The following discussion should be read in connection with the consolidated financial statements ofKennametal Inc. and the related financial statement notes included in Item 8 of this Annual Report. Unless otherwise specified, any reference to a "year" is to our fiscal year endedJune 30 . Additionally, when used in this Annual Report, unless the context requires otherwise, the terms "we," "our" and "us" refer toKennametal Inc. and its subsidiaries. OVERVIEWKennametal Inc. was founded based on a tungsten carbide technology breakthrough in 1938. The Company was incorporated inPennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling, and was listed on theNew York Stock Exchange (NYSE) in 1967. With more than 80 years of materials expertise, the Company is a global industrial technology leader, helping customers across the aerospace, earthworks, energy, general engineering and transportation industries manufacture with precision and efficiency. This expertise includes the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and extreme wear applications to keep customers up and running longer against conditions such as corrosion and high temperatures. Our standard and custom product offering spans metal cutting and wear applications including turning, milling, hole making, tooling systems and services, as well as specialized wear components and metallurgical powders. End users of the Company's metal cutting products include manufacturers engaged in a diverse array of industries including: the manufacturers of transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation. The Company's wear and metallurgical powders are used by producers and suppliers in equipment-intensive operations such as road construction, mining, quarrying, 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 inthe United States of America (U.S. GAAP), including organic sales growth (decline), constant currency regional sales growth (decline) and constant currency end market sales growth (decline). The explanation at the end of the MD&A provides the definition of these non-GAAP financial measures as well as details on their use and a reconciliation to the most directly comparable GAAP financial measures. Our sales of$1,885.3 million for the year endedJune 30, 2020 decreased 21 percent year-over-year, reflecting 18 percent organic sales decline, a 2 percent unfavorable currency exchange effect and a 1 percent decline from divestiture. The decline reflects a global manufacturing slow down and deteriorating end markets which accelerated in the second half of the fiscal year due to the emergence of the COVID-19 pandemic. Despite the challenging macro-economic environment, the Company continued to have success by introducing new and innovative products such as the award-winning HARVITM 1 TE end mill designed primarily for the general engineering end market. Operating income was$22.3 million compared to$328.9 million in the prior year. The decrease in operating income was primarily due to an organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes and simplification/modernization efforts in progress, higher restructuring and related charges of$66.0 million and$30.2 million of goodwill and other intangible asset impairment charges, partially offset by approximately$48 million of incremental simplification/modernization benefits, lower raw material costs and lower variable compensation expense. Operating margin was 1.2 percent compared to 13.8 percent in the prior year. The Industrial and Infrastructure segments had operating margins of 3.5 percent and 3.3 percent, respectively, while the Widia segment had operating loss margin of 21.3 percent. COVID-19 emerged inChina at the end of calendar year 2019 bringing significant uncertainty in our end markets and operations. National, regional and local governments have taken steps to limit the spread of the virus through stay-at-home, social distancing, and various other orders and guidelines. The imposition of these measures has created potentially significant operating constraints on our business. Recognizing the potential for COVID-19 to significantly disrupt operations, we began to deploy safety protocols and processes globally during the March quarter of fiscal 2020 to keep our employees safe while continuing to serve our customers. COVID-19 affected all regions and end markets during the latter half of fiscal 2020. As an essential business,Kennametal facilities continued to operate throughout the March and June quarters, with the notable exceptions ofKennametal India Ltd. and our Bolivian operation which were closed for approximately six weeks due to government mandated lockdowns. In fiscal 2020 we did not experience a material disruption in our supply chain as a result of these facility closures or elsewhere in our supply chain. We expect COVID-19 will continue to have a negative effect on customer demand in fiscal 2021 as a result of the disruption and uncertainty it is causing most acutely in the energy, aerospace and transportation end markets. The extent to which the COVID-19 pandemic may affect our business, operating results, financial condition, or liquidity in the future will depend on future developments, including the duration of the outbreak, travel restrictions, business and workforce disruptions, and the effectiveness of actions taken to contain and treat the disease. 17
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The FY20 Restructuring Actions, which are substantially complete, resulted in annualized savings of$33 million and pre-tax charges of$54 million . During the June quarter of fiscal 2020 the Company announced the acceleration of its structural cost reduction plans and increased the estimated annualized benefits of its FY21 Restructuring Actions to$65 million to$75 million from$25 million to$30 million and the expected pre-tax charges to$90 million to$100 million from$55 million to$60 million . As part of this acceleration, the Company is continuing our footprint rationalization and inAugust 2020 announced the closure of our manufacturing facility inJohnson City, Tennessee . The closure is expected to be completed in fiscal 2021. We recorded$83.3 million of pre-tax restructuring and related charges during 2020. Total benefits from our simplification/modernization efforts, including restructuring initiatives, were approximately$48 million in 2020, and we achieved annualized run-rate savings from simplification/modernization of approximately$101 million since inception. We recorded non-cash pre-tax Widia goodwill and other intangible asset impairment charges of$30.2 million in the current year as a result of deteriorating market conditions in part caused by the COVID-19 global pandemic. We reported loss per diluted share of$0.07 for fiscal 2020. Loss per share for the year was unfavorably affected by restructuring and related charges of$0.88 per share, goodwill and other intangible asset impairment charges of$0.33 per share and loss on divestiture of$0.06 per share, partially offset by discrete benefits from Swiss tax reform of$0.17 per share, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of$0.08 per share and other tax matters of$0.01 per share. The earnings per diluted share of$2.90 in the prior year included a discrete benefit fromU.S. tax reform of$0.11 per share, a discrete benefit of$0.01 per share from the release of a valuation allowance on Australian deferred tax assets, a tax charge from a change in permanent reinvestment assertion of$0.07 per share and restructuring and related charges of$0.17 per share. We generated cash flow from operating activities of$223.7 million in 2020 compared to$300.5 million during the prior year. Capital expenditures were$244.2 million and$212.3 million during 2020 and 2019, respectively, with the increase primarily due to higher spending associated with our simplification/modernization initiatives, and the Company returned$66.3 million and$65.7 million to shareholders through dividends during 2020 and 2019, respectively. As a result of the Company's focus on organizational efficiency, commercial excellence and growth in its metal cutting businesses, effectiveJuly 1, 2020 ,Kennametal has combined its Industrial and Widia business segments to form one Metal Cutting business segment. The Infrastructure segment remains unchanged. For discussion related to the results of operations, changes in financial condition and liquidity and capital resources for fiscal 2019 compared to fiscal 2018 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2019 Form 10-K, which was filed with theUnited States Securities and Exchange Commission onAugust 13, 2019 . RESULTS OF CONTINUING OPERATIONS SALES Sales in 2020 were$1,885.3 million , a 21 percent decrease from$2,375.2 million in 2019. The decrease was primarily due to organic sales decline of 18 percent, unfavorable currency exchange effect of 2 percent and unfavorable divestiture effect of 1 percent. 2020 (in percentages) As Reported Constant Currency End market sales decline: Energy (29)% (28)% Transportation (25) (23) General engineering (19) (17) Aerospace (17) (16) Earthworks (9) (7) Regional sales decline: Americas (23)% (21)% Europe, the Middle East and Africa (EMEA) (20) (17) Asia Pacific (17) (15) 18
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GROSS PROFIT Gross profit decreased$302.0 million to$529.5 million in 2020 from$831.5 million in 2019. This decrease was primarily due to an organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes and simplification/modernization efforts in progress, greater restructuring and related charges of$12 million and unfavorable foreign currency exchange effect of approximately$11 million , partially offset by incremental simplification/modernization benefits. The gross profit margin for 2020 was 28.1 percent compared to 35.0 percent in 2019. OPERATING EXPENSE Operating expense in 2020 was$388.4 million , a decrease of$85.7 million , or 18.1 percent, from$474.2 million in 2019. The decrease was primarily due to lower incentive compensation expense, incremental restructuring simplification benefits and favorable currency exchange effect of approximately$6 million . 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$38.7 million and 39.0 million for 2020 and 2019, respectively. RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES FY20 Restructuring Actions In the June quarter of fiscal 2019, we implemented, and in the current year substantially completed, the FY20 Restructuring Actions associated with our simplification/modernization initiative to reduce structural costs, improve operational efficiency and position us for long-term profitable growth. Total restructuring and related charges since inception of$53.5 million were recorded for this program throughJune 30, 2020 , consisting of:$43.1 million in Industrial,$8.2 million in Infrastructure and$2.2 million in Widia. Inception to date, we have achieved annualized savings of approximately$33 million . FY21 Restructuring Actions In the September quarter of fiscal 2020, we announced the initiation of restructuring actions inGermany associated with our simplification/modernization initiative, which are expected to reduce structural costs. We agreed with local employee representatives to downsize ourEssen, Germany operations instead of the previously proposed closure. During the fourth quarter of fiscal 2020, we also announced the acceleration of our structural cost reduction plans and increased the estimated annualized savings of the FY21 Restructuring Actions to$65 million to$75 million and the expected pre-tax charges to$90 million to$100 million . These actions are to be completed by the end of fiscal 2021 and are expected to be primarily cash expenditures. Total restructuring and related charges since inception of$43.2 million were recorded for this program throughJune 30, 2020 , consisting of:$37.9 million in Industrial,$3.0 million in Infrastructure and$2.3 million in Widia. Inception to date, we have achieved annualized savings of approximately$5 million . Annual Restructuring Charges During 2020, we recorded restructuring and related charges of$83.3 million . Of this amount, restructuring charges totaled$69.2 million , of which$0.9 million was related to inventory and was recorded in cost of goods sold. Restructuring-related charges of$14.1 million were recorded in cost of goods sold. During 2019, we recorded restructuring and related charges of$16.9 million , net of a$4.8 million gain on the sale of our previously closedMadison, AL manufacturing location as part of our FY19 Restructuring Actions. Of this amount, restructuring charges totaled$19.5 million , of which$0.7 million was related to inventory and was recorded in cost of goods sold. Restructuring-related charges of$1.8 million were recorded in cost of goods sold and$0.3 million were recorded in operating expense during 2019. LOSS ON DIVESTITURE During the year endedJune 30, 2020 , we completed the sale of certain assets of the non-core specialty alloys and metals business within the Infrastructure segment located inNew Castle, Pennsylvania to Advanced Metallurgical Group N.V. for an aggregate price of$24.0 million . The net book value of these assets at closing was$29.5 million , and the pre-tax loss on divestiture recognized during the year endedJune 30, 2020 was$6.5 million . Transaction proceeds were primarily used for capital expenditures related to our simplification/modernization efforts. AMORTIZATION OF INTANGIBLES Amortization expense was$13.8 million and$14.4 million in 2020 and 2019, respectively. INTEREST EXPENSE Interest expense in 2020 was$35.2 million , an increase of$2.2 million , compared to$33.0 million in 2019. The increase was primarily due to the increase in borrowings under our Credit Agreement. The portion of our debt subject to variable rates of interest was 45.7 percent atJune 30, 2020 , due to$500.0 million of borrowings outstanding under the Credit Agreement, and less than 1 percent atJune 30, 2019 . There were no borrowings outstanding under the Credit Agreement as ofJune 30, 2019 . 19
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OTHER INCOME, NET In 2020, other income, net was$14.9 million , a decrease of$0.5 million from$15.4 million in 2019. INCOME TAXES The effective tax rate for 2020 was 357.5 percent compared to 20.4 percent for 2019. The change is primarily due to the effects of current year restructuring and related charges, goodwill and other intangible asset impairment charges, a$14.5 million benefit for the one-time effect of Swiss tax reform, a$6.9 million benefit related to the CARES Act and the Global Intangible Low-Taxed Income (GILTI) tax. See Note 13 of our consolidated financial statements set forth in Item 8 of this Annual Report for a more comprehensive discussion about Swiss tax reform and the CARES Act. The prior year rate reflects several effects associated with the Tax Cuts and Jobs Act of 2017 (TCJA) including a$9.3 million net tax benefit associated with the finalization of a one-time tax that was imposed on our unremitted foreign earnings (toll tax). The 2019 rate also includes a$6.1 million charge related to changes in the Company's permanent reinvestment assertion on certain foreign subsidiaries' undistributed earnings, which are no longer considered permanently reinvested. In 2012, we received an assessment from the Italian tax authority that denied certain tax deductions primarily related to our 2008 tax return. Attempts at negotiating a reasonable settlement with the tax authority were unsuccessful; and as a result, we decided to litigate the matter. While the outcome of the litigation is still pending, the tax authority served notice in the September quarter of fiscal 2020 requiring payment in the amount of €36 million. Accordingly, we requested and were granted a stay and are not currently required to make a payment in connection with this assessment. We continue to believe that the assessment is baseless and accordingly, no income tax liability has been recorded in connection with this assessment in any period. However, if the Italian tax authority were to be successful in litigation, settlement of the amount alleged by the Italian tax authority would result in an increase to income tax expense for as much as €36 million, or$40 million , of which penalties and interest is €21 million, or$23 million . NET (LOSS) INCOME ATTRIBUTABLE TO KENNAMETAL Net loss attributable toKennametal was$5.7 million , or$0.07 loss per share, in 2020, compared to net income attributable toKennametal of$241.9 million , or$2.90 earnings per share (EPS), in 2019. The decrease is a result of the factors previously discussed. BUSINESS SEGMENT REVIEW We operate in three reportable operating segments consisting of Industrial, Widia and Infrastructure. Corporate expenses that are not allocated are reported in Corporate. Segment determination is based upon internal organizational structure, the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results. See Note 21 of our consolidated financial statements set forth in Item 8 of this Annual Report. Our sales and operating income by segment are as follows: (in thousands) 2020 2019 Sales: Industrial$ 1,015,058 $ 1,274,499 Widia 162,995 197,522 Infrastructure 707,252 903,213 Total sales$ 1,885,305 $ 2,375,234 Operating income (loss): Industrial$ 35,671 $ 220,696 Widia (34,686 ) 2,882 Infrastructure 23,113 108,480 Corporate (1,846 ) (3,208 ) Total operating income 22,252 328,850 Interest expense 35,154 32,994 Other income, net (14,862 ) (15,379 )
Income before income taxes
INDUSTRIAL
(in thousands) 2020 2019 Sales$ 1,015,058 $ 1,274,499 Operating income 35,671 220,696 Operating margin 3.5 % 17.3 % 20
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Table of Contents (in percentages) 2020 Organic sales decline (19)% Foreign currency exchange effect (1) Sales decline (20)% 2020 (in percentages) As Reported Constant Currency End market sales decline: Transportation (25)% (23)% General engineering (19) (18) Aerospace (17) (16) Energy (13) (12) Regional sales decline: EMEA (23)% (21)% Americas (19) (18) Asia Pacific (16) (15) In 2020, Industrial sales of$1,015.1 million decreased by$259.4 million , or 20 percent, from 2019. The sales decline was caused by lower manufacturing activity and challenging economic conditions across all end markets and regions. Transportation sales declined in all regions due to continued weakness in auto build rates and a slowdown in auto sales. Sales in our general engineering end market declined in all regions as a result of continued declines in manufacturing activity, partially related to the negative effects of COVID-19. Aerospace sales declined in all regions, primarily driven by lower OEM production rates on certain platforms as well as additional production cuts resulting from significantly less demand for air travel starting in the fourth quarter. Energy sales decreased primarily due to a decline in oil and gas drilling in theAmericas , partially offset by continued strength in renewable energy inChina . On a regional basis, the sales decrease in EMEA was due to declines in all end markets and was driven by the negative effects of COVID-19 and the associated effect on manufacturing production in the transportation, aerospace and general engineering end markets. TheAmericas also experienced sales declines in all end markets as manufacturing activity levels were significantly curtailed, especially in the fourth quarter. Additionally, the decline in oil and gas activity also affected theAmericas energy end market sales as oil and gas drilling slowed. The sales decrease inAsia Pacific was driven by declines in all end markets except energy. The declines were largely due to slowing end market demand primarily driven by the negative effects of COVID-19; however, we continue to see positive sales growth related to renewable energy inChina . In 2020, Industrial operating income was$35.7 million , a$185.0 million decrease from 2019. The decrease was primarily driven by organic sales decline, greater restructuring and related charges of$57.3 million and unfavorable labor and fixed cost absorption due to lower volumes, partially offset by incremental simplification/modernization benefits, lower variable compensation expense and other cost-control actions, WIDIA (in thousands) 2020 2019 Sales$ 162,995 $ 197,522 Operating income (34,686 ) 2,882 Operating margin (21.3 )% 1.5 % (in percentages) 2020 Organic sales decline (16)% Foreign currency exchange effect (1) Sales decline (17)% 21
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Table of Contents 2020 (in percentages) As Reported Constant Currency Regional sales decline: Asia Pacific (28)% (26)% EMEA (15) (12) America (13) (12) In 2020, Widia sales of$163.0 million decreased by$34.5 million , or 17 percent, from 2019. The sales decrease inAsia Pacific was driven primarily by the overall weak market conditions, most notably inIndia andChina . Sales in EMEA decreased primarily due to the increasingly difficult market environment which was significantly affected by the negative effects of COVID-19, partially offset by growth in products focused on aerospace applications, while the decrease in theAmericas was primarily due to a slowerU.S. manufacturing environment, partially offset by strength inLatin America . Widia operating loss was$34.7 million in 2020 compared to operating income of$2.9 million in 2019. The change was primarily driven by$30.2 million of goodwill and other intangible asset impairment charges, organic sales decline and unfavorable labor and fixed cost absorption due to lower volumes, partially offset by incremental simplification/modernization benefits, lower variable compensation expense and other cost-control actions. INFRASTRUCTURE (in thousands) 2020 2019 Sales$ 707,252 $ 903,213 Operating income 23,113 108,480 Operating margin 3.3 % 12.0 % (in percentages) 2020 Organic sales decline (18)% Foreign currency exchange effect (1) Divestiture effect (3) Sales decline (22)% 2020 (in percentages) As Reported Constant Currency End market sales decline: Energy (35)% (33)% General engineering (21) (15) Earthworks (9) (7) Regional sales decline: Americas (27)% (24)% Asia Pacific (14) (11) EMEA (9) (5) In 2020, Infrastructure sales of$707.3 million decreased by$196.0 million , or 22 percent, from 2019. Sales declined in all regions and end markets, partly due to the effect of COVID-19. TheU.S. oil and gas market drove the decline in the energy market as drilling activity declined due to falling commodity prices. In general engineering the lower level of manufacturing activity drove the decline in theAmericas andAsia Pacific , partially offset by increased defense related activity in EMEA. Earthworks end market sales were down due to softness in mining in all regions and construction inAsia Pacific and EMEA, partially offset by growth in theAmericas construction. On a regional basis, the sales decrease in theAmericas was driven by declines in the energy and general engineering end markets, and to a lesser extent, a decline in the earthworks end market. The decrease inAsia Pacific was driven primarily by lower levels of manufacturing activity in the general engineering end market. The sales decrease in EMEA was driven primarily by declines in both the energy and earthworks end markets, partially offset by growth in general engineering. 22
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In 2020, Infrastructure operating income was$23.1 million , a$85.4 million decrease from 2019. The primary drivers for the decrease were organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes and simplification/modernization efforts in progress, unfavorable mix, greater restructuring and related charges of$8.5 million and a loss on divestiture of$6.5 million , partially offset by incremental simplification/modernization benefits and lower variable compensation expense. CORPORATE (in thousands) 2020 2019 Corporate expense$ (1,846 ) $ (3,208 )
In 2020, Corporate expense decreased
LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the primary source of funding for our capital expenditures. During the year endedJune 30, 2020 , cash flow provided by operating activities was$223.7 million . Our five-year, multi-currency, revolving credit facility, as amended and restated inJune 2018 (Credit Agreement), is used to augment cash from operations and as an additional source of funds. The Credit Agreement provides for revolving credit loans of up to$700.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement allows for borrowings inU.S. dollars, euros, Canadian dollars, 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 inJune 2023 . The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: 1.) a maximum leverage ratio where debt, net of domestic cash in excess of$25 million , must be less than or equal to 3.5 times trailing twelve months EBITDA, adjusted for certain non-cash expenses and which may be further adjusted, at our discretion, to include up to$80 million of cash restructuring charges throughDecember 31, 2021 ; and 2.) a minimum consolidated interest coverage ratio of EBITDA to interest of 3.5 times (as the aforementioned terms are defined in the Credit Agreement). Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries. As ofJune 30, 2020 , we were in compliance with all covenants of the Credit Agreement and we had$500.0 million of borrowings outstanding and$200.0 million of additional availability. There were no borrowings outstanding as ofJune 30, 2019 . OnJune 9, 2020 the Company announced a 10 percent reduction in its salaried workforce to occur in the first half of fiscal 2021 as part of its simplification/modernization initiative. The Company also announced that effectiveJuly 1, 2020 , the compensation of salaried employees would be temporarily reduced by 10 to 20 percent, based on the job level, due to the market headwinds from COVID-19. The compensation adjustment replaced the furloughs and similar actions that were in place for our salaried workforce during the fourth quarter of fiscal 2020. The Company continues to assess the expected conditions in its primary end markets, including the effects of COVID-19 on the Company's business, financial condition, operating results and cash flows. Because the extent and duration of the COVID-19 pandemic are uncertain, the effects of the pandemic could materially affect our availability to borrow under the Credit Agreement and our compliance with the maximum leverage ratio covenant of the Credit Agreement. We are currently evaluating whether or not to access the capital markets or seek an amendment to the Credit Agreement, including modification of the covenant restrictions, among other terms. If over the course of the next year, market conditions do not improve or further deteriorate, the Company may need to take one or a combination of the following additional actions to ensure the Company has adequate access to liquidity and remains in compliance with the maximum leverage ratio covenant of the Credit Agreement, all of which are within the Company's control: implement additional short-term cost-control actions, temporarily reduce or suspend the dividend, and undertake new restructuring programs. We have concluded that we will remain in compliance with the covenants of the Credit Agreement and, as a result, will have adequate access to liquidity to satisfy our obligations within one year after the date the financial statements are issued. For the year endedJune 30, 2020 , average daily borrowings outstanding under the Credit Agreement were approximately$128.5 million . The weighted average interest rate on borrowings under the Credit Agreement was 2.17 percent as ofJune 30, 2020 . Additionally, we obtain local financing through credit lines with commercial banks in the various countries in which we operate. AtJune 30, 2020 , these borrowings were immaterial. 23
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Based upon our debt structure atJune 30, 2020 , 45.7 percent of our debt was exposed to variable rates of interest due to the$500.0 million of borrowings outstanding under the Credit Agreement. Based upon our debt structure atJune 30, 2019 , less than 1 percent of our debt was exposed to variable rates of interest, respectively. We consider the majority of the unremitted earnings of our non-U.S. subsidiaries to be permanently reinvested. With regard to these unremitted earnings, we have not, nor do we anticipate the need to, repatriate funds to theU.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. The remaining amount of approximately$1.4 billion is substantially all of the unremitted earnings of our non-U.S. subsidiaries which continues to be indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested earnings is not practicable due to our legal entity structure and the complexity ofU.S. and local tax laws. With regard to the small portion of unremitted earnings that are not indefinitely reinvested, we maintain a deferred tax liability for foreign withholding andU.S. state income taxes. The deferred tax liability associated with unremitted earnings of our non-U.S. subsidiaries not permanently reinvested is$5.9 million as ofJune 30, 2020 . AtJune 30, 2020 , we had cash and cash equivalents of$606.7 million . Total Kennametal Shareholders' equity was$1,229.9 million and total debt was$1,094.5 million . Our current senior credit ratings are considered investment grade. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers. The following is a summary of our contractual obligations and other commercial commitments as ofJune 30, 2020 (in thousands): Contractual Obligations Total 2021 2022-2023 2024-2025 Thereafter Long-term debt, including current maturities (1 )$ 701,981 $ 25,500 $ 335,500 $ 27,750 $ 313,231 Borrowings under Credit Agreement (2 ) 502,924 502,924 - - - Notes payable 385 385 - - - Pension benefit payments (3) 51,426 104,914 110,870 (3) Postretirement benefit payments (3) 1,342 2,404 2,033 (3) Operating leases 56,528 14,790 17,372 7,661 16,705 Purchase obligations (4 ) 105,565 66,519 39,042 4 - Unrecognized tax benefits (5 ) 10,299 438 2,441 5,664 1,756 Total$ 663,324 $ 501,673 $ 153,982
(1) Long-term debt includes interest obligations of
debt issuance costs of
assuming interest rates as of
(2) Borrowings under Credit Agreement includes interest obligations of
million. Interest obligations were determined assuming interest rates as of
(3) Annual payments are expected to continue into the foreseeable future at the
amounts noted in the table.
(4) Purchase obligations consist of purchase commitments for materials, supplies
and machinery and equipment as part of the ordinary conduct of business.
Purchase obligations with variable price provisions were determined assuming
market prices as of
(5) Unrecognized tax benefits are positions taken or expected to be taken on an
income tax return that may result in additional payments to tax authorities.
These amounts include interest of
accrued related to such positions as of
we are not able to reasonably estimate the timing of potential future
payments are included in the 'Thereafter' column. If a tax authority agrees
with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary. Other Commercial Commitments Total 2021 2022-2023 2024-2025 Thereafter Standby letters of credit$ 3,989 $ 2,737 $ 1,252 $ - $ - Guarantees 28,663 18,041 1,365 5 9,252 Total$ 32,652 $ 20,778 $ 2,617 $ 5$ 9,252
The standby letters of credit relate to insurance and other activities. The guarantees are non-debt guarantees with financial institutions, which are required primarily for security deposits, product performance guarantees and advances.
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Cash Flow Provided by Operating Activities During 2020, cash flow provided by operating activities was$223.7 million , compared to$300.5 million in 2019. During 2020, cash flow provided by operating activities consisted of net loss and non-cash items amounting to$150.3 million and changes in certain assets and liabilities netting to an inflow of$73.5 million . Contributing to the changes in certain assets and liabilities were a decrease in accounts receivable of$128.7 million and a decrease in inventories of$28.2 million , partially offset by a decrease in accounts payable and accrued liabilities of$46.3 million , a decrease in accrued pension and postretirement benefits of$20.0 million and a decrease in accrued income taxes of$8.6 million . The decreases in inventories and accounts receivable were primarily due to the decrease in demand in the March and June quarters. During 2019, cash flow provided by operating activities was$300.5 million . Cash flow provided by operating activities consisted of net income and non-cash items amounting to$388.0 million and changes in certain assets and liabilities netting to an outflow of$87.5 million . Contributing to the changes in certain assets and liabilities were an increase in inventories of$53.4 million , a decrease in accounts payable and accrued liabilities of$49.4 million and a decrease in accrued pension and postretirement benefits of$8.2 million , partially offset by a decrease in accounts receivable of$17.3 million . The changes in inventories and accounts receivable were primarily due to increased demand in the September and December quarters, increased strategic inventory on our high volume/high profitability products for improved customer service, raw material price increases, a temporary increase in inventory related to product moves between facilities as part of simplification/modernization and lower than anticipated sales in the March and June quarters. Cash Flow Used for Investing Activities Cash flow used for investing activities was$218.3 million for 2020, an increase of$16.9 million , compared to$201.5 million in 2019. During 2020, cash flow used for investing activities included capital expenditures, net of$241.5 million , which consisted primarily of expenditures related to our simplification/modernization initiatives and equipment upgrades, partially offset by proceeds from divestiture of$24.0 million from the sale of certain assets of the non-core specialty alloys and metals business located inNew Castle, Pennsylvania . Cash flow used for investing activities was$201.5 million for 2019. During 2019, cash flow used for investing activities included capital expenditures, net of$201.1 million , which consisted primarily of equipment upgrades and modernization initiatives. Cash Flow Provided by (Used for) Financing Activities Cash flow provided by financing activities was$425.5 million for 2020, compared to cash flow used for financing activities of$471.4 million in 2019. During 2020, cash flow provided by financing activities included an inflow of$500.4 million primarily due to borrowings outstanding under the Credit Agreement, partially offset by$66.3 million of cash dividends paid to Shareholders and$5.5 million of the effect of employee benefit and stock plans and dividend reinvestment. Cash flow used for financing activities was$471.4 million for 2019. During 2019, cash flow provided by financing activities included outflows of$400.9 million of net term debt repayments primarily due to the early extinguishment of our 2.650 percent Senior Unsecured Notes,$65.7 million of cash dividends paid to Shareholders and$4.7 million of the effect of employee benefit and stock plans and dividend reinvestment. FINANCIAL CONDITION AtJune 30, 2020 , total assets were$3,037.6 million , an increase of$381.3 million from$2,656.3 million atJune 30, 2019 . Total liabilities also increased$487.2 million from$1,281.6 million atJune 30, 2019 to$1,768.8 million atJune 30, 2020 . Working capital was$542.7 million atJune 30, 2020 , a decrease of$186.4 million from$729.1 million atJune 30, 2019 . The decrease in working capital was primarily driven by an increase in revolving and other lines of credit and notes payable to banks of$500.2 million due primarily to borrowings on our Credit Agreement, a decrease in accounts receivable of$141.9 million and a decrease in inventory of$49.1 million due primarily to decreased demand in the March and June quarters. Partially offsetting these items were an increase in cash and cash equivalents of$424.7 million primarily due to the$500.0 million draw under the Credit Agreement that remains in cash as ofJune 30, 2020 , a decrease in accounts payable of$48.3 million and a decrease in accrued payroll of$27.8 million . Currency exchange rate effects decreased working capital by a total of approximately$12 million , the effects of which are included in the aforementioned changes. Property, plant and equipment, net increased$103.4 million from$934.9 million atJune 30, 2019 to$1,038.3 million atJune 30, 2020 , primarily due to capital additions of$235.4 million , partially offset by depreciation expense of$106.0 million , a negative currency exchange effect of approximately$12 million , divestiture effect of$6.7 million and disposals of$9.0 million . AtJune 30, 2020 , other assets were$558.5 million , an increase of$28.0 million from$530.5 million atJune 30, 2019 . The primary drivers for the increase were the addition of operating lease right-of-use assets of$48.0 million due to the adoption of the new lease accounting standard without retrospective application to prior periods and an increase in deferred income taxes of$26.3 million . These increases were partially offset by a decrease in goodwill of$29.4 million , primarily due to goodwill impairment charges recorded in the Widia segment of$26.8 million and unfavorable currency exchange rate effects of approximately$2 million , and a decrease in intangible assets of$28.4 million , which was primarily due to amortization expense$13.8 million , divestiture effect of$12.5 million and impairment charges recorded in the Widia segment of$3.4 million . 25
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Kennametal Shareholders' equity was$1,229.9 million atJune 30, 2020 , a decrease of$105.3 million from$1,335.2 million in the prior year. The decrease was primarily due to cash dividends paid to Shareholders of$66.3 million and unfavorable currency exchange effects of$33.4 million , pension and other postretirement benefit effects in other comprehensive loss of$10.4 million and net loss attributable toKennametal of$5.7 million , partially offset by capital stock issued under employee benefit and stock plans of$10.4 million . EFFECTS OF INFLATION Despite modest inflation in recent years, rising costs, including the cost of certain raw materials, continue to affect our operations throughout the world. We strive to minimize the effects of inflation through cost containment, productivity improvements and price increases. DISCUSSION OF CRITICAL ACCOUNTING POLICIES In preparing our financial statements in conformity with accounting principles generally accepted in theU.S. , we make judgments and estimates about the amounts reflected in our financial statements. As part of our financial reporting process, our management collaborates to determine the necessary information on which to base our judgments and develops estimates used to prepare the financial statements. We use historical experience and available information to make these judgments and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in our financial statements. Our significant accounting policies are described in Note 2 of our financial statements, which are included in Item 8 of this Annual Report. We believe that the following discussion addresses our critical accounting policies. Revenue RecognitionThe Company's contracts with customers are comprised of purchase orders, and for larger customers, may also include long-term agreements. We account for a contract when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. These contracts with customers typically relate to the manufacturing of products, which represent single performance obligations that are satisfied when control of the product passes to the customer. The Company considers the timing of right to payment, transfer of risk and rewards, transfer of title, transfer of physical possession and customer acceptance when determining when control transfers to the customer. As a result, revenue is generally recognized at a point in time - either upon shipment or delivery - based on the specific shipping terms in the contract. The shipping terms vary across all businesses and depend on the product, customary local commercial terms and the type of transportation. Shipping and handling activities are accounted for as activities to fulfill a promise to transfer a product to a customer and as such, costs incurred are recorded when the related revenue is recognized. Payment for products is due within a limited time period after shipment or delivery, typically within 30 to 90 calendar days of the respective invoice dates. The Company does not generally offer extended payment terms. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Amounts billed and due from our customers are classified as accounts receivable, less allowance for doubtful accounts on the consolidated balance 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. We have recorded an estimated returned goods allowance to provide for any potential returns. We warrant that products sold are free from defects in material and workmanship under normal use and service when correctly installed, used and maintained. This warranty terminates 30 days after delivery of the product to the customer and does not apply to products that have been subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be returned toKennametal only after inspection and approval byKennametal and upon receipt by the customer of shipping instructions fromKennametal . We have included an estimated allowance for warranty returns in our returned goods allowance discussed above. The Company records a contract asset when it has a right to payment from a customer that is conditioned on events that have occurred other than the passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material remaining performance obligations, contract assets or liabilities as ofJune 30, 2020 and 2019. The Company pays sales commissions related to certain contracts, which qualify as incremental costs of obtaining a contract. However, the Company applies the practical expedient that allows an entity to recognize incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would have been recognized is one year or less. These costs are recorded within operating expense in our consolidated statement of income. 26
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Stock-Based Compensation We recognize stock-based compensation expense for all stock options, restricted stock awards and restricted stock units over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service (substantive vesting period), net of expected forfeitures. We utilize the Black-Scholes valuation method to establish the fair value of all stock option awards. Time vesting stock units are valued at the market value of the stock on the grant date. Performance vesting stock units with a market condition are valued using aMonte Carlo model. Accounting for Contingencies We accrue for contingencies when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment in both assessing whether or not a liability or loss has been incurred and estimating the amount of probable loss. The significant contingencies affecting our financial statements include environmental, health and safety matters and litigation. Long-Lived Assets We evaluate the recoverability of property, plant and equipment, operating lease right-of-use assets and intangible assets that are amortized whenever events or changes in circumstances indicate the carrying amount of such assets may not be fully recoverable. Changes in circumstances include technological advances, changes in our business model, capital structure, economic conditions or operating performance. Our evaluation is based upon, among other things, our assumptions about the estimated future undiscounted cash flows these assets are expected to generate. When the sum of the undiscounted cash flows is less than the carrying value, we will recognize an impairment loss to the extent that carrying value exceeds fair value. We apply our best judgment when performing these evaluations to determine if a triggering event has occurred, the undiscounted cash flows used to assess recoverability and the fair value of the asset.Goodwill and Indefinite-Lived Intangible Assets We evaluate the recoverability of goodwill of each of our reporting units by comparing the fair value of each reporting unit with its carrying value. The fair values of our reporting units are determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. We perform our annual impairment tests during the June quarter in connection with our annual planning process unless there are impairment indicators based on the results of an ongoing cumulative qualitative assessment that warrant a test prior to that quarter. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit. The discounted cash flow method was used to measure the fair value of our equity under the income approach. A terminal value utilizing a constant growth rate of cash flows was used to calculate a terminal value after the explicit projection period. The estimates and assumptions used in our calculations include revenue and gross margin growth rates, expected capital expenditures to determine projected cash flows, expected tax rates and an estimated discount rate to determine present value of expected cash flows. These estimates are based on historical experiences, our projections of future operating activity and our weighted average cost of capital (WACC). In order to determine the discount rate, the Company uses a market perspective WACC approach. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an effect on future calculations of estimated fair value. As ofJune 30, 2020 , there is no goodwill allocated to the Infrastructure or Widia reporting units. Interim impairment analyses were performed during the December and March quarters of fiscal 2020 related to the Widia reporting unit. This was largely due to the deteriorating market conditions, primarily in general engineering and transportation applications inIndia andChina , in addition to overall global weakness in the manufacturing sector which was later amplified by the COVID-19 pandemic. As a result of these interim tests, we recorded non-cash pre-tax impairment charges during fiscal 2020 of$30.2 million in the Widia segment, of which$26.8 million was for goodwill and$3.4 million was for an indefinite-lived trademark intangible asset. As ofJune 30, 2020 ,$270.6 million of goodwill was allocated to the Industrial reporting unit. We completed an annual quantitative test of goodwill impairment and determined that the fair value of the reporting unit substantially exceeded the carrying value and, therefore, no impairment was recorded during fiscal 2020. Further, an indefinite-lived trademark intangible asset of$11.2 million in the Widia reporting unit had a fair value that approximated its carrying value as of the date of the last impairment test. To determine fair value, we assumed revenue growth rates that take into effect the uncertainty related to COVID-19 in the near term, the eventual recovery of our end markets, and a residual period growth rate of 3 percent. We assumed a royalty rate of 1 percent, and the future period cash flows were discounted at 19.5 percent per annum. 27
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Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill and indefinite-lived intangible impairment test will prove to be an accurate prediction of the future. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately affect the estimated fair values of the Industrial reporting unit and of the indefinite-lived trademark may include such items as: (i) a decrease in expected future cash flows, specifically, a further decrease in sales volume driven by a prolonged weakness in customer demand or other pressures, including those related to the COVID-19 pandemic, adversely affecting our long-term sales trends; (ii) inability to achieve the anticipated benefits from simplification/modernization and other cost reduction programs and (iii) inability to achieve the sales from our strategic growth initiatives. Pension and Other Postretirement Benefits We sponsor pension and other postretirement benefit plans for certain employees and retirees. Accounting for the cost of these plans requires the estimation of the cost of the benefits to be provided well into the future and attributing that cost over either the expected work life of employees or over average life of participants participating in these plans, depending on plan status and on participant population. This estimation requires our judgment about the discount rate used to determine these obligations, expected return on plan assets, rate of future compensation increases, rate of future health care costs, withdrawal and mortality rates and participant retirement age. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans. In the valuation of our pension and other postretirement benefit liabilities, management utilizes various assumptions. Our discount rates are derived by identifying a theoretical settlement portfolio of high quality corporate bonds sufficient to provide for a plan's projected benefit payments. This rate can fluctuate based on changes in the corporate bond yields. AtJune 30, 2020 , a hypothetical 25 basis point increase in our discount rates would increase our pre-tax income by an immaterial amount, and a hypothetical 25 basis point decrease in our discount rates would decrease our pre-tax income by$0.1 million . The long-term rate of return on plan assets is estimated based on an evaluation of historical returns for each asset category held by the plans, coupled with the current and short-term mix of the investment portfolio. The historical returns are adjusted for expected future market and economic changes. This return will fluctuate based on actual market returns and other economic factors. The rate of future health care cost increases is based on historical claims and enrollment information projected over the next fiscal year and adjusted for administrative charges. This rate is expected to decrease until 2027. AtJune 30, 2020 , a hypothetical 1 percent increase or decrease in our health care cost trend rates would be immaterial to our pre-tax income. Future compensation rates, withdrawal rates and participant retirement age are determined based on historical information. These assumptions are not expected to significantly change. Mortality rates are determined based on a review of published mortality tables. We expect to contribute approximately$8 million and$1 million to our pension and other postretirement benefit plans, respectively, in 2021. Expected pension contributions in 2021 are primarily for international plans. Allowance for Doubtful Accounts We record allowances for estimated losses resulting from the inability of our customers to make required payments. We assess the creditworthiness of our customers based on multiple sources of information and analyze additional factors such as our historical bad debt experience, industry concentrations of credit risk, current economic trends and changes in customer payment terms. This assessment requires significant judgment. If the financial condition of our customers was to deteriorate, additional allowances may be required, resulting in future operating losses that are not included in the allowance for doubtful accounts atJune 30, 2020 . Inventories We use the last-in, first-out method for determining the cost of a significant portion of ourU.S. inventories, and they are stated at the lower of cost or market. The cost of the remainder of our inventories is measured using approximate costs determined on the first-in, first-out basis or using the average cost method, and are stated at the lower of cost or net realizable value. When market conditions indicate an excess of carrying costs over market value, a lower of cost or net realizable value provision or a lower of cost or market provision, as applicable, is recorded. Once inventory is determined to be excess or obsolete, a new cost basis is established that is not subsequently written back up in future periods. Income Taxes Realization of our deferred tax assets is primarily dependent on future taxable income, the timing and amount of which are uncertain. A valuation allowance is recognized if it is "more likely than not" that some or all of a deferred tax asset will not be realized. As ofJune 30, 2020 , the deferred tax assets net of valuation allowances relate primarily to net operating loss carryforwards, pension benefits, accrued employee benefits and inventory reserves. In the event that we were to determine that we would not be able to realize our deferred tax assets in the future, an increase in the valuation allowance would be required. In the event we were to determine that we are able to use our deferred tax assets for which a valuation allowance is recorded, a decrease in the valuation allowance would be required. 28
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Coronavirus Aid, Relief, and Economic Security Act (CARES Act) OnMarch 27, 2020 , the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, allows net operating losses arising in taxable years beginning afterDecember 31, 2017 and beforeJanuary 1, 2021 to be carried back to each of the 5 preceding taxable years to generate a refund of previously paid income taxes; permits net operating loss carryovers and carrybacks to offset 100 percent of taxable income for taxable years beginning beforeJanuary 1, 2021 ; and modifies the limitation on business interest by increasing the allowable business interest deduction from 30 percent of adjusted taxable income to 50 percent of adjusted taxable income for taxable years beginning in 2019 or 2020. We are planning to carry back our taxable loss in theU.S. for fiscal 2020 under the provisions of the CARES Act and have recorded a$6.9 million benefit in our tax provision during fiscal 2020. Swiss tax reform Legislation was effectively enacted during the December quarter of fiscal 2020 when theCanton of Schaffhausen approved the Federal Act on Tax Reform and AHV Financing onOctober 8, 2019 (Swiss tax reform). Significant changes from Swiss tax reform include the abolishment of certain favorable tax regimes and the creation of a ten-year transitional period at both the federal and cantonal levels. The transitional provisions of Swiss tax reform allow companies to utilize a combination of lower tax rates and tax basis adjustments to fair value, which are used for tax depreciation and amortization purposes resulting in deductions over the transitional period. To reflect the federal and cantonal transitional provisions, as they apply to us, we recorded a deferred tax asset of$14.5 million during the December quarter of fiscal 2020. We consider the deferred tax asset from Swiss tax reform to be an estimate based on our current interpretation of the legislation, which is subject to change based on further legislative guidance, review with the Swiss federal and cantonal authorities and modifications to the underlying valuation. NEW ACCOUNTING STANDARDS Adopted InFebruary 2016 , theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (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. We adopted this ASU onJuly 1, 2019 using the modified retrospective transition approach with the optional transition relief that allows for a cumulative-effect adjustment in the period of adoption and without a restatement of prior periods. Therefore, prior period amounts were not adjusted and will continue to be reported under the accounting standards in effect for those periods. We determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward historical lease classification. Adoption of this ASU resulted in the recording of lease liabilities of approximately$49 million with the offset to lease ROU assets of$49 million as ofJuly 1, 2019 . The standard did not materially affect our consolidated statement of income and our consolidated statement of cash flows. Refer to Note 9 for additional disclosure regarding the adoption of this new standard. InAugust 2017 , the FASB issued ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities," which seeks to improve financial reporting and obtain closer alignment with risk management activities, in addition to simplifying the application of hedge accounting guidance and additional disclosures. We adopted this ASU onJuly 1, 2019 . Adoption of this guidance did not have a material effect on our consolidated financial statements. InFebruary 2018 , the FASB issued ASU No. 2018-02, "Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which includes amendments allowing 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. Certain guidance is optional and was effective forKennametal onJuly 1, 2019 . We elected not to reclassify the stranded tax effects as permissible under this standard. Adoption of this guidance did not have a material effect on our consolidated financial statements. InJune 2018 , the FASB issued ASU No. 2018-07, "Improvements to Nonemployee Share-Based Payment Accounting," which expands the scope of accounting for stock-based compensation to nonemployees. We adopted this ASU onJuly 1, 2019 . Adoption of this guidance did not have a material effect on our consolidated financial statements. Issued InDecember 2019 , the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which is intended to simplify various aspects related to accounting for income taxes by eliminating certain exceptions within ASC 740, Income Taxes, and clarifying certain aspects of the current guidance. This standard is effective forKennametal beginningJuly 1, 2021 , with early adoption permitted. The Company is in the process of assessing the effect the adoption of this guidance may have on our consolidated financial statements. 29
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RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BYU.S. GAAP In accordance with theSEC's Regulation G, we are providing descriptions of the non-GAAP financial measures included in this Annual Report and reconciliations to the most closely related GAAP financial measures. We believe that these measures provide useful perspective on underlying business trends and results and a supplemental measure of year-over-year results. The non-GAAP financial measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes and may, therefore, also be useful to investors as they are a view of our business results through the eyes of management. These non-GAAP financial measures are not intended to be considered by the user in place of the related GAAP financial measure, but rather as supplemental information to our business results. These non-GAAP financial measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted. Organic sales decline Organic sales decline is a non-GAAP financial measure of sales decline (which is the most directly comparable GAAP measure) excluding the effects of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. We report organic sales decline at the consolidated and segment levels. Constant currency end market sales decline Constant currency end market sales decline is a non-GAAP financial measure of sales decline (which is the most directly comparable GAAP measure) by end market excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales decline, constant currency end market sales decline does not exclude the effect of business days. We believe this measure provides investors with a supplemental understanding of underlying end market trends by providing end market sales decline on a consistent basis. We report constant currency end market sales growth decline at the consolidated and segment levels. Widia sales are reported only in the general engineering end market. Therefore, we do not provide constant currency end market sales decline for the Widia segment and, thus, do not include a reconciliation for that metric. Constant currency regional sales growth (decline) Constant currency regional sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by region excluding the effects 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 effect of business days. We believe this measure provides investors with a supplemental understanding of underlying regional trends by providing regional sales growth (decline) on a consistent basis. We report constant currency regional sales growth (decline) at the consolidated and segment levels. Reconciliations of organic sales decline to sales decline are as follows: Year ended June 30, 2020 Industrial Widia Infrastructure
Total
Organic sales decline (19)% (16)% (18)%
(18)%
Foreign currency exchange effect(6) (1) (1) (1)
(2) Divestiture effect(7) - - (3) (1) Sales decline (20)% (17)% (22)% (21)% Reconciliations of constant currency end market sales growth (decline) to end market sales growth (decline), are as follows: Industrial General Year ended June 30, 2020 engineering Transportation Aerospace Energy Constant currency end market sales decline (18)% (23)% (16)% (12)% Foreign currency exchange effect(6) (1) (2) (1) (1) End market sales decline(8) (19)% (25)% (17)% (13)% 30
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Table of Contents Infrastructure General Year ended June 30, 2020 Energy Earthworks engineering
Constant currency end market sales decline (33)% (7)%
(15)%
Foreign currency exchange effect(6) (1) (2) - Divestiture effect(7) (1) - (6) End market sales decline(8) (35)% (9)% (21)% Total General Year ended June 30, 2020 engineering Transportation Aerospace Energy Earthworks Constant currency end market sales decline (17)% (23)% (16)% (28)% (7)% Foreign currency exchange effect(6) - (2) (1) - (2) Divestiture effect(7) (2) - - (1) - End market sales decline(8) (19)% (25)% (17)% (29)% (9)%
Reconciliations of constant currency regional sales decline to reported regional sales decline, are as follows:
Year Ended June 30, 2020 Americas EMEA Asia Pacific
Industrial
Constant currency regional sales decline (18)% (21)% (15)% Foreign currency exchange effect(6) (1) (2) (1) Regional sales decline(9)
(19)% (23)% (16)%
Widia
Constant currency regional sales decline (12)% (12)% (26)% Foreign currency exchange effect(6) (1) (3) (2) Regional sales decline(9)
(13)% (15)% (28)%
Infrastructure
Constant currency regional sales decline (24)% (5)% (11)% Foreign currency exchange effect(6)
1 (4) (3) Divestiture effect(7) (4) - - Regional sales decline(9) (27)% (9)% (14)%
Total
Constant currency regional sales decline (21)% (17)% (15)% Foreign currency exchange effect(6)
- (3) (2) Divestiture effect(7) (2) - - Regional sales decline(9) (23)% (20)% (17)% (6) Foreign currency exchange effect is calculated by dividing the difference between current period sales and current period sales at prior period foreign exchange rates by prior period sales. (7) Divestiture effect is calculated by dividing prior period sales attributable to divested businesses by prior period sales. (8) Aggregate sales for all end markets sum to the sales amount presented onKennametal's financial statements. (9) Aggregate sales for all regions sum to the sales amount presented onKennametal's financial statements. 31
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