KENNAMETAL : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

The following discussion should be read in connection with the consolidated
financial statements of Kennametal 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 ended June 30. Additionally, when
used in this Annual Report, unless the context requires otherwise, the terms
"we," "our" and "us" refer to Kennametal Inc. and its subsidiaries.
OVERVIEW Kennametal Inc. was founded based on a tungsten carbide technology
breakthrough in 1938. The Company was incorporated in Pennsylvania in 1943 as a
manufacturer of tungsten carbide metal cutting tooling, and was listed on the
New 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 in the 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 ended June 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 in China 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 of Kennametal 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.

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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 in August 2020 announced the
closure of our manufacturing facility in Johnson 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 from U.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, effective July 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 the United States Securities and Exchange Commission on August 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)



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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 through June 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 in Germany associated with our
simplification/modernization initiative, which are expected to reduce structural
costs. We agreed with local employee representatives to downsize our Essen,
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 through June 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 closed Madison, 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 ended June 30, 2020, we completed the sale
of certain assets of the non-core specialty alloys and metals business within
the Infrastructure segment located in New 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 ended June 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 at June 30, 2020, due to
$500.0 million of borrowings outstanding under the Credit Agreement, and less
than 1 percent at June 30, 2019. There were no borrowings outstanding under the
Credit Agreement as of June 30, 2019.

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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 to Kennametal
was $5.7 million, or $0.07 loss per share, in 2020, compared to net income
attributable to Kennametal 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 $ 1,960 $ 311,235

INDUSTRIAL

(in thousands)       2020            2019
Sales            $ 1,015,058     $ 1,274,499
Operating income      35,671         220,696
Operating margin         3.5 %          17.3 %



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(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 the Americas, partially offset by continued strength in renewable
energy in China. 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. The Americas 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 the Americas energy end market
sales as oil and gas drilling slowed. The sales decrease in Asia 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 in China.
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)%



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                                     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 in Asia Pacific was driven primarily by
the overall weak market conditions, most notably in India and China. 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 the Americas was primarily due to a slower U.S. manufacturing
environment, partially offset by strength in Latin 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. The U.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 the Americas and Asia 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 in Asia Pacific and EMEA, partially
offset by growth in the Americas construction. On a regional basis, the sales
decrease in the Americas 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 in Asia 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.

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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 $1.4 million from 2019.

LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the primary source
of funding for our capital expenditures. During the year ended June 30, 2020,
cash flow provided by operating activities was $223.7 million.
Our five-year, multi-currency, revolving credit facility, as amended and
restated in June 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 in U.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
in June 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 through December 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 of June 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 of June 30,
2019.
On June 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
effective July 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 ended June 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 of
June 30, 2020.
Additionally, we obtain local financing through credit lines with commercial
banks in the various countries in which we operate. At June 30, 2020, these
borrowings were immaterial.

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Based upon our debt structure at June 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 at June
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 the U.S. to satisfy
domestic liquidity needs arising in the ordinary course of business, including
liquidity needs associated with our domestic debt service requirements. The
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 of U.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 and U.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 of June 30, 2020.
At June 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 of June 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 $102.6 million and excludes

debt issuance costs of $4.1 million. Interest obligations were determined

assuming interest rates as of June 30, 2020 remain constant.

(2) Borrowings under Credit Agreement includes interest obligations of $2.9

million. Interest obligations were determined assuming interest rates as of

June 30, 2020 remain constant.

(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 June 30, 2020 remain constant.

(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 $1.2 million and penalty of $0.5 million

accrued related to such positions as of June 30, 2020. Positions for which

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 in New
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 At June 30, 2020, total assets were $3,037.6 million, an
increase of $381.3 million from $2,656.3 million at June 30, 2019. Total
liabilities also increased $487.2 million from $1,281.6 million at June 30, 2019
to $1,768.8 million at June 30, 2020.
Working capital was $542.7 million at June 30, 2020, a decrease of $186.4
million from $729.1 million at June 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 of June 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
at June 30, 2019 to $1,038.3 million at June 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.
At June 30, 2020, other assets were $558.5 million, an increase of $28.0 million
from $530.5 million at June 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.

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Kennametal Shareholders' equity was $1,229.9 million at June 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 to Kennametal 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 the U.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 Recognition 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
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 to
Kennametal only after inspection and approval by Kennametal and upon receipt by
the customer of shipping instructions from Kennametal. 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 of June 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.

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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 a Monte 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 of June 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 in India and China, 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 of June 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.

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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. At June 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. At
June 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 at June 30, 2020.
Inventories We use the last-in, first-out method for determining the cost of a
significant portion of our U.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 of June 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.

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Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
On March 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 after December 31, 2017 and before January 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
before January 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 the
U.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 the Canton of Schaffhausen approved the Federal Act on Tax Reform and AHV
Financing on October 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
In February 2016, the Financial 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 on July 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 of July 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.
In August 2017, the FASB issued ASU No. 2017-12, "Targeted Improvements to
Accounting for Hedging Activities," which seeks to improve financial reporting
and obtain closer alignment with risk management activities, in addition to
simplifying the application of hedge accounting guidance and additional
disclosures. We adopted this ASU on July 1, 2019. Adoption of this guidance did
not have a material effect on our consolidated financial statements.
In February 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 for
Kennametal on July 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.
In June 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 on July 1, 2019.
Adoption of this guidance did not have a material effect on our consolidated
financial statements.
Issued
In December 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 for Kennametal beginning July 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.

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RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BY U.S. GAAP In accordance with
the SEC'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)%



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


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