 7% | | 9% | | | | | | |
| | | | | | | | | | | | |
| Total | | | | | | | | | | | | |
| Constant currency regional sales growth | | 16% | | 10% | | 2% | | | | | | |
Foreign currency exchange effect(6) | | — | | (5) | | — | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth(8) | | 16% | | 5% | | 2% | | | | | | |
(6) Foreign currency exchange effect is calculated by dividing the difference between current period sales and current period sales at prior period foreign exchange rates by prior period sales. |
| | | | | | | | | | | |
| 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(7) Aggregate sales for all end markets sum to the sales amount presented on Kennametal's consolidated financial statements.
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(8) Aggregate sales for all regions sum to the sales amount presented on Kennametal's consolidated financial statements.
Table of ContentsITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 notesMARKET RISK We are an integral part of these consolidated financial statements.
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 | ) | | | | 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 | | | 4,606 |
| | | | (51,508 | ) | | | | (136,120 | ) |
| Reclassification of foreign currency translation adjustment loss realized upon sale | | | — |
| | | | 15,088 |
| | | | — |
|
| Other comprehensive income (loss), net of tax | | | 28,817 |
| | | | (111,503 | ) | | | | (177,392 | ) |
| Sale of subsidiary stock to noncontrolling interests | | | — |
| | | | 2,517 |
| | | | — |
|
| Balance at end of year | | | (323,692 | ) | | | | (352,509 | ) | | | | (243,523 | ) |
| NONCONTROLLING INTERESTS | | | | | | | | | | | |
| Balance at beginning of year | | | 31,478 |
| | | | 29,628 |
| | | | 32,352 |
|
| Net income | | | 2,842 |
| | | | 2,084 |
| | | | 2,935 |
|
| Other comprehensive income (loss), net of tax | | | 1,282 |
| | | | (1,188 | ) | | | | (3,345 | ) |
| Sale of subsidiary stock to noncontrolling interests | | | — |
| | | | 2,566 |
| | | | — |
|
| Cash dividends paid to noncontrolling interests | | | (243 | ) | | | | (1,612 | ) | | | | (2,314 | ) |
| Balance at end of year | | | 35,359 |
| | | | 31,478 |
| | | | 29,628 |
|
| Total equity, June 30 | | | $ | 1,052,653 |
| | | | $ | 995,801 |
| | | | $ | 1,375,435 |
|
The accompanying notesexposed to certain market risks arising from transactions that are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS
Kennametal Inc. is a global leaderentered into in the development and applicationnormal course 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” is to a fiscal year ended June 30. 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.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of our significant accounting policies is presented below to assist in evaluating our consolidated financial statements.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include our accounts and those of our majority-owned subsidiaries. All significant intercompany balances and transactions are eliminated. Investments in entities of less than 50 percent of the voting stock over which we have significant influence are accounted for on an equity basis. The factors used to determine significant influence include, but are not limited to, our management involvement in the investee, such as hiring and setting compensation for management of the investee, the ability to make operating and capital decisions of the investee, representation on the investee’s board of directors and purchase and supply agreements with the investee. Investments in entities of less than 50 percent of the voting stock in which we do not have significant influence are accounted for on the cost basis.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), 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 develop 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.
CASH AND CASH EQUIVALENTS Cash investments having original maturities of three months or less are considered cash equivalents. Cash equivalents principally consist of investments in money market funds and bank deposits at June 30, 2017.
ACCOUNTS RECEIVABLE We market our products to a diverse customer base throughout the world. Trade credit is extended based upon periodically updated evaluations of each customer’s ability to satisfy its obligations. We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Accounts receivable reserves are determined based upon an aging of accounts and a review of specific accounts.
INVENTORIES Inventories are stated at the lower of cost or market. We use the last-in, first-out (LIFO) method for determining the cost of a significant portion of our United States (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. The excess and obsolete inventory reserve at June 30, 2017 and 2016 was $32.1 million and $36.7 million, respectively.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Major improvements are capitalized, while maintenance and repairs are expensed as incurred. Retirements and disposals are removed from cost and accumulated depreciation accounts, with the gain or loss reflected in operating income. Interest related to the construction of major facilities is capitalized as part of the construction costs and is depreciated over the facilities' estimated useful lives.
Depreciation for financial reporting purposes is computed using the straight-line method over the following estimated useful lives: building and improvements over 15-40 years; machinery and equipment over 4-15 years; furniture and fixtures over 5-10 years and computer hardware and software over 3-5 years.
Leased property and equipment under capital leases are depreciated using the straight-line method over the terms of the related leases.
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 any 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 of the asset or asset group, 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 OTHER INTANGIBLE ASSETS Goodwill represents the excess of cost over the fair value of the net assets of acquired companies. Goodwill and other intangible assets with indefinite lives are tested at least annually for impairment. 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. We evaluate the recoverability of goodwill for 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. This evaluation is sensitive to changes in market interest rates and other external factors.
Identifiable assets with finite lives are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable.
2015 December Quarter Impairment Charge
As previously disclosed, we recorded a non-cash pre-tax impairment charge during the three months ended December 31, 2014 of $376.5 million in the Infrastructure segment, of which $375.0 million was for goodwill and $1.5 million was for an indefinite-lived trademark intangible asset.
2015 March Quarter Impairment Charge
As previously disclosed, we recorded an additional non-cash pre-tax impairment charge during the three months ended March 31, 2015 of $152.9 million in the Infrastructure reporting unit, of which $152.5 million was for goodwill and $0.4 million was for an indefinite-lived trademark intangible asset.
In addition, we recorded a $6.8 million charge during the three months ended March 31, 2015 for an indefinite-lived trademark intangible asset based upon completion of the 2015 December valuation.
During 2015, an impairment charge of $10.5 million was recorded for a contract-based technology intangible asset that was part of the Infrastructure segment, resulting in a non-cash impairment charge of $5.5 million and a reduction in a liability of $5.0 million.
2016 December Quarter Impairment Charge
As previously disclosed, we recorded a preliminary non-cash pre-tax impairment charge during the three months ended December 31, 2015 of $106.1 million in the Infrastructure segment, of which $105.7 million was for goodwill and $0.4 million was for an indefinite-lived trademark intangible asset. We also recorded a preliminary non-cash pre-tax impairment charge during the three months ended December 31, 2015 of $2.3 million in the Widia segment for an indefinite-lived trademark intangible asset. These impairment charges are recorded in restructuring and asset impairment charges in our consolidated statements of income.
The further acceleration or extended persistence of the current downturn in the global end markets could have a further negative impact on our business and financial performance. We cannot provide assurance that we will achieve all of the anticipated benefits from restructuring actions we have taken and expect to continue to take. 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.
2016 Divestiture Impact on Goodwill
During 2016, we completed the sale of non-core businesses, see Note 4. As a result of this transaction, goodwill decreased by $1.1 million and $6.5 million in our Industrial and Infrastructure segments, respectively. These decreases are recorded in loss on divestiture in our consolidated statements of income.
2016 Divestiture Impact on Other Intangible Assets
The divestiture of non-core businesses completed during 2016 resulted in a reduction of $30.0 million in customer-related, $15.4 million in unpatented technology, $5.0 million in indefinite-lived trademarks, $1.1 million in definite-lived trademarks, $0.8 million in technology-based and other and $0.5 million in contract-based.
2017 Reorganization Impact on Goodwill
At the beginning of fiscal 2017, we reorganized our operating structure in a manner that changed the composition of our reporting units. The Industrial and Widia reporting units in fiscal 2017 were formed from the fiscal 2016 Industrial reporting unit. In connection with this reporting unit realignment, during the first quarter of fiscal 2017 we updated our goodwill impairment assessment based on a quantitative analysis. We allocated our goodwill from the former Industrial segment to the current Industrial and Widia segments using a relative fair value approach. We evaluated the goodwill of our reporting units immediately prior to and after the realignment and concluded in both cases that there was no impairment.
We performed our annual impairment test during the June quarter of fiscal 2017 and concluded that there was no impairment.
PENSION AND OTHER POSTRETIREMENT BENEFITS We sponsor these types of 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. 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.
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 costs is based on historical claims and enrollment information projected over the next year and adjusted for administrative charges. This rate is expected to decrease until 2027.
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.
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 occurs related to the issuance of capital stock under stock option grants, restricted stock awards and restricted stock units. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options, restricted stock awards and restricted stock units.
For purposes of determining the number of diluted shares outstanding at June 30, 2017, weighted average shares outstanding for basic earnings per share calculations were increased due solely to the dilutive effect of unexercised capital stock options, unvested restricted stock awards and unvested restricted stock units by 0.8 million shares. Unexercised capital stock options, unvested restricted stock awards and restricted stock units of 1.4 million shares at June 30, 2017 were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price, and therefore the inclusion would have been anti-dilutive. In 2016 and 2015, the effect of unexercised capital stock options and unvested restricted stock units was anti-dilutive as a result of a net loss in the periods and therefore has been excluded from diluted shares outstanding as well as from the diluted earnings per share calculation.
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 damage 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 are 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 from our customers authorizing shipment. 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.
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.
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.
Capital stock options are granted to eligible employees at fair market value at the date of grant. Capital stock options are exercisable under specified conditions for up to 10 years from the date of grant. The Kennametal Inc. Stock and Incentive Plan of 2010, as Amended and Restated on October 22, 2013, and as further amended January 27, 2015 (A/R 2010 Plan) and the Kennametal Inc. 2016 Stock and Incentive Plan (2016 Plan) authorize the issuance of up to 9,500,000 shares of the Company’s capital stock plus any shares remaining unissued under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended (2002 Plan). Under the provisions of the A/R 2010 Plan and 2016 Plan participants may deliver stock, owned by the holder for at least six months, in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. The fair market value of shares delivered during 2017, 2016 and 2015 was immaterial. In addition to stock option grants, the A/R 2010 Plan and the 2016 Plan permit the award of stock appreciation rights, performance share awards, performance unit awards, restricted stock awards, restricted unit awards and share awards to directors, officers and key employees.
RESEARCH AND DEVELOPMENT COSTS Research and development costs of $38.0 million, $39.4 million and $45.1 million in 2017, 2016 and 2015, respectively, were expensed as incurred. These costs are included in operating expense in the consolidated statements of income.
SHIPPING AND HANDLING FEES AND COSTS All fees billed to customers for shipping and handling are classified as a component of sales. All costs associated with shipping and handling are classified as a component of cost of goods sold.
INCOME TAXES Deferred income taxes are recognized based on the future income tax effects (using enacted tax laws and rates) of differences in the carrying amounts of assets and liabilities for financial reporting and tax purposes. 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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIESbusiness. As part of our financial risk management program, we use certain derivative financial instruments.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 may use derivative financial instruments to provide predictability to the effects of changes in foreign exchange rates on our consolidated results, achieve our targeted mix of fixed and floating interest rates on our outstanding debt.results. 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-floatingwe use forward-starting interest rate mix,swaps to effectively hedge the variability in future benchmark interest payments attributable to changes in interest rates on forecasted issuances of fixed-rate debt. See Notes 2 and 17 of our consolidated financial statements set forth in Item 8 of this Annual Report.
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.
Included below is a separate decision from fundingsensitivity analysis that is based upon a hypothetical 10 percent change on the effective interest rates under our current borrowing arrangements as of June 30, 2022. We compared our borrowing arrangements in effect at June 30, 2022 to the bank and public debt markets.
We account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated as a hedge of such items. We measure hedge effectiveness by assessing the changeshypothetical interest rates in the fair value or expected future cash flows ofsensitivity analysis to determine the hedged item. The ineffective portions are recorded in othereffect on interest expense, (income), net. Certain currency forward contracts hedging significant cross-border intercompany loans are considered other derivativespre-tax income and therefore, do not qualify for hedge accounting. These contracts are recorded at fair value in the balance sheet, with the offset to other expense (income), net.
CASH FLOW HEDGESCurrency Forward contracts and 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) income,loss.
DEBT, REVOLVING AND OTHER LINES OF CREDIT AND NOTES PAYABLE At June 30, 2022 and are recognized as a component2021, we had $615.6 million and $600.5 million, respectively, of outstanding debt, including revolving and other expense (income), net when the underlying salelines of products or services is recognized into earnings.
Interest Rate Floating-to-fixedcredit and notes payable. The effective interest rate swap contracts, designatedwas 3.7 percent as cash flow hedges, are entered intoof June 30, 2022 and 2021. A hypothetical change of 10 percent in market interest rates from time to time to hedge our exposure to interestJune 30, 2022 levels would be immaterial.
CURRENCY EXCHANGE RATE FLUCTUATIONS Currency exchange rate changesfluctuations decreased diluted earnings per share by $0.10 in 2022 and decreased diluted earnings per share by $0.03 in 2021. Currency exchange rate fluctuations may have a material effect on a portion of our floating rate debt. These interest rate swap contracts convert a portion of our floating rate debt to fixed rate debt. We record the fair value of these contracts as an asset or a liability, as applicable,future earnings in the balance sheet, with the offset to accumulated other comprehensive (loss) income.short term and long term.
FAIR VALUE HEDGESInterest Rate Fixed-to-floating interest rate swap contracts, designated as fair value hedges, are entered into from time to time to hedge our exposure to fair value fluctuations on a portion
NET INVESTMENT HEDGES We designate financial instruments as net investment hedges from time to time to hedge the foreign exchange exposure of our net investment in foreign currency-based subsidiaries. The remeasurements of these non-derivatives designated as net investment hedges are calculated each period with changes reported in foreign currency translation adjustment within accumulated other comprehensive loss. Such amounts will remain in accumulated other comprehensive loss unless we complete or substantially complete liquidation or disposal of our investment in the underlying foreign operations.
CURRENCY TRANSLATION Assets and liabilities of international operations are translated into U.S. dollars using year-end exchange rates, while revenues and expenses are translated at average exchange rates throughout the year. The resulting net translation adjustments are recorded as a component of accumulated other comprehensive (loss) income. The local currency is the functional currency of most of our locations. A loss of $6.7 million and gains of $1.6 million and $1.7 million from currency transactions were included in other expense (income), net in 2017, 2016 and 2015, respectively.
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 adopt any new accounting standards during 2022 that have had or are expected to have a material impact on ourthe Company's consolidated financial position,statements or disclosures.
RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BY U.S. GAAP In accordance with SEC rules, we are providing descriptions of the non-GAAP financial measures included in this Annual Report and reconciliations to the most closely related GAAP financial measures. We believe that these measures provide useful perspective on underlying business trends and results and a supplemental measure of operationsyear-over-year results. The non-GAAP financial measures described below are used by management in making operating decisions, allocating financial resources and cash flows.for business strategy purposes and may, therefore, also be useful to investors as they are a view of our business results through the eyes of management. These non-GAAP financial measures are not intended to be considered by the user in place of the related GAAP financial measure, but rather as supplemental information to our business results. These non-GAAP financial 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.
Organic sales growth Organic sales growth is a non-GAAP financial measure of sales growth (which is the most directly comparable GAAP measure) excluding the effects of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. We report organic sales growth at the consolidated and segment levels.
Constant currency end market sales growth (decline) Constant currency end market sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by end market excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth, constant currency end market sales growth (decline) does not exclude the effect of business days. We believe this measure provides investors with a supplemental understanding of underlying end market trends by providing end market sales decline on a consistent basis. We report constant currency end market sales growth (decline) at the consolidated and segment levels.
In November 2015,Constant currency regional sales growth (decline) Constant currency regional sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the FASB issued guidancemost directly comparable GAAP measure) by region excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth (decline), constant currency regional sales growth (decline) does not exclude the effect of business days. We believe this measure provides investors with a supplemental understanding of underlying regional trends by providing regional sales growth (decline) on balance sheet classificationa consistent basis. We report constant currency regional sales growth (decline) at the consolidated and segment levels.
Reconciliations of deferred taxes. The amendments in this guidance require that deferred tax liabilitiesorganic sales growth to sales growth are as follows:
| | | | | | | | | | | | | | | | | | | | |
| Year ended June 30, 2022 | | Metal Cutting | | Infrastructure | | Total |
| Organic sales growth | | 9% | | 14% | | 11% |
Foreign currency exchange effect(6) | | (2) | | — | | (2) |
| | | | | | |
| | | | | | |
| | | | | | |
| Sales growth | | 7% | | 14% | | 9% |
Reconciliations of constant currency end market sales growth (decline) to end market sales growth (decline), are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Metal Cutting | | | | | | | | |
| Year ended June 30, 2022 | | General engineering | | Transportation | | Aerospace | | Energy |
| Constant currency end market sales growth (decline) | | 13% | | (1)% | | 23% | | 6% |
Foreign currency exchange effect(6) | | (3) | | (2) | | (2) | | (1) |
| | | | | | | | |
| | | | | | | | |
End market sales growth (decline)(7) | | 10% | | (3)% | | 21% | | 5% |
| | | | | | | | | | | | | | | | | | | | |
| Infrastructure | | | | | | |
| Year ended June 30, 2022 | | Energy | | Earthworks | | General engineering |
| Constant currency end market sales growth | | 27% | | 9% | | 10% |
Foreign currency exchange effect(6) | | — | | 1 | | (1) |
| | | | | | |
| | | | | | |
End market sales growth(7) | | 27% | | 10% | | 9% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | |
| Year ended June 30, 2022 | | General engineering | | Transportation | | Aerospace | | Energy | | Earthworks |
| Constant currency end market sales growth (decline) | | 12% | | (1)% | | 23% | | 20% | | 9% |
Foreign currency exchange effect(6) | | (2) | | (2) | | (2) | | (1) | | 1 |
| | | | | | | | | | |
| | | | | | | | | | |
End market sales growth(7) | | 10% | | (3)% | | 21% | | 19% | | 10% |
Reconciliations of constant currency regional sales growth (decline) to reported regional sales growth (decline), are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30, 2022 | | |
| | Americas | | EMEA | | Asia Pacific | | | | | | |
| Metal Cutting | | | | | | | | | | | | |
| Constant currency regional sales growth (decline) | | 14% | | 10% | | (2)% | | | | | | |
Foreign currency exchange effect(6) | | — | | (6) | | — | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth (decline)(8) | | 14% | | 4% | | (2)% | | | | | | |
| | | | | | | | | | | | |
| Infrastructure | | | | | | | | | | | | |
| Constant currency regional sales growth | | 18% | | 10% | | 7% | | | | | | |
Foreign currency exchange effect(6) | | — | | (3) | | 2 | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth(8) | | 18% | | 7% | | 9% | | | | | | |
| | | | | | | | | | | | |
| Total | | | | | | | | | | | | |
| Constant currency regional sales growth | | 16% | | 10% | | 2% | | | | | | |
Foreign currency exchange effect(6) | | — | | (5) | | — | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth(8) | | 16% | | 5% | | 2% | | | | | | |
(6) Foreign currency exchange effect is calculated by dividing the difference between current period sales and assets be classified as noncurrent in a classified statement of financial position, in comparisoncurrent period sales at prior period foreign exchange rates by prior period sales.
(7) Aggregate sales for all end markets sum to the previous practice of separating deferred income tax liabilities and assetssales amount presented on Kennametal's consolidated financial statements.
(8) Aggregate sales for all regions sum to the sales amount presented on Kennametal's consolidated financial statements.
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 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.
In May 2015,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 may use derivative financial instruments to provide predictability to the FASB issued guidanceeffects of changes in foreign exchange rates on disclosures for investments measured usingour consolidated results. 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, we use forward-starting interest rate swaps to effectively hedge the net asset value per share practical expedient. The guidance removes the requirementvariability in future benchmark interest payments attributable 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 2017changes in interest rates on forecasted issuances of fixed-rate debt. See Notes 2 and was applied retrospectively. See Note 13 in17 of our consolidated financial statements set forth in Item 8 (Note 13).of this Annual Report.
In April 2015,We are exposed to counterparty credit risk for nonperformance of derivative contracts and, in the FASB issued guidanceevent 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.
Included below is a sensitivity analysis that is based upon a hypothetical 10 percent change 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 sheetinterest rates under our current borrowing arrangements as of June 30, 20172022. We compared our borrowing arrangements in effect at June 30, 2022 to the hypothetical interest rates in the sensitivity analysis to determine the effect on interest expense, pre-tax income and 2016, respectively.accumulated other comprehensive loss.
In April 2015, the FASB issued guidance on accounting for fees paidDEBT, REVOLVING AND OTHER LINES OF CREDIT AND NOTES PAYABLE At June 30, 2022 and 2021, we had $615.6 million and $600.5 million, respectively, of outstanding debt, including revolving and other lines of credit and notes payable. The effective interest rate was 3.7 percent as of June 30, 2022 and 2021. A hypothetical change of 10 percent in a cloud computing arrangement. The amendmentsmarket interest rates from June 30, 2022 levels would be immaterial.
CURRENCY EXCHANGE RATE FLUCTUATIONS Currency exchange rate fluctuations decreased diluted earnings per share by $0.10 in this update provide guidance to customers about treatment of costs as either capitalized2022 and amortized as an intangible asset or expensed as incurred as a service contract. The amendments provide clarification that costsdecreased diluted earnings per share by $0.03 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 not2021. Currency exchange rate fluctuations may have a material impacteffect on future earnings in the short term and long term.
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, 2022 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, 2022, 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, 2022 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.
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Shareholders of Kennametal Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kennametal Inc. and its subsidiaries (the “Company”) as of June 30, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended June 30, 2022, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based 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.audits. We are ina public accounting firm registered with 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 costPublic Company Accounting Oversight Board (United States) (PCAOB) 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 presentedindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the income statement separatelyconsolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the service cost componentcurrent period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and outsidethat (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a subtotalwhole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Provision for Income Taxes
As described in Notes 2 and 13 to the consolidated financial statements, the Company recorded a provision for income taxes of $56.5 million for the year ended June 30, 2022. The Company’s provision for income from operations. This guidancetaxes is effective for Kennametal beginning July 1, 2018. We arecalculated based on income and statutory tax rates in the processvarious jurisdictions in which the Company operates and requires the use of management’s estimates and judgments. Management judgment is required in determining the Company’s worldwide provision for income taxes and recording the related assets and liabilities, including accruals for unrecognized tax benefits and assessing the impactneed for valuation allowances on deferred tax assets.
The principal considerations for our determination that performing procedures relating to the adoptionprovision for income taxes is a critical audit matter are (i) a high degree of this guidance willauditor effort in performing procedures and evaluating management’s provision for income taxes and the related assets and liabilities, including the accruals for unrecognized tax benefits, as well as management’s assessment of the need for valuation allowances on deferred tax assets and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the provision for income taxes, including controls over accruals for unrecognized tax benefits and valuation allowances on deferred tax assets. These procedures also included, among others (i) testing the accuracy of the provision for income taxes, which included the effective tax rate reconciliation and permanent and temporary differences, (ii) evaluating whether the data utilized in the calculations of the provision for income taxes and deferred tax assets and liabilities were appropriate and consistent with evidence obtained in other areas of the audit, (iii) evaluating the identification of accruals for unrecognized tax benefits and the reasonableness of the more likely than not determination in consideration of court decisions, legislative actions, statutes of limitations, and developments in tax examinations by jurisdiction, and (iv) evaluating the reasonableness of management’s assessment of the realizability of its deferred tax assets based on expectations of the ability to utilize its tax attributes through testing of historical and estimated future taxable income. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of management’s judgments and estimates related to the application of foreign and domestic tax laws and regulations.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
August 10, 2022
We have on our condensedserved as the Company’s auditor since 2002.
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | |
| Year ended June 30 (in thousands, except per share data) | 2022 | | 2021 | | 2020 |
| Sales | $ | 2,012,456 | | | $ | 1,841,441 | | | $ | 1,885,305 | |
| Cost of goods sold | 1,364,479 | | | 1,288,963 | | | 1,355,834 | |
| Gross profit | 647,977 | | | 552,478 | | | 529,471 | |
| Operating expense | 419,093 | | | 407,246 | | | 388,436 | |
| Restructuring (benefits) charges and asset impairment charges (Note 16) | (1,243) | | | 29,061 | | | 68,228 | |
| Goodwill and other intangible assets impairments (Note 8) | — | | | — | | | 30,227 | |
| (Gain) loss on divestiture (Note 4) | (1,001) | | | — | | | 6,517 | |
| Amortization of intangibles | 12,988 | | | 14,003 | | | 13,811 | |
| Operating income | 218,140 | | | 102,168 | | | 22,252 | |
| Interest expense | 25,914 | | | 46,375 | | | 35,154 | |
| Other income, net | (14,507) | | | (8,867) | | | (14,862) | |
| Income before income taxes | 206,733 | | | 64,660 | | | 1,960 | |
| Provision for income taxes (Note 13) | 56,532 | | | 6,243 | | | 7,007 | |
| Net income (loss) | 150,201 | | | 58,417 | | | (5,047) | |
| Less: Net income attributable to noncontrolling interests | 5,578 | | | 3,983 | | | 614 | |
| Net income (loss) attributable to Kennametal | $ | 144,623 | | | $ | 54,434 | | | $ | (5,661) | |
| PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS | | |
| Basic earnings (loss) per share | $ | 1.74 | | | $ | 0.65 | | | $ | (0.07) | |
| Diluted earnings (loss) per share | $ | 1.72 | | | $ | 0.65 | | | $ | (0.07) | |
| Basic weighted average shares outstanding | 83,252 | | | 83,602 | | | 83,047 | |
| Diluted weighted average shares outstanding | 83,944 | | | 84,333 | | | 83,047 | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | | | |
| Year ended June 30 (in thousands) | | 2022 | | 2021 | | 2020 |
| Net income (loss) | | $ | 150,201 | | | $ | 58,417 | | | $ | (5,047) | |
| Other comprehensive (loss) income, net of tax | | | | | | |
| Unrealized gain (loss) on derivatives designated and qualified as cash flow hedges | | — | | | 9,255 | | | (582) | |
| Reclassification of unrealized (gain) loss on expired derivatives designated and qualified as cash flow hedges | | (770) | | | (401) | | | 679 | |
| Unrecognized net pension and other postretirement benefit plans (loss) gain | | (4,163) | | | 9,107 | | | (18,299) | |
| Reclassification of net pension and other postretirement benefit plans loss | | 8,929 | | | 10,355 | | | 7,935 | |
| Foreign currency translation adjustments | | (91,185) | | | 60,528 | | | (35,891) | |
| Total other comprehensive (loss) income, net of tax | | (87,189) | | | 88,844 | | | (46,158) | |
| Total comprehensive income (loss) | | 63,012 | | | 147,261 | | | (51,205) | |
| Less: comprehensive income (loss) attributable to noncontrolling interests | | 2,013 | | | 5,910 | | | (1,846) | |
| Comprehensive income (loss) attributable to Kennametal Shareholders | | $ | 60,999 | | | $ | 141,351 | | | $ | (49,359) | |
The accompanying notes are an integral part of these consolidated financial statements.
In October 2016, the FASB issued guidance on the accounting for income tax consequences
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| As of June 30 (in thousands, except per share data) | 2022 | | 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 85,586 | | | $ | 154,047 | |
| Accounts receivable, less allowance for doubtful accounts of $9,422 and $9,734 respectively | 295,346 | | | 302,945 | |
| Inventories (Note 7) | 570,836 | | | 476,345 | |
| Other current assets | 72,940 | | | 71,470 | |
| Total current assets | 1,024,708 | | | 1,004,807 | |
| Property, plant and equipment: | | | |
| Land and buildings | 410,039 | | | 413,865 | |
| Machinery and equipment | 1,904,872 | | | 1,959,176 | |
| Less accumulated depreciation | (1,312,870) | | | (1,317,906) | |
| Property, plant and equipment, net | 1,002,041 | | | 1,055,135 | |
| Other assets: | | | |
| Goodwill (Note 8) | 264,230 | | | 277,615 | |
| Other intangible assets, less accumulated amortization of $160,699 and $153,972, respectively (Note 8) | 105,725 | | | 120,041 | |
| Operating lease right-of-use assets (Note 9) | 47,206 | | | 50,341 | |
| Deferred income taxes (Note 13) | 54,602 | | | 58,742 | |
| Long-term prepaid pension benefit (Note 14) | 66,433 | | | 89,233 | |
| Other | 8,579 | | | 9,847 | |
| Total other assets | 546,775 | | | 605,819 | |
| Total assets | $ | 2,573,524 | | | $ | 2,665,761 | |
| LIABILITIES | | | |
| Current liabilities: | | | |
| Revolving and other lines of credit and notes payable (Note 12) | $ | 21,186 | | | $ | 8,365 | |
| Current operating lease liabilities (Note 9) | 12,387 | | | 14,220 | |
| Accounts payable | 227,887 | | | 177,659 | |
| Accrued income taxes | 29,476 | | | 18,059 | |
| Accrued vacation pay | 15,340 | | | 17,100 | |
| Accrued payroll | 40,970 | | | 44,389 | |
| Other current liabilities (Note 10) | 138,403 | | | 157,602 | |
| Total current liabilities | 485,649 | | | 437,394 | |
| Long-term debt, less current maturities (Note 11) | 594,364 | | | 592,108 | |
| Operating lease liabilities (Note 9) | 35,342 | | | 36,800 | |
| Deferred income taxes (Note 13) | 32,185 | | | 23,710 | |
| Accrued postretirement benefits (Note 14) | 7,924 | | | 10,131 | |
| Accrued pension benefits (Note 14) | 105,071 | | | 160,936 | |
| Accrued income taxes | 6,369 | | | 4,246 | |
| Other liabilities | 15,373 | | | 32,231 | |
| Total liabilities | 1,282,277 | | | 1,297,556 | |
| Commitments and contingencies (Note 20) | 0 | | 0 |
| 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; 81,337 and 83,614 shares issued, respectively | 101,671 | | | 104,518 | |
| Additional paid-in capital | 494,202 | | | 562,820 | |
| Retained earnings | 1,070,655 | | | 992,597 | |
| Accumulated other comprehensive loss (Note 15) | (413,951) | | | (330,327) | |
| Total Kennametal Shareholders’ Equity | 1,252,577 | | | 1,329,608 | |
| Noncontrolling interests | 38,670 | | | 38,597 | |
| Total equity | 1,291,247 | | | 1,368,205 | |
| Total liabilities and equity | $ | 2,573,524 | | | $ | 2,665,761 | |
The accompanying notes are an integral part 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 condensedthese consolidated financial statements.
In August 2016, the FASB issued guidance on classification
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| Year ended June 30 (in thousands) | 2022 | | 2021 | | 2020 |
| OPERATING ACTIVITIES | | | | | |
| Net income (loss) | $ | 150,201 | | | $ | 58,417 | | | $ | (5,047) | |
| Adjustments to reconcile to cash from operations: | | | | | |
| Depreciation | 118,690 | | | 112,485 | | | 106,049 | |
| Amortization | 12,988 | | | 14,003 | | | 13,811 | |
| Stock-based compensation expense | 20,985 | | | 24,799 | | | 16,048 | |
| Restructuring (benefits) charges and asset impairment charges (Notes 8 and 16) | (753) | | | 5,664 | | | 34,175 | |
| Deferred income tax provision (benefit) | 11,292 | | | (21,189) | | | (23,899) | |
| (Gain) loss on divestiture (Note 4) | (1,001) | | | — | | | 6,517 | |
| Debt refinancing charge (Note 11) | — | | | 9,071 | | | — | |
| Other | (2,243) | | | 6,754 | | | 2,613 | |
| Changes in certain assets and liabilities: | | | | | |
| Accounts receivable | (14,432) | | | (53,324) | | | 128,715 | |
| Inventories | (127,409) | | | 61,270 | | | 28,185 | |
| Accounts payable and accrued liabilities | 31,997 | | | 46,775 | | | (46,315) | |
| Accrued income taxes | 10,238 | | | (18,273) | | | (8,645) | |
| Accrued pension and postretirement benefits | (24,216) | | | (31,585) | | | (20,022) | |
| Other | (4,893) | | | 20,815 | | | (8,447) | |
| Net cash flow provided by operating activities | 181,444 | | | 235,682 | | | 223,738 | |
| INVESTING ACTIVITIES | | | | | |
| Purchases of property, plant and equipment | (96,924) | | | (127,302) | | | (244,151) | |
| Disposals of property, plant and equipment | 924 | | | 4,373 | | | 2,622 | |
| Proceeds from divestiture (Note 4) | 1,001 | | | — | | | 23,950 | |
| Other | 60 | | | (47) | | | (757) | |
| Net cash flow used for investing activities | (94,939) | | | (122,976) | | | (218,336) | |
| FINANCING ACTIVITIES | | | | | |
| Net (decrease) increase in notes payable | (6,067) | | | 605 | | | (175) | |
| Net increase (decrease) in revolving and other lines of credit | 19,000 | | | (500,000) | | | 500,364 | |
| Term debt borrowings | — | | | 297,867 | | | — | |
| Term debt repayments | — | | | (300,000) | | | — | |
| Make-whole premium on early extinguishment of debt (Note 11) | — | | | (9,639) | | | — | |
| Settlement of interest rate swap agreement (Note 6) | — | | | 10,198 | | | — | |
| Purchase of capital stock | (85,542) | | | (197) | | | (209) | |
| The effect of employee benefit and stock plans and dividend reinvestment | (6,909) | | | 821 | | | (5,464) | |
| Cash dividends paid to Shareholders | (66,565) | | | (66,735) | | | (66,303) | |
| Other | (4,652) | | | (7,165) | | | (2,762) | |
| Net cash flow (used for) provided by financing activities | (150,735) | | | (574,245) | | | 425,451 | |
| Effect of exchange rate changes on cash and cash equivalents | (4,231) | | | 8,902 | | | (6,184) | |
| CASH AND CASH EQUIVALENTS | | | | | |
| Net (decrease) increase in cash and cash equivalents | (68,461) | | | (452,637) | | | 424,669 | |
| Cash and cash equivalents, beginning of year | 154,047 | | | 606,684 | | | 182,015 | |
| Cash and cash equivalents, end of year | $ | 85,586 | | | $ | 154,047 | | | $ | 606,684 | |
The accompanying notes are an integral part 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 condensedthese consolidated financial statements.
In
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2022 | | 2021 | | 2020 |
| Year ended June 30 (in thousands) | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
| CAPITAL STOCK | | | | | | | | | | | | |
| Balance at beginning of year | | 83,614 | | | $ | 104,518 | | | 82,923 | | | $ | 103,654 | | | 82,421 | | | $ | 103,026 | |
| Dividend reinvestment | | 6 | | | 7 | | | 6 | | | 7 | | | 7 | | | 9 | |
| Capital stock issued under employee benefit and stock plans | | 444 | | | 554 | | | 691 | | | 864 | | | 502 | | | 628 | |
| Purchase of capital stock | | (2,727) | | | (3,408) | | | (6) | | | (7) | | | (7) | | | (9) | |
| Balance at end of year | | 81,337 | | | 101,671 | | | 83,614 | | | 104,518 | | | 82,923 | | | 103,654 | |
| ADDITIONAL PAID-IN CAPITAL | | | | | | | | | | | | |
| Balance at beginning of year | | | | 562,820 | | | | | 538,575 | | | | | 528,827 | |
| Dividend reinvestment | | | | 182 | | | | | 191 | | | | | 201 | |
| Capital stock issued under employee benefit and stock plans | | | | 13,334 | | | | | 24,556 | | | | | 9,748 | |
| Purchase of noncontrolling interests | | | | — | | | | | (311) | | | | | — | |
| Purchase of capital stock | | | | (82,134) | | | | | (191) | | | | | (201) | |
| Balance at end of year | | | | 494,202 | | | | | 562,820 | | | | | 538,575 | |
| RETAINED EARNINGS | | | | | | | | | | | | |
| Balance at beginning of year | | | | 992,597 | | | | | 1,004,898 | | | | | 1,076,862 | |
| Net income (loss) attributable to Kennametal | | | | 144,623 | | | | | 54,434 | | | | | (5,661) | |
| Cash dividends ($0.80 per share in 2022, 2021 and 2020, respectively) | | | | (66,565) | | | | | (66,735) | | | | | (66,303) | |
| Balance at end of year | | | | 1,070,655 | | | | | 992,597 | | | | | 1,004,898 | |
| ACCUMULATED OTHER COMPREHENSIVE LOSS | | | | | | | | | | | | |
| Balance at beginning of year | | | | (330,327) | | | | | (417,242) | | | | | (373,543) | |
| Unrealized gain (loss) on derivatives designated and qualified as cash flow hedges | | | | — | | | | | 9,255 | | | | | (582) | |
| Reclassification of unrealized (gain) loss on expired derivatives designated and qualified as cash flow hedges | | | | (770) | | | | | (401) | | | | | 679 | |
| Unrecognized net pension and other postretirement benefit plans (loss) gain | | | | (4,163) | | | | | 9,107 | | | | | (18,299) | |
| Reclassification of net pension and other postretirement benefit plans loss | | | | 8,929 | | | | | 10,355 | | | | | 7,935 | |
| Foreign currency translation adjustments | | | | (87,620) | | | | | 58,599 | | | | | (33,432) | |
| Other comprehensive (loss) income, net of tax | | | | (83,624) | | | | | 86,915 | | | | | (43,699) | |
| Balance at end of year | | | | (413,951) | | | | | (330,327) | | | | | (417,242) | |
| NONCONTROLLING INTERESTS | | | | | | | | | | | | |
| Balance at beginning of year | | | | 38,597 | | | | | 38,903 | | | | | 39,532 | |
| Net income | | | | 5,578 | | | | | 3,983 | | | | | 614 | |
| Other comprehensive (loss) income, net of tax | | | | (3,565) | | | | | 1,927 | | | | | (2,459) | |
| Purchase of noncontrolling interests | | | | — | | | | | (1,319) | | | | | — | |
| Additions to noncontrolling interests | | | | — | | | | | — | | | | | 1,527 | |
| Cash dividends | | | | (1,940) | | | | | (4,897) | | | | | (311) | |
| Balance at end of year | | | | 38,670 | | | | | 38,597 | | | | | 38,903 | |
| Total equity, June 30 | | | | $ | 1,291,247 | | | | | $ | 1,368,205 | | | | | $ | 1,268,788 | |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — NATURE OF OPERATIONS
With more than 80 years of materials expertise, the Company is a global industrial technology leader, helping customers across the aerospace, earthworks, energy, general engineering and transportation end markets manufacture with precision and efficiency. This expertise includes the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and extreme wear applications to keep customers up and running longer against conditions such as corrosion and high temperatures.
Our standard and custom product offering spans metal cutting and wear applications including turning, milling, hole making, tooling systems and services, as well as specialized wear components and metallurgical powders. End users of the Company's metal cutting 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. The Company’s wear and metallurgical powders are used by producers and suppliers in equipment-intensive operations such as road construction, mining, quarrying, and oil and gas exploration, refining, production and supply.
Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 2016,30. When used in this Annual Report on Form 10-K, unless the FASB issued guidance on measurementcontext requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of credit losses on financial instruments. The new guidance introduces an approach based on expected lossesour significant accounting policies is presented below 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 areassist in the process of assessing the impact the adoption of this guidance will have onevaluating our consolidated financial statements.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include our accounts and those of our subsidiaries in which we have a controlling interest. All intercompany balances and transactions are eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTSIn 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 onpreparing our consolidated financial statements.
In April 2016, the FASB issued guidance on identifying performance obligations and licensing as part of Topic 606: Revenue from Contractsstatements in conformity with Customers. The amendments in this update clarify identifying performance obligations and the licensing implementation guidance, while retaining the relatedaccounting 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 aregenerally accepted in the processUnited States of assessingAmerica (U.S. GAAP), we make judgments and estimates about the impact the adoption of this guidance will have onamounts reflected in 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 As part of our U.S. entity. We will also reclassify excess tax benefitsfinancial reporting process, our management collaborates to determine the necessary information on the statement of cash flows from financing activitieswhich to operating activities,base our judgments and employee taxes paid when Kennametal withholds shares for tax withholding purposes from operating activitiesdevelop estimates used to financing activities, onprepare the consolidated statement of cash flows. See Note 12.
In March 2016,financial statements. We use historical experience and available information to make these judgments and estimates. Actual amounts could differ from the FASB issued guidance on principal versus agent considerationsestimates reflected 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,CASH AND CASH EQUIVALENTS Cash investments having original maturities of three months or less are considered cash equivalents. Cash equivalents principally consist of investments in money market funds and bank deposits at June 30, 2022.
ACCOUNTS RECEIVABLE We market our products to a diverse customer base throughout the FASB issued guidanceworld. Trade credit is extended based upon periodically updated evaluations of each customer’s ability to satisfy its obligations. 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 lease accounting, which replacesmultiple sources of information and analyze additional factors such as our historical bad debt experience, industry concentrations of credit risk, current economic trends, changes in customer payment terms and forward-looking information.
INVENTORIES We use the existing guidance in ASC 840, Leases. The standard establisheslast-in, first-out (LIFO) method for determining the cost of a right-of-use (ROU) model that requires a lessee to record a ROU assetsignificant portion of our United States (U.S.) inventories, 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. Wethey 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 measuredstated at the lower of cost or market. 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, and net realizable value, as opposed toare stated at the current practice of lower of cost or market. Subsequent measurementnet realizable value. When market conditions indicate an excess of carrying costs over market value, a lower of cost or net realizable value provision or a lower of cost or market provision, as applicable, is unchangedrecorded. Once inventory is determined to be excess or obsolete, a new cost basis is established that is not subsequently written back up in future periods.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Major improvements are capitalized, while maintenance and repairs are expensed as incurred. Retirements and disposals are removed from cost and accumulated depreciation accounts, with the gain or loss reflected in operating income. Interest related to the construction of major facilities is capitalized as part of the construction costs and is depreciated over the facilities' estimated useful lives.
Depreciation for inventoryfinancial reporting purposes is computed using the straight-line method over the following estimated useful lives: building and improvements over 15-40 years; machinery and equipment over 4-15 years; furniture and fixtures over 5-10 years and computer hardware and software over 3-5 years.
LONG-LIVED ASSETS We evaluate the recoverability of property, plant and equipment, operating lease right-of-use (ROU) assets and intangible assets that are amortized, whenever events or changes in circumstances indicate the carrying amount of any 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 performed at the asset group level, 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 group.
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of cost over the fair value of the net assets of acquired companies. Goodwill and other intangible assets with indefinite lives are tested at least annually for impairment. 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 quarter. As of June 30, 2022, only the Metal Cutting reporting unit has goodwill recorded. We evaluate the recoverability of goodwill for the reporting unit by comparing the fair value of the reporting unit with its carrying value. The fair value of our reporting unit is 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 the reporting unit. We evaluate the recoverability of indefinite-lived intangible assets using a discounted cash flow analysis based on projected financial information. This evaluation is sensitive to changes in market interest rates and other external factors.
The majority of our intangible assets with definite lives are amortized on a straight-line basis, while certain customer-related intangible assets are amortized on an accelerated method. Identifiable assets with finite lives are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable.
PENSION AND OTHER POSTRETIREMENT BENEFITS We sponsor these types of 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 the 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. 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.
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 costs is based on historical claims and enrollment information projected over the next year and adjusted for administrative charges. This rate is expected to decrease until 2027.
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.
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:
| | | | | | | | | | | | | |
| (in thousands) | | | 2022 | | 2021 |
| Weighted-average shares outstanding during period | | | 83,252 | | | 83,602 | |
| Add: Unexercised stock options and unvested restricted stock units | | | 692 | | | 731 | |
| Number of shares on which diluted earnings per share is calculated | | | 83,944 | | | 84,333 | |
| 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 | | | 260 | | | 295 | |
In 2020, the effect of unexercised capital stock options, unvested performance awards 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 calculation.
REVENUE RECOGNITION The Company's contracts with customers are comprised of purchase orders, and for larger customers, may also include long-term agreements. We account for a contract when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. These contracts with customers typically relate to the manufacturing of products, which represent single performance obligations that are satisfied when control of the product passes to the customer. The Company considers the timing of right to payment, transfer of risk and rewards, transfer of title, transfer of physical possession and customer acceptance when determining when control transfers to the customer. As a result, revenue is generally recognized at a point in time - either upon shipment or delivery - based on the specific shipping terms in the contract. The shipping terms vary across all businesses and depend on the product, customary local commercial terms and the type of transportation. Shipping and handling activities are accounted for as activities to fulfill a promise to transfer a product to a customer and as such, costs incurred are recorded when the related revenue is recognized. Payment for products is due within a limited time period after shipment or delivery, typically within 30 to 90 calendar days of the respective invoice dates. The Company does not generally offer extended payment terms.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Amounts billed and due from our customers are classified as accounts receivable, less allowance for doubtful accounts on the consolidated balance sheets. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract. Variable consideration primarily includes volume incentive rebates, which are based on achieving a certain level of purchases and other performance criteria as established by our distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned. The majority of our products are consumed by our customers or end users in the manufacture of their products. Historically, we have experienced very low levels of returned products and do not consider the effect of returned products to be material. We have recorded an estimated returned goods allowance to provide for any potential returns.
We warrant that products 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.
The Company records a contract asset when it has a right to payment from a customer that is conditioned on events that have occurred other than the passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material remaining performance obligations, contract assets or liabilities as of June 30, 2022 and 2021.
The Company pays sales commissions related to certain contracts, which qualify as incremental costs of obtaining a contract. However, the Company applies the practical expedient that allows an entity to recognize incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would have been recognized is one year or less. These costs are recorded within operating expense in our consolidated statements of income.
SHIPPING AND HANDLING FEES AND COSTS All fees billed to customers for shipping and handling are classified as a component of sales. All costs associated with shipping and handling are classified as a component of cost of goods sold.
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). Forfeitures are recorded as incurred. 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 LIFO. This standarda Monte Carlo model.
Capital stock options are granted to eligible employees at fair market value at the date of grant. Capital stock options are exercisable under specified conditions for up to 10 years from the date of grant. The Kennametal Inc. Stock and Incentive Plan of 2010, as Amended and Restated on October 22, 2013, and further amended on January 27, 2015 (A/R 2010 Plan), by the Kennametal Inc. 2016 Stock and Incentive Plan, and on October 27, 2020 by the Kennametal Inc. 2020 Stock and Incentive Plan (2020 Plan) authorize the issuance of up to 9,500,000 shares of the Company’s capital stock plus any shares remaining unissued under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended (2002 Plan). Under the provisions of the A/R 2010 Plan and 2020 Plan, participants may deliver stock, owned by the holder for at least six months, in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. The fair market value of shares delivered during 2022, 2021 and 2020 was immaterial. In addition to stock option grants, the A/R 2010 Plan and the 2020 Plan permit the award of stock appreciation rights, performance share awards, performance unit awards, restricted stock awards, restricted unit awards and share awards to directors, officers and key employees.
RESEARCH AND DEVELOPMENT COSTS Research and development costs of $42.1 million, $39.5 million and $38.7 million in 2022, 2021 and 2020, respectively, were expensed as incurred. These costs are included in operating expense in the consolidated statements of income.
INCOME TAXES The Company’s provision for income taxes is effectivecalculated based on income and statutory tax rates in the various jurisdictions in which the Company operates and requires the use of management’s estimates and judgments. Management judgment is required in determining the Company’s worldwide provision for Kennametal beginning July 1, 2017.income taxes and recording the related assets and liabilities, including accruals for unrecognized tax benefits and assessing the need for valuation allowances on deferred tax assets. Deferred income taxes are recognized based on the future income tax effects (using enacted tax laws and rates) of differences in the carrying amounts of assets and liabilities for financial reporting and tax purposes. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50 percent) that a tax benefit will not be realized. In evaluating the need for a valuation allowance, we consider all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, and projections of future profitability within the carry forward period, including taxable income from tax planning strategies. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of the deferred tax asset based on existing projections of income. Upon changes in facts and circumstances, we may conclude that deferred tax assets for which no valuation allowance is currently recorded may not be realized, resulting in a charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES As part of our financial risk management program, we use certain derivative financial instruments. We do not expect this guidanceenter into derivative transactions for speculative purposes and, therefore, hold no derivative instruments for trading purposes. We use derivative financial instruments to have a material impactprovide predictability to the effects of changes in foreign exchange rates on our consolidated financial statements.results. 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, we use forward-starting interest rate swaps to effectively hedge the variability in future benchmark interest payments attributable to changes in interest rates on forecasted issuances of fixed-rate debt.
In May 2014,We account for derivative instruments as a hedge of 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 prescribesrelated asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated as a five-step model for recognizing revenue, the applicationhedge 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 aresuch items. We measure hedge effectiveness by assessing the identificationchanges in the fair value or expected future cash flows of performance obligationsthe hedged item. Certain currency forward contracts hedging significant cross-border intercompany loans are considered other derivatives and, therefore, do not qualify for hedge accounting.
NET INVESTMENT HEDGES We designate financial instruments as net investment hedges from time to time to hedge the impactforeign exchange exposure of variable consideration onour net investment in foreign currency-based subsidiaries. The remeasurements of these non-derivatives designated as net investment hedges are calculated each period with changes reported in foreign currency translation adjustment within accumulated other comprehensive loss. Such amounts will remain in accumulated other comprehensive loss unless we complete or substantially complete liquidation or disposal of our investment in the transaction price determination. We have not determined the complete impact of adoption on our condensed consolidated financial statements.
underlying foreign operations.
CURRENCY TRANSLATION Assets and liabilities of international operations are translated into U.S. dollars using year-end exchange rates, while revenues and expenses are translated at average exchange rates throughout the year. The resulting net translation adjustments are recorded as a component of accumulated other comprehensive loss. The local currency is the functional currency of most of our locations.
Losses of $2.5 million, $3.3 million and $3.4 million from currency transactions were included in other income, net in 2022, 2021 and 2020, respectively.
NOTE 3 — SUPPLEMENTAL CASH FLOW DISCLOSURES
| | | | | | | | | | | |
| Year ended June 30 (in thousands) | 2022 | 2021 | 2020 |
| Cash paid during the period for: | | | |
| Interest | $ | 25,277 | | $ | 43,601 | | $ | 25,796 | |
| Income taxes | 36,105 | | 48,910 | | 36,852 | |
| Supplemental disclosure of non-cash information: | | | |
| Changes in accounts payable related to purchases of property, plant and equipment | 9,800 | | (17,500) | | (9,400) | |
| Changes in notes payable related to purchases of property, plant and equipment | — | | 7,254 | | — | |
|
| | | | | | | | | | | |
| Year ended June 30 (in thousands) | 2017 | | 2016 | | 2015 |
| Cash paid during the period for: | | | | | |
| Interest | $ | 27,529 |
| | $ | 26,250 |
| | $ | 30,984 |
|
| Income taxes | 16,755 |
| | 43,733 |
| | 40,295 |
|
| | | | | | |
| Supplemental disclosure of non-cash information: | | | | | |
| Changes in accounts payable related to purchases of property, plant and equipment | (3,900 | ) | | 1,000 |
| | (9,900 | ) |
NOTE 4 — DIVESTITURE
In 2016, KennametalDuring the year ended June 30, 2020, we completed the transaction to sell allsale of the outstanding capital stock of: Kennametal Extrude Hone LLC and its wholly owned subsidiaries, Kennametal Stellite S.r.l. (Bellusco, Italy), Kennametal Stellite S.p.A. (Milan, Italy), Kennametal Stellite GmbH (Koblenz, Germany); and all of thecertain assets of the businesses of: Tricon (manufacturing operationsnon-core specialty alloys and metals business within the Infrastructure segment located in Birmingham, Alabama; Chicago, Illinois; and Elko, Nevada), Landis (manufacturing operation in Waynesboro, Pennsylvania); and all of the assets located at the Biel, Switzerland manufacturing facility ("non-core businesses")New Castle, Pennsylvania to Madison IndustriesAdvanced Metallurgical Group N.V. for an aggregate price of $56.1 million cash, net of cash. A portion of the transaction proceeds were used to pay down revolver debt and the remaining balance is being held as cash on hand.$24.0 million.
The net book value of these non-core businessesassets at closing was $191.9 million. The$29.5 million, and the pre-tax net loss on divestiture recognized during the year ended June 30, 2020 was $6.5 million. Transaction proceeds were primarily used for capital expenditures related to our simplification/modernization efforts. During the year ended June 30, 2022, we recorded a pre-tax gain of $1.0 million on the New Castle divestiture due to proceeds held in 2016 was $131.5 million, of which $127.9 million and $3.6 million were recorded in the Infrastructure and Industrial segments, respectively. The pre-tax income attributable to the non-core businesses was assessed and determined to be immaterial for disclosure for the periods presented.escrow until November 2021.
NOTE 5 — FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three levels to prioritize the inputs used in valuations, as defined below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Inputs that are unobservable.
As of June 30, 2017,2022, the fair values of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows:
|
| | | | | | | | | | | | | | | |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
Derivatives (1) | $ | — |
| | $ | 359 |
| | $ | — |
| | $ | 359 |
|
| Total assets at fair value | $ | — |
| | $ | 359 |
| | $ | — |
| | $ | 359 |
|
| | | | | | | | |
| Liabilities: | | | | | | | |
Derivatives (1) | $ | — |
| | $ | 910 |
| | $ | — |
| | $ | 910 |
|
| Total liabilities at fair value | $ | — |
| | $ | 910 |
| | $ | — |
| | $ | 910 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
Derivatives (1) | $ | — | | | $ | 176 | | | $ | — | | | $ | 176 | |
| Total assets at fair value | $ | — | | | $ | 176 | | | $ | — | | | $ | 176 | |
| | | | | | | |
| Liabilities: | | | | | | | |
Derivatives (1) | $ | — | | | $ | 574 | | | $ | — | | | $ | 574 | |
| Total liabilities at fair value | $ | — | | | $ | 574 | | | $ | — | | | $ | 574 | |
As of June 30, 2016,2021, the fair value of the Company’s financial assets and financial liabilities measured at fair value on a recurring basis are categorized as follows:
| | | (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total | (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | Assets: | |
Derivatives (1) | $ | — |
| | $ | 334 |
| | $ | — |
| | $ | 334 |
| Derivatives (1) | $ | — | | | $ | 36 | | | $ | — | | | $ | 36 | |
| Total assets at fair value | $ | — |
| | $ | 334 |
| | $ | — |
| | $ | 334 |
| Total assets at fair value | $ | — | | | $ | 36 | | | $ | — | | | $ | 36 | |
| | | | | | | | | |
| Liabilities: | | | | | | | | Liabilities: | |
Derivatives (1) | $ | — |
| | $ | 763 |
| | $ | — |
| | $ | 763 |
| Derivatives (1) | $ | — | | | $ | 87 | | | $ | — | | | $ | 87 | |
| Contingent consideration | — |
| | — |
| | 6,600 |
| | 6,600 |
| |
| | Total liabilities at fair value | $ | — |
| | $ | 763 |
| | $ | 6,600 |
| | $ | 7,363 |
| Total liabilities at fair value | $ | — | | | $ | 87 | | | $ | — | | | $ | 87 | |
(1) Currency derivatives are valued based on observable market spot and forward rates and are classified within Level 2 of the fair value hierarchy.
There have been no changes in classification and transfers between levels in the fair value hierarchy in the current period. The fair value of contingent consideration payable that was classified as Level 3 at June 30, 2016 related to our probability assessments of expected future milestone targets, primarily associated with product delivery, for a previous acquisition. During 2017, the Company paid the remaining $6.6 million in conjunction with achieved milestone targets. The payment is recorded in the financing activities section of our condensed consolidated statement of cash flow for 2017 under the caption "other." The contingent consideration was recorded in other current liabilities in our condensed consolidated balance sheet at June 30, 2016. No other changes in the expected outcome have occurred during 2017.
NOTE 6 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As part of our financial risk management program, we use certain derivative financial instruments. See Note 2 for discussion on our derivative instruments and hedging activities policy.
There are no derivatives designated as hedging instruments as of June 30, 2022 or 2021. The fair value of derivatives designated and not designated as hedging instruments in the consolidated balance sheetsheets are as follows:
| | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Derivatives not designated as hedging instruments | | | |
| Other current assets - currency forward contracts | $ | 176 | | | $ | 36 | |
| Other current liabilities - currency forward contracts | (574) | | | (87) | |
| Total derivatives not designated as hedging instruments | (398) | | | (51) | |
| Total derivatives | $ | (398) | | | $ | (51) | |
|
| | | | | | | |
| (in thousands) | 2017 | | 2016 |
| Derivatives designated as hedging instruments | | | |
| Other current assets - range forward contracts | $ | 1 |
| | $ | 323 |
|
| Other current liabilities - range forward contracts | (671 | ) | | — |
|
| Other liabilities - range forward contracts | (101 | ) | | — |
|
| Total derivatives designated as hedging instruments | (771 | ) | | 323 |
|
| Derivatives not designated as hedging instruments | | | |
| Other current assets - currency forward contracts | 358 |
| | 11 |
|
| Other current liabilities - currency forward contracts | (138 | ) | | (763 | ) |
| Total derivatives not designated as hedging instruments | 220 |
| | (752 | ) |
| Total derivatives | $ | (551 | ) | | $ | (429 | ) |
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 consolidated balance sheet,sheets, with the offset to other expense (income),income, net. GainsLosses related to derivatives not designated as hedging instruments have been recognized as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Other income, net - currency forward contracts | $ | 377 | | | $ | 2 | | | $ | 210 | |
|
| | | | | | | | | | | |
| (in thousands) | 2017 | | 2016 | | 2015 |
| Other expense (income), net - currency forward contracts | $ | (873 | ) | | $ | 719 |
| | $ | (1,026 | ) |
FAIR VALUE HEDGES
Fixed-to-floating interest rate swap contracts, designated as fair value hedges, are entered into from time to time to hedge our exposure to fair value fluctuations on a portion of our fixed rate debt. We had no such contracts outstanding at June 30, 2017 and June 30, 2016.
CASH FLOW HEDGES
Currency forward contracts and 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) income, and are recognized as a component of other expense (income), net when the underlying sale of products or services is recognizedDuring fiscal 2020 we entered into earnings. The notional amount of the contracts translated into U.S. dollars at June 30, 2017 and 2016 was $75.3 million and $53.3 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 June 30, 2017, we expect to recognize into earnings in the next 12 months $1.1 million of losses on outstanding derivatives.
Floating-to-fixedseven forward-starting interest rate swap contracts designated as cash flow hedges, are entered into from time to time to hedge our exposure towith an aggregate notional amount totaling $200.0 million. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on a portionthe forecasted issuance of our floating ratefixed-rate debt. TheseDuring fiscal 2021, upon issuance of the Senior Unsecured Notes due 2031 (see Note 11 for more information) we settled the forward starting interest rate swap contracts convertfor a portiongain of our floating rate debt to fixed rate debt. We record the fair value$10.2 million in other comprehensive income (loss). The gain will be amortized out of these contracts as an asset or a liability, as applicable, in the balance sheet, with the offset to accumulated other comprehensive income (loss) income, netand into interest expense (as a benefit) over the life of tax. We hadthe Senior Unsecured Notes due 2031. There were no suchinterest rate swap contracts outstanding at June 30, 20172022 or 2016, respectively.
The following represents gains and losses related to cash flow hedges:
|
| | | | | | | | | | | |
| (in thousands) | 2017 | | 2016 | | 2015 |
| (Losses) gains recognized in other comprehensive loss (income), net | $ | (471 | ) | | $ | (297 | ) | | $ | 6,651 |
|
| Losses (gains) reclassified from accumulated other comprehensive loss into other expense (income), net | $ | 1,557 |
| | $ | 381 |
| | $ | (250 | ) |
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 years ended June 30, 2017, 2016 and 2015.2021.
NET INVESTMENT HEDGES
As of June 30, 2017,2022 and 2021 we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of €33.0€13 million and €5.2 million, respectively, designated as net investment hedges to hedge the foreign exchange exposure of our net investment in Euro-based subsidiaries. A gain of $0.8 million, a loss of $4.5$1.9 million, wasand a gain of $0.6 million were recorded as a component of foreign currency translation adjustments in other comprehensive income (loss) during 2017. We did not have net investment hedges during 20162022, 2021 and 2015.2020, respectively.
As of June 30, 2017,2022 and 2021, the foreign currency-denominated intercompany loans payable designated as net investment hedges consisted of:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2022 | 2021 | |
| Instrument | Notional (EUR)(2) | Notional (USD)(2) | Notional (EUR)(2) | Notional (USD)(2) | Maturity |
| Foreign currency-denominated intercompany loan payable | €0 | $0 | €5,173 | $6,146 | June 26, 2022 |
| Foreign currency-denominated intercompany loan payable | €13,013 | $13,531 | €0 | $0 | August 31, 2022 |
|
| | | | | | | |
| Instrument | Notional (EUR in thousands)(2) | Notional (USD in thousands)(2) | Maturity |
| Foreign currency-denominated intercompany loan payable | € | 26,526 |
| $ | 30,273 |
| June 26, 2022 |
| Foreign currency-denominated intercompany loan payable | 8,632 |
| 9,851 |
| November 20, 2018 |
| Foreign currency-denominated intercompany loan payable | 2,036 |
| 2,324 |
| October 11, 2017 |
NOTE 7 — INVENTORIES
Inventories consisted of the following at June 30:
| | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 |
| Finished goods | $ | 316,936 | | | $ | 302,524 | |
| Work in process and powder blends | 231,214 | | | 173,671 | |
| Raw materials | 107,024 | | | 72,551 | |
| Inventories at current cost | 655,174 | | | 548,746 | |
| Less: LIFO valuation | (84,338) | | | (72,401) | |
| Total inventories | $ | 570,836 | | | $ | 476,345 | |
|
| | | | | | | |
| (in thousands) | 2017 | | 2016 |
| Finished goods | $ | 290,817 |
| | $ | 284,054 |
|
| Work in process and powder blends | 166,857 |
| | 166,274 |
|
| Raw materials | 87,627 |
| | 68,472 |
|
| Inventories at current cost | 545,301 |
| | 518,800 |
|
| Less: LIFO valuation | (57,620 | ) | | (59,970 | ) |
| Total inventories | $ | 487,681 |
| | $ | 458,830 |
|
We used the LIFO method of valuing inventories for approximately 4339 percent and 44 percent of total inventories at June 30, 20172022 and 2016,2021, respectively.
NOTE 8 — GOODWILL AND OTHER INTANGIBLE ASSETS
As of June 30, 2022, $264.2 million of goodwill was allocated to the Metal Cutting reporting unit. We completed an annual quantitative test of goodwill impairment and determined that the fair value of the reporting unit substantially exceeded the carrying value and, therefore, no impairment was recorded during 2022. Further, an indefinite-lived trademark intangible asset of $10.4 million in the Metal Cutting reporting unit had a fair value that exceeded its carrying value as of the date of the annual impairment test and, therefore, no impairment was recorded during 2022.
December Quarter of Fiscal 2020 Impairment Charge
In the December quarter of fiscal 2020, the Company experienced deteriorating market conditions, primarily in general engineering and transportation applications in India and China, in addition to overall global weakness in the manufacturing sector. In view of these declining conditions and the significant detrimental effect on cash flows and actual and projected revenue and earnings compared with the fiscal 2019 annual impairment test, we determined that an impairment triggering event had occurred and performed an interim quantitative impairment test of our goodwill, indefinite-lived trademark intangible asset and other long-lived assets of our former Widia reporting unit. We evaluated the recoverability of goodwill for the reporting unit by comparing the fair value with its carrying value, with the fair values determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. As a result of this interim test, we recorded a non-cash pre-tax impairment charge during the three months ended December 31, 2019 of $14.6 million in the former Widia segment, which is now part of the Metal Cutting segment as of July 1, 2020, of which $13.1 million was for goodwill and $1.5 million was for an indefinite-lived trademark intangible asset. These impairment charges were recorded in goodwill and other intangible assets impairments in our consolidated statements of income. No impairment was recorded for the other long-lived assets.
March Quarter of Fiscal 2020 Impairment Charge
In the March quarter of fiscal 2020, the decline in actual and projected financial results for the former Widia reporting unit, primarily as a result of the COVID-19 pandemic, represented an interim impairment triggering event because there was essentially zero cushion between the reporting unit's carrying value and fair value as of March 31 2020. This is because the former Widia reporting unit was recorded at fair value as of the December 31, 2019 interim impairment testing date. We evaluated the recoverability of goodwill for the reporting unit by comparing the fair value with its carrying value, with the fair values determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. As a result of this interim test, we recorded a non-cash pre-tax impairment charge during the three months ended March 31, 2020 of $15.6 million in the former Widia segment, of which $13.7 million was for goodwill and $1.9 million was for an indefinite-lived trademark intangible asset. These impairment charges were recorded in goodwill and other intangible assets impairments in our consolidated statements of income. No impairment was recorded for the other long-lived assets.
A summary of the carrying amount of goodwill attributable to each segment, as well as the changes in such, is as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | Metal Cutting | | Infrastructure | | Total |
| Gross goodwill | $ | 448,241 | | | $ | 633,211 | | | $ | 1,081,452 | |
| Accumulated impairment losses | (177,661) | | | (633,211) | | | (810,872) | |
| Balance as of June 30, 2020 | $ | 270,580 | | | $ | — | | | $ | 270,580 | |
| | | | | |
| Activity for the year ended June 30, 2021: | | | | | |
| | | | | |
| | | | | |
| Change in gross goodwill due to translation | 7,035 | | | — | | | 7,035 | |
| | | | | |
| | | | | |
| Gross goodwill | 455,276 | | | 633,211 | | | 1,088,487 | |
| Accumulated impairment losses | (177,661) | | | (633,211) | | | (810,872) | |
| Balance as of June 30, 2021 | $ | 277,615 | | | $ | — | | | $ | 277,615 | |
| | | | | |
| Activity for the year ended June 30, 2022: | | | | | |
| | | | | |
| | | | | |
| Change in gross goodwill due to translation | (13,385) | | | — | | | (13,385) | |
| | | | | |
| | | | | |
| Gross goodwill | 441,891 | | | 633,211 | | | 1,075,102 | |
| Accumulated impairment losses | (177,661) | | | (633,211) | | | (810,872) | |
| Balance as of June 30, 2022 | $ | 264,230 | | | $ | — | | | $ | 264,230 | |
|
| | | | | | | | | | | | | | | |
| (in thousands) | Industrial | | Widia | | Infrastructure | | Total |
| Gross goodwill | $ | 414,298 |
| | $ | 41,073 |
| | $ | 640,360 |
| | $ | 1,095,731 |
|
| Accumulated impairment losses | (137,204 | ) | | (13,638 | ) | | (527,500 | ) | | (678,342 | ) |
| Balance as of June 30, 2015 | $ | 277,094 |
| | $ | 27,435 |
| | $ | 112,860 |
| | $ | 417,389 |
|
| | | | | | | | |
| Activity for 2016: | | | | | | | |
| Divestiture | (1,075 | ) | | — |
| | (6,461 | ) | | (7,536 | ) |
| Translation | (4,518 | ) | | (449 | ) | | (688 | ) | | (5,655 | ) |
| Change in gross goodwill | (5,593 | ) | | (449 | ) | | (7,149 | ) | | (13,191 | ) |
| Impairment charges | — |
| | — |
| | (105,711 | ) | | — |
|
| | | | | | | | |
| Gross goodwill | 408,705 |
| | 40,624 |
| | 633,211 |
| | 1,082,540 |
|
| Accumulated impairment losses | (137,204 | ) | | (13,638 | ) | | (633,211 | ) | | (784,053 | ) |
| Balance as of June 30, 2016 | $ | 271,501 |
| | $ | 26,986 |
| | $ | — |
| | $ | 298,487 |
|
| | | | | | | | |
| Activity for 2017: | | | | | | | |
| Change in gross goodwill due to translation | 1,989 |
| | 891 |
| | — |
| | 2,880 |
|
| | | | | | | | |
| Gross goodwill | 410,694 |
| | 41,515 |
| | 633,211 |
| | 1,085,420 |
|
| Accumulated impairment losses | (137,204 | ) | | (13,638 | ) | | (633,211 | ) | | (784,053 | ) |
| Balance as of June 30, 2017 | $ | 273,490 |
| | $ | 27,877 |
| | $ | — |
| | $ | 301,367 |
|
The components of our other intangible assets were as follows:
| | | | Estimated Useful Life (in years) | | June 30, 2017 | | June 30, 2016 | | Estimated
Useful Life
(in years) | | June 30, 2022 | | June 30, 2021 |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | | Gross Carrying Amount | | Accumulated Amortization | (in thousands) | | Gross Carrying
Amount | | Accumulated
Amortization | | | Gross Carrying
Amount | | Accumulated
Amortization |
| Contract-based | 3 to 15 | | $ | 7,064 |
| | $ | (7,014 | ) | | | $ | 7,152 |
| | $ | (6,886 | ) | |
| Technology-based and other | 4 to 20 | | 46,461 |
| | (29,061 | ) | | | 47,323 |
| | (27,011 | ) | Technology-based and other | 4 to 20 | | $ | 31,592 | | | $ | (22,734) | | | | $ | 33,632 | | | $ | (24,413) | |
| Customer-related | 10 to 21 | | 205,502 |
| | (74,669 | ) | | | 205,471 |
| | (66,938 | ) | Customer-related | 10 to 21 | | 180,263 | | | (104,698) | | | | 183,338 | | | (98,901) | |
| Unpatented technology | 10 to 30 | | 31,754 |
| | (10,589 | ) | | | 31,837 |
| | (4,614 | ) | Unpatented technology | 10 to 30 | | 31,807 | | | (22,950) | | | | 31,957 | | | (20,575) | |
| Trademarks | 5 to 20 | | 12,401 |
| | (8,648 | ) | | | 12,668 |
| | (8,644 | ) | Trademarks | 5 to 20 | | 12,403 | | | (10,317) | | | | 13,268 | | | (10,083) | |
| Trademarks | Indefinite | | 17,326 |
| | — |
| | | 16,850 |
| | — |
| Trademarks | Indefinite | | 10,359 | | | — | | | | 11,818 | | | — | |
| Total | | $ | 320,508 |
| | $ | (129,981 | ) | | | $ | 321,301 |
| | $ | (114,093 | ) | Total | | $ | 266,424 | | | $ | (160,699) | | | | $ | 274,013 | | | $ | (153,972) | |
Amortization expense for intangible assets was $16.6$13.0 million, $20.8$14.0 million and $26.7$13.8 million for 2017, 20162022, 2021 and 2015,2020, respectively. Estimated amortization expense for 20182023 through 20222027 is $14.5$12.3 million, $14.1$10.7 million, $13.8$9.6 million, $13.5$9.2 million, and $13.1$7.7 million, respectively.
NOTE 9 — 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 $3.7 million, $2.4 million and $6.4 million for the years ended June 30, 2022, 2021 and 2020, 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 year ended June 30, 2022, 2021 and 2020. 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.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in operating expense on our consolidated statements of income. Operating lease cost was $21.3 million, $20.2 million and $22.6 million in 2022, 2021 and 2020, respectively.
The following table sets forth supplemental balance sheet information related to our operating leases:
| | | | | | | | | | | | | | | | | |
| Year Ended June 30 | 2022 | | 2021 | | 2020 |
| Weighted average remaining lease term | 8.1 years | | 8.0 years | | 8.6 years |
| Weighted average discount rate | 3.2 | % | | 3.3 | % | | 3.3 | % |
The following table sets forth supplemental cash flow information related to our operating leases:
| | | | | | | | | | | | | | | | | |
Year Ended June 30
(in thousands) | 2022 | | 2021 | | 2020 |
| Operating cash outflows from operating leases | $ | 17,592 | | | $ | 17,651 | | | $ | 15,635 | |
| ROU assets obtained in exchange for new operating lease liabilities | $ | 15,430 | | | $ | 17,235 | | | $ | 16,171 | |
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 consolidated balance sheet as of June 30, 2022:
| | | | | | | | |
| Year Ended June 30 | | (in thousands) |
| 2023 | | $ | 13,383 | |
| 2024 | | 10,195 | |
| 2025 | | 7,374 | |
| 2026 | | 4,672 | |
| 2027 | | 3,110 | |
| Thereafter | | 16,029 | |
| Total undiscounted operating lease payments | | $ | 54,763 | |
| Less: discount to net present value | | 7,034 | |
| Total operating lease liabilities | | $ | 47,729 | |
NOTE 10 — OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following at June 30:
| | | | | | | | | | | | | | |
| (in thousands) | | 2022 | | 2021 |
| Accrued employee benefits | | $ | 35,270 | | | $ | 51,783 | |
| Payroll, state and local taxes | | 9,989 | | | 6,873 | |
| Accrued professional and legal fees | | 9,489 | | | 8,428 | |
| Accrued environmental | | 7,938 | | | 2,561 | |
| Accrued restructuring (Note 16) | | 6,019 | | | 19,851 | |
| Accrued interest | | 3,394 | | | 3,520 | |
| Other | | 66,304 | | | 64,586 | |
| Total other current liabilities | | $ | 138,403 | | | $ | 157,602 | |
|
| | | | | | | | |
| (in thousands) | | 2017 | | 2016 |
| Accrued employee benefits | | $ | 39,478 |
| | $ | 33,754 |
|
| Accrued restructuring (Note 15) | | 27,294 |
| | 15,703 |
|
| Payroll, state and local taxes | | 9,943 |
| | 12,983 |
|
| Accrued legal and professional fees | | 10,741 |
| | 12,112 |
|
| Accrued interest | | 7,048 |
| | 7,079 |
|
| Other | | 58,443 |
| | 70,638 |
|
| Total other current liabilities | | $ | 152,947 |
| | $ | 152,269 |
|
NOTE 1011 — LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital lease obligations consisted of the following at June 30:
| | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 |
| 2.800% Senior Unsecured Notes due fiscal 2031, net of discount of $0.2 million for 2022 and $0.2 million for 2021 | $ | 299,842 | | | $ | 299,823 | |
| 4.625% Senior Unsecured Notes due fiscal 2028, net of discount of $1.3 million for 2022 and $1.5 million for 2021 | 298,702 | | | 298,483 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Total term debt | 598,544 | | | 598,306 | |
| Less unamortized debt issuance costs | (4,180) | | | (6,198) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Total long-term debt | $ | 594,364 | | | $ | 592,108 | |
|
| | | | | | | |
| (in thousands) | 2017 | | 2016 |
| 2.65% Senior Unsecured Notes due 2019 net of discount of $0.2 million for 2017 and $0.3 million for 2016 | $ | 399,823 |
| | $ | 399,748 |
|
| 3.875% Senior Unsecured Notes due 2022 net of discount of $0.2 million for 2017 and 2016 | 299,831 |
| | 299,794 |
|
| Capital leases with terms expiring through 2018 at 3.9% in 2017 and 2016 | 190 |
| | 748 |
|
| Total debt and capital leases | 699,844 |
| | 700,290 |
|
| Less unamortized debt issuance costs | (4,663 | ) | | (6,010 | ) |
| Less current maturities of capital leases | (190 | ) | | (732 | ) |
| Total long-term debt | $ | 694,991 |
| | $ | 693,548 |
|
Senior Unsecured Notes On November 7, 2012, In February 2021, we issued $400.0$300.0 million of 2.652.800 percent Senior Unsecured Notes due in 2019.with a maturity date of March 1, 2031. Interest is paid semi-annually on MayMarch 1 and NovemberSeptember 1 of each year. WeDuring 2021, we settled forward starting interest rate swap contracts for a gain of $10.2 million related to the bond issuance as discussed in Note 6. In March 2021, we used the net proceeds from this notes offering to repay outstanding indebtedness underthe bond issuance, plus cash on hand, for the early extinguishment of our credit facility and for general corporate purposes. On February 14, 2012, we issued $300$300.0 million of 3.875 percent Senior Unsecured Notes due 2022 (the 2022 Senior Notes). Due to the early extinguishment, interest expense during 2021 includes a make-whole premium of $9.6 million and the acceleration of a loss in 2022.the amount of $2.6 million from other comprehensive loss related to forward starting interest rate contracts that were used to hedge the interest payments of the 2022 Senior Notes. A stranded tax benefit associated with the termination of this hedge was also recognized during 2021. Refer to Note 13 for more information related to the stranded tax benefit. On June 7, 2018, we issued $300.0 million of 4.625 percent Senior Unsecured Notes with a maturity date of June 15, 2028. Interest on these notes is paid semi-annually on FebruaryJune 15 and AugustDecember 15 of each year.
Future principal maturities of long-term debt are $300.0 million in 2028 and $300.0 million in 2031.
Fixed rate debt had a fair market value of $536.1 million and $644.2 million at June 30, 2022 and 2021, respectively. The Level 2 fair value is determined based on the quoted market prices for similar debt instruments as of June 30, 2022 and 2021, respectively.
NOTE 12 — REVOLVING AND OTHER LINES OF CREDIT AND NOTES PAYABLE
Credit Agreement During fiscal 2022, we entered into the Sixth Amended and Restated Credit Agreement dated as of June 14, 2022 (the Credit Agreement). The Credit Agreement is a five-year, multi-currency, revolving credit facility, which we use to augment cash from operations and as amended and restated in April 2016 (Credit Agreement) permitsan additional source of funds. The Credit Agreement provides for revolving credit loans of up to $600$700.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement matures in April 2021 and allows for borrowings in U.S. dollars, euro,euros, Canadian dollars, poundpounds sterling and Japanese yen. Interest payable under the Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOREuro Interbank Offered Rate (EURIBOR), Sterling Overnight Index Average (SONIA), Tokyo Interbank Offered Rate (TIBOR), Secured Overnight Financing Rate (SOFR), and Canadian Dollar Offered Rate (CDOR) for any borrowings in euros, pounds sterling, yen, U.S. dollars and Canadian dollars, respectively, plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us. The Credit Agreement matures in June 2027.
The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including twoone financial covenants:covenant: a maximum leverage ratio where debt, net of domestic cash in excess of $25 million and a minimum consolidated interest coverage ratio (as those terms are defined insixty percent of the agreement). Weunrestricted cash held outside of the United States, must be less than or equal to 3.75 times trailing twelve months EBITDA, adjusted for certain non-cash expenses.
As of June 30, 2022, we were in compliance with all covenants of the Credit Agreement and we had $19.0 million of borrowings outstanding and $681.0 million of availability. There were no borrowings outstanding as of June 30, 2017. We had no2021. The weighted average interest rate on borrowings outstanding under the Credit Agreement as ofwas 1.4 percent for the year ended June 30, 20172022.
Borrowings on other lines of credit and 2016. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries.
Future principal maturities of long-term debt are $400 million in 2020 and $300 million in 2022.
Future minimum lease payments under capital leases for the next five years and thereafter in total are as follows:
|
| | | |
| (in thousands) | |
| 2018 | $ | 199 |
|
| 2019 | — |
|
| 2020 | — |
|
| 2021 | — |
|
| 2022 | — |
|
| After 2022 | — |
|
| Total future minimum lease payments | 199 |
|
| Less amount representing interest | (9 | ) |
| Amount recognized as capital lease obligations | $ | 190 |
|
At June 30, 2017 and 2016 our collateralized debt consisted of capitalized lease obligations of $0.2 million and $0.7 million, respectively. The underlying assets collateralize these obligations.
NOTE 11 — NOTES PAYABLE AND LINES OF CREDIT
Notesnotes payable to banks of $0.7were $2.2 million and $1.2$8.4 million at June 30, 20172022 and 2016, respectively, represents2021, respectively. The lines of credit represented short-term borrowings under credit lines with commercial banks. Thesebanks in the various countries in which we operate. The availability of these credit lines, translated into U.S. dollars at June 30, 20172022 exchange rates, totaled $152.3 million at June 30, 2017, of which $151.6 million was unused. The weighted average interest rate for notes payable and lines of credit was 13.8 percent and 9.0 percent at June 30, 2017 and 2016, respectively.$60.7 million.
NOTE 1213 — INCOME TAXES
Income (loss) before income taxes consisted of the following for the years ended June 30:
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2022 | | 2021 | | 2020 |
| Income (loss) before income taxes: | | | | | | |
| United States | | $ | 10,109 | | | $ | (60,775) | | | $ | (76,107) | |
| International | | 196,624 | | | 125,435 | | | 78,067 | |
| Total income before income taxes | | $ | 206,733 | | | $ | 64,660 | | | $ | 1,960 | |
| Current income taxes: | | | | | | |
| Federal | | $ | 1,115 | | | $ | 39 | | | $ | (3,558) | |
| State | | 106 | | | 133 | | | 905 | |
| International | | 44,019 | | | 30,726 | | | 33,559 | |
| Total current income taxes | | 45,240 | | | 30,898 | | | 30,906 | |
| Deferred income taxes: | | | | | | |
| Federal | | $ | 10,841 | | | $ | (23,170) | | | $ | (9,113) | |
| State | | (676) | | | (2,948) | | | 724 | |
| International | | 1,127 | | | 1,463 | | | (15,510) | |
| Total deferred income taxes: | | 11,292 | | | (24,655) | | | (23,899) | |
| Provision for income taxes | | $ | 56,532 | | | $ | 6,243 | | | $ | 7,007 | |
| Effective tax rate | | 27.3 | % | | 9.7 | % | | 357.5 | % |
|
| | | | | | | | | | | |
| (in thousands) | 2017 | | 2016 | | 2015 |
| Income (loss) before income taxes: | | | | | |
| United States | $ | (23,055 | ) | | $ | (228,667 | ) | | $ | (323,299 | ) |
| International | 104,930 |
| | 30,096 |
| | (64,316 | ) |
| Total income (loss) before income taxes | $ | 81,875 |
| | $ | (198,571 | ) | | $ | (387,615 | ) |
| Current income taxes: | | | | | |
| Federal | $ | (1,455 | ) | | $ | (15,039 | ) | | $ | (9,328 | ) |
| State | 172 |
| | 454 |
| | 816 |
|
| International | 24,911 |
| | 31,570 |
| | 40,433 |
|
| Total current income taxes | 23,628 |
| | 16,985 |
| | 31,921 |
|
| Deferred income taxes: | | | | | |
| Federal | $ | 298 |
| | $ | 6,786 |
| | $ | (38,943 | ) |
| State | (867 | ) | | 8,407 |
| | (8,680 | ) |
| International | 6,836 |
| | (6,865 | ) | | (952 | ) |
| Total deferred income taxes: | 6,267 |
| | 8,328 |
| | (48,575 | ) |
| Provision (benefit) for income taxes | $ | 29,895 |
| | $ | 25,313 |
| | $ | (16,654 | ) |
| Effective tax rate | 36.5 | % | | (12.7 | )% | | 4.3 | % |
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, allows net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021 to be carried back to each of the 5 preceding taxable years to generate a refund of previously paid income taxes; permits net operating loss carryovers and carrybacks to offset 100 percent of taxable income for taxable years beginning before January 1, 2021; and modifies the limitation on business interest by increasing the allowable business interest deduction from 30 percent of adjusted taxable income to 50 percent of adjusted taxable income for taxable years beginning in 2019 or 2020. We carried back our taxable loss in the U.S. for fiscal 2020 under the provisions of the CARES Act and recorded a benefit in our tax provision during fiscal 2020.
Swiss tax reform
Legislation was effectively enacted during the December quarter of fiscal 2020 when the Canton of Schaffhausen approved the Federal Act on Tax Reform and AHV Financing on October 8, 2019 (Swiss tax reform). Significant changes from Swiss tax reform include the abolishment of certain favorable tax regimes and the creation of a multi-year transitional period at both the federal and cantonal levels.
The transitional provisions of Swiss tax reform allow companies to utilize a combination of lower tax rates and tax basis adjustments to fair value, which are used for tax depreciation and amortization purposes resulting in deductions over the transitional period. To reflect the federal and cantonal transitional provisions, as they apply to us, we recorded a deferred tax asset of $14.5 million during the December quarter of fiscal 2020. We consider the deferred tax asset from Swiss tax reform to be an estimate based on our current interpretation of the legislation, which is subject to change based on further legislative guidance, review with the Swiss federal and cantonal authorities, and modifications to the underlying valuation. We anticipate finalization of the deferred tax asset within the next six months.
The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for income taxes was as follows for the years ended June 30: |
| | | | | | | | | | | |
| (in thousands) | 2017 | | 2016 | | 2015 |
| Income taxes at U.S. statutory rate | $ | 28,656 |
| | $ | (69,500 | ) | | $ | (135,665 | ) |
| State income taxes, net of federal tax benefits | (306 | ) | | 859 |
| | (1,748 | ) |
| U.S. income taxes provided on international income | 10,273 |
| | 2,364 |
| | 3,679 |
|
| Combined tax effects of international income | (11,530 | ) | | (25,469 | ) | | (21,560 | ) |
| Impact of goodwill impairment charges | — |
| | 6,439 |
| | 134,657 |
|
| Impact of divestiture | — |
| | 27,790 |
| | — |
|
| Change in valuation allowance and other uncertain tax positions | 5,163 |
| | 84,530 |
| | 1,530 |
|
| Impact of domestic production activities deduction | — |
| | (2,072 | ) | | — |
|
| Research and development credit | (1,895 | ) | | (4,351 | ) | | (3,087 | ) |
| Change in permanent reinvestment assertion | — |
| | 3,659 |
| | 2,945 |
|
| Other | (466 | ) | | 1,064 |
| | 2,595 |
|
| Provision (benefit) for income taxes | $ | 29,895 |
| | $ | 25,313 |
| | $ | (16,654 | ) |
| | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2022 | | 2021 | | 2020 |
| Income taxes at U.S. statutory rate | | $ | 43,414 | | | $ | 13,579 | | | $ | 412 | |
| State income taxes, net of federal tax benefit | | (450) | | | (1,725) | | | 1,283 | |
| U.S. income taxes provided on international income | | 12,815 | | | (6,479) | | | 12,422 | |
| Combined tax effects of international income | | 2,747 | | | 5,860 | | | 10,583 | |
| Impact of goodwill impairment charges | | — | | | — | | | 5,651 | |
| | | | | | |
| Change in valuation allowance and other uncertain tax positions | | (614) | | | 1,127 | | | 755 | |
| | | | | | |
| U.S. research and development credit | | (2,814) | | | (3,055) | | | (4,093) | |
| Change in permanent reinvestment assertion | | 775 | | | — | | | — | |
| | | | | | |
| Combined effects of Swiss tax reform | | — | | | — | | | (14,500) | |
| Combined effects of the U.S. CARES Act | | — | | | — | | | (6,913) | |
| Recognition of stranded deferred tax balance | | — | | | (3,465) | | | — | |
| | | | | | |
| Other | | 659 | | | 401 | | | 1,407 | |
| Provision for income taxes | | $ | 56,532 | | | $ | 6,243 | | | $ | 7,007 | |
During 2017,2021, we recorded a valuation allowance againsttax benefit of $3.5 million for the netrecognition of a stranded deferred tax assets of our Australian subsidiary.balance in accumulated other comprehensive loss associated with the forward starting interest rate swap contracts that were terminated when the 2022 Senior Notes were extinguished. The impact of the valuation allowance was approximately $1.3 million andthis item is included in the tax reconciliation table under the caption "change“Recognition of stranded deferred tax balance” and in valuation allowance and other uncertain tax positions.the consolidated statements of cash flows as a non-cash item within the caption "Debt refinancing charge."
During 2016,2021, we recorded a valuation allowance againstnet tax benefit of $9.3 million related to a tax election made in our net domestic deferredfiscal 2020 U.S. income tax assetsreturn pursuant to global intangible low-taxed income (GILTI) regulations which were issued during the current fiscal year. The impact of $105.9 million, as discussed below. Of this amount, $81.2 million impacted the effective tax rate anditem is included in the income tax reconciliation table under the caption "change in valuation allowance and other uncertain tax positions," and $24.7 million was recorded in other comprehensive“U.S. income taxes provided on international income.
During 2016 and 2015, we recorded goodwill impairment charges related to our Infrastructure segment. There was no tax benefit for a portion of charges in 2016. There was no tax benefit for a majority of charges in 2015. The federal effect of these permanent differences is included in the income tax reconciliation table under the caption "impact of goodwill impairment charges."
”
During 2016, we divested certain non-core businesses as described in Note 4. A portion of the loss from this divestiture was not deductible for tax purposes. The Federal effect of this permanent difference is included in the income tax reconciliation table under the caption "impact of divestiture."
During 2016 we recorded on adjustment of $3.7 million related to a change in assertion of certain foreign subsidiaries' undistributed earnings primarily related to the transaction described in Note 4, which are no longer considered permanently reinvested. The effect of this charge is included in the income tax reconciliation table under the caption "change in permanent reinvestment assertion."
During 2015, we recorded an adjustment of $2.9 million related to a change in assertion of certain foreign subsidiaries' undistributed earnings, which are no longer considered permanently reinvested. The effect of this charge is included in the income tax reconciliation table under the caption "change in permanent reinvestment assertion."
The components of net deferred tax assets and (liabilities)liabilities were as follows at June 30: | | | | | | | | | | | | |
| (in thousands) | | 2022 | | 2021 |
| Deferred tax assets: | | | | |
| Net operating loss (NOL) carryforwards | | $ | 25,868 | | | $ | 44,258 | |
| Inventory valuation and reserves | | 11,747 | | | 11,068 | |
| Pension benefits | | — | | | 7,136 | |
| Other postretirement benefits | | 3,050 | | | 3,486 | |
| Accrued employee benefits | | 11,775 | | | 11,168 | |
| Operating lease liabilities | | 11,995 | | | 12,652 | |
| Other accrued liabilities | | 12,992 | | | 15,596 | |
| Tax credits and other carryforwards | | 34,930 | | | 32,490 | |
| Intangible assets | | 4,246 | | | 7,784 | |
| | | | |
| Total | | 116,603 | | | 145,638 | |
| Valuation allowance | | 14,385 | | | 21,263 | |
| Total deferred tax assets | | $ | 102,218 | | | $ | 124,375 | |
| Deferred tax liabilities: | | | | |
| Tax depreciation in excess of book | | $ | 57,109 | | | $ | 63,020 | |
| Operating lease right-of-use assets | | 11,852 | | | 12,502 | |
| | | | |
| Unremitted earnings not permanently reinvested | | 7,242 | | | 6,429 | |
| Pension benefits | | 1,061 | | | — | |
| Other | | 2,537 | | | 7,392 | |
| Total deferred tax liabilities | | $ | 79,801 | | | $ | 89,343 | |
| Total net deferred tax assets (liabilities) | | $ | 22,417 | | | $ | 35,032 | |
|
| | | | | | | |
| (in thousands) | 2017 | | 2016 |
| Deferred tax assets: | | | |
| Net operating loss (NOL) carryforwards | $ | 85,659 |
| | $ | 77,198 |
|
| Inventory valuation and reserves | 20,428 |
| | 18,865 |
|
| Pension benefits | 24,824 |
| | 42,432 |
|
| Other postretirement benefits | 5,959 |
| | 7,111 |
|
| Accrued employee benefits | 11,234 |
| | 17,069 |
|
| Other accrued liabilities | 8,609 |
| | 9,229 |
|
| Hedging activities | 5,409 |
| | 5,507 |
|
| Tax credits and other carryforwards | 41,039 |
| | 30,733 |
|
| Intangible assets | 14,947 |
| | 21,575 |
|
| Total | 218,108 |
| | 229,719 |
|
| Valuation allowance | (116,770 | ) | | (122,699 | ) |
| Total deferred tax assets | $ | 101,338 |
| | $ | 107,020 |
|
| Deferred tax liabilities: | | | |
| Tax depreciation in excess of book | $ | 83,258 |
| | $ | 83,412 |
|
| Other | 4,614 |
| | 149 |
|
| Total deferred tax liabilities | $ | 87,872 |
| | $ | 83,561 |
|
| Total net deferred tax assets | $ | 13,466 |
| | $ | 23,459 |
|
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not (greater than 50%) that a tax benefit will not be realized. In evaluating the need for a valuation allowance,As of June 30, 2022, we consider all potential sourceshave $25.9 million of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, and projections of future profitability within the carry forward period, including taxable income from tax planning strategies. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of the deferred tax asset based on existing projections of income. Upon changes in facts and circumstances, we may conclude that deferred tax assets for which no valuation allowance is currently recorded may not be realized, resulting in a future charge to establish a valuation allowance. Existing valuation allowances are re-examined under the same standards of positive and negative evidence. If it is determined that it is more likely than not that a deferred tax asset will be realized, the appropriate amount of the valuation allowance, if any, is released.
During 2017, we recorded a valuation allowance of $1.3 million against theU.S. net deferred tax assets of our Australian subsidiary.
In 2016, we recorded a valuation allowance of $105.9 million against our net deferred tax assets in the U.S. Ofassets. Within this amount $81.2is $46.2 million was recorded in the provision for income taxesrelated to net operating loss, tax credit, and $24.7 million was recorded in other comprehensivecarryforwards that can be used to offset future U.S. taxable income. After weighing all available positive and negative evidence, as previously described,Certain of these carryforwards will expire if they are not used within a specified timeframe. At this time, we determined thatconsider it was no longer more likely than not that we will have sufficient U.S. taxable income in the future that will allow us to realize the tax benefit of these net deferred tax assets. This was driven by cumulative pre-tax domestic lossesHowever, it is possible that some or all of these tax attributes could ultimately expire unused. Therefore, if we are unable to generate sufficient U.S. taxable income from charges relatedour operations, a valuation allowance to asset impairment, restructuring and loss on divestiture, as well as an overall decreasereduce the U.S. net deferred tax assets may be required, which would materially increase income tax expense in demandthe period in U.S. operations.
which the valuation allowance is recorded.
Included in deferred tax assets at June 30, 20172022 is $41.0$34.9 million associated with tax credits and other carryforward items primarily in federalthe U.S. and state jurisdictions.Europe. Of that amount, $1.4 million expires through 2022, $31.1 million expires through 2027, $0.6$2.5 million expires through 2032, $7.7$4.6 million expires through 2037, and the remaining $0.2$19.1 million expires through 2042, $1.5 million does not expire.expire, and $7.2 million is amortizable over ten years.
Included in deferred tax assets at June 30, 20172022 is $85.7$25.9 million associated with NOL carryforwards in federal,U.S. state and foreign jurisdictions. Of that amount, $9.5 million expires through 2022, $2.7$4.7 million expires through 2027, $2.5$2.0 million expires through 2032, $47.3$3.2 million expires through 2037, $2.2 million expires through 2042, and the remaining $23.7$13.8 million does not expire. The realization of these tax benefits is primarily dependent on future taxable income in these jurisdictions.
We do not recognize the windfall tax benefits related to the exercise of a stock option or the vesting of restricted stock units unless such deduction reduces income taxes payable. As of June 30, 2017, the gross amount of NOL carryforwards is $3.7 million, and $1.4 million would be recorded in equity when realized. Effective July 1, 2017, the Company will adopt new FASB guidance on equity-based award accounting. See Note 2.
A valuation allowance of $116.8$14.4 million has been placed against deferred tax assets primarily in the U.S., state, Brazil, Europe, AustraliaBolivia, and Hong Kong,Russia jurisdictions, all of which would be allocated to income tax expense upon realization of the deferred tax assets. As the respective operations generate sufficient income, the valuation allowances will be partially or fully reversed at such time we believe it will be more likely than not that the deferred tax assets will be realized. In 2017,2022, the valuation allowance related to these deferred tax assets decreased by $5.9 million, due primarily to$6.9 million.
We consider the change inmajority of the mix of U.S. deferred tax assets and liabilities.
As of June 30, 2017,$1.5 billion unremitted earnings of our non-U.S. subsidiaries and affiliates of $2,023.4 million, the majority of whichto be permanently reinvested. With regard to these unremitted earnings, we have not, been previously taxednor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the U.S., are considered permanently reinvested, and accordingly, noordinary course of business, including liquidity needs associated with our domestic debt service requirements. Determination of the amount of unrecognized deferred tax liability has been recorded in connection therewith. Itrelated to indefinitely reinvested earnings is not practicalpracticable due to estimateour legal entity structure and the incomecomplexity of U.S. and local tax effect that might be incurred if cumulative prior year earnings not previously taxed in the U.S. were remittedlaws. With regard to the small portion of unremitted earnings that are not indefinitely reinvested, we maintain a deferred tax liability for foreign withholding and U.S. state income taxes. The deferred tax liability associated with unremitted earnings of our non-U.S. subsidiaries not permanently reinvested is $7.2 million as of June 30, 2022.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest)interest and penalty) is as follows as of June 30: |
| | | | | | | | | | | | |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Balance at beginning of year | | $ | 3,106 |
| | $ | 14,619 |
| | $ | 20,366 |
|
| Increases for tax positions of prior years | | — |
| | 1,197 |
| | — |
|
| Decreases for tax positions of prior years | | — |
| | — |
| | (3,188 | ) |
| Decreases related to settlement with taxing authority | | (231 | ) | | (11,942 | ) | | (348 | ) |
| Decreases related to lapse of statute of limitations | | (184 | ) | | (667 | ) | | (398 | ) |
| Foreign currency translation | | (59 | ) | | (101 | ) | | (1,813 | ) |
| Balance at end of year | | $ | 2,632 |
| | $ | 3,106 |
| | $ | 14,619 |
|
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | 2022 | | 2021 | | 2020 |
| Balance at beginning of year | | $ | 8,656 | | | $ | 8,680 | | | $ | 8,952 | |
| Increases for tax positions of prior years | | 105 | | | — | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| Decreases related to lapse of statute of limitations | | (779) | | | (229) | | | (214) | |
| Foreign currency translation | | (384) | | | 205 | | | (58) | |
| Balance at end of year | | $ | 7,598 | | | $ | 8,656 | | | $ | 8,680 | |
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate in 2017, 20162022, 2021 and 20152020 is $2.6$7.6 million, $3.1$8.7 million and $2.7$8.7 million, respectively. We believe that it is reasonably possible that the amount of unrecognized tax benefits will decrease by approximately $2.0 million within the next twelve months.
Our policy is to recognize interest and penalties related to income taxes as a component of the provision for income taxes in the consolidated statementstatements of income. We recognized an increase of $0.1 million and $1.0 million in interest2022 and 2020, respectively, and a decrease of $0.2 million in 2017, and reduction in interest of $0.2 million and $0.7 million in 2016 and 2015, respectively.2021. As of June 30, 20172022 and 20162021, the amount of interest accrued was $0.5$1.4 million and $0.3 million, respectively.in both periods. As of June 30, 20172022 and 2016, the amount of2021, there was no penalty accrued was $0.1 million and $0.3 million, respectively.
In 2016, decreases for tax positions primarily relate to one foreign tax position. We settled this position with the foreign authority. A corresponding deferred tax asset in the amount of $11.9 million was released for the position in the U.S. and in the prior year this amount was included in the components of net deferred tax liabilities and assets table under the caption "other."accrued.
With few exceptions, we are no longer subject to income tax examinations by tax authorities for years prior to 2011.2015. The Internal Revenue Service has audited or the statute of limitations has expired for all U.S. tax years prior to 2015.2018. Various state and foreign jurisdiction tax authorities are in the process of examining our income tax returns for various tax years ranging from 20112015 to 2015.2019. We continue to execute our pan-European business model. As a result of this and other matters, we continuously review our uncertain tax positions and evaluate any potential issues that may lead to an increase or decrease in the total amount of unrecognized tax benefits recorded.
We believe that it is reasonably possible that the amount of unrecognized tax benefits could decrease by approximately $0.4 million within the next twelve months.
NOTE 1314 — PENSION AND OTHER POSTRETIREMENT BENEFITS
We have defined benefit pension plans that cover certain employees in the U.S., Germany, the UK and Canada. Pension benefits under defined benefit pension plans are based on years of service and, for certain plans, on average compensation for specified years preceding retirement. We fund pension costs in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, for U.S. plans and in accordance with local regulations or customs for non-U.S. plans. Beginning in 2017, the accrued benefit for all participants in the Kennametal Inc. Retirement Income Plan is frozen as the result of amendment. The majority of our defined benefit pension plans are closed to future participation.
We have an Executive Retirement Plan for various executives and a Supplemental Executive Retirement Plan both of which have been closed to future participation on June 15, 2017 and July 26, 2006, respectively.
We presently provide varying levels of postretirement health care and life insurance benefits to certain employees and retirees. Postretirement health care benefits are available to employees and their spouses retiring on or after age 55 with 10 or more years of service. Beginning with retirements on or after January 1, 1998, our portion of the costs of postretirement health care benefits is capped at 1996 levels. Beginning with retirements on or after January 1, 2009, we have no obligation to provide a company subsidy for retiree medical costs. Postretirement health and life benefits are closed to future participants as of December 31, 2016.
We use a June 30 measurement date for all of our plans.
Defined Benefit Pension Plans
We have defined benefit pension plans that cover certain employees in the U.S., Germany, the UK, Switzerland, Canada and Israel. Pension benefits under defined benefit pension plans are based on years of service and, for certain plans, on average compensation for specified years preceding retirement. We fund pension costs in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, for U.S. plans and in accordance with local regulations or customs for non-U.S. plans. The accrued benefit for all participants in the Kennametal Inc. Retirement Income Plan was frozen as of December 31, 2016. The majority of our defined benefit pension plans are closed to future participation.
We have an Executive Retirement Plan for certain executives and a Supplemental Executive Retirement Plan both of which are closed to future participation as of June 15, 2017 and July 26, 2006, respectively.
We presently provide varying levels of postretirement health care and life insurance benefits to certain employees and retirees. By fiscal 2019, participants over the age of 65 were transitioned to a private exchange and some received a fixed Health Retirement Account (HRA) contribution to offset the cost of their coverage. Postretirement health and life benefits are closed to future participants as of December 31, 2016.
We use a June 30 measurement date for all of our plans. During fiscal 2021, as part of the plan to wind-up the fully frozen, overfunded Canadian defined benefit pension plans, the Company purchased an upfront annuity for retirees resulting in a non-cash settlement charge of $2.8 million. The Company expects to complete the wind-up of the Canadian plans by fiscal 2024.
The funded status of our pension plans and amounts recognized in the consolidated balance sheets as of June 30 were as follows:
|
| | | | | | | |
| (in thousands) | 2017 | | 2016 |
| Change in benefit obligation: | | | |
| Benefit obligation, beginning of year | $ | 1,005,368 |
| | $ | 954,454 |
|
| Service cost | 2,908 |
| | 4,640 |
|
| Interest cost | 31,113 |
| | 37,726 |
|
| Participant contributions | 8 |
| | 6 |
|
| Actuarial (gains) losses | (19,660 | ) | | 86,425 |
|
| Benefits and expenses paid | (70,257 | ) | | (45,074 | ) |
| Currency translation adjustments | (1,045 | ) | | (19,283 | ) |
| Plan amendments | — |
| | 696 |
|
| Special termination benefits | 98 |
| | 334 |
|
| Plan settlements | (7,439 | ) | | (7,991 | ) |
| Plan curtailments | — |
| | (6,565 | ) |
| Benefit obligation, end of year | $ | 941,094 |
| | $ | 1,005,368 |
|
| Change in plans' assets: | | | |
| Fair value of plans' assets, beginning of year | $ | 821,675 |
| | $ | 827,337 |
|
| Actual return on plans' assets | 56,818 |
| | 50,637 |
|
| Company contributions | 11,960 |
| | 15,876 |
|
| Participant contributions | 8 |
| | 6 |
|
| Plan settlements | (7,439 | ) | | (7,991 | ) |
| Benefits and expenses paid | (70,257 | ) | | (45,074 | ) |
| Currency translation adjustments | (4,130 | ) | | (19,116 | ) |
| Fair value of plans' assets, end of year | $ | 808,635 |
| | $ | 821,675 |
|
| Funded status of plans | $ | (132,459 | ) | | $ | (183,693 | ) |
| Amounts recognized in the balance sheet consist of: | | | |
| Long-term prepaid benefit | $ | 17,208 |
| | $ | 8,941 |
|
| Short-term accrued benefit obligation | (5,713 | ) | | (10,037 | ) |
| Accrued pension benefits | (143,954 | ) | | (182,597 | ) |
| Net amount recognized | $ | (132,459 | ) | | $ | (183,693 | ) |
| | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 |
| Change in benefit obligation: | | | |
| Benefit obligation, beginning of year | $ | 968,725 | | | $ | 1,004,005 | |
| Service cost | 1,117 | | | 1,685 | |
| Interest cost | 22,532 | | | 23,188 | |
| Participant contributions | 479 | | | 548 | |
| Actuarial gains | (170,055) | | | (16,794) | |
| Benefits and expenses paid | (53,149) | | | (52,719) | |
| Currency translation adjustments | (27,074) | | | 23,276 | |
| Plan amendments | (66) | | | (129) | |
| | | |
| | | |
| Plan settlements | (1,805) | | | (13,966) | |
| Plan curtailments | (3) | | | (10) | |
| Other adjustments | 308 | | | (359) | |
| Benefit obligation, end of year | $ | 741,009 | | | $ | 968,725 | |
| Change in plans' assets: | | | |
| Fair value of plans' assets, beginning of year | $ | 890,104 | | | $ | 876,036 | |
| Actual return on plans' assets | (133,374) | | | 54,026 | |
| Company contributions | 8,170 | | | 9,998 | |
| Participant contributions | 479 | | | 548 | |
| | | |
| Plan settlements | (1,805) | | | (13,966) | |
| Benefits and expenses paid | (53,149) | | | (52,719) | |
| Currency translation adjustments | (14,455) | | | 16,032 | |
| Other adjustments | (5) | | | 149 | |
| Fair value of plans' assets, end of year | $ | 695,965 | | | $ | 890,104 | |
| Funded status of plans | $ | (45,044) | | | $ | (78,621) | |
| Amounts recognized in the balance sheets consist of: | | | |
| Long-term prepaid benefit | $ | 66,433 | | | $ | 89,233 | |
| Short-term accrued benefit obligation | (6,406) | | | (6,918) | |
| Accrued pension benefits | (105,071) | | | (160,936) | |
| Net amount recognized | $ | (45,044) | | | $ | (78,621) | |
The pre-tax amounts related to our defined benefit pension plans recognized in accumulated other comprehensive (loss) incomeloss were as follows at June 30:
| | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 |
| Unrecognized net actuarial losses | $ | 274,416 | | | $ | 279,628 | |
| Unrecognized net prior service costs | 1,822 | | | 2,001 | |
| Unrecognized transition obligations | 158 | | | 277 | |
| Total | $ | 276,396 | | | $ | 281,906 | |
|
| | | | | | | |
| (in thousands) | 2017 | | 2016 |
| Unrecognized net actuarial losses | $ | 246,428 |
| | $ | 272,802 |
|
| Unrecognized net prior service credits | 580 |
| | 155 |
|
| Unrecognized transition obligations | 622 |
| | 740 |
|
| Total | $ | 247,630 |
| | $ | 273,697 |
|
Prepaid pension benefits are included in other long-term assets. The assets of our U.S. and international defined benefit pension plans consist principally of capital stocks, corporate bonds and government securities.
To the best of our knowledge and belief, the asset portfolios of our defined benefit pension plans do not contain our capital stock. WeApart from the partial annuitization of the Canadian plans as previously mentioned, we do not issue insurance contracts to cover future annual benefits of defined benefit pension plan participants. Transactions between us and our defined benefit pension plans include the reimbursement of plan expenditures incurred by us on behalf of the plans. To the best of our knowledge and belief, the reimbursement of cost is permissible under current ERISA rules or local government law. The accumulated benefit obligation for all defined benefit pension plans was $940.9$740.4 million and $1,003.5$967.5 million as of June 30, 20172022 and 2016,2021, respectively.
Included in the above information are plans with accumulated benefit obligations exceeding the fair value of plan assets as of June 30 as follows:
| | | (in thousands) | 2017 | | 2016 | (in thousands) | 2022 | | 2021 |
| Projected benefit obligation | $ | 156,816 |
| | $ | 877,146 |
| Projected benefit obligation | $ | 118,199 | | | $ | 174,973 | |
| Accumulated benefit obligation | 156,590 |
| | 875,233 |
| Accumulated benefit obligation | 117,614 | | | 173,684 | |
| Fair value of plan assets | 7,083 |
| | 684,512 |
| Fair value of plan assets | 6,718 | | | 7,116 | |
The components of net periodic pension income include the following as of June 30:
| | | (in thousands) | 2017 | | 2016 | | 2015 | (in thousands) | 2022 | | 2021 | | 2020 |
| Service cost | $ | 2,908 |
| | $ | 4,640 |
| | $ | 5,474 |
| Service cost | $ | 1,117 | | | $ | 1,685 | | | $ | 1,796 | |
| Interest cost | 31,113 |
| | 37,726 |
| | 39,007 |
| Interest cost | 22,532 | | | 23,188 | | | 27,320 | |
| Expected return on plans' assets | (58,781 | ) | | (58,523 | ) | | (59,698 | ) | Expected return on plans' assets | (51,928) | | | (53,653) | | | (53,943) | |
| Amortization of transition obligation | 89 |
| | 80 |
| | 78 |
| Amortization of transition obligation | 94 | | | 94 | | | 88 | |
| Amortization of prior service cost | (452 | ) | | (417 | ) | | (361 | ) | Amortization of prior service cost | 13 | | | 34 | | | 50 | |
| Special termination benefit charge | 98 |
| | 334 |
| | 459 |
| |
| Curtailment loss | — |
| | — |
| | 358 |
| |
| Settlement loss | 379 |
| | 227 |
| | 261 |
| |
| Curtailment | | Curtailment | (2) | | | (7) | | | (115) | |
| Settlement | | Settlement | 205 | | | 3,190 | | | (51) | |
| Recognition of actuarial losses | 8,356 |
| | 7,286 |
| | 3,671 |
| Recognition of actuarial losses | 11,702 | | | 13,606 | | | 10,359 | |
| Other adjustments | | Other adjustments | 277 | | | (473) | | | 288 | |
| Net periodic pension income | $ | (16,290 | ) | | $ | (8,647 | ) | | $ | (10,751 | ) | Net periodic pension income | $ | (15,990) | | | $ | (12,336) | | | $ | (14,208) | |
As of June 30, 2017,2022, the projected benefit payments, including future service accruals for these plans for 20182023 through 2022,2027, are $47.5$53.2 million, $49.0$54.4 million, $50.0$54.9 million, $51.5$54.5 million and $52.0$54.5 million, respectively, and $277.8$260.4 million in 20232028 through 2027.2032.
The amounts of accumulated other comprehensive loss expected to be recognized in net periodic pension cost during 20182023 related to net actuarial losses and transition obligations are $6.8 million and $0.1 million, respectively.$4.5 million. The amount of accumulated other comprehensive income expected to be recognized in net periodic pension cost during 20182023 related to transition obligations and prior service creditcost is $0.2 million.immaterial.
We expect to contribute approximately $7.9 million to our pension plans in 2018.2023, which is primarily for international plans.
Other Postretirement Benefit Plans
The funded status of our other postretirement benefit plans and the related amounts recognized in the consolidated balance sheets were as follows: | | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 |
| Change in benefit obligation: | | | |
| Benefit obligation, beginning of year | $ | 11,383 | | | $ | 12,365 | |
| Interest cost | 288 | | | 307 | |
| Actuarial losses | (1,402) | | | 60 | |
| Benefits paid | (1,224) | | | (1,281) | |
| Other | 68 | | | (68) | |
| Benefit obligation, end of year | $ | 9,113 | | | $ | 11,383 | |
| Funded status of plan | $ | (9,113) | | | $ | (11,383) | |
| Amounts recognized in the balance sheets consist of: | | | |
| Short-term accrued benefit obligation | $ | (1,189) | | | $ | (1,252) | |
| Accrued postretirement benefits | (7,924) | | | (10,131) | |
| Net amount recognized | $ | (9,113) | | | $ | (11,383) | |
|
| | | | | | | |
| (in thousands) | 2017 | | 2016 |
| Change in benefit obligation: | | | |
| Benefit obligation, beginning of year | $ | 20,542 |
| | $ | 21,205 |
|
| Interest cost | 673 |
| | 840 |
|
| Actuarial losses | (747 | ) | | 722 |
|
| Benefits paid | (2,308 | ) | | (2,225 | ) |
| Benefit obligation, end of year | $ | 18,160 |
| | $ | 20,542 |
|
| Funded status of plan | $ | (18,160 | ) | | $ | (20,542 | ) |
| Amounts recognized in the balance sheet consist of: | | | |
| Short-term accrued benefit obligation | $ | (1,254 | ) | | $ | (1,666 | ) |
| Accrued postretirement benefits | (16,906 | ) | | (18,876 | ) |
| Net amount recognized | $ | (18,160 | ) | | $ | (20,542 | ) |
The pre-tax amounts related to our other postretirement benefit plans which were recognized in accumulated other comprehensive (loss) incomeloss were as follows at June 30:
| | | (in thousands) | 2017 | | 2016 | (in thousands) | 2022 | | 2021 |
| Unrecognized net actuarial losses | $ | 5,266 |
| | $ | 6,368 |
| Unrecognized net actuarial losses | $ | 2,657 | | | $ | 4,355 | |
| Unrecognized net prior service credits | (128 | ) | | (150 | ) | Unrecognized net prior service credits | (1,649) | | | (1,924) | |
| Total | $ | 5,138 |
| | $ | 6,218 |
| Total | $ | 1,008 | | | $ | 2,431 | |
The components of net periodic other postretirement benefit cost include the following for the years ended June 30:
| | | (in thousands) | 2017 | | 2016 | | 2015 | (in thousands) | 2022 | | 2021 | | 2020 |
| Service cost | $ | — |
| | $ | — |
| | $ | 45 |
| |
| | Interest cost | 673 |
| | 840 |
| | 934 |
| Interest cost | $ | 288 | | | $ | 307 | | | $ | 404 | |
| Amortization of prior service credit | (22 | ) | | (22 | ) | | (59 | ) | Amortization of prior service credit | (276) | | | (276) | | | (276) | |
| Recognition of actuarial loss | 355 |
| | 324 |
| | 492 |
| Recognition of actuarial loss | 297 | | | 307 | | | 257 | |
| Curtailment gain | — |
| | — |
| | (221 | ) | |
| | Net periodic other postretirement benefit cost | $ | 1,006 |
| | $ | 1,142 |
| | $ | 1,191 |
| Net periodic other postretirement benefit cost | $ | 309 | | | $ | 338 | | | $ | 385 | |
As of June 30, 2017,2022, the projected benefit payments, including future service accruals for our other postretirement benefit plans for 20182023 through 2022,2027, are $1.9$1.2 million, $1.8$1.1 million, $1.7$1.0 million, $1.6$0.9 million and $1.5$0.9 million, respectively, and $6.2$3.4 million in 20232028 through 2027.2032.
The amounts of accumulated other comprehensive loss expected to be recognized in net periodic pension cost during 20182023 related to net actuarial losses are $0.3 million. The amount of accumulated other comprehensive income expected to be recognized in net periodic pension cost during 2018and related to prior service credit is less than $0.1 million.are costs of $0.2 million and income of $0.3 million, respectively.
We expect to contribute approximately $1.9$1.2 million to our other postretirement benefit plans in 2018.2023.
net periodic pension income of $1.1 million, $1.7 million and $1.8 million for 2022, 2021 and 2020, respectively, was reported as a component of cost of goods sold and operating expense. The other components of net periodic pension income and net periodic other postretirement benefit cost totaling a net benefit of $16.8 million, $13.7 million and $15.6 million for 2022, 2021 and 2020, respectively, were presented as a component of other income, net.
Assumptions
The significant actuarial assumptions used to determine the present value of net benefit obligations for our defined benefit pension plans and other postretirement benefit plans were as follows:
| | | | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| Discount Rate: | | | Discount Rate: | |
| U.S. plans | 3.3-3.9% |
| | 2.4-3.7% | | 3.2-4.5% | U.S. plans | 4.3-5.0% | | 1.2-3.0% | | 1.6-2.9% |
| International plans | 2.0-3.3% |
| | 0.9-3.2% | | 2.3-3.8% | International plans | 2.0-5.0% | | 0.3-3.2% | | 0.2-2.4% |
| Rates of future salary increases: | | | Rates of future salary increases: | |
| U.S. plans | 4.0 | % | | 3.0-4.0% | | 3.0-4.0% | |
| U.S. plans (Executive Retirement Plan only) | | U.S. plans (Executive Retirement Plan only) | 4.0 | % | | 4.0 | % | | 4.0 | % |
| International plans | 2.5-3.0% |
| | 2.5-3.0% | | 2.5-3.0% | International plans | 1.5 | % | | 1.5 | % | | 1.5 | % |
The significant assumptions used to determine the net periodic (income) costincome for our pension and other postretirement benefit plans were as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Discount Rate: | | | | | |
| U.S. plans | 1.2-3.0% | | 1.6-2.9% | | 2.7-3.6% |
| International plans | 0.3-3.2% | | 0.2-2.4% | | 0.4-2.9% |
| Rates of future salary increases: | | | | | |
| U.S. plans (Executive Retirement Plan only) | 4.0 | % | | 4.0 | % | | 4.0 | % |
| International plans | 1.5 | % | | 1.5 | % | | 1.8-3.0% |
| Rate of return on plans assets: | | | | | |
| U.S. plans | 6.5 | % | | 6.8 | % | | 7.0 | % |
| International plans | 0.3-5.0% | | 0.2-5.3% | | 0.4-5.3% |
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Discount Rate: | | | | | |
| U.S. plans | 2.4-3.7% |
| | 3.2-4.5% |
| | 4.4 | % |
| International plans | 0.9-3.2% |
| | 2.3-3.8% |
| | 2.9-4.3% |
|
| Rates of future salary increases: | | | | | |
| U.S. plans | 3.0-4.0% |
| | 3.0-4.0% |
| | 3.0-5.0% |
|
| International plans | 2.5-3.0% |
| | 2.5-3.0% |
| | 2.5-3.0% |
|
| Rate of return on plans assets: | | | | | |
| U.S. plans | 7.5 | % | | 7.5 | % | | 7.5 | % |
| International plans | 5.3-5.5% |
| | 5.3-5.5% |
| | 5.0-6.0% |
|
The rates of return on plan assets are based on historical performance, as well as future expected returns by asset class considering macroeconomic conditions, current portfolio mix, long-term investment strategy and other available relevant information.
The annual assumed rate of increase in the per capita cost of covered benefits (the health care cost trend rate) for our postretirement benefit plans was as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Health care costs trend rate assumed for next year | 6.3 | % | | 6.5 | % | | 6.8 | % |
| Rate to which the cost trend rate gradually declines | 5.0 | % | | 5.0 | % | | 5.0 | % |
| Year that the rate reaches the rate at which it is assumed to remain | 2027 | | 2027 | | 2027 |
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Health care costs trend rate assumed for next year | 8.0 | % | | 8.5 | % | | 7.3 | % |
| Rate to which the cost trend rate gradually declines | 5.0 | % | | 5.0 | % | | 5.0 | % |
| Year that the rate reaches the rate at which it is assumed to remain | 2027 |
| | 2027 |
| | 2024 |
|
A change of one percentage point in the assumed health care cost trend rates would have the following effectsan immaterial effect on both the total service and interest cost components of our other postretirement cost and other postretirement benefit obligation at June 30, 2017:
|
| | | | | | | |
| (in thousands) | 1% Increase | | 1% Decrease |
| Effect on total service and interest cost components | $ | 30 |
| | $ | (27 | ) |
| Effect on other postretirement obligation | 735 |
| | (655 | ) |
Plan Assets
The primary objective of certain of our pension plans' investment policies is to ensure that sufficient assets are available to provide the benefit obligations at the time the obligations come due. The overall investment strategy for the defined benefit pension plans' assets combinecombines considerations of preservation of principal and moderate risk-taking. The assumption of an acceptable level of risk is warranted in order to achieve satisfactory results consistent with the long-term objectives of the portfolio. Fixed income securities comprise a significant portion of the portfolio due to their plan-liability-matching characteristics and to address the plans' cash flow requirements. Additionally, diversification of investments within each asset class is utilized to further reduce the impacteffect of losses in single investments.
Investment management practices for U.S. defined benefit pension plans must comply with ERISA and all applicable regulations and rulings thereof. The use of derivative instruments is permitted where appropriate and necessary for achieving overall investment policy objectives. Currently, the use of derivative instruments is not significant when compared to the overall investment portfolio.
The Company utilizes a liability driven investment strategy (LDI) for the assets of its U.S. defined benefit pension plans in order to reduce the volatility of the funded status of these plans and to meet the obligations at an acceptable cost over the long term. This LDI strategy entails modifying the asset allocation and duration of the assets of the plans to more closely match the liability profile of these plans. The asset reallocation involves increasing the fixed income allocation, reducing the equity component and adding alternative investments. Longer duration interest rate swaps have been utilized periodically in order to increase the overall duration of the asset portfolio to more closely match the liabilities.
Our defined benefit pension plans’ asset allocations as of June 30, 20172022 and 20162021 and target allocations for 2018,2023, by asset class, were as follows:
| | | | 2017 | | 2016 | | Target % | | 2022 | | 2021 | | Target % |
| Equity | 27 | % | | 23 | % | | 22.5 | % | Equity | 14 | % | | 20 | % | | 14 | % |
| Fixed Income | 63 | % | | 67 | % | | 70.0 | % | Fixed Income | 82 | % | | 76 | % | | 79 | % |
| Other | 10 | % | | 10 | % | | 7.5 | % | Other | 4 | % | | 4 | % | | 7 | % |
The following sections describe the valuation methodologies used by the trustee to measure the fair value of the defined benefit pension plan assets, including an indication of the level in the fair value hierarchy in which each type of asset is generally classified (see Note 5 for the definition of fair value and a description of the fair value hierarchy).
Corporate fixed income securities Investments in corporate fixed income securities consist of corporate debt and asset backed securities. These investments are classified as level two and are valued using independent observable market inputs such as the treasury curve, swap curve and yield curve.
Common stock Common stocks are classified as level one and are valued at their quoted market price.
Government securities Investments in government securities consist of fixed income securities such as U.S. government and agency obligations and foreign government bonds and asset and mortgage backed securities such as obligations issued by government sponsored organizations. These investments are classified as level two and are valued using independent observable market inputs such as the treasury curve, credit spreads and interest rates.
Other fixed income securities Investments in other fixed income securities are classified as level two and valued based on observable market data.
Other Other investments consist primarily of a hedge fund, in addition to state and local obligations and short term investments including cash, corporate notes, and various short term debt instruments which can be redeemed within a nominal redemption notice period. These investments are primarily classified as level two and are valued using independent observable market inputs.
The fair value methods described may not be reflective of future fair values. Additionally, while the Company believes the valuation methods used by the plans’ trustee are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in different fair value measurement at the reporting date.
The following table presents the fair value of the benefit plans' assets by asset category as of June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | NAV(3) | | Total |
Common / collective trusts (3): | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Blend funds | $ | — | | | $ | — | | | $ | — | | | $ | 48,973 | | | $ | 48,973 | |
| Mutual funds | — | | | — | | | — | | | 24,528 | | | 24,528 | |
| Corporate fixed income securities | — | | | 379,324 | | | — | | | — | | | 379,324 | |
| Common stock | 25,704 | | | — | | | — | | | — | | | 25,704 | |
| Government securities: | | | | | | | | | |
| U.S. government securities | — | | | 130,064 | | | — | | | — | | | 130,064 | |
| Foreign government securities | — | | | 40,729 | | | — | | | — | | | 40,729 | |
| Other fixed income securities | — | | | 20,248 | | | — | | | — | | | 20,248 | |
| Other | 747 | | | 25,648 | | | — | | | — | | | 26,395 | |
| Total investments | $ | 26,451 | | | $ | 596,013 | | | $ | — | | | $ | 73,501 | | | $ | 695,965 | |
The following table presents the fair value of the benefit planplans' assets by asset category as of June 30, 2017:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | NAV(3) | | Total |
Common / collective trusts (3): | | | | | | | | | |
| Blend funds | $ | — | | | $ | — | | | $ | — | | | $ | 90,338 | | | $ | 90,338 | |
| Mutual funds | — | | | — | | | — | | | 48,446 | | | 48,446 | |
| | | | | | | | | |
| Corporate fixed income securities | — | | | 443,948 | | | — | | | — | | | 443,948 | |
| Common stock | 42,670 | | | — | | | — | | | — | | | 42,670 | |
| Government securities: | | | | | | | | | |
| U.S. government securities | — | | | 149,514 | | | — | | | — | | | 149,514 | |
| Foreign government securities | — | | | 57,253 | | | — | | | — | | | 57,253 | |
| Other fixed income securities | — | | | 21,107 | | | — | | | — | | | 21,107 | |
| Other | 1,107 | | | 35,721 | | | — | | | — | | | 36,828 | |
| Total investments | $ | 43,777 | | | $ | 707,543 | | | $ | — | | | $ | 138,784 | | | $ | 890,104 | |
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | NAV(3) | | Total |
Common / collective trusts (3): | | | | | | | | | |
| Value funds | $ | — |
| | $ | — |
| | $ | — |
| | $ | 76,186 |
| | $ | 76,186 |
|
| Growth funds | — |
| | — |
| | — |
| | 43,880 |
| | 43,880 |
|
| Balanced funds | — |
| | — |
| | — |
| | 12,421 |
| | 12,421 |
|
| Corporate fixed income securities | — |
| | 365,723 |
| | — |
| | — |
| | 365,723 |
|
| Common stock | 85,138 |
| | — |
| | — |
| | — |
| | 85,138 |
|
| Government securities: | | | | | | | | | |
| U.S. government securities | — |
| | 72,817 |
| | — |
| | — |
| | 72,817 |
|
| Foreign government securities | — |
| | 45,359 |
| | — |
| | — |
| | 45,359 |
|
| Other fixed income securities | — |
| | 25,761 |
| | — |
| | — |
| | 25,761 |
|
| Other | 3,313 |
| | 78,037 |
| | — |
| | — |
| | 81,350 |
|
| Total investments | $ | 88,451 |
| | $ | 587,697 |
| | $ | — |
| | $ | 132,487 |
| | $ | 808,635 |
|
The following table presents the fair value of the benefit plan assets by asset category as of June 30, 2016:
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | NAV(3) | | Total |
Common / collective trusts (3): | | | | | | | | | |
| Value funds | $ | — |
| | $ | — |
| | $ | — |
| | $ | 68,731 |
| | $ | 68,731 |
|
| Growth funds | — |
| | — |
| | — |
| | 38,126 |
| | 38,126 |
|
| Balanced funds | — |
| | — |
| | — |
| | 8,581 |
| | 8,581 |
|
| Corporate fixed income securities | — |
| | 395,102 |
| | — |
| | — |
| | 395,102 |
|
| Common stock | 74,163 |
| | — |
| | — |
| | — |
| | 74,163 |
|
| Government securities: | | | | | | | | | |
| U.S. government securities | — |
| | 79,275 |
| | — |
| | — |
| | 79,275 |
|
| Foreign government securities | — |
| | 43,729 |
| | — |
| | — |
| | 43,729 |
|
| Other fixed income securities | — |
| | 31,503 |
| | — |
| | — |
| | 31,503 |
|
| Other | 3,029 |
| | 79,436 |
| | — |
| | — |
| | 82,465 |
|
| Total investments | $ | 77,192 |
| | $ | 629,045 |
| | $ | — |
| | 115,438 |
| | $ | 821,675 |
|
(3) Investments in common / collective trusts invest primarily in publicly traded securities and are valued using net asset value (NAV) of units of a bank collective trust. Therefore, these amounts have not been classified in the fair value hierarchy and are presented in the tables to reconcile the fair value hierarchy to the total fair value of plan assets.
Defined Contribution Plans
We sponsor several defined contribution retirement plans. Costs for defined contribution plans were $15.8$14.2 million, $17.2$13.3 million and $23.1$14.7 million in 2017, 20162022, 2021 and 2015,2020, respectively.
Certain U.S. employees are eligible to participate in the Kennametal Thrift Plus Plan (Thrift), which is a qualified defined contribution plan under section 401(k) of the Internal Revenue Code. Under the Thrift, eligible employees receive a full match of their contributions up to 6 percent of eligible compensation.
All contributions, including the company match and discretionary, are made in cash and invested in accordance with participants’ investment elections. There are no minimum amounts that must be invested in company stock, and there are no restrictions on transferring amounts out of company stock to another investment choice, other than excessive trading rules applicable to such investments. Employee contributions and our matching and discretionary contributions vest immediately as of the participants' employment dates.
NOTE 1415 — ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOMELOSS
TotalThe components of and changes in accumulated other comprehensive loss (AOCL) consistswere as follows, net of net income and other changes in equity from transactions and other events from sources other than shareholders. It includes postretirement benefit plan adjustments, currency translation adjustments, and unrealized gains and losses from derivative instruments designated as cash flow hedges.tax, for the year ended June 30, 2022 (in thousands):
| | | | | | | | | | | | | | |
| Attributable to Kennametal: | Pension and other postretirement benefits | Currency translation adjustment | Derivatives | Total |
| Balance, June 30, 2021 | $ | (213,172) | | $ | (122,428) | | $ | 5,273 | | $ | (330,327) | |
| Other comprehensive loss before reclassifications | (4,163) | | (87,620) | | — | | (91,783) | |
| Amounts reclassified from AOCL | 8,929 | | — | | (770) | | 8,159 | |
| Net other comprehensive income (loss) | 4,766 | | (87,620) | | (770) | | (83,624) | |
| AOCL, June 30, 2022 | $ | (208,406) | | $ | (210,048) | | $ | 4,503 | | $ | (413,951) | |
| | | | |
| Attributable to noncontrolling interests: | | | | |
| Balance, June 30, 2021 | $ | — | | $ | (3,982) | | $ | — | | $ | (3,982) | |
| Other comprehensive income before reclassifications | — | | (3,565) | | — | | (3,565) | |
| Net other comprehensive loss | — | | (3,565) | | — | | (3,565) | |
| AOCL, June 30, 2022 | $ | — | | $ | (7,547) | | $ | — | | $ | (7,547) | |
The components of and changes in AOCL were as follows, net of tax, for the year ended June 30, 20172021 (in thousands):
| | | | | | | | | | | | | | |
| Attributable to Kennametal: | Pension and other postretirement benefits | Currency translation adjustment | Derivatives | Total |
| Balance, June 30, 2020 | $ | (232,634) | | $ | (181,027) | | $ | (3,581) | | $ | (417,242) | |
| Other comprehensive income before reclassifications | 9,107 | | 58,599 | | 9,255 | | 76,961 | |
| Amounts reclassified from AOCL | 10,355 | | — | | (401) | | 9,954 | |
| Net other comprehensive income | 19,462 | | 58,599 | | 8,854 | | 86,915 | |
| AOCL, June 30, 2021 | $ | (213,172) | | $ | (122,428) | | $ | 5,273 | | $ | (330,327) | |
| | | | |
| Attributable to noncontrolling interests: | | | | |
| Balance, June 30, 2020 | $ | — | | $ | (5,909) | | $ | — | | $ | (5,909) | |
| Other comprehensive income before reclassifications | — | | 1,927 | | — | | 1,927 | |
| Net other comprehensive income | — | | 1,927 | | — | | 1,927 | |
| AOCL, June 30, 2021 | $ | — | | $ | (3,982) | | $ | — | | $ | (3,982) | |
|
| | | | | | | | | | | | |
| Attributable to Kennametal: | Postretirement benefit plans | Currency translation adjustment | Derivatives | Total |
| Balance, June 30, 2016 | $ | (212,163 | ) | $ | (131,212 | ) | $ | (9,134 | ) | $ | (352,509 | ) |
| Other comprehensive (loss) income before reclassifications | 15,559 |
| 4,606 |
| (471 | ) | 19,694 |
|
| Amounts Reclassified from AOCL | 7,566 |
| — |
| 1,557 |
| 9,123 |
|
| Net current period other comprehensive loss | 23,125 |
| 4,606 |
| 1,086 |
| 28,817 |
|
| AOCL, June 30, 2017 | $ | (189,038 | ) | $ | (126,606 | ) | $ | (8,048 | ) | $ | (323,692 | ) |
| | | | | |
| Attributable to noncontrolling interests: | | | | |
| Balance, June 30, 2016 | $ | — |
| $ | (3,446 | ) | $ | — |
| $ | (3,446 | ) |
| Other comprehensive loss before reclassifications | — |
| 1,282 |
| — |
| 1,282 |
|
| Net current period other comprehensive loss | — |
| 1,282 |
| — |
| 1,282 |
|
| AOCL, June 30, 2017 | $ | — |
| $ | (2,164 | ) | $ | — |
| $ | (2,164 | ) |
The components of and changes in AOCL were as follows, net of tax, for the year ended June 30, 20162020 (in thousands):
| | | | | | | | | | | | | | |
| Attributable to Kennametal: | Pension and other postretirement benefits | Currency translation adjustment | Derivatives | Total |
| Balance, June 30, 2019 | $ | (222,270) | | $ | (147,595) | | $ | (3,678) | | $ | (373,543) | |
| Other comprehensive loss before reclassifications | (18,299) | | (33,432) | | (582) | | (52,313) | |
| Amounts reclassified from AOCL | 7,935 | | — | | 679 | | 8,614 | |
| Net other comprehensive (loss) income | (10,364) | | (33,432) | | 97 | | (43,699) | |
| | | | |
| AOCL, June 30, 2020 | $ | (232,634) | | $ | (181,027) | | $ | (3,581) | | $ | (417,242) | |
| | | | |
| Attributable to noncontrolling interests: | | | | |
| Balance, June 30, 2019 | $ | — | | $ | (3,450) | | $ | — | | $ | (3,450) | |
| Other comprehensive loss before reclassifications | — | | (2,459) | | — | | (2,459) | |
| Net other comprehensive loss | — | | (2,459) | | — | | (2,459) | |
| AOCL, June 30, 2020 | $ | — | | $ | (5,909) | | $ | — | | $ | (5,909) | |
|
| | | | | | | | | | | | |
| Attributable to Kennametal: | Postretirement benefit plans | Currency translation adjustment | Derivatives | Total |
| Balance, June 30, 2015 | $ | (138,793 | ) | $ | (97,309 | ) | $ | (7,421 | ) | $ | (243,523 | ) |
| Other comprehensive (loss) income before reclassifications | (78,295 | ) | (51,508 | ) | (150 | ) | (129,953 | ) |
| Amounts Reclassified from AOCL | 4,925 |
| 15,088 |
| (1,563 | ) | 18,450 |
|
| Net current period other comprehensive loss | (73,370 | ) | (36,420 | ) | (1,713 | ) | (111,503 | ) |
| Sale of subsidiary stock to noncontrolling interest | — |
| 2,517 |
| — |
| $ | 2,517 |
|
| AOCL, June 30, 2016 | $ | (212,163 | ) | $ | (131,212 | ) | $ | (9,134 | ) | $ | (352,509 | ) |
| | | | | |
| Attributable to noncontrolling interests: | | | | |
| Balance, June 30, 2015 | $ | — |
| $ | (2,258 | ) | $ | — |
| $ | (2,258 | ) |
| Other comprehensive income before reclassifications | — |
| (1,188 | ) | — |
| (1,188 | ) |
| Net current period other comprehensive loss | — |
| (1,188 | ) | — |
| (1,188 | ) |
| AOCL, June 30, 2016 | $ | — |
| $ | (3,446 | ) | $ | — |
| $ | (3,446 | ) |
The components of and changes in AOCL were as follows, net of tax, for the year ended June 30, 2015 (in thousands):
|
| | | | | | | | | | | | |
| Attributable to Kennametal: | Postretirement benefit plans | Currency translation adjustment | Derivatives | Total |
| Balance, June 30, 2014 | $ | (93,742 | ) | $ | 38,811 |
| $ | (11,200 | ) | $ | (66,131 | ) |
| Other comprehensive income (loss) before reclassifications | (47,982 | ) | (136,120 | ) | 6,652 |
| (177,450 | ) |
| Amounts Reclassified from AOCL | 2,931 |
| — |
| (2,873 | ) | 58 |
|
| Net current period other comprehensive loss | (45,051 | ) | (136,120 | ) | 3,779 |
| (177,392 | ) |
| AOCL, June 30, 2015 | $ | (138,793 | ) | $ | (97,309 | ) | $ | (7,421 | ) | $ | (243,523 | ) |
| | | | | |
| Attributable to noncontrolling interests: | | | | |
| Balance, June 30, 2014 | $ | — |
| $ | 1,087 |
| $ | — |
| $ | 1,087 |
|
Other comprehensive loss before
reclassifications | — |
| (3,345 | ) | — |
| (3,345 | ) |
| Net current period other comprehensive loss | — |
| (3,345 | ) | — |
| (3,345 | ) |
| AOCL, June 30, 2015 | $ | — |
| $ | (2,258 | ) | $ | — |
| $ | (2,258 | ) |
Reclassifications out of AOCL for the years ended June 30, 2017, 20162022, 2021 and 20152020 consisted of the following:
| | | | | | | | | | | | | | |
| Year Ended June 30, | |
Details about AOCL components
(in thousands) | 2022 | 2021 | 2020 | Affected line item in the Income Statement |
| (Gains) and losses on cash flow hedges: | | | | |
| Forward starting interest rate swaps | $ | (1,020) | | $ | 4,082 | | $ | 2,444 | | Interest expense |
| Currency exchange contracts | — | | (24) | | (1,545) | | Other income, net |
| Total before tax | (1,020) | | 4,058 | | 899 | | |
| Tax impact | 250 | | (4,459) | | (220) | | Provision for income taxes |
| Net of tax | $ | (770) | | $ | (401) | | $ | 679 | | |
| | | | |
| Pension and other postretirement benefits: | | | | |
| Amortization of transition obligations | $ | 94 | | $ | 94 | | $ | 88 | | Other income, net |
| Amortization of prior service credit | (263) | | (242) | | (226) | | Other income, net |
| Recognition of actuarial losses | 11,999 | | 13,913 | | 10,616 | | Other income, net |
| Total before tax | 11,830 | | 13,765 | | 10,478 | | |
| Tax impact | (2,901) | | (3,410) | | (2,543) | | Provision for income taxes |
| Net of tax | $ | 8,929 | | $ | 10,355 | | $ | 7,935 | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
|
| | | | | | | | | | |
| | Year Ended June 30, | |
Details about AOCL components
(in thousands) | 2017 | 2016 | 2015 | Affected line item in the Income Statement |
| Gains and losses on cash flow hedges: | | | | |
| Forward starting interest rate swaps | $ | 2,180 |
| $ | 2,099 |
| $ | 2,021 |
| Interest expense |
| Currency exchange contracts | (623 | ) | (4,645 | ) | (6,700 | ) | Other expense (income), net |
| Total before tax | 1,557 |
| (2,546 | ) | (4,679 | ) | |
| Tax impact | — |
| 983 |
| 1,806 |
| Provision (benefit) for income taxes |
| Net of tax | $ | 1,557 |
| $ | (1,563 | ) | $ | (2,873 | ) | |
| | | | | |
| Postretirement benefit plans: | | | | |
| Amortization of transition obligations | $ | 89 |
| $ | 80 |
| $ | 78 |
| See Note 13 for further details |
| Amortization of prior service credit | (474 | ) | (439 | ) | (420 | ) | See Note 13 for further details |
| Recognition of actuarial losses | 8,711 |
| 7,610 |
| 4,163 |
| See Note 13 for further details |
| Total before tax | 8,326 |
| 7,251 |
| 3,821 |
| |
| Tax impact | (760 | ) | (2,326 | ) | (890 | ) | Provision (benefit) for income taxes |
| Net of tax | $ | 7,566 |
| $ | 4,925 |
| $ | 2,931 |
| |
| | | | | |
| Foreign currency translation adjustments: | | | | |
| Released due to divestiture | $ | — |
| $ | 15,088 |
| $ | — |
| Loss on divestiture |
| Total before taxes | — |
| 15,088 |
| — |
| |
| Tax impact | — |
| — |
| — |
| Provision (benefit) for income taxes |
| Net of tax | $ | — |
| $ | 15,088 |
| $ | — |
| |
The amount of income tax allocated to each component of other comprehensive income for the year ended June 30, 2017:2022:
|
| | | | | | | | | |
| (in thousands) | Pre-tax | Tax impact | Net of tax |
| Unrealized loss on derivatives designated and qualified as cash flow hedges | $ | (471 | ) | $ | — |
| $ | (471 | ) |
| Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges | 1,557 |
| — |
| 1,557 |
|
| Unrecognized net pension and other postretirement benefit gain | 18,656 |
| (3,097 | ) | 15,559 |
|
| Reclassification of net pension and other postretirement benefit loss | 8,326 |
| (760 | ) | 7,566 |
|
| Foreign currency translation adjustments | 6,266 |
| (378 | ) | 5,888 |
|
| Other comprehensive income | $ | 34,334 |
| $ | (4,235 | ) | $ | 30,099 |
|
| | | | | | | | | | | |
| (in thousands) | Pre-tax | Tax impact | Net of tax |
| | | |
| Reclassification of unrealized gain on expired derivatives designated and qualified as cash flow hedges | $ | (1,020) | | $ | 250 | | $ | (770) | |
| Unrecognized net pension and other postretirement benefit plans loss | (3,894) | | (269) | | (4,163) | |
| Reclassification of net pension and other postretirement benefit plans loss | 11,830 | | (2,901) | | 8,929 | |
| Foreign currency translation adjustments | (91,012) | | (173) | | (91,185) | |
| Other comprehensive loss | $ | (84,096) | | $ | (3,093) | | $ | (87,189) | |
The amount of income tax allocated to each component of other comprehensive loss for the year ended June 30, 2016:2021:
|
| | | | | | | | | |
| (in thousands) | Pre-tax | Tax impact | Net of tax |
| Unrealized loss on derivatives designated and qualified as cash flow hedges | $ | (244 | ) | $ | 94 |
| $ | (150 | ) |
| Reclassification of unrealized gain on expired derivatives designated and qualified as cash flow hedges | (2,546 | ) | 983 |
| (1,563 | ) |
| Unrecognized net pension and other postretirement benefit loss | (84,266 | ) | 5,971 |
| (78,295 | ) |
| Reclassification of net pension and other postretirement benefit loss | 7,251 |
| (2,326 | ) | 4,925 |
|
| Foreign currency translation adjustments | (52,699 | ) | 4 |
| (52,695 | ) |
| Reclassification of foreign currency translation adjustment loss realized upon sale | 15,088 |
| — |
| 15,088 |
|
| Other comprehensive loss | $ | (117,416 | ) | $ | 4,726 |
| $ | (112,690 | ) |
| | | | | | | | | | | |
| (in thousands) | Pre-tax | Tax impact | Net of tax |
| Unrealized gain on derivatives designated and qualified as cash flow hedges | $ | 12,264 | | $ | (3,009) | | $ | 9,255 | |
| Reclassification of unrealized loss (gain) on expired derivatives designated and qualified as cash flow hedges | 4,058 | | (4,459) | | (401) | |
| Unrecognized net pension and other postretirement benefit plans gain | 11,901 | | (2,794) | | 9,107 | |
| Reclassification of net pension and other postretirement benefit plans loss | 13,765 | | (3,410) | | 10,355 | |
| Foreign currency translation adjustments | 61,038 | | (510) | | 60,528 | |
| Other comprehensive income | $ | 103,026 | | $ | (14,182) | | $ | 88,844 | |
The amount of income tax allocated to each component of other comprehensive loss for the year ended June 30, 2015:2020:
| | | | | | | | | | | |
| (in thousands) | Pre-tax | Tax impact | Net of tax |
| Unrealized loss on derivatives designated and qualified as cash flow hedges | $ | (771) | | $ | 189 | | $ | (582) | |
| Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges | 899 | | (220) | | 679 | |
| Unrecognized net pension and other postretirement benefit plans loss | (23,999) | | 5,700 | | (18,299) | |
| Reclassification of net pension and other postretirement benefit plans loss | 10,478 | | (2,543) | | 7,935 | |
| Foreign currency translation adjustments | (35,936) | | 45 | | (35,891) | |
| | | |
| Other comprehensive loss | $ | (49,329) | | $ | 3,171 | | $ | (46,158) | |
|
| | | | | | | | | |
| (in thousands) | Pre-tax | Tax impact | Net of tax |
| Unrealized gain on derivatives designated and qualified as cash flow hedges | $ | 10,834 |
| $ | (4,182 | ) | $ | 6,652 |
|
| Reclassification of unrealized gain on expired derivatives designated and qualified as cash flow hedges | (4,679 | ) | 1,806 |
| (2,873 | ) |
| Unrecognized net pension and other postretirement benefit loss | (76,029 | ) | 28,047 |
| (47,982 | ) |
| Reclassification of net pension and other postretirement benefit loss | 3,821 |
| (890 | ) | 2,931 |
|
| Foreign currency translation adjustments | (147,172 | ) | 7,707 |
| (139,465 | ) |
| Other comprehensive loss | $ | (213,225 | ) | $ | 32,488 |
| $ | (180,737 | ) |
NOTE 1516 — RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES
We are implementing restructuring actionsFY20 Restructuring Actions
In the June quarter of fiscal 2019, we implemented, and in fiscal 2020 substantially completed, the FY20 Restructuring Actions associated with our simplification/modernization initiative to streamline the Company's cost structure. These initiatives are expected toreduce structural costs, improve the alignment of our cost structure with the current operating environment through headcount reductions, as well as rationalizationoperational efficiency and consolidation of certain manufacturing facilities. These restructuring actions are expected to be completed by December 31, 2018 and are anticipated to be mostly cash expenditures.
The total pre-tax chargesposition us 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.long-term profitable growth. Total restructuring and related charges since inception of $147.7$54.8 million have beenwere recorded for these programsthis program through June 30, 2017: $80.52021, consisting of: $46.6 million in Industrial, $12.9Metal Cutting and $8.3 million in Widia, $47.0Infrastructure. The FY20 Restructuring Actions are considered complete.
FY21 Restructuring Actions
In the September quarter of fiscal 2020, we announced the initiation of restructuring actions in Germany associated with our simplification/modernization initiative to reduce structural costs. Subsequently, we agreed with local employee representatives to downsize our Essen, Germany operations instead of the previously proposed closure. During the fourth quarter of fiscal 2020, we also announced the acceleration of our other structural cost reduction plans.
Total restructuring and related charges since inception of $86.4 million, compared to a target of approximately $85 million, were recorded for this program through June 30, 2022, consisting of: $78.1 million in InfrastructureMetal Cutting and $7.3$8.3 million in Corporate.Infrastructure. The FY21 Restructuring Actions are considered substantially complete.
Annual Restructuring Charges
During 2017,2022, we recognized totalrecorded restructuring and related charges of $76.2 million.$4.2 million, which consisted of $3.6 million in Metal Cutting and $0.6 million in Infrastructure. Of this amount, a net benefit from the reversal of restructuring charges totaled $1.2 million and restructuring-related charges of $5.5 million were included in cost of goods sold.
During 2021, we recorded restructuring and related charges of $40.4 million, which consisted of $35.6 million in Metal Cutting and $4.8 million in Infrastructure. Of this amount, restructuring charges totaled $65.6$29.6 million, of which $0.6$0.5 million were chargeswas related to inventory and werewas recorded in cost of goods sold. Restructuring-related charges of $7.1$10.8 million were recordedincluded in cost of goods sold and $3.5 million in operating expense during 2017.sold.
During 2016,2020, we recognized totalrecorded restructuring and related charges of $53.5 million.$83.3 million which consisted of $73.7 million in Metal Cutting and $8.8 million in Infrastructure. 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.
During 2015, we recognized total restructuring and related charges of $58.1 million. Of this amount, restructuring charges totaled $42.1$69.2 million, of which $1.5$0.9 million were chargeswas related to inventory and werewas recorded in cost of goods sold. Restructuring-related charges of $8.2$14.1 million were recordedincluded in cost of goods sold and $7.8 million in operating expense during 2015.sold.
As of June 30, 2017, property, plant, and equipment of $7.0 million for certain closed manufacturing locations that are part of our restructuring programs met held for sale criteria. We expect to sell these assets within one year from the balance sheet date. These assets are recorded at the lower of carrying amount or fair value less cost to sell. We have also ceased depreciation for these assets.
As of June 30, 2017, $27.3 million and $2.52022, $6.0 million of the restructuring accrual is recorded in other current liabilities and $1.9 million is recorded in other liabilities respectively, in our condensed consolidated balance sheet. The restructuring accrual of $15.7 million and $20.8 million asAs of June 30, 2016 and 2015, respectively,2021, $19.9 million of the restructuring accrual is recorded in other current liabilities.liabilities and $9.9 million is recorded in other liabilities in our consolidated balance sheet. The amount attributable to each segment isamounts are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | June 30, 2021 | | Expense, net | | Asset Write-Down | | | | Translation | | Cash Expenditures | | June 30, 2022 |
| Severance | $ | 29,723 | | | $ | (4,628) | | | $ | — | | | | | $ | (1,772) | | | $ | (15,404) | | | $ | 7,919 | |
| Facilities | — | | | 3,385 | | | (3,385) | | | | | — | | | — | | | — | |
| Other | — | | | — | | | — | | | | | — | | | — | | | — | |
| Total | 29,723 | | | (1,243) | | | (3,385) | | | | | (1,772) | | | (15,404) | | | 7,919 | |
| | | | | | | | | | | | | |
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| (in thousands) | June 30, 2016 | | Expense | | Asset Write-Down | | Translation | | Cash Expenditures | | June 30, 2017 |
| Industrial | | | | | | | | | | | |
| Severance | $ | 8,180 |
| | $ | 39,214 |
| | $ | — |
| | $ | 229 |
| | $ | (29,984 | ) | | $ | 17,639 |
|
| Facilities | — |
| | 237 |
| | (237 | ) | | — |
| | — |
| | — |
|
| Other | 809 |
| | 162 |
| | — |
| | (8 | ) | | (869 | ) | | 94 |
|
| Total Industrial | 8,989 |
| | 39,613 |
| | (237 | ) | | 221 |
| | (30,853 | ) | | 17,733 |
|
| | | | | | | | | | | | |
| Widia | | | | | | | | | | | |
| Severance | 909 |
| | 6,325 |
| | — |
| | 37 |
| | (4,837 | ) | | 2,434 |
|
| Facilities | — |
| | 10 |
| | (10 | ) | | — |
| | — |
| | — |
|
| Other | 90 |
| | 26 |
| | — |
| | (1 | ) | | (115 | ) | | — |
|
| Total Widia | 999 |
| | 6,361 |
| | (10 | ) | | 36 |
| | (4,952 | ) | | 2,434 |
|
| | | | | | | | | | | | |
| Infrastructure | | | | | | | | | | | |
| Severance | 5,301 |
| | 17,710 |
| | — |
| | 103 |
| | (13,541 | ) | | 9,573 |
|
| Facilities | 33 |
| | 1,849 |
| | (1,849 | ) | | — |
| | (12 | ) | | 21 |
|
| Other | 381 |
| | 73 |
| | — |
| | (4 | ) | | (405 | ) | | 45 |
|
| Total Infrastructure | 5,715 |
| | 19,632 |
| | (1,849 | ) | | 99 |
| | (13,958 | ) | | 9,639 |
|
| Total | $ | 15,703 |
| | $ | 65,606 |
| | $ | (2,096 | ) | | $ | 356 |
| | $ | (49,763 | ) | | $ | 29,806 |
|
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| (in thousands) | June 30, 2020 | | Expense | | Asset Write-Down | | | | Translation | | Cash Expenditures | | June 30, 2021 |
| Severance | $ | 47,303 | | | $ | 23,917 | | | $ | — | | | | | $ | 2,445 | | | $ | (43,942) | | | $ | 29,723 | |
| Facilities | — | | | 5,664 | | | (5,664) | | | | | — | | | — | | | — | |
| Other | 63 | | | — | | | — | | | | | 2 | | | (65) | | | — | |
| Total | 47,366 | | | 29,581 | | | (5,664) | | | | | 2,447 | | | (44,007) | | | 29,723 | |
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| (in thousands) | June 30, 2015 | | Expense | | Asset Write-Down | | Other (4) | | Translation | | Cash Expenditures | | June 30, 2016 |
| Industrial | | | | | | | | | | | | | |
| Severance | $ | 12,110 |
| | $ | 15,590 |
| | $ | — |
| | $ | (312 | ) | | $ | (126 | ) | | $ | (19,082 | ) | | $ | 8,180 |
|
| Facilities | — |
| | 297 |
| | (702 | ) | | — |
| | — |
| | 405 |
| | — |
|
| Other | 25 |
| | 267 |
| | — |
| | — |
| | (4 | ) | | 521 |
| | 809 |
|
| Total Industrial | 12,135 |
| | 16,154 |
| | (702 | ) | | (312 | ) | | (130 | ) | | (18,156 | ) | | 8,989 |
|
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| Widia | | | | | | | | | | | | | |
| Severance | 1,346 |
| | 1,732 |
| | — |
| | (35 | ) | | (14 | ) | | (2,120 | ) | | 909 |
|
| Facilities | — |
| | 33 |
| | (78 | ) | | — |
| | — |
| | 45 |
| | — |
|
| Other | 3 |
| | 30 |
| | — |
| | — |
| | (1 | ) | | 58 |
| | 90 |
|
| Total Widia | 1,349 |
| | 1,795 |
| | (78 | ) | | (35 | ) | | (15 | ) | | (2,017 | ) | | 999 |
|
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| Infrastructure | | | | | | | | | | | | | |
| Severance | 7,173 |
| | 7,424 |
| | — |
| | (201 | ) | | (60 | ) | | (9,035 | ) | | 5,301 |
|
| Facilities | 131 |
| | 4,515 |
| | (3,914 | ) | | — |
| | — |
| | (699 | ) | | 33 |
|
| Other | — |
| | 127 |
| | — |
| | — |
| | (2 | ) | | 256 |
| | 381 |
|
| Total Infrastructure | 7,304 |
| | 12,066 |
| | (3,914 | ) | | (201 | ) | | (62 | ) | | (9,478 | ) | | 5,715 |
|
| Total | $ | 20,788 |
| | $ | 30,015 |
| | $ | (4,694 | ) | | $ | (548 | ) | | $ | (207 | ) | | $ | (29,651 | ) | | $ | 15,703 |
|
(4) Special termination benefit charge and settlement charge for one of our U.S.-based benefit pension plans resulting from executive retirement - see Note 13.Asset impairment Charges
See discussion on goodwill and other intangible asset impairment charges in Note 2.
During 2016, we identified specific machinery and equipment that was no longer being utilized in the manufacturing organization of which we disposed 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 in restructuring and asset impairment charges in our consolidated statement of income.
NOTE 1617 — FINANCIAL INSTRUMENTS
The methods used to estimate the fair value of our financial instruments are as follows:
Cash and Cash Equivalents, Current MaturitiesRevolving and Other Lines of Long-Term DebtCredit and Notes Payable to Banks The carrying amounts approximate their fair value because of the short maturity of the instruments.
Long-Term Debt, Including Current Maturities Fixed rate debt had a fair market value of $704.0$536.1 million and $644.2 million at June 30, 20172022 and 2016.2021, respectively. The Level 2 fair value is determined based on the quoted market price of thisprices for similar debt instruments as of June 30, 2022 and were classified in Level 22021, respectively.
Interest Rate Swap Contracts During 2021, upon issuance of the fair value hierarchy.
Foreign Exchange ContractsSenior Unsecured Notes due 2031 (see Note 11 for more information) we settled the forward starting interest rate swap contracts used to hedge a portion of the interest rate risk related to the refinancing. The notional amount of outstanding foreign exchange contracts, translated at current exchange rates, was $75.3 million and $53.3 million at June 30, 2017 and 2016, 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. The carrying value equaled the fair value for theseforward starting interest rate swap contracts at June 30, 2017 and 2016. Fair value2020 was estimated based on quoted market prices of comparable instruments.$200.0 million. There were no interest rate swap contracts outstanding at June 30, 2022 or 2021.
Concentrations of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist primarily of temporary cash investments and trade receivables. By policy, we make temporary cash investments with high credit quality financial institutions and limit the amount of exposure to any one financial institution. With respect to trade receivables, concentrations of credit risk are significantly reduced because we serve numerous customers in many industries and geographic areas.
We are exposed to counterparty credit risk for nonperformance of derivatives and, in the unlikely 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. As of June 30, 20172022 and 2016,2021, we had no significant concentrations of credit risk.
NOTE 1718 — STOCK-BASED COMPENSATION
Stock Options
There were no grants made during 2017. The assumptions used in our Black-Scholes valuation related to grants made during 2016 and 2015 were as follows:
|
| | | | | | |
| | | 2016 | | 2015 |
| Risk-free interest rate | | 1.4 | % | | 1.5 | % |
Expected life (years) (5) | | 4.5 |
| | 4.5 |
|
Expected volatility (6) | | 31.7 | % | | 32.5 | % |
| Expected dividend yield | | 2.1 | % | | 1.7 | % |
(5) Expected life is derived from historical experience.(6) Expected volatility is based on the implied historical volatility of our stock.
Changes in our stock options for 20172022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted
Average
Exercise Price | | Weighted
Average
Remaining
Life (years) | | Aggregate
Intrinsic value
(in thousands) |
| Options outstanding, June 30, 2021 | 315,012 | | | $ | 37.83 | | | | | |
| | | | | | | |
| Exercised | (6,916) | | | 31.69 | | | | | |
| Lapsed and forfeited | (36,253) | | | 41.84 | | | | | |
| Options outstanding, June 30, 2022 | 271,843 | | | $ | 37.45 | | | 1.9 | | $ | 33 | |
| Options vested and expected to vest, June 30, 2022 | 271,843 | | | $ | 37.45 | | | 1.9 | | $ | 33 | |
| Options exercisable, June 30, 2022 | 271,843 | | | $ | 37.45 | | | 1.9 | | $ | 33 | |
|
| | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Life (years) | | Aggregate Intrinsic value (in thousands) |
| Options outstanding, June 30, 2016 | 2,547,809 |
| | $ | 33.72 |
| | | | |
| Granted | — |
| | — |
| | | | |
| Exercised | (637,769 | ) | | 33.44 |
| | | | |
| Lapsed and forfeited | (183,249 | ) | | 31.29 |
| | | | |
| Options outstanding, June 30, 2017 | 1,726,791 |
| | $ | 34.08 |
| | 4.7 | | $ | 9,296 |
|
| Options vested and expected to vest, June 30, 2017 | 1,713,555 |
| | $ | 34.12 |
| | 4.6 | | $ | 9,173 |
|
| Options exercisable, June 30, 2017 | 1,260,230 |
| | $ | 35.76 |
| | 3.4 | | $ | 5,231 |
|
During 2017, 2016 and 2015, compensation expense related to stock options was $1.5 million, $3.3 million and $3.2 million, respectively. As of June 30, 2017, the total2022 and June 30, 2021, there was no unrecognized compensation cost related to options outstanding was $0.9 millionoutstanding. All options were fully vested as of June 30, 2022 and is expected to be recognized over a weighted average period of 1.2 years.June 30, 2021.
Weighted average fair value of options granted during 2016 and 2015 was $6.45 and $10.16 per option, respectively. Fair value of options vested during 2017, 2016 and 2015 was $3.3 million, $2.3 million and $7.6 million, respectively.
Tax benefits relating to excess stock-based compensation deductions are presented in the statementconsolidated statements of cash flowflows as financingoperating cash inflows. No tax benefits were realized resulting from stock-based compensation deductions for 2017 due to the valuation allowance on U.S. deferred tax assets. Tax benefits resulting from stock-based compensation deductions were less than the amounts reported for financial reporting purposes by $1.9$0.2 million in 2016 and exceeded2022, greater than the amounts reported for financial reporting purposes by $1.3$0.7 million in 2015.2021, and an immaterial amount in 2020.
The amount of cash received from the exercise of capital stock options during 2017, 20162022, 2021 and 20152020 was $21.3$0.2 million, $1.0$6.6 million and $11.7$0.9 million,, respectively. NoThe related tax benefit was realizedzero in 2017 due to the valuation allowance on U.S. deferred tax assets,2022, $0.6 million in 2021, and the related tax benefit was immaterial in 2016 and $2.0 million in 2015.2020. The total intrinsic value of options exercised in 20172022, 2021 and 20152020 was $3.1$0.1 million, $2.4 million and $5.3$0.3 million,, respectively, and was immaterial in 2016.
Under the provisions of the A/R 2010 Plan and the 2016 Plan, participants may deliver stock, owned by the holder for at least six months, in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. The fair market value of shares delivered during 2017, 2016 and 2015 were immaterial.
respectively.
Restricted Stock Units – Time Vesting and Performance Vesting
Performance vesting restricted stock units are earned pro rata each year if certainbased on both annual and three-year performance goalstargets. The performance and time vesting restricted stock units are met over a three-year period, and are also subject to a service condition that requires the individual to be employed by the Company at the payment date after the three-year performancea 3-year period, with the exception of retirement eligible grantees, who upon retirement are entitled to receive payment for any units that have been earned, including a prorated portion in the partially completed fiscal year in which the retirement occurs. Time vesting stock units are valued at the market value of the stock on the grant date. Performance vesting stock units with a market condition are valued using a Monte Carlo model.
Changes in our time vesting and performance vesting restricted stock units for 20172022 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, 2021 | 500,477 | | | $ | 32.53 | | | 1,332,740 | | | $ | 31.72 | |
| Granted | 108,234 | | | 36.70 | | | 532,638 | | | 36.51 | |
| Vested | (38,620) | | | 39.69 | | | (534,462) | | | 32.14 | |
| Performance metric adjustments, net | (150,711) | | | 31.18 | | | — | | | — | |
| | | | | | | |
| Forfeited | (68,425) | | | 33.43 | | | (117,020) | | | 32.79 | |
| Unvested, June 30, 2022 | 350,955 | | | $ | 33.44 | | | 1,213,896 | | | $ | 33.53 | |
|
| | | | | | | | | | | | | |
| | Performance Vesting Stock Units | | Performance Vesting Weighted Average Fair Value | | Time Vesting Stock Units | | Time Vesting Weighted Average Fair Value |
| Unvested, June 30, 2016 | 115,467 |
| | $ | 36.96 |
| | 1,014,744 |
| | $ | 31.97 |
|
| Granted | 235,241 |
| | 26.35 |
| | 610,998 |
| | 25.46 |
|
| Vested | (17,124 | ) | | 45.24 |
| | (393,518 | ) | | 35.37 |
|
| Performance metric not achieved | (35,980 | ) | | 26.35 |
| | — |
| | — |
|
| Forfeited | (17,354 | ) | | 35.31 |
| | (78,780 | ) | | 27.42 |
|
| Unvested, June 30, 2017 | 280,250 |
| | $ | 27.62 |
| | 1,153,444 |
| | $ | 27.66 |
|
During 2017, 20162022, 2021 and 2015,2020, compensation expense related to time vesting and performance vesting restricted stock units was $19.3$20.1 million, $14.6$23.9 million and $13.5$15.3 million,, respectively. Certain performance metrics were not met, resulting in an adjustment of 150,711 performance vesting stock units during 2022. As of June 30, 2017,2022, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $13.8$23.3 million and is expected to be recognized over a weighted average period of 1.81.7 years.
NOTE 18—19— 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 liabilitiessites 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.current or former operations.
Other Environmental MattersWe establish and maintain reservesaccruals for othercertain potential environmental issues.liabilities. At June 30, 20172022 and 2016,2021, the balancebalances of these reserves was $12.4 million andliabilities were $12.5 million, of which $7.9 million was current, and $14.7 million, of which $2.6 million was current, respectively. These reservesaccruals represent anticipated costs associated with the remediation of these issues.issues and are generally not discounted.
The reservesaccruals we have established for environmental liabilities represent our best current estimate of the probable and reasonably estimable 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,United States Environmental Protection Agency (USEPA), other governmental agencies and by the PRPPotentially Responsible Party (PRP) groups in which we are participating. Although the reservesaccruals currently appear to be sufficient to cover these environmental liabilities,obligations, 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 reservedrecorded and unreservedunrecorded liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.
We maintain a Corporate Environmental Health and Safety (EHS) Department to monitor compliance with environmental regulations and to oversee remediation activities. In addition,1980, under which we have designated EHS analysts who are responsible for each ofbeen identified by the USEPA or other third party as a PRP with respect to environmental remedial costs at certain sites. We have evaluated our global manufacturing facilities. Our financial management team periodically meetsclaims and potential liability associated with membersthese sites based upon the best information currently available to us. We believe our environmental accruals will be adequate to cover our portion of the Corporate EHS Departmentenvironmental remedial costs at those sites where we have been designated a PRP, to the extent these expenses are probable 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.reasonably estimable.
NOTE 1920 — COMMITMENTS AND CONTINGENCIES
Legal Matters Various lawsuits arising during the normal course of business are pending against us. In our opinion, the ultimate liability, if any, resulting from these matters will have no significant effect on our consolidated financial positionsposition or results of operations.
Lease Commitments We lease a wide variety of facilities and equipment under operating leases, primarily for warehouses, production and office facilities and equipment. Lease expense under these rentals amountedRefer to $26.3 million, $28.6 million and $29.4 million in 2017, 2016 and 2015, respectively. Future minimum lease paymentsNote 9 for non-cancelable operating leases are $19.3 million, $14.6 million, $11.8 million, $8.5 million and $7.2 million for the years 2018 through 2022 and $15.3 million thereafter.more information.
Purchase Commitments We have purchase commitments for materials, supplies and machinery and equipment as part of the ordinary conduct of business. Some of these commitments extend beyond one year and are based on minimum purchase requirements. We believe these commitments are not at prices in excess of current market.
Other Contractual Obligations We do not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect our liquidity.
Related Party Transactions Sales to affiliated companies were immaterial in 2017, 20162022, 2021 and 2015.2020. We do not have any other related party transactions that affect our operations, results of operations, cash flow or financial condition.
NOTE 2021 — SEGMENT DATA
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.
The Company now manages and reports its business in the following three2 segments: Industrial, WidiaMetal Cutting and Infrastructure. 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. We do not allocate certain corporate expenses related to executive retirement plans, the Company’s Board of Directors and strategic initiatives, as well as certain other costs and report them in Corporate. None of ourOur reportable operating segments do not represent the aggregation of two or more operating segments.
Sales to a single customer did not aggregate 4to 5 percent or more of total sales in 2017, 20162022, 2021 and 2015. Export sales from U.S. operations2020.
METAL CUTTING The Metal Cutting segment develops and manufactures high performance tooling and metal cutting products and services and offers an assortment of standard and custom metal cutting solutions to unaffiliated customers were $58.6 million, $65.3 million and $71.0 million in 2017, 2016 and 2015, respectively.
INDUSTRIAL The Industrial segment generally serves customers that operate in industrialdiverse end markets, such as transportation,including aerospace, general engineering, aerospaceenergy 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 ourtransportation. The products include milling, hole making, turning, threading and servicestoolmaking systems used in the manufacture of airframes, aero engines, airframes,trucks and automobiles, trucks, ships and other various types of industrial equipment. The technologyWe leverage advanced manufacturing capabilities in combination with varying levels of customization to solve our customers’ toughest challenges and customization requirements we provide vary by customer, application and industry. Industrial goes to marketdeliver improved productivity for a wide range of applications. Metal Cutting markets its products under the Kennametal® brandKennametal®, WIDIA®, WIDIA Hanita® and WIDIA GTD® brands 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 The WidiaINFRASTRUCTURE Our Infrastructure segment offers a focused assortment of standard custom metal cutting solutions toproduces engineered tungsten carbide and ceramic components, earth-cutting tools, and advanced metallurgical powders, primarily for the energy, earthworks and general engineering aerospace, energyend markets. These wear-resistant products include compacts, nozzles, frac seats 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 The Infrastructure segment generally serves customers that operatecustom components used in the energy and earthworks market sectors that support primary industries such as oil and gas power generation and chemicals;petrochemical industries; rod blanks and abrasive water jet nozzles for general industries; earth cutting tools and systems used in underground surfacemining, trenching and hard-rock mining; highway constructionfoundation drilling and road maintenance;milling; tungsten carbide powders for the oil and gas, aerospace and process industriesindustries; and ceramics used by the packaging industry for metallization of films and papers. We combine deep metallurgical and engineering expertise with advanced manufacturing capabilities, such as food and feed. Our success is determined by3D printing, to deliver solutions that drive improved productivity for 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.customers. Infrastructure markets its products primarily under the Kennametal®Kennametal® brand and sells through a direct sales force as well as through distributors.
Segment data is summarized as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Sales: | | | | | |
| Metal Cutting | $ | 1,227,273 | | | $ | 1,150,746 | | | $ | 1,178,053 | |
| Infrastructure | 785,183 | | | 690,695 | | | 707,252 | |
| Total sales | $ | 2,012,456 | | | $ | 1,841,441 | | | $ | 1,885,305 | |
| | | | | |
| Operating income: | | | | | |
| Metal Cutting | $ | 121,386 | | | $ | 45,855 | | | $ | 985 | |
| Infrastructure | 98,871 | | | 59,461 | | | 23,113 | |
| Corporate | (2,117) | | | (3,148) | | | (1,846) | |
| Total operating income | $ | 218,140 | | | $ | 102,168 | | | $ | 22,252 | |
| | | | | |
| Interest expense | $ | 25,914 | | | $ | 46,375 | | | $ | 35,154 | |
| Other income, net | (14,507) | | | (8,867) | | | (14,862) | |
| Income before income taxes | $ | 206,733 | | | $ | 64,660 | | | $ | 1,960 | |
| | | | | |
| Depreciation and amortization: | | | | | |
| Metal Cutting | $ | 87,986 | | | $ | 81,796 | | | $ | 74,664 | |
| Infrastructure | 43,691 | | | 44,661 | | | 45,176 | |
| Corporate | 1 | | | 31 | | | 20 | |
| Total depreciation and amortization | $ | 131,678 | | | $ | 126,488 | | | $ | 119,860 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Segment assets(4): | | | | | |
| Metal Cutting | $ | 1,469,835 | | | $ | 1,532,177 | | | $ | 1,452,131 | |
| Infrastructure | 768,226 | | | 698,766 | | | 748,424 | |
| Corporate | 335,463 | | | 434,818 | | | 837,036 | |
| Total assets | $ | 2,573,524 | | | $ | 2,665,761 | | | $ | 3,037,591 | |
| | | | | |
| Capital expenditures: | | | | | |
| Metal Cutting | $ | 64,055 | | | $ | 103,812 | | | $ | 195,167 | |
| Infrastructure | 32,869 | | | 23,490 | | | 48,984 | |
| Total capital expenditures | $ | 96,924 | | | $ | 127,302 | | | $ | 244,151 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
(4) Metal Cutting and Infrastructure segment assets are principally accounts receivable, less allowance for doubtful accounts; inventories; property, plant and equipment, net; goodwill; other intangible assets, net of accumulated amortization; and operating lease ROU assets. Corporate assets are principally cash and cash equivalents, other current assets, long-term prepaid pension benefit, deferred income taxes and other assets.
|
| | | | | | | | | | | |
| (in thousands) | 2017 | | 2016 | | 2015 |
| Sales: | | | | | |
Industrial (7) | $ | 1,126,309 |
| | $ | 1,098,439 |
| | $ | 1,269,786 |
|
Widia (7) | 177,662 |
| | 170,723 |
| | 191,958 |
|
| Infrastructure | 754,397 |
| | 829,274 |
| | 1,185,451 |
|
| Total sales | $ | 2,058,368 |
| | $ | 2,098,436 |
| | $ | 2,647,195 |
|
| | | | | | |
| Operating income (loss): | | | | | |
Industrial (7) | $ | 82,842 |
| | $ | 90,324 |
| | $ | 165,434 |
|
Widia (7) | (9,606 | ) | | (9,081 | ) | | (4,540 | ) |
| Infrastructure | 40,011 |
| | (246,306 | ) | | (509,381 | ) |
| Corporate | (303 | ) | | (9,880 | ) | | (9,336 | ) |
| Total 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 | ) |
| | | | | | |
| Depreciation and amortization: | | | | | |
Industrial (7) | $ | 54,269 |
| | $ | 52,523 |
| | $ | 54,237 |
|
Widia (7) | 10,728 |
| | 10,419 |
| | 9,951 |
|
| Infrastructure | 42,596 |
| | 54,459 |
| | 67,413 |
|
| Corporate | 63 |
| | 65 |
| | 63 |
|
| Total depreciation and amortization | $ | 107,656 |
| | $ | 117,466 |
| | $ | 131,664 |
|
| | | | | | |
| Total assets: | | | | | |
Industrial (7) | $ | 1,103,686 |
| | $ | 1,019,887 |
| | $ | 1,059,278 |
|
Widia (7) | 191,626 |
| | 195,339 |
| | 199,992 |
|
| Infrastructure | 813,747 |
| | 849,447 |
| | 1,279,608 |
|
Corporate (8) | 306,437 |
| | 298,110 |
| | 304,777 |
|
| Total assets | $ | 2,415,496 |
| | $ | 2,362,783 |
| | $ | 2,843,655 |
|
| | | | | | |
| Capital expenditures: | | | | | |
Industrial (7) | $ | 70,281 |
| | $ | 66,467 |
| | $ | 55,301 |
|
Widia (7) | 17,853 |
| | 14,093 |
| | 9,196 |
|
| Infrastructure | 29,884 |
| | 30,137 |
| | 36,442 |
|
| Total capital expenditures | $ | 118,018 |
| | $ | 110,697 |
| | $ | 100,939 |
|
(7) Amounts for 2016 and 2015 and as of June 30, 2016 and June 30, 2015 have been restated to reflect the change in reportable operating segments.
(8) Amounts as of June 30, 2016 and June 30, 2015 have been restated to reflect the adopted of FASB guidance on the presentation of debt issuance costs.
Geographic information for sales, based on country where the sale originated, and long-lived assets is as follows:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2022 | | 2021 | | 2020 |
| Sales: | | | | | |
| United States | $ | 797,768 | | | $ | 692,106 | | | $ | 778,054 | |
| Germany | 262,764 | | | 260,792 | | | 248,796 | |
| China | 234,997 | | | 242,815 | | | 214,364 | |
| Canada | 94,956 | | | 79,891 | | | 90,247 | |
| India | 108,695 | | | 94,966 | | | 81,366 | |
| Italy | 67,930 | | | 59,955 | | | 52,699 | |
| France | 47,218 | | | 45,356 | | | 45,817 | |
| United Kingdom | 30,686 | | | 28,464 | | | 33,305 | |
Other(5) | 367,442 | | | 337,096 | | | 340,657 | |
| Total sales | $ | 2,012,456 | | | $ | 1,841,441 | | | $ | 1,885,305 | |
| | | | | |
| Total long-lived assets: | | | | | |
| United States | $ | 585,003 | | | $ | 611,724 | | | $ | 607,222 | |
| Germany | 195,325 | | | 218,250 | | | 210,674 | |
| China | 92,315 | | | 97,404 | | | 92,658 | |
| India | 45,146 | | | 19,144 | | | 20,508 | |
| Israel | 26,864 | | | 44,504 | | | 44,673 | |
| Canada | 18,478 | | | 21,790 | | | 22,249 | |
Other (5) | 38,910 | | | 42,319 | | | 40,287 | |
Total long-lived assets(6) | $ | 1,002,041 | | | $ | 1,055,135 | | | $ | 1,038,271 | |
|
| | | | | | | | | | | |
| (in thousands) | 2017 | | 2016 | | 2015 |
| Sales: | | | | | |
| United States | $ | 897,326 |
| | $ | 897,399 |
| | $ | 1,176,622 |
|
| Germany | 282,347 |
| | 334,366 |
| | 442,009 |
|
| China | 220,561 |
| | 210,124 |
| | 246,953 |
|
| India | 84,769 |
| | 77,934 |
| | 85,193 |
|
| Italy | 59,967 |
| | 69,821 |
| | 85,530 |
|
| Canada | 56,628 |
| | 55,812 |
| | 73,912 |
|
| France | 56,231 |
| | 56,264 |
| | 59,772 |
|
| United Kingdom | 39,731 |
| | 50,723 |
| | 70,600 |
|
| Other | 360,808 |
| | 345,993 |
| | 406,604 |
|
| Total sales | $ | 2,058,368 |
| | $ | 2,098,436 |
| | $ | 2,647,195 |
|
| | | | | | |
| Total assets: | | | | | |
United States (8) | $ | 1,075,444 |
| | $ | 1,069,320 |
| | $ | 1,332,720 |
|
| Germany | 347,226 |
| | 327,679 |
| | 394,491 |
|
| China | 239,908 |
| | 233,200 |
| | 274,774 |
|
| Switzerland | 197,783 |
| | 189,498 |
| | 194,139 |
|
| India | 98,602 |
| | 91,544 |
| | 97,463 |
|
| Canada | 58,337 |
| | 57,174 |
| | 60,492 |
|
| Italy | 48,990 |
| | 50,352 |
| | 94,978 |
|
| United Kingdom | 48,729 |
| | 48,507 |
| | 71,342 |
|
| Other | 300,477 |
| | 295,509 |
| | 323,256 |
|
| Total assets: | $ | 2,415,496 |
| | $ | 2,362,783 |
| | $ | 2,843,655 |
|
(8) Amounts(6) Total long-lived assets as of June 30, 20162022, 2021 and June 30, 2015 have been restated to reflect the adopted of FASB guidance on the presentation of debt issuance costs.2020 include property, plant, and equipment, net.
The following table presents Kennametal's revenue disaggregated by segment by geography:
Approximate sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Metal Cutting | | Infrastructure | | Total Kennametal |
| 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 |
| Americas | 41 | % | 38 | % | 42 | % | | 59 | % | 57 | % | 62 | % | | 48 | % | 45 | % | 49 | % |
| EMEA | 37 | | 39 | | 37 | | | 18 | | 19 | | 18 | | | 30 | | 31 | | 30 | |
| Asia Pacific | 22 | | 23 | | 21 | | | 23 | | 24 | | 20 | | | 22 | | 24 | | 21 | |
The following table presents Kennametal's revenue disaggregated by segment by end markets as a percentage of consolidated sales are as follows:market:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Metal Cutting | | Infrastructure | | Total Kennametal |
| 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 |
| General Engineering | 56 | % | 54 | % | 53 | % | | 34 | % | 35 | % | 34 | % | | 47 | % | 47 | % | 46 | % |
| Transportation | 27 | | 30 | | 27 | | | — | | — | | — | | | 17 | | 19 | | 17 | |
| Aerospace | 9 | | 8 | | 12 | | | — | | — | | — | | | 6 | | 5 | | 7 | |
| Energy | 8 | | 8 | | 8 | | | 29 | | 26 | | 28 | | | 16 | | 15 | | 16 | |
| Earthworks | — | | — | | — | | | 37 | | 39 | | 38 | | | 14 | | 14 | | 14 | |
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| End markets: | | | | | |
| General engineering | 39 | % | | 38 | % | | 36 | % |
| Transportation | 20 |
| | 21 |
| | 21 |
|
| Energy | 18 |
| | 17 |
| | 19 |
|
| Earthworks | 15 |
| | 16 |
| | 17 |
|
| Aerospace and defense | 8 |
| | 8 |
| | 7 |
|
| Total | 100 | % | | 100 | % | | 100 | % |
NOTE 21 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| For the quarter ended (in thousands, except per share data) | September 30 | | December 31 | | March 31 | | June 30 |
| 2017 | | | | | | | |
| Sales | $ | 477,140 |
| | $ | 487,573 |
| | $ | 528,630 |
| | $ | 565,025 |
|
| Gross profit | 143,530 |
| | 147,623 |
| | 186,265 |
| | 180,289 |
|
| Net (loss) income attributable to Kennametal | (21,656 | ) | | 7,262 |
| | 38,890 |
| | 24,643 |
|
Basic (loss) earnings per share attributable to Kennametal (9) | | | | | | | |
| Net income | (0.27 | ) | | 0.09 |
| | 0.48 |
| | 0.31 |
|
Diluted (loss) earnings per share attributable to Kennametal (9) | | | | | | | |
| Net income | (0.27 | ) | | 0.09 |
| | 0.48 |
| | 0.30 |
|
| 2016 | | | | | | | |
| Sales | $ | 555,354 |
| | $ | 524,021 |
| | $ | 497,837 |
| | $ | 521,224 |
|
| Gross profit | 151,224 |
| | 140,806 |
| | 157,353 |
| | 166,684 |
|
| Net (loss) income attributable to Kennametal | (6,226 | ) | | (169,227 | ) | | 16,000 |
| | (66,515 | ) |
Basic (loss) earnings per share attributable to Kennametal (9) | | | | | | | |
| Net income | (0.08 | ) | | (2.12 | ) | | 0.20 |
| | (0.83 | ) |
Diluted (loss) earnings per share attributable to Kennametal (9) | | | | | | | |
| Net income | (0.08 | ) | | (2.12 | ) | | 0.20 |
| | (0.83 | ) |
(9) Earnings per share amounts attributable to Kennametal for each quarter are computed using the weighted average number of shares outstanding during the quarter. Earnings per share amounts attributable to Kennametal for the full year are computed using the weighted average number of shares outstanding during the year. Thus, the sum of the four quarters’ earnings per share attributable to Kennametal does not always equal the full-year earnings per share attributable to Kennametal.
NOTE 22 — SUBSEQUENT EVENTS
Effective August 1, 2017, Christopher Rossi was appointed to serve as President and Chief Executive Officer of the Company, and former President and Chief Executive Officer, Ronald M. De Feo, transitioned to the role of Executive Chairman of the Board of Directors.
ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A — CONTROLS AND PROCEDURES
| |
(a) | Evaluation of Disclosure Controls and Procedures |
(a)Evaluation of Disclosure Controls and Procedures
The Company’s management evaluated, with the participation of the Company’s Executive Chairman, Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2017.2022. The Company’s disclosure controls were designed to provide a reasonable assurance that information required to be disclosed in reports that we file or submit under the Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls’ stated goals. Based on that evaluation, the Company’s Executive Chairman, Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance at June 30, 2017 to ensure2022 that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) accumulated and communicated to management, including the Company’s Executive Chairman, Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
| |
(b) | Management’s Report on Internal Control over Financial Reporting |
(b)Management’s Report on Internal Control over Financial Reporting
Management’s Report on Internal Control over Financial Reporting is included in Item 8 of this Form 10-KAnnual Report and incorporated herein by reference.
| |
(c) | Attestation Report of the Independent Registered Public Accounting Firm |
(c)Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of Kennametal’s internal control over financial reporting as of June 30, 20172022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in Item 8 of this annual report on Form 10-K,Annual Report, which is incorporated herein by reference.
| |
(d) | Changes in Internal Control over Financial Reporting |
(d)Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the fourth quarter of 20172022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B — OTHER INFORMATION
None.
ITEM 9C — DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the executive officers of Kennametal Inc. is as follows: Name, Age, Position, and Experience Duringduring the Past Five Years (1).
Ronald M. De Feo, 65
Executive Chairman
Executive Chairman since August 2017; President and Chief Executive Officer from February 2016 to July 2017; Director since November 2001; Formerly, Chairman of the Board and Chief Executive Officer of Terex Corporation (provides machinery and industrial products), from March 1998 and March 1995, respectively, until December 2015.
Christopher Rossi, 5358
President and Chief Executive Officer
President and Chief Executive Officer since August 2017; Formerly, Chief Executive Officer of Dresser-Rand at Siemens Aktiengesellschaft (provides custom-engineered rotating equipment for applications in the oil, gas, process, power, and other industries), from September 2015 to May 2017; Executive Vice President of Global Operations at Dresser-Rand Group Inc. from September 2012 to September 2015.
Judith L. Bacchus, 5560
Vice President and Chief Human ResourcesAdministrative Officer
Vice President and Corporate RelationsChief Administrative Officer
since May 2019; Vice President and Chief Human Resources and Corporate Relations Officer since December 2015; Vice President and Chief Human Resources Officer from June 2011 to November 2015.
Charles M. Byrnes, Jr., 52
Vice President, Kennametal Inc. and President, Industrial Business Segment
Vice President, Kennametal Inc. and President, Industrial Business Segment since May 2016; Vice President and Executive Vice President, Industrial Business Segment from December 2015 to May 2016; Formerly President at General Bearing Corporation (provides bearing components and bearing products) from March 2014 to December 2015; and Senior Vice President - Sales and Marketing at Accuride Corporation (provides commercial vehicle components) from September 2011 to February 2014.
Robert J. Clemens, 60
Vice President and Chief Technology Officer
Vice President and Chief Technology Officer since March 2013; Formerly, Vice President, Corporate Technology at Eastman Chemical Company (specialty chemical company) from January 2008 to February 2013.
Peter A. Dragich,Franklin Cardenas, 54
Vice President, Kennametal Inc. and President, Infrastructure Business Segment
Vice President, Kennametal Inc. and President, Infrastructure Business Segment since May 2016;February 2020; Formerly, Vice President of Asia Pacific for the Donaldson Company (a global leader in the filtration industry) from 2016 to 2020 and Vice President, Global Engine Aftermarket from 2010 to 2016. He started at Donaldson Company in 1995 and held roles of increasing responsibility until 2020.
Sanjay Chowbey, 54
President, Metal Cutting
President, Metal Cutting since June 2021; Formerly, President, Services and Solutions of Flowserve from 2019 to 2021 and Senior Vice President and Executive Vice President Infrastructure Business Segmentof TE SubCom from October 20152017 to May 2016; Vice2018. Previously spent over 11 years at Danaher / Fortive Corporation (from 2006 through 2017) serving in various roles of increasing responsibility, the latest being President, Integrated Supply Chain and Logistics from October 2012 to October 2015. Formerly, Vice President, Global Field Operations, Climate, Controls, and Security for United Technologies Corporation (provides products and services to aerospace and building systems industries) from May 2010 to October 2012.
Jan Kees van Gaalen, 60
Vice President and Chief Financial Officer
Vice President and Chief Financial Officer since September 2015; Formerly, Executive Vice President and Chief Financial Officer of Dresser-Rand Group Inc. (provides custom-engineered rotating equipment for applications in the oil, gas, process, power, and other industries) from April 2013 to June 2015; Vice President and Treasurer of Baker Hughes Inc. (oil field services) from January 2008 to April 2013.Thomson Industries.
Michelle R. Keating, 4146
Vice President, Secretary and General Counsel, Kennametal Inc.
Vice President, Secretary and General Counsel, Kennametal Inc. since December 2016; Vice President, Secretary and Interim General Counsel from July 2016 to December 2016; Vice President, Associate General Counsel & Assistant Secretary from March 2016 to July 2016; Assistant General Counsel & Assistant Secretary from August 2011 to February 2016.
Carlonda R. Reilly, 54
Vice President and Chief Technology Officer since September 2018; Formerly, Global Technology Director in Transportation and Advanced Polymers business at DuPont (chemical company) from January 2016 to September 2018 and Global Technology Director in Building Innovations at DuPont from 2013 to January 2016.
Patrick S. Watson, 4449
Vice President Finance and Corporate Controller, Kennametal Inc.Chief Financial Officer
Vice President Finance and Chief Financial Officer since June 2022; Formerly, Vice President Finance and Corporate Controller, Kennametal Inc. sincefrom March 2017;2017 to June 2022; Vice President Finance - Industrial Business from March 2014 to February 2017; Director Finance, Kennametal EMEA from August 2011 to August 2014.
John W. Witt, 43
Vice President Finance and Corporate Controller
Vice President Finance and Corporate Controller since June 2022; Formerly, Director, Internal Audit, Kennametal Inc. from April 2019 to June 2022; Assistant Corporate Controller, Kennametal Inc. from August 2018 to April 2019; Assurance Director at PricewaterhouseCoopers ("PwC") from July 2016 to August 2018 and prior to this in other roles of increasing responsibility at PwC.
(1) Each executive officer has been elected by the Board of Directors to serve until removed or until a successor is elected and qualified. Unless otherwise noted, none of the executive officers (i) has an arrangement or understanding with any other person(s) pursuant to which he or she was selected as an officer, (ii) has any family relationship with any director or executive officer of the Company, or (iii) is involved in any legal proceeding which would require disclosure under this item.
Incorporated herein by reference is the information to be provided under the captions “Proposal I. Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after June 30, 2017 (20172022 (2022 Proxy Statement). Also incorporated herein by reference is the information to be set forth under the caption “Ethics and Corporate Governance-Code of Conduct” and "Ethics and Corporate Governance-Corporate Governance" in the 20172022 Proxy Statement.
The Company has a separately designated standing Audit Committee established in accordance with Section 3(a) (58) (A) of the Exchange Act. The members of the Audit Committee are: Timothy R. McLevishWilliam M. Lambert (Chair); Cindy L. Davis; WilliamLorraine M. Lambert;Martin; Sagar A. PatelPatel; and Steven H. Wunning. Incorporated herein by reference is the information provided under the caption “Board of Directors and Board Committees-Committee Functions-Audit Committee” in the 20172022 Proxy Statement.
ITEM 11 — EXECUTIVE COMPENSATION
Incorporated herein by reference from our 2022 Proxy Statement is certainthe information into be set forth under the captions “Executive Compensation, Compensation Discussion and Analysis” section of the 2017 Proxy Statement including, without limitation, CompensationAnalysis,” "Compensation Committee Report, Analysis" "Analysis of Risk Inherent in our Compensation Policies and Practices, the Executive" "Executive Compensation Tables," "2022 Nonqualified Deferred Compensation," "Retirement Programs" and Potential"Potential Payments Upon Termination or Change in Control." Also incorporated herein by reference from our 2022 Proxy Statement is certainthe information into be set forth under the captions “Board of Directors Compensation and Benefits” and “Board of Directors and Board Committees.Committees - Committee Functions - Compensation Committee Interlocks and Insider Participation."
ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference from our 20172022 Proxy Statement are: (i) the information to be set forth under the caption “Equity Compensation Plans”Plans,” (ii) the information to be set forth under the caption “Ownership of Capital Stock by Directors, Nominees and Executive Officers” with respect to the directors’ and officers’ shareholdings; and (iii) the information to be set forth under the caption “Principal Holders of Voting Securities” with respect to other beneficial owners.
ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated herein by reference is certainthe information to be set forth under the captions “Ethics and Corporate Governance-Corporate Governance-Board of Director Review and Approval of Related Person Transactions,” “Executive Compensation,” “Executive Compensation Tables” and “Ethics and Corporate Governance-Corporate Governance-Board Composition and Independence” in the 20172022 Proxy Statement.
ITEM 14 — PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated herein by reference is the information with respect to pre-approval policies set forth under the caption “Proposal II. Ratification of PricewaterhouseCoopers LLP (PCAOB ID 238) as our Independent Registered Public Accounting Firm for the Fiscal Year ending June 30, 2018-Audit2023-Audit Committee Pre-Approval Policy” and the information with respect to principal accountant fees and services set forth under “Proposal II. Ratification of PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm for the Fiscal Year ending June 30, 2018-Fees2023-Fees and Services” to be set forth in the 20172022 Proxy Statement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | KENNAMETAL INC. |
| Date: August 10, 2022 | | | | KENNAMETAL INC.By: | | /s/ John W. Witt |
Date: August 14, 2017 | | | | By: | | /s/ Patrick S. WatsonJohn W. Witt |
| | | | | | Patrick S. Watson |
| | | | | | Vice President Finance and Corporate Controller |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| | | | |
| SIGNATURE | | TITLE | | DATE |
SIGNATURE | | TITLE | | DATE |
| | |
/s/ RONALD M. DE FEO
Ronald M. De Feo
| | Executive Chairman | | August 14, 2017 |
| | |
/s/ CHRISTOPHER ROSSI Christopher Rossi | | President and Chief Executive Officer | | August 14, 201710, 2022 |
| | | | |
/s/ JAN KEES VAN GAALEN
Jan Kees van Gaalen
| | Vice President and Chief Financial Officer | | August 14, 2017 |
| | | | |
/s/ PATRICK S. WATSON Patrick S. Watson | | Vice President and Chief Financial Officer | | August 10, 2022 |
| | | | |
/s/ JOHN W. WITT John W. Witt | | Vice President Finance and Corporate Controller | | August 14, 201710, 2022 |
| | |
/s/ LAWRENCE W. STRANGHOENER Lawrence W. Stranghoener | | Lead DirectorChairman of the Board | | August 14, 201710, 2022 |
| | | | |
/s/ JOSEPH ALVARADO Joseph Alvarado | | Director | | August 10, 2022 |
| | | | |
/s/ CINDY L. DAVIS Cindy L. Davis | | Director | | August 14, 201710, 2022 |
| | | | |
/s/ PHILIP A. DUR
Philip A. Dur
| | Director | | August 14, 2017 |
| | |
/s/ WILLIAM J. HARVEY William J. Harvey | | Director | | August 14, 201710, 2022 |
| | |
/s/ WILLIAM M. LAMBERT William M. Lambert | | Director | | August 14, 201710, 2022 |
| | | | |
/s/ TIMOTHY R. MCLEVISHLORRAINE M. MARTIN Timothy R. McLevishLorraine M. Martin
| | Director | | August 14, 201710, 2022 |
| | | | |
/s/ SAGAR A. PATEL Sagar A. Patel | | Director | | August 14, 201710, 2022 |
| | |
/s/ STEVEN H. WUNNING Steven H. Wunning | | Director | | August 14, 201710, 2022 |
PART IV
ITEM 15 — EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Form 10-K report.
1. Financial Statements included in Part II, Item 8
2. Financial Statement Schedule
The financial statement schedule required by Part II, Item 8 of this document is filed as part of this report. All of the other schedules are omitted as the required information is inapplicable or the information is presented in our consolidated financial statements or related notes.
FINANCIAL STATEMENT SCHEDULE Page 81
Schedule II—Valuation and Qualifying Accounts and Reserves for the Years Ended June 30, 2017, 2016 and 2015
3. Exhibits
|
| | | | | | | |
2FINANCIAL STATEMENT SCHEDULE |
Page | |
Schedule II—Valuation and Qualifying Accounts for the Years Ended June 30, 2022, 2021 and 2020
3. Exhibits
| Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession | | | | | | | | | | | | | |
2.13 |
| | Share Sale and Purchase Agreement relating to Deloro Stellite Holdings 1 Limited dated 2012 | | Exhibit 2.1 of the Form 10-Q filed February 8, 2012 (File No. 001-05318) is incorporated herein by reference. |
2.2 |
| | Warranty Agreement relating to Deloro Stellite Holdings 1 Limited dated January 13, 2012 | | Exhibit 2.2 of the Form 10-Q filed February 8, 2012 (File No. 001-05318) is incorporated herein by reference. |
2.3 |
| | Tax Deed Covenant relating to Deloro Stellite Holdings 1 Limited dated March 1, 2012 | | Exhibit 2.1 of the Form 10-Q filed May 9, 2012 (File No. 001-05318) is incorporated herein by reference. |
2.4 |
| | Purchase Agreement relating to the Tungsten Materials Business of Allegheny Technologies Incorporated dated as of September 13, 2013 | | Exhibit 2.1 of the Form 10-Q filed November 7, 2013 (File No. 001-05318) is incorporated herein by reference. |
| | | | |
3 |
| | Articles of Incorporation and Bylaws | | |
| 3.1 |
| | | | Exhibit 3.(i) of the Form 8-K filed October 30, 2014 (File No. 001-05318) is incorporated herein by reference. |
| 3.2 |
| | | | Exhibit 10.1 of the Form 8-K filed July 28, 2016 (File No. 001-05318) is incorporated herein by reference. |
| | | | |
| 4 |
| | Instruments Defining the Rights of Security Holders, Including Indentures | | |
| 4.1 |
| | | | Exhibit 4.1 of the Form 8-K filed June 20, 2002 (File No. 001-05318) is incorporated herein by reference. |
| 4.2 |
| | | | Exhibit 4.2 of the Form 8-K filed June 20, 2002 (File No. 001-05318) is incorporated herein by reference. |
| 4.3 |
| | | | Exhibit 4.1 of the Form 8-K filed February 14, 2012 (File No. 001-05318) is incorporated herein by reference. |
| 4.4 |
| | | | Exhibit 4.2 of the Form 8-K filed February 14, 2012 (File No. 001-05318) is incorporated herein by reference. |
| 4.5 |
| | | | Exhibit 4.4 of the Form 8-K filed November 7, 2012 (File No. 001-05318) is incorporated herein by reference. |
| 4.6 | | | | | Exhibit 4.1 of the Form 8-K filed June 7, 2018 (File No. 001-05318) is incorporated herein by reference. |
104.7 |
| | Material Contracts | | |
10.1* |
| | | | Appendix A toExhibit 4.1 of the 2011 Proxy StatementForm 8-K filed September 12, 2011February 23, 2021 (File No. 001-05318) is incorporated herein by reference. |
10.2*4.8 |
| | | | Exhibit 4.1 of the Form 8-K filed February 23, 2021 (File No. 001-05318) is incorporated herein by reference. |
| 4.9 | | | | | Filed herewith. |
| | | | |
| 10 | | | Material Contracts | | |
| 10.1* | | | | Exhibit 10.1 of the December 31, 2008 Form 10-Q filed February 4, 2009 (File No. 001-05318) is incorporated herein by reference. |
10.3*10.2* |
| | Executive Deferred Compensation Trust Agreement | | Exhibit 10.5 of the June 30, 1988 Form 10-K (File No. 001-05318) is incorporated herein by reference. |
10.4* |
| | | | Exhibit 10.2 of the December 31, 2008 Form 10-Q filed February 4, 2009 (File No. 001-05318) is incorporated herein by reference. |
|
| 10.3* | | | | | |
10.5* |
| | | | Exhibit 10.3 of the December 31, 2008 Form 10-Q filed February 4, 2009 (File No. 001-05318) is incorporated herein by reference. |
10.6*10.4* |
| | | | Appendix A to the 2008 Proxy Statement filed September 8, 2008 (File No. 001-05318) is incorporated herein by reference. |
10.7*10.5* |
| | Forms of Award Agreements under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended | | Exhibit 10.18 of the June 30, 2004 Form 10-K filed September 10, 2004 (File No. 001-05318) is incorporated herein by reference. |
10.8* |
| | Form of Kennametal Inc. Restricted Unit Award (granted under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended) | | Exhibit 10.1 of the September 30, 2009 Form 10-Q filed November 5, 2009 (File No. 001-05318) is incorporated herein by reference. |
10.9* |
| | Form of Kennametal Inc. Performance Unit Award (granted under the Kennametal Inc. Stock and Incentive Plan of 2002, as amended) | | Exhibit 10.1 of Form 10-Q filed November 5, 2010 (File No. 001-05318) is incorporated herein by reference. |
10.10* |
| | Form of Officer’s Employment Agreement with Ronald M. De Feo | | Exhibit 10.1 to Form 8-K filed February 5, 2016 (File No. 001-05318) is incorporated herein by reference. |
10.11* |
| | Form of Officer's Employment Agreement with certain Named Executive Officers | | Exhibit 10.16 of the Form 10-K filed August 13, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.12* |
| | Schedule of Named Executive Officers who have entered into the Form of Officer's Employment Agreement as set forth in Exhibit 10.11 | | Exhibit 10.17 of the Form 10-K filed August 13, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.13* |
| | | | Exhibit 10.2 of the Form 8-K filed March 22, 2005 (File No. 001-05318) is incorporated herein by reference. |
10.14*10.6* |
| | | | Filed herewith. |
10.15*10.7* |
| | Form of Employment Agreement with Donald A. Nolan | | Exhibit 10.1 of the Form 8-K filed November 17, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.16* |
| | | | Exhibit 10.8 of the December 31, 2008 Form 10-Q filed February 4, 2009 (File No. 001-05318) is incorporated herein by reference. |
10.17*10.8* |
| | | | Exhibit 10.2 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.18*10.9* |
| | | | Exhibit 10.1 of the Form 8-K filed June 23, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.19*10.10* |
| | | | Exhibit 10.9 of the December 31, 2008 Form 10-Q filed February 4, 2009 (File No. 001-05318) is incorporated herein by reference. |
10.20*10.11* |
| | | | Exhibit 10.2 of the Form 8-K filed June 23, 2015 (File No. 001-05318) is incorporated herein by reference. |
| | | | | | | | | | | | | | |
10.21*10.12* |
| | | | Exhibit 10.2310.12 of the Form 10-K filed August 11, 201610, 2018 (File No. 001-05318) is incorporated herein by reference. |
10.22 |
| | Third Amended and Restated Credit Agreement dated as of June 25, 2010 among Kennametal Inc., Kennametal Europe GmbH, Bank of America, N.A., London Branch (as Euro Swingline Lender), PNC Bank, National Association and JPMorgan Chase Bank, N.A. (as Co-Syndication Agents), Citizens Bank of Pennsylvania and Bank of Tokyo- Mitsubishi UFJ Trust Company (as Co-Documentation Agents), Bank of America, N.A. (as the Administrative Agent), and the following lenders: Bank of America, N.A., PNC Bank, National Association, JPMorgan Chase Bank, N.A., Bank of Tokyo-Mitsubishi UFJ Trust Company, Citizens Bank of Pennsylvania, Mizuho Corporate Bank, Ltd., Comerica Bank, Commerzbank AG New York and Grand Cayman Branches, HSBC Bank USA, National Association, Intesa Sanpaolo S.p.A New York Branch, U.S. Bank National Association, First Commonwealth Bank and TriState Capital Bank | | Exhibit 10.1 of Form 8-K filed June 30, 2010 (File No. 001-05318) is incorporated herein by reference. |
10.23 |
| | Amendment No. 1, dated as of October 21, 2011, to the Third Amended and Restated Credit Agreement by and among Kennametal Inc., Kennametal Europe GmbH, Bank of America, N.A., Bank of America, N.A., London Branch, PNC Bank, National Association, JPMorgan Chase Bank, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd., Citizens Bank of Pennsylvania, Mizuho Corporate Bank, Ltd., HSBC Bank USA, N.A., U.S. Bank National Association, Comerica Bank, Commerzbank AG New York and Grand Cayman Branches,The Huntington National Bank, First Commonwealth Bank and Intesa Sanpaolo S.p.A | | Exhibit 10.1 of Form 8-K filed October 27, 2011 (File No. 001-05318) is incorporated herein by reference. |
|
| 10.13* | | | | | |
10.24 |
| | Amendment No. 2, dated as of April 5, 2013, to the Third Amended and Restated Credit Agreement by and among Kennametal Inc., Kennametal Europe GmbH, Bank of America, N.A., Bank of America, N.A., London Branch, PNC Bank, National Association, JPMorgan Chase Bank, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd., Citizens Bank of Pennsylvania, Mizuho Corporate Bank, Ltd., HSBC Bank USA, N.A., U.S. Bank National Association, Commerzbank AG New York and Grand Cayman Branches,The Huntington National Bank, Compass Bank and First Commonwealth Bank. | | Exhibit 10.1 of Form 8-K filed April 11, 2013 (File No. 001-05318) is incorporated herein by reference. |
10.25 |
| | Form of Third Amended and Restated Guarantee (in connection with the Third Amended and Restated Credit Agreement) | | Exhibit 10.26 of Form 10-K filed August 12, 2010 (File No. 001-05318) is incorporated herein by reference. |
10.26 |
| | Fourth Amended and Restated Credit Agreement dated as of April 15, 2016 among Kennametal Inc. and Kennametal Europe GmbH (the “Borrowers”), the several banks and other financial institutions or entities from time to time parties to the Agreement (“Lenders”), Bank of America, N.A., London Branch (as Euro Swingline Lender), PNC Bank, National Association and JPMorgan Chase Bank, N.A. (as Co-Syndication Agents), Citizens Bank of Pennsylvania, The Bank of Tokyo-Mitsubishi UFJ Trust Company and Mizuho Bank, Ltd. (as Co-Documentation Agents), Bank of America, N.A. (as the Administrative Agent). | | Exhibit 10.1 of Form 8-K filed April 19, 2016 (File No. 001-05318) is incorporated herein by reference. |
10.27* |
| | Stock and Incentive Plan of 2010 | | Exhibit A of the 2010 Proxy Statement filed September 13, 2010 (File No. 001-05318) is incorporated herein by reference. |
10.28* |
| | Form of Kennametal Inc. Performance Unit Award (granted under the Kennametal Inc. Stock and Incentive Plan of 2010) | | Exhibit 10.2 of Form 10-Q filed February 8, 2011 (File No. 001-05318) is incorporated herein by reference. |
10.29* |
| | Form of Kennametal Inc. Restricted Unit Award (granted under the Kennametal Inc. Stock and Incentive Plan of 2010) | | Exhibit 10.3 of Form 10-Q filed February 8, 2011 (File No. 001-05318) is incorporated herein by reference. |
10.30* |
| | Form of Kennametal Inc. Restricted Unit Award for Non-Employee Directors (granted under the Kennametal Inc. Stock and Incentive Plan of 2010) | | Exhibit 10.4 of Form 10-Q filed February 8, 2011 (File No. 001-05318) is incorporated herein by reference. |
10.31* |
| | | | Exhibit 10.5 of Form 10-Q filed February 8, 2011 (File No. 001-05318) is incorporated herein by reference. |
10.32*10.14* |
| | | | Exhibit 10.6 of Form 10-Q filed February 8, 2011 (File No. 001-05318) is incorporated herein by reference |
10.33*10.15* |
| | Form of Performance Unit Award (granted under Kennametal Inc. Stock and Incentive Plan 2010) | | Exhibit 10.2 of Form 10-Q filed November 8, 2011 (File No. 001-05318) is incorporated herein by reference |
10.34* |
| | | | Exhibit 10.1 of Form 8-K filed May 13, 2011 (File No. 001-05318) is incorporated herein by reference. |
10.35*10.16* |
| | | | Filed herewith.Exhibit 10.16 of the Form 10-K filed August 13, 2019 (File No. 001-05318) is incorporated herein by reference. |
10.36*10.17* |
| | Form of Kennametal Inc. Restricted Unit Award - President and CEO (granted under Amendment No. 1 to the Kennametal Inc. | | Exhibit 10.3 to Form 8-K filed February 5, 2016 (File No. 001-05318) is incorporated herein by reference |
10.37* |
| | Form of Kennametal Inc. Nonstatutory Stock Option Award - President and CEO (granted under Amendment No. 1 to the Kennametal Inc. Stock and Incentive Plan of 2010 (As Amended and Restated October 22, 2013)) | | Exhibit 10.2 to Form 8-K filed February 5, 2016 (File No. 001-05318) is incorporated herein by reference |
10.38* |
| | Form of Kennametal Inc. Restricted Unit Award - President and CEO (granted under Amendment No. 1 to the Kennametal Inc. Stock and Incentive Plan of 2010 (As Amended and Restated October 22, 2013)) | | Exhibit 10.40 of the Form 10-K filed August 11, 2016 (File No. 001-05318) is incorporated herein by reference.
|
10.39* |
| | Form of Kennametal Inc. Performance Unit Award - President and CEO (granted under Amendment No. 1 to the Kennametal Inc. Stock and Incentive Plan of 2010 (As Amended and Restated October 22, 2013)) | | Exhibit 10.41 of the Form 10-K filed August 11, 2016 (File No. 001-05318) is incorporated herein by reference.
|
10.40* |
| | Stock and Incentive Plan of 2010 (As Amended and Restated October 22, 2013) | | Appendix A of the 2013 Proxy Statement filed September 17, 2013 (File No. 001-05318) is incorporated herein by reference. |
10.41*10.18* |
| | Form of Kennametal Inc. Performance Unit Award (granted under the Kennametal Inc. Stock and Incentive Plan of 2010 (As Amended and Restated October 22, 2013)) | | Exhibit 10.38 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference. |
10.42* |
| | | | Exhibit 10.39 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference. |
|
| 10.19* | | | | | |
10.43* |
| | Form of Kennametal Inc. Restricted Unit Award for Non-Employee Directors (granted under the Kennametal Inc. Stock and Incentive Plan of 2010 (As Amended and Restated October 22, 2013)) | | Exhibit 10.40 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference. |
10.44* |
| | | | Exhibit 10.41 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference. |
10.45*10.20* |
| | | | Exhibit 10.42 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference. |
10.46*10.21* |
| | | | Exhibit 10.43 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference. |
10.47*10.22* |
| | Form of Kennametal Inc. Stock Appreciation Right Award for China-based Employees (granted under the Kennametal Inc. Stock and Incentive Plan of 2010 (As Amended and Restated October 22, 2013)) | | Exhibit 10.44 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference. |
10.48* |
| | | | Exhibit 10.45 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference. |
10.49*10.23* |
| | | | Exhibit 10.46 of Form 10-K filed August 13, 2014 (File No. 001-05318) is incorporated herein by reference. |
10.50*10.24* |
| | | | Exhibit 10.1 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.51*10.25* |
| | | | Exhibit 10.3 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.52*10.26* |
| | | | Exhibit 10.4 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.53*10.27* |
| | | | Exhibit 10.5 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference.
|
10.54*10.28* |
| | | | Exhibit 10.6 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.55*10.29* |
| | | | Exhibit 10.8 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.56*10.30* |
| | | | Exhibit 10.9 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.57*10.31* |
| | | | Exhibit 10.10 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.58*10.32* |
| | | | Exhibit 10.12 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference. |
| | | | | | | | | | | | | | |
10.59*10.33* |
| | Form of Kennametal Inc. Stock Appreciation Right Award for China-based Employees (granted under Amendment No. 1 to the Kennametal Inc. Stock and Incentive Plan of 2010 (As Amended and Restated October 22, 2013)) | | Exhibit 10.13 to the Form 8-K dated February 2, 2015 (File No. 001-05318) is incorporated herein by reference. |
10.60* |
| | | | Exhibit 10.1 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference. |
10.61*10.34* |
| | | | Exhibit 10.3 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference. |
|
| 10.35* | | | | | |
10.62* |
| | | | Exhibit 10.5 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference. |
10.63*10.36* |
| | | | Exhibit 10.6 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference. |
10.64*10.37* |
| | | | Exhibit 10.7 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference. |
10.65*10.38* |
| | | | Exhibit 10.9 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference. |
10.66*10.39* |
| | Form of Kennametal Inc. Stock Appreciation Right Award for China-based Employees (granted under Amendment No. 1 to the Kennametal Inc. Stock and Incentive Plan of 2010 (As Amended and Restated October 22, 2013)) | | Exhibit 10.10 to the Form 8-K dated July 30, 2015, (File No. 001-05318) is incorporated herein by reference. |
10.67* |
| | | | Appendix C of 2016 Proxy Statement filed September 13, 2016 (File No. 001-05318) is incorporated by reference herein. |
10.68*10.40* |
| | | | Exhibit 10.1 of the Form 10-Q filed November 7, 2016 (File No. 001-05318) is incorporated by reference herein. |
10.69*10.41* |
| | Form of Kennametal Performance Unit Award (for President and CEO) (granted under Kennametal Inc. Stock and Incentive Plan of 2010, as amended and restated on October 22, 2013, and amended on January 27, 2015) | | Exhibit 10.2 of the Form 10-Q filed November 7, 2016 (File No. 001-05318) is incorporated by reference herein. |
10.70* |
| | | | Exhibit 10.4 of the Form 10-Q filed November 7, 2016 (File No. 001-05318) is incorporated by reference herein. |
10.71*10.42* |
| | | | Exhibit 10.5 of the Form 10-Q filed November 7, 2016 (File No. 001-05318) is incorporated by reference herein. |
10.72*10.43* |
| | | | Exhibit 10.1 of the Form 10-Q filed February 8, 2017 (File No. 001-05318) is incorporated by reference herein. |
10.73*10.44* |
| | Form of Letter Agreement with Mr. De Feo dated August 1, 2017 | | Exhibit 10.1 of the Form 8-K filed June 29, 2017 (File No. 001-05318) is incorporated by reference herein. |
10.74* |
| | | | Filed herewith.Exhibit 10.74 to Form 10-K filed August 14, 2017 (File No. 001-05318) is incorporated by reference herein. |
10.75*10.45* |
| | | | Filed herewith.Exhibit 10.75 to Form 10-K filed August 14, 2017 (File No. 001-05318) is incorporated by reference herein. |
10.76*10.46* |
| | Form of Kennametal Inc. | | Filed herewith.Exhibit 10.76 to Form 10-K filed August 14, 2017 (File No. 001-05318) is incorporated by reference herein. |
10.77*10.47* |
| | | Exhibit 10.52 to Form 10-K filed August 13, 2019 (File No. 001-05318) is incorporated by reference herein. |
| 10.48* | | | | Filed herewith.Exhibit 10.77 to Form 10-K filed August 14, 2017 (File No. 001-05318) is incorporated by reference herein. |
10.78*10.49* |
| | | Exhibit 10.54 to Form 10-K filed August 13, 2019 (File No. 001-05318) is incorporated by reference herein. |
| 10.50* | | | | Filed herewith.Exhibit 10.78 to Form 10-K filed August 14, 2017 (File No. 001-05318) is incorporated by reference herein. |
10.79*10.51* |
| |
| | Filed herewith.Exhibit 10.2 to Form 10-Q filed November 6, 2018 (File No. 001-05318) is incorporated by reference herein. |
10.80*10.52* |
| | Form of Executive Chairman Employment Agreement with Ronald M. De Feo | | Exhibit 10.1 of the Form 8-K filed June 29,November 3, 2017 (File No. 001-05318) is incorporated herein by reference. |
| 10.53* | | | | Exhibit 10.2 of the Form 8-K filed November 3, 2017 (File No. 001-05318) is incorporated herein by reference. |
2110.54* |
| | Subsidiaries | Exhibit 10.59 to Form 10-K filed August 13, 2019 (File No. 001-05318) is incorporated by reference herein. |
| 10.55* | | | | Exhibit 10.60 of the Registrant | | Filed herewith.Form 10-K filed August 10, 2018 (File No. 001-05318) is incorporated by reference herein. |
| 10.56* | | | | |
23 |
| | Consent of Independent Registered Public Accounting Firm | | Filed herewith. |
| | | | |
31 |
| | Certifications | | |
31.1 |
| | Certification executed by Ronald M. De Feo, Executive Chairman of Kennametal Inc. | | Filed herewith. |
|
| | | | | | | | | | | | | |
31.210.57 |
| Sixth Amended and Restated Credit Agreement dated as of June 14, 2022, among Kennametal Inc. and Kennametal Europe GmbH (the “Borrowers”) and the several banks and other financial institutions or entities from time to time parties thereto (the “Lenders”), Bank of America, N.A., London Branch, as Euro Swingline Lender, PNC Bank, National Association and JPMorgan Chase Bank, N.A., as co-syndication agents, BNP Paribas, Citizens Bank, N.A., Mizuho Bank, Ltd., and U.S. Bank National Association, as co-documentation agents and Bank of America, N.A., as administrative agent. | | Exhibit 10.1 of the Form 8-K filed June 15, 2022 (File No. 001-05318) is incorporated herein by reference. |
| 10.58* | | | | Exhibit 10.1 of the Form 10-Q filed February 3, 2021 (File No. 001-05318) is incorporated herein by reference. |
| 10.59* | | | | Exhibit 10.2 of the Form 10-Q filed February 3, 2021 (File No. 001-05318) is incorporated herein by reference. |
| 10.60* | | | | Exhibit 10.3 of the Form 10-Q filed February 3, 2021 (File No. 001-05318) is incorporated herein by reference. |
| 10.61* | | | | Exhibit 10.4 of the Form 10-Q filed February 3, 2021 (File No. 001-05318) is incorporated herein by reference. |
| 10.62* | | | | Exhibit 10.5 of the Form 10-Q filed February 3, 2021 (File No. 001-05318) is incorporated herein by reference. |
| 10.63* | | | | Exhibit 10.6 of the Form 10-Q filed February 3, 2021 (File No. 001-05318) is incorporated herein by reference. |
| 10.64* | | | | Exhibit 10.65 to Form 10-K filed August 10, 2021 (File No. 001-05318) is incorporated by reference herein. |
| 10.65* | | | | Appendix B of 2020 Proxy Statement filed September 15, 2020 (File No. 001-05318) is incorporated by reference herein. |
| | | | |
| 21 | | | | | Filed herewith. |
| | | | |
| 23 | | | | | Filed herewith. |
| | | | |
| 31 | | | Certifications | | |
| 31.1 | | | | | Filed herewith. |
31.331.2 |
| | | | Filed herewith. |
| | | | |
| 32 |
| | Section 1350 Certifications | | |
| 32.1 |
| | | | Filed herewith. |
| | | | |
| *Denotes management contract or compensatory plan or arrangement. | | |
| | | | |
| 101 |
| | XBRL | | |
101.INS(1) |
| | XBRL Instance Document. | | Filed herewith. |
101.SCH(2) |
| | XBRL Taxonomy Extension Schema Document. | | Filed herewith. |
101.CAL(2) |
| | XBRL Taxonomy Extension Calculation Linkbase Document. | | Filed herewith. |
101.DEF(2) |
| | XBRL Taxonomy Definition Linkbase | | Filed herewith. |
101.LAB(2) |
| | XBRL Taxonomy Extension Label Linkbase Document. | | Filed herewith. |
101.PRE(2) |
| | XBRL Taxonomy Extension Presentation Linkbase Document. | | Filed herewith. |
(1)The instance document does not appear in the Interactive Data File because its XBRL (Extensible Business Reporting Language) tags are embedded within the Inline XBRL document.
(2)Attached as Exhibit 101 to this report are the following documents formatted in Inline XBRL: (i) the Consolidated Statements of Income for the years ended June 30, 2022, 2021 and 2020, (ii) the Consolidated Statements of Comprehensive Income for the years ended June 30, 2022, 2021 and 2020, (iii) the Consolidated Balance Sheets at June 30, 2022 and 2021, (iv) the Consolidated Statements of Cash Flows for the years ended June 30, 2022, 2021 and 2020 and (v) Notes to Consolidated Financial Statements for the years ended June 30, 2022, 2021 and 2020.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) For the year ended June 30 | | Balance at Beginning of Year |
| | Charges to Costs and Expenses |
| | | Charged to Other Comprehensive (Loss) Income |
| | | Recoveries |
| | Other Adjustments |
| | | Deductions from Reserves |
| | Balance at End of Year |
|
| 2017 | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 12,724 |
| | $ | 3,589 |
| | | $ | — |
| | | $ | 45 |
| | $ | (24 | ) | | (1) | $ | (2,641 | ) | (2) | $ | 13,693 |
|
| Reserve for excess and obsolete inventory | | 36,713 |
| | 9,603 |
| | | — |
| | | — |
| | 328 |
| | (1) | (14,530 | ) | (3) | 32,114 |
|
| Deferred tax asset valuation allowance | | 122,699 |
| | 2,361 |
| | | (5,805 | ) | | | — |
| | (2,485 | ) | | (6) | — |
| | 116,770 |
|
| 2016 | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 13,560 |
| | $ | 4,827 |
| | | $ | — |
| | | $ | 31 |
| | $ | (601 | ) | | (4) | $ | (5,093 | ) | (2) | $ | 12,724 |
|
| Reserve for excess and obsolete inventory | | 45,020 |
| | 5,393 |
| | | — |
| | | — |
| | (3,372 | ) | | (4) | (10,328 | ) | (3) | 36,713 |
|
| Deferred tax asset valuation allowance | | 16,771 |
| | 85,361 |
| | (5) | 24,666 |
| | (5) | — |
| | (4,099 | ) | | (4) | — |
| | 122,699 |
|
| 2015 | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 14,027 |
| | $ | 3,602 |
| | | $ | — |
| | | $ | 40 |
| | $ | (1,095 | ) | | (1) | $ | (3,014 | ) | (2) | $ | 13,560 |
|
| Reserve for excess and obsolete inventory | | 52,737 |
| | 8,666 |
| | | — |
| | | — |
| | (5,613 | ) | | (1) | (10,770 | ) | (3) | 45,020 |
|
| Deferred tax asset valuation allowance | | 17,860 |
| | 1,846 |
| | | — |
| | | — |
| | (2,935 | ) | | (1) | — |
| | 16,771 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands)
For the year ended June 30 | | Balance at
Beginning
of Year | | Charges to
Costs and
Expenses | | | | | | Recoveries | | Other
Adjustments | | | Deductions
from
Reserves | | Balance at
End of
Year |
| 2022 | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 9,734 | | | $ | 1,242 | | | | | | | $ | 163 | | | $ | (321) | | | (1) | $ | (1,396) | | (2) | $ | 9,422 | |
| Deferred tax asset valuation allowance | | 21,263 | | | 371 | | | | | | | (4,459) | | | 42 | | | (1) | (2,832) | | (3) | 14,385 | |
| 2021 | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 9,430 | | | $ | 2,602 | | | | | | | $ | 635 | | | $ | 400 | | | (1) | $ | (3,333) | | (2) | $ | 9,734 | |
| Deferred tax asset valuation allowance | | 16,654 | | | 4,115 | | | | | | | — | | | 494 | | | (1) | — | | | 21,263 | |
| 2020 | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 10,083 | | | $ | 2,300 | | | | | | | $ | 40 | | | $ | (287) | | | (1) | $ | (2,706) | | (2) | $ | 9,430 | |
| Deferred tax asset valuation allowance | | 14,614 | | | 4,213 | | | | | | | — | | | (1,216) | | | (1) | (957) | | (3) | 16,654 | |
(1)Represents foreign currency translation adjustment.
(2)Represents uncollected accounts charged against the allowance.
(3)Represents scrapped inventory and other charges against the reserve.
(4)Represents foreign currency translation adjustment and reserves divested through business combinations.
(5)Represents primarily effects from the recording of a valuation allowance against ourforfeited net deferred tax assets in the U.S.operating loss deduction
(6)Represents the shortfall on restricted stock units and non-qualified stock options which resulted in a reduction of our deferred tax asset and
subsequently the valuation allowance, in addition to foreign currency translation adjustment.
ITEM 16 — FORM 10-K SUMMARY
None.
