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, ~~2017~~2018

Commission file number 1-5318

KENNAMETAL INC.

(Exact name of registrant as specified in its charter)



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

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

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

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer [X]		Accelerated filer [ ]
Non-accelerated filer [ ] ~~(Do not check if 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 31, ~~2018~~2019
Capital Stock, par value $1.25 per share		~~81,573,415~~82,233,615

Table of Contents

KENNAMETAL INC.

FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, ~~2017~~2018

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, 2017 and 2016	4	Condensed Consolidated Statements of Income (Unaudited) Three and six months ended December 31, 2018 and 2017	4

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three and six months ended December 31, 2017 and 2016	5	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three and six months ended December 31, 2018 and 2017	4

	Condensed Consolidated Balance Sheets (Unaudited) December 31, 2017 and June 30, 2017	6	Condensed Consolidated Balance Sheets (Unaudited) December 31, 2018 and June 30, 2018	5

	Condensed Consolidated Statements of Cash Flow (Unaudited) Six months ended December 31, 2017 and 2016	7	Condensed Consolidated Statements of Cash Flow (Unaudited) Six months ended December 31, 2018 and 2017	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	23

3.	Quantitative and Qualitative Disclosures About Market Risk	37	Quantitative and Qualitative Disclosures About Market Risk	34

4.	Controls and Procedures	38	Controls and Procedures	35

PART II - OTHER INFORMATION	PART II - OTHER INFORMATION		PART II - OTHER INFORMATION
1.	Legal Proceedings	39	Legal Proceedings	36

2.	Unregistered Sales of Equity Securities and Use of Proceeds	39	Unregistered Sales of Equity Securities and Use of Proceeds	36

6.	Exhibits	40	Exhibits	36

Signatures	Signatures	41	Signatures	37

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 downturns;~~the economy; our ability to achieve ~~all~~ anticipated benefits of our restructuring, simplification and modernization initiatives; risks related to our foreign operations and international markets, such as fluctuations in currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; 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 forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. Except as required by law, we do not intend to release publicly any revisions to forward-looking statements as a result of future events or developments.

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) 2017 2016 2017 2016
Sales $ 571,345
$ 487,573
$ 1,113,799
$ 964,713
Cost of goods sold 378,800
339,950
736,261
673,560
Gross profit 192,545
147,623
377,538
291,153
Operating expense 120,649
111,004
239,980
230,869
Restructuring and asset impairment charges (Note 7) 45
8,456
5,570
37,061
Amortization of intangibles 3,677
4,150
7,338
8,421
Operating income 68,174
24,013
124,650
14,802
Interest expense 7,231
7,151
14,379
14,144
Other expense, net 1,313
726
1,401
844
Income (loss) before income taxes 59,630
16,136
108,870
(186 )
Provision for income taxes 17,472
8,221
27,074
13,100
Net income (loss) 42,158
7,915
81,796
(13,286 )
Less: Net income attributable to noncontrolling interests 557
653
1,011
1,108
Net income (loss) attributable to Kennametal $ 41,601
$ 7,262
$ 80,785
$ (14,394 )
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
Basic earnings (loss) per share $ 0.51
$ 0.09
$ 0.99
$ (0.18 )
Diluted earnings (loss) per share $ 0.50
$ 0.09
$ 0.98
$ (0.18 )
Dividends per share $ 0.20
$ 0.20
$ 0.40
$ 0.40
Basic weighted average shares outstanding 81,477
80,206
81,274
80,131
Diluted weighted average shares outstanding 82,778
81,026
82,446
80,131

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



	Three Months Ended December 31,						Six Months Ended December 31,
(in thousands, except per share amounts)	2018			2017			2018			2017
Sales (Note 3)	$	587,394		$	571,345		$	1,174,080		$	1,113,799
Cost of goods sold	388,796			381,844			764,389			742,348
Gross profit	198,598			189,501			409,691			371,451
Operating expense	114,635			122,138			237,920			242,731
Restructuring and asset impairment charges (Note 7)	1,545			45			2,620			5,570
Amortization of intangibles	3,560			3,677			7,141			7,338
Operating income	78,858			63,641			162,010			115,812
Interest expense	8,104			7,231			16,201			14,379
Other income, net	(4,022		)	(3,220		)	(6,782		)	(7,437		)
Income before income taxes	74,776			59,630			152,591			108,870
Provision for income taxes	18,529			17,472			37,921			27,074
Net income	56,247			42,158			114,670			81,796
Less: Net income attributable to noncontrolling interests	1,549			557			3,274			1,011
Net income attributable to Kennametal	$	54,698		$	41,601		$	111,396		$	80,785
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
Basic earnings per share	$	0.66		$	0.51		$	1.35		$	0.99
Diluted earnings per share	$	0.66		$	0.50		$	1.34		$	0.98
Dividends per share	$	0.20		$	0.20		$	0.40		$	0.40
Basic weighted average shares outstanding	82,331			81,477			82,218			81,274
Diluted weighted average shares outstanding	83,310			82,778			83,233			82,446

~~Table of Contents~~

KENNAMETAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2017 2016 2017 2016
Net income (loss) $ 42,158
$ 7,915
$ 81,796
$ (13,286 )
Other comprehensive income (loss), net of tax
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges (286 ) 1,606
(905 ) 1,480
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges 1,007
382
1,403
769
Unrecognized net pension and other postretirement benefit (loss) gain (625 ) 3,471
(2,590 ) 4,101
Reclassification of net pension and other postretirement benefit loss 1,569
1,796
3,348
3,630
Foreign currency translation adjustments 13,924
(41,428 ) 33,793
(40,264 )
Total other comprehensive income (loss), net of tax 15,589
(34,173 ) 35,049
(30,284 )
Total comprehensive income (loss) 57,747
(26,258 ) 116,845
(43,570 )
Less: comprehensive income (loss) attributable to noncontrolling interests 1,445
(401 ) 2,184
469
Comprehensive income (loss) attributable to Kennametal Shareholders $ 56,302
$ (25,857 ) $ 114,661
$ (44,039 )



	Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2018			2017			2018			2017
Net income	$	56,247		$	42,158		$	114,670		$	81,796
Other comprehensive (loss) income, net of tax
Unrealized gain (loss) on derivatives designated and qualified as cash flow hedges	170			(286		)	(91		)	(905		)
Reclassification of unrealized loss on derivatives designated and qualified as cash flow hedges	262			1,007			857			1,403
Unrecognized net pension and other postretirement benefit gain (loss)	871			(625		)	1,194			(2,590		)
Reclassification of net pension and other postretirement benefit loss	1,298			1,569			2,606			3,348
Foreign currency translation adjustments	(3,400		)	13,924			(19,605		)	33,793
Total other comprehensive (loss) income, net of tax	(799		)	15,589			(15,039		)	35,049
Total comprehensive income	55,448			57,747			99,631			116,845
Less: comprehensive income attributable to noncontrolling interests	2,049			1,445			2,542			2,184
Comprehensive income attributable to Kennametal Shareholders	$	53,399		$	56,302		$	97,089		$	114,661

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, 2017			June 30, 2017			December 31, 2018			June 30, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	159,940		$	190,629		$	96,276		$	556,153
Accounts receivable, less allowance for doubtful accounts of $13,332 and $13,693, respectively	392,923			380,425
Accounts receivable, less allowance for doubtful accounts of $10,951 and $11,807, respectively							380,683			401,290
Inventories (Note 10)	507,462			487,681			578,566			525,466
Other current assets	68,057			55,166			63,509			63,257
Total current assets	1,128,382			1,113,901			1,119,034			1,546,166
Property, plant and equipment:
Land and buildings	351,190			350,002			349,857			351,953
Machinery and equipment	1,660,218			1,577,776			1,753,544			1,702,243
Less accumulated depreciation	(1,231,743		)	(1,183,390		)	(1,248,298		)	(1,229,983		)
Property, plant and equipment, net	779,665			744,388			855,103			824,213
Other assets:
Assets held for sale (Note 7)	7,547			6,980
Goodwill (Note 17)	306,147			301,367			300,003			301,802
Other intangible assets, less accumulated amortization of $139,202 and $129,981, respectively (Note 17)	184,523			190,527
Deferred income taxes (Note 3)	21,667			28,349
Other intangible assets, less accumulated amortization of $151,364 and $145,334, respectively (Note 17)							168,486			176,468
Deferred income taxes							16,052			17,015
Other	47,930			29,984			72,430			60,073
Total other assets	567,814			557,207			556,971			555,358
Total assets	$	2,475,861		$	2,415,496		$	2,531,108		$	2,925,737
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases	$	48		$	190
Current maturities of long-term debt (Note 11)							$	—		$	399,266
Notes payable to banks	1,312			735			3,371			934
Accounts payable	190,592			215,722			198,350			221,903
Accrued income taxes	17,370			6,202			28,621			18,603
Accrued expenses	64,631			85,682			57,780			95,239
Other current liabilities	133,668			152,947			123,931			150,586
Total current liabilities	407,621			461,478			412,053			886,531
Long-term debt and capital leases, less current maturities (Note 11)	695,722			694,991
Long-term debt, less current maturities (Note 11)							591,688			591,505
Deferred income taxes	15,141			14,883			28,563			26,991
Accrued pension and postretirement benefits	164,701			160,860			157,818			159,522
Accrued income taxes	2,776			2,636			8,374			6,249
Other liabilities	25,952			27,995			24,328			24,612
Total liabilities	1,311,913			1,362,843			1,222,824			1,695,410
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; 81,517 and 80,665 shares issued, respectively	101,897			100,832
Capital stock, $1.25 par value; 120,000 shares authorized; 82,160 and 81,646 shares issued, respectively							102,700			102,058
Additional paid-in capital	500,388			474,547			522,413			511,909
Retained earnings	813,936			765,607			979,259			900,683
Accumulated other comprehensive loss	(289,816		)	(323,692		)	(334,632		)	(320,325		)
Total Kennametal Shareholders’ Equity	1,126,405			1,017,294			1,269,740			1,194,325
Noncontrolling interests	37,543			35,359			38,544			36,002
Total equity	1,163,948			1,052,653			1,308,284			1,230,327
Total liabilities and equity	$	2,475,861		$	2,415,496		$	2,531,108		$	2,925,737

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,						Six Months Ended December 31,
(in thousands)	2017			2016			2018			2017
OPERATING ACTIVITIES
Net income (loss)	$	81,796		$	(13,286	)
Net income							$	114,670		$	81,796
Adjustments for non-cash items:
Depreciation	46,061			45,994			47,807			46,061
Amortization	7,338			8,421			7,141			7,338
Stock-based compensation expense	11,995			13,275			13,435			11,995
Restructuring and asset impairment charges (Note 7)	3,172			781			(257		)	3,172
Deferred income tax provision	7,241			1,274			1,512			7,241
Other	3,474			(2,773		)	2,109			3,474
Changes in certain assets and liabilities:
Accounts receivable	(3,290		)	20,423			14,026			(3,290		)
Inventories	(9,080		)	(1,938		)	(59,190		)	(9,080		)
Accounts payable and accrued liabilities (Note 3)	(66,620		)	(5,497		)
Accounts payable and accrued liabilities (Note 4)							(82,828		)	(92,320		)
Accrued income taxes	3,966			1,632			7,995			3,966
Accrued pension and postretirement benefits	(13,824		)	(11,298		)	(9,760		)	(13,824		)
Other	(5,455		)	(8,309		)	4,841			(5,455		)
Net cash flow provided by operating activities	66,774			48,699			61,501			41,074
INVESTING ACTIVITIES
Purchases of property, plant and equipment	(85,223		)	(70,573		)
Purchases of property, plant and equipment (Note 4)							(88,076		)	(59,523		)
Disposals of property, plant and equipment	846			3,509			2,490			846
Other	244			100			89			244
Net cash flow used for investing activities	(84,133		)	(66,964		)	(85,497		)	(58,433		)
FINANCING ACTIVITIES
Net increase in notes payable	643			1,005			2,473			643
Net decrease in short-term revolving and other lines of credit							(174		)	—
Term debt repayments	(141		)	(427		)	(400,000		)	(141		)
Purchase of capital stock	(109		)	(125		)	(107		)	(109		)
Dividend reinvestment and the effect of employee benefit and stock plans (Note 3)	15,020			1,341
The effect of employee benefit and stock plans and dividend reinvestment							(2,182		)	15,020
Cash dividends paid to Shareholders	(32,456		)	(31,970		)	(32,820		)	(32,456		)
Other	(271		)	(6,626		)	151			(271		)
Net cash flow used for financing activities	(17,314		)	(36,802		)	(432,659		)	(17,314		)
Effect of exchange rate changes on cash and cash equivalents	3,984			(4,511		)	(3,222		)	3,984
CASH AND CASH EQUIVALENTS
Net decrease in cash and cash equivalents	(30,689		)	(59,578		)	(459,877		)	(30,689		)
Cash and cash equivalents, beginning of period	190,629			161,579			556,153			190,629
Cash and cash equivalents, end of period	$	159,940		$	102,001		$	96,276		$	159,940

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

Table of Contents

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.~~ORGANIZATION~~

Kennametal Inc. was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling. From this beginning, Kennametal Inc. and its subsidiaries (collectively, Kennametal or the Company) has grown into a global leader in the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and mission-critical wear applications to combat extreme conditions associated with wear fatigue, corrosion and high temperatures. The Company's reputation for material technology, metal cutting application knowledge, as well as expertise and innovation in the development of custom solutions and services, contributes to its leading position in its primary markets.

Our product offering includes a wide selection of standard and customized technologies for metalworking applications, such as turning, milling, hole making, tooling systems and services. End users of the Company's metalworking products include manufacturers engaged in a diverse array of industries including: the manufacturers of transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation.

We also 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.

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 ~~2017~~2018 Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, ~~2017~~2018 was derived from the audited balance sheet included in our ~~2017~~2018 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 months ended December 31, ~~2017~~2018 and ~~2016~~2017 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 ~~2018~~2019 is to the fiscal year ending June 30, ~~2018.~~2019. When used in this Quarterly Report on Form 10-Q, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

3.2.NEW ACCOUNTING STANDARDS

Adopted

In ~~March 2016,~~May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. ~~2016-09, "Improvements to Employee Share-Based Payment Accounting,~~2014-09, "Revenue from Contracts with Customers (Topic 606)," which ~~is intended~~requires an entity to ~~simplify equity-based award accounting~~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 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 ~~presentation. The guidance impacts income tax accounting related~~18 to ~~equity-based awards,~~ the ~~classification~~condensed consolidated financial statements for further details.

In August 2016, the FASB issued ASU No. 2016-15, "Classification of ~~awards as either equity or liabilities,~~Certain Cash Receipts and Cash Payments (a consensus of the ~~classification on~~Emerging Issues Task Force)," which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice with respect to how these are classified in the statement of cash flows. We adopted this ~~guidance~~ASU July 1, 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 at the time of adoption of this standard; (2) excess tax benefits, previously reported in the financing activities section of the condensed consolidated statements of cash flow, is now reported in the operating activities section, adopted on a prospective basis. Therefore, prior period statements of cash flow were not retrospectively adjusted for this provision; and (3) employee taxes paid when Kennametal withholds shares for tax withholding purposes, previously reported in the 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 $2.1 million for the six months ended December 31, 2016.

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory," which requires that inventory other than LIFO be subsequently measured at the lower of cost and net realizable value, as opposed to the previous practice of lower of cost or market. Subsequent measurement is unchanged for inventory measured using LIFO. We adopted this guidance July 1, 2017.2018. Adoption of this guidance did not have a material ~~impact~~effect on our condensed consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory," which 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. We adopted this ASU July 1, 2018. Adoption of this guidance did not have a material effect on our condensed consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. We adopted this ASU July 1, 2018, with the amendments applied on a retrospective basis. Refer to Note 9 to the condensed consolidated financial statements for further details.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting," which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. We adopted this ASU July 1, 2018. Adoption of this guidance did not have a material effect on our condensed consolidated financial statements.

Issued

In February 2016, the FASB issued ASU No. 2016-02, "Leases: Topic 842," which replaces the existing guidance in ASC 840, Leases. The standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for substantially all leases. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This standard is effective for Kennametal beginning July 1, 2019. Currently, we are inventorying our leasing arrangements and gathering lease data in order to determine the impact this ASU will have on our consolidated financial statements.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


3.	REVENUE RECOGNITION

Revenue Accounting Description and Policy

The Company's contracts with customers are comprised of purchase orders, and for larger customers, may also include long-term agreements. We account for a contract when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. These contracts with customers typically relate to the manufacturing of products, which represent single performance obligations that are satisfied when control of the product passes to the customer. The Company considers the timing of right to payment, transfer of risk and rewards, transfer of title, transfer of physical possession and customer acceptance when determining when control transfers to the customer. As a result, revenue is generally recognized at a point in time - either upon shipment or delivery - based on the specific shipping terms in the contract. The shipping terms vary across all businesses and depend on the product, customary local commercial terms and the type of transportation. Shipping and handling activities are accounted for as activities to fulfill a promise to transfer a product to a customer and as such, costs incurred are recorded when the related revenue is recognized. Payment for products is due within a limited time period after shipment or delivery, typically within 30 to 90 calendar days of the respective invoice dates. The Company does not generally offer extended payment terms.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Amounts billed and due from our customers are classified as accounts receivable, less allowance for doubtful accounts on the condensed consolidated balance sheet. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract. Variable consideration primarily includes volume incentive rebates, which are based on achieving a certain level of purchases and other performance criteria as established by our distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned. The majority of our products are consumed by our customers or end users in the manufacture of their products. Historically, we have experienced very low levels of returned products and do not consider the effect of returned products to be material.

See "Note 18. Segment Data" for disaggregation of revenue by geography and end market.

Contract Balances

The Company records a contract asset when it has a right to payment from a customer that is conditioned on events that have occurred other than the passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material remaining performance obligations, contract assets or liabilities as of December 31, 2018 and June 30, 2018.

Practical Expedient

The Company pays sales commissions related to certain contracts, which qualify as incremental costs of obtaining a contract. However, the Company applies the practical expedient that allows an entity to recognize incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would have been recognized is one year or less. These costs are recorded within operating expense in our condensed consolidated statement of income.


4.	SUPPLEMENTAL CASH FLOW DISCLOSURES



	Six Months Ended December 31,
(in thousands)	2018			2017
Cash paid during the period for:
Income taxes	$	28,414		$	15,866
Interest	16,745			13,714
Supplemental disclosure of non-cash information:
Changes in accounts payable related to purchases of property, plant and equipment	(100		)	14,200

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Issued~~

~~In May 2014,~~During the ~~FASB issued ASU No. 2014-09, “Revenue from Contracts~~current quarter, the Company revised its condensed consolidated statement of cash flow for the six months ended December 31, 2017 to correctly present the changes in accounts payable and accrued liabilities and in purchases of property, plant and equipment, resulting in a decrease of $25.7 million to previously reported net cash flow provided by operating activities and a corresponding decrease to previously reported net cash flow used for investing activities. Revisions of $22.7 million will be made in future filings to the condensed consolidated statements of cash flow for the nine months ended March 31, 2018 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. Currently, we are analyzing the standard's impact on our customer arrangements and evaluating the new standard against our historical accounting policies and practices, including the timing of revenue recognition. In particular, we are assessing the identification of performance obligations and the impact of variable considerationsimilar effects on the transaction price determination. 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 Industrial and Widia segments. We are evaluating the timing of revenue to determine if it will occur in the same or different periods. We have a project team that is performing a detailed review of the terms and provisions of our customer contracts. We have not yet determined the complete impact of adoption of this standard on our condensed consolidated statements of cash flow. The supplemental disclosure of non-cash information for changes in accounts payable related to purchases of property, plant and equipment for the six months ended December 31, 2017 was also revised accordingly, at an increase of $14.2 million. The amount of that disclosure will be revised in future filings for the nine months ended March 31, 2018 to depict an increase of $11.2 million. The Company has evaluated the correction and determined it was not material to the previously issued interim financial statements.


4.	~~SUPPLEMENTAL CASH FLOW DISCLOSURES~~

Six Months Ended December 31,
(in thousands) 2017 2016
Cash paid during the period for:
Income taxes $ 15,866
$ 10,191
Interest 13,714
13,480
Supplemental disclosure of non-cash information:
Changes in accounts payable related to purchases of property, plant and equipment 11,477
15,404
The correction had no effect on the previously issued annual financial statements.

5.FAIR VALUE MEASUREMENTS

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

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

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

Level 3: Inputs that are unobservable.

As of December 31, ~~2017,~~2018, 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⁾	$	—	$	212	$	—	$	212	$	—	$	513	$	—	$	513
Total assets at fair value	$	—	$	212	$	—	$	212	$	—	$	513	$	—	$	513

Liabilities:
Derivatives⁽¹⁾	$	—	$	1,253	$	—	$	1,253	$	—	$	49	$	—	$	49
Total liabilities at fair value	$	—	$	1,253	$	—	$	1,253	$	—	$	49	$	—	$	49

As of June 30, 2018, 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
Assets:
Derivatives ⁽¹⁾	$	—	$	1,665	$	—	$	1,665
Total assets at fair value	$	—	$	1,665	$	—	$	1,665

Liabilities:
Derivatives ⁽¹⁾	$	—	$	207	$	—	$	207
Total liabilities at fair value	$	—	$	207	$	—	$	207

⁽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.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~As of June 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
Assets:
Derivatives ⁽¹⁾
$ —
$ 359
$ —
$ 359
Total assets at fair value $ —
$ 359
$ —
$ 359

Liabilities:
Derivatives ⁽¹⁾
$ —
$ 910
$ —
$ 910
Total liabilities at fair value $ —
$ 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.~~


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,~~income, net.

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, 2017			June 30, 2017			December 31, 2018			June 30, 2018
Derivatives designated as hedging instruments
Other current assets - range forward contracts	$	25		$	1		$	513		$	799
Other current liabilities - range forward contracts	(1,224		)	(671		)	—			(5		)
Other assets - range forward contracts	3			—			—			27
Other liabilities - range forward contracts	(6		)	(101		)
Total derivatives designated as hedging instruments	(1,202		)	(771		)	513			821
Derivatives not designated as hedging instruments
Other current assets - currency forward contracts	184			358			—			839
Other current liabilities - currency forward contracts	(23		)	(138		)	(49		)	(202		)
Total derivatives not designated as hedging instruments	161			220			(49		)	637
Total derivatives	$	(1,041	)	$	(551	)	$	464		$	1,458

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~~(Gains) losses related to derivatives not designated as hedging instruments have been recognized as follows:


	Three Months Ended December 31,						Six Months Ended December 31,						Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2017			2016			2017			2016			2018			2017			2018		2017
Other expense, net - currency forward contracts	$	(92	)	$	(59	)	$	(208	)	$	(377	)
Other income, net - currency forward contracts													$	(2	)	$	(92	)	$	76	$	(208	)

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~~KENNAMETAL INC.~~

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

CASH FLOW HEDGES

Range forward contracts (a transaction where both a put option is purchased and a call option is sold) are designated as cash flow hedges and hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts are recorded in accumulated other comprehensive loss and are recognized as a component of other ~~expense,~~income, net when the underlying sale of products or services is recognized into earnings. The notional amount of the contracts translated into U.S. dollars at December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, was ~~$77.9~~$43.5 million and ~~$75.3~~$62.9 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, ~~2017,~~2018, we expect to recognize into earnings $0.3 million of income on outstanding derivatives in the next 12 ~~months $1.6 million of expense on outstanding derivatives.~~months.

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

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2017 2016 2017 2016
(Losses) gains recognized in other comprehensive loss, net $ (287 ) $ 1,606
$ (906 ) $ 1,481
Losses reclassified from accumulated other comprehensive loss into other expense, net $ 870
$ 382
$ 1,262
$ 768



	Three Months Ended December 31,					Six Months Ended December 31,
(in thousands)	2018		2017			2018			2017
Gaines (losses) recognized in other comprehensive (loss) income, net	$	170	$	(287	)	$	(91	)	$	(906	)
Losses reclassified from accumulated other comprehensive loss into other income, net	$	565	$	870		$	1,097		$	1,262

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

No portion of the gains or losses recognized in earnings was due to ineffectiveness and no amounts were excluded from our effectiveness testing for the six months ended December 31, ~~2017~~2018 and ~~2016.~~2017.

NET INVESTMENT HEDGES

As of December 31, ~~2017,~~2018, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of ~~€33.0~~€71.0 million as net investment hedges to hedge the foreign exchange exposure of our net investment in Euro-based subsidiaries. ~~Losses~~We recorded a gain of $0.5 million and ~~$1.9~~a loss of $0.5 million ~~were recorded~~ as a component of foreign currency translation adjustments in other comprehensive (loss) income for the three months ended December 31, 2018 and 2017, respectively. We recorded a gain of $0.5 million and a loss of $1.9 million as a component of foreign currency translation adjustments in other comprehensive (loss) income for the six months ended December 31, 2018 and 2017, respectively. ~~We did not have net investment hedges during the three and six months ended December 31, 2016.~~

As of December 31, ~~2017,~~2018, 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	Notional (EUR in thousands)⁽²⁾		Notional (USD in thousands)⁽²⁾		Maturity
Foreign currency-denominated intercompany loan payable	€	26,929	$	32,279	June 26, 2022	€	40,125	$	45,927	June 27, 2019
Foreign currency-denominated intercompany loan payable	8,667		10,388		November 20, 2018	27,728		31,738		June 26, 2022
Foreign currency-denominated intercompany loan payable	2,004		2,402		October 11, 2019	6,509		7,450		November 20, 2021
Foreign currency-denominated intercompany loan payable						2,024		2,316		October 11, 2019

⁽²⁾ Includes principal and accrued interest.


7.	RESTRUCTURING AND RELATED 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 employment reductions, as well as rationalization and consolidation of certain manufacturing facilities. These restructuring actions were substantially completed in the firstJune quarter of fiscal 2018, we implemented and ~~were mainly cash expenditures.~~

substantially completed restructuring actions to simplify the Industrial segment's cost structure by directing resources to more profitable business and increasing sales force productivity. We supplemented this with the rationalization of small manufacturing facilities in the Infrastructure and Industrial segments, which we expect to complete in fiscal 2019. Total restructuring and related charges since inception of ~~$156.0~~$13.9 million have been recorded for ~~these programs~~this program through December 31, ~~2017: $84.6 million in Industrial, $50.3 million in Infrastructure, $13.8 million in Widia and $7.3 million in Corporate.~~2018.

We recorded restructuring and related charges of ~~$1.5~~$2.1 million and ~~$11.8~~$1.5 million for the three months ended December 31, ~~2017~~2018 and ~~2016,~~2017, respectively. Of these amounts, restructuring charges totaled $1.5 million for the three months ended December 31, 2018 and were less than $0.1 million for the three months ended December 31, ~~2017 and totaled $8.8 million for the three months ended December 31, 2016, of which expense of $0.3 million was related to inventory and was recorded in cost of good sold.~~2017. Restructuring-related charges of ~~$1.3~~$0.6 million and ~~$2.1~~$1.3 million were recorded in cost of goods sold ~~and $0.2 million and $0.9 million in operating expense~~ for the three months ended December 31, 2018 and 2017, respectively. For the three months ended December 31, 2017, restructuring-related charges of $0.2 million were recorded in operating expense.

We recorded restructuring and ~~2016,~~related charges of $3.1 million and $8.4 million for the six months ended December 31, 2018 and 2017, respectively. Of these amounts, restructuring charges totaled $2.6 million and $5.6 million, respectively. Restructuring-related charges of $0.5 million and $2.5 million were recorded in cost of goods sold for the six months ended December 31, 2018 and 2017, respectively. For the six months ended December 31, 2017, restructuring-related charges of $0.3 million were recorded in operating expense.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

We recorded restructuring and related charges of $8.4 million and $43.4 million for the six months ended December 31, 2017 and 2016, respectively. Of these amounts, restructuring charges totaled $5.6 million and $37.3 million, respectively, of which expense of $0.3 million for the six months ended December 31, 2016 was related to inventory and was recorded in cost of goods sold. Restructuring-related charges of $2.5 million and $4.1 million were recorded in cost of goods sold and $0.3 million and $2.0 million in operating expense for the six months ended December 31, 2017 and 2016, respectively.

As of December 31, ~~2017 and~~2018, the total restructuring accrual is recorded in other current liabilities in our condensed consolidated balance sheet. As of June 30, ~~2017, property, plant, and equipment of $7.5~~2018, $17.5 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 December 31, 2017 and June 30, 2017, $15.8 million and $27.3~~$0.1 million of the restructuring accrual is recorded in other current liabilities and ~~$0.7 million and $2.5 million is recorded in~~ other liabilities, ~~respectively, in our condensed consolidated balance sheet.~~respectively. The amount attributable to each segment is as follows:


(in thousands)	June 30, 2017		Expense			Asset Write-Down			Translation		Cash Expenditures			December 31, 2017		June 30, 2018		Expense			Asset Write-Down		Translation			Cash Expenditures			December 31, 2018
Industrial
Severance	$	17,639	$	1,618		$	—		$	820	$	(11,214	)	$	8,863	$	7,967	$	1,552		$	—	$	(128	)	$	(3,568	)	$	5,823
Facilities	—		2,356			(2,356		)	—		—			—		—		(9		)	9		—			—			—
Other	94		(29		)	—			2		(28		)	39		—		29			—		(1		)	10			38
Total Industrial	$	17,733	$	3,945		$	(2,356	)	$	822	$	(11,242	)	$	8,902	$	7,967	$	1,572		$	9	$	(129	)	$	(3,558	)	$	5,861

Widia
Severance	$	2,434	$	414		$	—		$	209	$	(2,865	)	$	192	$	2,087	$	113		$	—	$	(9	)	$	(261	)	$	1,930
Facilities	—		747			(747		)	—		—			—		—		—			—		—			—			—
Other	—		(7		)	—			1		7			1		15		2			—		—			1			18
Total Widia	$	2,434	$	1,154		$	(747	)	$	210	$	(2,858	)	$	193	$	2,102	$	115		$	—	$	(9	)	$	(260	)	$	1,948

Infrastructure
Severance	$	9,573	$	409		$	—		$	207	$	(2,831	)	$	7,358	$	7,558	$	1,159		$	—	$	(96	)	$	(2,665	)	$	5,956
Facilities	21		69			(69		)	—		(21		)	—		—		(248		)	248		—			—			—
Other	45		(7		)	—			—		(21		)	17		12		22			—		—			7			41
Total Infrastructure	$	9,639	$	471		$	(69	)	$	207	$	(2,873	)	$	7,375	$	7,570	$	933		$	248	$	(96	)	$	(2,658	)	$	5,997
Total	$	29,806	$	5,570		$	(3,172	)	$	1,239	$	(16,973	)	$	16,470	$	17,639	$	2,620		$	257	$	(234	)	$	(6,476	)	$	13,806


8.	STOCK-BASED COMPENSATION

Stock Options

~~There~~Changes in our stock options for the six months ended December 31, 2018 were ~~no grants made~~as follows:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Life (years)	Aggregate Intrinsic value (in thousands)
Options outstanding, June 30, 2018	989,992		$	33.08
Exercised	(136,405	)	29.18
Lapsed or forfeited	(7,000	)	45.24
Options outstanding, December 31, 2018	846,587		$	33.61	4.0	$	3,018
Options vested and expected to vest, December 31, 2018	846,587		$	33.61	4.0	$	3,018
Options exercisable, December 31, 2018	841,920		$	33.68	4.0	$	2,960

Fair value of options vested during the six months ended December 31, 2018 and 2017 was $1.2 million and ~~2016.~~

$1.7 million, respectively. The amount of cash received from the exercise of capital stock options during the six months ended December 31, 2018 and 2017 was $3.9 million and $19.1 million, respectively. The total intrinsic value of options exercised during the six months ended December 31, 2018 and 2017 was $1.8 million and $4.8 million, respectively.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Restricted Stock Units – Performance Vesting and Time Vesting

Changes in our performance vesting and time vesting restricted stock ~~options~~units for the six months ended December 31, ~~2017~~2018 were as follows:

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 (521,259 ) 36.63

Lapsed or forfeited (62,763 ) 39.46

Options outstanding, December 31, 2017 1,142,769
$ 32.62
5.4 $ 18,049
Options vested and expected to vest, December 31, 2017 1,136,169
$ 32.64
5.4 $ 17,916
Options exercisable, December 31, 2017 888,358
$ 34.36
4.7 $ 12,485



	Performance Vesting Stock Units		Performance Vesting Weighted Average Fair Value		Time Vesting Stock Units		Time Vesting Weighted Average Fair Value
Unvested, June 30, 2018	409,297		$	31.22	1,083,675		$	30.47
Granted	161,066		40.10		536,910		38.92
Vested	(36,394	)	31.86		(461,851	)	31.22
Performance metric adjustments, net	41,196		29.69		—		—
Forfeited	(44,179	)	31.04		(26,371	)	32.27
Unvested, December 31, 2018	530,986		$	33.77	1,132,363		$	34.15

During the six months ended December 31, ~~2017~~2018 and ~~2016,~~2017, compensation expense related to time vesting and performance vesting restricted stock ~~options~~units was $~~0.4~~12.8 million and $~~1.0~~11.0 million, respectively. As of December 31, ~~2017,~~2018, the total unrecognized compensation cost related to ~~options outstanding~~unvested time vesting and performance vesting restricted stock units was ~~$0.5~~$26.7 million and is expected to be recognized over a weighted average period of ~~0.8~~2.3 years.

~~Fair value~~


9.	PENSION AND OTHER POSTRETIREMENT BENEFITS

We sponsor several defined benefit pension plans. Additionally, we provide varying levels of ~~options vested during~~postretirement health care and life insurance benefits to certain 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)	2018			2017			2018			2017
Service cost	$	407		$	406		$	818		$	810
Interest cost	7,970			7,678			15,960			15,335
Expected return on plan assets	(13,434		)	(14,132		)	(26,896		)	(28,221		)
Amortization of transition obligation	23			23			45			46
Amortization of prior service (credit) cost	(5		)	(41		)	(10		)	132
Recognition of actuarial losses	1,679			1,718			3,374			3,428
Net periodic pension income	$	(3,360	)	$	(4,348	)	$	(6,709	)	$	(8,470	)

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



	Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2018			2017			2018			2017
Interest cost	$	153		$	157		$	307		$	314
Amortization of prior service credit	(22		)	(6		)	(45		)	(11		)
Recognition of actuarial loss	62			70			124			140
Net periodic other postretirement benefit cost	$	193		$	221		$	386		$	443

In accordance with ASU 2017-07, as described in Note 2, the service cost of $0.4 million and $0.8 million for the three and six months ended December 31, 2018 and 2017 was reported as a component of cost of goods sold and operating expense. The other components of net periodic pension income and net periodic other postretirement benefit cost totaling a net benefit of $3.6 million and $7.1 million for the three and six months ended December 31, 2018 were presented as a component of other income, net. For the three and six months ended December 31, 2017, ~~and 2016 was $1.7~~we reclassified a net benefit of $3.0 million and ~~$3.1~~$6.1 million,~~, respectively.~~

~~Tax benefits relating~~ respectively, from cost of goods sold to ~~excess stock-based compensation deductions are presented in the operating activities section~~other income, net and a net benefit of the condensed consolidated statements of cash flow for the six months ended December 31, 2017. Tax benefits resulting from stock-based compensation deductions were less than the amounts reported for financial reporting purposes by $0.2 million for the six months ended December 31, 2017, and no tax benefits were realized for the six months ended ~~December 31, 2016due to the valuation allowance on U.S. deferred tax assets.~~

~~The amount of cash received from the exercise of capital stock options during the six months ended December 31, 2017 and 2016 was $19.1~~$1.5 million and ~~$3.1~~$2.8 million, ~~respectively. The related tax benefit was $1.1 million for the six months ended December 31, 2017, and there was no related tax benefit realized for the six months ended December 31, 2016 due~~respectively, from operating expense to ~~the valuation allowance on U.S. deferred tax assets. The total intrinsic value of options exercised during the six months ended December 31, 2017~~ ~~was$4.8 million and was immaterial for the~~ ~~six~~ ~~months ended December 31, 2016.~~

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 the six months ended December 31, 2017 and 2016 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 has ended, 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 for 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.other income, net.

Table of Contents

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Changes in our time vesting and performance vesting restricted stock units for the six months ended December 31, 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
424,754
37.64
Vested (10,031 ) 42.83
(390,874 ) 30.67
Performance metric adjustments, net 16,766
25.84
—
—
Forfeited —
—
(20,192 ) 31.89
Unvested, December 31, 2017 445,382
$ 31.19
1,167,132
$ 30.20

~~During the six months ended December 31, 2017 and 2016, compensation expense related to time vesting and performance vesting restricted stock units was~~ ~~$11.0 million~~ ~~and~~ ~~$12.3 million, respectively. As of December 31, 2017, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was~~ ~~$23.2 million~~ ~~and is expected to be recognized over a weighted average period of 2.1 years.~~


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) 2017 2016 2017 2016
Service cost $ 406
$ 727
$ 810
$ 1,460
Interest cost 7,678
7,770
15,335
15,579
Expected return on plan assets (14,132 ) (14,672 ) (28,221 ) (29,429 )
Amortization of transition obligation 23
22
46
45
Amortization of prior service (credit) cost (41 ) (113 ) 132
(226 )
Recognition of actuarial losses 1,718
2,088
3,428
4,200
Net periodic pension income $ (4,348 ) $ (4,178 ) $ (8,470 ) $ (8,371 )

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

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2017 2016 2017 2016
Interest cost $ 157
$ 168
$ 314
$ 337
Amortization of prior service credit (6 ) (6 ) (11 ) (11 )
Recognition of actuarial loss 70
89
140
177
Net periodic other postretirement benefit cost $ 221
$ 251
$ 443
$ 503


10.	INVENTORIES

We used the last-in, first-out (LIFO) method of valuing inventories for 4139 percent and 4340 percent of total inventories at December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, 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.

~~Table of Contents~~

~~KENNAMETAL INC.~~

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

Inventories consisted of the following:


(in thousands)	December 31, 2017			June 30, 2017			December 31, 2018			June 30, 2018
Finished goods	$	283,812		$	290,817		$	306,680		$	279,240
Work in process and powder blends	210,265			166,857			256,271			232,973
Raw materials	86,944			87,627			99,145			96,859
Inventories at current cost	581,021			545,301			662,096			609,072
Less: LIFO valuation	(73,559		)	(57,620		)	(83,530		)	(83,606		)
Total inventories	$	507,462		$	487,681		$	578,566		$	525,466


11.	LONG-TERM DEBT

Our five-year, multi-currency, revolving credit facility, as amended and restated in ~~April 2016~~June 2018 (Credit Agreement), provides for revolving credit loans of up to ~~$600~~$700 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the Credit Agreement). We were in compliance with all such covenants as of December 31, ~~2017.~~2018. We had no borrowings outstanding under the Credit Agreement as of December 31, ~~2017~~2018 and June 30, ~~2017.~~2018. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries. The Credit Agreement matures in ~~April 2021.~~June 2023.

Fixed rate debt had a fair market value of ~~$702.1~~$597.5 million and ~~$704.0~~$996.4 million at December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, respectively. The Level 2 fair value is determined based on the quoted market ~~price of this~~prices for similar debt instruments as of December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, respectively.

On July 9, 2018, the Company completed the early redemption of its previously outstanding $400.0 million of 2.650 percent Senior Unsecured Notes due 2019.


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 (CERCLA), under which we have been designated by the United States Environmental Protection Agency (USEPA) as a Potentially Responsible Party (PRP) with respect to environmental remedial costs at certain Superfund sites. We have evaluated our claims and liabilities associated with these Superfund sites based upon best currently available information. We believe our environmental accruals are adequate to cover our portion of the environmental remedial costs at the Superfund sites where we have been designated a PRP, to the extent these expenses are probable and reasonably estimable.

~~Other Environmental Matters~~We establish and maintain reserves for ~~other~~certain potential environmental issues. At December 31, ~~2017~~2018 and June 30, ~~2017,~~2018, the balances of these reserves were ~~$12.7~~$12.5 million and ~~$12.4~~$12.6 million, respectively. These reserves represent anticipated costs associated with the remediation of these ~~issues.~~issues and are generally not discounted.

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,~~United States Environmental Protection Agency (USEPA), other governmental agencies and by the ~~PRP~~Potentially Responsible Party (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.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~We maintain a Corporate~~Superfund Sites Among other environmental laws, we are subject to the Comprehensive Environmental ~~Health~~Response Compensation and ~~Safety (EHS) Department to monitor compliance with environmental regulations and to oversee remediation activities. In addition,~~Liability Act of 1980 (CERCLA), under which we have been designated ~~EHS analysts who~~by the USEPA as a PRP with respect to environmental remedial costs at certain Superfund sites. We have evaluated our claims and liabilities associated with these Superfund sites based upon best currently available information. We believe our environmental accruals are ~~responsible for each of~~adequate to cover our ~~global manufacturing facilities. Our financial management team periodically meets with members~~portion of the ~~Corporate EHS Department~~environmental remedial costs at the Superfund sites where we have been designated a PRP, to the extent these expenses are probable and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly basis, we review financial provisions and reserves for environmental contingencies and adjust these reserves when appropriate.reasonably estimable.


13.	INCOME TAXES

~~On December 22, 2017, the~~ Tax Cuts and Jobs Act of 2017 (TCJA) ~~was signed into law in the U.S.~~

The three primary items from TCJA amends the Internal Revenue Code of 1986 to reduce tax rates and modify policies, credits and deductions for individuals and corporations. For corporations, TCJA reduces the federal tax rate from a maximum of 35.0 percent to a flat 21.0 percent rate and transitions from a worldwide tax system to a territorial tax system. TCJA also adds many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII). We are assessing the impact of certain provisions, including the tax on GILTI, the BEAT and the deduction for FDII, which do not apply to the Company until fiscal 2019. This assessment includes the evaluation of our accounting election relative to GILTI as either a period cost or an adjustment to deferred tax assets or liabilities of our foreign subsidiaries for the new tax. The two material items that effect the Company for fiscal ~~2018~~2019 are the reduction in the statutory tax rate, ~~and a~~the one-time tax that is imposed on our unremitted foreign earnings ~~(toll tax).~~

~~On December 22, 2017,~~(Toll Tax) and the ~~SEC issued Staff Accounting Bulletin 118 (SAB 118) that includes additional guidance allowing companies~~tax on global intangible low-taxed income (GILTI) which we elected to ~~use~~record as a ~~measurement~~ period similar to that used in business combinations, to account for the impacts of TCJA in their financial statements. We have accounted for the impacts of TCJA to the extent a reasonable estimate could be made during the three months ended December 31, 2017. We will continue to refine our estimates throughout the measurement period, which will not extend beyond 12 months from the enactment of TCJA, or until the accounting is complete.cost.

The U.S. federal tax rate reduction iswas effective as of January 1, 2018. As a June 30 fiscal year-end taxpayer, our fiscal 2018 ~~fiscal year~~U.S. federal statutory tax rate was a blended rate of 28.1 percent. Our U.S. federal statutory tax rate is ~~expected to be a blended rate of 28.1 percent. We expect our U.S. federal statutory tax rate to be~~ 21.0 percent in fiscal 2019.

~~As a result of~~During the reduction in the U.S. corporate income tax rate from 35.0 percent to 21.0 percent under TCJA, we recorded a provisional reduction to our net deferred tax assets with a corresponding decrease to the valuation allowance prior to its release on December 31, 2017. The result of this reduction had no impact on our condensed consolidated statement of income for the sixthree months ended December 31, ~~2017.~~2018, we finalized our estimate of the Toll Tax charge based upon the U.S. Department of the Treasury regulations and other relevant guidance issued through December 31, 2018. The ~~revaluation of our deferred tax assets and liabilities are subject~~adjustment to ~~further adjustments~~the toll charge during the ~~measurement period due to~~quarter resulted in an additional net benefit of $3.9 million, decreasing the complexity of determining our net deferred tax liability as of the enactment date. Some of the information necessary to determine the accounting impacts of the tax rate change includes final calculations related to our 2017 tax return as well as refining the analysis of which existing deferred balances at the enactment date will reverse in 2018 at the 28.1 percent tax rate and which deferred balances will reverse after 2018 at the 21.0 percent tax rate.

~~We have estimated the toll tax~~total Toll Tax charge to be $77 million after available foreign tax credits. The toll tax charge consumed our entire U.S. federal net operating loss carryforward and other credit carryforwards, which represent a significant portion of our previously available deferred tax assets, and was offset by the release of the valuation allowance associated with these assets. As a result, we$78.0 million. We do not expect to make a cash payment associated with the ~~toll charge. The toll~~Toll Tax.

At this time, the Company does not anticipate a material impact to the fiscal 2019 condensed consolidated financial statements from the base erosion anti-abuse tax or a deduction for foreign-derived intangible income.

In accordance with the SEC Staff Accounting Bulletin 118, we have finalized our accounting for the impacts of the TCJA provisions enacted in fiscal 2018, including the remeasurement of deferred tax assets and ~~analyzing~~liabilities at the ~~calculation in reasonable detail to complete the accounting.~~reduced U.S. federal rate of 21.0 percent.

~~During~~Effective Tax Rates

The effective income tax rates for the three months ended December 31, 2018 and 2017 ~~we released~~were 24.8 percent and 29.3 percent, respectively. The current year rate reflects the lower U.S. federal statutory tax rate, the $6.1 million charge related to changes in the indefinite reinvestment assertion on certain foreign subsidiaries' undistributed earnings which are no longer considered permanently reinvested, GILTI and the $3.9 million benefit recorded to reflect the finalization of the amount of the Toll Tax. The prior year rate includes the tax effects associated with the release of a valuation allowance ~~of $3.9 million~~ that was previously recorded against our net deferred tax assets in the U.S. ~~A benefit of $6.8 million would have been recorded in the provision for income taxes; however, because of~~and a ~~current period~~ charge ~~of $2.9 million due~~related to an out of period adjustment, a $3.9 million benefit was recorded in the provision for income taxes. The valuation allowance release was driven by utilization of a significant portion of our deferred tax assets to satisfy the toll tax provision in TCJA. Along with expected full-year income in the U.S. in fiscal 2018, we anticipate our domestic deferred taxes to be in a net liability position by June 30, 2018.

~~Table of Contents~~

~~KENNAMETAL INC.~~

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

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 a result of TCJA, which among other provisions allows for a 100% dividends received deduction from controlled foreign subsidiaries, we will re-evaluate our assertion with respect to permanent reinvestment. As part of this evaluation, we will consider our global working capital and capital investment requirements, among other considerations including the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent. If we determine that an entity should no longer remain subject to the permanent reinvestment assertion, we will accrue additional tax charges, including but not limited to state income taxes, withholding taxes and other relevant foreign taxes in the period the conclusion is determined. In accordance with SAB 118, we expect to complete our evaluation by December 22, 2018.adjustment.

The effective income tax rates for the ~~three months ended December 31, 2017 and 2016 were 29.3 percent and 50.9 percent, respectively. The effective income tax rate for the~~ six months ended December 31, 2018 and 2017 ~~was~~were 24.9 ~~percent,~~percent. The current year rate reflects the lower U.S. federal statutory tax rate, the $6.1 million charge related to changes in the indefinite reinvestment assertion on certain foreign subsidiaries' undistributed earnings which are no longer considered permanently reinvested, GILTI and the ~~effective income tax rate for~~$3.9 million benefit recorded to reflect the ~~six months ended December 31, 2016 was not meaningful as~~finalization of the amount of the Toll Tax. The prior year ~~loss before income taxes was negligible. The change in both periods was primarily driven by prior year U.S. losses not being tax-effected and current year U.S. income being subject to tax. This is~~rate includes a benefit from the ~~result~~release of ~~the~~a valuation allowance ~~originally~~that was previously recorded ~~in the fourth quarter of fiscal 2016, being released in the current quarter.~~

During the three months ended December 31, 2017, we identified an error related to the tax rate that had historically been used to calculate the deferred tax charge on intra-entity product transfers. This resulted in an overstatement ofagainst our net deferred tax assets ~~of $8.2 million as of June 30, 2017. During the current quarter, $2.9 million of this amount was corrected~~ in ~~connection with the release of~~ the U.S. ~~valuation allowance. Therefore, the~~and a charge related to an out of period adjustment recorded resulted in a further increase of $5.3 million to the provision for income taxes for the three and six months ended December 31, 2017. The remaining balance related to this item has been reclassified and included in other current assets as of December 31, 2017. The impact to the effective tax rate was 8.9 percent and 4.9 percent for the three and six months ended December 31, 2017, respectively. After evaluation, we determined that the impact of the adjustment was not material to the previously issued financial statements, nor are the out of period adjustments material to the estimated results of this fiscal year.adjustment.


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 purposes of determining the number of diluted shares outstanding, 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 1.3 million shares and 0.8 million shares for the three months ended December 31, 2017 and 2016, respectively, and 1.2 million shares for the six months ended December 31, 2017. Unexercised capital stock options, performance awards and restricted stock units of 0.2 million shares and 1.7 million shares for the three months ended December 31, 2017 and 2016, respectively, and 0.5 million shares for the six months ended December 31, 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 six months ended December 31, 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.

~~Table of Contents~~

~~KENNAMETAL INC.~~

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


~~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 December 31, 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 —
—
80,785
—
1,011
81,796
Other comprehensive income —
—
—
33,876
1,173
35,049
Dividend reinvestment 3
106
—
—
—
109
Capital stock issued under employee benefit and stock plans⁽³⁾
1,065
25,841
—
—
—
26,906
Purchase of capital stock (3 ) (106 ) —
—
—
(109 )
Cash dividends paid —
—
(32,456 ) —
—
(32,456 )
Balance as of December 31, 2017 $ 101,897
$ 500,388
$ 813,936
$ (289,816 ) $ 37,543
$ 1,163,948

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⁽³⁾
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

~~(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.~~


~~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.

1815

Table of Contents

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following tables provide the computation of diluted shares outstanding for the three and six months ended December 31, 2018 and 2017:



	Three Months Ended December 31,		Six Months Ended December 31,
(in thousands)	2018	2017	2018	2017
Weighted-average shares outstanding during period	82,331	81,477	82,218	81,274
Add: Unexercised capital stock options, unvested performance awards and unvested restricted stock units	979	1,301	1,015	1,172
Number of shares on which diluted earnings per share is calculated	83,310	82,778	83,233	82,446
Unexercised capital stock options, performance awards and restricted stock units not included in the computation because the option exercise price was greater than the average market price	469	219	400	483


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 December 31, 2018 and 2017 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, 2018	$	102,058		$	511,909		$	900,683		$	(320,325	)	$	36,002		$	1,230,327
Net income	—			—			111,396			—			3,274			114,670
Other comprehensive loss	—			—			—			(14,307		)	(732		)	(15,039		)
Dividend reinvestment	3			104			—			—			—			107
Capital stock issued under employee benefit and stock plans⁽³⁾	642			10,504			—			—			—			11,146
Purchase of capital stock	(3		)	(104		)	—			—			—			(107		)
Cash dividends	—			—			(32,820		)	—			—			(32,820		)
Balance as of December 31, 2018	$	102,700		$	522,413		$	979,259		$	(334,632	)	$	38,544		$	1,308,284



	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	—			—			80,785			—			1,011		81,796
Other comprehensive income	—			—			—			33,876			1,173		35,049
Dividend reinvestment	3			106			—			—			—		109
Capital stock issued under employee benefit and stock plans⁽³⁾	1,065			25,841			—			—			—		26,906
Purchase of capital stock	(3		)	(106		)	—			—			—		(109		)
Cash dividends	—			—			(32,456		)	—			—		(32,456		)
Balance as of December 31, 2017	$	101,897		$	500,388		$	813,936		$	(289,816	)	$	37,543	$	1,163,948

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

Table of Contents

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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


16.	ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of, and changes in, ~~AOCL~~accumulated other comprehensive loss (AOCL) were as follows, net of tax, for the six months ended December 31, ~~2017 (in thousands):~~2018:

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 (2,590 ) 32,620
(905 ) 29,125
Amounts reclassified from AOCL 3,348
—
1,403
4,751
Net current period other comprehensive
  income
758
32,620
498
33,876
AOCL, December 31, 2017 $ (188,280 ) $ (93,986 ) $ (7,550 ) $ (289,816 )

Attributable to noncontrolling interests:
Balance, June 30, 2017 $ —
$ (2,164 ) $ —
$ (2,164 )
Other comprehensive income before
  reclassifications
—
1,173
—
1,173
Net current period other comprehensive
  income
—
1,173
—
1,173
AOCL, December 31, 2017 $ —
$ (991 ) $ —
$ (991 )



(in thousands)	Postretirement benefit plans			Currency translation adjustment			Derivatives			Total
Attributable to Kennametal:
Balance, June 30, 2018	$	(187,755	)	$	(127,347	)	$	(5,223	)	$	(320,325	)
Other comprehensive income (loss) before reclassifications	1,194			(18,873		)	(91		)	(17,770		)
Amounts reclassified from AOCL	2,606			—			857			3,463
Net current period other comprehensive income (loss)	3,800			(18,873		)	766			(14,307		)
AOCL, December 31, 2018	$	(183,955	)	$	(146,220	)	$	(4,457	)	$	(334,632	)

Attributable to noncontrolling interests:
Balance, June 30, 2018	$	—		$	(2,913	)	$	—		$	(2,913	)
Other comprehensive loss before reclassifications	—			(732		)	—			(732		)
Net current period other comprehensive loss	—			(732		)	—			(732		)
AOCL, December 31, 2018	$	—		$	(3,645	)	$	—		$	(3,645	)

The components of, and changes in, AOCL were as follows, net of tax, for the six months ended December 31, ~~2016 (in thousands):~~2017:


(in thousands)													Postretirement benefit plans			Currency translation adjustment			Derivatives			Total
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	4,101			(39,625		)	1,480			(34,044		)
Balance, June 30, 2017													$	(189,038	)	$	(126,606	)	$	(8,048	)	$	(323,692	)
Other comprehensive (loss) income before reclassifications													(2,590		)	32,620			(905		)	29,125
Amounts reclassified from AOCL	3,630			—			769			4,399			3,348			—			1,403			4,751
Net current period other comprehensive income	7,731			(39,625		)	2,249			(29,645		)	758			32,620			498			33,876
AOCL, December 31, 2016	$	(204,432	)	$	(170,837	)	$	(6,885	)	$	(382,154	)
AOCL, December 31, 2017													$	(188,280	)	$	(93,986	)	$	(7,550	)	$	(289,816	)

Attributable to noncontrolling interests:
Balance, June 30, 2016	$	—		$	(3,446	)	$	—		$	(3,446	)
Balance, June 30, 2017													$	—		$	(2,164	)	$	—		$	(2,164	)
Other comprehensive income before reclassifications	—			(639		)	—			(639		)	—			1,173			—			1,173
Net current period other comprehensive income	—			(639		)	—			(639		)	—			1,173			—			1,173
AOCL, December 31, 2016	$	—		$	(4,085	)	$	—		$	(4,085	)
AOCL, December 31, 2017													$	—		$	(991	)	$	—		$	(991	)

1917

Table of Contents

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Reclassifications out of AOCL for the three and six months ended December 31, ~~2017~~2018 and ~~2016~~2017 consisted of the ~~following (in thousands):~~following:


	Three Months Ended December 31,						Six Months Ended December 31,							Three Months Ended December 31,						Six Months Ended December 31,
Details about AOCL components	2017			2016			2017			2016			Affected line item in the Income Statement
(in thousands)														2018			2017			2018			2017			Affected line item in the Income Statement
Gains and losses on cash flow hedges:
Forward starting interest rate swaps	$	566		$	545		$	1,132		$	1,090		Interest expense	$	588		$	566		$	1,176		$	1,132		Interest expense
Currency exchange contracts	768			(163		)	726			(321		)	Other expense, net	(241		)	768			(41		)	726			Other income, net
Total before tax	1,334			382			1,858			769				347			1,334			1,135			1,858
Tax impact	(327		)	—			(455		)	—			Provision for income taxes	(85		)	(327		)	(278		)	(455		)	Provision for income taxes
Net of tax	$	1,007		$	382		$	1,403		$	769			$	262		$	1,007		$	857		$	1,403

Postretirement benefit plans:
Amortization of transition obligations	$	23		$	22		$	46		$	45		See note 9 for further details	$	23		$	23		$	45		$	46		Other income, net
Amortization of prior service (credit) cost	(47		)	(119		)	121			(237		)	See note 9 for further details	(27		)	(47		)	(55		)	121			Other income, net
Recognition of actuarial losses	1,788			2,177			3,568			4,377			See note 9 for further details	1,741			1,788			3,498			3,568			Other income, net
Total before tax	1,764			2,080			3,735			4,185				1,737			1,764			3,488			3,735
Tax impact	(195		)	(284		)	(387		)	(555		)	Provision for income taxes	(439		)	(195		)	(882		)	(387		)	Provision for income taxes
Net of tax	$	1,569		$	1,796		$	3,348		$	3,630			$	1,298		$	1,569		$	2,606		$	3,348

The amount of income tax allocated to each component of other comprehensive (loss) income ~~(loss)~~ for the three months ended December 31, 2018 and 2017 ~~and 2016:~~

2017 2016
(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 $ (379 ) $ 93
$ (286 ) $ 1,606
$ —
$ 1,606
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges 1,334
(327 ) 1,007
382
—
382
Unrecognized net pension and other postretirement benefit (loss) gain (834 ) 209
(625 ) 4,639
(1,168 ) 3,471
Reclassification of net pension and other postretirement benefit loss 1,764
(195 ) 1,569
2,080
(284 ) 1,796
Foreign currency translation adjustments 13,996
(72 ) 13,924
(41,428 ) —
(41,428 )
Other comprehensive income (loss) $ 15,881
$ (292 ) $ 15,589
$ (32,721 ) $ (1,452 ) $ (34,173 )

~~Table of Contents~~

~~KENNAMETAL INC.~~

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

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

2017 2016
(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 $ (1,199 ) $ 294
$ (905 ) $ 1,480
$ —
$ 1,480
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges 1,858
(455 ) 1,403
769
—
769
Unrecognized net pension and other postretirement benefit (loss) gain (3,434 ) 844
(2,590 ) 5,401
(1,300 ) 4,101
Reclassification of net pension and other postretirement benefit loss 3,735
(387 ) 3,348
4,185
(555 ) 3,630
Foreign currency translation adjustments 34,058
(265 ) 33,793
(40,264 ) —
(40,264 )
Other comprehensive income (loss) $ 35,018
$ 31
$ 35,049
$ (28,429 ) $ (1,855 ) $ (30,284 )


~~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.~~

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

(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 six months ended December 31, 2017:
Change in gross goodwill due to translation 4,382
398
—
4,780

Gross goodwill 415,076
41,913
633,211
1,090,200
Accumulated impairment losses (137,204 ) (13,638 ) (633,211 ) (784,053 )
Balance as of December 31, 2017 $ 277,872
$ 28,275
$ —
$ 306,147



				2018									2017
(in thousands)	Pre-tax			Tax impact			Net of tax			Pre-tax			Tax impact			Net of tax
Unrealized gain (loss) on derivatives designated and qualified as cash flow hedges	$	225		$	(55	)	$	170		$	(379	)	$	93		$	(286	)
Reclassification of unrealized loss on derivatives designated and qualified as cash flow hedges	347			(85		)	262			1,334			(327		)	1,007
Unrecognized net pension and other postretirement benefit gain (loss)	1,134			(263		)	871			(834		)	209			(625		)
Reclassification of net pension and other postretirement benefit loss	1,737			(439		)	1,298			1,764			(195		)	1,569
Foreign currency translation adjustments	(3,407		)	7			(3,400		)	13,996			(72		)	13,924
Other comprehensive (loss) income	$	36		$	(835	)	$	(799	)	$	15,881		$	(292	)	$	15,589

2118

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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 months ended December 31, 2018 and 2017 were as follows:



				2018									2017
(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	$	(121	)	$	30		$	(91	)	$	(1,199	)	$	294		$	(905	)
Reclassification of unrealized loss on derivatives designated and qualified as cash flow hedges	1,135			(278		)	857			1,858			(455		)	1,403
Unrecognized net pension and other postretirement benefit gain (loss)	1,551			(357		)	1,194			(3,434		)	844			(2,590		)
Reclassification of net pension and other postretirement benefit loss	3,488			(882		)	2,606			3,735			(387		)	3,348
Foreign currency translation adjustments	(19,679		)	74			(19,605		)	34,058			(265		)	33,793
Other comprehensive (loss) income	$	(13,626	)	$	(1,413	)	$	(15,039	)	$	35,018		$	31		$	35,049


17.	GOODWILL AND OTHER INTANGIBLE ASSETS

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



(in thousands)	Industrial			Widia			Infrastructure			Total
Gross goodwill	$	411,458		$	41,186		$	633,211		$	1,085,855
Accumulated impairment losses	(137,204		)	(13,638		)	(633,211		)	(784,053		)
Balance as of June 30, 2018	$	274,254		$	27,548		$	—		$	301,802

Activity for the six months ended December 31, 2018:
Change in gross goodwill due to translation	(1,604		)	(195		)	—			(1,799		)

Gross goodwill	409,854			40,991			633,211			1,084,056
Accumulated impairment losses	(137,204		)	(13,638		)	(633,211		)	(784,053		)
Balance as of December 31, 2018	$	272,650		$	27,353		$	—		$	300,003

The components of our other intangible assets were as follows:

Estimated
Useful Life
(in years)
December 31, 2017 June 30, 2017
(in thousands)
Gross Carrying
Amount

Accumulated
Amortization

Gross Carrying
Amount

Accumulated
Amortization
Contract-based 3 to 15 $ 7,070
$ (7,033 ) $ 7,064
$ (7,014 )
Technology-based and other 4 to 20 47,032
(30,497 ) 46,461
(29,061 )
Customer-related 10 to 21 207,102
(80,872 ) 205,502
(74,669 )
Unpatented technology 10 to 30 31,924
(11,888 ) 31,754
(10,589 )
Trademarks 5 to 20 12,530
(8,912 ) 12,401
(8,648 )
Trademarks Indefinite 18,067
—
17,326
—
Total $ 323,725
$ (139,202 ) $ 320,508
$ (129,981 )

~~During the six months ended December 31, 2017 and 2016, we recorded amortization expense of $7.3 million and $8.4 million, respectively, related to our other intangible assets.~~



	Estimated Useful Life (in years)	December 31, 2018					June 30, 2018
(in thousands)	Estimated Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization				Gross Carrying Amount		Accumulated Amortization
Contract-based	3 to 15	$	7,055	$	(7,043	)		$	7,061	$	(7,036	)
Technology-based and other	4 to 20	46,333		(31,314		)		46,666		(30,923		)
Customer-related	10 to 21	205,189		(89,701		)		206,162		(85,301		)
Unpatented technology	10 to 30	31,697		(14,259		)		31,854		(13,096		)
Trademarks	5 to 20	12,377		(9,047		)		12,450		(8,978		)
Trademarks	Indefinite	17,199		—				17,609		—
Total		$	319,850	$	(151,364	)		$	321,802	$	(145,334	)

Table of Contents

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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.

Our reportable operating segments have been determined in accordance with our 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, among other things, executive retirement plans, our Board of Directors and strategic initiatives ~~as well as certain other~~to our reportable operating segments. These costs ~~and report them~~are instead reported in Corporate. None of our three reportable operating segments represent the aggregation of two or more operating segments.

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

The Widia segment offers a focused assortment of standard custom metal cutting solutions to general engineering, aerospace, energy and transportation customers. We serve our customers primarily through a network of value added resellers, integrated supplier channels and via the Internet. Widia markets its products under the WIDIA^®, WIDIA Hanita^® and WIDIA GTD^® brands.

The Infrastructure segment generally serves customers that operate in the energy and earthworks market sectors that support primary industries such as oil and gas, power generation and chemicals; underground, surface and hard-rock mining; highway construction and road maintenance; and process industries such as food and feed. Our success is determined by our ability to gain an in-depth understanding of our customers’ engineering and development needs, to provide complete system solutions and high-performance capabilities to optimize and add value to their operations. Infrastructure markets its products primarily under the Kennametal^® brand and sells through a direct sales force as well as distributors.

Our sales and operating income by segment are as follows:



	Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2018			2017			2018			2017
Sales:
Industrial	$	317,320		$	312,448		$	637,878		$	609,912
Widia	48,954			47,744			97,626			92,987
Infrastructure	221,120			211,153			438,576			410,900
Total sales	$	587,394		$	571,345		$	1,174,080		$	1,113,799
Operating income:
Industrial	$	57,519		$	40,504		$	116,061		$	72,543
Widia	1,728			474			3,822			154
Infrastructure	20,614			23,833			44,474			44,223
Corporate	(1,003		)	(1,170		)	(2,347		)	(1,108		)
Total operating income	78,858			63,641			162,010			115,812
Interest expense	8,104			7,231			16,201			14,379
Other income, net	(4,022		)	(3,220		)	(6,782		)	(7,437		)
Income from continuing operations before income taxes	$	74,776		$	59,630		$	152,591		$	108,870

2220

Table of Contents

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Our sales and operating income (loss)~~The following table presents Kennametal's revenue disaggregated by ~~segment are as follows:~~geography:

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2017 2016 2017 2016
Sales:
Industrial $ 312,448
$ 267,492
$ 609,912
$ 536,536
Widia 47,744
42,874
92,987
83,888
Infrastructure 211,153
177,207
410,900
344,289
Total sales $ 571,345
$ 487,573
$ 1,113,799
$ 964,713
Operating income (loss):
Industrial $ 43,292
$ 18,067
$ 78,104
$ 23,603
Widia 856
(2,666 ) 918
(8,403 )
Infrastructure 25,511
10,274
47,580
2,687
Corporate (1,485 ) (1,662 ) (1,952 ) (3,085 )
Total operating income 68,174
24,013
124,650
14,802
Interest expense 7,231
7,151
14,379
14,144
Other expense, net 1,313
726
1,401
844
Income (loss) from continuing operations before income taxes $ 59,630
$ 16,136
$ 108,870
$ (186 )



	Three Months Ended
	December 31, 2018				December 31, 2017
(in thousands)	Industrial	Widia	Infrastructure	Total Kennametal	Industrial	Widia	Infrastructure	Total Kennametal
Americas	40%	45%	66%	50%	37%	46%	65%	48%
EMEA	41	26	15	30	42	26	16	31
Asia Pacific	19	29	19	20	21	28	19	21



	Six Months Ended
	December 31, 2018				December 31, 2017
(in thousands)	Industrial	Widia	Infrastructure	Total Kennametal	Industrial	Widia	Infrastructure	Total Kennametal
Americas	40%	45%	66%	50%	38%	47%	64%	48%
EMEA	40	25	15	29	41	25	16	31
Asia Pacific	20	30	19	21	21	28	20	21

The following tables presents Kennametal's revenue disaggregated by end market:



	Three Months Ended December 31, 2018
(in thousands)	Industrial	Widia	Infrastructure	Total Kennametal
General engineering	44%	100%	32%	44%
Transportation	34	—	—	18
Aerospace and defense	13	—	—	7
Energy	9	—	36	19
Earthworks	—	—	32	12



	Three Months Ended December 31, 2017
(in thousands)	Industrial	Widia	Infrastructure	Total Kennametal
General engineering	42%	100%	32%	43%
Transportation	37	—	—	20
Aerospace and defense	12	—	—	6
Energy	9	—	32	17
Earthworks	—	—	36	14



	Six Months Ended December 31, 2018
(in thousands)	Industrial	Widia	Infrastructure	Total Kennametal
General engineering	44%	100%	32%	44%
Transportation	34	—	—	19
Aerospace and defense	13	—	—	7
Energy	9	—	35	18
Earthworks	—	—	33	12

Table of Contents

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



	Six Months Ended December 31, 2017
(in thousands)	Industrial	Widia	Infrastructure	Total Kennametal
General engineering	42%	100%	31%	43%
Transportation	37	—	—	20
Aerospace and defense	12	—	—	6
Energy	9	—	32	17
Earthworks	—	—	37	14

2322

Table of Contents

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

OVERVIEW

Kennametal Inc. was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling. From this beginning, the Company has grown into a global leader in the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and mission-critical wear applications to combat extreme conditions associated with wear fatigue, corrosion and high temperatures. The Company's reputation for material technology, metal cutting application knowledge, as well as expertise and innovation in the development of custom solutions and services, contributes to its leading position in its primary markets.

~~We also~~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~~these products include producers and suppliers in equipment-intensive operations such as coal mining, road construction, quarrying, oil and gas exploration, refining, production and supply.

For the second quarter of fiscal year 2018 Kennametal has reported another strong operating quarter. The markets are continuing to show strength, and our growth initiatives are taking hold. On a consolidated basis, sales increased 17.2 percent, reflecting sales growth in all segments, regions and end markets. By working on our simplification initiatives, we have put the foundation in place for our modernization program to generate further margin improvement. Operating margin improved significantly to 11.9 percent from 4.9 percent in the prior year quarter reflecting improvement in both gross margin and operating expense as a percentage of sales.

Our sales of $571.3 million for the quarter ended December 31, 2017 increased 17.2 percent compared to sales for the quarter ended December 31, 2016, driven by organic sales growth of 15 percent and favorable currency exchange impact of 3 percent, partially offset by fewer business days impact of 1 percent compared to the prior year quarter. Every segment and every region reported increased sales and improved profitability. The Industrial, Infrastructure and Widia segments posted operating margins of 13.9 percent, 12.1 percent and 1.8 percent, respectively.

Operating income was $68.2 million, compared to a $24.0 million in the prior year quarter. Year-over-year comparative operating results reflect organic sales growth, incremental restructuring benefits of approximately $17 million, $10.3 million less restructuring and related charges in the current period, higher productivity and fixed cost absorption and favorable mix, partially offset by higher compensation expense and more overtime costs.

While end market demand has trended higher than previously anticipated, our effective tax rate for the full fiscal year is likely to be higher than previously anticipated. This increase in taxes is due primarily to the ongoing effects of no longer having a valuation allowance on U.S. deferred tax assets. The release of the valuation allowance was triggered by the application of the toll tax provision in the Tax Cuts and Jobs Act of 2017 (TCJA). Along with expected full-year income in the U.S. in fiscal 2018, we anticipate our domestic deferred taxes to be in a net liability position by June 30, 2018. In addition to the discrete items discussed below, current period earnings per share included additional tax expense of approximately $0.08 per share resulting from U.S. income now being subject to taxes as a result of the release of the valuation allowance. As a result of TCJA, we anticipate the long-term, beyond fiscal 2018, tax rate will decrease from mid-20s to low-20s.

We reported current quarter earnings per diluted share of $0.50, which include a charge of $0.07 per share from the impact of recording an out of period charge to provision for income taxes and a one-time benefit of $0.05 per share from releasing the U.S. deferred tax valuation allowance. The earnings per diluted share of $0.09 in the prior year quarter included $0.13 per share of restructuring and related charges and $0.02 per share associated with recording a valuation allowance related to deferred tax assets in Australia.

We substantially completed our existing restructuring programs in the previous quarter. Pre-tax benefits from these restructuring actions were approximately $41 million in the current quarter, of which approximately $17 million were incremental to the prior year quarter. Please see the Results of Continuing Operations section of Item 2 for further discussion and analysis of our restructuring programs.

The cost savings we achieved through our existing restructuring programs do not include the anticipated benefits from our modernization initiative. The results of those programs are anticipated to accrue to the Company over the next few years.

~~Table of Contents~~

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

We had a net cash inflow from operating activities of $66.8 million during the six months ended December 31, 2017 compared to $48.7 million during the prior year quarter. The increase is due primarily to higher cash from operations before changes in certain other assets and liabilities and lower restructuring payments, partially offset by higher working capital. Capital expenditures were $85.2 million and $70.6 million during the six months ended December 31, 2017 and 2016, respectively.

Throughout the MD&A, we refer to measures used by management to evaluate performance. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, constant currency regional sales growth (decline) and constant currency end market sales ~~growth. The explanation~~growth (decline). We provide the definitions of these non-GAAP financial measures at the end of the MD&A ~~provides the definition of these non-GAAP financial measures~~section as well as details on the use and ~~the~~ derivation of these financial measures.

Operating results for the second quarter of fiscal year 2019 reflect continued margin improvement on the eighth consecutive quarter of sales growth. Our sales of $587.4 million for the quarter ended December 31, 2018 increased 3 percent from the prior year quarter, reflecting growth in all segments and constant currency regional sales growth in all regions. These results reflect the ongoing monetization of our growth and simplification/modernization initiatives.

Operating income was $78.9 million, compared to $63.6 million in the prior year quarter. The increase in operating income reflects organic sales growth and incremental simplification/modernization benefits, partially offset by higher raw material costs and a temporary increase in manufacturing expenses at certain locations due to the timing of simplification/modernization efforts underway. Price realization continued to outpace raw material cost inflation, and operating margin improved to 13.4 percent from 11.1 percent in the prior year quarter reflecting improvement in both gross profit and operating expense. The Industrial, Infrastructure and Widia segments had operating margins of 18.1 percent, 9.3 percent and 3.5 percent, respectively.

In connection with our simplification/modernization initiative, we recorded $2 million of pre-tax restructuring and related charges in the current quarter and incremental pre-tax benefits from simplification/modernization restructuring were approximately $3 million in the quarter. Annualized run-rate pre-tax benefits of approximately $12 million have been achieved in connection with these simplification/modernization restructuring initiatives.

In the quarter, we finalized the accounting for the tax effects of enactment of the Tax Cuts and Jobs Act of 2017 (TCJA) based upon the U.S. Department of the Treasury (USDT) regulations and other relevant guidance issued through December 31, 2018, including the re-evaluation of our permanent reinvestment assertion in certain jurisdictions. See Note 13 to our condensed consolidated financial statements for a complete discussion on income taxes and the Liquidity and Capital Resources section of the MD&A for further information regarding the results of the re-evaluation of our permanent reinvestment assertion.

We reported current quarter earnings per diluted share of $0.66, which include net discrete tax charges of $0.03 and restructuring and related charges of $0.02 per share. The earnings per diluted share of $0.50 in the prior year quarter included net discrete tax charges of $0.02 per share.

We had a net cash inflow from operating activities of $61.5 million during the six months ended December 31, 2018 compared to $41.1 million during the prior year quarter. The year-over-year change is due primarily to increased cash flow from operations before changes in certain other assets and liabilities, partially offset by higher working capital. Capital expenditures were $88.1 million and $59.5 million during the six months ended December 31, 2018 and 2017, respectively, with the increase due in part to higher spending for modernization.

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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, ~~2017~~2018 were $~~571.3~~587.4 million, an increase of ~~$83.8~~$16.0 million or ~~17.2~~3 percent, from $~~487.6~~571.3 million in the prior year quarter. The increase in sales was driven by ~~a 15~~4 percent organic sales growth and a 32 percent ~~favorable currency exchange impact,~~increase due to more business days, partially offset by a 13 percent ~~decrease due to fewer business days. Constant~~unfavorable currency end market sales growth was approximately 23 percent in energy, 14 percent in transportation, 12 percent in general engineering, 11 percent in earthworks and 9 percent in aerospace and defense. Constant currency regional sales growth was approximately 19 percent in Asia Pacific, 15 percent in the Americas and 9 percent in Europe, the Middle East and Africa (EMEA).exchange impact.

Sales for the six months ended December 31, ~~2017~~2018 were ~~$1,113.8~~$1,174.1 million, an increase of ~~$149.1~~$60.3 million or ~~15.5~~5 percent, from ~~$964.7~~$1,113.8 million in the prior year period. The increase in sales was driven by ~~a 14~~7 percent organic sales growth and a 21 percent ~~favorable currency exchange impact,~~increase due to more business days, partially offset by a 13 percent ~~decrease due to fewer business days. Constant~~unfavorable currency end market sales growth was approximately 24 percent in energy, 12 percent in earthworks, 10 percent in general engineering, 11 percent in transportation and 8 percent in aerospace and defense. Constant currency regional sales growth was approximately 17 percent in Asia Pacific, 14 percent in the Americas and 9 percent in EMEA.exchange impact.



	Three Months Ended December 31, 2018		Six Months Ended December 31, 2018
(in percentages)	As Reported	Constant Currency	As Reported	Constant Currency
End market sales growth (decline):
Aerospace and defense	18%	22%	18%	20%
Energy	14	15	14	15
General engineering	5	8	8	10
Transportation	(9)	(5)	(3)	1
Earthworks	(9)	(7)	(5)	(3)
Regional sales growth (decline):
Americas	7%	9%	9%	10%
Europe, the Middle East and Africa (EMEA)	—	5	1	5
Asia Pacific	(3)	2	4	7

GROSS PROFIT

Gross profit for the three months ended December 31, ~~2017~~2018 was $~~192.5~~198.6 million, an increase of ~~$44.9~~$9.1 million from ~~$147.6~~$189.5 million in the prior year quarter. The increase was primarily due to organic sales growth and incremental ~~restructuring~~simplification/modernization benefits, partially offset by higher raw material costs, a temporary increase in manufacturing expenses at certain locations due to the timing of ~~approximately $13 million, favorable~~simplification/modernization efforts underway, unfavorable foreign currency exchange impact of ~~$5.3~~approximately $7 million ~~higher productivity~~ and ~~fixed cost absorption, favorable mix and $1.2 million less restructuring-related charges, partially offset by~~ higher compensation ~~expense and more overtime costs.~~expense. The gross profit margin for the three months ended December 31, ~~2017~~2018 was ~~33.7~~33.8 percent, as compared to ~~30.3~~33.2 percent in the prior year quarter.

Gross profit for the six months ended December 31, ~~2017~~2018 was ~~$377.5~~$409.7 million, an increase of ~~$86.4~~$38.2 million from ~~$291.2~~$371.5 million in the prior year period. The increase was primarily due to organic sales growth, incremental ~~restructuring~~simplification/modernization benefits ~~of approximately $28 million,~~and favorable mix, ~~favorable~~partially offset by higher raw material costs, a temporary increase in manufacturing expenses at certain locations due to the timing of simplification/modernization efforts underway and unfavorable foreign currency exchange impact of ~~$8.3 million and $1.9 million less restructuring-related charges, partially offset by higher compensation expense, overtime costs and raw material costs.~~approximately $10 million. The gross profit margin for the six months ended December 31, ~~2017~~2018 was ~~33.9~~34.9 percent, as compared to ~~30.2~~33.3 percent in the prior year period.

OPERATING EXPENSE

Operating expense for the three months ended December 31, ~~2017 increased to $120.6~~2018 was $114.6 million compared to ~~$111.0~~$122.1 million for the three months ended December 31, ~~2016.~~2017. The ~~increase~~decrease was primarily due to ~~higher compensation expense and an unfavorable foreign~~favorable currency exchange impact of ~~$2.9~~approximately $3 million, lower compensation expense and incremental restructuring simplification benefits.

Operating expense for the six months ended December 31, 2018 was $237.9 million compared to $242.7 million for the six months ended December 31, 2017. The decrease was primarily due to favorable currency exchange impact of approximately $4 million and incremental restructuring simplification benefits.

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

We invested further in technology and innovation to continue delivering high quality products to our customers. Research and development expenses included in operating expense totaled $8.9 million and $9.5 million for the three months ended December 31, 2018 and 2017, respectively, and $18.6 million and $19.1 million for the six months ended December 31, 2018 and 2017, respectively.

RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES

In the June quarter of fiscal 2018, we implemented and substantially completed restructuring actions to simplify the Industrial segment's cost structure by directing resources to more profitable business and increasing sales force productivity. We supplemented this with the rationalization of small manufacturing facilities in the Infrastructure and Industrial segments, which we expect to complete in fiscal 2019. Total restructuring and related charges since inception of $13.9 million have been recorded for this program through December 31, 2018.

We recorded restructuring and related charges of $2.1 million and $1.5 million for the three months ended December 31, 2018 and 2017, respectively. Of these amounts, restructuring charges totaled $1.5 million for the three months ended December 31, 2018 and were less than $0.1 million for the three months ended December 31, 2017. Restructuring-related charges of $0.6 million and $1.3 million were recorded in cost of goods sold for the three months ended December 31, 2018 and 2017, respectively. For the three months ended December 31, 2017, restructuring-related charges of $0.2 million were recorded in operating expense.

We recorded restructuring and related charges of $3.1 million and $8.4 million for the six months ended December 31, 2018 and 2017, respectively. Of these amounts, restructuring charges totaled $2.6 million and $5.6 million, respectively. Restructuring-related charges of $0.5 million and $2.5 million were recorded in cost of goods sold for the six months ended December 31, 2018 and 2017, respectively. For the six months ended December 31, 2017, restructuring-related charges of $0.3 million were recorded in operating expense.

INTEREST EXPENSE

Interest expense for the three months ended December 31, 2018 increased to $8.1 million compared to $7.2 million for the three months ended December 31, 2017. Interest expense for the six months ended December 31, 2018 increased to $16.2 million compared to $14.4 million for the six months ended December 31, 2017. Both increases were primarily due to the incremental interest expense associated with the $300.0 million of 4.625 percent Senior Unsecured Notes due 2028 issued in June 2018. On July 9, 2018, the Company completed the early redemption of its previously outstanding $400.0 million of 2.650 percent Senior Unsecured Notes due 2019.

OTHER INCOME, NET

Other income for the three months ended December 31, 2018 increased to $4.0 million compared to $3.2 million for the three months ended December 31, 2017 primarily due to lower foreign currency transaction losses, partially offset by ~~incremental restructuring benefits~~lower pension income in the current quarter.

Other income for the six months ended December 31, 2018 decreased to $6.8 million compared to $7.4 million for the six months ended December 31, 2017 primarily due to lower pension income in the current period, partially offset by lower foreign currency transaction losses.

PROVISION FOR INCOME TAXES

The effective income tax rates for the three months ended December 31, 2018 and 2017 were 24.8 percent and 29.3 percent, respectively. The current year rate reflects the lower U.S. federal statutory tax rate, the $6.1 million charge related to changes in the indefinite reinvestment assertion on certain foreign subsidiaries' undistributed earnings which are no longer considered permanently reinvested, the tax on global intangible low-taxed income (GILTI) and the $3.9 million benefit recorded to reflect the finalization of ~~approximately $5 million~~the amount of the one-time tax that is imposed on our unremitted foreign earnings (Toll Tax). The prior year rate includes the tax effects associated with the release of a valuation allowance that was previously recorded against our net deferred tax assets in the U.S. and ~~$0.7 million less in restructuring-related charges.~~a charge related to an out of period adjustment.

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

~~Operating expense~~The effective income tax rates for the six months ended December 31, 2018 and 2017 ~~increased~~were 24.9 percent. The current year rate reflects the lower U.S. federal statutory tax rate, the $6.1 million charge related to $240.0 million compared to $230.9 million for the six months ended December 31, 2016. The increase was primarily due to higher compensation expense and an unfavorable foreign currency exchange impact of $4.5 million, partially offset by incremental restructuring benefits of approximately $12 million and $1.6 million less in restructuring-related charges.

~~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 employment reductions, as well as rationalization and consolidation of certain manufacturing facilities. These restructuring actions were substantially completedchanges in the ~~first quarter~~indefinite reinvestment assertion on certain foreign subsidiaries' undistributed earnings which are no longer considered permanently reinvested, GILTI and the $3.9 million benefit recorded to reflect the finalization of ~~fiscal 2018, were mostly cash expenditures~~the amount of the Toll Tax. The prior year rate includes a benefit from the release of a valuation allowance that was previously recorded against our net deferred tax assets in the U.S. and ~~achieved annual run rate ongoing pre-tax savings of approximately $165 million.~~

We recorded restructuring and related charges of $1.5 million and $11.8 million for the three months ended December 31, 2017 and 2016, respectively. Of these amounts, restructuring charges were less than $0.1 million for the three months ended December 31, 2017 and totaled $8.8 million for the three months ended ~~December 31, 2016, of which expense of $0.3 million was~~a charge related to ~~inventory and was recorded in cost~~an out of good sold. Restructuring-related charges of $1.3 million and $2.1 million were recorded in cost of goods sold and $0.2 million and $0.9 million in operating expense for the three months ended December 31, 2017 and 2016, respectively.period adjustment.

~~Total restructuring and related charges since the inception of our restructuring plans through December 31, 2017 were $156.0 million.~~ See Note 713 in our condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on Form ~~10-Q (Note 7).~~10-Q.

~~INTEREST EXPENSE~~

Interest expense for the three months ended December 31, 2017 and 2016 was $7.2 million. Interest expense for the six months ended December 31, 2017 and 2016 was $14.4 million and $14.1 million, respectively.

~~OTHER EXPENSE, NET~~

Other expense for the three months ended December 31, 2017 increased to $1.3 million compared to $0.7 million for the three months ended December 31, 2016 primarily due to prior year income from transition services provided related to a prior divestiture.

Other expense for the six months ended December 31, 2017 increased to $1.4 million compared to $0.8 million for the six months ended December 31, 2016 primarily due to prior year income from transition services provided related to a prior divestiture, partially offset by foreign currency transaction gains in the current period.

~~INCOME TAXES~~

The effective income tax rates for the three months ended December 31, 2017 and 2016 were 29.3 percent and 50.9 percent, respectively. The effective income tax rate for the six months ended December 31, 2017 was 24.9 percent, and the effective income tax rate for the six months ended December 31, 2016 was not meaningful as the prior year loss before income taxes was negligible. The change in both periods was primarily driven by prior year U.S. losses not being tax-effected and current year U.S. income being subject to tax. This is the result of the valuation allowance, originally recorded in the fourth quarter of fiscal 2016, being released in the current quarter.

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

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.

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


	Three Months Ended December 31,						Six Months Ended December 31,						Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2017			2016			2017			2016			2018			2017			2018			2017
Sales:
Industrial	$	312,448		$	267,492		$	609,912		$	536,536		$	317,320		$	312,448		$	637,878		$	609,912
Widia	47,744			42,874			92,987			83,888			48,954			47,744			97,626			92,987
Infrastructure	211,153			177,207			410,900			344,289			221,120			211,153			438,576			410,900
Total sales	$	571,345		$	487,573		$	1,113,799		$	964,713		$	587,394		$	571,345		$	1,174,080		$	1,113,799
Operating income (loss):
Operating income:
Industrial	$	43,292		$	18,067		$	78,104		$	23,603		$	57,519		$	40,504		$	116,061		$	72,543
Widia	856			(2,666		)	918			(8,403		)	1,728			474			3,822			154
Infrastructure	25,511			10,274			47,580			2,687			20,614			23,833			44,474			44,223
Corporate	(1,485		)	(1,662		)	(1,952		)	(3,085		)	(1,003		)	(1,170		)	(2,347		)	(1,108		)
Total operating income	68,174			24,013			124,650			14,802			78,858			63,641			162,010			115,812
Interest expense	7,231			7,151			14,379			14,144			8,104			7,231			16,201			14,379
Other expense, net	1,313			726			1,401			844
Income (loss) from continuing operations before income taxes	$	59,630		$	16,136		$	108,870		$	(186	)
Other income, net													(4,022		)	(3,220		)	(6,782		)	(7,437		)
Income from continuing operations before income taxes													$	74,776		$	59,630		$	152,591		$	108,870

INDUSTRIAL



	Three Months Ended December 31,						Six Months Ended December 31,
(in thousands, except operating margin)	2018			2017			2018			2017
Sales	$	317,320		$	312,448		$	637,878		$	609,912
Operating income	57,519			40,504			116,061			72,543
Operating margin	18.1		%	13.0		%	18.2		%	11.9		%



	Three Months Ended December 31, 2018	Six Months Ended December 31, 2018
(in percentages)	Three Months Ended December 31, 2018	Six Months Ended December 31, 2018
Organic sales growth	3%	7%
Foreign currency exchange impact⁽¹⁾	(4)	(3)
Business days impact⁽²⁾	3	1
Sales growth	2%	5%

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



	Three Months Ended December 31, 2018		Six Months Ended December 31, 2018
(in percentages)	As Reported	Constant Currency	As Reported	Constant Currency
End market sales growth (decline):
Aerospace and defense	18%	22%	18%	20%
General engineering	6	9	8	10
Energy	3	6	3	5
Transportation	(9)	(5)	(3)	1
Regional sales growth (decline):
Americas	10%	12%	10%	12%
EMEA	—	5	2	6
Asia Pacific	(8)	(4)	—	4

For the three months ended December 31, ~~2017,~~2018, Industrial sales increased 172 percent from the prior year quarter. Sales in aerospace benefited from higher demand for engines and frames globally as well as strength in accessory sales in the Americas. General engineering sales experienced growth from ~~global sales~~strength in the indirect channel ~~and~~particularly in the Americas. Energy growth was driven primarily by oil and gas drilling in the Americas, and sales in Asia and EMEA to transportation OEMs were weaker than in the prior year quarter primarily due to lower production levels. The sales increase in the Americas was driven primarily by increases in the general engineering and aerospace end markets, while growth in EMEA, excluding the unfavorable impact of currency exchange, was mostly due to increases in the general engineering and aerospace end markets, partially offset by a decrease in transportation. The sales decrease in Asia Pacific was primarily driven by a decline in the transportation end market in China.

For the three months ended December 31, 2018, Industrial operating income increased by $17.0 million, driven primarily by organic sales growth and incremental simplification/modernization benefits, partially offset by a temporary increase in manufacturing expenses at certain locations due to the timing of simplification/modernization efforts underway.

For the six months ended December 31, 2018, Industrial sales increased 5 percent from the prior year period. Sales in aerospace benefited from higher demand for engines and frames globally as well as accessory sales in the Americas. General engineering sales experienced growth from strength in the indirect channel particularly in the Americas and a more robust light and general engineering ~~sector. Growth~~sector in ~~transportation sales~~EMEA. Energy growth was driven primarily by oil and gas drilling in the Americas. Sales in Asia ~~Pacific~~ and EMEA to ~~tier suppliers and~~transportation OEMs were ~~dampened by lower~~weaker than in the prior year period, while sales to ~~OEMs in the Americas. Oil and gas drilling sales~~transportation suppliers increased in the Americas continues to provide overall growth in energy, coupled with increases in power generation sales primarily in Asia Pacific. 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.~~EMEA. The sales increase in the Americas was primarily driven by the performance in the general engineering, aerospace and energy end markets. The sales increase in EMEA was primarily driven by growth in the general engineering and aerospace end markets, while the increase in Asia Pacific, excluding the unfavorable impact of currency exchange, was driven by growth in general engineering and ~~defense end markets.~~aerospace, partially offset by a decrease in transportation.

For the ~~three~~six months ended December 31, ~~2017,~~2018, Industrial operating income increased by ~~$25.2~~$43.5 million, driven primarily by organic sales growth, incremental ~~restructuring~~simplification/modernization benefits ~~of approximately $10 million, $5.9 million less restructuring~~ and ~~related charges in the current quarter and higher productivity and fixed cost absorption,~~favorable mix, partially offset by ~~higher compensation expense. Industrial operating margin was 13.9 percent compared with 6.8 percent in the prior year.~~

~~For the six month~~s ended December 31, 2017, Industrial sales increased 14 percent from the prior year period. General engineering sales experienced growth from sales in the indirect channel across all regions and positive performance in the light and general engineering sector in EMEA and the Americas. Transportation sales to tier suppliers globally increased in the period as well as to OEMs in EMEA and Asia Pacific. This was offset slightly by lower sales to OEMs in the Americas. Oil and gas drilling sales in the Americas continue to provide overall growth in energy, coupled with increases in renewable power generation sales globally. Conditions continue to be favorable in the aerospace sector, with increasing global sales related to engine growth being supplemented by increasing demand related to frames in the Americas and EMEA. The sales increases in Asia Pacific and EMEA were primarily driven by the transportation and general engineering end markets. The salesa temporary increase in manufacturing expenses at certain locations due to the ~~Americas was primarily driven by the performance in the energy, general engineering~~timing of simplification/modernization efforts underway and ~~aerospace and defense end markets.~~higher raw material costs.

WIDIA



	Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2018			2017			2018			2017
Sales	$	48,954		$	47,744		$	97,626		$	92,987
Operating income	1,728			474			3,822			154
Operating margin	3.5		%	1.0		%	3.9		%	0.2		%

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



	Three Months Ended December 31, 2018	Six Months Ended December 31, 2018
(in percentages)	Three Months Ended December 31, 2018	Six Months Ended December 31, 2018
Organic sales growth	4%	7%
Foreign currency exchange impact⁽¹⁾	(4)	(3)
Business days impact⁽²⁾	3	1
Sales growth	3%	5%



	Three Months Ended December 31, 2018		Six Months Ended December 31, 2018
(in percentages)	As Reported	Constant Currency	As Reported	Constant Currency
Regional sales growth:
Asia Pacific	5%	12%	12%	18%
EMEA	2	8	4	9
Americas	2	2	1	2

For the three and six months ended December 31, 2018, Widia sales increased 3 percent and 5 percent, respectively, from the prior year period. For both periods, strong sales in Asia Pacific were mainly driven by accelerating results in India, followed by sales growth in EMEA which reflects progress with aerospace growth initiatives. In the Americas we continued to make steady progress in establishing an effective distribution network and have exited portions of our portfolio in order to improve profitability.

For the three months ended December 31, 2018, Widia operating income increased by $1.3 million primarily due to organic sales growth. For the six months ended December 31, ~~2017, Industrial~~2018, Widia operating income increased by ~~$54.5~~$3.7 million ~~driven~~ primarily bydue to organic sales growth ~~incremental restructuring benefits of approximately $24 million~~ and ~~$20.6~~$0.9 million less restructuring and related charges in the current ~~quarter, partially offset by higher compensation expense and unfavorable mix. Industrial operating margin was 12.8 percent compared with 4.4 percent in the prior year~~ period.

INFRASTRUCTURE


	Three Months Ended December 31,						Six Months Ended December 31,						Three Months Ended December 31,						Six Months Ended December 31,
(in thousands, except operating margin)	2017			2016			2017			2016
(in thousands)													2018			2017			2018			2017
Sales	$	312,448		$	267,492		$	609,912		$	536,536		$	221,120		$	211,153		$	438,576		$	410,900
Operating income	43,292			18,067			78,104			23,603			20,614			23,833			44,474			44,223
Operating margin	13.9		%	6.8		%	12.8		%	4.4		%	9.3		%	11.3		%	10.1		%	10.8		%

Three Months Ended December 31, 2017 Six Months Ended December 31, 2017

In percentages
Organic sales growth 14 % 12 %
Foreign currency exchange impact⁽¹⁾
4
3
Business days impact⁽²⁾
(1 ) (1 )
Divestiture impact⁽³⁾
—
—
Acquisition impact⁽⁴⁾
—
—
Sales growth 17 % 14 %

Constant Currency
Regional Sales Growth
Three Months Ended December 31, 2017 Six Months Ended December 31, 2017
Asia Pacific 20 % 17 %
EMEA 11
9
Americas 11
10

Constant Currency
End Market Sales Growth
Three Months Ended December 31, 2017 Six Months Ended December 31, 2017
Energy 19 % 20 %
Transportation 14
11
General engineering 11
9
Aerospace and defense 9
8

~~WIDIA~~

For the three months ended December 31, 2017, Widia sales increased 11 percent from the prior year quarter. Widia organic sales growth continues to be positively impacted by the reorganization of distribution in Europe, growth in India related to higher 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 December 31, 2017, Widia operating income was $0.9 million compared to an operating loss of $2.7 million for the prior year quarter. The year-over-year change of $3.5 million was ~~driven primarily b~~y $1.8 million less restructuring and related charges and organic sales growth. Widia operating income margin was 1.8 percent compared with operating loss margin of 6.2 percent in the prior year quarter.



	Three Months Ended December 31, 2018	Six Months Ended December 31, 2018
(in percentages)	Three Months Ended December 31, 2018	Six Months Ended December 31, 2018
Organic sales growth	4%	7%
Foreign currency exchange impact⁽¹⁾	(1)	(1)
Business days impact⁽²⁾	2	1
Sales growth	5%	7%

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

For the six months ended December 31, 2017, Widia sales increased 11 percent from the prior year period. Widia organic sales growth continues to be positively impacted by the reorganization of distribution in Europe, growth in India related to higher demand trends, in addition to increasing demand in the U.S. energy markets and higher growth rates in emerging markets.

For the six months ended December 31, 2017, Widia operating income was $0.9 million compared to an operating loss of $8.4 million for the prior year period. The year-over-year change of $9.3 million was ~~driven primarily b~~y $4.0 million less restructuring and related charges, organic sales growth, higher productivity and fixed cost absorption and incremental restructuring benefits of approximately $1 million. Widia operating income margin was 1.0 percent compared with operating loss margin of 10.0 percent in the prior year.

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2017 2016 2017 2016
Sales $ 47,744
$ 42,874
$ 92,987
$ 83,888
Operating income (loss) 856
(2,666 ) 918
(8,403 )
Operating margin 1.8 % (6.2 )% 1.0 % (10.0 )%

Three Months Ended December 31, 2017 Six Months Ended December 31, 2017

In percentages
Organic sales growth 9 % 9 %
Foreign currency exchange impact⁽¹⁾
2
2
Business days impact⁽²⁾
—
—
Divestiture impact⁽³⁾
—
—
Acquisition impact⁽⁴⁾
—
—
Sales growth 11 % 11 %

Constant Currency
Regional Sales Growth
Three Months Ended December 31, 2017 Six Months Ended December 31, 2017
EMEA 16 % 18 %
Americas 8
7
Asia Pacific 4
6

~~INFRASTRUCTURE~~



	Three Months Ended December 31, 2018		Six Months Ended December 31, 2018
(in percentages)	As Reported	Constant Currency	As Reported	Constant Currency
End market sales growth (decline):
Energy	18%	19%	18%	18%
General engineering	7	9	9	11
Earthworks	(9)	(7)	(5)	(3)
Regional sales growth (decline):
Americas	6%	7%	9%	9%
Asia Pacific	2	7	6	10
EMEA	1	4	(1)	1

For the three months ended December 31, ~~2017,~~2018, Infrastructure sales increased by 195 percent from the prior year quarter. The U.S. oiloil and gas market ~~continues to stabilize, manifesting in high~~drove year-over-year growth in energy with average U.S. land rig counts up ~~over 60~~17 percent compared to the prior year ~~quarter. In~~quarter, while strong growth in general engineering was driven primarily by more robust activity in the ~~earthworks~~general economy across all regions. Earthworks end market ~~underground mining continues~~sales were down year-over-year due primarily to ~~show signs~~timing of ~~improvement,~~large projects in the Americas. The sales increases in all regions were driven primarily by the performance in the energy and general engineering end markets.

For the three months ended December 31, 2018, Infrastructure operating income decreased by $3.2 million driven primarily by higher raw material costs, partially offset by organic sales growth, favorable mix and incremental simplification/modernization benefits.

For the six months ended December 31, 2018, Infrastructure sales increased by 7 percent from the prior year period. The U.S. oil and gas market drove year-over-year growth in energy with average U.S. land rig counts up 14 percent compared to the prior year period, while ~~construction~~strong growth in general engineering was driven primarily by more robust activity in the general economy across all regions. Earthworks end market sales ~~improved in part~~were down year-over-year due to ~~stronger demand~~continuing disruption in ~~road rehabilitation.~~South African coal production and softness in construction activities in the Americas and EMEA. The sales increase in the Americas was driven primarily by growth in the energy and general engineering end markets, partially offset by a decrease in earthworks, while the sales increase in Asia Pacific was driven ~~primarily~~by growth in all three end markets: earthworks, energy, and general engineering. The slight increase in EMEA, excluding the unfavorable impact of currency exchange, was driven by the ~~performance in the earthworks~~energy and general engineering end ~~markets. Growth~~markets, partially offset by declines in the ~~Americas was primarily driven by the oil and gas, general engineering and~~ earthworks end ~~markets.~~market.

For the ~~three~~six months ended December 31, ~~2017,~~2018, Infrastructure operating income ~~increased by $15.2 million~~ remained flat compared to the prior year period. Increases driven ~~primarily~~ by organic sales growth, ~~incremental restructuring program benefits of approximately $6 million, $2.6~~ favorable mix, $1.9 million less restructuring and related charges in the current period and incremental simplification/modernization benefits were offset by higher raw material costs.

CORPORATE



	Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2018			2017			2018			2017
Corporate expense	$	(1,003	)	$	(1,170	)	$	(2,347	)	$	(1,108	)

For the three months ended December 31, 2018, Corporate expense decreased by $0.2 million from the prior year quarter. For the six months ended December 31, 2018, Corporate expense increased by $1.2 million from the prior year period primarily driven by higher employment expenses.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations is the primary source of funding for capital expenditures. For the six months ended December 31, 2018, cash flow provided by operating activities was ~~favorable mix,~~$61.5 million, primarily due to the net inflow from net income with adjustments for non-cash items, partially offset by ~~higher compensation expense, raw material costs~~a net outflow from changes in other assets and ~~overtime costs~~. ~~Infrastructure operating margin was 12.1 percent compared with 5.8 percent in the prior year quarter.~~liabilities.

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

~~For the six months ended December 31, 2017, Infrastructure sales increased by 19 percent from the prior year period. The U.S. o~~il and gas market continues to stabilize, manifesting in high year-over-year growth in energy with average U.S. land rig counts up over 75 percent compared to the prior year period. On a year-to-date basis, we are seeing improvements in all end markets, including underground mining and construction. The sales increase in Asia Pacific was driven primarily by the performance in the earthworks and general engineering end markets. Growth in the Americas was primarily driven by the oil and gas, earthworks and general engineering end markets. The sales increase in EMEA was primarily driven by performance in the earthworks end market.

~~For the six months ended December 31, 2017, Infrastructure operating income increased by $44.9 million~~ ~~driven primarily by organic sales growth,~~ ~~incremental restructuring program benefits of approximately $14 million, $10.4 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 and overtime costs and higher compensation expense~~. ~~Infrastructure operating margin was 11.6 percent compared with 0.8 percent in the prior year period.~~

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2017 2016 2017 2016
Sales $ 211,153
$ 177,207
$ 410,900
$ 344,289
Operating income 25,511
10,274
47,580
2,687
Operating margin 12.1 % 5.8 % 11.6 % 0.8 %

Three Months Ended December 31, 2017 Six Months Ended December 31, 2017

In percentages
Organic sales growth 18 % 19 %
Foreign currency exchange impact⁽¹⁾
2
1
Business days impact⁽²⁾
(1 ) (1 )
Divestiture impact⁽³⁾
—
—
Acquisition impact⁽⁴⁾
—
—
Sales growth 19 % 19 %

Constant Currency
Regional Sales Growth
Three Months Ended December 31, 2017 Six Months Ended December 31, 2017
Asia Pacific 24 % 22 %
Americas 20
20
EMEA 1
5

Constant Currency
End Market Sales Growth
Three Months Ended December 31, 2017 Six Months Ended December 31, 2017
Energy 25 % 26 %
General engineering 20
15
Earthworks 11
12

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

~~CORPORATE~~

For the three months ended December 31, 2017, Corporate unallocated expense decreased $0.2 million, or 10.6 percent, from the prior year quarter. For the six months ended December 31, 2017, Corporate unallocated expense decreased $1.1 million, or 36.7 percent, from the prior year period.

Three Months Ended December 31, Six Months Ended December 31,
(in thousands) 2017 2016 2017 2016
Corporate unallocated expense $ (1,485 ) $ (1,662 ) $ (1,952 ) $ (3,085 )

~~LIQUIDITY AND CAPITAL RESOURCES~~

~~Cash flow from operations is the primary source of funding for capital expenditures. Year to date December 31, 2017 cash flow provided by operating activities was~~ ~~$66.8 million, primarily due to the net inflow from net income with adjustments for non-cash items, partially offset by a net outflow from changes in other assets and liabilities.~~

Our five-year, multi-currency, revolving credit facility, as amended and restated in ~~April 2016~~June 2018 (Credit Agreement), is used to augment cash from operations and is an additional source of funds. The Credit Agreement provides for revolving credit loans of up to ~~$600.0~~$700.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement allows for borrowings in U.S. dollars, ~~euro,~~euros, Canadian dollars, ~~pound~~pounds 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, 2017.~~June 2023.

The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: a maximum leverage ratio and a minimum consolidated interest coverage ratio (as those terms are defined in the Credit Agreement). We were in compliance with all such covenants as of December 31, ~~2017.~~2018. For the six months ended December 31, ~~2017,~~2018, average daily borrowings outstanding under the Credit Agreement were approximately ~~$1.9~~$17.3 million. We had no borrowings outstanding under the Credit Agreement as of December 31, 2018 and June 30, 2018. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries.

During the three months ended December 31, 2018, we finalized the accounting for the Toll Tax charge and the remeasurement of deferred tax assets and liabilities at the reduced U.S. federal rate of 21.0 percent based upon USDT regulations and other relevant guidance issued through December 31, 2018. The adjustment to the Toll Tax charge during the quarter resulted in an additional net benefit of $3.9 million, decreasing the total Toll Tax charge to $78.0 million. We ~~consider substantially~~do not expect to make a cash payment associated with the Toll Tax.

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 ~~our~~certain non-U.S. subsidiaries ~~that have not previously been taxed in the U.S. to~~and affiliates will no longer be permanently reinvested. AsThese changes in assertion required the recognition of a ~~result~~tax charge of ~~TCJA, which among other provisions allows~~$6.1 million primarily for ~~a 100% dividends received deduction from controlled~~ foreign ~~subsidiaries, we will re-evaluate our assertion with respect to permanent reinvestment. As part~~withholding and U.S. state income taxes. The remaining amount of ~~this evaluation, we will consider our global working capital and capital investment requirements, among other considerations including the potential tax liabilities that would be incurred if the~~unremitted earnings of non-U.S. subsidiaries ~~distribute cash~~continue to be indefinitely reinvested. With regard to the ~~U.S. parent. If~~unremitted earnings which remain indefinitely reinvested, we determine that an entity should no longer remain subject to the permanent reinvestment assertion, we will accrue additional tax charges, including but not limited to state income taxes, withholding taxes and other relevant foreign taxes in the period the conclusion is determined. In accordance with SEC guidance in Staff Accounting Bulletin 118, we expect to complete our evaluation by December 22, 2018. 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, orincluding liquidity needs associated with our domestic debt service requirements.

During the three months ended December 31, 2017, we recorded a $77 million provisional tax charge as a result of a new U.S. tax law in the Tax Cuts and Jobs Act of 2017’s provision requiring a one-time transition tax on previously untaxed accumulated earnings and profits of certain non-U.S. companies. The toll tax charge consumed our entire U.S. federal net operating loss carryforward and other credit carryforwards, which represent a significant portion of our previously available deferred tax assets, and was offset by the release of the valuation allowance associated with these assets. As a result, we do not expect to make a cash payment associated with the toll charge.

At December 31, ~~2017,~~2018, cash and cash equivalents were ~~$159.9~~$96.3 million, Total Kennametal Shareholders' equity was ~~$1,126.4~~$1,269.7 million and total debt was ~~$697.1~~$595.1 million. Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We 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~~Other than the completion of the early redemption of our previously outstanding $400.0 million of 2.650 percent Senior Unsecured Notes due 2019 on July 9, 2018, there have been no material changes in our contractual obligations and commitments since June 30, ~~2017.~~2018.

Cash Flow Provided by Operating Activities

During the six months ended December 31, 2018, cash flow provided by operating activities was $61.5 million, compared to $41.1 million for the prior year period. Cash flow provided by operating activities for the current year period consisted of net income and non-cash items amounting to an inflow of $186.4 million and changes in certain assets and liabilities netting to an outflow of $124.9 million. Contributing to the changes in certain assets and liabilities were a decrease in accounts payable and accrued liabilities of $82.8 million and an increase in inventories of $59.2 million due in part to increasing demand and raw material price increases. Partially offsetting these cash outflows was a decrease in accounts receivable of $14.0 million.

During the six months ended December 31, 2017, cash flow used for operating activities consisted of net income and non-cash items amounting to an inflow of $161.1 million and changes in certain assets and liabilities netting to an outflow of $120.0 million. Contributing to the changes in certain assets and liabilities were a decrease of accounts payable and accrued liabilities of $92.3 million, a decrease in accrued pension and postretirement benefits of $13.8 million and an increase in inventories of $9.1 million due in part to increasing volumes.

Cash Flow Used for Investing Activities

Cash flow used for investing activities was $85.5 million for the six months ended December 31, 2018, compared to $58.4 million for the prior year period. During the current year period, cash flow used for investing activities included capital expenditures, net of $85.6 million, which consisted primarily of equipment upgrades and modernization initiatives.

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

~~Cash Flow Provided by Operating Activities~~

~~During~~For the six months ended December 31, 2017, cash flow provided by operating activities was $66.8 million, compared to $48.7 million for the prior year period. Cash flow provided by operating activities for the current year period consisted of net income and non-cash items amounting to an inflow of $161.1 million and changes in certain assets and liabilities netting to an outflow of $94.3 million. Contributing to the changes in certain assets and liabilities were a decrease of accounts payable and accrued liabilities of $66.6 million, a decrease in accrued pension and postretirement benefits of $13.8 million and an increase in inventories of $9.1 million due in part to increasing volumes.

During the six months ended December 31, 2016, cash flow provided by operating activities 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 $5.0 million. Contributing to the changes in certain assets and liabilities were a decrease in accrued pension and postretirement benefits of $11.3 million and a net decrease of accounts payable and accrued liabilities of $5.5 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.

~~Cash Flow Used for Investing Activities~~

~~Cash flow used for investing activities was~~ ~~$84.1 million~~ ~~for the six months ended December 31, 2017, compared to~~ ~~$67.0 million~~ ~~for the prior year period. During the current year period,~~ cash flow used for investing activities included capital expenditures, net of ~~$84.4 million, which consisted primarily of equipment upgrades.~~

~~For the six months ended December 31, 2016, cash flow used for investing activities included capital expenditures, net of $67.1~~$58.7 million, which consisted primarily of equipment upgrades.

Cash Flow Used for Financing Activities

Cash flow used for financing activities was $~~17.3~~432.7 million for the six months ended December 31, ~~2017~~2018 compared to $~~36.8~~17.3 million in the prior year period. During the current year period, cash flow used for financing activities included outflows of $400.0 million of term debt repayments from the early extinguishment of our 2.650 percent Senior Unsecured Notes, $32.8 million of cash dividends paid to Shareholders and $2.2 million of the effect of employee benefit and stock plans and dividend reinvestment, partially offset by an inflow from a net increase in notes payable of $2.5 million.

For the six months ended December 31, 2017, cash flow used for financing activities included outflows of $32.5 million of cash dividends paid to Shareholders, partially offset by an inflow of $15.0 million of ~~dividend reinvestment and the effect of employee benefit and stock plans.~~

For the six months ended December 31, 2016, 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 $1.3 million of dividend reinvestment and the effect of employee benefit and stock plans and ~~$0.6 million net increase in borrowings.~~dividend reinvestment.

FINANCIAL CONDITION

Working capital was $~~720.8~~707.0 million at December 31, ~~2017,~~2018, an increase of $~~68.3~~47.3 million from ~~$652.4~~$659.6 million at June 30, ~~2017.~~2018. The increase in working capital was primarily driven by a decrease in ~~accounts payable~~current maturities of ~~$25.1~~long-term debt of $399.3 million due to the early redemption of our $400 million of 2.650 percent Senior Unsecured Notes, an increase in inventories of $53.1 million due primarily to increasing demand and raw material price increases, a decrease in accrued expenses of ~~$21.1~~$37.5 million ~~driven by~~primarily due to payroll timing and lower accrued vacation pay, ~~an increase in inventories of $19.8 million due in part to increasing volumes,~~ a decrease in other current liabilities of ~~$19.3~~$26.7 million primarily due ~~primarily~~ to bonus and restructuring payments and bonus payments, and increase in other current assets of $12.9 million due in part to reclassification of tax assets from deferred income taxes to other current assets related to out of period adjustment and an increasea decrease in accounts ~~receivable~~payable of ~~$12.5 million due in part to increasing volumes.~~$23.6 million. Partially offsetting these items was a decrease in cash and cash equivalents of ~~$30.7~~$459.9 million, a decrease in accounts receivable of $20.6 million and an increase in accrued income taxes of ~~$11.2~~$10.0 million due primarily to increased taxable income in taxpaying jurisdictions. Currency exchange rate effects ~~increased~~decreased working capital by a total of ~~$16.3~~approximately $12 million, the impact of which is included in the aforementioned changes.

Property, plant and equipment, net increased ~~$35.3~~$30.9 million from ~~$744.4~~$824.2 million at June 30, ~~2017~~2018 to ~~$779.7~~$855.1 million at December 31, ~~2017,~~2018, primarily due to capital additions of ~~$73.7~~$88.0 million, ~~and a positive currency exchange impact of $12.0 million during the current period. This increase was~~ partially offset by depreciation expense of ~~$46.1~~$47.8 million, ~~impairment related to restructuring programs~~a negative currency exchange impact of ~~$2.3~~approximately $7 million and ~~disposal~~disposals of ~~$0.8~~$2.5 million.

At December 31, ~~2017,~~2018, other assets were ~~$567.8~~$557.0 million, an increase of ~~$10.6~~$1.6 million from ~~$557.2~~$555.4 million at June 30, ~~2017.~~2018. The primary ~~drivers~~driver for the increase ~~were~~was an increase in other assets of ~~$17.9~~$12.4 million primarily due to an increase in pension plan assets, ~~and an increase in goodwill of $4.8 million due to favorable currency exchange effects. This increase was~~ partially offset by a $6.7 million decrease in deferred income taxes primarily due to out of period adjustment related to tax assets recorded on intra-entity inventory transfers, partially offset by release of the valuation allowance on U.S. deferred tax assets, in addition to a $6.0an $8.0 million decrease in other intangible assets, which was due ~~primarily~~ to amortization ~~expense.~~

~~Table~~expense of ~~Contents~~

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

~~Long-term debt~~$7.1 million and ~~capital leases increased by $0.7~~unfavorable currency exchange effects of approximately $1 million, and a decrease in goodwill of $1.8 million primarily due to ~~$695.7 million at December 31, 2017 from $695.0 million at June 30, 2017.~~unfavorable currency exchange effects.

Kennametal Shareholders' equity was ~~$1,126.4~~$1,269.7 million at December 31, ~~2017,~~2018, an increase of ~~$109.1~~$75.4 million from ~~$1,017.3~~$1,194.3 million at June 30, ~~2017.~~2018. The increase was primarily due to net income attributable to Kennametal of ~~$80.8~~$111.4 million ~~favorable currency exchange of $32.6 million,~~and capital stock issued under employee benefit and stock plans of ~~$26.9 million and reclassification of net pension and other postretirement benefit loss of $3.3~~$11.1 million, partially offset by cash dividends paid to Shareholders of ~~$32.5~~$32.8 million and ~~unrecognized net pension and other postretirement benefit loss~~unfavorable currency exchange of ~~$2.6~~$18.9 million.

~~ENVIRONMENTAL MATTERS~~

~~Other Environmental Matters~~ We establish and maintain reserves for other potential environmental issues. At December 31, 2017 and June 30, 2017, the balances of these reserves were $12.7 million and $12.4 million, respectively. These reserves represent anticipated costs associated with the remediation of these issues.

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

We maintain a Corporate Environmental Health and Safety (EHS) Department, to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS analysts who are responsible for each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EHS Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly basis, we review financial provisions and reserves for environmental contingencies and adjust these reserves when appropriate.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

Effective July 1, ~~2017~~2018 with the adoption of ~~new~~ Financial Accounting Standards Board (FASB) guidance on ~~subsequent measurement~~revenue from contracts with customers, our critical accounting policy for revenue recognition has been modified. See Note 3 to our condensed consolidated financial statements set forth in Part I, Item 1 of ~~inventory, non-LIFO inventories are now stated at the lower~~this Quarterly Report on Form 10-Q for a description of ~~cost or net realizable value. LIFO inventories continue to be stated at the lower of cost or market.~~our revenue accounting policy.

There have been no other changes to our critical accounting policies since June 30, ~~2017.~~2018.

NEW ACCOUNTING STANDARDS

See Note 32 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.

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

RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BY U.S. GAAP

In accordance with SEC rules, below are the ~~SEC's Regulation G, the following provides~~ definitions of the non-GAAP financial measures we use in this report and the reconciliation of these measures 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. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. Also, we report organic sales growth at the consolidated and segment levels.

Constant currency end market sales growth (decline) Constant currency end market sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by end market excluding the impacts of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth, constant currency end market sales growth (decline) does not exclude the impact of business days. We believe this measure provides investors with a supplemental understanding of underlying end market trends by providing end market sales growth (decline) on a consistent basis. Also, we report constant currency end market sales growth (decline) at the consolidated and segment levels. Widia sales are reported only in the general engineering end market. Therefore, we do not provide constant currency end market sales growth for the Widia segment and, thus, do not include a reconciliation for that metric.

Constant currency regional sales growth (decline) Constant currency regional sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by region excluding the impacts of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth, constant currency regional sales growth (decline) does not exclude the impact of business days. We believe this measure provides investors with a supplemental understanding of underlying regional trends by providing regional sales growth (decline) on a consistent basis. Also, we report constant currency regional sales growth (decline) at the consolidated and segment levels.

Reconciliations of organic sales growth to sales growth are as follows:



Three Months Ended December 31, 2018	Industrial	Widia	Infrastructure	Total
Organic sales growth	3%	4%	4%	4%
Foreign currency exchange impact⁽¹⁾	(4)	(4)	(1)	(3)
Business days impact⁽²⁾	3	3	2	2
Sales growth	2%	3%	5%	3%

Three Months Ended December 31, 2017 Industrial Widia Infrastructure Total
Organic sales growth 14% 9% 18% 15%
Foreign currency exchange impact⁽¹⁾
4 2 2 3
Business days impact⁽²⁾
(1) — (1) (1)
Divestiture impact⁽³⁾
— — — —
Acquisition impact⁽⁴⁾
— — — —
Sales growth 17% 11% 19% 17%


Six Months Ended December 31, 2017	Industrial	Widia	Infrastructure	Total
Six Months Ended December 31, 2018					Industrial	Widia	Infrastructure	Total
Organic sales growth	12%	9%	19%	14%	7%
Foreign currency exchange impact⁽¹⁾	3	2	1	2	(3)		(1)	(3)
Business days impact⁽²⁾	(1)	—	(1)	(1)	1
Divestiture impact⁽³⁾	—	—	—	—
Acquisition impact⁽⁴⁾	—	—	—	—
Sales growth	14%	11%	19%	15%	5%		7%	5%

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

Reconciliations of constant currency end market sales growth (decline) to end market sales growth (decline)⁽⁵⁾⁽³⁾, are as follows:



Industrial
Three Months Ended December 31, 2018	General engineering	Transportation	Aerospace and defense	Energy
Constant currency end market sales growth (decline)	9%	(5)%	22%	6%
Foreign currency exchange impact⁽¹⁾	(3)	(4)	(4)	(3)
End market sales growth (decline)⁽³⁾	6%	(9)%	18%	3%

Industrial
Three Months Ended December 31, 2017 General engineering Transportation Aerospace and defense Energy
Constant currency end market sales growth 11% 14% 9% 19%
Foreign currency exchange impact⁽¹⁾
4 4 2 3
Divestiture impact⁽³⁾
— — — —
Acquisition impact⁽⁴⁾
— — — —
End market sales growth⁽⁵⁾
15% 18% 11% 22%



Infrastructure
Three Months Ended December 31, 2018	Energy	Earthworks	General engineering
Constant currency end market sales growth (decline)	19%	(7)%	9%
Foreign currency exchange impact⁽¹⁾	(1)	(2)	(2)
End market sales growth (decline)⁽³⁾	18%	(9)%	7%

Infrastructure
Three Months Ended December 31, 2017 Energy Earthworks General engineering
Constant currency end market sales growth 25% 11% 20%
Foreign currency exchange impact⁽¹⁾
1 2 2
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
End market sales growth⁽⁵⁾
26% 13% 22%



Total
Three Months Ended December 31, 2018	General engineering	Transportation	Aerospace and defense	Energy	Earthworks
Constant currency end market sales growth	8%	(5)%	22%	15%	(7)%
Foreign currency exchange impact⁽¹⁾	(3)	(4)	(4)	(1)	(2)
End market sales growth (decline)⁽³⁾	5%	(9)%	18%	14%	(9)%

Total
Three Months Ended December 31, 2017 General engineering Transportation Aerospace and defense Energy Earthworks
Constant currency end market sales growth 12% 14% 9% 23% 11%
Foreign currency exchange impact⁽¹⁾
3 4 2 2 2
Divestiture impact⁽³⁾
— — — — —
Acquisition impact⁽⁴⁾
— — — — —
End market sales growth⁽⁵⁾
15% 18% 11% 25% 13%



Industrial
Six Months Ended December 31, 2018	General engineering	Transportation	Aerospace and defense	Energy
Constant currency end market sales growth	10%	1%	20%	5%
Foreign currency exchange impact⁽¹⁾	(2)	(4)	(2)	(2)
End market sales growth⁽³⁾	8%	(3)%	18%	3%



Infrastructure
Six Months Ended December 31, 2018	Energy	Earthworks	General engineering
Constant currency end market sales growth (decline)	18%	(3)%	11%
Foreign currency exchange impact⁽¹⁾	—	(2)	(2)
End market sales growth (decline)⁽³⁾	18%	(5)%	9%

Industrial
Six Months Ended December 31, 2017 General engineering Transportation Aerospace and defense Energy
Constant currency end market sales growth 9% 11% 8% 20%
Foreign currency exchange impact⁽¹⁾
3 2 2 3
Divestiture impact⁽³⁾
— — — —
Acquisition impact⁽⁴⁾
— — — —
End market sales growth⁽⁵⁾
12% 13% 10% 23%



Total
Six Months Ended December 31, 2018	General engineering	Transportation	Aerospace and defense	Energy	Earthworks
Constant currency end market sales growth	10%	1%	20%	15%	(3)%
Foreign currency exchange impact⁽¹⁾	(2)	(4)	(2)	(1)	(2)
End market sales growth (decline)⁽³⁾	8%	(3)%	18%	14%	(5)%

Infrastructure
Six Months Ended December 31, 2017 Energy Earthworks General engineering
Constant currency end market sales growth 26% 12% 15%
Foreign currency exchange impact⁽¹⁾
1 2 1
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
End market sales growth⁽⁵⁾
27% 14% 16%

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

Total
Six Months Ended December 31, 2017 General engineering Transportation Aerospace and defense Energy Earthworks
Constant currency end market sales growth 10% 11% 8% 24% 12%
Foreign currency exchange impact⁽¹⁾
2 2 2 2 2
Divestiture impact⁽³⁾
— — — — —
Acquisition impact⁽⁴⁾
— — — — —
End market sales growth⁽⁵⁾
12% 13% 10% 26% 14%

Reconciliations of constant currency regional sales growth (decline) to reported regional sales growth (decline)⁽⁶⁾⁽⁴⁾, are as follows:

Industrial
Three Months Ended December 31, 2017 Americas EMEA Asia Pacific
Constant currency regional sales growth 11% 11% 20%
Foreign currency exchange impact⁽¹⁾
1 8 3
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
Regional sales growth⁽⁶⁾
12% 19% 23%

Widia
Three Months Ended December 31, 2017 Americas EMEA Asia Pacific
Constant currency regional sales growth 8% 16% 4%
Foreign currency exchange impact⁽¹⁾
1 6 3
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
Regional sales growth⁽⁶⁾
9% 22% 7%

Infrastructure
Three Months Ended December 31, 2017 Americas EMEA Asia Pacific
Constant currency regional sales growth 20% 1% 24%
Foreign currency exchange impact⁽¹⁾
1 5 2
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
Regional sales growth⁽⁶⁾
21% 6% 26%

Total
Three Months Ended December 31, 2017 Americas EMEA Asia Pacific
Constant currency regional sales growth 15% 9% 19%
Foreign currency exchange impact⁽¹⁾
1 7 3
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
Regional sales growth⁽⁶⁾
16% 16% 22%

~~Table of Contents~~

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

Industrial
Six Months Ended December 31, 2017 Americas EMEA Asia Pacific
Constant currency regional sales growth 10% 9% 17%
Foreign currency exchange impact⁽¹⁾
— 6 2
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
Regional sales growth⁽⁶⁾
10% 15% 19%

Widia
Six Months Ended December 31, 2017 Americas EMEA Asia Pacific
Constant currency regional sales growth 7% 18% 6%
Foreign currency exchange impact⁽¹⁾
— 4 2
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
Regional sales growth⁽⁶⁾
7% 22% 8%

Infrastructure
Six Months Ended December 31, 2017 Americas EMEA Asia Pacific
Constant currency regional sales growth 20% 5% 22%
Foreign currency exchange impact⁽¹⁾
1 6 2
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
Regional sales growth⁽⁶⁾
21% 11% 24%

Total
Six Months Ended December 31, 2017 Americas EMEA Asia Pacific
Constant currency regional sales growth 14% 9% 17%
Foreign currency exchange impact⁽¹⁾
1 5 2
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
Regional sales growth⁽⁶⁾
15% 14% 19%



	Three Months Ended December 31, 2018			Six Months Ended December 31, 2018
	Americas	EMEA	Asia Pacific	Americas	EMEA	Asia Pacific
Industrial
Constant currency regional sales growth	12%	5%	(4)%	12%	6%	4%
Foreign currency exchange impact⁽¹⁾	(2)	(5)	(4)	(2)	(4)	(4)
Regional sales growth (decline)⁽⁴⁾	10%	—%	(8)%	10%	2%	—%

Widia
Constant currency regional sales growth	2%	8%	12%	2%	9%	18%
Foreign currency exchange impact⁽¹⁾	—	(6)	(7)	(1)	(5)	(6)
Regional sales growth⁽⁴⁾	2%	2%	5%	1%	4%	12%

Infrastructure
Constant currency regional sales growth	7%	4%	7%	9%	1%	10%
Foreign currency exchange impact⁽¹⁾	(1)	(3)	(5)	—	(2)	(4)
Regional sales growth (decline)⁽⁴⁾	6%	1%	2%	9%	(1)%	6%

Total
Constant currency regional sales growth	9%	5%	2%	10%	5%	7%
Foreign currency exchange impact⁽¹⁾	(2)	(5)	(5)	(1)	(4)	(3)
Regional sales growth (decline)⁽⁴⁾	7%	—%	(3)%	9%	1%	4%

⁽¹⁾ Foreign currency exchange impact is calculated by dividing the difference between current period sales at prior period foreign exchange rates and prior period sales by prior period sales.

⁽²⁾ Business days impact is calculated by dividing the year-over-year change in weighted average working days (based on mix of sales by country) by prior period weighted average working days.

⁽³⁾ ~~Divestiture impact is calculated by dividing prior period sales attributable to divested businesses by prior period sales.~~

⁽⁴⁾ ~~Acquisition impact is calculated by dividing current period sales attributable to acquired businesses by prior period sales.~~

⁽⁵⁾Aggregate sales for all end markets sum to the sales amount presented on Kennametal's financial statements.

⁽⁶⁾⁽⁴⁾ Aggregate sales for all regions sum to the sales amount presented on Kennametal's financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our market risk exposures since June 30, ~~2017.~~2018.

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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, ~~2017~~2018 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

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. See "Note 12. Environmental Matters" for a discussion of our exposure to certain environmental liabilities.

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, 2017 —
$ —
—
10,100,100
November 1 through November 30, 2017 1,321
45.48
—
10,100,100
December 1 through December 31, 2017 3,679
46.54
—
10,100,100
Total 5,000
$ 46.26
—



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, 2018	216	$	39.50	—	10,100,100
November 1 through November 30, 2018	2,024	39.84		—	10,100,100
December 1 through December 31, 2018	10,734	32.62		—	10,100,100
Total	12,974	$	33.86	—


(1)	During the current period, ~~1,202~~1,341 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 ~~3,798~~11,633 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.

~~Table of Contents~~

ITEM 6. EXHIBITS



~~(10)~~	~~Material Contracts~~
~~(10.1)~~	~~Separation Agreement for Charles M. Byrnes~~	~~Exhibit 10.1 of the Form 8-K filed January 31, 2018 (File No. 001-05318) is incorporated herein by reference.~~
(31)	Rule 13a-14(a)/15d-14(a) Certifications
(31.1)	Certification executed by Christopher Rossi, President and Chief Executive Officer of Kennametal Inc.	Filed herewith.
(31.2)	Certification executed by ~~Jan Kees van Gaalen,~~Damon J. Audia, 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 Christopher Rossi, President and Chief Executive Officer of Kennametal Inc., and ~~Jan Kees van Gaalen,~~Damon J. Audia, 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 ~~6, 2018~~5, 2019	By:	/s/ Patrick S. Watson
			Patrick S. Watson Vice President Finance and Corporate Controller

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	Three Months Ended December 31, 2017		Six Months Ended December 31, 2017

In percentages
Organic sales growth	14	%	12	%
Foreign currency exchange impact⁽¹⁾	4		3
Business days impact⁽²⁾	(1	)	(1	)
Divestiture impact⁽³⁾	—		—
Acquisition impact⁽⁴⁾	—		—
Sales growth	17	%	14	%



	Constant Currency Regional Sales Growth
	Three Months Ended December 31, 2017		Six Months Ended December 31, 2017
Asia Pacific	20	%	17	%
EMEA	11		9
Americas	11		10