KENNAMETAL INC. OVERVIEW
Kennametal 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 offerings span 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 our 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. Our 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). We provide the definitions of these non-GAAP financial measures at the end of the MD&A section as well as details on the use and derivation of these financial measures. Our sales of$484.7 million for the quarter endedMarch 31, 2021 remained consistent with the prior quarter reflecting a 2 percent favorable currency exchange effect, offset by a 1 percent organic sales decline and an unfavorable impact of 1 percent from less business days. However, sales improved sequentially this quarter by approximately 10 percent, which outpaced the typical seasonal trend. Operating income increased$1.6 million from$37.9 million in the prior year quarter to$39.5 million in the current quarter. The year-over-year change was due primarily to approximately$18 million of incremental simplification/modernization benefits, no goodwill and other intangible asset impairment charges in the current year quarter and lower restructuring and related charges of$3.5 million , largely offset by an increase in variable compensation, unfavorable geographic and product mix and unfavorable labor and fixed cost absorption due to lower volumes. Operating margin was 8.2 percent compared to 7.8 percent in the prior year quarter. The Infrastructure and Metal Cutting segments had operating margins of 10.4 percent and 7.4 percent, respectively, for the quarter endedMarch 31, 2021 . OnMarch 11, 2020 , theWorld Health Organization declared the Coronavirus Disease 2019 (COVID-19) a pandemic 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 created 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. In fiscal 2020 and to date, we have not experienced a material disruption in our supply chain. The extent to which the COVID-19 pandemic may continue to 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. In connection with the Company's simplification/modernization initiative, we remain on track for$180 million of expected simplification/modernization savings by the end of fiscal 2021. FY21 Restructuring Actions are expected to deliver annualized savings of approximately$75 million and the expected pre-tax charges are$90 million to$95 million . We recorded$2.1 million of pre-tax restructuring and related charges in the quarter, and total incremental benefits related to simplification/modernization initiatives were approximately$18 million in the current quarter, which includes incremental restructuring savings of approximately$13 million . The Company achieved annualized total savings inception to date from our simplification/modernization initiatives of$164 million . Current quarter earnings per diluted share (EPS) of$0.26 was unfavorably affected by the effects of the early debt extinguishment of$0.08 per share, differences in annual projected tax rates of$0.08 per share and restructuring and related charges of$0.02 per share, partially offset by a discrete tax benefit of$0.12 per share. The EPS of$0.03 in the prior year quarter included differences in annual projected tax rates of$0.20 per share, goodwill and other intangible asset impairment charges of$0.17 per share and restructuring and related charges of$0.06 per share. 23
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
We generated net cash flows from operating activities of$139.2 million during the nine months endedMarch 31, 2021 compared to$146.1 million during the prior year period. Capital expenditures were$94.1 million and$206.1 million during the nine months endedMarch 31, 2021 and 2020, respectively, with the decrease primarily related to lower capital spending on our simplification/modernization initiative.
RESULTS OF CONTINUING OPERATIONS
SALES
Sales for the three months endedMarch 31, 2021 were$484.7 million , an increase of$1.6 million , from$483.1 million in the prior year quarter. The increase in sales was driven by a 2 percent favorable currency exchange impact, offset by an unfavorable business day effect of 1 percent and a 1 percent organic sales decline. Sales for the nine months endedMarch 31, 2021 were$1,325.5 million , a decrease of$180.8 million , or 12 percent, from$1,506.3 million in the prior year period. The decrease in sales was driven by a 12 percent organic sales decline and a 1 percent decline from divestiture, partially offset by a 1 percent favorable currency exchange impact. Three Months Ended March 31, 2021 Nine Months Ended March 31, 2021 As (in percentages) As Reported Constant Currency Reported Constant Currency End market sales growth (decline): Transportation 15% 11% (4)% (5)% General engineering 4 1 (9) (9) Earthworks - (3) (8) (8) Energy (12) (14) (20) (21) Aerospace (32) (34) (40) (41) Regional sales growth (decline): Asia Pacific 22% 17% 4% 2% Europe, the Middle East and Africa (EMEA) 4 (3) (8) (12) Americas (10) (10) (21) (19) GROSS PROFIT Gross profit for the three months endedMarch 31, 2021 was$150.2 million , a decrease of$6.8 million from$157.0 million in the prior year quarter. The decrease was primarily due to an organic sales decline and unfavorable labor and fixed cost absorption due to lower production volumes, partially offset by incremental simplification/modernization benefits and favorable foreign currency exchange effect of approximately$5 million . Gross profit margin for the three months endedMarch 31, 2021 was 31.0 percent, as compared to 32.5 percent in the prior year quarter. Gross profit for the nine months endedMarch 31, 2021 was$376.8 million , a decrease of$51.2 million from$428.0 million in the prior year period. The decrease was primarily due to an organic sales decline and unfavorable labor and fixed cost absorption due to lower volumes, partially offset by lower raw material costs and incremental simplification/modernization benefits. Gross profit margin for the nine months endedMarch 31, 2021 and 2020 was 28.4 percent. OPERATING EXPENSE Operating expense for the three months endedMarch 31, 2021 was$108.1 million , an increase of$9.6 million from$98.5 million in the prior year quarter. The increase was primarily due to an increase in variable compensation, partially offset by incremental simplification/modernization benefits. Operating expense for the nine months endedMarch 31, 2021 was$299.2 million , a decrease of$21.1 million from$320.3 million in the prior year period. The decrease was primarily due to incremental simplification/modernization benefits and cost control measures. 24
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
We invested further in technology and innovation during the current quarter to continue delivering high quality products to our customers. Research and development expenses included in operating expense totaled$10.6 million and$9.8 million for the three months endedMarch 31, 2021 and 2020, respectively, and$28.7 million and$30.3 million for the nine months endedMarch 31, 2021 and 2020, respectively. RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES FY20 Restructuring Actions In the June quarter of fiscal 2019, we implemented, and in fiscal 2020 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$54.8 million were recorded for this program throughMarch 31, 2021 , consisting of:$46.5 million in Metal Cutting and$8.3 million in Infrastructure. Inception to date, we have achieved annualized savings of approximately$35 million related to the FY20 Restructuring Actions. 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. Subsequently, we also announced the acceleration of our structural cost reduction plans including the closing of theJohnson City, Tennessee facility. Estimated annualized benefits of the FY21 Restructuring Actions are$75 million and the expected pre-tax charges are$90 million to$95 million . Total restructuring and related charges since inception of$76.7 million were recorded for this program throughMarch 31, 2021 , consisting of:$71.0 million in Metal Cutting and$5.8 million in Infrastructure. The majority of the remaining charges related to the FY21 Restructuring Actions are expected to be in the Metal Cutting segment. Inception to date, we have achieved annualized savings of approximately$58 million related to the FY21 Restructuring Actions. Restructuring and Related Charges Recorded We recorded restructuring and related charges of$2.1 million for the three months endedMarch 31, 2021 , which consisted of charges of$2.5 million in Metal Cutting offset by a benefit from the reversal of charges of$0.4 million in Infrastructure, and$5.8 million for the three months endedMarch 31, 2020 . Of these amounts, restructuring benefits from the reversal of charges of$0.9 million were recorded for the three months endedMarch 31, 2021 , of which$0.1 million is included in cost of goods sold, and charges of$1.8 million were recorded for the three months endedMarch 31, 2020 , of which$0.2 million was included in cost of goods sold. Restructuring-related charges of$3.0 million and$4.0 million were recorded in cost of goods sold for the three months endedMarch 31, 2021 and 2020, respectively. We recorded restructuring and related charges of$34.9 million for the nine months endedMarch 31, 2021 , of which$32.0 million was in Metal Cutting and$2.9 million was in Infrastructure, and$65.1 million for the nine months endedMarch 31, 2020 . Of these amounts, restructuring charges totaled$26.5 million for the nine months endedMarch 31, 2021 , of which$0.3 million is included in cost of goods sold, and$54.5 million for the nine months endedMarch 31, 2020 , of which$0.6 million was included in cost of goods sold. Restructuring-related charges of$8.5 million and$10.6 million were recorded in cost of goods sold for the nine months endedMarch 31, 2021 and 2020, respectively.Goodwill and Other Intangible Asset Impairment Charges We recorded non-cash pre-tax goodwill and other intangible asset impairment charges of$15.6 million and$30.2 million during the three and nine months endedMarch 31, 2020 , respectively. See Note 17 to our condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q. LOSS ON DIVESTITURE During the three months endedDecember 31, 2019 , 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 three months endedDecember 31, 2019 was$6.5 million . Transaction proceeds were primarily used for capital expenditures related to our simplification/modernization efforts. 25
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST EXPENSE Interest expense for the three months endedMarch 31, 2021 increased to$20.9 million compared to$7.9 million for the three months endedMarch 31, 2020 . Interest expense for the nine months endedMarch 31, 2021 increased to$39.8 million compared to$23.8 million for the nine months endedMarch 31, 2020 . Both increases were primarily due to the early extinguishment of the 2022 Notes. See "Note 10. Long-Term Debt" for further details. OTHER INCOME, NET Other income for the three months endedMarch 31, 2021 increased to$2.7 million from$2.4 million during the three months endedMarch 31, 2020 . Other income for the nine months endedMarch 31, 2021 increased to$10.6 million from$9.3 million during the nine months endedMarch 31, 2020 . PROVISION FOR INCOME TAXES The effective income tax rates for the three months endedMarch 31, 2021 and 2020 were 8.0 percent (benefit on income) and 93.1 percent (provision on income), respectively. The year-over-year change is primarily due to the effects of changes in projected pretax income in both periods and two discrete tax benefits that were recorded in the current year quarter. The first discrete tax benefit of$12.4 million is a provision to return adjustment related to our fiscal 2020 U.S. income tax returns, the majority of which is attributable to a tax election made in our federal income tax return pursuant to global intangible low-taxed income (GILTI) regulations which were issued during the current fiscal year. The second discrete tax benefit of$3.5 million is the recognition of a stranded deferred tax balance in accumulated other comprehensive loss arising from valuation allowance adjustments and enacted tax rate changes associated with the forward starting interest rate cash flow hedges that were terminated during the current year quarter (see Note 10). The prior year rate included the effects from the impairment of goodwill and other intangible asset impairment charges in the former Widia segment. The effective income tax rates for the nine months endedMarch 31, 2021 and 2020 were 84.6 percent (benefit on income) and 143.5 percent (benefit on a loss), respectively. The year-over-year change is primarily due to (i) the effects of relatively low projected pretax income in the current year quarter coupled with a relatively low projected pretax loss in the prior year quarter, and (ii) two discrete tax benefits that were recorded in the current year quarter. The first discrete tax benefit of$12.4 million is a provision to return adjustment related to our fiscal 2020 U.S. income tax returns, the majority of which is attributable to a tax election made in our federal income tax return pursuant to global intangible low-taxed income (GILTI) regulations which were issued during the current fiscal year. The second discrete tax benefit of$3.5 million is the recognition of a stranded deferred tax balance in accumulated other comprehensive loss arising from valuation allowance adjustments and enacted tax rate changes associated with the forward starting interest rate cash flow hedges that were terminated during the current year quarter (see Note 10). The prior year rate included a discrete$14.5 million benefit for the one-time effect of Swiss tax reform and the effects from the impairment of goodwill and other intangible asset impairment charges in the former Widia segment. BUSINESS SEGMENT REVIEW EffectiveJuly 1, 2020 , as a result of a change in commercial strategy, organizational structure, and the way performance is assessed and resources are allocated, the Industrial and Widia businesses were combined to form one Metal Cutting business. The Infrastructure business remained unchanged. Therefore, we currently operate in two reportable segments consisting of Metal Cutting and Infrastructure. Our reportable operating segments have been determined in accordance with our internal management structure, which is organized based on operating activities, the manner in which we organize segments for allocating resources, making operating decisions and assessing performance and the availability of separate financial results. We do not allocate certain corporate expenses related to executive retirement plans, our Board of Directors, strategic initiatives, and certain other costs and report them in Corporate. Our reportable operating segments do not represent the aggregation of two or more operating segments. 26
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Our sales and operating income (loss) by segment are as follows:
Three Months Ended March 31, Nine Months Ended March 31,
(in thousands) 2021 2020 2021 2020
Sales:
Metal Cutting $ 308,144 $ 303,459 $ 838,937 $ 951,123
Infrastructure 176,514 179,625 486,533 555,129
Total sales $ 484,658 $ 483,084 $ 1,325,470 $ 1,506,252
Operating income (loss):
Metal Cutting $ 22,674 $ 16,619 $ 12,741 $ 749
Infrastructure 18,282 21,941 31,815 7,679
Corporate (1,434) (667) (3,178) (1,797)
Total operating income 39,522 37,893 41,378 6,631
Interest expense 20,928 7,897 39,823 23,834
Other income, net (2,692) (2,438) (10,568) (9,330)
Income (loss) before income taxes $ 21,286 $ 32,434 $ 12,123 $ (7,873)
METAL CUTTING
Three Months Ended March 31, Nine Months Ended March 31,
(in thousands, except operating
margin) 2021 2020 2021 2020
Sales $ 308,144 $ 303,459 $ 838,937 $ 951,123
Operating income 22,674 16,619 12,741 749
Operating margin 7.4 % 5.5 % 1.5 % 0.1 %
Three Months
Ended March 31, Nine Months Ended
(in percentages) 2021 March 31, 2021
Organic sales growth (decline) -% (12)%
Foreign currency exchange effect(1) 3 1
Business days effect(2) (1) (1)
Sales growth (decline) 2% (12)%
Three Months Ended March 31, 2021 Nine Months Ended March 31, 2021
(in percentages) As Reported Constant Currency As Reported Constant Currency
End market sales growth (decline):
Transportation 15% 11% (4)% (5)%
General engineering 4 1 (9) (10)
Energy (12) (16) (15) (17)
Aerospace (32) (34) (40) (41)
Regional sales growth (decline):
Asia Pacific 15% 10% -% (2)%
EMEA 7 - (8) (12)
Americas (10) (9) (21) (19)
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three months endedMarch 31, 2021 , Metal Cutting sales increased 2 percent from the prior year quarter. Transportation end market sales increased in all regions. Sales in our general engineering end market increased slightly, with growth inAsia Pacific partially offset by a decline in theAmericas , while EMEA was flat. The general engineering end market continued to be impacted by lower manufacturing activity related to the COVID-19 pandemic. Energy sales decreased primarily due to a decline in oil and gas drilling in theAmericas , while Aerospace end market sales declined in all regions due to a significant reduction in airplane manufacturing. On a regional basis, the sales increase inAsia Pacific was driven by increases in the general engineering and transportation end markets, partially offset by a decline in the aerospace end market. The sales increase in EMEA was primarily due to growth in the transportation end market, partially offset by a decline in the aerospace end market. The sales decrease in theAmericas was driven by declines in the aerospace, general engineering, and energy end markets, partially offset by an increase in sales in the transportation end market. For the three months endedMarch 31, 2021 , Metal Cutting operating income was$22.7 million compared to$16.6 million in the prior year quarter. The year-over-year increase was driven primarily by approximately$11 million of incremental simplification/modernization benefits, no goodwill and other intangible asset impairment charges in the current year quarter and lower restructuring and related charges of$1.6 million , partially offset by an increase in variable compensation, unfavorable product mix and unfavorable labor and fixed cost absorption due to lower volumes. For the nine months endedMarch 31, 2021 , Metal Cutting sales decreased 12 percent from the prior year period. Aerospace end market sales declined in all regions due to a significant reduction in airplane manufacturing. Energy sales decreased primarily due to a decline in oil and gas drilling in theAmericas , partially offset by strength in wind power generation inChina . Sales in our general engineering end market declined in all regions except forAsia Pacific , which had moderate growth. The general engineering end market continued to be impacted by lower manufacturing activity related to the COVID-19 pandemic. Transportation end market sales declined in all regions due to continued weakness in auto build rates caused by a slowdown in auto sales. On a regional basis, the sales decreases in theAmericas and EMEA were driven by declines in all four end markets. The sales decrease inAsia Pacific , excluding the impact from foreign currency exchange, was driven by declines in the transportation and aerospace end markets, partially offset by increases in sales in the energy and general engineering end markets. For the nine months endedMarch 31, 2021 , Metal Cutting operating income was$12.7 million compared to$0.7 million in the prior year period. The year-over-year increase was driven primarily by incremental simplification/modernization benefits, no goodwill and other intangible asset impairment charges in the current period, lower restructuring and related charges of$27.6 million and lower raw material costs, partially offset by organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes, an increase in variable compensation and unfavorable product mix. INFRASTRUCTURE Three Months Ended March 31, Nine Months Ended March 31, (in thousands) 2021 2020 2021 2020 Sales$ 176,514 $ 179,625 $ 486,533 $ 555,129 Operating income 18,282 21,941 31,815 7,679 Operating margin 10.4 % 12.2 % 6.5 % 1.4 % Three Months Ended March 31, Nine Months Ended (in percentages) 2021 March 31, 2021 Organic sales decline (3)% (11)% Foreign currency exchange effect(1) 2 1 Business days effect(2) (1) - Divestiture effect(3) - (2) Sales decline (2)% (12)% 28
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Three Months Ended March 31, 2021 Nine Months Ended March 31, 2021
(in percentages) As Reported Constant Currency As Reported Constant Currency
End market sales (decline) growth:
Energy (12)% (14)% (22)% (23)%
Earthworks - (3) (8) (8)
General engineering 5 2 (9) (6)
Regional sales (decline) growth:
Americas (11)% (11)% (21)% (19)%
EMEA (7) (13) (9) -
Asia Pacific 37 30 13 9
For the three months ended March 31, 2021 , Infrastructure sales decreased by 2
percent from the prior year quarter. The U.S. oil and gas market drove
year-over-year decline in the energy market with U.S. land rig counts down
approximately 51 percent compared to the prior year quarter. Earthworks end
market sales were down year-over-year, excluding the impact from foreign
currency exchange, due to softness in mining and construction in the Americas ,
partially offset by mining in Asia Pacific . The sales increase in general
engineering was driven by economic recovery in Asia Pacific , most notably in
China . On a regional basis, the sales decrease in the Americas was driven by a
decline in the energy end market, and to a lesser extent, declines in the
earthworks and general engineering end markets, while the sales decrease in EMEA
was primarily driven by a decline in general engineering. The increase in Asia
Pacific was driven by sales growth in all three end markets.
For the three months ended March 31, 2021 , Infrastructure operating income was
$18.3 million compared to $21.9 million in the prior year quarter. The
year-over-year change was driven primarily by an increase in variable
compensation, organic sales decline and unfavorable labor and fixed cost
absorption due to lower volumes, partially offset by approximately $4 million of
incremental simplification/modernization benefits and lower restructuring and
related charges of $1.9 million .
For the nine months ended March 31, 2021 , Infrastructure sales decreased by 12
percent from the prior year period. The U.S. oil and gas market drove
year-over-year decline in the energy market with U.S. land rig counts down
approximately 63 percent compared to the prior year period. Earthworks end
market sales were down year-over-year due to softness in mining in the Americas ,
and to a lesser extent, construction. The sales decline in general engineering
was driven by economic decline and COVID-19 impact in the Americas and EMEA,
partially offset by sales growth in Asia Pacific . On a regional basis, the sales
decrease in the Americas was driven by a decline in the energy end market, and
to a lesser extent, declines in the earthworks and general engineering end
markets, while in EMEA the sales decrease was primarily driven by a decline in
the general engineering end market. The increase in sales in Asia Pacific was
driven primarily by growth in both the general engineering and energy end
markets.
For the nine months ended March 31, 2021 , Infrastructure operating income was
$31.8 million compared to $7.7 million in the prior year period. The
year-over-year increase was driven primarily by lower raw material costs,
incremental simplification/modernization benefits and lower restructuring and
related charges of $1.9 million , partially offset by organic sales decline,
unfavorable labor and fixed cost absorption due to lower volumes and an increase
in variable compensation.
CORPORATE
Three Months Ended March 31, Nine Months Ended March 31,
(in thousands) 2021 2020 2021 2020
Corporate expense $ (1,434) $ (667) $ (3,178) $ (1,797)
For the three and nine months ended March 31, 2021 , Corporate expense increased
by $0.8 million and $1.4 million from the prior quarter and prior year period,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is the primary source of funding for our capital
expenditures. For the nine months ended March 31, 2021 , cash flow provided by
operating activities was $139.2 million , primarily due to the net inflow from
cash earnings.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the three months endedSeptember 30, 2020 , we entered into the First Amendment (the Amendment) to the Fifth Amended and Restated Credit Agreement dated as ofJune 21, 2018 , (as amended by the Amendment, the Credit Agreement). The Credit Agreement is a five-year, multi-currency, revolving credit facility and 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 and sixty percent of the unrestricted cash held outside ofthe United States , must be less than or equal to 3.5 times trailing twelve months EBITDA (temporarily increased by the Amendment to 4.25 times trailing twelve months EBITDA during the period fromSeptember 30, 2020 through and includingDecember 31, 2021 ), adjusted for certain non-cash expenses and which may be further adjusted, at our discretion, to include up to$120 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 ofMarch 31, 2021 , we were in compliance with all covenants of the Credit Agreement and we had$10.0 million of borrowings outstanding and$670.0 million of additional availability. There were$500.0 million of borrowings outstanding as ofJune 30, 2020 . For the nine months endedMarch 31, 2021 , average daily borrowings outstanding under the Credit Agreement were approximately$168.3 million . We had$10.0 million and$500.0 million of borrowings outstanding under the Credit Agreement as ofMarch 31, 2021 andJune 30, 2020 , 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. 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. 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 authority has served notice 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 by as much as €36 million, or$42 million , including penalties and interest of €21 million, or$25 million . A trial date has not yet been set by the Italian court. AtMarch 31, 2021 , cash and cash equivalents were$114.3 million , Total Kennametal Shareholders' equity was$1,276.4 million and total debt was$610.4 million . Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We believe that we have sufficient resources available to meet cash requirements for the next 12 months. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers. There have been no material changes in our contractual obligations and commitments sinceJune 30, 2020 apart from the refinancing of$300 million Senior Unsecured Notes as more fully described in Note 10 to our condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q. 30
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Cash Flow Provided by Operating Activities During the nine months endedMarch 31, 2021 , cash flow provided by operating activities was$139.2 million , compared to$146.1 million for the prior year period. Cash flow provided by operating activities for the current year period consisted of net income and non-cash items amounting to an inflow of$137.5 million and changes in certain assets and liabilities netting to an inflow of$1.7 million . Contributing to the changes in certain assets and liabilities were a decrease in accrued income taxes of$20.9 million , an increase in accounts receivable of$56.5 million and a decrease in accrued pension and postretirement benefits of$21.1 million . Offsetting these cash outflows was a decrease in inventories of$58.1 million , an increase in accounts payable and accrued liabilities of$28.1 million and an increase in other of$14.0 million . During the nine months endedMarch 31, 2020 , cash flow provided by operating activities consisted of net income and non-cash items amounting to an inflow of$126.7 million and changes in certain assets and liabilities netting to an inflow of$19.4 million . Contributing to the changes in certain assets and liabilities were a decrease in accounts receivable of$60.6 million and a decrease in inventories of$29.9 million . Partially offsetting these cash inflows were a decrease in accounts payable and accrued liabilities of$34.4 million , a decrease in accrued income taxes of$22.0 million and a decrease in accrued pension and postretirement benefits of$18.2 million . Cash Flow Used for Investing Activities Cash flow used for investing activities was$92.7 million for the nine months endedMarch 31, 2021 , compared to$180.2 million for the prior year period. During the current year period, cash flow used for investing activities primarily included capital expenditures, net of$92.9 million , which consisted primarily of expenses related to our simplification/modernization initiatives and equipment upgrades. For the nine months endedMarch 31, 2020 , cash flow used for investing activities included capital expenditures, net of$203.3 million , which consisted primarily of expenses 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 Financing Activities Cash flow used for financing activities was$545.5 million for the nine months endedMarch 31, 2021 compared to$54.0 million in the prior year period. During the current year period, cash flow used for financing activities included$490.0 million of a net decrease in the revolving and other lines of credit, the debt refinancing (see Note 10. "Long-Term Debt" to our condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion) and$50.0 million of cash dividends paid to Kennametal Shareholders. For the nine months endedMarch 31, 2020 , cash flow used for financing activities included$49.7 million of cash dividends paid toKennametal Shareholders and$5.7 million of the effect of employee benefit and stock plans and dividend reinvestment, partially offset by$4.5 million of borrowings outstanding under the Credit Agreement. FINANCIAL CONDITION Working capital was$541.4 million atMarch 31, 2021 , a decrease of$1.4 million from$542.7 million atJune 30, 2020 . The decrease in working capital was driven by the net decrease in cash and cash equivalents and revolving and other lines of credit and notes payable primarily related to paying down outstanding borrowings on the Credit Agreement during the current fiscal year, a decrease in inventory of$46.3 million , an increase in other current liabilities of$15.2 million primarily due to an increase in the amount of accrued variable compensation, an increase in accrued expenses of$10.7 million due to an increase in accrued payroll and an increase in current operating lease liabilities of$1.5 million . Offsetting these decreases were an increase in accounts receivable of$65.2 million and a decrease in accrued income taxes of$18.1 million . Currency exchange rate effects increased working capital by a total of approximately$24 million , the impact of which is included in the aforementioned changes. Property, plant and equipment, net increased$15.7 million from$1,038.3 million atJune 30, 2020 to$1,054.0 million atMarch 31, 2021 , primarily due to capital additions of approximately$86.6 million and favorable currency exchange impact of approximately$20 million , partially offset by depreciation expense of$83.7 million and disposals of$6.9 million . AtMarch 31, 2021 , other assets were$594.1 million , an increase of$35.6 million from$558.5 million atJune 30, 2020 . The primary drivers for the increase were an increase in other assets of$24.8 million primarily due to an increase in pension plan assets and an increase in deferred income taxes of$9.2 million . 31
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Kennametal Shareholders' equity was$1,276.4 million atMarch 31, 2021 , an increase of$46.5 million from$1,229.9 million atJune 30, 2020 . The increase was primarily due to favorable currency exchange effects of$47.1 million , net income attributable toKennametal of$19.3 million and capital stock issued under employee benefit and stock plans of$19.1 million , partially offset by cash dividends paid to Kennametal Shareholders of$50.0 million . DISCUSSION OF CRITICAL ACCOUNTING POLICIES There have been no changes to our critical accounting policies sinceJune 30, 2020 . RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BYU.S. GAAP In accordance withSEC rules, below are the definitions of the non-GAAP financial measures we use in this report and the reconciliation of these measures to the most closely related GAAP financial measures. We believe that these measures provide useful perspective on underlying business trends and results and provide a supplemental measure of year-over-year results. The non-GAAP financial measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes. We believe these measures may be useful to investors as they provide supplemental information about business performance and provide investors a view of our business results through the eyes of management. These non-GAAP financial measures are not intended to be considered by the user in place of the related GAAP financial measure, but rather as supplemental information to our business results. These non-GAAP financial measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted. Organic sales growth (decline) Organic sales growth (decline) is a non-GAAP financial measure of sales growth (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 (decline) on a consistent basis. Also, we report organic sales growth (decline) at the consolidated and segment levels. Constant currency end market sales growth (decline) Constant currency end market sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by end market excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth (decline), constant currency end market sales growth (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 growth (decline) on a consistent basis. Also, we report constant currency end market sales growth (decline) at the consolidated and segment levels. 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 (decline), 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. Also, we report constant currency regional sales growth (decline) at the consolidated and segment levels. Reconciliations of organic sales growth (decline) to sales growth (decline) are as follows: Three Months Ended March 31, 2021 Metal Cutting Infrastructure Total Organic sales growth (decline) -% (3)% (1)% Foreign currency exchange effect(1) 3 2 2 Business days effect(2) (1) (1) (1) Sales growth (decline) 2% (2)% -% 32
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Nine Months Ended March 31, 2021 Metal Cutting Infrastructure Total Organic sales decline (12)% (11)% (12)% Foreign currency exchange effect(1) 1 1 1 Business days effect(2) (1) - - Divestiture effect(3) - (2) (1) Sales decline (12)% (12)% (12)% Reconciliations of constant currency end market sales growth (decline) to end market sales growth (decline)(4) are as follows: Metal Cutting Three Months Ended March 31, 2021 General engineering Transportation Aerospace Energy Constant currency end market sales growth (decline) 1% 11% (34)% (16)% Foreign currency exchange effect(1) 3 4 2 4 End market sales growth (decline)(4) 4% 15% (32)% (12)%
Infrastructure
Three Months Ended March 31, 2021 Energy Earthworks General engineering Constant currency end market sales (decline) growth (14)% (3)% 2% Foreign currency exchange effect(1) 2 3 3 End market sales (decline) growth(4) (12)% -% 5%
Total
Three Months Ended March 31, 2021 General engineering Transportation Aerospace Energy Earthworks Constant currency end market sales growth (decline) 1% 11% (34)% (14)% (3)% Foreign currency exchange effect(1) 3 4 2 2 3 End market sales growth (decline)(4) 4% 15% (32)% (12)% -% Metal Cutting Nine Months Ended March 31, 2021 General engineering Transportation Aerospace Energy Constant currency end market sales decline (10)% (5)% (41)% (17)% Foreign currency exchange effect(1) 1 1 1 2 End market sales decline(4) (9)% (4)% (40)% (15)% Infrastructure Nine Months Ended March 31, 2021 Energy Earthworks General engineering Constant currency end market sales decline (23)% (8)% (6)% Foreign currency exchange effect(1) 2 - 2 Divestiture effect(3) (1) - (5) End market sales decline(4) (22)% (8)% (9)% Total Nine Months Ended March 31, 2021 General engineering Transportation Aerospace Energy Earthworks Constant currency end market sales decline (9)% (5)% (41)% (21)% (8)% Foreign currency exchange effect(1) 1 1 1 1 - Divestiture effect(3) (1) - - - - End market sales decline(4) (9)% (4)% (40)% (20)% (8)%
Reconciliations of constant currency regional sales (decline) growth to reported regional sales (decline) growth(5) are as follows:
Three Months Ended Nine Months Ended
March 31, 2021 March 31, 2021
Americas EMEA Asia Pacific Americas EMEA Asia Pacific
Metal Cutting
Constant currency regional sales
(decline) growth (9)% -% 10% (19)% (12)% (2)%
Foreign currency exchange effect(1) (1) 7 5 (2) 4
2
Regional sales (decline) growth(5) (10)% 7% 15% (21)% (8)%
-%
Infrastructure
Constant currency regional sales (decline) growth (11)% (13)% 30% (19)% -%
9%
Foreign currency exchange effect(1) - 6 7 1 (9) 4 Divestiture effect(3) - - - (3) - - Regional sales (decline) growth(5) (11)% (7)% 37% (21)% (9)%
13%
Total
Constant currency regional sales (decline) growth (10)% (3)% 17% (19)% (12)%
2%
Foreign currency exchange effect(1) - 7 5 (1) 4 2 Divestiture effect(3) - - - (1) - - Regional sales (decline) growth(5) (10)% 4% 22% (21)% (8)%
4%
(1) 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. (2) Business days effect is calculated by dividing the year-over-year change in weighted average working days (based on mix of sales by country) by prior period weighted average working days. (3) Divestiture effect is calculated by dividing prior period sales attributable to divested businesses by prior period sales. (4) Aggregate sales for all end markets sum to the sales amount presented onKennametal's financial statements. (5) Aggregate sales for all regions sum to the sales amount presented onKennametal's financial statements. 33
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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