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 ~~MARCH~~DECEMBER 31, 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 ~~April 30, 2018~~January 31, 2019
Capital Stock, par value $1.25 per share		~~81,628,262~~82,233,615

Table of Contents

KENNAMETAL INC.

FORM 10-Q

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~MARCH~~DECEMBER 31, 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 nine months ended March 31, 2018 and 2017	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 nine months ended March 31, 2018 and 2017	5	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three and six months ended December 31, 2018 and 2017	4

	Condensed Consolidated Balance Sheets (Unaudited) March 31, 2018 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) Nine months ended March 31, 2018 and 2017	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	39	Exhibits	36

Signatures	Signatures	40	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 the economy; our ability to achieve 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 March 31, Nine Months Ended March 31,
(in thousands, except per share amounts) 2018 2017 2018 2017
Sales $ 607,936
$ 528,630
$ 1,721,734
$ 1,493,343
Cost of goods sold 388,475
342,365
1,124,736
1,015,926
Gross profit 219,461
186,265
596,998
477,417
Operating expense 129,151
116,939
369,131
347,808
Restructuring and asset impairment charges (Note 7) 1,264
7,169
6,834
44,230
Amortization of intangibles 3,690
4,245
11,028
12,665
Operating income 85,356
57,912
210,005
72,714
Interest expense 7,468
7,331
21,848
21,475
Other expense, net 647
1,626
2,046
2,470
Income before income taxes 77,241
48,955
186,111
48,769
Provision for income taxes 24,130
9,301
51,204
22,401
Net income 53,111
39,654
134,907
26,368
Less: Net income attributable to noncontrolling interests 2,245
764
3,256
1,873
Net income attributable to Kennametal $ 50,866
$ 38,890
$ 131,651
$ 24,495
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
Basic earnings per share $ 0.62
$ 0.48
$ 1.62
$ 0.31
Diluted earnings per share $ 0.61
$ 0.48
$ 1.59
$ 0.30
Dividends per share $ 0.20
$ 0.20
$ 0.60
$ 0.60
Basic weighted average shares outstanding 81,793
80,398
81,445
80,219
Diluted weighted average shares outstanding 83,109
81,381
82,670
80,965

~~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 March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2018			2017			2018			2017			2018			2017			2018			2017
Net income	$	53,111		$	39,654		$	134,907		$	26,368		$	56,247		$	42,158		$	114,670		$	81,796
Other comprehensive income (loss), net of tax
Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges	(783		)	(866		)	(1,688		)	614
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges	898			389			2,301			1,158
Unrecognized net pension and other postretirement benefit (loss) gain	(1,749		)	(725		)	(4,339		)	3,376
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	1,344			1,804			4,692			5,434			1,298			1,569			2,606			3,348
Foreign currency translation adjustments	20,282			13,785			54,075			(26,480		)	(3,400		)	13,924			(19,605		)	33,793
Total other comprehensive income (loss), net of tax	19,992			14,387			55,041			(15,898		)
Total other comprehensive (loss) income, net of tax													(799		)	15,589			(15,039		)	35,049
Total comprehensive income	73,103			54,041			189,948			10,470			55,448			57,747			99,631			116,845
Less: comprehensive income attributable to noncontrolling interests	2,515			1,734			4,699			2,203			2,049			1,445			2,542			2,184
Comprehensive income attributable to Kennametal Shareholders	$	70,588		$	52,307		$	185,249		$	8,267		$	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)	March 31, 2018			June 30, 2017			December 31, 2018			June 30, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	221,906		$	190,629		$	96,276		$	556,153
Accounts receivable, less allowance for doubtful accounts of $13,404 and $13,693, respectively	410,550			380,425
Accounts receivable, less allowance for doubtful accounts of $10,951 and $11,807, respectively							380,683			401,290
Inventories (Note 10)	537,205			487,681			578,566			525,466
Assets held for sale (Note 7)	4,947			—
Other current assets	65,979			55,166			63,509			63,257
Total current assets	1,240,587			1,113,901			1,119,034			1,546,166
Property, plant and equipment:
Land and buildings	359,512			350,002			349,857			351,953
Machinery and equipment	1,703,582			1,577,776			1,753,544			1,702,243
Less accumulated depreciation	(1,258,140		)	(1,183,390		)	(1,248,298		)	(1,229,983		)
Property, plant and equipment, net	804,954			744,388			855,103			824,213
Other assets:
Assets held for sale (Note 7)	886			6,980
Goodwill (Note 17)	309,433			301,367			300,003			301,802
Other intangible assets, less accumulated amortization of $144,012 and $129,981, respectively (Note 17)	181,676			190,527
Deferred income taxes (Note 3)	22,160			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	58,166			29,984			72,430			60,073
Total other assets	572,321			557,207			556,971			555,358
Total assets	$	2,617,862		$	2,415,496		$	2,531,108		$	2,925,737
LIABILITIES
Current liabilities:
Current maturities of long-term debt and capital leases	$	—		$	190
Current maturities of long-term debt (Note 11)							$	—		$	399,266
Notes payable to banks	1,399			735			3,371			934
Accounts payable	220,205			215,722			198,350			221,903
Accrued income taxes	27,300			6,202			28,621			18,603
Accrued expenses	88,505			85,682			57,780			95,239
Other current liabilities	140,381			152,947			123,931			150,586
Total current liabilities	477,790			461,478			412,053			886,531
Long-term debt and capital leases, less current maturities (Note 11)	696,087			694,991
Long-term debt, less current maturities (Note 11)							591,688			591,505
Deferred income taxes	14,856			14,883			28,563			26,991
Accrued pension and postretirement benefits	168,328			160,860			157,818			159,522
Accrued income taxes	8,766			2,636			8,374			6,249
Other liabilities	25,881			27,995			24,328			24,612
Total liabilities	1,391,708			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; 81,626 and 80,665 shares issued, respectively	102,032			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	506,902			474,547			522,413			511,909
Retained earnings	848,485			765,607			979,259			900,683
Accumulated other comprehensive loss	(270,094		)	(323,692		)	(334,632		)	(320,325		)
Total Kennametal Shareholders’ Equity	1,187,325			1,017,294			1,269,740			1,194,325
Noncontrolling interests	38,829			35,359			38,544			36,002
Total equity	1,226,154			1,052,653			1,308,284			1,230,327
Total liabilities and equity	$	2,617,862		$	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)


	Nine Months Ended March 31,						Six Months Ended December 31,
(in thousands)	2018			2017			2018			2017
OPERATING ACTIVITIES
Net income	$	134,907		$	26,368		$	114,670		$	81,796
Adjustments for non-cash items:
Depreciation	69,994			68,369			47,807			46,061
Amortization	11,028			12,665			7,141			7,338
Stock-based compensation expense	16,225			17,285			13,435			11,995
Restructuring and asset impairment charges (Note 7)	4,267			1,224			(257		)	3,172
Deferred income tax provision	6,911			1,300			1,512			7,241
Other	3,384			(2,711		)	2,109			3,474
Changes in certain assets and liabilities:
Accounts receivable	(14,761		)	(12,736		)	14,026			(3,290		)
Inventories	(32,861		)	(38,110		)	(59,190		)	(9,080		)
Accounts payable and accrued liabilities (Note 3)	(15,703		)	28,561
Accounts payable and accrued liabilities (Note 4)							(82,828		)	(92,320		)
Accrued income taxes	20,206			1,087			7,995			3,966
Accrued pension and postretirement benefits	(19,973		)	(18,799		)	(9,760		)	(13,824		)
Other	(3,038		)	(1,710		)	4,841			(5,455		)
Net cash flow provided by operating activities	180,586			82,793			61,501			41,074
INVESTING ACTIVITIES
Purchases of property, plant and equipment	(128,310		)	(94,095		)
Purchases of property, plant and equipment (Note 4)							(88,076		)	(59,523		)
Disposals of property, plant and equipment	2,196			3,852			2,490			846
Other	321			111			89			244
Net cash flow used for investing activities	(125,793		)	(90,132		)	(85,497		)	(58,433		)
FINANCING ACTIVITIES
Net increase in notes payable	791			333			2,473			643
Term debt borrowings	—			25,298
Net decrease in short-term revolving and other lines of credit							(174		)	—
Term debt repayments	(190		)	(25,830		)	(400,000		)	(141		)
Purchase of capital stock	(163		)	(188		)	(107		)	(109		)
Dividend reinvestment and the effect of employee benefit and stock plans (Note 3)	17,493			4,285
The effect of employee benefit and stock plans and dividend reinvestment							(2,182		)	15,020
Cash dividends paid to Shareholders	(48,773		)	(48,013		)	(32,820		)	(32,456		)
Other	(415		)	(6,439		)	151			(271		)
Net cash flow used for financing activities	(31,257		)	(50,554		)	(432,659		)	(17,314		)
Effect of exchange rate changes on cash and cash equivalents	7,741			(2,869		)	(3,222		)	3,984
CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents	31,277			(60,762		)
Net decrease in cash and cash equivalents							(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	$	221,906		$	100,817		$	96,276		$	159,940

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

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.~~ORGANIZATION~~

Kennametal Inc. was incorporated in Pennsylvania in 1943 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, and 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 ~~nine~~six months ended ~~March~~December 31, 2018 and 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, are 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 $2.8 million for the nine months ended March 31, 2017.

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 February 2018,~~During the ~~FASB issued ASU No. 2018-02, “Reporting Comprehensive Income (Topic 220): Reclassification~~current quarter, the Company revised its condensed consolidated statement of ~~Certain Tax Effects from Accumulated Other Comprehensive Income," which includes amendments related~~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 reclassification of the income tax effects of the Tax Cuts and Jobs Act of 2017 (TCJA) to improve the usefulness of information reported to financial statement users. The amendments in this update also require certain disclosures about stranded tax effects. This guidance is effective for us July 1, 2019, although early adoption is permitted. We are in the process of assessing the impact the adoption of this guidance may have on our condensed consolidated ~~financial statements.~~

~~In May 2014,~~statements of cash flow for the ~~FASB issued ASU No. 2014-09, “Revenue from Contracts~~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 using the modified retrospective approach. We have a project team that has performed a detailed review of the terms and provisions in customer contracts, tentatively concluding that the new standard will not affect the timing and measurement of revenue for these contracts in comparison to the results of historical accounting policies and practices. Under the provisions of this ASU, we believe certain costs currently reported in operating expense may be reclassified to cost of goods soldsimilar effects on the condensed consolidated ~~statement~~statements of ~~income, as they represent costs incurred~~cash flow. The supplemental disclosure of non-cash information for changes in ~~satisfaction~~accounts payable related to purchases of ~~performance obligations. Although we have~~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 ~~yet finalized our assessment of~~material to the ~~impact of adoption of this guidance, we do not expect it to have a material impact~~previously issued interim financial statements. The correction had no effect on ~~our condensed consolidated~~the previously issued annual financial ~~statements other than additional disclosures.~~


4.	~~SUPPLEMENTAL CASH FLOW DISCLOSURES~~

Nine Months Ended March 31,
(in thousands) 2018 2017
Cash paid during the period for:
Income taxes $ 24,087
$ 20,013
Interest 21,091
20,725
Supplemental disclosure of non-cash information:
Changes in accounts payable related to purchases of property, plant and equipment 11,477
15,404
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, 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⁾	$	—	$	513	$	—	$	513
Total assets at fair value	$	—	$	513	$	—	$	513

Liabilities:
Derivatives⁽¹⁾	$	—	$	49	$	—	$	49
Total liabilities at fair value	$	—	$	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 March 31, 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⁾
$ —
$ 44
$ —
$ 44
Total assets at fair value $ —
$ 44
$ —
$ 44

Liabilities:
Derivatives⁽¹⁾
$ —
$ 1,289
$ —
$ 1,289
Total liabilities at fair value $ —
$ 1,289
$ —
$ 1,289

~~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) March 31,
2018 June 30,
2017
Derivatives designated as hedging instruments
Other current assets - range forward contracts $ —
$ 1
Other current liabilities - range forward contracts (1,262 ) (671 )
Other liabilities - range forward contracts —
(101 )
Total derivatives designated as hedging instruments (1,262 ) (771 )
Derivatives not designated as hedging instruments
Other current assets - currency forward contracts 44
358
Other current liabilities - currency forward contracts (27 ) (138 )
Total derivatives not designated as hedging instruments 17
220
Total derivatives $ (1,245 ) $ (551 )

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~~KENNAMETAL INC.~~

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



(in thousands)	December 31, 2018			June 30, 2018
Derivatives designated as hedging instruments
Other current assets - range forward contracts	$	513		$	799
Other current liabilities - range forward contracts	—			(5		)
Other assets - range forward contracts	—			27
Total derivatives designated as hedging instruments	513			821
Derivatives not designated as hedging instruments
Other current assets - currency forward contracts	—			839
Other current liabilities - currency forward contracts	(49		)	(202		)
Total derivatives not designated as hedging instruments	(49		)	637
Total derivatives	$	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 March 31,				Nine Months Ended March 31,					Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2018		2017		2018			2017		2018			2017			2018		2017
Other expense (income), net - currency forward contracts	$	182	$	538	$	(26	)	$	161
Other income, net - currency forward contracts										$	(2	)	$	(92	)	$	76	$	(208	)

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 ~~March~~December 31, 2018 and June 30, ~~2017,~~2018, was ~~$61.6~~$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 ~~March~~December 31, 2018, we expect to recognize into earnings ~~$1.5~~$0.3 million of ~~expense~~income on outstanding derivatives in the next 12 months.

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

Three Months Ended March 31, Nine Months Ended March 31,
(in thousands) 2018 2017 2018 2017
(Losses) gains recognized in other comprehensive loss, net $ (782 ) $ (866 ) $ (1,688 ) $ 615
Losses reclassified from accumulated other comprehensive loss into other expense, net $ 761
$ 390
$ 2,024
$ 1,158



	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 ~~nine~~six months ended ~~March~~December 31, 2018 and 2017.

NET INVESTMENT HEDGES

As of ~~March~~December 31, 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 ~~$1.1~~$0.5 million and ~~$2.9~~a loss of $0.5 million ~~were recorded~~ as a component of foreign currency translation adjustments in other comprehensive (loss) income ~~(loss)~~ for the three ~~and nine~~ months ended ~~March~~December 31, 2018 ~~respectively, compared to~~and 2017, respectively. We recorded a gain of $0.5 million and a loss of ~~$0.5~~$1.9 million ~~recorded~~as a component of foreign currency translation adjustments in other comprehensive (loss) income for the ~~three and nine~~six months ended ~~March~~December 31, ~~2017.~~

2018 and 2017, respectively.

As of ~~March~~December 31, 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	€	27,126	$	33,414	June 26, 2022	€	40,125	$	45,927	June 27, 2019
Foreign currency-denominated intercompany loan payable	8,687		10,700		November 20, 2018	27,728		31,738		June 26, 2022
Foreign currency-denominated intercompany loan payable	2,009		2,475		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 employee 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 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 ~~mainly cash expenditures.~~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.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Total~~As of December 31, 2018, the total restructuring ~~and related charges since inception~~accrual is recorded in other current liabilities in our condensed consolidated balance sheet. As of ~~$157.7 million have been recorded for these programs through March 31, 2018: $85.6 million in Industrial, $50.9 million in Infrastructure, $13.9 million in Widia and $7.3 million in Corporate.~~

~~We recorded restructuring and related charges of $1.7~~June 30, 2018, $17.5 million and $9.6 million for the three months ended March 31, 2018 and 2017, respectively. Of these amounts, restructuring charges totaled $1.1 million and $7.1 million for the three months ended March 31, 2018 and 2017, respectively, of which benefit of $0.2 million was related to inventory and was recorded in cost of goods sold for the three months ended March 31, 2018. Restructuring-related charges of $0.9 million and $1.7 million were recorded in cost of goods sold and $0.3 million of benefit and $0.8 million of expense were recorded in operating expense for the three months ended March 31, 2018 and 2017, respectively.

We recorded restructuring and related charges of $10.0 million and $53.1 million for the nine months ended March 31, 2018 and 2017, respectively. Of these amounts, restructuring charges totaled $6.7 million and $44.5 million, of which benefit of $0.2 million and expense of $0.3 million were related to inventory and were recorded in cost of goods sold for the nine months ended March 31, 2018 and 2017, respectively. Restructuring-related charges of $3.3 million and $5.8 million were recorded in cost of goods sold and $0.1 ~~million and $2.8 million in operating expense for the nine months ended March 31, 2018 and 2017, respectively.~~

As of March 31, 2018 and June 30, 2017, property, plant, and equipment of $5.8 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 March 31, 2018 and June 30, 2017, $11.8 million and $27.3~~ million of the restructuring accrual is recorded in other current liabilities and ~~$0.5 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			March 31, 2018		June 30, 2018		Expense			Asset Write-Down		Translation			Cash Expenditures			December 31, 2018
Industrial
Severance	$	17,639	$	1,804		$	—		$	1,171	$	(15,099	)	$	5,515	$	7,967	$	1,552		$	—	$	(128	)	$	(3,568	)	$	5,823
Facilities	—		3,084			(3,084		)	—		—			—		—		(9		)	9		—			—			—
Other	94		(29		)	—			3		(38		)	30		—		29			—		(1		)	10			38
Total Industrial	$	17,733	$	4,859		$	(3,084	)	$	1,174	$	(15,137	)	$	5,545	$	7,967	$	1,572		$	9	$	(129	)	$	(3,558	)	$	5,861

Widia
Severance	$	2,434	$	384		$	—		$	249	$	(3,067	)	$	—	$	2,087	$	113		$	—	$	(9	)	$	(261	)	$	1,930
Facilities	—		747			(747		)	—		—			—		—		—			—		—			—			—
Other	—		(6		)	—			1		8			3		15		2			—		—			1			18
Total Widia	$	2,434	$	1,125		$	(747	)	$	250	$	(3,059	)	$	3	$	2,102	$	115		$	—	$	(9	)	$	(260	)	$	1,948

Infrastructure
Severance	$	9,573	$	422		$	—		$	273	$	(3,501	)	$	6,767	$	7,558	$	1,159		$	—	$	(96	)	$	(2,665	)	$	5,956
Facilities	21		265			(265		)	—		(21		)	—		—		(248		)	248		—			—			—
Other	45		(7		)	—			—		(21		)	17		12		22			—		—			7			41
Total Infrastructure	$	9,639	$	680		$	(265	)	$	273	$	(3,543	)	$	6,784	$	7,570	$	933		$	248	$	(96	)	$	(2,658	)	$	5,997
Total	$	29,806	$	6,664		$	(4,096	)	$	1,697	$	(21,739	)	$	12,332	$	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 ~~nine~~six months ended ~~March~~December 31, 2018 and ~~2017.~~

2017 was $1.2 million and $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 ~~nine~~six months ended ~~March~~December 31, 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 (609,230 ) 35.68

Lapsed or forfeited (94,292 ) 34.06

Options outstanding, March 31, 2018 1,023,269
$ 33.12
5.2 $ 8,168
Options vested and expected to vest, March 31, 2018 1,020,522
$ 33.13
5.2 $ 8,141
Options exercisable, March 31, 2018 845,436
$ 33.98
4.7 $ 6,159



	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 ~~nine~~six months ended ~~March~~December 31, 2018 and 2017, compensation expense related to time vesting and performance vesting restricted stock ~~options~~units was $~~0.6~~12.8 million and $~~1.3~~11.0 million, respectively. As of ~~March~~December 31, 2018, the total unrecognized compensation cost related to ~~options outstanding~~unvested time vesting and performance vesting restricted stock units was ~~$0.2~~$26.7 million and is expected to be recognized over a weighted average period of ~~0.5~~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 ~~nine~~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 ~~March~~December 31, 2018 and 2017 was ~~$1.9~~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 ~~$3.3 million, respectively.~~

Tax benefits relating to excess stock-based compensation deductions are presented in the operating activities section of the condensed consolidated statements of cash flow for the nine months ended March 31, 2018. Tax benefits resulting from stock-based compensation deductions were greater than the amounts reported for financial reporting purposes by $0.1$7.1 million for the ~~nine~~three and six months ended ~~March~~December 31, 2018 were presented as a component of other income, net. For the three and ~~no tax benefits were realized for the nine~~six months ended ~~March~~December 31, 2017,~~due to the valuation allowance on U.S. deferred tax assets.~~

~~The amount~~ we reclassified a net benefit of ~~cash received from the exercise of capital stock options during the nine months ended March 31, 2018 and 2017 was $21.7~~$3.0 million and ~~$7.2~~$6.1 million, ~~respectively. The related tax~~respectively, from cost of goods sold to other income, net and a net benefit was $1.4 million for the nine months ended March 31, 2018, and there was no related tax benefit realized for the nine months ended March 31, 2017 due to the valuation allowance on U.S. deferred tax assets. The total intrinsic value of ~~options exercised during the nine months ended March 31, 2018~~ ~~and~~ ~~2017~~ ~~was $6.4~~$1.5 million and ~~$1.6~~$2.8 million, ~~respectively.~~

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 nine months ended March 31, 2018 and 2017 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~~respectively, from operating expense 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 nine months ended March 31, 2018 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
434,391
37.87
Vested (10,031 ) 42.83
(417,712 ) 30.27
Performance metric adjustments, net 16,766
25.88
—
—
Forfeited (36,085 ) 30.91
(66,507 ) 30.98
Unvested, March 31, 2018 409,297
$ 31.22
1,103,616
$ 30.47

~~During the nine months ended March 31, 2018 and 2017, compensation expense related to time vesting and performance vesting restricted stock units was~~ ~~$15.0 million~~ ~~and~~ ~~$15.8 million, respectively. As of March 31, 2018, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was~~ ~~$18.1 million~~ ~~and is expected to be recognized over a weighted average period of 2.0 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 March 31, Nine Months Ended March 31,
(in thousands) 2018 2017 2018 2017
Service cost $ 414
$ 720
$ 1,224
$ 2,180
Interest cost 7,716
7,756
23,051
23,335
Expected return on plan assets (14,188 ) (14,659 ) (42,410 ) (44,088 )
Amortization of transition obligation 24
22
70
67
Amortization of prior service (credit) cost (42 ) (113 ) 90
(339 )
Recognition of actuarial losses 1,746
2,066
5,174
6,266
Settlement gain —
(320 ) —
(320 )
Net periodic pension income $ (4,330 ) $ (4,528 ) $ (12,801 ) $ (12,899 )

~~The settlement gain of $0.3 million during the three and nine months ended March 31, 2017 is the result of income from the settlement with several terminated Executive Retirement Plan participants.~~

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

Three Months Ended March 31, Nine Months Ended March 31,
(in thousands) 2018 2017 2018 2017
Interest cost $ 157
$ 168
$ 471
$ 505
Amortization of prior service credit (6 ) (6 ) (16 ) (16 )
Recognition of actuarial loss 70
89
210
266
Net periodic other postretirement benefit cost $ 221
$ 251
$ 665
$ 755

~~Table of Contents~~

~~KENNAMETAL INC.~~

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


10.	INVENTORIES

We used the last-in, first-out (LIFO) method of valuing inventories for 39 percent and 4340 percent of total inventories at ~~March~~December 31, 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.

Inventories consisted of the following:


(in thousands)	March 31, 2018			June 30, 2017			December 31, 2018			June 30, 2018
Finished goods	$	304,313		$	290,817		$	306,680		$	279,240
Work in process and powder blends	217,659			166,857			256,271			232,973
Raw materials	88,792			87,627			99,145			96,859
Inventories at current cost	610,764			545,301			662,096			609,072
Less: LIFO valuation	(73,559		)	(57,620		)	(83,530		)	(83,606		)
Total inventories	$	537,205		$	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 ~~March~~December 31, 2018. We had no borrowings outstanding under the Credit Agreement as of ~~March~~December 31, 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 ~~$700.3~~$597.5 million and ~~$704.0~~$996.4 million at ~~March~~December 31, 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 ~~March~~December 31, 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 ~~March~~December 31, 2018 and June 30, ~~2017,~~2018, the balances of these reserves were ~~$12.8~~$12.5 million and ~~$12.4~~$12.6 million, respectively. These reserves represent anticipated costs associated with the remediation of these ~~issues.~~

~~Table of Contents~~

~~KENNAMETAL INC.~~

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

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.

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.


~~13.~~	~~INCOME TAXES~~

On December 22, 2017, TCJA was signed into law in the U.S. 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 are the reduction in the tax rate and a one-time tax that is imposed on our unremitted foreign earnings (toll tax).

On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (SAB 118) that includes additional guidance allowing companies to use 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 and nine months ended March 31, 2018. 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.

The U.S. federal tax rate reduction is effective as of January 1, 2018. As a June 30 fiscal year-end taxpayer, our 2018 fiscal year 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 2019.

As a result of 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 during the three months ended December 31, 2017 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 six months ended December 31, 2017. The revaluation of our deferred tax assets and liabilities are subject to further adjustments during the measurement period due to the complexity of determining our net deferred tax liability as of the enactment date. Some of the information necessary to determine the accounting effects of the tax rate change includes finalizing the assessment of which existing deferred balances at the enactment date 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.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~During~~Superfund Sites Among other environmental laws, we are subject to the ~~three months ended December 31, 2017,~~Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), under which we estimated the toll tax charge to be $77 million after available foreign tax credits. We recorded an adjustment to this estimate during the three months ended March 31, 2018, primarily related to consideration of Internal Revenue Service notices issued during the March quarter. The adjustment resulted in an additional $6 million of expense, increasing the total estimated toll tax charge to $83 million as of March 31, 2018. 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 offsethave been designated by the ~~release of the valuation allowance~~USEPA as a PRP with respect to environmental remedial costs at certain Superfund sites. We have evaluated our claims and liabilities associated with these ~~assets.~~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.


13.	INCOME TAXES

Tax Cuts and Jobs Act of 2017 (TCJA)

The three primary items from TCJA that effect the Company for fiscal 2019 are the reduction in the statutory tax rate, the one-time tax that is imposed on our unremitted foreign earnings (Toll Tax) and the tax on global intangible low-taxed income (GILTI) which we elected to record as a period cost.

The U.S. federal tax rate reduction was effective as of January 1, 2018. As a ~~result~~June 30 fiscal year-end taxpayer, our fiscal 2018 U.S. federal statutory tax rate was a blended rate of ~~the March quarter adjustment, we estimate a cash payment of $6.4 million associated with the toll charge which will be paid over eight years, of which $5.9 million~~28.1 percent. Our U.S. federal statutory tax rate is ~~classified as long-term accrued income taxes~~21.0 percent in our condensed consolidated balance sheet as of March 31, 2018. The toll tax charge is preliminary, and subject to finalization of collecting all information, applying any additional regulatory guidance issued after March 31, 2018, considering changes in interpretations and assumptions and analyzing the calculation, along with foreign taxes and the related gross-up, in reasonable detail to complete the accounting.fiscal 2019.

During the three months ended December 31, 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 adjustment to the toll 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 do not expect to make a cash payment associated with the 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 liabilities at the reduced U.S. federal rate of 21.0 percent.

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. ~~The valuation allowance release was triggered by utilization~~and a charge related to an out 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.

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~~six months ended ~~March~~December 31, 2018 and 2017 were ~~31.2 percent and 19.0 percent, respectively.~~24.9 percent. The ~~change is primarily driven by~~current year rate reflects the ~~discrete~~lower U.S. federal statutory tax rate, the $6.1 million charge ~~of $6 million recorded~~related to changes in the ~~current quarter for adjustment~~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 ~~toll tax charge and~~finalization of the amount of the Toll Tax. The prior year ~~U.S. income 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 December quarter of fiscal 2018.~~

The effective income tax rates for the nine months ended March 31, 2018 and 2017 were 27.5 percent and 45.9 percent, respectively. The change is primarily driven by restructuring and related charges, and to a lesser extent theagainst our net discrete tax charges recorded in the current year associated with TCJA and prior year U.S. loss not being tax-effected and current year U.S. income being subject to tax as a result of the aforementioned timing of release of the valuation allowance.

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 of deferred tax assets ~~of $8.2 million as of June 30, 2017. During the December quarter of fiscal 2018, $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 months ended December 31, 2017. The remaining balance related to this item was reclassified and included in other current assets. The impact to the effective tax rate was 2.8 percent for the nine months ended March 31, 2018. 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 fiscal year 2018.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.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~For purposes of determining~~The following tables provide the ~~number~~computation 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 1.0 million shares for the three and six months ended ~~March~~December 31, 2018 and 2017, respectively, and 1.2 million shares and 0.7 million shares for the nine months ended March 31, 2018 and 2017, respectively. Unexercised capital stock options, unvested performance awards and unvested restricted stock units of 1.2 million shares for the three months ended March 31, 2017 and 0.4 million shares and 1.8 million shares for the nine months ended March 31, 2018 and 2017, respectively, 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. The amount of shares of unexercised capital stock options, unvested performance awards and unvested restricted stock units for the three months ended March 31, 2018 that were not included in the computation of diluted earnings per share was immaterial.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 ~~March~~December 31, 2018 and 2017 is as follows:


	Kennametal Shareholders’ Equity																		Kennametal Shareholders’ Equity
(in thousands)	Capital stock			Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Non- controlling interests			Total equity			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
Balance as of June 30, 2018																			$	102,058		$	511,909		$	900,683		$	(320,325	)	$	36,002		$	1,230,327
Net income	—			—			131,651			—			3,256			134,907			—			—			111,396			—			3,274			114,670
Other comprehensive income	—			—			—			53,598			1,443			55,041
Other comprehensive loss																			—			—			—			(14,307		)	(732		)	(15,039		)
Dividend reinvestment	5			158			—			—			—			163			3			104			—			—			—			107
Capital stock issued under employee benefit and stock plans⁽³⁾	1,200			32,355			—			—			—			33,555			642			10,504			—			—			—			11,146
Purchase of capital stock	(5		)	(158		)	—			—			—			(163		)	(3		)	(104		)	—			—			—			(107		)
Cash dividends	—			—			(48,773		)	—			(1,229		)	(50,002		)	—			—			(32,820		)	—			—			(32,820		)
Balance as of March 31, 2018	$	102,032		$	506,902		$	848,485		$	(270,094	)	$	38,829		$	1,226,154
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

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 income —
—
24,495
—
1,873
26,368
Other comprehensive (loss) income —
—
—
(16,228 ) 330
(15,898 )
Dividend reinvestment 7
181
—
—
—
188
Capital stock issued under employee benefit and stock plans⁽³⁾
697
20,688
—
—
—
21,385
Purchase of capital stock (7 ) (181 ) —
—
—
(188 )
Cash dividends —
—
(48,013 ) —
(72 ) (48,085 )
Balance as of March 31, 2017 $ 100,315
$ 457,305
$ 757,079
$ (368,737 ) $ 33,609
$ 979,571

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

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

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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

~~Total~~The components of, and changes in, accumulated other comprehensive loss (AOCL) ~~consists~~were as follows, net of net income and other changes in equity from transactions and other events from sources other than shareholders. It includes postretirement benefit plan adjustments, currency translation adjustments and unrealized gains and losses from derivative instruments designated as cash flow hedges.tax, for the six months ended December 31, 2018:



(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 ~~nine~~six months ended ~~March~~December 31, ~~2018 (in thousands):~~2017:

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 (loss) before reclassifications (4,339 ) 52,632
(1,688 ) 46,605
Amounts reclassified from AOCL 4,692
—
2,301
6,993
Net current period other comprehensive
  income
353
52,632
613
53,598
AOCL, March 31, 2018 $ (188,685 ) $ (73,974 ) $ (7,435 ) $ (270,094 )

Attributable to noncontrolling interests:
Balance, June 30, 2017 $ —
$ (2,164 ) $ —
$ (2,164 )
Other comprehensive income before
  reclassifications
—
1,443
—
1,443
Net current period other comprehensive
  income
—
1,443
—
1,443
AOCL, March 31, 2018 $ —
$ (721 ) $ —
$ (721 )

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

Attributable to Kennametal: Postretirement benefit plans Currency translation adjustment Derivatives Total
Balance, June 30, 2016 $ (212,163 ) $ (131,212 ) $ (9,134 ) $ (352,509 )
Other comprehensive income (loss) before reclassifications 3,376
(26,810 ) 614
(22,820 )
Amounts reclassified from AOCL 5,434
—
1,158
6,592
Net current period other comprehensive
  income (loss)
8,810
(26,810 ) 1,772
(16,228 )
AOCL, March 31, 2017 $ (203,353 ) $ (158,022 ) $ (7,362 ) $ (368,737 )

Attributable to noncontrolling interests:
Balance, June 30, 2016 $ —
$ (3,446 ) $ —
$ (3,446 )
Other comprehensive income before
  reclassifications
—
330
—
330
Net current period other comprehensive
  income
—
330
—
330
AOCL, March 31, 2017 $ —
$ (3,116 ) $ —
$ (3,116 )



(in thousands)	Postretirement benefit plans			Currency translation adjustment			Derivatives			Total
Attributable to Kennametal:
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	3,348			—			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	)

1917

Table of Contents

KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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


	Three Months Ended March 31,						Nine Months Ended March 31,							Three Months Ended December 31,						Six Months Ended December 31,
Details about AOCL components	2018			2017			2018			2017			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		$	1,698		$	1,635		Interest expense	$	588		$	566		$	1,176		$	1,132		Interest expense
Currency exchange contracts	623			(156		)	1,350			(477		)	Other expense, net	(241		)	768			(41		)	726			Other income, net
Total before tax	1,189			389			3,048			1,158				347			1,334			1,135			1,858
Tax impact	(291		)	—			(747		)	—			Provision for income taxes	(85		)	(327		)	(278		)	(455		)	Provision for income taxes
Net of tax	$	898		$	389		$	2,301		$	1,158			$	262		$	1,007		$	857		$	1,403

Postretirement benefit plans:
Amortization of transition obligations	$	24		$	22		$	70		$	67		See note 9 for further details	$	23		$	23		$	45		$	46		Other income, net
Amortization of prior service (credit) cost	(48		)	(119		)	74			(355		)	See note 9 for further details	(27		)	(47		)	(55		)	121			Other income, net
Recognition of actuarial losses	1,816			2,155			5,384			6,532			See note 9 for further details	1,741			1,788			3,498			3,568			Other income, net
Total before tax	1,792			2,058			5,528			6,244				1,737			1,764			3,488			3,735
Tax impact	(448		)	(254		)	(836		)	(810		)	Provision for income taxes	(439		)	(195		)	(882		)	(387		)	Provision for income taxes
Net of tax	$	1,344		$	1,804		$	4,692		$	5,434			$	1,298		$	1,569		$	2,606		$	3,348

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

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 $ (1,037 ) $ 254
$ (783 ) $ (866 ) $ —
$ (866 )
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges 1,189
(291 ) 898
389
—
389
Unrecognized net pension and other postretirement benefit loss (2,271 ) 522
(1,749 ) (970 ) 245
(725 )
Reclassification of net pension and other postretirement benefit loss 1,792
(448 ) 1,344
2,058
(254 ) 1,804
Foreign currency translation adjustments 20,437
(155 ) 20,282
13,706
79
13,785
Other comprehensive income $ 20,110
$ (118 ) $ 19,992
$ 14,317
$ 70
$ 14,387

~~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 nine months ended March 31, 2018 and 2017:~~

2018 2017
(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 $ (2,236 ) $ 548
$ (1,688 ) $ 614
$ —
$ 614
Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges 3,048
(747 ) 2,301
1,158
—
1,158
Unrecognized net pension and other postretirement benefit (loss) gain (5,705 ) 1,366
(4,339 ) 4,431
(1,055 ) 3,376
Reclassification of net pension and other postretirement benefit loss 5,528
(836 ) 4,692
6,244
(810 ) 5,434
Foreign currency translation adjustments 54,495
(420 ) 54,075
(26,559 ) 79
(26,480 )
Other comprehensive income (loss) $ 55,130
$ (89 ) $ 55,041
$ (14,112 ) $ (1,786 ) $ (15,898 )


~~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~~2017 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 nine months ended March 31, 2018:
Change in gross goodwill due to translation 7,611
455
—
8,066

Gross goodwill 418,305
41,970
633,211
1,093,486
Accumulated impairment losses (137,204 ) (13,638 ) (633,211 ) (784,053 )
Balance as of March 31, 2018 $ 281,101
$ 28,332
$ —
$ 309,433



				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)
March 31, 2018 June 30, 2017
(in thousands)
Gross Carrying
Amount

Accumulated
Amortization

Gross Carrying
Amount

Accumulated
Amortization
Contract-based 3 to 15 $ 7,066
$ (7,036 ) $ 7,064
$ (7,014 )
Technology-based and other 4 to 20 47,357
(31,244 ) 46,461
(29,061 )
Customer-related 10 to 21 208,107
(84,114 ) 205,502
(74,669 )
Unpatented technology 10 to 30 32,071
(12,566 ) 31,754
(10,589 )
Trademarks 5 to 20 12,600
(9,052 ) 12,401
(8,648 )
Trademarks Indefinite 18,487
—
17,326
—
Total $ 325,688
$ (144,012 ) $ 320,508
$ (129,981 )

~~During the nine months ended March 31, 2018 and 2017, we recorded amortization expense of $11.0 million and $12.7 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 March 31, Nine Months Ended March 31,
(in thousands) 2018 2017 2018 2017
Sales:
Industrial $ 333,012
$ 289,455
$ 942,922
$ 825,990
Widia 52,217
46,297
145,204
130,186
Infrastructure 222,707
192,878
633,608
537,167
Total sales $ 607,936
$ 528,630
$ 1,721,734
$ 1,493,343
Operating income (loss):
Industrial $ 53,029
$ 38,535
$ 131,132
$ 62,138
Widia 1,638
606
2,556
(7,797 )
Infrastructure 31,767
19,770
79,347
22,457
Corporate (1,078 ) (999 ) (3,030 ) (4,084 )
Total operating income 85,356
57,912
210,005
72,714
Interest expense 7,468
7,331
21,848
21,475
Other expense, net 647
1,626
2,046
2,470
Income from continuing operations before income taxes $ 77,241
$ 48,955
$ 186,111
$ 48,769



	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.

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 ~~third~~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 ~~were strong. End markets are robust,~~increased 3 percent from the prior year quarter, reflecting growth in all segments and the work being performed on all three of our initiatives - growth, simplification and modernization - is driving improvements to results and margins. On a consolidated basis, sales increased 15.0 percent, reflectingconstant currency regional sales growth in all ~~segments, regions and end markets. We are aggressively pursuing our simplification efforts and starting to get traction on~~regions. These results reflect the ~~execution~~ongoing monetization of our growth and simplification/modernization ~~initiatives, which contributed~~initiatives.

Operating income was $78.9 million, compared to ~~our strong results. In addition, even~~$63.6 million in the ~~face of rising~~prior year quarter. The increase in operating income reflects organic sales growth and incremental simplification/modernization benefits, partially offset by higher raw material costs ~~price~~and a temporary increase in manufacturing expenses at certain locations due to the timing of simplification/modernization efforts underway. Price realization ~~outpaced~~continued to outpace raw material cost inflation, ~~a trend we expect to continue in the June quarter. Operating~~and operating margin improved ~~significantly~~ to ~~14.0~~13.4 percent from ~~11.0~~11.1 percent in the prior year quarter reflecting improvement in both gross ~~margin~~profit and operating ~~expense as a percentage of sales. We remain intensely focused on executing our multi-year simplification and modernization plan.~~

Our sales of $607.9 million for the quarter ended March 31, 2018 increased 15.0 percent compared to sales for the quarter ended March 31, 2017, driven by organic sales growth of 11 percent and favorable currency exchange impact of 6 percent, partially offset by fewer business days impact of 2 percent compared to the prior year quarter. Every segment and every region reported increased sales and improved profitability.expense. The Industrial, Infrastructure and Widia segments ~~posted~~had operating margins of ~~15.9~~18.1 percent, ~~14.3~~9.3 percent and ~~3.1~~3.5 percent, respectively.

~~Operating income was $85.4~~In connection with our simplification/modernization initiative, we recorded $2 million ~~compared to $57.9 million in the prior year quarter. Year-over-year comparative operating results reflect organic sales growth, incremental restructuring benefits~~ of ~~approximately $11 million, $7.9 million less~~pre-tax restructuring and related charges in the current ~~period, favorable currency exchange~~quarter and ~~mix, partially offset by higher raw material costs, decreased manufacturing efficiency~~incremental pre-tax benefits from simplification/modernization restructuring were approximately $3 million in ~~part due to~~ the quarter. Annualized run-rate pre-tax benefits of approximately $12 million have been achieved in connection with these simplification/modernization ~~efforts in progress, salary inflation and higher variable compensation expense due to higher than expected operating results.~~restructuring initiatives.

~~Our effective tax rate~~In the quarter, we finalized the accounting for the ~~full fiscal year is expected to be higher than anticipated at the beginning of fiscal year 2018. This increase in the~~ tax ~~rate is due primarily to the ongoing~~ effects of ~~no longer having a valuation allowance on U.S. deferred tax assets. The release~~enactment of ~~the valuation allowance in the December quarter of fiscal 2018 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~~ 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 ~~fiscal 2018, we anticipate~~certain jurisdictions. See Note 13 to our ~~domestic deferred~~condensed consolidated financial statements for a complete discussion on income taxes ~~to be in a net liability position by June 30, 2018. As a result~~and the Liquidity and Capital Resources section of ~~TCJA, we anticipate~~the MD&A for further information regarding the results of the re-evaluation of our ~~long-term, beyond fiscal 2018, tax rate will decrease from mid-20s to low-20s.~~permanent reinvestment assertion.

We reported current quarter earnings per diluted share of ~~$0.61,~~$0.66, which include ~~a $0.08 per share charge related to adjustments made to the provisional toll~~net discrete tax ~~associated with U.S. tax reform~~charges of $0.03 and ~~$0.01 per share of~~ restructuring and related ~~charges.~~charges of $0.02 per share. The earnings per diluted share of ~~$0.48~~$0.50 in the prior year quarter included ~~$0.12~~net discrete tax charges of $0.02 per ~~share~~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, 2018 were $587.4 million, an increase of $16.0 million or 3 percent, from $571.3 million in the prior year quarter. The increase in sales was driven by 4 percent organic sales growth and a 2 percent increase due to more business days, partially offset by a 3 percent unfavorable currency exchange impact.

Sales for the six months ended December 31, 2018 were $1,174.1 million, an increase of $60.3 million or 5 percent, from $1,113.8 million in the prior year period. The increase in sales was driven by 7 percent organic sales growth and a 1 percent increase due to more business days, partially offset by a 3 percent unfavorable currency 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, 2018 was $198.6 million, an increase of $9.1 million from $189.5 million in the prior year quarter. The increase was primarily due to organic sales growth and incremental simplification/modernization benefits, 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, unfavorable foreign currency exchange impact of approximately $7 million and higher compensation expense. The gross profit margin for the three months ended December 31, 2018 was 33.8 percent, as compared to 33.2 percent in the prior year quarter.

Gross profit for the six months ended December 31, 2018 was $409.7 million, an increase of $38.2 million from $371.5 million in the prior year period. The increase was primarily due to organic sales growth, incremental simplification/modernization benefits and favorable mix, 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 approximately $10 million. The gross profit margin for the six months ended December 31, 2018 was 34.9 percent, as compared to 33.3 percent in the prior year period.

OPERATING EXPENSE

Operating expense for the three months ended December 31, 2018 was $114.6 million compared to $122.1 million for the three months ended December 31, 2017. The decrease was primarily due to favorable currency exchange impact of 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 ~~related charges.~~incremental restructuring simplification benefits.

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

We substantially completed our existing restructuring programs in the first quarter of fiscal year 2018. Pre-tax benefits from these restructuring actions were approximately $41 million in the current quarter, of which approximately $11 million were incremental to the prior year quarter. These cost savings achieved through the previous restructuring programs do not include the anticipated benefits from our modernization initiative. Please see the Results of Continuing Operations section of Item 2 for further discussion and analysis of our restructuring programs. While modernization is starting to drive improved results along with continuing benefits from simplification, incrementally higher results of those programs are anticipated to accrue to the Company over the next few years.

We had a net cash inflow from operating activities of $180.6 million during the nine months ended March 31, 2018 compared to $82.8 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 $128.3 million and $94.1 million during the nine months ended March 31, 2018 and 2017, respectively, in part attributable to increased spending for modernization.

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 ~~$10.0~~$8.9 million and $9.5 million for the three months ended ~~March~~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.

~~RESULTS OF CONTINUING OPERATIONS~~

~~SALES~~

~~Sales~~We recorded restructuring and related charges of $2.1 million and $1.5 million for the three months ended ~~March~~December 31, 2018 ~~were~~ ~~$607.9~~and 2017, respectively. Of these amounts, restructuring charges totaled $1.5 million~~, an increase of $79.3 million or 15 percent, from~~ ~~$528.6 million~~ in the prior year quarter. The increase in sales was driven by a 11 percent organic sales growth and a 6 percent favorable currency exchange impact, partially offset by a 2 percent decrease due to fewer business days.

Sales for the nine months ended March 31, 2018 were $1,721.7 million, an increase of $228.4 million or 15 percent, from $1,493.3 million in the prior year period. The increase in sales was driven by a 13 percent organic sales growth and a 3 percent favorable currency exchange impact, partially offset by a 1 percent decrease due to fewer business days.

End Market Sales Growth: As Reported Constant Currency
Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018 Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018
Aerospace and defense 23 % 15 % 17 % 11 %
General engineering 16
14
10
10
Energy 14
22
11
19
Transportation 13
13
4
8
Earthworks 10
13
5
9

Regional Sales Growth: As Reported Constant Currency
Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018 Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018
Europe, the Middle East and Africa (EMEA) 19 % 16 % 5 % 7 %
Asia Pacific 15
18
8
14
Americas 13
14
12
14

~~GROSS PROFIT~~

~~Gross profit~~ for the three months ended ~~March~~December 31, 2018 ~~was~~ ~~$219.5~~and were less than $0.1 million, an increase of $33.2 million from $186.3 million in the prior year quarter. The increase was primarily due to organic sales growth, favorable foreign currency exchange impact of $12.7 million, incremental restructuring benefits of approximately $9 million, favorable mix and $1.0 million less restructuring-related charges, partially offset by higher raw material costs, decreased manufacturing efficiency in part due to modernization efforts in progress, and salary inflation. The gross profit margin for the three months ended ~~March~~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 ~~was 36.1 percent, as~~and 2017, respectively. For the three months ended December 31, 2017, restructuring-related charges of $0.2 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 ~~35.2~~$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 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 the amount of the one-time tax that is imposed on our unremitted foreign earnings (Toll Tax). The prior year ~~quarter.~~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 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)

~~Gross profit~~The effective income tax rates for the ~~nine~~six months ended March 31, 2018 was $597.0 million, an increase of $119.6 million from $477.4 million in the prior year period. The increase was primarily due to organic sales growth, incremental restructuring benefits of approximately $37 million, favorable currency exchange impact of $21.0 million, favorable mix and $2.9 million less restructuring-related charges, partially offset by salary inflation and higher raw material costs. The gross profit margin for the nine months ended March 31, 2018 was 34.7 percent, as compared to 32.0 percent in the prior year period.

~~OPERATING EXPENSE~~

Operating expense for the three months ended March 31, 2018 increased to $129.2 million compared to $116.9 million for the three months ended March 31, 2017. The increase was primarily due to unfavorable currency exchange impact of $6.4 million, higher variable compensation expense due to higher than expected operating results and salary inflation, partially offset by incremental restructuring benefits of approximately $2 million and $1.1 million less in restructuring-related charges.

Operating expense for the nine months ended March 31, 2018 increased to $369.1 million compared to $347.8 million for the nine months ended March 31, 2017. The increase was primarily due to an unfavorable currency exchange impact of $10.9 million, salary inflation and higher variable compensation expense due to higher than expected operating results, partially offset by incremental restructuring benefits of approximately $14 million and $2.7 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 completed in the first quarter of fiscal 2018, were mostly cash expenditures and achieved annual run rate ongoing pre-tax savings of approximately $165 million.

~~We recorded restructuring and related charges of $1.7 million and $9.6 million for the three months ended March~~December 31, 2018 and 2017 ~~respectively. Of these amounts, restructuring charges totaled $1.1~~were 24.9 percent. The current year rate reflects the lower U.S. federal statutory tax rate, the $6.1 million ~~and $7.1 million for the three months ended March 31, 2018 and 2017, respectively, of which benefit of $0.2 million was~~charge related to ~~inventory~~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 a benefit from the release of a valuation allowance that was previously recorded against our net deferred tax assets in ~~cost of goods sold for~~ the ~~three months ended March 31, 2018. Restructuring-related charges of $0.9 million~~U.S. and $1.7 million were recorded in cost of goods sold and $0.3 million of benefit and $0.8 million of expense were recorded in operating expense for the three months ended March 31, 2018 and 2017, respectively.

We recorded restructuring and related charges of $10.0 million and $53.1 million for the nine months ended March 31, 2018 and 2017, respectively. Of these amounts, restructuring charges totaled $6.7 million and $44.5 million, of which benefit of $0.2 million and expense of $0.3 million werea charge related to ~~inventory and were recorded in cost~~an out of goods sold for the nine months ended March 31, 2018 and 2017, respectively. Restructuring-related charges of $3.3 million and $5.8 million were recorded in cost of goods sold and $0.1 million and $2.8 million in operating expense for the nine months ended March 31, 2018 and 2017, respectively.period adjustment.

~~Total restructuring and related charges since the inception of our restructuring plans through March 31, 2018 were $157.7 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).~~

~~INTEREST EXPENSE~~

Interest expense for the three months ended March 31, 2018 and 2017 was $7.5 million and $7.3 million, respectively. Interest expense for the nine months ended March 31, 2018 and 2017 was $21.8 million and $21.5 million, respectively.

~~OTHER EXPENSE, NET~~

Other expense for the three months ended March 31, 2018 decreased to $0.6 million compared to $1.6 million for the three months ended March 31, 2017 primarily due to higher interest income and foreign currency transaction gains in the current quarter, partially offset by prior year income from transition services provided related to a prior divestiture that did not repeat.

Other expense for the nine months ended March 31, 2018 decreased to $2.0 million compared to $2.5 million for the nine months ended March 31, 2017 primarily due to foreign currency transaction gains in the current period and higher interest income, partially offset by prior year income from transition services provided related to a prior divestiture that did not repeat.

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

~~INCOME TAXES~~

The effective income tax rates for the three months ended March 31, 2018 and 2017 were 31.2 percent and 19.0 percent, respectively. The change is primarily driven by the discrete tax charge of $6 million recorded in the current quarter for adjustment to the toll tax charge and prior year U.S. income 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 December quarter of fiscal 2018.

The effective income tax rates for the nine months ended March 31, 2018 and 2017 were 27.5 percent and 45.9 percent, respectively. The change is primarily driven by restructuring and related charges, and to a lesser extent the net discrete tax charges recorded in the current year associated with TCJA and prior year U.S. loss not being tax-effected and current year U.S. income being subject to tax as a result of the aforementioned timing of release of the valuation allowance.10-Q.

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 March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2018			2017			2018			2017			2018			2017			2018			2017
Sales:
Industrial	$	333,012		$	289,455		$	942,922		$	825,990		$	317,320		$	312,448		$	637,878		$	609,912
Widia	52,217			46,297			145,204			130,186			48,954			47,744			97,626			92,987
Infrastructure	222,707			192,878			633,608			537,167			221,120			211,153			438,576			410,900
Total sales	$	607,936		$	528,630		$	1,721,734		$	1,493,343		$	587,394		$	571,345		$	1,174,080		$	1,113,799
Operating income (loss):
Operating income:
Industrial	$	53,029		$	38,535		$	131,132		$	62,138		$	57,519		$	40,504		$	116,061		$	72,543
Widia	1,638			606			2,556			(7,797		)	1,728			474			3,822			154
Infrastructure	31,767			19,770			79,347			22,457			20,614			23,833			44,474			44,223
Corporate	(1,078		)	(999		)	(3,030		)	(4,084		)	(1,003		)	(1,170		)	(2,347		)	(1,108		)
Total operating income	85,356			57,912			210,005			72,714			78,858			63,641			162,010			115,812
Interest expense	7,468			7,331			21,848			21,475			8,104			7,231			16,201			14,379
Other expense, net	647			1,626			2,046			2,470
Other income, net													(4,022		)	(3,220		)	(6,782		)	(7,437		)
Income from continuing operations before income taxes	$	77,241		$	48,955		$	186,111		$	48,769		$	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%

Three Months Ended March 31, Nine Months Ended March 31,
(in thousands, except operating margin) 2018 2017 2018 2017
Sales $ 333,012
$ 289,455
$ 942,922
$ 825,990
Operating income 53,029
38,535
131,132
62,138
Operating margin 15.9 % 13.3 % 13.9 % 7.5 %

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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, 2018, Industrial sales increased 2 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 strength in the indirect channel 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 in EMEA. Energy growth was driven primarily by oil and gas drilling in the Americas. Sales in Asia and EMEA to transportation OEMs were weaker than in the prior year period, while sales to transportation suppliers increased in the Americas and 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 aerospace, partially offset by a decrease in transportation.

For the six months ended December 31, 2018, Industrial operating income increased by $43.5 million, driven primarily by organic sales growth, incremental simplification/modernization benefits and favorable mix, partially offset by a temporary increase in manufacturing expenses at certain locations due to the timing of simplification/modernization efforts underway and 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 March 31, 2018			Nine Months Ended March 31, 2018			Three Months Ended December 31, 2018		Six Months Ended December 31, 2018
							Three Months Ended December 31, 2018		Six Months Ended December 31, 2018
In percentages
(in percentages)							Three Months Ended December 31, 2018		Six Months Ended December 31, 2018
Organic sales growth		10	%				Three Months Ended December 31, 2018	11	Six Months Ended December 31, 2018	%
Foreign currency exchange impact⁽¹⁾		8				4			(4)		(3)
Business days impact⁽²⁾	(3	)		(1	)		3		1
Divestiture impact⁽³⁾	—			—
Acquisition impact⁽⁴⁾	—			—
Sales growth	15	%		14	%		3%		5%


Regional Sales Growth:	As Reported				Constant Currency
	Three Months Ended March 31, 2018		Nine Months Ended March 31, 2018		Three Months Ended March 31, 2018		Nine Months Ended March 31, 2018		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	22	%	17	%	7	%	8	%	2	8	4	9
Americas	12		11		12		10		2	2	1	2
Asia Pacific	7		14		—		11

End Market Sales Growth: As Reported Constant Currency
Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018 Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018
Aerospace and defense 19 % 13 % 13 % 10 %
General engineering 15
13
7
8
Transportation 13
13
4
8
Energy 10
18
4
14

For the three ~~month~~sand six months ended ~~March~~December 31, 2018, ~~Industrial~~Widia sales increased 153 percent and 5 percent, respectively, from the prior year ~~quarter. General engineering~~period. For both periods, strong sales ~~experienced growth from the indirect channel in the Americas and EMEA as well as from the general engineering sector in both regions, while shipment disruptions~~ in Asia Pacific were mainly driven by accelerating results in ~~the prior year quarter yielded unusual patterns in~~India, followed by sales ~~that did not repeat. Transportation sales increased due to~~ growth ~~to tier suppliers and OEMs~~ in EMEA ~~and~~which reflects progress with aerospace growth initiatives. In the Americas ~~partially offset by slowing car sales~~we continued to make steady progress in ~~China. Conditions continue~~establishing an effective distribution network and have exited portions of our portfolio in order to be favorable in the aerospace sector due to growth in sales in the Americas related to engines and frames. Oil and gas sales in the Americas continue to provide growth in energy. The sales increase in the Americas was primarily driven by the performance in the aerospace and defense, general engineering, transportation and energy end markets. The sales increase in EMEA was primarily driven by the performance in the general engineering and transportation end markets. Sales were relatively flat in Asia Pacific transportation and general engineering.improve profitability.

For the three months ended ~~March~~December 31, 2018, ~~Industrial~~Widia operating income increased by ~~$14.5~~$1.3 million ~~driven~~ primarily due to organic sales growth. For the six months ended December 31, 2018, Widia operating income increased by $3.7 million primarily due to organic sales growth ~~incremental restructuring benefits of approximately $7 million, $4.1~~and $0.9 million less restructuring and related charges in the current quarter and favorable currency exchange impact, partially offset by decreased manufacturing efficiency in part due to modernization efforts in progress, higher variable compensation expense due to higher than expected operating results and salary inflation. Industrial operating margin was 15.9 percent compared with 13.3 percent in the prior year quarter.period.

~~For the nine month~~s ended March 31, 2018, Industrial sales increased 14 percent from the prior year period. General engineering sales experienced growth from the indirect channel across all regions as well as 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. These increases were partially offset by lower sales to OEMs in the Americas. Oil and gas sales in the Americas continue to provide overall growth in energy in addition to increases in global renewable power generation sales. Conditions continue to be favorable in the aerospace sector due to growth in engine sales in the Americas and Asia Pacific supplemented by increasing demand related to frames in the Americas. The sales increases in Asia Pacific and EMEA were primarily driven by the performance in the transportation and general engineering end markets. The sales increase in the Americas was primarily driven by the performance in the general engineering, energy, aerospace and defense and transportation end markets.

INFRASTRUCTURE



	Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2018			2017			2018			2017
Sales	$	221,120		$	211,153		$	438,576		$	410,900
Operating income	20,614			23,833			44,474			44,223
Operating margin	9.3		%	11.3		%	10.1		%	10.8		%



	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)



	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 ~~nine~~three months ended ~~March~~December 31, 2018, ~~Industrial~~Infrastructure sales increased by 5 percent from the prior year quarter. The U.S. oil and gas market drove year-over-year growth in energy with average U.S. land rig counts up 17 percent compared to the prior year quarter, while strong growth in general engineering was driven primarily by more robust activity in the general economy across all regions. Earthworks end market sales were down year-over-year due primarily to timing of 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 ~~increased~~decreased by ~~$69.0~~$3.2 million driven primarily by higher raw material costs, partially offset by organic sales growth, favorable mix and incremental ~~restructuring benefits~~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 strong growth in general engineering was driven primarily by more robust activity in the general economy across all regions. Earthworks end market sales were down year-over-year due to continuing disruption in 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 by growth in all three end markets: earthworks, energy, and general engineering. The slight increase in EMEA, excluding the unfavorable impact of ~~approximately $31 million, $24.7~~currency exchange, was driven by the energy and general engineering end markets, partially offset by declines in the earthworks end market.

For the six months ended December 31, 2018, Infrastructure operating income remained flat compared to the prior year period. Increases driven by organic sales growth, favorable mix, $1.9 million less restructuring and related charges in the current period and ~~favorable currency exchange impact, partially~~incremental simplification/modernization benefits were offset by higher variable compensation expense and salary inflation, decreased manufacturing efficiency in part due to modernization efforts in progress, and unfavorable mix. Industrial operating margin was 13.9 percent compared with 7.5 percent in the prior year period.raw material costs.

~~WIDIA~~CORPORATE

Three Months Ended March 31, Nine Months Ended March 31,
(in thousands) 2018 2017 2018 2017
Sales $ 52,217
$ 46,297
$ 145,204
$ 130,186
Operating income (loss) 1,638
606
2,556
(7,797 )
Operating margin 3.1 % 1.3 % 1.8 % (6.0 )%

Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018

In percentages
Organic sales growth 9 % 9 %
Foreign currency exchange impact⁽¹⁾
5
3
Business days impact⁽²⁾
(1 ) —
Divestiture impact⁽³⁾
—
—
Acquisition impact⁽⁴⁾
—
—
Sales growth 13 % 12 %

Regional Sales Growth: As Reported Constant Currency
Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018 Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018
EMEA 25 % 23 % 14 % 16 %
Asia Pacific 22
13
15
9
Americas 2
5
1
5



	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 ~~March~~December 31, 2018, ~~Widia sales increased 13 percent~~Corporate expense decreased by $0.2 million from the prior year quarter. Excluding the effects of currency exchange, strong sales in Asia Pacific were mainly driven by China and India, followed by EMEA growth due primarily to increases in Eastern Europe and Germany. Demand in the Americas was strong. However, a large order in the prior year quarter did not repeat this year. Thus, sales growth was lower in the Americas relative to the other regions.

For the ~~three~~six months ended ~~March~~December 31, 2018, ~~Widia operating income~~Corporate expense increased by ~~$1.0~~$1.2 million driven primarily by organic sales growth and $0.4 million less restructuring and related charges in the current quarter, partially offset by slightly unfavorable mix. Widia operating income margin was 3.1 percent compared with 1.3 percent in the prior year quarter.

~~For the nine months ended March 31, 2018, Widia sales increased 12 percent~~ from the prior year ~~period. Sales growth in EMEA was broad-based, while sales growth in Asia Pacific was~~period primarily driven by ~~China and India.~~higher employment expenses.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations is the primary source of funding for capital expenditures. For the ~~nine~~six months ended ~~March~~December 31, 2018, ~~Widia~~cash flow provided by operating activities was $61.5 million, primarily due to the net inflow from net income ~~was $2.6 million compared to an operating loss of $7.8 million~~with adjustments for ~~the prior year period. The year-over-year change of $10.4 million was driven primarily~~non-cash items, partially offset by ~~organic sales growth, $4.5 million less restructuring~~a net outflow from changes in other assets and related charges and incremental restructuring benefits of approximately $2 million. Widia operating income margin was 1.8 percent compared with operating loss margin of 6.0 percent in the prior year period.liabilities.

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

~~INFRASTRUCTURE~~

Three Months Ended March 31, Nine Months Ended March 31,
(in thousands) 2018 2017 2018 2017
Sales $ 222,707
$ 192,878
$ 633,608
$ 537,167
Operating income 31,767
19,770
79,347
22,457
Operating margin 14.3 % 10.3 % 12.5 % 4.2 %

Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018

In percentages
Organic sales growth 14 % 17 %
Foreign currency exchange impact⁽¹⁾
3
2
Business days impact⁽²⁾
(2 ) (1 )
Divestiture impact⁽³⁾
—
—
Acquisition impact⁽⁴⁾
—
—
Sales growth 15 % 18 %

Regional Sales Growth: As Reported Constant Currency
Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018 Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018
Asia Pacific 26 % 25 % 19 % 21 %
Americas 15
18
14
18
EMEA 8
10
(5 ) 1

End Market Sales Growth: As Reported Constant Currency
Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018 Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018
General engineering 21 % 18 % 16 % 15 %
Energy 16
23
14
21
Earthworks 9
12
4
9

~~For the three months ended March 31, 2018, Infrastructure sales increased by 15 percent from the prior year quarter~~. Infrastructure saw strength in many end markets during the current quarter. Favorability in general engineering is driven primarily by overall more robust activity in the general economy, particularly in the Americas. Additionally, increases in process industries and oil and gas activity in the U.S. yielded strong growth in the energy end market. Growth in earthworks was driven primarily by mining in Asia Pacific, partially offset by softness in mining in EMEA. The sales increase in Asia Pacific was driven primarily by the performance in the earthworks and general engineering end markets, while growth in the Americas was primarily driven by the general engineering and energy end markets. Excluding the favorable impacts of currency exchange, the sales decrease in EMEA was driven by a decline in performance in earthworks. This is mainly due to the anticipation of labor disruptions in South Africa that did not occur, yet still affected underground mining in the region. Also contributing to the sales decrease in EMEA is declines in general engineering, partially offset by growth in energy.

For the three months ended March 31, 2018, Infrastructure operating income increased by $12.0 million driven primarily by organic sales growth, favorable mix, $3.3 million less restructuring and related charges in the current quarter and incremental restructuring benefits of approximately $3 million, partially offset by higher raw material costs, decreased manufacturing efficiency in part due to modernization efforts in progress and higher compensation expense. Infrastructure operating margin was 14.3 percent compared with 10.3 percent in the prior year quarter.

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

~~For the nine months ended March 31, 2018, Infrastructure sales increased by 18 percent from the prior year period~~. On a year-to-date basis, Infrastructure saw improvements in all end markets, including underground mining and construction. Year-over-year growth in energy was strong with an increase in rig count activity and increased power generation activity. Strong growth in general engineering is driven primarily by overall more robust activity in the general economy, particularly in the Americas. 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 driven by the performance in all three end markets: energy, general engineering and earthworks.

~~For the nine months ended March 31, 2018, Infrastructure operating income increased by $56.9 million~~ ~~driven primarily by~~ organic sales growth, favorable mix, incremental restructuring benefits of approximately $17 million and $13.8 million less restructuring and related charges in the current period, partially offset by higher raw material costs, compensation expense and overtime costs. Infrastructure operating margin was 12.5 percent compared with 4.2 percent in the prior year period.

~~CORPORATE~~

Three Months Ended March 31, Nine Months Ended March 31,
(in thousands) 2018 2017 2018 2017
Corporate unallocated expense $ (1,078 ) $ (999 ) $ (3,030 ) $ (4,084 )

For the three months ended March 31, 2018, Corporate unallocated expense decreased $0.1 million, or 7.9 percent, from the prior year quarter. For the nine months ended March 31, 2018, Corporate unallocated expense decreased $1.1 million, or 25.8 percent, from the prior year period.

~~LIQUIDITY AND CAPITAL RESOURCES~~

~~Cash flow from operations is the primary source of funding for capital expenditures. Year to date March 31, 2018 cash flow provided by operating activities was~~ ~~$180.6 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 under our Credit Agreement as of March 31, 2018.~~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 ~~March~~December 31, 2018. For the ~~nine~~six months ended ~~March~~December 31, 2018, average daily borrowings outstanding under the Credit Agreement were approximately ~~$1.3~~$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.

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

~~During the three months ended~~At December 31, 2017, we estimated the toll tax charge to be $77 million after available foreign tax credits. We recorded an adjustment to this estimate during the three months ended March 31, 2018, primarily related to consideration of Internal Revenue Service notices issued during the March quarter. The adjustment resulted in an additional $6 million of expense, increasing the total estimated toll tax charge to $83 million as of March 31, 2018. 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 of the March quarter adjustment, we estimate a cash payment of $6.4 million associated with the toll charge which will be paid over eight years, of which $5.9 million is classified as long-term accrued income taxes in our condensed consolidated balance sheet as of March 31, 2018. The toll tax charge is preliminary, and subject to finalization of collecting all information, applying any additional regulatory guidance issued after March 31, 2018, considering changes in interpretations and assumptions and analyzing the calculation, along with foreign taxes and the related gross-up, in reasonable detail to complete the accounting.

~~At March~~ 31, 2018, cash and cash equivalents were ~~$221.9~~$96.3 million, Total Kennametal Shareholders' equity was ~~$1,187.3~~$1,269.7 million and total debt was ~~$697.5~~$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 ~~nine~~six months ended ~~March~~December 31, 2018, cash flow provided by operating activities was ~~$180.6~~$61.5 million, compared to ~~$82.8~~$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 ~~$246.7~~$186.4 million and changes in certain assets and liabilities netting to an outflow of ~~$66.1~~$124.9 million. Contributing to the changes in certain assets and liabilities were ~~an increase in inventories of $32.9 million due in part to increasing volumes, a decrease in accrued pension and postretirement benefits of $20.0 million,~~ a decrease in accounts payable and accrued liabilities of ~~$15.7~~$82.8 million and an increase in ~~accounts receivable~~inventories of ~~$14.8~~$59.2 million due in part to increasing ~~volumes.~~demand and raw material price increases. Partially offsetting these cash outflows was ~~an increase~~a decrease in ~~accrued income taxes~~accounts receivable of ~~$20.2~~$14.0 million.

During the ~~nine~~six months ended ~~March~~December 31, 2017, cash flow ~~provided by~~used for operating activities consisted of net income and non-cash items amounting to an inflow of ~~$124.5~~$161.1 million and changes in certain assets and liabilities netting to an outflow of ~~$41.7~~$120.0 million. Contributing to the changes in certain assets and liabilities were ~~an increase in inventories~~a decrease of ~~$38.1~~accounts payable and accrued liabilities of $92.3 million, a decrease in accrued pension and postretirement benefits of ~~$18.8~~$13.8 million and an increase in ~~accounts receivable~~inventories of $12.7 million. Partially offsetting these cash outflows was a net increase of accounts payable and accrued liabilities of $28.6 million. The increases in inventories, accounts payable and accounts receivable was$9.1 million due in part to ~~higher demand trends in most of our end markets.~~increasing volumes.

Cash Flow Used for Investing Activities

Cash flow used for investing activities was $~~125.8~~85.5 million for the ~~nine~~six months ended ~~March~~December 31, 2018, compared to $~~90.1~~58.4 million for the prior year period. During the current year period, cash flow used for investing activities included capital expenditures, net of ~~$126.1~~$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)

For the ~~nine~~six months ended ~~March~~December 31, 2017, cash flow used for investing activities included capital expenditures, net of ~~$90.2~~$58.7 million, which consisted primarily of equipment upgrades.

Cash Flow Used for Financing Activities

Cash flow used for financing activities was $~~31.3~~432.7 million for the ~~nine~~six months ended ~~March~~December 31, 2018 compared to $~~50.6~~17.3 million in the prior year period. During the current year period, cash flow used for financing activities included ~~$48.8~~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 ~~$17.5~~an inflow of $15.0 million of ~~dividend reinvestment and~~ the effect of employee benefit and stock ~~plans.~~plans and dividend reinvestment.

FINANCIAL CONDITION

Working capital was $707.0 million at December 31, 2018, an increase of $47.3 million from $659.6 million at June 30, 2018. The increase in working capital was primarily driven by a decrease in current maturities of 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 $37.5 million primarily due to payroll timing and lower accrued vacation pay, a decrease in other current liabilities of $26.7 million primarily due to bonus and restructuring payments and a decrease in accounts payable of $23.6 million. Partially offsetting these items was a decrease in cash and cash equivalents of $459.9 million, a decrease in accounts receivable of $20.6 million and an increase in accrued income taxes of $10.0 million due primarily to increased taxable income in taxpaying jurisdictions. Currency exchange rate effects decreased working capital by a total of approximately $12 million, the impact of which is included in the aforementioned changes.

~~For~~Property, plant and equipment, net increased $30.9 million from $824.2 million at June 30, 2018 to $855.1 million at December 31, 2018, primarily due to capital additions of $88.0 million, partially offset by depreciation expense of $47.8 million, a negative currency exchange impact of approximately $7 million and disposals of $2.5 million.

At December 31, 2018, other assets were $557.0 million, an increase of $1.6 million from $555.4 million at June 30, 2018. The primary driver for the ~~nine months ended March~~increase was an increase in other assets of $12.4 million primarily due to an increase in pension plan assets, partially offset by an $8.0 million decrease in other intangible assets, which was due to amortization expense of $7.1 million and unfavorable currency exchange effects of approximately $1 million, and a decrease in goodwill of $1.8 million primarily due to unfavorable currency exchange effects.

Kennametal Shareholders' equity was $1,269.7 million at December 31, ~~2017, cash flow used for financing activities included $48.0~~2018, an increase of $75.4 million from $1,194.3 million at June 30, 2018. The increase was primarily due to net income attributable to Kennametal of $111.4 million and capital stock issued under employee benefit and stock plans of $11.1 million, partially offset by cash dividends paid to Shareholders of $32.8 million and unfavorable currency exchange of $18.9 million.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

Effective July 1, 2018 with the adoption of Financial Accounting Standards Board (FASB) guidance on 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 this Quarterly Report on Form 10-Q for a ~~$6.4 million payment~~description of our revenue accounting policy.

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

NEW ACCOUNTING STANDARDS

See Note 2 to our condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on ~~the remaining contingent consideration related to~~Form 10-Q for a ~~prior acquisition. These cash outflows were partially offset by $4.3 million~~description of ~~dividend reinvestment and the effect of employee benefit and stock plans.~~new accounting standards.

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

~~FINANCIAL CONDITION~~

~~Working capital was~~ ~~$762.8 million~~ ~~at March 31, 2018, an increase of~~ ~~$110.4 million~~ from $652.4 million at June 30, 2017. The increase in working capital was primarily driven by an increase in inventories of $49.5 million due primarily to increasing demand and cost inflation, an increase in cash and cash equivalents of $31.3 million, an increase in accounts receivable of $30.1 million due in part to increasing volumes, a decrease in other current liabilities of $12.6 million primarily due to a decrease in the restructuring accrual and an increase in other current assets of $10.8 million due in part to reclassification of tax assets from deferred income taxes to other current assets related to an out of period adjustment. Partially offsetting these items was an increase in accrued income taxes of $21.1 million due primarily to increased taxable income in taxpaying jurisdictions. Currency exchange rate effects increased working capital by a total of $26.5 million, the impact of which is included in the aforementioned changes.

Property, plant and equipment, net increased $60.6 million from $744.4 million at June 30, 2017 to $805.0 million at March 31, 2018, primarily due to capital additions of $116.8 million and a positive currency exchange impact of $18.7 million during the current period. This increase was partially offset by depreciation expense of $70.0 million, impairment related to restructuring programs of $3.1 million and disposals of $2.2 million.

At March 31, 2018, other assets were $572.3 million, an increase of $15.1 million from $557.2 million at June 30, 2017. The primary drivers for the increase were an increase in other assets of $28.2 million primarily due to an increase in pension plan assets and an increase in goodwill of $8.1 million due to favorable currency exchange effects. This increase was partially offset by an $8.9 million decrease in other intangible assets, which was due to amortization expense of $11.0 million partially offset by favorable currency exchange effects of $2.1 million, and a $6.2 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.

~~Long-term debt and capital leases increased by $1.1 million to $696.1 million at March 31, 2018 from $695.0 million at June 30, 2017.~~

Kennametal Shareholders' equity was $1,187.3 million at March 31, 2018, an increase of $170.0 million from $1,017.3 million at June 30, 2017. The increase was primarily due to net income attributable to Kennametal of $131.7 million, favorable currency exchange of $52.6 million and capital stock issued under employee benefit and stock plans of $33.6 million, partially offset by cash dividends paid to Shareholders of $48.8 million.

~~ENVIRONMENTAL MATTERS~~

~~Other Environmental Matters~~ We establish and maintain reserves for other potential environmental issues. At March 31, 2018 and June 30, 2017, the balances of these reserves were $12.8 million and $12.4 million, respectively. These reserves represent anticipated costs associated with the remediation of these issues.

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

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

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

~~DISCUSSION OF CRITICAL ACCOUNTING POLICIES~~

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

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

~~NEW ACCOUNTING STANDARDS~~

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

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

In accordance with 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.

~~Table of Contents~~

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

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 March 31, 2018 Industrial Widia Infrastructure Total
Organic sales growth 10% 9% 14% 11%
Foreign currency exchange impact⁽¹⁾
8 5 3 6
Business days impact⁽²⁾
(3) (1) (2) (2)
Divestiture impact⁽³⁾
— — — —
Acquisition impact⁽⁴⁾
— — — —
Sales growth 15% 13% 15% 15%

Nine Months Ended March 31, 2018 Industrial Widia Infrastructure Total
Organic sales growth 11% 9% 17% 13%
Foreign currency exchange impact⁽¹⁾
4 3 2 3
Business days impact⁽²⁾
(1) — (1) (1)
Divestiture impact⁽³⁾
— — — —
Acquisition impact⁽⁴⁾
— — — —
Sales growth 14% 12%
18%
15%

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

Industrial
Three Months Ended March 31, 2018 General engineering Transportation Aerospace and defense Energy
Constant currency end market sales growth 7% 4% 13% 4%
Foreign currency exchange impact⁽¹⁾
8 9 6 6
Divestiture impact⁽³⁾
— — — —
Acquisition impact⁽⁴⁾
— — — —
End market sales growth⁽⁵⁾
15% 13% 19% 10%



Six Months Ended December 31, 2018	Industrial	Widia	Infrastructure	Total
Organic sales growth	7%	7%	7%	7%
Foreign currency exchange impact⁽¹⁾	(3)	(3)	(1)	(3)
Business days impact⁽²⁾	1	1	1	1
Sales growth	5%	5%	7%	5%

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

Infrastructure
Three Months Ended March 31, 2018 Energy Earthworks General engineering
Constant currency end market sales growth 14% 4% 16%
Foreign currency exchange impact⁽¹⁾
2 5 5
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
End market sales growth⁽⁵⁾
16% 9% 21%

Total
Three Months Ended March 31, 2018 General engineering Transportation Aerospace and defense Energy Earthworks
Constant currency end market sales growth 10% 4% 17% 11% 5%
Foreign currency exchange impact⁽¹⁾
6 9 6 3 5
Divestiture impact⁽³⁾
— — — — —
Acquisition impact⁽⁴⁾
— — — — —
End market sales growth⁽⁵⁾
16% 13% 23% 14% 10%

Reconciliations of constant currency end market sales growth (decline) to end market sales growth (decline)⁽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
Nine Months Ended March 31, 2018 General engineering Transportation Aerospace and defense Energy
Constant currency end market sales growth 8% 8% 10% 14%
Foreign currency exchange impact⁽¹⁾
5 5 3 4
Divestiture impact⁽³⁾
— — — —
Acquisition impact⁽⁴⁾
— — — —
End market sales growth⁽⁵⁾
13% 13% 13% 18%



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%



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)%

Infrastructure
Nine Months Ended March 31, 2018 Energy Earthworks General engineering
Constant currency end market sales growth 21% 9% 15%
Foreign currency exchange impact⁽¹⁾
2 3 3
Divestiture impact⁽³⁾
— — —
Acquisition impact⁽⁴⁾
— — —
End market sales growth⁽⁵⁾
23% 12% 18%



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%

Total
Nine Months Ended March 31, 2018 General engineering Transportation Aerospace and defense Energy Earthworks
Constant currency end market sales growth 10% 8% 11% 19% 9%
Foreign currency exchange impact⁽¹⁾
4 5 4 3 4
Divestiture impact⁽³⁾
— — — — —
Acquisition impact⁽⁴⁾
— — — — —
End market sales growth⁽⁵⁾
14% 13% 15% 22% 13%



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)%

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

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

Industrial Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018
Americas EMEA Asia Pacific Americas EMEA Asia Pacific
Constant currency regional sales growth 12% 7% —% 10% 8% 11%
Foreign currency exchange impact⁽¹⁾
— 15 7 1 9 3
Divestiture impact⁽³⁾
— — — — — —
Acquisition impact⁽⁴⁾
— — — — — —
Regional sales growth⁽⁶⁾
12% 22% 7% 11% 17% 14%

Widia Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018
Americas EMEA Asia Pacific Americas EMEA Asia Pacific
Constant currency regional sales growth 1% 14% 15% 5% 16% 9%
Foreign currency exchange impact⁽¹⁾
1 11 7 — 7 4
Divestiture impact⁽³⁾
— — — — — —
Acquisition impact⁽⁴⁾
— — — — — —
Regional sales growth⁽⁶⁾
2% 25% 22% 5% 23% 13%

Infrastructure Three Months Ended March 31, 2018 Nine Months Ended March 31, 2018
Americas EMEA Asia Pacific Americas EMEA Asia Pacific
Constant currency regional sales growth (decline) 14% (5)% 19% 18% 1% 21%
Foreign currency exchange impact⁽¹⁾
1 13 7 — 9 4
Divestiture impact⁽³⁾
— — — — — —
Acquisition impact⁽⁴⁾
— — — — — —
Regional sales growth⁽⁶⁾
15% 8% 26% 18% 10% 25%


Total	Three Months Ended March 31, 2018			Nine Months Ended March 31, 2018
	Americas	EMEA	Asia Pacific	Americas	EMEA	Asia Pacific	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%	8%	14%	7%	14%	12%	5%	(4)%	12%	6%	4%
Foreign currency exchange impact⁽¹⁾	1	14	7	—	9	4	(2)	(5)	(4)	(2)	(4)	(4)
Divestiture impact⁽³⁾	—	—	—	—	—	—
Acquisition impact⁽⁴⁾	—	—	—	—	—	—
Regional sales growth⁽⁶⁾	13%	19%	15%	14%	16%	18%
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 ~~March~~December 31, 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⁾

January 1 through January 31, 2018 —
$ —
—
10,100,100
February 1 through February 28, 2018 5,389
46.29
—
10,100,100
March 1 through March 31, 2018 1,399
40.54
—
10,100,100
Total 6,788
$ 45.10
—



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, ~~1,248~~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 ~~5,540~~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.

ITEM 6. EXHIBITS



(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:	~~May 8, 2018~~February 5, 2019	By:	/s/ Patrick S. Watson
			Patrick S. Watson Vice President Finance and Corporate Controller

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End Market Sales Growth:	As Reported				Constant Currency
	Three Months Ended March 31, 2018		Nine Months Ended March 31, 2018		Three Months Ended March 31, 2018		Nine Months Ended March 31, 2018
Aerospace and defense	23	%	15	%	17	%	11	%
General engineering	16		14		10		10
Energy	14		22		11		19
Transportation	13		13		4		8
Earthworks	10		13		5		9