UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~DECEMBER 31, 2016~~SEPTEMBER 30, 2017

Commission file number 1-5318

KENNAMETAL INC.

(Exact name of registrant as specified in its charter)



Pennsylvania		25-0900168
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

600 Grant Street Suite 5100 Pittsburgh, Pennsylvania		15219-2706
(Address of principal executive offices)		(Zip Code)

~~Website:~~ ~~www.kennametal.com~~

Registrant’s telephone number, including area code: (412) 248-8000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X] NO [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ~~or a~~ smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting ~~company”~~company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. ~~(Check one):~~



Large accelerated filer [X]		Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)		Smaller reporting company [ ]
		Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

Indicate the number of shares outstanding of each of the issuer’s classes of capital stock, as of the latest practicable date.



Title of Each Class		Outstanding at ~~January~~October 31, 2017
Capital Stock, par value $1.25 per share		~~80,193,977~~81,048,153

Table of Contents

KENNAMETAL INC.

FORM 10-Q

FOR THE THREE ~~AND SIX~~ MONTHS ENDED ~~DECEMBER 31, 2016~~SEPTEMBER 30, 2017

TABLE OF CONTENTS


Item No.	Item No.	Page No.	Item No.	Page No.

PART I - FINANCIAL INFORMATION	PART I - FINANCIAL INFORMATION		PART I - FINANCIAL INFORMATION

1.	Financial Statements		Financial Statements

	Condensed Consolidated Statements of Income (Unaudited) Three and six months ended December 31, 2016 and 2015	4	Condensed Consolidated Statements of Income (Unaudited) Three months ended September 30, 2017 and 2016	4

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three and six months ended December 31, 2016 and 2015	5	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three months ended September 30, 2017 and 2016	4

	Condensed Consolidated Balance Sheets (Unaudited) December 31, 2016 and June 30, 2016	6	Condensed Consolidated Balance Sheets (Unaudited) September 30, 2017 and June 30, 2017	5

	Condensed Consolidated Statements of Cash Flow (Unaudited) Six months ended December 31, 2016 and 2015	7	Condensed Consolidated Statements of Cash Flow (Unaudited) Three months ended September, 2017 and 2016	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	8	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

3.	Quantitative and Qualitative Disclosures About Market Risk	33	Quantitative and Qualitative Disclosures About Market Risk	29

4.	Controls and Procedures	33	Controls and Procedures	29

PART II - OTHER INFORMATION	PART II - OTHER INFORMATION		PART II - OTHER INFORMATION
1.			Legal Proceedings	30

2.	Unregistered Sales of Equity Securities and Use of Proceeds	34	Unregistered Sales of Equity Securities and Use of Proceeds	30

6.	Exhibits	35	Exhibits	31

Signatures	Signatures	36	Signatures	32

Table of Contents

FORWARD-LOOKING INFORMATION

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

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KENNAMETAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended December 31, Six Months Ended December 31,
(in thousands, except per share amounts) 2016 2015 2016 2015
Sales $ 487,573
$ 524,021
$ 964,713
$ 1,079,376
Cost of goods sold 339,950
383,215
673,560
787,345
Gross profit 147,623
140,806
291,153
292,031
Operating expense 111,004
123,580
230,869
252,824
Restructuring and asset impairment charges (Notes 8 and 18) 8,456
112,237
37,061
121,357
Loss on divestiture (Note 5) —
133,307
—
133,307
Amortization of intangibles 4,150
5,638
8,421
11,886
Operating income (loss) 24,013
(233,956 ) 14,802
(227,343 )
Interest expense 7,151
6,803
14,144
13,782
Other expense (income), net 726
(732 ) 844
353
Income (loss) before income taxes 16,136
(240,027 ) (186 ) (241,478 )
Provision (benefit) for income taxes 8,221
(71,216 ) 13,100
(66,964 )
Net income (loss) 7,915
(168,811 ) (13,286 ) (174,514 )
Less: Net income attributable to noncontrolling interests 653
416
1,108
939
Net income (loss) attributable to Kennametal $ 7,262
$ (169,227 ) $ (14,394 ) $ (175,453 )
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
Basic earnings (loss) per share $ 0.09
$ (2.12 ) $ (0.18 ) $ (2.20 )
Diluted earnings (loss) per share $ 0.09
$ (2.12 ) $ (0.18 ) $ (2.20 )
Dividends per share $ 0.20
$ 0.20
$ 0.40
$ 0.40
Basic weighted average shares outstanding 80,206
79,840
80,131
79,784
Diluted weighted average shares outstanding 81,026
79,840
80,131
79,784

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



	Three Months Ended September 30,
(in thousands, except per share amounts)	2017		2016
Sales	$	542,454	$	477,140
Cost of goods sold	357,461		333,610
Gross profit	184,993		143,530
Operating expense	119,330		119,865
Restructuring and asset impairment charges (Notes 7 and 17)	5,525		28,605
Amortization of intangibles	3,661		4,271
Operating income (loss)	56,477		(9,211		)
Interest expense	7,149		6,993
Other expense, net	88		118
Income (loss) before income taxes	49,240		(16,322		)
Provision for income taxes	9,602		4,879
Net income (loss)	39,638		(21,201		)
Less: Net income attributable to noncontrolling interests	455		455
Net income (loss) attributable to Kennametal	$	39,183	$	(21,656	)
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
Basic earnings (loss) per share	$	0.48	$	(0.27	)
Diluted earnings (loss) per share	$	0.48	$	(0.27	)
Dividends per share	$	0.20	$	0.20
Basic weighted average shares outstanding	81,071		80,054
Diluted weighted average shares outstanding	82,123		80,054

~~Table of Contents~~

KENNAMETAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2016 2015 2016 2015
Net income (loss) $ 7,915
$ (168,811 ) $ (13,286 ) $ (174,514 )
Other comprehensive loss, net of tax
Unrealized gain on derivatives designated and qualified as cash flow hedges 1,606
277
1,480
802
Reclassification of unrealized loss (gain) on expired derivatives designated and qualified as cash flow hedges 382
(418 ) 769
(2,184 )
Unrecognized net pension and other postretirement benefit gain 3,471
1,450
4,101
2,449
Reclassification of net pension and other postretirement benefit loss 1,796
1,203
3,630
2,422
Foreign currency translation adjustments (41,428 ) (23,639 ) (40,264 ) (42,488 )
Reclassification of foreign currency translation adjustment loss realized upon sale —
17,028
—
17,028
Total other comprehensive loss, net of tax (34,173 ) (4,099 ) (30,284 ) (21,971 )
Total comprehensive loss (26,258 ) (172,910 ) (43,570 ) (196,485 )
Less: comprehensive (loss) income attributable to noncontrolling interests (401 ) (111 ) 469
(128 )
Comprehensive loss attributable to Kennametal Shareholders $ (25,857 ) $ (172,799 ) $ (44,039 ) $ (196,357 )



	Three Months Ended September 30,
(in thousands)	2017			2016
Net income (loss)	$	39,638		$	(21,201	)
Other comprehensive income, net of tax
Unrealized loss on derivatives designated and qualified as cash flow hedges	(619		)	(126		)
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges	396			387
Unrecognized net pension and other postretirement benefit (loss) gain	(1,965		)	630
Reclassification of net pension and other postretirement benefit loss	1,779			1,834
Foreign currency translation adjustments	19,868			1,164
Total other comprehensive income, net of tax	19,459			3,889
Total comprehensive income (loss)	59,097			(17,312		)
Less: comprehensive income attributable to noncontrolling interests	739			870
Comprehensive income (loss) attributable to Kennametal Shareholders	$	58,358		$	(18,182	)

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

Table of Contents

KENNAMETAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(in thousands, except per share data)	December 31, 2016			June 30, 2016			September 30, 2017			June 30, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	102,001		$	161,579		$	110,697		$	190,629
Accounts receivable, less allowance for doubtful accounts of $12,247 and $12,724, respectively	339,479			370,916
Inventories (Note 11)	449,890			458,830
Deferred income taxes (Note 3)	—			26,713
Accounts receivable, less allowance for doubtful accounts of $13,455 and $13,693, respectively							385,624			380,425
Inventories (Note 10)							514,720			487,681
Other current assets	80,375			57,303			64,874			55,166
Total current assets	971,745			1,075,341			1,075,915			1,113,901
Property, plant and equipment:
Land and buildings	348,848			353,789			351,351			350,002
Machinery and equipment	1,518,731			1,511,462			1,616,376			1,577,776
Less accumulated depreciation	(1,142,446		)	(1,134,611		)	(1,212,208		)	(1,183,390		)
Property, plant and equipment, net	725,133			730,640			755,519			744,388
Other assets:
Investments in affiliated companies	2			2
Goodwill (Note 18)	291,952			298,487
Other intangible assets, less accumulated amortization of $119,522 and $114,093, respectively (Note 18)	197,267			207,208
Assets held for sale (Note 7)							7,547			6,980
Goodwill (Note 17)							304,678			301,367
Other intangible assets, less accumulated amortization of $134,941 and $129,981, respectively (Note 17)							187,740			190,527
Deferred income taxes (Note 3)	34,368			14,459			28,772			28,349
Other	34,314			36,646			39,529			29,984
Total other assets	557,903			556,802			568,266			557,207
Total assets	$	2,254,781		$	2,362,783		$	2,399,700		$	2,415,496
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases	$	254		$	732		$	96		$	190
Notes payable to banks	2,009			1,163			1,156			735
Accounts payable	168,880			182,039			186,342			215,722
Accrued income taxes	18,742			16,602			7,135			6,202
Accrued expenses	59,744			74,470			65,122			85,682
Other current liabilities	140,522			152,269			137,116			152,947
Total current liabilities	390,151			427,275			396,967			461,478
Long-term debt and capital leases, less current maturities (Notes 3 and 12)	694,329			693,548
Deferred income taxes (Note 3)	13,901			17,126
Long-term debt and capital leases, less current maturities (Note 11)							695,357			694,991
Deferred income taxes							15,479			14,883
Accrued pension and postretirement benefits	191,717			201,473			162,941			160,860
Accrued income taxes	2,756			3,100			2,737			2,636
Other liabilities	27,246			24,460			28,141			27,995
Total liabilities	1,320,100			1,366,982			1,301,622			1,362,843
EQUITY (Note 16)
Commitments and contingencies
EQUITY (Note 15)
Kennametal Shareholders’ Equity:
Preferred stock, no par value; 5,000 shares authorized; none issued	—			—			—			—
Capital stock, $1.25 par value; 120,000 shares authorized; 80,065 and 79,694 shares issued, respectively	100,082			99,618
Capital stock, $1.25 par value; 120,000 shares authorized; 80,967 and 80,665 shares issued, respectively							101,208			100,832
Additional paid-in capital	450,645			436,617			476,690			474,547
Retained earnings	734,233			780,597			788,599			765,607
Accumulated other comprehensive loss	(382,154		)	(352,509		)	(304,517		)	(323,692		)
Total Kennametal Shareholders’ Equity	902,806			964,323			1,061,980			1,017,294
Noncontrolling interests	31,875			31,478			36,098			35,359
Total equity	934,681			995,801			1,098,078			1,052,653
Total liabilities and equity	$	2,254,781		$	2,362,783		$	2,399,700		$	2,415,496

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

Table of Contents

KENNAMETAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)


	Six Months Ended December 31,						Three Months Ended September 30,
(in thousands)	2016			2015			2017			2016
OPERATING ACTIVITIES
Net loss	$	(13,286	)	$	(174,514	)
Net income (loss)							$	39,638		$	(21,201	)
Adjustments for non-cash items:
Depreciation	45,994			50,429			22,777			23,167
Amortization	8,421			11,886			3,661			4,271
Stock-based compensation expense	13,275			10,811			6,543			9,088
Restructuring and asset impairment charges (Note 8 and 18)	781			111,327
Restructuring and asset impairment charges (Note 7 and 17)							3,159			(77		)
Deferred income tax provision	1,274			(78,742		)	577			456
Loss on divestiture (Note 5)	—			133,307
Other	(2,773		)	(345		)	1,368			(1,312		)
Changes in certain assets and liabilities:
Accounts receivable	20,423			69,832			626			23,111
Inventories	(1,938		)	46,565			(19,704		)	838
Accounts payable and accrued liabilities	(7,618		)	(44,142		)
Accounts payable and accrued liabilities (Note 3)							(62,654		)	(2,145		)
Accrued income taxes	1,632			(12,390		)	398			(521		)
Accrued pension and postretirement benefits	(11,298		)	(18,176		)	(8,060		)	(5,644		)
Other	(8,309		)	(1,304		)	(8,203		)	(6,480		)
Net cash flow provided by operating activities	46,578			104,544
Net cash flow (used for) provided by operating activities							(19,874		)	23,551
INVESTING ACTIVITIES
Purchases of property, plant and equipment	(70,573		)	(61,175		)	(42,106		)	(42,264		)
Disposals of property, plant and equipment	3,509			4,402			426			1,138
Proceeds from divestiture (Note 5)	—			61,100
Other	100			814			(67		)	159
Net cash flow (used for) provided by investing activities	(66,964		)	5,141
Net cash flow used for investing activities							(41,747		)	(40,967		)
FINANCING ACTIVITIES
Net increase (decrease) in notes payable	1,005			(6,990		)	423			(128		)
Term debt borrowings	—			26,173
Term debt repayments	(427		)	(63,726		)	(93		)	(244		)
Purchase of capital stock	(125		)	(167		)	(55		)	(63		)
Dividend reinvestment and the effect of employee benefit and stock plans	3,462			1,473
Dividend reinvestment and the effect of employee benefit and stock plans (Note 3)							(3,969		)	(2,124		)
Cash dividends paid to Shareholders	(31,970		)	(31,845		)	(16,191		)	(15,980		)
Other	(6,626		)	(290		)	(320		)	(6,576		)
Net cash flow used for financing activities	(34,681		)	(75,372		)	(20,205		)	(25,115		)
Effect of exchange rate changes on cash and cash equivalents	(4,511		)	(829		)	1,894			363
CASH AND CASH EQUIVALENTS
Net (decrease) increase in cash and cash equivalents	(59,578		)	33,484
Net decrease in cash and cash equivalents							(79,932		)	(42,168		)
Cash and cash equivalents, beginning of period	161,579			105,494			190,629			161,579
Cash and cash equivalents, end of period	$	102,001		$	138,978		$	110,697		$	119,411

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

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.ORGANIZATION

Kennametal Inc. was incorporated in Pennsylvania in ~~1943.~~1943 as a manufacturer of tungsten carbide metal cutting tooling. From this beginning, Kennametal Inc. and its subsidiaries (collectively, Kennametal or the Company) ~~are~~has grown into a ~~leading~~ global ~~manufacturer~~leader in the development and ~~supplier~~application of ~~tooling, engineered components~~tungsten carbides, ceramics, super-hard materials and ~~advanced materials consumed~~solutions used in ~~production processes. We believe that our~~metal cutting and mission-critical wear applications to combat extreme conditions associated with wear fatigue, corrosion and high temperatures. The Company's reputation for ~~manufacturing excellence,~~material technology, metal cutting application knowledge, as well as ~~our technological~~ expertise and innovation ~~we deliver~~ in ~~our products~~the development of custom solutions and services, ~~helps us~~contributes to ~~achieve a~~its leading position in ~~our~~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 ~~our~~the Company's metalworking products include ~~metalworking and machinery~~ manufacturers ~~and suppliers across~~engaged in a diverse array of industries ~~including~~including: the ~~aerospace, defense,~~manufacturers of transportation vehicles and components, machine ~~tool,~~tools and light ~~machinery~~ and heavy ~~machinery,~~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 ~~a number of~~ equipment-intensive ~~industries~~operations such as coal mining, road construction, ~~and~~ quarrying, ~~as well as~~ oil and gas exploration, refining, production and supply. ~~Our end users' applications range from airframes to mining operations, engines to oil wells and turbochargers to processing.~~

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. In order to better leverage the opportunities in this business, in addition to being more agile and competitive in the marketplace, we are placing higher levels of focus, determination and leadership in this business. The Industrial and Widia segments in 2017 were formed from the 2016 Industrial segment. We now have three global reportable operating segments: Industrial, Widia, and Infrastructure.

2.BASIS OF PRESENTATION

The condensed consolidated financial statements, which include our accounts and those of our majority-owned subsidiaries, should be read in conjunction with our ~~2016~~2017 Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, ~~2016~~2017 was derived from the audited balance sheet included in our ~~2016~~2017 Annual Report on Form 10-K. These interim statements are unaudited; however, we believe that all adjustments necessary for a fair statement of the results of the interim periods were made and all adjustments are normal recurring adjustments. The results for the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016 ~~and 2015~~ are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. For example, a reference to ~~2017~~2018 is to the fiscal year ending June 30, ~~2017.~~2018. When used in this Form 10-Q, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

3.NEW ACCOUNTING STANDARDS

Adopted

In ~~November 2015,~~March 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting," which is intended to simplify equity-based award accounting and presentation. The guidance ~~on balance sheet~~impacts income tax accounting related to equity-based awards, the classification of ~~deferred taxes. The amendments in this guidance require that deferred tax~~awards as either equity or liabilities, and ~~assets be classified as noncurrent in a classified~~the classification on the 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.~~cash flows. We adopted this guidance July 1, ~~2016~~2017. The adoption of this guidance resulted in three changes. (1) The increase to deferred tax assets of $1.4 million related to cumulative excess tax benefits previously unrecognized was offset by a valuation allowance, due to the valuation allowance position of our U.S. entity. (2) Excess tax benefits, previously reported in the financing activities section of the condensed consolidated statement of cash flows, is now reported in the operating activities section, adopted on a prospective basis. Therefore, prior period ~~balance sheets~~statements of cash flow were not retrospectively ~~adjusted. Current deferred~~adjusted for this provision. (3) Employee taxes paid when Kennametal withholds shares for tax ~~assets of $26.7 million and current deferred tax liabilities of $0.6 million are~~withholding purposes, previously reported in the ~~June~~operating activities section of the condensed consolidated statement of cash flows, is now reported in the financing activities section, adopted on a retrospective basis. Therefore, prior period statements of cash flow were retrospectively adjusted for this provision: cash flow provided by operating activities and cash flow used for financing activities increased by $1.7 million for the three months ended September 30, ~~2016 balance sheet.~~2016.

In ~~April~~July 2015, the FASB issued ~~guidance on~~ASU No. 2015-11, "Simplifying the ~~presentation~~Measurement of ~~debt issuance costs. The guidance~~Inventory," which requires that ~~debt issuance costs related~~inventory other than LIFO be subsequently measured at the lower of cost and net realizable value, as opposed to ~~a recognized debt liability be presented in~~ the ~~balance sheet as a direct reduction from the carrying amount~~previous practice of ~~that debt liability, consistent with debt discounts. This~~lower of cost or market. Subsequent measurement is unchanged for inventory measured using LIFO. We adopted this guidance ~~was effective for Kennametal beginning~~ July 1, 2016 and was retrospectively applied to all periods presented. Debt issuance costs of $5.3 million and $6.0 million are reported as direct reductions of the carrying amounts of debt liabilities in the balance sheet as of December 31, and June 30, 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 adoption2017. Adoption of this guidance did not have a material impact on our condensed consolidated financial ~~position, results of operations and cash flows.~~statements.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Issued

In ~~October 2016,~~August 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities," which seeks to improve financial reporting and obtain closer alignment with risk management activities, in addition to simplifying the application of hedge accounting guidance 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.and additional disclosures. This guidance is effective for ~~Kennametal beginning~~us July 1, ~~2018.~~2019. We are in the process of assessing the impact the adoption of this guidance ~~will~~may have on our condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 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. It also requires additional disclosures. We will adopt this standard on July 1, 2018. ~~We have commenced our assessment of the new standard and developed a project plan to guide the implementation. This project plan includes~~Currently, we are analyzing the ~~standard’s~~standard's impact on our customer arrangements ~~comparing~~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 continue to evaluate the ~~requirements~~impact that the adoption of this ASU will have on the ~~new standard~~condensed consolidated financial statements, including the timing of revenue recognition associated with certain customized products primarily in the Industrial and ~~identifying potential differences from applying~~Infrastructure segments. Further, we continue to assess certain marketing programs and expect to identify more performance obligations under ASC 606 as compared with deliverables and separate units of account previously identified, primarily in the ~~requirements~~Industrial and Widia segments. We are evaluating the timing of revenue to determine if it will occur in the ~~new standard.~~same or different periods. We have not ~~yet~~ determined the complete impact of adoption on our condensed consolidated financial statements.


4.	SUPPLEMENTAL CASH FLOW DISCLOSURES

Six Months Ended December 31,
(in thousands) 2016 2015
Cash paid during the period for:
Interest $ 13,480
$ 13,076
Income taxes 10,191
25,735
Supplemental disclosure of non-cash information:
Changes in accounts payable related to purchases of property, plant and equipment 15,404
16,400


5.	~~DIVESTITURE~~

During the three months ended December 31, 2015, Kennametal completed the sale of the outstanding capital stock of: Kennametal Extrude Hone LLC and its wholly owned subsidiaries, Kennametal Stellite S.r.l. (Bellusco, Italy), Kennametal Stellite S.p.A. (Milan, Italy), Kennametal Stellite GmbH (Koblenz, Germany); and all of the assets of the businesses of: Tricon (manufacturing operations in Birmingham, Alabama; Chicago, Illinois; and Elko, Nevada), Landis (manufacturing operation in Waynesboro, Pennsylvania); and all of the assets located at the Biel, Switzerland manufacturing facility ("non-core businesses") to Madison Industries for an aggregate price of $61.1 million, net. A portion of the transaction proceeds were used to pay down revolver debt and the remaining balance was held as cash on hand.

The net book value of these non-core businesses was $191.9 million, which included a refinement to estimated working capital adjustment. We recognized a pre-tax loss on the sale of $133.3 million during the three months ended December 31, 2015, of which $126.0 million and $7.3 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.



	Three Months Ended September 30,
(in thousands)	2017		2016
Cash paid during the period for:
Income taxes	$	8,627	$	4,943
Interest	7,060		6,935
Supplemental disclosure of non-cash information:
Changes in accounts payable related to purchases of property, plant and equipment	11,477		15,404

6.5.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.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Level 3: Inputs that are unobservable.~~

As of ~~December 31, 2016,~~September 30, 2017, the fair values of the Company’s financial assets and financial liabilities are categorized as follows:


(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Derivatives ⁽¹⁾	$	—	$	2,543	$	—	$	2,543	$	—	$	163	$	—	$	163
Total assets at fair value	$	—	$	2,543	$	—	$	2,543	$	—	$	163	$	—	$	163

Liabilities:
Derivatives⁽¹⁾	$	—	$	1,287	$	—	$	1,287	$	—	$	1,674	$	—	$	1,674
Total liabilities at fair value	$	—	$	1,287	$	—	$	1,287	$	—	$	1,674	$	—	$	1,674

As of June 30, ~~2016,~~2017, the fair values of the Company’s financial assets and financial liabilities are categorized as follows:


(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Derivatives ⁽¹⁾	$	—	$	334	$	—	$	334	$	—	$	359	$	—	$	359
Total assets at fair value	$	—	$	334	$	—	$	334	$	—	$	359	$	—	$	359

Liabilities:
Derivatives ⁽¹⁾	$	—	$	763	$	—	$	763	$	—	$	910	$	—	$	910
Contingent consideration	—		—		6,600		6,600
Total liabilities at fair value	$	—	$	763	$	6,600	$	7,363	$	—	$	910	$	—	$	910

⁽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, related to a previous acquisition. During the the six months ended December 31, 2016, 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 the six months ended December 31, 2016 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 the six months ended December 31, 2016.


7.6.	DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

As part of our financial risk management program, we use certain derivative financial instruments. We do not enter into derivative transactions for speculative purposes and, therefore, hold no derivative instruments for trading purposes. We account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated and qualifies as a hedge of such items. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow. We measure hedge effectiveness by assessing the changes in the fair value or expected future cash flows of the hedged item. The ineffective portions are recorded in other expense, net.

The fair value of derivatives designated and not designated as hedging instruments in the condensed consolidated balance sheet are as follows:



(in thousands)	September 30, 2017			June 30, 2017
Derivatives designated as hedging instruments
Other current assets - range forward contracts	$	38		$	1
Other current liabilities - range forward contracts	(1,510		)	(671		)
Other assets - range forward contracts	15			—
Other liabilities - range forward contracts	—			(101		)
Total derivatives designated as hedging instruments	(1,457		)	(771		)
Derivatives not designated as hedging instruments
Other current assets - currency forward contracts	110			358
Other current liabilities - currency forward contracts	(164		)	(138		)
Total derivatives not designated as hedging instruments	(54		)	220
Total derivatives	$	(1,511	)	$	(551	)

109

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~~The fair value of derivatives designated and not designated as hedging instruments in the condensed consolidated balance sheet are as follows:~~

(in thousands) December 31,
2016 June 30,
2016
Derivatives designated as hedging instruments
Other current assets - range forward contracts $ 1,590
$ 323
Total derivatives designated as hedging instruments 1,590
323
Derivatives not designated as hedging instruments
Other current assets - currency forward contracts 953
11
Other current liabilities - currency forward contracts (1,287 ) (763 )
Total derivatives not designated as hedging instruments (334 ) (752 )
Total derivatives $ 1,256
$ (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 condensed consolidated balance sheet, with the offset to other expense, ~~(income),~~ net. Gains related to derivatives not designated as hedging instruments have been recognized as follows:


	Three Months Ended December 31,					Six Months Ended December 31,					Three Months Ended September 30,
(in thousands)	2016			2015		2016			2015		2017			2016
Other expense (income), net - currency forward contracts	$	(59	)	$	25	$	(377	)	$	8
Other expense, net - currency forward contracts											$	(116	)	$	(318	)

CASH FLOW HEDGES

Range forward contracts (a transaction where both a put option is purchased and a call option is sold) are designated as cash flow hedges and hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts ~~at maturity~~ are recorded in accumulated other comprehensive loss and are recognized as a component of other expense, net when the underlying sale of products or services is recognized into earnings. The notional amount of the contracts translated into U.S. dollars at ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016,~~2017, was ~~$52.7~~$75.7 million and ~~$53.3~~$75.3 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 ~~December 31, 2016,~~September 30, 2017, we expect to recognize into earnings in the next 12 months ~~$1.3~~$1.8 million of income on outstanding derivatives.

The following represents gains and losses related to cash flow hedges:

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2016 2015 2016 2015
Gains (losses) recognized in other comprehensive loss, net $ 1,606
$ (239 ) $ 1,481
$ 277
Losses (gains) reclassified from accumulated other comprehensive loss into other expense (income), net $ 382
$ 1,122
$ 768
$ (336 )



	Three Months Ended September 30,
(in thousands)	2017			2016
Losses recognized in other comprehensive loss, net	$	(619	)	$	(125	)
Losses reclassified from accumulated other comprehensive loss into other expense, net	$	392		$	386

No portion of the gains or losses recognized in earnings was due to ineffectiveness and no amounts were excluded from our effectiveness testing for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2017 and ~~2015.~~2016.

NET INVESTMENT HEDGES

As of September 30, 2017, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of €33.0 million as net investment hedges to hedge the foreign exchange exposure of our net investment in Euro-based subsidiaries. A loss of $1.3 million was recorded as a component of foreign currency translation adjustments in other comprehensive income (loss) for the three months ended September 30, 2017. We did not have net investment hedges during the three months ended September 30, 2016.

As of September 30, 2017, the foreign currency-denominated intercompany loans payable designated as net investment hedges consisted of:



Instrument	Notional (EUR in thousands)⁽²⁾		Notional (USD in thousands)⁽²⁾		Maturity
Foreign currency-denominated intercompany loan payable	€	26,728	$	31,616	June 26, 2022
Foreign currency-denominated intercompany loan payable	8,653		10,235		November 20, 2018
Foreign currency-denominated intercompany loan payable	2,041		2,414		October 11, 2019

⁽²⁾ Includes principal and accrued interest.


8.7.	RESTRUCTURING AND RELATED CHARGES

~~We are implementing~~In prior years, we implemented restructuring actions to streamline the Company's cost structure. ~~These~~The purpose of these initiatives ~~are expected~~was to improve the alignment of our cost structure with the current operating environment through headcount ~~reductions;~~reductions, as well as rationalization and consolidation of certain manufacturing facilities. These restructuring actions ~~are expected to be~~were substantially completed ~~by December~~in the September quarter of fiscal ~~2019~~2018 and ~~are anticipated to be~~were mostly cash expenditures.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Total restructuring and related charges since inception of $154.5 million has been recorded for these programs through September 30, 2017: $84.5 million in Industrial, $49.1 million in Infrastructure, $13.6 million in Widia and $7.3 million in Corporate.

We recorded restructuring and related charges of $6.9 million and $31.7 million for the three months ended September 30, 2017 and 2016, respectively. Of these amounts, restructuring charges totaled $5.5 million and $28.6 million, respectively. During the three months ended September 30, 2016, an immaterial amount of restructuring charges was related to inventory disposals and was recorded in cost of goods sold. There were no restructuring charges related to inventory disposals and recorded in cost of good sold during the three months ended September 30, 2017. Restructuring-related charges of $1.3 million and $2.0 million were recorded in cost of goods sold and $0.1 million and $1.1 million in operating expense for the three months ended September 30, 2017 and 2016, respectively.

As of September 30, 2017 and June 30, 2017, property, plant, and equipment of $7.5 million and $7.0 million, respectively, 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 depreciating these assets.

As of September 30, 2017 and June 30, 2017, $19.7 million and $27.3 million of the restructuring accrual is recorded in other current liabilities, respectively, and as of September 30, 2017 and June 30, 2017, $2.5 million is recorded in other liabilities in our condensed consolidated balance sheet. The amount attributable to each segment is as follows:



(in thousands)	June 30, 2017		Expense			Asset Write-Down			Translation		Cash Expenditures			September 30, 2017
Industrial
Severance	$	17,639	$	1,686		$	—		$	696	$	(7,627	)	$	12,394
Facilities	—		2,374			(2,374		)	—		—			—
Other	94		(30		)	—			2		(22		)	44
Total Industrial	$	17,733	$	4,030		$	(2,374	)	$	698	$	(7,649	)	$	12,438

Widia
Severance	$	2,434	$	342		$	—		$	141	$	(1,545	)	$	1,372
Facilities	—		747			(747		)	—		—			—
Other	—		(6		)	—			—		6			—
Total Widia	$	2,434	$	1,083		$	(747	)	$	141	$	(1,539	)	$	1,372

Infrastructure
Severance	$	9,573	$	381		$	—		$	158	$	(1,726	)	$	8,386
Facilities	21		38			(38		)	—		(21		)	—
Other	45		(7		)	—			—		5			43
Total Infrastructure	$	9,639	$	412		$	(38	)	$	158	$	(1,742	)	$	8,429
Total	$	29,806	$	5,525		$	(3,159	)	$	997	$	(10,930	)	$	22,239


8.	STOCK-BASED COMPENSATION

Stock Options

There were no grants made during the three months ended September 30, 2017 and 2016.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The total pre-tax charges for these programs are expected to be in the range of $155 million to $175 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 $114.9 million have been recorded for these programs through December 31, 2016: $60.3 million in Industrial, $36.7 million in Infrastructure, $10.6 million in Widia and $7.3 million in Corporate.

We have recorded restructuring and related charges of $11.8 million and $8.9 million for the three months ended December 31, 2016 and 2015, respectively. Of these amounts, restructuring charges totaled $8.8 million and $3.5 million, of which expense of $0.3 million and benefits of $0.3 million were related to inventory and were recorded in cost of goods sold, respectively. Restructuring-related charges of $2.1 million and $2.0 million were recorded in cost of goods sold and $0.9 million and $3.4 million in operating expense for the three months ended December 31, 2016 and 2015, respectively.

We have recorded restructuring and related charges of $43.4 million and $24.0 million for the six months ended December 31, 2016 and 2015, respectively. Of these amounts, restructuring charges totaled $37.3 million and $12.6 million, of which expense of $0.3 million and benefits of $0.3 million were related to inventory and were recorded in cost of goods sold, respectively. Restructuring-related charges of $4.1 million and $3.6 million were recorded in cost of goods sold and $2.0 million and $7.8 million in operating expense for the six months ended December 31, 2016 and 2015, respectively.

As of December 31, 2016, $16.1 million and $3.0 million of the restructuring accrual is recorded in other current liabilities and other liabilities, respectively, in our condensed consolidated balance sheet. The restructuring accrual of $15.7 million as of June 30, 2016 is recorded in other current liabilities. The amount attributable to each segment is as follows:

(in thousands) June 30, 2016 Expense Asset Write-Down Translation Cash Expenditures December 31, 2016
Industrial
Severance $ 8,180
$ 21,270
$ —
$ (412 ) $ (18,324 ) $ 10,714
Facilities —
100
(100 ) —
—
—
Other 809
(72 ) —
(10 ) (477 ) 250
Total Industrial $ 8,989
$ 21,298
$ (100 ) $ (422 ) $ (18,801 ) $ 10,964

Widia
Severance $ 909
$ 4,504
$ —
$ (87 ) $ (3,880 ) $ 1,446
Facilities —
9
(9 ) —
—
—
Other 90
(15 ) —
(3 ) (72 ) —
Total Widia 999
4,498
(9 ) (90 ) (3,952 ) 1,446

Infrastructure
Severance $ 5,301
$ 10,620
$ —
$ (205 ) $ (9,148 ) $ 6,568
Facilities 33
967
(967 ) —
—
33
Other 381
(36 ) —
(7 ) (245 ) 93
Total Infrastructure $ 5,715
$ 11,551
$ (967 ) $ (212 ) $ (9,393 ) $ 6,694
Total $ 15,703
$ 37,347
$ (1,076 ) $ (724 ) $ (32,146 ) $ 19,104


9.	~~STOCK-BASED COMPENSATION~~

~~Stock Options~~

~~There were no grants made during the six months ended December 31, 2016.~~

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~~KENNAMETAL INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~The assumptions used in our Black-Scholes valuation related to grants made during the six months ended December 31, 2015 were as follows:~~



~~Risk-free interest rate~~	~~1.4~~	%
~~Expected life (years)~~ ⁽²⁾	~~4.5~~
~~Expected volatility~~ ⁽³⁾	~~31.0~~	%
~~Expected dividend yield~~	~~2.0~~	%

~~(2) Expected life is derived from historical experience.~~

~~(3) Expected volatility is based on the implied historical volatility of our stock.~~

Changes in our stock options for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2017 were as follows:

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 (111,683 ) 27.34

Lapsed or forfeited (169,129 ) 30.51

Options outstanding, December 31, 2016 2,266,997
$ 34.27
4.3 $ 4,445
Options vested and expected to vest, December 31, 2016 2,243,491
$ 34.32
4.3 $ 4,369
Options exercisable, December 31, 2016 1,747,101
$ 35.96
3.0 $ 2,153



	Options		Weighted Average Exercise Price		Weighted Average Remaining Life (years)	Aggregate Intrinsic value (in thousands)
Options outstanding, June 30, 2017	1,726,791		$	34.08
Granted	—		—
Exercised	(1,628	)	26.99
Lapsed or forfeited	(60,849	)	39.40
Options outstanding, September 30, 2017	1,664,314		$	33.89	4.5	$	12,406
Options vested and expected to vest, September 30, 2017	1,654,835		$	33.92	4.5	$	12,291
Options exercisable, September 30, 2017	1,383,912		$	35.47	3.8	$	8,380

During the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015,~~ compensation expense related to stock options was $~~1.0~~0.2 million and $~~1.9~~0.5 million, respectively. As of ~~December 31, 2016,~~September 30, 2017, the total unrecognized compensation cost related to options outstanding was $~~1.4~~0.7 million and is expected to be recognized over a weighted average period of ~~1.6 years~~1.0 year.

~~Weighted average fair value of options granted during the six months ended December 31, 2015 was~~ ~~$6.84~~ ~~per option.~~ Fair value of options vested during the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016 ~~and 2015~~ was ~~$3.1~~$1.6 million and $~~2.3~~2.6 million, respectively.

~~Tax benefits relating to excess stock-based compensation deductions are presented in the condensed consolidated statements of cash flow as financing cash inflows.~~ No tax benefits were realized resulting from stock-based compensation deductions for the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016 due to the valuation allowance on U.S. deferred tax assets. ~~Tax benefits resulting from stock-based compensation deductions were less than amounts reported for financial reporting purposes by $1.7 million for the six months ended December 31, 2015.~~

The amount of cash received from the exercise of capital stock options during the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016 ~~and 2015~~ was ~~$3.1 million and $1.0 million, respectively.~~immaterial. No related tax benefit was realized for the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016 due to the valuation allowance on U.S. deferred tax ~~assets, and the related tax benefit was immaterial for the six months ended December 31, 2015.~~assets. The total intrinsic value of options exercised ~~was immaterial~~ during the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016 ~~and 2015.~~ was immaterial.

Under the provisions of the Kennametal Inc. Stock and Incentive Plan of 2010 as amended and restated on October 22, 2013 and as further amended January 27, 2015, and the Kennametal Inc. 2016 Stock and Incentive Plan, plan participants may deliver stock, owned by the holder for at least six months, in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. The fair market value of shares delivered during both the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016 ~~and 2015~~ was immaterial.

Restricted Stock Units – Time Vesting and Performance Vesting

Performance vesting restricted stock units are earned pro rata each year if certain performance goals are met over a three-year period and are also subject to a service condition that requires the individual to be employed by the Company at the vesting date after the three-year performance period, with the exception of retirement eligible grantees, who upon retirement are entitled to vest in 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 the three months ended September 30, 2017 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, 2017	280,250		$	27.62	1,153,444		$	27.66
Granted	158,397		38.81		414,515		37.50
Vested	(10,031	)	42.83		(371,610	)	30.81
Performance metric adjustments, net	16,766		25.84		—		—
Forfeited	—		—		(10,311	)	32.50
Unvested, September 30, 2017	445,382		$	31.19	1,186,038		$	30.06

1312

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Changes in our time vesting and performance vesting restricted stock units for~~During the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016, ~~were as follows:~~

Performance Vesting Stock Units Performance Vesting Weighted Average Fair Value
Time Vesting
Stock Units
Time Vesting Weighted Average Fair Value
Unvested performance vesting and time vesting restricted stock units, June 30, 2016 115,467
$ 36.96
1,014,744
$ 31.97
Granted 235,241
26.35
586,662
25.01
Vested (16,084 ) 45.24
(300,888 ) 36.11
Performance metric not achieved (35,980 ) 26.35
—
—
Forfeited (17,354 ) 35.31
(49,727 ) 27.20
Unvested performance vesting and time vesting restricted stock units, December 31, 2016 281,290
$ 27.69
1,250,791
$ 27.89

~~During the six months ended December 31, 2016 and 2015,~~ compensation expense related to time vesting and performance vesting restricted stock units was $~~12.3~~6.0 million and $~~8.8~~8.3 million, respectively. As of ~~December 31, 2016,~~September 30, 2017, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $~~19.8~~27.5 million and is expected to be recognized over a weighted average period of ~~2.2~~2.3 years.


~~10.~~9.	BENEFIT PLANS

We sponsor several defined benefit pension plans. Additionally, we provide varying levels of postretirement health care and life insurance benefits to some U.S. employees.

The table below summarizes the components of net periodic pension income:

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2016 2015 2016 2015
Service cost $ 727
$ 1,156
$ 1,460
$ 2,319
Interest cost 7,770
9,438
15,579
18,923
Expected return on plan assets (14,672 ) (14,657 ) (29,429 ) (29,364 )
Amortization of transition obligation 22
21
45
42
Amortization of prior service credit (113 ) (104 ) (226 ) (209 )
Recognition of actuarial losses 2,088
1,815
4,200
3,648
Special termination benefit charge —
54
—
107
Net periodic pension income $ (4,178 ) $ (2,277 ) $ (8,371 ) $ (4,534 )

~~The special termination benefit charge of $0.1 million during the six months ended December 31, 2015 is the result of lump sum payments to several terminated Executive Retirement Plan participants.~~



	Three Months Ended September 30,
(in thousands)	2017			2016
Service cost	$	404		$	733
Interest cost	7,657			7,809
Expected return on plan assets	(14,090		)	(14,757		)
Amortization of transition obligation	23			23
Amortization of prior service cost (credit)	173			(113		)
Recognition of actuarial losses	1,710			2,112
Net periodic pension (income) cost	$	(4,123	)	$	(4,193	)

The table below summarizes the components of net periodic other postretirement benefit cost:


	Three Months Ended December 31,						Six Months Ended December 31,						Three Months Ended September 30,
(in thousands)	2016			2015			2016			2015			2017			2016
Interest cost	$	168		$	210		$	337		$	420		$	157		$	168
Amortization of prior service credit	(6		)	(5		)	(11		)	(11		)	(6		)	(6		)
Recognition of actuarial loss	89			81			177			162			70			89
Net periodic other postretirement benefit cost	$	251		$	286		$	503		$	571		$	221		$	251

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~~KENNAMETAL INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~


~~11.~~10.	INVENTORIES

We used the last-in, first-out (LIFO) method of valuing inventories for 4641 percent and 4443 percent of total inventories at ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016,~~2017, respectively. Since inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs. Therefore, the interim financial results are subject to any final year-end LIFO inventory adjustments.

Inventories consisted of the following:

(in thousands) December 31, 2016 June 30, 2016
Finished goods $ 280,427
$ 284,054
Work in process and powder blends 150,881
166,274
Raw materials 76,003
68,472
Inventories at current cost 507,311
518,800
Less: LIFO valuation (57,421 ) (59,970 )
Total inventories $ 449,890
$ 458,830

During the three months ended December 31, 2016, the Company identified and recorded an adjustment to correct an error impacting the excess and obsolete inventory reserve as of September 30, 2016. This resulted in an increase of $1.4 million to cost of goods sold for the three months ended December 31, 2016 that should have been recorded in the three months ended September 30, 2016. There was no impact to cost of goods sold for the six months ended December 31, 2016 nor to inventories as of December 31, 2016. After evaluation, the Company determined that the impact was not material to the previously issued interim financial statements.



(in thousands)	September 30, 2017			June 30, 2017
Finished goods	$	298,266		$	290,817
Work in process and powder blends	190,638			166,857
Raw materials	86,072			87,627
Inventories at current cost	574,976			545,301
Less: LIFO valuation	(60,256		)	(57,620		)
Total inventories	$	514,720		$	487,681

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


~~12.~~11.	LONG-TERM DEBT

Our five-year, multi-currency, revolving credit facility, as amended and restated in April 2016 (Credit Agreement) ~~permits~~provides for revolving credit loans of up to $600 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the Credit agreement). We were in compliance with all covenants as of ~~December 31, 2016.~~September 30, 2017. We had no borrowings outstanding under the Credit Agreement as of ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016.~~2017. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries. The Credit Agreement matures in April 2021.

Fixed rate debt had a fair market value of ~~$696.6~~$707.2 million and $704.0 million at ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016,~~2017, respectively. The Level 2 fair value is determined based on the quoted market price of this debt as of ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016,~~2017, respectively.

~~13.ENVIRONMENTAL MATTERS~~


12.	ENVIRONMENTAL MATTERS

The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain of our locations.

Superfund Sites Among other environmental laws, we are subject to the Comprehensive Environmental Response Compensation and Liability Act of 1980 ~~(Superfund)~~(CERCLA), under which we have been designated by the United States Environmental Protection Agency (USEPA) as a ~~potentially responsible party~~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 Matters We establish and maintain reserves for other potential environmental issues. At ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016,~~2017, the balances of these reserves were ~~$12.1~~$12.6 million and ~~$12.5~~$12.4 million, respectively. These reserves represent anticipated costs associated with the remediation of these issues.

~~Table of Contents~~

~~KENNAMETAL INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

The reserves we have established for environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the USEPA, other governmental agencies and by the PRP groups in which we are participating. Although the reserves currently appear to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The reserved and unreserved liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.

We maintain a Corporate Environmental Health and Safety (EHS) Department to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS ~~coordinators~~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.


~~14.~~13.	INCOME TAXES

The effective income tax rates for the three months ended ~~December 31,~~September 30, 2017 and 2016 ~~and 2015~~ were ~~50.9~~19.5 percent (provision on income) and ~~29.7~~29.9 percent ~~(benefit~~(provision on a loss), respectively. The ~~effective income tax rate for the six months ended December 31, 2016 was not meaningful and was 27.7 percent (benefit on a loss) for the six months ended December 31, 2015. The~~ change ~~in both periods~~ was primarily driven by ~~an asset impairment charge; the tax impact of the divestiture of non-core businesses~~U.S. losses in the prior ~~year; losses~~year and U.S. income in the ~~U.S. that cannot~~current year, neither of which can be tax affected ~~in the current year; jurisdictional mix of earnings; and the effect of the R&D legislation enacted in the prior year.~~due to a full valuation allowance on our domestic deferred tax assets.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


~~15.~~14.	EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of shares outstanding during the period, while diluted earnings per share is calculated to reflect the potential dilution that would occur related to the issuance of capital stock under stock option grants, performance awards and restricted stock units. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options, performance awards and restricted stock units.

For the six months ended December 31, 2016 and for the three and six months ended December 31, 2015, the effect of unexercised capital stock options and unvested restricted stock units was anti-dilutive as a result of net losses in the periods and therefore has been excluded from diluted shares outstanding as well as from the diluted earnings per share calculation. For purposes of determining the number of diluted shares outstanding, ~~for the three months ended December 31, 2016,~~ weighted average shares outstanding for basic earnings per share calculations were increased due solely to the dilutive effect of unexercised capital stock options, unvested performance awards and unvested restricted stock units by ~~0.8~~1.1 million ~~shares.~~shares for the three months ended September 30, 2017. Unexercised capital stock options, performance awards and restricted stock units of ~~1.7~~0.8 million shares for the three months ended ~~December 31, 2016~~September 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. For the three months ended September 30, 2016, 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.


15.	EQUITY

A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests as of September 30, 2017 and 2016 is as follows:



	Kennametal Shareholders’ Equity
(in thousands)	Capital stock			Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Non- controlling interests		Total equity
Balance as of June 30, 2017	$	100,832		$	474,547		$	765,607		$	(323,692	)	$	35,359	$	1,052,653
Net income	—			—			39,183			—			455		39,638
Other comprehensive income	—			—			—			19,175			284		19,459
Dividend reinvestment	2			53			—			—			—		55
Capital stock issued under employee benefit and stock plans⁽³⁾	376			2,143			—			—			—		2,519
Purchase of capital stock	(2		)	(53		)	—			—			—		(55		)
Cash dividends paid	—			—			(16,191		)	—			—		(16,191		)
Balance as of September 30, 2017	$	101,208		$	476,690		$	788,599		$	(304,517	)	$	36,098	$	1,098,078



	Kennametal Shareholders’ Equity
(in thousands)	Capital stock			Additional paid-in capital			Retained earnings			��	Accumulated other comprehensive loss			Non- controlling interests		Total equity
Balance as of June 30, 2016	$	99,618		$	436,617		$	780,597			$	(352,509	)	$	31,478	$	995,801
Net (loss) income	—			—			(21,656		)		—			455		(21,201		)
Other comprehensive income	—			—			—				3,474			415		3,889
Dividend reinvestment	3			60			—				—			—		63
Capital stock issued under employee benefit and stock plans⁽³⁾	290			6,609			—				—			—		6,899
Purchase of capital stock	(3		)	(60		)	—				—			—		(63		)
Cash dividends paid	—			—			(15,980		)		—			—		(15,980		)
Balance as of September 30, 2016	$	99,908		$	443,226		$	742,961			$	(349,035	)	$	32,348	$	969,408

1615

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~16.EQUITY~~

~~A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests as of December 31, 2016 and 2015 is as follows:~~

Kennametal Shareholders’ Equity
(in thousands) Capital
stock Additional
paid-in
capital Retained
earnings Accumulated
other
comprehensive loss Non-
controlling
interests Total equity
Balance as of June 30, 2016 $ 99,618
$ 436,617
$ 780,597
$ (352,509 ) $ 31,478
$ 995,801
Net (loss) income —
—
(14,394 ) —
1,108
(13,286 )
Other comprehensive income —
—
—
(29,645 ) (639 ) (30,284 )
Dividend reinvestment 5
122
—
—
—
127
Capital stock issued under employee benefit and stock plans⁽⁴⁾
464
14,028
—
—
—
14,492
Purchase of capital stock (5 ) (122 ) —
—
—
(127 )
Cash dividends paid —
—
(31,970 ) —
(72 ) (32,042 )
Balance as of December 31, 2016 $ 100,082
$ 450,645
$ 734,233
$ (382,154 ) $ 31,875
$ 934,681

Kennametal Shareholders’ Equity
(in thousands)
Capital
stock

Additional
paid-in
capital

Retained
earnings
Accumulated
other
comprehensive
loss
Non-
controlling
interests
Total equity
Balance as of June 30, 2015 $ 99,219
$ 419,829
$ 1,070,282
$ (243,523 ) $ 29,628
$ 1,375,435
Net (loss) income —
—
(175,453 ) —
939
(174,514 )
Other comprehensive loss —
—
—
(20,904 ) (1,067 ) (21,971 )
Dividend reinvestment 8
159
—
—
—
167
Capital stock issued under employee benefit and stock plans⁽⁴⁾
369
6,874
—
—
—
7,243
Purchase of capital stock (8 ) (159 ) —
—
—
(167 )
Cash dividends paid —
—
(31,845 ) —
(71 ) (31,916 )
Balance as of December 31, 2015 $ 99,588
$ 426,703
$ 862,984
$ (264,427 ) $ 29,429
$ 1,154,277

~~(4)~~(3) Net of restricted stock units delivered upon vesting to satisfy tax withholding requirements.

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


~~17.~~16.	ACCUMULATED OTHER COMPREHENSIVE LOSS

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

The components of, and changes in, AOCL were as follows, net of tax, for the three months ended September 30, 2017 (in thousands):



Attributable to Kennametal:	Postretirement benefit plans			Currency translation adjustment			Derivatives			Total
Balance, June 30, 2017	$	(189,038	)	$	(126,606	)	$	(8,048	)	$	(323,692	)
Other comprehensive income before reclassifications	(1,965		)	19,584			(619		)	17,000
Amounts reclassified from AOCL	1,779			—			396			2,175
Net current period other comprehensive income	(186		)	19,584			(223		)	19,175
AOCL, September 30, 2017	$	(189,224	)	$	(107,022	)	$	(8,271	)	$	(304,517	)

Attributable to noncontrolling interests:
Balance, June 30, 2017	$	—		$	(2,164	)	$	—		$	(2,164	)
Other comprehensive income before reclassifications	—			284			—			284
Net current period other comprehensive income	—			284			—			284
AOCL, September 30, 2017	$	—		$	(1,880	)	$	—		$	(1,880	)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The components of, and changes in, AOCL were as follows, net of tax, for the ~~six~~three months ended ~~December 31,~~September 30, 2016 (in thousands):

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 income (loss) before reclassifications 4,101
(39,625 ) 1,480
(34,044 )
Amounts reclassified from AOCL 3,630
—
769
4,399
Net current period other comprehensive
income (loss)
7,731
(39,625 ) 2,249
(29,645 )
AOCL, December 31, 2016 $ (204,432 ) $ (170,837 ) $ (6,885 ) $ (382,154 )

Attributable to noncontrolling interests:
Balance, June 30, 2016 $ —
$ (3,446 ) $ —
$ (3,446 )
Other comprehensive income before
reclassifications
—
(639 ) —
(639 )
Net current period other comprehensive loss —
(639 ) —
(639 )
AOCL, December 31, 2016 $ —
$ (4,085 ) $ —
$ (4,085 )

~~The components of, and changes in, AOCL were as follows, net of tax, for the six months ended December 31, 2015 (in thousands):~~

Attributable to Kennametal: Postretirement benefit plans Currency translation adjustment Derivatives Total
Balance, June 30, 2015 $ (138,793 ) $ (97,309 ) $ (7,421 ) $ (243,523 )
Other comprehensive income (loss) before reclassifications 2,449
(41,421 ) 802
(38,170 )
Amounts reclassified from AOCL 2,422
17,028
(2,184 ) 17,266
Net current period other comprehensive
  income (loss)
4,871
(24,393 ) (1,382 ) (20,904 )
AOCL, December 31, 2015 $ (133,922 ) $ (121,702 ) $ (8,803 ) $ (264,427 )

Attributable to noncontrolling interests:
Balance, June 30, 2015 $ —
$ (2,258 ) $ —
$ (2,258 )
Other comprehensive loss before
  reclassifications
—
(1,067 ) —
(1,067 )
Net current period other comprehensive
  loss
—
(1,067 ) —
(1,067 )
AOCL, December 31, 2015 $ —
$ (3,325 ) $ —
$ (3,325 )

~~Table of Contents~~

~~KENNAMETAL INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~



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 income before reclassifications	630			749			(126		)	1,253
Amounts reclassified from AOCL	1,834			—			387			2,221
Net current period other comprehensive income	2,464			749			261			3,474
AOCL, September 30, 2016	$	(209,699	)	$	(130,463	)	$	(8,873	)	$	(349,035	)

Attributable to noncontrolling interests:
Balance, June 30, 2016	$	—		$	(3,446	)	$	—		$	(3,446	)
Other comprehensive income before reclassifications	—			415			—			415
Net current period other comprehensive income	—			415			—			415
AOCL, September 30, 2016	$	—		$	(3,031	)	$	—		$	(3,031	)

Reclassifications out of AOCL for the three ~~and six~~ months ended ~~December 31,~~September 30, 2017 and 2016 ~~and 2015~~ consisted of the following (in thousands):

Three Months Ended December 31, Six Months Ended December 31,
Details about AOCL components 2016 2015 2016 2015 Affected line item in the Income Statement
Gains and losses on cash flow hedges:
Forward starting interest rate swaps $ 545
$ 525
$ 1,090
$ 1,049
Interest expense
Currency exchange contracts (163 ) (1,199 ) (321 ) (4,572 ) Other expense (income), net
Total before tax 382
(674 ) 769
(3,523 )
Tax impact —
256
—
1,339
Provision (benefit) for income taxes
Net of tax $ 382
$ (418 ) $ 769
$ (2,184 )

Postretirement benefit plans:
Amortization of transition obligations $ 22
$ 21
$ 45
$ 42
See note 10 for further details
Amortization of prior service credit (119 ) (109 ) (237 ) (220 ) See note 10 for further details
Recognition of actuarial losses 2,177
1,896
4,377
3,810
See note 10 for further details
Total before tax 2,080
1,808
4,185
3,632

Tax impact (284 ) (605 ) (555 ) (1,210 ) Provision (benefit) for income taxes
Net of tax $ 1,796
$ 1,203
$ 3,630
$ 2,422

Foreign currency translation adjustments:
Released due to divestiture $ —
$ 17,028
$ —
$ 17,028
Loss on divestiture
Total before taxes —
17,028
—
17,028

Tax impact —
—
—
—
Provision (benefit) for income taxes
Net of tax $ —
$ 17,028
$ —
$ 17,028

~~The amount of income tax allocated to each component of other comprehensive loss for the three months ended December 31, 2016 and 2015:~~

2016 2015
(in thousands) Pre-tax Tax impact Net of tax Pre-tax Tax impact Net of tax
Unrealized gain on derivatives designated and qualified as cash flow hedges $ 1,606
$ —
$ 1,606
$ 447
$ (170 ) $ 277
Reclassification of unrealized loss (gain) on expired derivatives designated and qualified as cash flow hedges 382
—
382
(674 ) 256
(418 )
Unrecognized net pension and other postretirement benefit gain 4,639
(1,168 ) 3,471
1,949
(499 ) 1,450
Reclassification of net pension and other postretirement benefit loss 2,080
(284 ) 1,796
1,808
(605 ) 1,203
Foreign currency translation adjustments (41,428 ) —
(41,428 ) (24,643 ) 1,004
(23,639 )
Reclassification of foreign currency translation adjustment loss realized upon sale —
—
—
17,028
—
17,028
Other comprehensive loss $ (32,721 ) $ (1,452 ) $ (34,173 ) $ (4,085 ) $ (14 ) $ (4,099 )



	Three Months Ended September 30,
Details about AOCL components	2017			2016			Affected line item in the Income Statement
Gains and losses on cash flow hedges:
Forward starting interest rate swaps	$	566		$	545		Interest expense
Currency exchange contracts	(170		)	(158		)	Other expense, net
Total before tax	396			387
Tax impact	—			—			Provision for income taxes
Net of tax	$	396		$	387

Postretirement benefit plans:
Amortization of transition obligations	$	23		$	23		See note 9 for further details
Amortization of prior service credit	167			(119		)	See note 9 for further details
Recognition of actuarial losses	1,780			2,201			See note 9 for further details
Total before tax	1,970			2,105
Tax impact	(191		)	(271		)	Provision for income taxes
Net of tax	$	1,779		$	1,834

1917

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The amount of income tax allocated to each component of other comprehensive ~~loss~~income for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2017 and ~~2015:~~2016:

2016 2015
(in thousands) Pre-tax Tax impact Net of tax Pre-tax Tax impact Net of tax
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges $ 1,480
$ —
$ 1,480
$ 1,294
$ (492 ) $ 802
Reclassification of unrealized loss (gain) on expired derivatives designated and qualified as cash flow hedges 769
—
769
(3,523 ) 1,339
(2,184 )
Unrecognized net pension and other postretirement benefit gain 5,401
(1,300 ) 4,101
3,216
(767 ) 2,449
Reclassification of net pension and other postretirement benefit loss 4,185
(555 ) 3,630
3,632
(1,210 ) 2,422
Foreign currency translation adjustments (40,264 ) —
(40,264 ) (43,548 ) 1,060
(42,488 )
Reclassification of foreign currency translation adjustment loss realized upon sale —
—
—
17,028
—
17,028
Other comprehensive loss $ (28,429 ) $ (1,855 ) $ (30,284 ) $ (21,901 ) $ (70 ) $ (21,971 )



				2017									2016
(in thousands)	Pre-tax			Tax impact			Net of tax			Pre-tax			Tax impact			Net of tax
Unrealized loss on derivatives designated and qualified as cash flow hedges	$	(619	)	$	—		$	(619	)	$	(126	)	$	—		$	(126	)
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges	396			—			396			387			—			387
Unrecognized net pension and other postretirement benefit (loss) gain	(2,600		)	635			(1,965		)	716			(86		)	630
Reclassification of net pension and other postretirement benefit loss	1,970			(191		)	1,779			2,105			(271		)	1,834
Foreign currency translation adjustments	20,445			(577		)	19,868			1,164			—			1,164
Other comprehensive income	$	19,592		$	(133	)	$	19,459		$	4,246		$	(357	)	$	3,889


~~18.~~17.	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.

~~At the beginning~~A summary 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 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 allocated our goodwill from the former Industrial segment to the current Industrial and Widia segments using a relative fair value approach. The restated Industrial reporting unit passed the goodwill impairment test with fair value substantially exceeded the carrying ~~value. The new Widia reporting unit's fair value approximates its carrying value.~~amount of goodwill attributable to each segment, as well as the changes in such, is as follows:

~~See Note 19 for further discussion regarding the Company's segments.~~

We are currently exploring strategic alternatives for one of our non-core Infrastructure businesses. The estimated net book value of the business is approximately $30 million as of December 31, 2016. As the strategic direction has not yet been determined for this business, the Company cannot determine if additional impairment charges will be incurred.



(in thousands)	Industrial			Widia			Infrastructure			Total
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

Activity for the three months ended September 30, 2017:
Change in gross goodwill due to translation	3,176			135			—			3,311

Gross goodwill	413,870			41,650			633,211			1,088,731
Accumulated impairment losses	(137,204		)	(13,638		)	(633,211		)	(784,053		)
Balance as of September 30, 2017	$	276,666		$	28,012		$	—		$	304,678

2018

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~A summary of the carrying amount of goodwill attributable to each segment, as well as the changes in such, is as follows:~~

(in thousands) Industrial Widia Infrastructure Total
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 the six months ended December 31, 2016:
Change in gross goodwill due to translation (6,549 ) 14
—
(6,535 )
Gross goodwill 402,156
40,638
633,211
1,076,005
Accumulated impairment losses (137,204 ) (13,638 ) (633,211 ) (784,053 )
Balance as of December 31, 2016 $ 264,952
$ 27,000
$ —
$ 291,952

~~Fiscal 2016 December Quarter Impairment Charge~~

As previously disclosed, we recorded a 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 Industrial segment for an indefinite-lived trademark intangible asset. These impairment charges were recorded in restructuring and asset impairment charges in our condensed consolidated statements of income.

~~Divestiture Impact on Goodwill and Other Intangible Assets~~

During the three months ended December 31, 2015, we completed the sale of non-core businesses, see Note 5. 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 were recorded in the loss on divestiture account in our condensed consolidated statements of income.

The components of our other intangible assets were as follows:


	Estimated Useful Life (in years)	December 31, 2016					June 30, 2016						Estimated Useful Life (in years)	September 30, 2017					June 30, 2017
(in thousands)	Estimated Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization				Gross Carrying Amount		Accumulated Amortization			Estimated Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization				Gross Carrying Amount		Accumulated Amortization
Contract-based	3 to 15	$	7,058	$	(6,996	)		$	7,152	$	(6,886	)	3 to 15	$	7,071	$	(7,027	)		$	7,064	$	(7,014	)
Technology-based and other	4 to 20	45,914		(27,152		)		47,323		(27,011		)	4 to 20	46,875		(29,911		)		46,461		(29,061		)
Customer-related	10 to 21	203,731		(67,922		)		205,471		(66,938		)	10 to 21	206,552		(77,963		)		205,502		(74,669		)
Unpatented technology	10 to 30	31,659		(9,363		)		31,837		(4,614		)	10 to 30	31,833		(11,235		)		31,754		(10,589		)
Trademarks	5 to 20	12,230		(8,089		)		12,668		(8,644		)	5 to 20	12,492		(8,805		)		12,401		(8,648		)
Trademarks	Indefinite	16,197		—				16,850		—			Indefinite	17,858		—				17,326		—
Total		$	316,789	$	(119,522	)		$	321,301	$	(114,093	)		$	322,681	$	(134,941	)		$	320,508	$	(129,981	)

During the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015,~~ we recorded amortization expense of ~~$8.4~~$3.7 million and ~~$11.9~~$4.3 million, respectively, related to our other intangible assets.


~~19.~~18.	SEGMENT DATA

Kennametal delivers productivity to customers seeking peak performance in demanding environments by providing innovative custom and standard wear-resistant solutions. To provide these solutions, we harness our knowledge of advanced materials and application development with a commitment to environmental sustainability. Our product offering includes a wide selection of standard and customized technologies for metalworking, such as sophisticated metal cutting tools, tooling systems and services, as well as advanced, high-performance materials, such as cemented tungsten carbide products, super alloys, coatings and investment castings to address customer demands. We offer these products through a variety of channels to meet customer-specified needs.

~~Table of Contents~~

~~KENNAMETAL INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

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 our three reportable operating segments represent the aggregation of two or more operating segments.

The Industrial segment generally serves customers that operate in industrial end markets such as transportation, general engineering, ~~and~~ aerospace and defense market sectors, as well as the machine tool industry, delivering high performance metalworking tools for specified purposes. ~~The~~Our customers in these end markets use our products and services in the manufacture of engines, airframes, automobiles, trucks, ships and other various types of industrial equipment. The technology and customization requirements ~~for customers~~ we ~~serve~~provide vary by customer, application and industry. ~~The value we deliver~~Industrial goes to market under the Kennametal® brand through its direct sales force, a network of independent and national chain distributors, integrated supplier channels and via the Internet. Application engineers and technicians are critical to the sales process and directly assist our ~~Industrial segment~~ customers ~~centers on our~~with specified product design, selection, application ~~expertise~~ and ~~our diverse offering of products and services, with products delivered through a diverse base including direct and indirect channels.~~support.

The Widia segment generally serves customers that operate in industrial end markets, primarily in general engineering, delivering high performance metalworking tools for general purposes. Whereas the Industrial segment's core is in application expertise and specific customer needs, Widia offers a ~~competitive alternative for general~~focused assortment of standard custom metal cutting solutions ~~across a broader platform for application, with products delivered~~to general engineering, aerospace, energy and transportation customers. We serve our customers primarily through ~~indirect channels.~~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.

The Infrastructure segment generally serves customers that operate in the energy and earthworks ~~and energy~~market sectors ~~who~~that support primary industries such as oil and gas, power generation and chemicals; underground, surface and hard-rock ~~mining,~~mining; highway construction and road ~~maintenance. Generally, we rely on customer intimacy~~maintenance; and process industries such as food and feed. Our success is determined by our ability to ~~serve this segment. By gaining~~gain an in-depth understanding of our customers’ engineering and development needs, ~~we are able~~ to ~~offer~~provide complete system solutions and high-performance capabilities to optimize and add value to their operations.

~~Our~~ Infrastructure markets its products primarily under the Kennametal® brand and sells through a direct sales ~~and operating income (loss) by segment are~~force as ~~follows:~~

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2016 2015 2016 2015
Sales:
Industrial ⁽⁵⁾
$ 267,492
$ 268,578
$ 536,536
$ 538,770
Widia ⁽⁵⁾
42,874
42,305
83,888
85,447
Infrastructure 177,207
213,138
344,289
455,159
Total sales $ 487,573
$ 524,021
$ 964,713
$ 1,079,376
Operating income (loss):
Industrial ⁽⁵⁾
$ 18,067
$ 12,025
$ 23,603
$ 33,483
Widia ⁽⁵⁾
(2,666 ) (4,665 ) (8,403 ) (6,374 )
Infrastructure 10,274
(237,738 ) 2,687
(246,166 )
Corporate (1,662 ) (3,578 ) (3,085 ) (8,286 )
Total operating income (loss) 24,013
(233,956 ) 14,802
(227,343 )
Interest expense 7,151
6,803
14,144
13,782
Other expense (income), net 726
(732 ) 844
353
Income (loss) from continuing operations before income taxes $ 16,136
$ (240,027 ) $ (186 ) $ (241,478 )
well as distributors.

2219

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Total assets~~Our sales and operating income (loss) by segment are as follows:


					Three Months Ended September 30,
(in thousands)	December 31, 2016		June 30, 2016		2017			2016
Industrial ⁽⁵⁾	$	1,054,688	$	1,019,887
Widia ⁽⁵⁾	193,343		195,339
Sales:
Industrial					$	297,464		$	269,043
Widia					45,243			41,015
Infrastructure					199,747			167,082
Total sales					$	542,454		$	477,140
Operating income (loss):
Industrial					$	34,812		$	5,556
Widia					62			(5,756		)
Infrastructure	755,836		849,447		22,069			(7,587		)
Corporate	250,914		298,110		(466		)	(1,424		)
Total assets	$	2,254,781	$	2,362,783
Total operating income (loss)					56,477			(9,211		)
Interest expense					7,149			6,993
Other expense, net					88			118
Income (loss) from continuing operations before income taxes					$	49,240		$	(16,322	)

~~(5) Amounts for the three and six months ended December 31, 2015 and as of June 30, 2016 have been restated to reflect the change in reportable operating segments.~~

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Kennametal Inc. iswas incorporated in Pennsylvania in 1943 as a ~~leading~~manufacturer of tungsten carbide metal cutting tooling. From this beginning, the Company has grown into a global ~~manufacturer~~leader in the development and ~~supplier~~application of ~~tooling, engineered components~~tungsten carbides, ceramics, super-hard materials and ~~advanced materials consumed~~solutions used in ~~production processes. We deliver productivity solutions~~metal cutting and mission-critical wear applications to customers seeking peak performance in demanding environments. The Company provides innovative wear-resistant products, application engineering and services backed by advanced material science serving customers across diverse sectors of industrial production, transportation, earthworks, energy, construction, process industries and aerospace. Kennametal solutions are built around industry-essential technology platforms, including precision-engineered metalworking tools and components, surface technologies and earth cutting tools that are mission-critical to customer operations battlingcombat extreme conditions associated with wear fatigue, corrosion and high temperatures. The ~~Company’s~~Company's reputation for material ~~and industrial~~ technology, ~~excellence,~~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 ~~industrial~~markets.

Our product offering includes a wide selection of standard and ~~infrastructure markets.~~customized technologies for metalworking applications, such as turning, milling, hole making, tooling systems and services. End users of the ~~Company’s~~Company's metalworking products include manufacturers ~~metalworking suppliers, machinery operators and processors~~ engaged in a diverse array of industries ~~including~~including: the ~~manufacture~~manufacturers of transportation vehicles and ~~components;~~components, machine ~~tool,~~tools and light ~~machinery~~ and heavy ~~machinery industries;~~machinery; airframe and aerospace components; and energy-related components ~~defense;~~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. ~~We believe we are one~~

Overall performance in the first quarter of fiscal year 2018 surpassed our expectations. On a consolidated basis, sales increased 13.7 percent, reflecting the ~~largest global providers~~sales growth in all segments, regions and end markets. Operating margin improved significantly to 10.4 percent from a 1.9 percent loss margin in the prior year quarter reflecting improvement in both gross margin and operating expense as a percentage of ~~consumable metal cutting tools and tooling supplies.~~sales.

Our sales of ~~$487.6~~$542.5 million for the quarter ended ~~December 31, 2016 decreased 7~~September 30, 2017 increased 13.7 percent compared to sales for the quarter ended ~~December 31, 2015. The Company grew organically for the first time since the~~ September ~~quarter of fiscal 2015, and the Infrastructure segment completed the quarter without~~30, 2016, driven by organic sales ~~decline for the first time since the June quarter~~growth of ~~fiscal 2014. Industrial grew organically for the second consecutive quarter, benefiting from stability in the indirect channel stock levels~~13 percent and favorable ~~conditions in~~currency exchange impact of 2 percent, partially offset by fewer business days impact of 1 percent compared to the ~~aerospace sector.~~prior year quarter. Every segment and every region reported increased sales and improved profitability. The Industrial, Infrastructure and Widia ~~also had organic growth this quarter, in part due to strong performance in Asia.~~segments posted operating margins of 11.7 percent, 11.0 percent and 0.1 percent, respectively.

Operating income was ~~$24.0~~$56.5 million, compared to ~~operating~~a $9.2 million loss ~~of $234.0 million~~ in the prior year ~~quarter, which included loss on divestiture of $133.3 million and goodwill and other intangible asset impairment charges of $108.5 million. Additionally, year-over-year~~quarter. Year-over-year comparative operating results reflect ~~incremental restructuring benefits of approximately $16~~$24.8 million ~~higher fixed cost absorption and productivity, the positive effects of lower raw material costs and sales volume growth, partially offset by the negative impacts of unfavorable price and mix and more~~less restructuring and related charges in the current ~~period.~~period, organic sales growth, incremental restructuring benefits of approximately $22 million, favorable mix and higher productivity and fixed cost absorption, partially offset by higher compensation expense, more overtime costs and higher raw material costs.

~~Our cost reduction initiatives are mitigating challenging end market conditions. As~~We reported current quarter earnings per diluted share of ~~December 31, 2016, we have identified 85 percent~~$0.48, which include $0.07 per share of ~~the targeted employment reduction~~restructuring and related charges. The loss per diluted share of 1,000, corresponding to approximately 72 percent of the estimated annualized savings associated with this initiative. Further, our modernization and end-to-end initiatives are progressing as planned, which we expect will deliver higher profitability$0.27 in the ~~future.~~prior year quarter included $0.38 per share of restructuring and related charges.

We substantially completed our existing restructuring programs in the quarter. The ~~permanent~~ savings that we ~~are realizing~~have realized from restructuring are the result of all programs that we ~~have~~had undertaken over the past 2433 months. Approximate ongoing annualized savings for the programs are $165 million and inception to date total charges were $154.5 million. Pre-tax benefits from these restructuring actions were approximately ~~$24~~$40 million in the current quarter, of which approximately ~~$16~~$22 million were incremental to the same quarter one year ago. Refer to the Results of Continuing Operations section of Item 2 for further discussion and analysis of our restructuring programs.

~~In addition~~The cost savings we achieved include only a small amount of the anticipated benefits from the Modernization initiative that we have planned, and the benefits from our ongoing product and process simplification initiatives. The results of those programs are anticipated to these restructuring programs, our product line simplification, end-to-end and factory modernization initiatives are underway. We will be monitoring future sales levels as certain indicators are showing more rapid improvements than previously expected. If our modernization efforts increase pressure on our abilityaccrue to ~~maintain timely order fulfillment in certain locations, then we may be required to sustain higher levels of direct hourly employment in those locations than currently anticipated.~~the Company over the next few years.

We ~~reported current quarter earnings per diluted share of $0.09, which includes $0.13 per share of restructuring and related charges and $0.02 per share associated with recording~~had a valuation allowance with regards to deferred tax assets in Australia. Loss per diluted share of $2.12 in the prior year quarter included $1.20 per share loss on divestiture, $0.98 per share of goodwill and other intangible asset impairment charges and $0.08 per share of restructuring and related charges.

~~We generated~~net cash ~~flow~~outflow from operating activities of ~~$46.6 million and $104.5~~$19.9 million during the ~~six~~three months ended ~~December 31, 2016 and 2015, respectively.~~September 30, 2017 compared to an net cash inflow from operating activities of $23.6 million during the prior year quarter. The ~~decrease~~change is due primarily to ~~comparatively lower reductions~~a net outflow from changes in ~~primary working capital~~other assets and ~~lower cash earnings,~~liabilities, partially offset by ~~lower payments~~the net inflow from net income with adjustments for ~~taxes.~~non-cash items. Capital expenditures were ~~$70.6~~$42.1 million and ~~$61.2~~$42.3 million during the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016, respectively.

We invested further in technology and ~~2015, respectively.~~innovation to continue delivering high quality products to our customers. Research and development expenses included in operating expense totaled $9.6 million for the three months ended September 30, 2017.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Throughout the MD&A, we refer to measures used by management to evaluate performance. We ~~invested further~~also refer to a number of financial measures that are not defined under accounting principles generally accepted in ~~technology and innovation to continue meeting our customers' needs. Research and development expenses included in operating expense totaled $9.3 million for~~ the ~~three months ended December 31, 2016.~~

United States of America (U.S. GAAP), including organic sales growth. The ~~following narrative~~explanation at the end of the MD&A provides ~~further discussion and analysis~~the definition of ~~our results of operations, liquidity and capital resources,~~this non-GAAP financial measures as well as ~~other pertinent matters.~~details on the use and the derivation of these financial measures.

~~NEW OPERATING STRUCTURE IMPLEMENTED IN FISCAL 2017~~

~~In order to take advantage of the growth opportunities of our WIDIA brand, we implemented a new operating structure in fiscal 2017.~~

A key attribute of the new structure is the establishment of the Widia operating segment. In order to better leverage the opportunities in this business, in addition to being more agile and competitive in the marketplace, we are placing higher levels of focus, determination and leadership in the business. The newly formed Industrial and Widia segments were formed from the previously reported Industrial segment. Amounts for the three and six months ended December 31, 2015 and as of June 30, 2016 have been restated to reflect the change in reportable operating segments.

~~We now have three reportable operating segments going forward: Industrial, Widia and Infrastructure.~~

In connection with this change, we updated our goodwill impairment assessment based on a quantitative analysis during the first quarter of fiscal 2017. 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 allocated our goodwill from the former Industrial segment to the current Industrial and Widia segments using a relative fair value approach. The restated Industrial reporting unit passed the goodwill impairment test with fair value substantially exceeded the carrying value. The new Widia reporting unit's fair value approximates its carrying value. The amount of goodwill allocated to the Widia reporting unit was $27.0 million.

We completed Step 1 of the Widia goodwill impairment test using both an income approach and a market approach. 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 growth rates, expense 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"). The discount rate used was 14.5 percent. 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 impact on future calculations of estimated fair value. Management forecasts were used for the years ending June 30, 2017-2021, with a residual period growth rate of 3.0 percent. The tax rate used was 25.0 percent. Under the market approach, we estimate the fair value based on market multiples of revenue and earnings of comparable publicly traded companies and comparable transactions of similar companies.

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 goodwill and indefinite-lived intangible impairment test will prove to be an accurate prediction of the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units 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 consumer demand or other competitive pressures adversely affecting our long term volume trends, unfavorable working capital changes and an inability to successfully achieve our cost savings targets; (ii) inability to achieve all of the anticipated benefits from restructuring actions assumed; (iii) an economic recovery that significantly differs from our assumptions in timing and/or degree; (iv) volatility in the equity and debt markets or other country specific factors which could result in a higher discount rate; and (v) sensitivity to market transaction multiples.

~~Table of Contents~~

~~Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)~~

RESULTS OF CONTINUING OPERATIONS

SALES

Sales for the three months ended ~~December 31, 2016~~September 30, 2017 were $~~487.6~~542.5 million, ~~a decrease~~an increase of ~~$36.4~~$65.3 million or 713.7 percent, from $~~524.0~~477.1 million in the prior year quarter. The ~~decrease~~increase in sales was driven by a 613 percent ~~decline from divestiture,~~organic sales growth and a 2 percent ~~decline~~favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business ~~days and a 1 percent unfavorable currency exchange impact, offset partially by 2 percent organic growth.~~days. Excluding the impact of currency exchange, ~~and divestiture,~~ sales increased by approximately 24 percent in energy, 14 percent in earthworks, 10 percent in aerospace and defense, ~~by 5~~7 percent ~~and 3 percent~~ in ~~both~~ general engineering and ~~energy, partially offset by decreases of 9 percent in earthworks and 1~~7 percent in transportation. On a regional basis excluding the impact of currency exchange, ~~and divestiture,~~ sales increased by 315 percent in Asia ~~and 1~~Pacific, 13 percent in the Americas ~~offset by a decrease of approximately 3~~and 8 percent in ~~Europe.~~

~~Sales for~~Europe, the six months ended December 31, 2016 were $964.7 million, a decrease of $114.7 million or 11 percent, from $1,079.4 million in the prior year period. The decrease in sales was driven by an 8 percent decline from divestiture, a 1 percent unfavorable currency exchange impact, a 1 percent decrease due to fewer business daysMiddle East and a 1 percent organic decline. Excluding the impact of currency exchange and divestiture, sales decreased by approximately 15 percent in earthworks and 3 percent in energy, offset by increases of approximately 5 percent in aerospace and defense and 2 percent in general engineering, while sales in transportation remained relatively flat. On a regional basis excluding the impact of currency exchange and divestiture, sales decreased 3 percent in both the Americas and Europe, offset partially by a 2 percent increase in Asia.Africa (EMEA).

GROSS PROFIT

Gross profit for the three months ended ~~December 31, 2016~~September 30, 2017 was $~~147.6~~185.0 million, an increase of ~~$6.8~~$41.5 million from ~~$140.8~~$143.5 million in the prior year quarter. The increase was primarily due to ~~higher fixed cost absorption and productivity, lower raw material costs,~~organic sales growth, incremental restructuring benefits of approximately $7$16 million, favorable mix, higher productivity and ~~sales volume growth, partially offset by the negative impacts of unfavorable price and business mix, divestiture impact of $3.7 million and unfavorable~~fixed cost absorption, favorable currency exchange impact of ~~$2.9 million.~~$3.1 million and $0.8 million less restructuring related charges, partially offset by higher compensation expense and raw material costs. The gross profit margin for the three months ended ~~December 31, 2016~~September 30, 2017 was ~~30.3~~34.1 percent, as compared to ~~26.9~~30.1 percent generated in the prior year quarter.

Gross profit for the six months ended December 31, 2016 was $291.2 million, a decrease of $0.9 million from $292.0 million in the prior year quarter. The decrease was primarily due to unfavorable business mix, organic sales decline, divestiture impact of $11.4 million and unfavorable currency exchange impact of $5.5 million, partially offset by lower raw material costs, higher fixed cost absorption and productivity and incremental restructuring benefits of approximately $10 million. The gross profit margin for the six months ended December 31, 2016 was 30.2 percent, as compared to 27.1 percent generated in the prior year quarter.

OPERATING EXPENSE

Operating expense for the three months ended ~~December 31, 2016~~September 30, 2017 decreased ~~$12.6~~slightly to $119.3 million ~~or 10.2 percent to $111.0 million as~~ compared to ~~$123.6~~$119.9 million infor the ~~prior year quarter.~~three months ended September 30, 2016. The decrease was primarily due to incremental restructuring benefits of approximately $9$7 million ~~divestiture impact of $4.5 million, $2.5~~and $0.9 million less in restructuring-related charges, partially offset by higher compensation expense and ~~favorable~~an unfavorable foreign currency exchange ~~impacts of $1.0 million, partially offset by $3.9 million higher employment-related costs.~~

Operating expense for the six months ended December 31, 2016 decreased $22.0 million or 8.7 percent to $230.9 million as compared to $252.8 million in the prior year quarter. The decrease was primarily due to incremental restructuring benefits of approximately $15 million, divestiture impact of ~~$10.5 million, $5.8 million less in restructuring-related charges and favorable foreign currency exchange impacts of $2.5 million, offset partially by higher employment-related costs of $9.9~~$1.6 million.

RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES

In prior years, we implemented restructuring actions to streamline the Company's cost structure. The purpose of these initiatives was 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 were substantially completed in the September quarter of fiscal 2018, were mostly cash expenditures and achieved annual run rate ongoing pre-tax savings of approximately $165 million.

We have recorded restructuring and related charges of ~~$11.8~~$6.9 million and ~~$8.9~~$31.7 million for the three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015,~~ respectively. Of these amounts, restructuring charges totaled ~~$8.8~~$5.5 million and ~~$3.5~~$28.6 million, respectively. During the three months ended September 30, 2016, an immaterial amount of ~~which expense of $0.3 million and benefits of $0.3 million were~~restructuring charges was related to inventory disposals and were recorded in cost of goods sold. There were no restructuring charges related to inventory disposals and recorded in cost of good sold ~~respectively.~~during the three months ended September 30, 2017. Restructuring-related charges of ~~$2.1~~$1.3 million and $2.0 million were recorded in cost of goods sold and ~~$0.9~~$0.1 million and ~~$3.4~~$1.1 million in operating expense for the three months ended ~~December 31,~~September 30, 2017 and 2016, respectively.

Total restructuring and ~~2015,~~related charges since the inception of our restructuring plans through September 30, 2017 were $154.5 million. See Note 7 in our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q (Note 7).

INTEREST EXPENSE

Interest expense for the three months ended September 30, 2017 and 2016 was $7.1 million and $7.0 million, respectively.

Table of Contents

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Total restructuring and related charges since the inception of our restructuring plans through December 31, 2016 were $114.9 million. See Note 8 in our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q (Note 8).

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 $147 million to $162 million once completed by December of fiscal 2019 and are anticipated to be mostly cash expenditures. The total pre-tax charges for these programs are expected to be in the range of $155 million to $175 million.

~~Asset Impairment Charges~~

We recorded non-cash pre-tax asset impairment charges of $108.5 million during the three and six months ended December 31, 2015. See Note 18 in our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q (Note 18).

~~LOSS ON DIVESTITURE~~

During the three months ended December 31, 2015, we completed the divestiture of non-core businesses for net proceeds of $61.1 million and recognized a pre-tax loss on divestiture of $133.3 million. See Note 5 in our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q (Note 5).

~~INTEREST EXPENSE~~

~~Interest~~Other expense for the three months ended December 31, 2016 increased $0.3 million to $7.2 million as compared to $6.8 million in the prior year quarter. Interest expense for the six months ended December 31, 2016 increased $0.4 million to $14.1 million as compared to $13.8 million in the prior year period.

~~OTHER EXPENSE (INCOME), NET~~

~~Other expense, net for the three months ended December 31,~~September 30, 2017 and 2016 was $~~0.7~~0.1 million ~~compared to other income, net of~~ ~~$0.7 million~~. Foreign currency transaction gains in the ~~prior year quarter. The year-over-year change was primarily due to losses on derivatives.~~

~~Other expense, net for the six months ended December 31, 2016, was $0.8 million compared to $0.4 million in the prior year period. The increase was primarily due to losses on derivatives, partially~~current period were offset by ~~loss on sale of assets in the~~ prior year ~~and~~ income from transition services provided related to ~~the acquirer of our non-core businesses.~~a prior divestiture.

INCOME TAXES

BUSINESS SEGMENT REVIEW

We operate three reportable segments consisting of Industrial, Widia and Infrastructure. Expenses that are not allocated are reported in Corporate. Segment determination is based upon the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results.

INDUSTRIAL

For the three months ended September 30, 2017, Industrial sales increased 11 percent from the prior year quarter. General engineering sales continue to experience growth from sales in the indirect channel across all regions and positive performance in the light and general engineering sector in EMEA. Transportation sales in the quarter to tier suppliers and OEMs grew in Asia Pacific and EMEA. Oil and gas drilling sales in the Americas continue to provide overall growth in energy, coupled with increases in power generation sales globally. Conditions continue to be favorable in the aerospace sector, with global sales related to engine growth being supplemented by increasing demand related to frames in the Americas. The sales increases in Asia Pacific and EMEA were primarily driven by the transportation and general engineering end markets. The sales increase in the Americas was primarily driven by the performance in the energy, general engineering and aerospace and defense end markets.

For the three months ended September 30, 2017, Industrial operating income increased by $29.3 million, driven primarily by $14.7 million less restructuring and related charges in the current quarter, incremental restructuring benefits of approximately $13 million and organic sales growth, partially offset by unfavorable mix and higher compensation expense. Industrial operating margin was 11.7 percent compared with 2.1 percent in the prior year.



	Three Months Ended September 30,
(in thousands)	2017		2016
Sales	$	297,464	$	269,043
Operating income	34,812		5,556

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~~Amounts for~~



	Three Months Ended September 30, 2017

Sales growth, in percentages
Organic	9	%
Currency exchange	2
Business days	—
Total	11	%
By region ⁽¹⁾:
Asia Pacific	14	%
Americas	8
EMEA	7
By end market ⁽¹⁾:
Energy	22	%
General engineering	7
Aerospace and defense	7
Transportation	7

⁽¹⁾ Excluding the ~~three and six months ended December 31, 2015 for Industrial and Widia have been restated to reflect the change in reportable operating segments.~~impact of currency exchange

~~INDUSTRIAL~~

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2016 2015 2016 2015
Sales $ 267,492
$ 268,578
$ 536,536
$ 538,770
Operating income 18,067
12,025
23,603
33,483
WIDIA

For the three months ended ~~December 31, 2016, Industrial~~September 30, 2017, Widia sales ~~remained relatively flat compared to~~increased 10 percent from the prior year ~~quarter, reflecting~~quarter. Widia organic sales growth was positively impacted by restoring distribution in Europe, growth in India related to higher local and global demand trends, in addition to increasing demand in the U.S. energy markets and higher growth rates in emerging markets.

For the three months ended September 30, 2017, Widia operating income was $0.1 million compared to an operating loss of 4$5.8 million for the prior year period. The year-over-year change of $5.8 million was driven primarily by organic sales growth, $2.2 million less restructuring and related charges, incremental restructuring benefits of approximately $1 million and favorable mix. Widia operating income margin was 0.1 percent ~~offset by a 2~~compared with operating loss margin of 14.0 percent ~~decrease due to fewer business days, a 1 percent unfavorable currency exchange impact and a 1 percent decline due to divestiture.~~in the prior year.



	Three Months Ended September 30,
(in thousands)	2017		2016
Sales	$	45,243	$	41,015
Operating income (loss)	62		(5,756		)



	Three Months Ended September 30, 2017

Sales growth, in percentages
Organic	9	%
Currency exchange	1
Business days	—
Total	10	%
By region ⁽¹⁾:
EMEA	19	%
Asia Pacific	8
Americas	5
By end market ⁽¹⁾:
General engineering	9	%

⁽¹⁾ Excluding the impact of currency exchange and divestiture, sales increased approximately 6 percent in general engineering and 4 percent in aerospace and defense, offset partially by sales decreases of approximately 5 percent in energy and 2 percent in transportation. General engineering sales grew in the Americas and Asia, benefiting from stability in the indirect channel stock levels, while general engineering activity in Europe was flat. Globally, conditions remain favorable in the aerospace sector. The transportation market was mixed with more projects and favorable conditions contributing to higher sales in Asia, which were more than offset by less favorable conditions in Europe and the Americas. On a segment regional basis excluding the impact of divestiture and currency exchange, sales increased 7 percent in Asia and 4 percent in the Americas, partially offset by a 2 percent decrease in Europe. The sales increase in Asia was primarily driven by the transportation and general engineering end markets and to a lesser extent the aerospace and defense end market, partially offset by a decrease in the energy end market. The sales increase in the Americas was primarily driven by the performance in the general engineering end market, partially offset by decreases in the transportation end market. The sales decrease in Europe was primarily driven by the performance in the transportation end market, offset partially by an increase in the aerospace and defense end market.

For the three months ended December 31, 2016, Industrial operating income increased by $6.0 million, driven primarily by incremental restructuring benefits of approximately $8 million, a $7.3 million loss on divestiture in the prior period and current period higher productivity, partially offset by unfavorable mix, higher employment-related costs and $2.0 million more restructuring and related charges. Industrial operating margin was 6.8 percent compared with 4.5 percent in the prior year.

For the six months ended December 31, 2016, Industrial sales remained flat compared to the same period last year, reflecting organic growth of 3 percent, offset by unfavorable currency exchange of 1 percent, unfavorable business days impact of 1 percent and divestiture impact of 1 percent. Excluding the impact of currency exchange and divestiture, sales increased 5 percent in general engineering and 5 percent in aerospace and defense, offset partially by decreases of approximately 8 percent in energy and 1 percent in transportation. Activity in the aerospace sector remains elevated with sales growing globally. General engineering sales in the Americas and Asia have benefited from stability in the indirect channel stock levels, offsetting the general industrial weakness caused by the continued decline in the energy sector. The transportation market was mixed with more projects contributing to higher sales in Asia, partially offset by less favorable conditions in Europe and Americas. On a segment regional basis excluding the impact of divestiture and currency exchange, sales increased 7 percent in Asia and 4 percent in the Americas, offset partially by a decrease of 1 percent in Europe. The sales increase in Asia was primarily driven by the transportation and general engineering end markets, partially offset by a decrease in the energy end market. The sales increase in the Americas was primarily driven by the performance in the general engineering end market and to a lesser extent in the aerospace and defense end market, partially offset by decreases in the transportation and energy end markets. The sales decrease in Europe was primarily driven by the performance in the transportation and energy end markets, offset partially by an increase in the aerospace and defense end market.

For the six months ended December 31, 2016, Industrial operating income decreased by $9.9 million, driven primarily by $15.2 million more restructuring and related charges, higher employment-related costs, unfavorable mix and unfavorable currency exchange, partially offset by incremental restructuring benefits of approximately $13 million, a $7.3 million loss on divestiture in the prior period, higher productivity and organic sales growth. Industrial operating margin was 4.4 percent compared with 6.2 percent in the prior year.

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~~WIDIA~~

INFRASTRUCTURE

For the three months ended September 30, 2017, Infrastructure sales increased by 20 percent from the prior year quarter. Oil and gas in the U.S. is now stabilizing, manifesting in high year-over-year growth in energy with average U.S. land rig counts up over 100 percent compared to the prior year quarter. Underground mining continues to show signs of improvement in the earthworks market. Construction sales improved in part due to the timing of orders related to the road rehabilitation season. The sales increase in Asia Pacific was driven primarily by the performance in the industrial applications and mining end markets. Growth in the Americas was primarily driven by the oil and gas, industrial applications and construction end markets. The sales increase in EMEA was primarily driven by performance in the earthworks and construction end markets.

For the three months ended September 30, 2017, Infrastructure operating income was $22.1 million compared to an operating loss of $7.6 million for the prior year period. The year-over-year change of $29.7 million was driven primarily by organic sales growth, incremental restructuring program benefits of approximately $8 million, $7.9 million less restructuring and related charges in the current period, favorable mix and higher fixed cost absorption and productivity, partially offset by higher raw material costs. Infrastructure operating margin was 11.0 percent compared with 4.5 percent in the prior year.


	Three Months Ended December 31,						Six Months Ended December 31,						Three Months Ended September 30,
(in thousands)	2016			2015			2016			2015			2017		2016
Sales	$	42,874		$	42,305		$	83,888		$	85,447		$	199,747	$	167,082
Operating loss	(2,666		)	(4,665		)	(8,403		)	(6,374		)
Operating income (loss)													22,069		(7,587		)



	Three Months Ended September 30, 2017

Sales growth (decline), in percentages
Organic	19	%
Currency exchange	2
Business days	(1	)
Total	20	%
By region ⁽¹⁾:
Asia Pacific	21	%
Americas	20
EMEA	8
By end market ⁽¹⁾:
Energy	25	%
Earthworks	13
General engineering	8

⁽¹⁾ Excluding the impact of currency exchange

CORPORATE

For the three months ended ~~December 31, 2016, Widia sales increased 1~~September 30, 2017, Corporate unallocated expense decreased $1.0 million, or 67.3 percent, from the prior year quarter, driven by organic growth of 5 percent, offset partially by a 3 percent decrease due to fewer business days and a 1 percent unfavorable currency exchange impact. On a segment regional basis excluding the impact of currency exchange, sales increased 19 percent in Asia, offset partially by decreases of 4 percent in the Americas and 2 percent in Europe.quarter.

For the three months ended December 31, 2016, Widia operating loss was $2.7 million compared to $4.7 million for the prior year period. Operating loss decreased by $2.0 million, driven primarily by a prior period other intangible asset impairment charge of $2.3 million and incremental restructuring benefits of approximately $2 million, partially offset by $1.3 million higher restructuring and related charges. Widia operating loss margin was 6.2 percent compared with 11.0 percent in the prior year.

For the six months ended December 31, 2016, Widia segment sales decreased by 2 percent from the same period last year, due to an unfavorable business days impact of 2 percent and unfavorable currency exchange of 1 percent, offset partially by organic growth of 1 percent. On a segment regional basis excluding the impact of currency exchange, sales decreased 6 percent in Europe and 5 percent in the Americas, offset partially by an increase of 12 percent in Asia.

For the six months ended December 31, 2016, Widia operating loss was $8.4 million compared to $6.4 million for the prior year period. Operating loss increased by $2.0 million, driven primarily by $3.6 million higher restructuring and related charges in addition to unfavorable mix, partially offset by a prior period other intangible asset impairment charge of $2.3 million, incremental restructuring benefits of approximately $2 million and higher productivity. Widia operating loss margin was 10.0 percent compared with 7.5 percent in the prior year.

~~INFRASTRUCTURE~~

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2016 2015 2016 2015
Sales $ 177,207
$ 213,138
$ 344,289
$ 455,159
Operating income (loss) 10,274
(237,738 ) 2,687
(246,166 )



	Three Months Ended September 30,
(in thousands)	2017			2016
Corporate unallocated expense	$	(466	)	$	(1,424	)

For the three months ended December 31, 2016, Infrastructure sales decreased by 17 percent from the prior year quarter, reflecting a 14 percent decline due to divestiture, a 2 percent decrease due to fewer business days and a 1 percent unfavorable currency exchange impact. Excluding the impact of currency exchange and divestiture, sales decreased by approximately 10 percent in earthworks and 5 percent in general engineering, offset partially by an increase of 6 percent in energy. Key energy markets, particularly in North America, began to stabilize in the December quarter of fiscal 2017. During the December quarter, average quarterly U.S. rig counts were still down year-over-year by over 20 percent, but have increased from the lows experienced in the June quarter of fiscal 2016. Sales in the December quarter of fiscal 2017 associated with oil & gas in Americas have increased year-over-year by approximately 13 percent. Conditions in underground mining in North America continued to be challenging with sales down approximately 24 percent. As previously disclosed, this weakness is expected to continue for the foreseeable future. On a segment regional basis excluding the impact of divestiture and currency exchange, sales decreased 8 percent in Europe and 7 percent in Asia, while sales in the Americas remained flat. The sales decrease in Europe was primarily driven by decreases in the earthworks and general engineering end markets, partially offset by increases in the energy end market. The sales decrease in Asia was driven primarily by the performance in the earthworks end market, offset partially by increases in the energy and general engineering end markets. While sales in the Americas remained flat, decreases in the earthworks and general engineering end markets were offset by increases in the energy end market.

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For the three months ended December 31, 2016, Infrastructure operating income was $10.3 million compared to operating loss of $237.7 million for the prior year period. The change in operating results is due primarily to a prior period $126.0 million loss on divestiture, prior period goodwill and other intangible asset impairment charges of $106.1 million, current period lower raw material costs, incremental restructuring program benefits of approximately $6 million, better productivity and divestiture impact of $1.8 million, partially offset by unfavorable mix and $2.0 million higher restructuring and related charges. Infrastructure operating income margin was 5.8 percent compared with operating loss margin 111.5 percent in the prior year.

For the six months ended December 31, 2016, Infrastructure sales decreased by 24 percent, reflecting a 17 percent decline due to divestiture, a 5 percent organic sales decline, a 1 percent unfavorable currency exchange impact and a 1 percent unfavorable business days impact. Excluding the impact of currency exchange and divestiture, sales decreased by approximately 16 percent in earthworks and 4 percent in general engineering, while energy was flat. Key energy markets, particularly in North America, have continued to stabilize during the year. U.S. rig counts have increased steadily from fiscal 2016 year-end lower levels. Oil and gas sales in the Americas were effectively flat compared to the prior year. Conditions in underground mining in North America declined further, with sales down 28 percent year-over-year. As previously disclosed, this weakness is expected to continue for the foreseeable future. On a segment regional basis excluding the impact of divestiture and currency exchange, sales decreased 8 percent in the Americas, 7 percent in Asia and 6 percent in Europe. The sales decrease in the Americas was driven by decreases in earthworks, general engineering and energy end markets, although oil and gas-related sales increased. The sales decrease in Asia was driven primarily by the performance in the earthworks end market, offset partially by increases in the general engineering end market. The sales decrease in Europe was primarily driven by decreases in the general engineering and earthworks end markets, offset partially by an increase in the energy end market.

For the six months ended December 31, 2016, Infrastructure operating income was $2.7 million compared to operating loss of $246.2 million for the prior year period. The change in operating results is due primarily to a prior period $126.0 million loss on divestiture, prior period goodwill and other intangible asset impairment charges of $106.1 million, current period lower raw material costs, higher productivity, incremental restructuring program benefits of approximately $9 million and divestiture impact of $1.9 million, offset partially by unfavorable mix, lower organic sales and $6.3 million more restructuring and related charges. Infrastructure operating income margin was 0.8 percent compared with operating loss margin of 54.1 percent in the prior year.

~~CORPORATE~~

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2016 2015 2016 2016
Corporate unallocated expense $ (1,662 ) $ (3,578 ) $ (3,085 ) $ (8,286 )

For the three months ended December 31, 2016, Corporate unallocated expense decreased $1.9 million, or 53.5 percent, primarily due to $2.3 million lower restructuring-related charges in the current period.

~~For the six months ended December 31, 2016, Corporate unallocated expense decreased $5.2 million, or 62.8 percent, due to $5.6 million lower restructuring-related charges in the current period.~~

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations is the primary source of funding for capital ~~expenditures and internal growth.~~expenditures. Year to date ~~December 31, 2016~~September 30, 2017 cash flow ~~provided by~~used for operating activities was $~~46.6~~19.9 million, primarily ~~driven by cash earnings and primary working capital improvements, partially offset by~~due to a net ~~outflows~~outflow from changes in other assets and ~~liabilities.~~liabilities, partially offset by the net inflow from net income with adjustments for non-cash items.

Our five-year, multi-currency, revolving credit facility, as amended and restated in April 2016 (Credit Agreement) is used to augment cash from operations and is an additional source of funds. The Credit Agreement ~~permits~~provides for revolving credit loans of up to $600.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement allows for borrowings in U.S. dollars, euro, Canadian dollars, pound sterling and Japanese yen. Interest payable under the Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us. The Credit Agreement matures in April 2021. We had no borrowings outstanding on our Credit Agreement as of ~~December 31, 2016.~~

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2017.

The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the Credit agreement). We were in compliance with all covenants as of ~~December 31, 2016.~~September 30, 2017. For the ~~six~~three months ended ~~December 31, 2016,~~September 30, 2017, average daily borrowings outstanding under the Credit Agreement were approximately ~~$19.5~~$3.5 million. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries.

We consider substantially all of the unremitted earnings of our non-U.S. subsidiaries that have not previously been taxed in the U.S. to be permanently reinvested. As of ~~December 31, 2016,~~September 30, 2017, cash and cash equivalents of ~~$44.0~~$82.3 million and short-term intercompany advances made by our foreign subsidiaries to our U.S. parent of ~~$39.5~~$9.5 million would not be available for use in the U.S. on a ~~long term~~long-term basis without incurring U.S. federal and state income tax consequences. We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business or associated with our domestic debt service requirements.

At ~~December 31, 2016,~~September 30, 2017, cash and cash equivalents were ~~$102.0~~$110.7 million, ~~total debt, including notes payable, was $696.6 million and total~~Total Kennametal Shareholders' equity was ~~$902.8~~$1,062.0 million and total debt was $696.6 million. Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide access to the capital markets. We believe that we have sufficient resources available to meet cash requirements for the next 12 months. 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.

There have been no material changes in our contractual obligations and commitments since June 30, ~~2016.~~2017.

Cash Flow (Used for) Provided by Operating Activities

During the ~~six~~three months ended ~~December 31, 2016,~~September 30, 2017, cash flow used for operating activities was $19.9 million, compared to cash flow provided by operating activities ~~was $46.6 million, compared to $104.5~~of $23.6 million for the prior year period. Cash flow ~~provided by~~used for operating activities for the current year period consisted of ~~net loss and non-cash items amounting to an inflow of $53.7 million and~~ changes in certain assets and liabilities netting to an outflow of ~~$7.1~~$97.6 million and net income and non-cash items amounting to an inflow of $77.7 million. Contributing to the changes in certain assets and liabilities were a decrease of accounts payable and accrued liabilities of $62.7 million, an increase in inventories of $19.7 million due in part to increasing volumes and a decrease in accrued pension and postretirement benefits of $11.3 million, a net decrease of accounts payable and accrued liabilities of $7.6 million primarily driven by lower accrued compensation. Partially offsetting these cash outflows was a decrease in accounts receivable of $20.4 million due to lower sales volume.$8.1 million.

During the ~~six~~three months ended ~~December 31, 2015,~~September 30, 2016, cash flow provided by operating activities for the period consisted of net loss and non-cash items amounting to an inflow of ~~$64.2~~$14.4 million, and by changes in certain assets and liabilities netting to an inflow of ~~$40.4~~$9.2 million. Contributing to the changes in certain assets and liabilities were a decrease in accounts receivable of ~~$69.8~~$23.1 million due to lower sales ~~volume and a decrease in inventory of $46.6 million due to our continued focus on working capital management.~~volume. Offsetting these cash inflows were ~~a decrease of accounts payable and accrued liabilities of $44.1 million primarily driven by lower accrued compensation and lower restructuring liabilities;~~ a decrease in accrued pension and postretirement benefits of ~~$18.2~~$5.6 million ~~due in part to payments to previous executives;~~ and a net decrease of accounts payable and accrued ~~income taxes~~liabilities of ~~$12.4~~$2.1 million primarily driven by ~~payment of a capital gains tax related to a prior period tax reorganization.~~lower accrued compensation, partially offset by an increase in accounts payable.

Cash Flow ~~(Used for) Provided by~~Used for Investing Activities

Cash flow used for investing activities was $~~67.0~~41.7 million for the ~~six~~three months ended ~~December 31, 2016,~~September 30, 2017, compared to ~~cash provided by investing activities of~~ $~~5.1~~41.0 million in the prior year period. During the current year period, cash flow used for investing activities included capital expenditures, net of ~~$67.1~~$41.7 million, which consisted primarily of equipment upgrades.

For the ~~six~~three months ended ~~December 31, 2015,~~September 30, 2016, cash flow ~~provided by~~used for investing activities included ~~$61.1 million of proceeds from the sale of non-core businesses, partially offset by~~ capital expenditures, net of ~~$56.8~~$41.1 million, which consisted primarily of equipment upgrades.

~~Cash Flow Used for Financing Activities~~

~~Cash flow used for financing activities was~~ ~~$34.7 million~~ ~~for the six months ended December 31, 2016 compared to~~ ~~$75.4 million~~ in the prior year period. During the current year period, cash flow used for financing activities included $32.0 million of cash dividends paid to Shareholders and a $6.6 million payment on the remaining contingent consideration related to a prior acquisition. These cash outflows were partially offset by $3.5 million of dividend reinvestment and the effect of employee benefit and stock plans and $0.6 million net increase in borrowings.

For the six months ended December 31, 2015, cash flow used for financing activities primarily included $44.5 million net decrease in borrowings and $31.8 million of cash dividends paid to Shareholders. These cash flows were partially offset by $1.5 million of dividend reinvestment and the effect of employee benefit and stock plans.

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Cash Flow Used for Financing Activities

Cash flow used for financing activities was $20.2 million for the three months ended September 30, 2017 compared to $25.1 million in the prior year period. During the current year period, cash flow used for financing activities included $16.2 million of cash dividends paid to Shareholders and $4.0 million of dividend reinvestment and the effect of employee benefit and stock plans.

For the three months ended September 30, 2016, cash flow used for financing activities included $16.0 million of cash dividends paid to Shareholders, a $6.6 million payment on the remaining contingent consideration related to a prior acquisition, $2.1 million of dividend reinvestment and the effect of employee benefit and stock plans and $0.4 million net decrease in borrowings.

FINANCIAL CONDITION

Working capital was $~~581.6~~678.9 million at ~~December 31, 2016, a decrease~~September 30, 2017, an increase of $~~66.5~~26.5 million from ~~$648.1~~$652.4 million at June 30, ~~2016.~~2017. The ~~decrease~~increase in working capital was primarily driven by a decrease in ~~cash and cash equivalents~~accounts payable of ~~$59.6~~$29.4 million, a decrease in accounts receivable of $31.4 million due to lower sales volume, a decrease in deferred income taxes of $26.7 million due to the impact of prospective adoption of a new accounting standard requiring all deferred tax assets and liabilities to be classified as long-term and a decreasean increase in inventories of ~~$8.9 million. Partially offsetting these items were an increase~~$27.0 million due in ~~other current assets of $23.1 million as a result of the reclassification of $14 million prepaid taxes from noncurrent~~part to ~~current as we expect to receive a refund in the next 12 months,~~increasing volumes, a decrease in accrued expenses of ~~$14.7~~$20.6 million driven by payroll timing and lower accrued vacation pay, a decrease in ~~accounts payable of $13.2 million as a result of both lower volumes and our focus on working capital management and a decrease in~~ other current liabilities of ~~$11.7~~$15.8 million due primarily to ~~the payment~~bonus payments and restructuring payments and an increase in other current assets of $9.7 million due primarily to ~~relieve the remaining contingent consideration related to~~higher prepaid taxes other than income and higher prepaid maintenance. Partially offsetting these items was a ~~prior year acquisition~~decrease cash and ~~lower accrued compensation.~~cash equivalents of $79.9 million. Currency exchange rate effects ~~decreased~~increased working capital by ~~$18.4 million.~~a total of $9.4 million, the impact of which is included in the aforementioned changes.

Property, plant and equipment, net ~~decreased $5.5~~increased $11.1 million from ~~$730.6~~$744.4 million at June 30, ~~2016~~2017 to ~~$725.1~~$755.5 million at ~~December 31, 2016,~~September 30, 2017, primarily due to ~~depreciation expense~~capital additions of ~~$46.0~~$30.6 million and a ~~negative~~positive currency exchange impact of ~~$12.0~~$7.5 million during the current ~~period and disposals of $3.5 million. These decreases are~~period. This increase is partially offset by ~~capital expenditures~~depreciation expense of ~~$70.6~~$22.8 million ~~which includes $15.4 million change in accounts payable~~and impairment related to ~~purchases~~restructuring programs of ~~property, plant and equipment.~~$2.4 million.

At ~~December 31, 2016,~~September 30, 2017, other assets were ~~$557.9~~$568.3 million, an increase of ~~$1.1~~$11.1 million from ~~$556.8~~$557.2 million at June 30, ~~2016.~~2017. The primary ~~driver~~drivers for the increase ~~was~~were an increase in ~~deferred income taxes~~other assets of ~~$19.9~~$9.5 million primarily due to an increase in pension plan assets and an increase in goodwill of $3.3 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.~~favorable currency exchange effects. This increase was partially offset by a ~~$9.9~~$2.8 million decrease in other intangible assets, which was due to amortization expense of ~~$8.4~~$3.7 million, ~~and unfavorable~~partially offset by favorable currency exchange effects of ~~$1.5 million, and a $6.5 million decrease in goodwill due to currency exchange effects.~~$0.9 million.

Long-term debt and capital leases increased by ~~$0.8~~$0.4 million to ~~$694.3~~$695.4 million at ~~December 31, 2016~~September 30, 2017 from ~~$693.5~~$695.0 million at June 30, ~~2016.~~2017.

Kennametal Shareholders' equity was ~~$902.8~~$1,062.0 million at ~~December 31, 2016, a decrease~~September 30, 2017, an increase of ~~$61.5~~$44.7 million from ~~$964.3~~$1,017.3 million at June 30, ~~2016.~~2017. The ~~decrease~~increase was primarily due to ~~unfavorable currency exchange of $40.3 million, cash dividends paid to Shareholders of $32.0 million and~~ net ~~loss~~income attributable to Kennametal of ~~$14.4~~$39.2 million, ~~partially offset by~~ capital stock issued under employee benefit and stock plans of ~~$14.5~~$2.5 million, ~~unrecognized net pension and other postretirement benefit gain of $4.1 million and~~ reclassification of net pension and other postretirement benefit loss of ~~$3.6~~$1.8 million and favorable currency exchange of $19.6 million, partially offset by cash dividends paid to Shareholders of $16.2 million and unrecognized net pension and other postretirement benefit loss of $2.0 million.

ENVIRONMENTAL MATTERS

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The reserves we have established for environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the USEPA, other governmental agencies, and by the PRP groups in which we are participating. Although the reserves currently appear to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The reserved and unreserved liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.

We maintain a Corporate Environmental Health and Safety (EHS) Department, to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS ~~coordinators~~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.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

Effective July 1, 2017 with the adoption of new Financial Accounting Standards Board (FASB) guidance on subsequent measurement of inventory, non-LIFO inventories are now stated at the lower of cost or net realizable value. LIFO inventories continue to be stated at the lower of cost or market.

There have been no other changes to our critical accounting policies since June 30, ~~2016.~~2017.

NEW ACCOUNTING STANDARDS

See Note 3 to our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q for a description of new accounting standards.

RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BY U.S. GAAP In accordance with the SEC's Regulation G, the following provides definitions of the non-GAAP financial measures and the reconciliation to the most closely related GAAP financial measure. We believe that these measures provide useful perspective on underlying business trends and results and provide a supplemental measure of year-over-year results. The non-GAAP financial measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes. These measures may be useful to investors as they provide supplemental information about business performance and provide investors a view of our business results through the eyes of management. These non-GAAP 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 impacts of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. Management believes this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis.

Reconciliations of organic sales growth to the most closely related GAAP financial measure, sales growth, are as follows:



Three months ended September 30, 2017	Sales Growth	Foreign Currency Exchange Impact	Business Days Impact	Organic Sales Growth
Industrial	11%	2%	—%	9%
Widia	10%	1%	—%	9%
Infrastructure	20%	2%	(1)%	19%
Total Kennametal	14%	2%	(1)%	13%

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our market risk exposures since June 30, ~~2016.~~2017.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this quarterly report on Form 10-Q, the Company's management evaluated, with the participation of the Company's 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)). 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 Securities Exchange Act of 1934, as amended (Exchange Act), 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 Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance at ~~December 31, 2016~~September 30, 2017 to ensure 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 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.

There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Part I, Item 1, under the caption “Regulation” of the annual report on Form 10-K for the year ended June 30, ~~2016~~2017 is incorporated by reference into this Item 1. From time to time, we are party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible or intellectual property. Although certain of these types of actions are currently pending, we do not believe that any individual proceeding is material or that our pending legal proceedings in the aggregate are material to Kennametal.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

Period
Total Number of
Shares Purchased ⁽¹⁾

Average Price
Paid per Share

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

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

October 1 through October 31, 2016 655
$ 28.59
—
10,100,100
November 1 through November 30, 2016 4,418
30.58
—
10,100,100
December 1 through December 31, 2016 2,530
32.99
—
10,100,100
Total 7,603
$ 31.21
—



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⁾
July 1 through July 31, 2017	—	$	—	—	10,100,100
August 1 through August 31, 2017	79,099	37.46		—	10,100,100
September 1 through September 30, 2017	3,649	35.73		—	10,100,100
Total	82,748	$	37.39	—


(1)	During the current period, ~~1,824~~1,544 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 ~~5,779~~81,204 shares of restricted stock to Kennametal, upon vesting, to satisfy tax withholding requirements.


(2)	On July 25, 2013, the Company publicly announced an amended repurchase program for up to 17 million shares of its outstanding capital stock outside of the Company's dividend reinvestment program.

UNREGISTERED SALES OF EQUITY SECURITIES

None.

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ITEM 6. EXHIBITS



(10)	Material Contracts
(10.1)	~~Form of~~ Kennametal Inc. ~~Restricted Unit Award (three-year cliff vest) (granted under the Kennametal Inc. Stock and Incentive~~Restoration Plan ~~of 2016)~~(dated January 1, 2018)	~~Filed herewith.~~Exhibit 10.1 of the Form 8-K filed November 3, 2017 (File No. 001-05318) is incorporated herein by reference.
(10.2)	Kennametal Inc. Restoration Plan Adoption Agreement (dated January 1, 2018)	Exhibit 10.2 of the Form 8-K filed November 3, 2017 (File No. 001-05318) is incorporated herein by reference.
(31)	Rule 13a-14(a)/15d-14(a) Certifications
(31.1)	Certification executed by ~~Ronald M. De Feo,~~Christopher Rossi, President and Chief Executive Officer of Kennametal Inc.	Filed herewith.
(31.2)	Certification executed by Jan Kees van Gaalen, Vice President and Chief Financial Officer of Kennametal Inc.	Filed herewith.
(32)	Section 1350 Certifications
(32.1)	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by ~~Ronald M. De Feo,~~Christopher Rossi, President and Chief Executive Officer of Kennametal Inc., and Jan Kees van Gaalen, Vice President and Chief Financial Officer of Kennametal Inc.	Filed herewith.
(101)	XBRL
(101.INS)	XBRL Instance Document	Filed herewith.
(101.SCH)	XBRL Taxonomy Extension Schema Document	Filed herewith.
(101.CAL)	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith.
(101.DEF)	XBRL Taxonomy Definition Linkbase	Filed herewith.
(101.LAB)	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith.
(101.PRE)	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith.

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SIGNATURES

Pursuant to the requirements 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:	~~February 8,~~November 7, 2017	By:	/s/ ~~Martha Fusco~~Patrick S. Watson
			~~Martha Fusco~~Patrick S. Watson Vice President Finance and Corporate Controller

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