FORWARD-LOOKING INFORMATION

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

ITEM 1.    FINANCIAL STATEMENTS

KENNAMETAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

KENNAMETAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

KENNAMETAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

KENNAMETAL INC.

The condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q, which include our accounts and those of our majority-owned subsidiaries, should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 20182019 (the "2018"2019 Annual Report"). The condensed consolidated balance sheet as of June 30, 20182019 was derived from the audited balance sheet included in our 20182019 Annual Report. The interim statements are unaudited; however, we believe that all adjustments necessary for a fair statement of the results of the interim periods were made and all adjustments are normal recurring adjustments. The results for the ninesix months ended MarchDecember 31, 2019 and 2018 are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. For example, a reference to 20192020 is to the fiscal year ending June 30, 2019.2020. When used in this Quarterly Report on Form 10-Q, unless the context requires otherwise, the terms "the Company," “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

In May 2014,February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which requires an entity to recognize revenue in a manner that depicts the transfer of promised goods to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange. The standard also expands the disclosure requirements around contracts with customers. We adopted Topic 606 on July 1, 2018 using the modified retrospective transition method applied to those contracts that were not completed as of that date. The adoption did not have a material impact on the condensed consolidated financial statements beyond the additional disclosure requirements. Refer to Notes 3 and 18 to the condensed consolidated financial statements for further details.

The net book value of these assets at closing was $29.5 million, and the changes in accounts payable and accrued liabilities and in purchases of property, plant and equipment previously reported, resulting in a decrease of $22.7 million to previously reported net cash flow provided by operating activities and a corresponding decrease to previously reported net cash flowpre-tax loss on divestiture recognized during the three months ended December 31, 2019 was $6.5 million. Transaction proceeds were primarily used for investing activities. The supplemental disclosure of non-cash information for changes in accounts payablecapital expenditures related to purchases of property, plant and equipment for the nine months ended March 31, 2018 was also revised accordingly, at an increase of $11.2 million. The Company has evaluated these corrections and determined they were not material to the previously issued interim financial statements. The corrections had no effect on the previously issued annual consolidated financial statements.our simplification/modernization efforts.

Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three levels to prioritize the inputs used in valuations, as defined below:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Inputs that are unobservable.

As of June 30, 2018,2019, the fair values of the Company’sour financial assets and financial liabilities are categorized as follows:

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

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

CASH FLOW HEDGES

Range forward contracts (a transaction where both a put option is purchased and a call option is sold) are designated as cash flow hedges and hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts are recorded in accumulated other comprehensive loss and are recognized as a component of cost of goods sold and other income, net when the underlying sale of products or services is recognized into earnings. The notional amount of the contracts translated into U.S. dollars at MarchDecember 31, 2019 and June 30, 2018,2019, was $46.1$29.2 million and $62.9$61.5 million, respectively. The time value component of the fair value of range forward contracts is excluded from the assessment of hedge effectiveness. Assuming the market rates remain constant with the rates at MarchDecember 31, 2019, we expect to recognize into earnings $0.6$0.1 million of incomeexpense on outstanding derivatives in the next 12 months.

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

As of MarchDecember 31, 2019, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of €101.0€42.5 million as net investment hedges to hedge the foreign exchange exposure of our net investment in our Euro-based subsidiaries. We recorded a gainloss of $2.3$1.2 million and a lossgain of $1.1$0.5 million as a component of foreign currency translation adjustments in other comprehensive income (loss)loss for the three months ended MarchDecember 31, 2019 and 2018, respectively. We recorded a gainloss of $2.8$0.1 million and a lossgain of $2.9$0.5 million as a component of foreign currency translation adjustments in other comprehensive income (loss)loss for the ninesix months ended MarchDecember 31, 2019 and 2018, respectively.

As of MarchDecember 31, 2019, the foreign currency-denominated intercompany loans payable designated as net investment hedges consisted of:

In the June quarter of fiscal 2018,2019, we implementedbegan implementing the current phase of restructuring associated with our simplification/modernization initiative. These actions are expected to reduce structural costs, improve operational efficiency and substantiallyposition us for long-term profitable growth. These actions are expected to be completed restructuring actionsin fiscal 2020 and are expected to simplify the Industrial segment's cost structure by directing resourcesbe primarily cash expenditures.

The pre-tax charges for these programs are expected to more profitable business and increasing sales force productivity. We supplemented this with the rationalization of small manufacturing facilitiesbe in the range of $55 million to $65 million, which are expected to be 80 percent Industrial, 15 percent Infrastructure and Industrial segments, which we expect to complete in fiscal 2019.5 percent Widia. Total restructuring and related charges since inception of $17.4$44.5 million have beenwere recorded for this program through MarchDecember 31, 2019.2019, consisting of: $36.6 million in Industrial, $5.8 million in Infrastructure and $2.2 million in Widia.

We recorded restructuring and related charges of $3.7$51.3 million and $1.7$2.1 million for the three months ended MarchDecember 31, 2019 and 2018, respectively. Of these amounts, restructuring charges totaled $2.6 million and $1.1 million for the three months ended MarchDecember 31, 2019 and 2018, respectively,totaled $48.0 million, of which expense of $0.2$0.3 million and benefit of $0.2 million waswere related to inventory and waswere recorded in cost of goods sold, and restructuring charges for the three months ended December 31, 2018 totaled $1.5 million. Restructuring-related charges of $3.3 million and $0.6 million were recorded in cost of goods sold for the three months ended March 31, 2019 and 2018, respectively. Restructuring-related charges of $0.9 million were recorded in cost of goods sold and $0.1 million of expense and $0.3 million of benefit were recorded in operating expense for the three months ended MarchDecember 31, 2019 and 2018, respectively.

We recorded restructuring and related charges of $6.8$59.3 million and $10.0$3.1 million for the ninesix months ended MarchDecember 31, 2019 and 2018, respectively. Of these amounts, restructuring charges for the six months ended December 31, 2019 totaled $5.3$52.7 million, and $6.7 million, respectively, of which expense of $0.2$0.3 million and benefit of $0.2 million waswere related to inventory and were recorded in cost of goods sold, and restructuring charges for the ninesix months ended MarchDecember 31, 2019 and 2018 respectively.totaled $2.6 million. Restructuring-related charges of $1.4$6.6 million and $3.3$0.5 million were recorded in cost of goods sold and $0.1 million were recorded in operating expense for the ninesix months ended MarchDecember 31, 2019 and 2018, respectively.

As of MarchDecember 31, 2019, the total restructuring accrual is recorded in other current liabilities in our condensed consolidated balance sheet. As of June 30, 2018, $17.5$43.5 million and $0.1$13.0 million of the restructuring accrual is recorded in other current liabilities and other liabilities, respectively.respectively, in our condensed consolidated balance sheet. The restructuring accrual of $19.2 million as of June 30, 2019 is recorded in other current liabilities. The amount attributable to each segment is as follows:

Stock Options

All options were fully vested as of December 31, 2019. Fair value of options vested during the ninesix months ended MarchDecember 31, 2019 and 2018 was $1.2 million and $1.9 million, respectively.

Restricted Stock Units – Performance Vesting and Time Vesting

Changes in our performance vesting and time vesting restricted stock units for the ninesix months ended MarchDecember 31, 2019 were as follows:

During the ninesix months ended MarchDecember 31, 2019 and 2018, compensation expense related to time vesting and performance vesting restricted stock units was $18.0$13.4 million and $15.0$12.8 million, respectively. As of MarchDecember 31, 2019, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $22.6$28.6 million and is expected to be recognized over a weighted average period of 2.1 years.

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

We used the last-in, first-out (LIFO) method of valuing inventories for 4140 percent and 4041 percent of total inventories at MarchDecember 31, 2019 and June 30, 2018,2019, respectively. Since inventoryInventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year,year; therefore, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs. Therefore, the interim financial resultscosts and are subject to any final year-end LIFO inventory adjustments.

Our five-year, multi-currency, revolving credit facility, as amended and restated in June 2018 (Credit Agreement), provides for revolving credit loans of up to $700 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the Credit Agreement). We were in compliance with all such covenants as of MarchDecember 31, 2019. We had no0 borrowings outstanding under the Credit Agreement as of MarchDecember 31, 2019 and June 30, 2018.2019. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries. The Credit Agreement matures in June 2023.

Fixed rate debt had a fair market value of $606.8$630.8 million and $996.4$622.0 million at MarchDecember 31, 2019 and June 30, 2018,2019, respectively. The Level 2 fair value is determined based on the quoted market prices for similar debt instruments as of MarchDecember 31, 2019 and June 30, 2018,2019, respectively.

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

We establish and maintain reserves for certain potential environmental issues.liabilities. At MarchDecember 31, 2019 and June 30, 2018,2019, the balances of these reserves were $12.4$12.0 million and $12.6$12.4 million, respectively. These reserves represent anticipated costs associated with the remediation of these issuespotential remedial requirements and are generally not discounted.

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

In addition to the direct effects of TCJA, the provisions of TCJA caused the Company to re-evaluate its permanent reinvestment assertion in all jurisdictions, concluding that a portion of the unremitted earnings and profits of certain non-U.S. subsidiaries and affiliates will no longer be permanently reinvested. These changes in assertion required the recognition of aEffective tax charge of $6.1 million recorded in the December quarter of fiscal 2019 primarily for foreign withholding and U.S. state income taxes. The remaining amount of unremitted earnings of non-U.S. subsidiaries continue to be indefinitely reinvested. With regard to the unremitted earnings which remain indefinitely reinvested, 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, including liquidity needs associated with our domestic debt service requirements.

The effective income tax rates for the three months ended MarchDecember 31, 2019 and 2018 were 11.087.9 percent (benefit on a loss) and 31.224.8 percent (provision on income), respectively. The current quarter rate reflectsyear-over-year change is primarily due to a discrete $14.5 million benefit for the lowerone-time effect of Swiss tax reform, the impairment of Widia goodwill, the change in the jurisdictional mix caused by expected restructuring and related charges and the increase in tax on global intangible low-taxed income (GILTI) and the base erosion anti-abuse tax (BEAT), which are both components of the U.S. federal statutory tax rateTax Cuts and a $6.8 million discrete benefit to adjust the Toll Tax charge based on regulations issued during the March quarterJobs Act of fiscal 2019.2017. The prior year rate includesincluded a discrete Toll Tax charge of $6.4 million.

The transitional provisions of Swiss tax reform allow companies to utilize a combination of lower tax rates and tax basis adjustments to fair value, which are no longer considered permanently reinvested,used for tax depreciation and GILTI. The prior year rate includes charges relatedamortization purposes resulting in deductions over the transitional period. To reflect the federal and cantonal transitional provisions, as they apply to us, we recorded a deferred tax asset of $14.5 million during the three months ended December 31, 2019. We consider the deferred tax asset from Swiss tax reform to be an estimate based on our current interpretation of the legislation, which is subject to change based on further legislative guidance, review with the Swiss federal and cantonal authorities and modifications to an out of period adjustment.the underlying valuation.

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

The following tables provide the computation of diluted shares outstanding for the three and nine months ended MarchDecember 31, 2018 and the six months ended December 31, 2019 and 2018: