UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended: December 31, 2021
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2017OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number 1-5318
KENNAMETAL INC.
(Exact name of registrant as specified in its charter)
|
| | | | | | | | | | |
| Pennsylvania | | 25-0900168 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
600 Grant Street
Suite 5100
Pittsburgh, Pennsylvania
525 William Penn Place | | 15219-2706 |
| Suite 3300 | | |
| Pittsburgh, | Pennsylvania | | 15219 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (412) 248-8000
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Capital Stock, par value $1.25 per share | KMT | New York Stock Exchange |
| Preferred Stock Purchase Rights | | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | | | | | | | | |
Large accelerated filer [X] | ☒ | Accelerated filer [ ] | ☐ |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | ☐ | Smaller reporting company [ ] | ☐ |
| | Emerging growth company [ ] | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]Yes ☐ No ☒
Indicate the number
As of January 31, 2022 83,090,710 shares outstanding of each of the issuer’s classes of capital stock, as of the latest practicable date.
Registrant’s Capital Stock, par value $1.25 per share, were outstanding. |
| | |
Title of Each Class | | Outstanding at January 31, 2018 |
Capital Stock, par value $1.25 per share | | 81,573,415 |
KENNAMETAL INC.
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 20172021
TABLE OF CONTENTS
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FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934.1934, as amended. Forward-looking statements are statements that do not relate strictly to historical or current facts. You can identify forward-looking statements by the fact they use words such as “should,” “anticipate,” “estimate,” “approximate,” “expect,” “may,” “will,” “project,” “intend,” “plan,” “believe” and other words of similar meaning and expression in connection with any discussion of future operating or financial performance or events. We have also included forward lookingforward-looking statements in this Quarterly Report on Form 10-Q concerning, among other things, our strategy, goals, plans and projections regarding our financial position, liquidity and capital resources, results of operations, market position and product development. These statements are based on current estimates that involve inherent risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: downturnsthe duration and spread of the COVID-19 pandemic, the emergence of more contagious or virulent strains of the virus, its impacts on our business operations, financial results and financial position and on the industries in which we operate and the global economy generally, including as a result of travel restrictions, business cycleand workforce disruptions associated with the pandemic, the success of preventative measures to contain or mitigate the spread of the virus and emerging variants, and the effectiveness, distribution and acceptance of COVID-19 vaccines; other economic downturns;recession; our ability to achieve all anticipated benefits of our restructuring, simplification and modernization initiatives; risks related to our foreign operations and international markets, such as fluctuations in currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability; changes in the regulatory environment in which we operate, including environmental, health and safety regulations; potential for future goodwill and other intangible asset impairment charges; our ability to protect and defend our intellectual property; continuity and security of information technology infrastructure; competition; our ability to retain our management and employees; demands on management resources; availability and cost of the raw materials we use to manufacture our products; product liability claims; integrating acquisitions and achieving the expected savings and synergies; global or regional catastrophic events; demand for and market acceptance of our products; business divestitures; energy costs; commodity prices; labor relations; and implementation of environmental remediation matters. We provide additional information about many of the specific risks we face in the “Risk Factors” section of our Annual Report on Form 10-K.10-K and in other periodic reports we file from time to time with the Securities and Exchange Commission. We can give no assurance that any goal or plan set forth in our forward-looking statements canwill be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. Except as required by law, we do not intend to release publicly any revisions to forward-looking statements as a result of future events or developments.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, |
| (in thousands, except per share amounts) | 2021 | | 2020 | 2021 | | 2020 |
| Sales | $ | 486,673 | | | $ | 440,507 | | $ | 970,182 | | | $ | 840,812 | |
| Cost of goods sold | 333,718 | | | 318,978 | | 656,477 | | | 614,210 | |
| Gross profit | 152,955 | | | 121,529 | | 313,705 | | | 226,602 | |
| Operating expense | 106,654 | | | 97,758 | | 209,348 | | | 191,097 | |
| Restructuring (benefits) charges and asset impairment charges (Note 6) | (3,460) | | | 1,390 | | (3,270) | | | 26,967 | |
| Gain on divestiture (Note 3) | (1,001) | | | — | | (1,001) | | | — | |
| Amortization of intangibles | 3,257 | | | 3,347 | | 6,517 | | | 6,681 | |
| Operating income | 47,505 | | | 19,034 | | 102,111 | | | 1,857 | |
| Interest expense | 6,460 | | | 8,317 | | 12,781 | | | 18,896 | |
| Other income, net | (3,142) | | | (3,857) | | (6,601) | | | (7,875) | |
| Income (loss) before income taxes | 44,187 | | | 14,574 | | 95,931 | | | (9,164) | |
| Provision for (benefit from) income taxes | 11,462 | | | (5,676) | | 25,454 | | | (8,554) | |
| Net income (loss) | 32,725 | | | 20,250 | | 70,477 | | | (610) | |
| Less: Net income attributable to noncontrolling interests | 1,304 | | | 862 | | 2,858 | | | 1,677 | |
| Net income (loss) attributable to Kennametal | $ | 31,421 | | | $ | 19,388 | | $ | 67,619 | | | $ | (2,287) | |
| PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS | | | |
| Basic earnings (loss) per share | $ | 0.38 | | | $ | 0.23 | | $ | 0.81 | | | $ | (0.03) | |
| Diluted earnings (loss) per share | $ | 0.37 | | | $ | 0.23 | | $ | 0.80 | | | $ | (0.03) | |
| Basic weighted average shares outstanding | 83,637 | | | 83,582 | | 83,759 | | | 83,451 | |
| Diluted weighted average shares outstanding | 84,374 | | | 84,197 | | 84,502 | | | 83,451 | |
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands, except per share amounts) | 2017 | | 2016 | | 2017 | | 2016 |
| Sales | $ | 571,345 |
| | $ | 487,573 |
| | $ | 1,113,799 |
| | $ | 964,713 |
|
| Cost of goods sold | 378,800 |
| | 339,950 |
| | 736,261 |
| | 673,560 |
|
| Gross profit | 192,545 |
| | 147,623 |
| | 377,538 |
| | 291,153 |
|
| Operating expense | 120,649 |
| | 111,004 |
| | 239,980 |
| | 230,869 |
|
| Restructuring and asset impairment charges (Note 7) | 45 |
| | 8,456 |
| | 5,570 |
| | 37,061 |
|
| Amortization of intangibles | 3,677 |
| | 4,150 |
| | 7,338 |
| | 8,421 |
|
| Operating income | 68,174 |
| | 24,013 |
| | 124,650 |
| | 14,802 |
|
| Interest expense | 7,231 |
| | 7,151 |
| | 14,379 |
| | 14,144 |
|
| Other expense, net | 1,313 |
| | 726 |
| | 1,401 |
| | 844 |
|
| Income (loss) before income taxes | 59,630 |
| | 16,136 |
| | 108,870 |
| | (186 | ) |
| Provision for income taxes | 17,472 |
| | 8,221 |
| | 27,074 |
| | 13,100 |
|
| Net income (loss) | 42,158 |
| | 7,915 |
| | 81,796 |
| | (13,286 | ) |
| Less: Net income attributable to noncontrolling interests | 557 |
| | 653 |
| | 1,011 |
| | 1,108 |
|
| Net income (loss) attributable to Kennametal | $ | 41,601 |
| | $ | 7,262 |
| | $ | 80,785 |
| | $ | (14,394 | ) |
| PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS | | | | |
| Basic earnings (loss) per share | $ | 0.51 |
| | $ | 0.09 |
| | $ | 0.99 |
| | $ | (0.18 | ) |
| Diluted earnings (loss) per share | $ | 0.50 |
| | $ | 0.09 |
| | $ | 0.98 |
| | $ | (0.18 | ) |
| Dividends per share | $ | 0.20 |
| | $ | 0.20 |
| | $ | 0.40 |
| | $ | 0.40 |
|
| Basic weighted average shares outstanding | 81,477 |
| | 80,206 |
| | 81,274 |
| | 80,131 |
|
| Diluted weighted average shares outstanding | 82,778 |
| | 81,026 |
| | 82,446 |
| | 80,131 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | Six Months Ended December 31, |
| (in thousands) | 2021 | | 2020 | 2021 | | 2020 |
| Net income (loss) | $ | 32,725 | | | 20,250 | | $ | 70,477 | | | $ | (610) | |
| Other comprehensive income (loss), net of tax | | | | | | |
| Unrealized gain on derivatives designated and qualified as cash flow hedges | — | | | 3,291 | | — | | | 4,501 | |
| Reclassification of unrealized (gain) loss on derivatives designated and qualified as cash flow hedges | (192) | | | 479 | | (385) | | | 940 | |
| Unrecognized net pension and other postretirement benefit gain (loss) | 876 | | | (4,211) | | 2,781 | | | (7,521) | |
| Reclassification of net pension and other postretirement benefit loss | 2,201 | | | 2,614 | | 4,416 | | | 5,179 | |
| Foreign currency translation adjustments | (10,081) | | | 42,601 | | (26,557) | | | 74,547 | |
| | | | | | |
| Total other comprehensive (loss) income, net of tax | (7,196) | | | 44,774 | | (19,745) | | | 77,646 | |
| Total comprehensive income | 25,529 | | | 65,024 | | 50,732 | | | 77,036 | |
| Less: comprehensive income attributable to noncontrolling interests | 855 | | | 2,218 | | 1,954 | | | 4,312 | |
| Comprehensive income attributable to Kennametal Shareholders | $ | 24,674 | | | 62,806 | | $ | 48,778 | | | $ | 72,724 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | | | | | | | | |
| | Three Months Ended December 31, | Six Months Ended December 31, |
| (in thousands) | 2017 | | 2016 | 2017 | | 2016 |
| Net income (loss) | $ | 42,158 |
| | $ | 7,915 |
| $ | 81,796 |
| | $ | (13,286 | ) |
| Other comprehensive income (loss), net of tax | | | | | | |
| Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges | (286 | ) | | 1,606 |
| (905 | ) | | 1,480 |
|
| Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges | 1,007 |
| | 382 |
| 1,403 |
| | 769 |
|
| Unrecognized net pension and other postretirement benefit (loss) gain | (625 | ) | | 3,471 |
| (2,590 | ) | | 4,101 |
|
| Reclassification of net pension and other postretirement benefit loss | 1,569 |
| | 1,796 |
| 3,348 |
| | 3,630 |
|
| Foreign currency translation adjustments | 13,924 |
| | (41,428 | ) | 33,793 |
| | (40,264 | ) |
| Total other comprehensive income (loss), net of tax | 15,589 |
| | (34,173 | ) | 35,049 |
| | (30,284 | ) |
| Total comprehensive income (loss) | 57,747 |
| | (26,258 | ) | 116,845 |
| | (43,570 | ) |
| Less: comprehensive income (loss) attributable to noncontrolling interests | 1,445 |
| | (401 | ) | 2,184 |
| | 469 |
|
| Comprehensive income (loss) attributable to Kennametal Shareholders | $ | 56,302 |
| | $ | (25,857 | ) | $ | 114,661 |
| | $ | (44,039 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | (in thousands, except per share data) | December 31,
2017 | | June 30,
2017 | (in thousands, except per share data) | December 31,
2021 | | June 30, 2021 |
| ASSETS | | | | ASSETS | |
| Current assets: | | | | Current assets: | |
| Cash and cash equivalents | $ | 159,940 |
| | $ | 190,629 |
| Cash and cash equivalents | $ | 101,799 | | | $ | 154,047 | |
| Accounts receivable, less allowance for doubtful accounts of $13,332 and $13,693, respectively | 392,923 |
| | 380,425 |
| |
| Inventories (Note 10) | 507,462 |
| | 487,681 |
| |
| Accounts receivable, less allowance for doubtful accounts of $9,367 and $9,734, respectively | | Accounts receivable, less allowance for doubtful accounts of $9,367 and $9,734, respectively | 272,592 | | | 302,945 | |
| Inventories (Note 9) | | Inventories (Note 9) | 533,016 | | | 476,345 | |
| | Other current assets | 68,057 |
| | 55,166 |
| Other current assets | 76,794 | | | 71,470 | |
| Total current assets | 1,128,382 |
| | 1,113,901 |
| Total current assets | 984,201 | | | 1,004,807 | |
| Property, plant and equipment: | | | | Property, plant and equipment: | |
| Land and buildings | 351,190 |
| | 350,002 |
| Land and buildings | 414,947 | | | 413,865 | |
| Machinery and equipment | 1,660,218 |
| | 1,577,776 |
| Machinery and equipment | 1,937,533 | | | 1,959,176 | |
| Less accumulated depreciation | (1,231,743 | ) | | (1,183,390 | ) | Less accumulated depreciation | (1,329,710) | | | (1,317,906) | |
| Property, plant and equipment, net | 779,665 |
| | 744,388 |
| Property, plant and equipment, net | 1,022,770 | | | 1,055,135 | |
| Other assets: | | | | Other assets: | |
| Assets held for sale (Note 7) | 7,547 |
| | 6,980 |
| |
| | Goodwill (Note 17) | 306,147 |
| | 301,367 |
| Goodwill (Note 17) | 273,319 | | | 277,615 | |
| Other intangible assets, less accumulated amortization of $139,202 and $129,981, respectively (Note 17) | 184,523 |
| | 190,527 |
| |
| Deferred income taxes (Note 3) | 21,667 |
| | 28,349 |
| |
| Other intangible assets, less accumulated amortization of $159,163 and $153,972, respectively (Note 17) | | Other intangible assets, less accumulated amortization of $159,163 and $153,972, respectively (Note 17) | 113,009 | | | 120,041 | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | 45,667 | | | 50,341 | |
| Deferred income taxes | | Deferred income taxes | 57,074 | | | 58,742 | |
| Other | 47,930 |
| | 29,984 |
| Other | 114,832 | | | 99,080 | |
| Total other assets | 567,814 |
| | 557,207 |
| Total other assets | 603,901 | | | 605,819 | |
| Total assets | $ | 2,475,861 |
| | $ | 2,415,496 |
| Total assets | $ | 2,610,872 | | | $ | 2,665,761 | |
| LIABILITIES | | | | LIABILITIES | |
| Current liabilities: | | | | Current liabilities: | |
| Current maturities of long-term debt and capital leases | $ | 48 |
| | $ | 190 |
| |
| Notes payable to banks | 1,312 |
| | 735 |
| |
| | Revolving and other lines of credit and notes payable (Note 11) | | Revolving and other lines of credit and notes payable (Note 11) | $ | 12,228 | | | $ | 8,365 | |
| Current operating lease liabilities | | Current operating lease liabilities | 13,125 | | | 14,220 | |
| Accounts payable | 190,592 |
| | 215,722 |
| Accounts payable | 185,857 | | | 177,659 | |
| Accrued income taxes | 17,370 |
| | 6,202 |
| Accrued income taxes | 30,318 | | | 18,059 | |
| Accrued expenses | 64,631 |
| | 85,682 |
| Accrued expenses | 43,610 | | | 61,489 | |
| | Other current liabilities | 133,668 |
| | 152,947 |
| Other current liabilities | 125,845 | | | 157,602 | |
| Total current liabilities | 407,621 |
| | 461,478 |
| Total current liabilities | 410,983 | | | 437,394 | |
| Long-term debt and capital leases, less current maturities (Note 11) | 695,722 |
| | 694,991 |
| |
| Long-term debt, less current maturities (Note 10) | | Long-term debt, less current maturities (Note 10) | 592,731 | | | 592,108 | |
| Operating lease liabilities | | Operating lease liabilities | 33,161 | | | 36,800 | |
| Deferred income taxes | 15,141 |
| | 14,883 |
| Deferred income taxes | 23,609 | | | 23,710 | |
| Accrued pension and postretirement benefits | 164,701 |
| | 160,860 |
| Accrued pension and postretirement benefits | 163,069 | | | 171,067 | |
| Accrued income taxes | 2,776 |
| | 2,636 |
| Accrued income taxes | 4,085 | | | 4,246 | |
| Other liabilities | 25,952 |
| | 27,995 |
| Other liabilities | 26,661 | | | 32,231 | |
| Total liabilities | 1,311,913 |
| | 1,362,843 |
| Total liabilities | 1,254,299 | | | 1,297,556 | |
| Commitments and contingencies | | | | Commitments and contingencies | 0 | | 0 |
| EQUITY (Note 15) | | | | EQUITY (Note 15) | |
| Kennametal Shareholders’ Equity: | | | | Kennametal Shareholders’ Equity: | |
| Preferred stock, no par value; 5,000 shares authorized; none issued | — |
| | — |
| Preferred stock, no par value; 5,000 shares authorized; none issued | — | | | — | |
Capital stock, $1.25 par value; 120,000 shares authorized; 81,517 and 80,665 shares issued, respectively | 101,897 |
| | 100,832 |
| |
Capital stock, $1.25 par value; 120,000 shares authorized; 83,074 and 83,614 shares issued, respectively | | Capital stock, $1.25 par value; 120,000 shares authorized; 83,074 and 83,614 shares issued, respectively | 103,842 | | | 104,518 | |
| Additional paid-in capital | 500,388 |
| | 474,547 |
| Additional paid-in capital | 534,592 | | | 562,820 | |
| Retained earnings | 813,936 |
| | 765,607 |
| Retained earnings | 1,026,756 | | | 992,597 | |
| Accumulated other comprehensive loss | (289,816 | ) | | (323,692 | ) | Accumulated other comprehensive loss | (349,168) | | | (330,327) | |
| Total Kennametal Shareholders’ Equity | 1,126,405 |
| | 1,017,294 |
| Total Kennametal Shareholders’ Equity | 1,316,022 | | | 1,329,608 | |
| Noncontrolling interests | 37,543 |
| | 35,359 |
| Noncontrolling interests | 40,551 | | | 38,597 | |
| Total equity | 1,163,948 |
| | 1,052,653 |
| Total equity | 1,356,573 | | | 1,368,205 | |
| Total liabilities and equity | $ | 2,475,861 |
| | $ | 2,415,496 |
| Total liabilities and equity | $ | 2,610,872 | | | $ | 2,665,761 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KENNAMETAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) | | | | Six Months Ended December 31, | | Six Months Ended
December 31, |
| (in thousands) | 2017 | | 2016 | (in thousands) | 2021 | | 2020 |
| OPERATING ACTIVITIES | | | | OPERATING ACTIVITIES | |
| Net income (loss) | $ | 81,796 |
| | $ | (13,286 | ) | Net income (loss) | $ | 70,477 | | | $ | (610) | |
| Adjustments for non-cash items: | | | | |
| Adjustments to reconcile to cash from operations: | | Adjustments to reconcile to cash from operations: | |
| Depreciation | 46,061 |
| | 45,994 |
| Depreciation | 58,229 | | | 55,483 | |
| Amortization | 7,338 |
| | 8,421 |
| Amortization | 6,517 | | | 6,681 | |
| Stock-based compensation expense | 11,995 |
| | 13,275 |
| Stock-based compensation expense | 13,374 | | | 12,797 | |
| Restructuring and asset impairment charges (Note 7) | 3,172 |
| | 781 |
| |
| Deferred income tax provision | 7,241 |
| | 1,274 |
| |
| Restructuring (benefits) charges and asset impairment charges (Note 6) | | Restructuring (benefits) charges and asset impairment charges (Note 6) | (3,246) | | | 1,602 | |
| Deferred income taxes | | Deferred income taxes | 108 | | | (455) | |
| Gain on divestiture (Note 3) | | Gain on divestiture (Note 3) | (1,001) | | | — | |
| Other | 3,474 |
| | (2,773 | ) | Other | 22 | | | 4,549 | |
| Changes in certain assets and liabilities: | | | | Changes in certain assets and liabilities: | |
| Accounts receivable | (3,290 | ) | | 20,423 |
| Accounts receivable | 23,017 | | | (22,538) | |
| Inventories | (9,080 | ) | | (1,938 | ) | Inventories | (67,031) | | | 46,711 | |
| Accounts payable and accrued liabilities (Note 3) | (66,620 | ) | | (5,497 | ) | |
| Accounts payable and accrued liabilities | | Accounts payable and accrued liabilities | (36,616) | | | (9,631) | |
| Accrued income taxes | 3,966 |
| | 1,632 |
| Accrued income taxes | 8,562 | | | (24,463) | |
| Accrued pension and postretirement benefits | (13,824 | ) | | (11,298 | ) | Accrued pension and postretirement benefits | (12,884) | | | (13,435) | |
| Other | (5,455 | ) | | (8,309 | ) | Other | (1,724) | | | 10,661 | |
| Net cash flow provided by operating activities | 66,774 |
| | 48,699 |
| Net cash flow provided by operating activities | 57,804 | | | 67,352 | |
| INVESTING ACTIVITIES | | | | INVESTING ACTIVITIES | |
| Purchases of property, plant and equipment | (85,223 | ) | | (70,573 | ) | Purchases of property, plant and equipment | (37,736) | | | (68,616) | |
| Disposals of property, plant and equipment | 846 |
| | 3,509 |
| Disposals of property, plant and equipment | 598 | | | 904 | |
| | Proceeds from divestiture (Note 3) | | Proceeds from divestiture (Note 3) | 1,001 | | | — | |
| Other | 244 |
| | 100 |
| Other | 63 | | | 93 | |
| Net cash flow used for investing activities | (84,133 | ) | | (66,964 | ) | Net cash flow used for investing activities | (36,074) | | | (67,619) | |
| FINANCING ACTIVITIES | | | | FINANCING ACTIVITIES | |
| Net increase in notes payable | 643 |
| | 1,005 |
| |
| Term debt repayments | (141 | ) | | (427 | ) | |
| Net (decrease) increase in notes payable | | Net (decrease) increase in notes payable | (5,129) | | | 2,738 | |
| Net increase (decrease) in revolving and other lines of credit | | Net increase (decrease) in revolving and other lines of credit | 9,000 | | | (475,500) | |
| | Purchase of capital stock | (109 | ) | | (125 | ) | Purchase of capital stock | (35,508) | | | (100) | |
| Dividend reinvestment and the effect of employee benefit and stock plans (Note 3) | 15,020 |
| | 1,341 |
| |
| The effect of employee benefit and stock plans and dividend reinvestment | | The effect of employee benefit and stock plans and dividend reinvestment | (6,774) | | | (2,531) | |
| Cash dividends paid to Shareholders | (32,456 | ) | | (31,970 | ) | Cash dividends paid to Shareholders | (33,460) | | | (33,310) | |
| Other | (271 | ) | | (6,626 | ) | Other | (678) | | | (3,334) | |
| Net cash flow used for financing activities | (17,314 | ) | | (36,802 | ) | Net cash flow used for financing activities | (72,549) | | | (512,037) | |
| Effect of exchange rate changes on cash and cash equivalents | 3,984 |
| | (4,511 | ) | Effect of exchange rate changes on cash and cash equivalents | (1,429) | | | 8,808 | |
| CASH AND CASH EQUIVALENTS | | | | CASH AND CASH EQUIVALENTS | |
| Net decrease in cash and cash equivalents | (30,689 | ) | | (59,578 | ) | Net decrease in cash and cash equivalents | (52,248) | | | (503,496) | |
| Cash and cash equivalents, beginning of period | 190,629 |
| | 161,579 |
| Cash and cash equivalents, beginning of period | 154,047 | | | 606,684 | |
| Cash and cash equivalents, end of period | $ | 159,940 |
| | $ | 102,001 |
| Cash and cash equivalents, end of period | $ | 101,799 | | | $ | 103,188 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.ORGANIZATION
Kennametal Inc. was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling. From this beginning, Kennametal Inc. and its subsidiaries (collectively, Kennametal or the Company) has grown into a global leader in the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and mission-critical wear applications to combat extreme conditions associated with wear fatigue, corrosion and high temperatures. The Company's reputation for material technology, metal cutting application knowledge, as well as expertise and innovation in the development of custom solutions and services, contributes to its leading position in its primary markets.
Our product offering includes a wide selection of standard and customized technologies for metalworking applications, such as turning, milling, hole making, tooling systems and services. End users of the Company's metalworking products include manufacturers engaged in a diverse array of industries including: the manufacturers of transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation.
We also produce specialized wear components and metallurgical powders that are used for custom-engineered and challenging applications. End users of the Company's products include producers and suppliers in equipment-intensive operations such as coal mining, road construction, quarrying, oil and gas exploration, refining, production and supply.
2.BASIS OF PRESENTATION
The condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q, which include our accounts and those of our majority-owned subsidiaries in which we have a controlling interest, should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2017 Annual Report on Form 10-K.10-K for the fiscal year ended June 30, 2021 (the “2021 Annual Report”). The condensed consolidated balance sheet as of June 30, 20172021 was derived from the audited balance sheet included in our 20172021 Annual Report on Form 10-K. TheseReport. The interim statements are unaudited; however, we believe that all adjustments necessary for a fair statement of the results of the interim periods were made and all adjustments are normal recurring adjustments. The results for the six months ended December 31, 2017 and 20162021 are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. For example, a reference to 20182022 is to the fiscal year ending June 30, 2018.2022. When used in this Quarterly Report on Form 10-Q, unless the context requires otherwise, the terms “the Company,” “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
3.NEW ACCOUNTING STANDARDS2.SUPPLEMENTAL CASH FLOW DISCLOSURES
Adopted | | | | | | | | | | | |
| Six Months Ended December 31, |
| (in thousands) | 2021 | | 2020 |
| Cash paid during the period for: | | | |
| Interest | $ | 12,617 | | | $ | 19,335 | |
| Income taxes | 16,784 | | | 16,481 | |
| Supplemental disclosure of non-cash information: | | | |
| Changes in accounts payable related to purchases of property, plant and equipment | (150) | | | (11,800) | |
| Changes in notes payable related to purchases of property, plant and equipment | — | | | 7,254 | |
In March 2016,
3. DIVESTITURE
During the Financial Accounting Standards Board (FASB) issued ASU No. 2016-09, "Improvementsyear 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 Employee Share-Based Payment Accounting," which is intended to simplify equity-based award accountingAdvanced 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 presentation. The guidance impacts income tax accountingthe 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 equity-based awards,our simplification/modernization efforts. During the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. We adopted this guidance July 1, 2017. The adoption of this guidance resulted in three changes: (1) the increase to deferred tax assets of $1.4 million related to cumulative excess tax benefits previously unrecognized was offset by a valuation allowance, due to the valuation allowance position of our U.S. entity at the time of adoption of this standard; (2) excess tax benefits, previously reported in the financing activities section of the condensed consolidated statements of cash flow, is now reported in the operating activities section, adopted on a prospective basis. Therefore, prior period statements of cash flow were not retrospectively adjusted for this provision; and (3) employee taxes paid when Kennametal withholds shares for tax withholding purposes, previously reported in the operating activities section of the condensed consolidated statement of cash flows, is now reported in the financing activities section, adopted on a retrospective basis. Therefore, prior period statements of cash flow were retrospectively adjusted for this provision. Cash flow provided by operating activities and cash flow used for financing activities increased by $2.1 million for the six monthsquarter ended December 31, 2016.
In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement2021, we recorded a gain of Inventory," which requires that inventory other than LIFO be subsequently measured at the lower of cost and net realizable value, as opposed to the previous practice of lower of cost or market. Subsequent measurement is unchanged for inventory measured using LIFO. We adopted this guidance July 1, 2017. Adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Issued
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. It also requires additional disclosures. We will adopt this standard on July 1, 2018. Currently, we are analyzing the standard's impact on our customer arrangements and evaluating the new standard against our historical accounting policies and practices, including the timing of revenue recognition. In particular, we are assessing the identification of performance obligations and the impact of variable consideration$1.0 million on the transaction price determination. Further, we continueNew Castle divestiture due to assess certain marketing programs and expect to identify more performance obligations under ASC 606 as compared with deliverables and separate units of account previously identified, primarilyproceeds held in the Industrial and Widia segments. We are evaluating the timing of revenue to determine if it will occur in the same or different periods. We have a project team that is performing a detailed review of the terms and provisions of our customer contracts. We have not yet determined the complete impact of adoption of this standard on our condensed consolidated financial statements.escrow until November 2021.
| |
4. | SUPPLEMENTAL CASH FLOW DISCLOSURES |
|
| | | | | | | |
| | Six Months Ended December 31, |
| (in thousands) | 2017 | | 2016 |
| Cash paid during the period for: | | | |
| Income taxes | $ | 15,866 |
| | $ | 10,191 |
|
| Interest | 13,714 |
| | 13,480 |
|
| Supplemental disclosure of non-cash information: | | | |
| Changes in accounts payable related to purchases of property, plant and equipment | 11,477 |
| | 15,404 |
|
5.4. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three levels to prioritize the inputs used in valuations, as defined below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Inputs that are unobservable.
As of December 31, 2017, the fair values of the Company’s financial assets and financial liabilities are categorized as follows:
|
| | | | | | | | | | | | | | | |
| (in thousands) | Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
|
| Assets: | | | | | | | |
Derivatives (1) | $ | — |
| | $ | 212 |
| | $ | — |
| | $ | 212 |
|
| Total assets at fair value | $ | — |
| | $ | 212 |
| | $ | — |
| | $ | 212 |
|
| | | | | | | | |
| Liabilities: | | | | | | | |
Derivatives (1) | $ | — |
| | $ | 1,253 |
| | $ | — |
| | $ | 1,253 |
|
| Total liabilities at fair value | $ | — |
| | $ | 1,253 |
| | $ | — |
| | $ | 1,253 |
|
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2021, the fair values of our financial assets and financial liabilities are categorized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
Derivatives (1) | $ | — | | | $ | 25 | | | $ | — | | | $ | 25 | |
| Total assets at fair value | $ | — | | | $ | 25 | | | $ | — | | | $ | 25 | |
| | | | | | | |
| Liabilities: | | | | | | | |
Derivatives (1) | $ | — | | | $ | 61 | | | $ | — | | | $ | 61 | |
| Total liabilities at fair value | $ | — | | | $ | 61 | | | $ | — | | | $ | 61 | |
As of June 30, 2017,2021, the fair values of the Company’sour financial assets and financial liabilities are categorized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
Derivatives (1) | $ | — | | | $ | 36 | | | $ | — | | | $ | 36 | |
| Total assets at fair value | $ | — | | | $ | 36 | | | $ | — | | | $ | 36 | |
| | | | | | | |
| Liabilities: | | | | | | | |
Derivatives (1) | $ | — | | | $ | 87 | | | $ | — | | | $ | 87 | |
| Total liabilities at fair value | $ | — | | | $ | 87 | | | $ | — | | | $ | 87 | |
|
| | | | | | | | | | | | | | | |
| (in thousands) | Level 1 |
| | Level 2 |
| | Level 3 |
| | Total |
|
| Assets: | | | | | | | |
Derivatives (1) | $ | — |
| | $ | 359 |
| | $ | — |
| | $ | 359 |
|
| Total assets at fair value | $ | — |
| | $ | 359 |
| | $ | — |
| | $ | 359 |
|
| | | | | | | | |
| Liabilities: | | | | | | | |
Derivatives (1) | $ | — |
| | $ | 910 |
| | $ | — |
| | $ | 910 |
|
| Total liabilities at fair value | $ | — |
| | $ | 910 |
| | $ | — |
| | $ | 910 |
|
(1) Currency derivatives are valued based on observable market spot and forward rates and are classified within Level 2 of the fair value hierarchy.
There have been no changes in classification and transfers between levels in the fair value hierarchy in the current period.
| |
6. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As part of our financial risk management program, we use certain derivative financial instruments. We do not enter into derivative transactions for speculative purposes and, therefore, we do not hold noany derivative instruments for trading purposes. We account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated and qualifies as a hedge of such items. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow. We measure hedge effectiveness by assessing the changes in the fair value or expected future cash flows of the hedged item. The ineffective portions are recorded in other expense, net.
There were no derivatives designated as hedging instruments as of December 31, 2021 and June 30, 2021. The fair value of derivatives designated and not designated as hedging instruments in the condensed consolidated balance sheetsheets are as follows:
| | (in thousands) | | (in thousands) | December 31,
2021 | | June 30, 2021 |
| | | (in thousands) | December 31,
2017 | | June 30,
2017 | |
| Derivatives designated as hedging instruments | | | | |
| Other current assets - range forward contracts | $ | 25 |
| | $ | 1 |
| |
| Other current liabilities - range forward contracts | (1,224 | ) | | (671 | ) | |
| Other assets - range forward contracts | 3 |
| | — |
| |
| Other liabilities - range forward contracts | (6 | ) | | (101 | ) | |
| Total derivatives designated as hedging instruments | (1,202 | ) | | (771 | ) | |
| | Derivatives not designated as hedging instruments | | | | Derivatives not designated as hedging instruments | |
| Other current assets - currency forward contracts | 184 |
| | 358 |
| Other current assets - currency forward contracts | $ | 25 | | | $ | 36 | |
| Other current liabilities - currency forward contracts | (23 | ) | | (138 | ) | Other current liabilities - currency forward contracts | (61) | | | (87) | |
| Total derivatives not designated as hedging instruments | 161 |
| | 220 |
| Total derivatives not designated as hedging instruments | (36) | | | (51) | |
| Total derivatives | $ | (1,041 | ) | | $ | (551 | ) | Total derivatives | $ | (36) | | | $ | (51) | |
Certain currency forward contracts that hedge significant cross-border intercompany loans are considered as other derivatives and therefore do not qualify for hedge accounting. These contracts are recorded at fair value in the condensed consolidated balance sheet, with the offset to other expense,income, net. Gains(Gains) losses related to derivatives not designated as hedging instruments have been recognized as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Other expense, net - currency forward contracts | $ | (92 | ) | | $ | (59 | ) | | $ | (208 | ) | | $ | (377 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Other income, net - currency forward contracts | $ | (134) | | | $ | (2,127) | | | $ | 6 | | | $ | (1,409) | |
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH FLOW HEDGES
Range forward contracts (a transaction where both a put option is purchased and a call option is sold) are designated as cash flow hedges and hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts are recorded in accumulated other comprehensive loss and are recognized as a component of other expense, net when the underlying sale of products or services is recognized into earnings. The notional amount of the contracts translated into U.S. dollars at December 31, 2017 and June 30, 2017, was $77.9 million and $75.3 million, respectively. The time value component of the fair value of range forward contracts is excluded from the assessment of hedge effectiveness. Assuming the market rates remain constant with the rates at December 31, 2017, we expect to recognize into earnings in the next 12 months $1.6 million of expense on outstanding derivatives.
The following represents gains and losses related to cash flow hedges:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| (Losses) gains recognized in other comprehensive loss, net | $ | (287 | ) | | $ | 1,606 |
| | $ | (906 | ) | | $ | 1,481 |
|
| Losses reclassified from accumulated other comprehensive loss into other expense, net | $ | 870 |
| | $ | 382 |
| | $ | 1,262 |
| | $ | 768 |
|
No portion of the gains or losses recognized in earnings was due to ineffectiveness and no amounts were excluded from our effectiveness testing for the six months ended December 31, 2017 and 2016.
NET INVESTMENT HEDGES
As of December 31, 2017,2021 and June 30, 2021, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of €33.0€5.3 million and €5.2 million, respectively, designated as net investment hedges to hedge the foreign exchange exposure of our net investment in our Euro-based subsidiaries. LossesA gain of $0.5$0.1 million and $1.9a loss of $0.8 million were recorded as a component of foreign currency translation adjustments in other comprehensive income for the three months ended December 31, 2021 and 2020, respectively. A gain of $1.4 million and a loss of $1.4 million were recorded as a component of foreign currency translation adjustments in other comprehensive loss for the six months ended December 31, 2017,2021 and 2020, respectively. We did not have net investment hedges during the three and six months ended December 31, 2016.
As of December 31, 2017,2021, the foreign currency-denominated intercompany loans payable designated as net investment hedges consisted of:
| | | | | | | | | | | |
| Instrument | Notional (EUR in thousands)(2) | Notional (USD in thousands)(2) | Maturity |
| Foreign currency-denominated intercompany loan payable | € | 5,265 | | $ | 5,953 | | June 26, 2022 |
|
| | | | | | | |
| Instrument | Notional (EUR in thousands)(2) | Notional (USD in thousands)(2) | Maturity |
| Foreign currency-denominated intercompany loan payable | € | 26,929 |
| $ | 32,279 |
| June 26, 2022 |
| Foreign currency-denominated intercompany loan payable | 8,667 |
| 10,388 |
| November 20, 2018 |
| Foreign currency-denominated intercompany loan payable | 2,004 |
| 2,402 |
| October 11, 2019 |
| |
7. | RESTRUCTURING AND RELATED CHARGES |
6. RESTRUCTURING AND RELATED CHARGES
FY21 Restructuring Actions
In prior years, we implemented restructuring actions to streamline the Company's cost structure. The purpose of these initiatives was to improve the alignment of our cost structure with the current operating environment through employment reductions, as well as rationalization and consolidation of certain manufacturing facilities. These restructuring actions were substantially completed in the firstSeptember quarter of fiscal 2018 and were mainly cash expenditures.
2020, we announced the initiation of restructuring actions in Germany associated with our simplification/modernization initiative to reduce structural costs. Subsequently, we also announced the acceleration of our other structural cost reduction plans including the closure of the Johnson City, Tennessee facility. Expected pre-tax charges for the FY21 Restructuring Actions are approximately $85 million. Total restructuring and related charges since inception of $156.0$81.8 million have beenwere recorded for these programsthis program through December 31, 2017: $84.62021, consisting of: $74.1 million in Industrial, $50.3Metal Cutting and $7.7 million in Infrastructure, $13.8 million in WidiaInfrastructure. The remaining charges related to the FY21 Restructuring Actions are expected to be within the Metal Cutting segment.
Restructuring and $7.3 million in Corporate.Related Charges Recorded
We recorded restructuring and related benefits from the reversal of charges of $1.5 million and $11.8$1.7 million for the three months ended December 31, 20172021, which consisted of benefits of $1.7 million in Metal Cutting and 2016, respectively.an immaterial amount in Infrastructure. Of these amounts,this amount, restructuring benefits were $3.5 million and restructuring-related charges were less than $0.1$1.8 million (included in cost of goods sold) for the three months ended December 31, 20172021. For the three months ended December 31, 2020, we recorded restructuring and related charges of $4.2 million, which consisted of charges of $3.5 million in Metal Cutting and $0.7 million in Infrastructure. Of this amount, restructuring charges totaled $8.8$1.8 million of which $0.4 million was included in cost of goods sold for the three months ended December 31, 2016, of which expense of $0.3 million was related to inventory and was recorded in cost of good sold.2020. Restructuring-related charges of $1.3 million and $2.1$2.4 million were recorded in cost of goods sold and $0.2 million and $0.9 million in operating expense for the three months ended December 31, 20172020.
We recorded restructuring and 2016, respectively.
related benefits from the reversal of charges of $0.4 million for the six months ended December 31, 2021, which consisted of benefits of $0.4 million in Metal Cutting and an immaterial amount in Infrastructure. Of this amount, restructuring benefits were $3.3 million and restructuring-related charges were $2.8 million (included in cost of goods sold) for the six months ended December 31, 2021. For the six months ended December 31, 2020, we recorded restructuring and related charges of $32.9 million, which consisted of charges of $29.5 million in Metal Cutting and $3.3 million in Infrastructure. Of this amount, restructuring charges were $27.4 million of which $0.4 million was included in cost of goods sold. Restructuring-related charges of $5.5 million were recorded in cost of goods sold for the six months ended December 31, 2020.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We recorded restructuring and related charges of $8.4 million and $43.4 million for the six months ended December 31, 2017 and 2016, respectively. Of these amounts, restructuring charges totaled $5.6 million and $37.3 million, respectively, of which expense of $0.3 million for the six months ended December 31, 2016 was related to inventory and was recorded in cost of goods sold. Restructuring-related charges of $2.5 million and $4.1 million were recorded in cost of goods sold and $0.3 million and $2.0 million in operating expense for the six months ended December 31, 2017 and 2016, respectively.
As of December 31, 2017 and June 30, 2017, property, plant, and equipment of $7.52021, $10.6 million and $7.0 million, respectively, for certain closed manufacturing locations that are part of our restructuring programs met held for sale criteria. We expect to sell these assets within one year from the balance sheet date. These assets are recorded at the lower of carrying amount or fair value less cost to sell. We have also ceased depreciating these assets.
As of December 31, 2017 and June 30, 2017, $15.8 million and $27.3$4.5 million of the restructuring accrual iswas recorded in other current liabilities and $0.7 million and $2.5 million is recorded in other liabilities, respectively, in our condensed consolidated balance sheet. As of June 30, 2021, $19.9 million and $9.9 million of the restructuring accrual was recorded in other current liabilities and other liabilities, respectively. The amount attributable to each segment isamounts are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | June 30, 2021 | | Expense | | Asset Write-Down | | | | Translation | | Cash Expenditures | | December 31, 2021 |
| Severance | $ | 29,723 | | | $ | (3,999) | | | $ | — | | | | | $ | (1,012) | | | $ | (9,656) | | | $ | 15,056 | |
| Facilities | — | | | 729 | | | (729) | | | | | — | | | — | | | — | |
| Other | — | | | — | | | — | | | | | — | | | — | | | — | |
| Total | $ | 29,723 | | | $ | (3,270) | | | $ | (729) | | | | | $ | (1,012) | | | $ | (9,656) | | | $ | 15,056 | |
7. STOCK-BASED COMPENSATION
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | June 30, 2017 | | Expense | | Asset Write-Down | | Translation | | Cash Expenditures | | December 31, 2017 |
| Industrial | | | | | | | | | | | |
| Severance | $ | 17,639 |
| | $ | 1,618 |
| | $ | — |
| | $ | 820 |
| | $ | (11,214 | ) | | $ | 8,863 |
|
| Facilities | — |
| | 2,356 |
| | (2,356 | ) | | — |
| | — |
| | — |
|
| Other | 94 |
| | (29 | ) | | — |
| | 2 |
| | (28 | ) | | 39 |
|
| Total Industrial | $ | 17,733 |
| | $ | 3,945 |
| | $ | (2,356 | ) | | $ | 822 |
| | $ | (11,242 | ) | | $ | 8,902 |
|
| | | | | | | | | | | | |
| Widia | | | | | | | | | | | |
| Severance | $ | 2,434 |
| | $ | 414 |
| | $ | — |
| | $ | 209 |
| | $ | (2,865 | ) | | $ | 192 |
|
| Facilities | — |
| | 747 |
| | (747 | ) | | — |
| | — |
| | — |
|
| Other | — |
| | (7 | ) | | — |
| | 1 |
| | 7 |
| | 1 |
|
| Total Widia | $ | 2,434 |
| | $ | 1,154 |
| | $ | (747 | ) | | $ | 210 |
| | $ | (2,858 | ) | | $ | 193 |
|
| | | | | | | | | | | | |
| Infrastructure | | | | | | | | | | | |
| Severance | $ | 9,573 |
| | $ | 409 |
| | $ | — |
| | $ | 207 |
| | $ | (2,831 | ) | | $ | 7,358 |
|
| Facilities | 21 |
| | 69 |
| | (69 | ) | | — |
| | (21 | ) | | — |
|
| Other | 45 |
| | (7 | ) | | — |
| | — |
| | (21 | ) | | 17 |
|
| Total Infrastructure | $ | 9,639 |
| | $ | 471 |
| | $ | (69 | ) | | $ | 207 |
| | $ | (2,873 | ) | | $ | 7,375 |
|
| Total | $ | 29,806 |
| | $ | 5,570 |
| | $ | (3,172 | ) | | $ | 1,239 |
| | $ | (16,973 | ) | | $ | 16,470 |
|
| |
8. | STOCK-BASED COMPENSATION |
Stock Options
There were no grants made during the six months ended December 31, 2017 and 2016.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes in our stock options for the six months ended December 31, 20172021 were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Weighted Average Remaining Life (years) | | Aggregate Intrinsic value (in thousands) |
| Options outstanding, June 30, 2021 | 315,012 | | | $ | 37.83 | | | | | |
| | | | | | | |
| Exercised | (6,916) | | | 31.69 | | | | | |
| Lapsed or forfeited | (28,000) | | | 41.32 | | | | | |
| Options outstanding, December 31, 2021 | 280,096 | | | $ | 37.63 | | | 2.4 | | $ | 611 | |
| Options vested, December 31, 2021 | 280,096 | | | $ | 37.63 | | | 2.4 | | $ | 611 | |
| Options exercisable, December 31, 2021 | 280,096 | | | $ | 37.63 | | | 2.4 | | $ | 611 | |
|
| | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Life (years) | | Aggregate Intrinsic value (in thousands) |
| Options outstanding, June 30, 2017 | 1,726,791 |
| | $ | 34.08 |
| | | | |
| Granted | — |
| | — |
| | | | |
| Exercised | (521,259 | ) | | 36.63 |
| | | | |
| Lapsed or forfeited | (62,763 | ) | | 39.46 |
| | | | |
| Options outstanding, December 31, 2017 | 1,142,769 |
| | $ | 32.62 |
| | 5.4 | | $ | 18,049 |
|
| Options vested and expected to vest, December 31, 2017 | 1,136,169 |
| | $ | 32.64 |
| | 5.4 | | $ | 17,916 |
|
| Options exercisable, December 31, 2017 | 888,358 |
| | $ | 34.36 |
| | 4.7 | | $ | 12,485 |
|
During the six months ended December 31, 2017 and 2016, compensation expense related to stock options was $0.4 million and $1.0 million, respectively. As of December 31, 2017, the total2021 and June 30, 2021, there was no unrecognized compensation cost related to options outstanding, was $0.5 millionand is expected to be recognized over a weighted average periodall options were fully vested as of 0.8 years.
Fair value of options vested during the six months ended December 31, 20172021 and 2016 was $1.7 million and $3.1 million, respectively.2020.
Tax benefits relating to excess stock-based compensation deductions are presented in the operating activities section of the condensed consolidated statements of cash flow for the six months ended December 31, 2017. Tax benefits resulting from stock-based compensation deductions were less than the amounts reported for financial reporting purposes by $0.2 million for the six months ended December 31, 2017, and no tax benefits were realized for the six months ended December 31, 2016due to the valuation allowance on U.S. deferred tax assets.
The amount of cash received from the exercise of capital stock options during the six months ended December 31, 20172021 and 20162020 was $19.1$0.2 million and $3.1 million, respectively. The related tax benefit was $1.1 million for the six months ended December 31, 2017, and there was no related tax benefit realized for the six months ended December 31, 2016 due to the valuation allowance on U.S. deferred tax assets. The total intrinsic value of options exercised was $0.1 million and $1.6 million during the six months ended December 31, 2017 was$4.8 million2021 and was immaterial for the six months ended December 31, 2016.
Under the provisions of the Kennametal Inc. Stock and Incentive Plan of 2010, as amended and restated on October 22, 2013 and as further amended January 27, 2015, and the Kennametal Inc. 2016 Stock and Incentive Plan, plan participants may deliver stock, owned by the holder for at least six months, in payment of the option price and receive credit for the fair market value of the shares on the date of delivery. The fair market value of shares delivered during the six months ended December 31, 2017 and 2016 was immaterial.
2020, respectively.
Restricted Stock Units – TimePerformance Vesting and PerformanceTime Vesting
Performance vesting restricted stock units are earned pro rata each year if certain performance goals are met over a three-year period and are also subject to a service condition that requires the individual to be employed by the Company at the vesting date after the three-year performance period has ended, with the exception of retirement eligible grantees, who upon retirement are entitled to vest in any units that have been earned, including a prorated portion for the partially completed fiscal year in which the retirement occurs. Time vesting stock units are valued at the market value of the stock on the grant date. Performance vesting stock units with a market condition are valued using a Monte Carlo model.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes in our timeperformance vesting and performancetime vesting restricted stock units for the six months ended December 31, 20172021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Performance Vesting Stock Units | | Performance Vesting Weighted Average Fair Value | | Time Vesting Stock Units | | Time Vesting Weighted Average Fair Value |
| Unvested, June 30, 2021 | 500,477 | | | $ | 32.53 | | | 1,332,740 | | | $ | 31.72 | |
| Granted | 194,821 | | | 36.70 | | | 504,752 | | | 36.64 | |
| Vested | (36,455) | | | 40.10 | | | (506,654) | | | 32.17 | |
| Performance metric adjustments, net | (150,711) | | | 31.18 | | | — | | | — | |
| Forfeited | (11,541) | | | 30.51 | | | (38,064) | | | 31.64 | |
| Unvested, December 31, 2021 | 496,591 | | | $ | 34.07 | | | 1,292,774 | | | $ | 33.46 | |
|
| | | | | | | | | | | | | |
| | Performance Vesting Stock Units | | Performance Vesting Weighted Average Fair Value | | Time Vesting Stock Units | | Time Vesting Weighted Average Fair Value |
| Unvested, June 30, 2017 | 280,250 |
| | $ | 27.62 |
| | 1,153,444 |
| | $ | 27.66 |
|
| Granted | 158,397 |
| | 38.81 |
| | 424,754 |
| | 37.64 |
|
| Vested | (10,031 | ) | | 42.83 |
| | (390,874 | ) | | 30.67 |
|
| Performance metric adjustments, net | 16,766 |
| | 25.84 |
| | — |
| | — |
|
| Forfeited | — |
| | — |
| | (20,192 | ) | | 31.89 |
|
| Unvested, December 31, 2017 | 445,382 |
| | $ | 31.19 |
| | 1,167,132 |
| | $ | 30.20 |
|
During the six months ended December 31, 20172021 and 2016,2020, compensation expense related to time vesting and performance vesting restricted stock units was $11.0$12.6 million and $12.3$12.3 million,, respectively. Certain performance metrics were not met, resulting in an adjustment of 150,711 performance vesting stock units during the six months ended December 31, 2021. As of December 31, 2017,2021, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $23.2$32.2 million and is expected to be recognized over a weighted average period of 2.1 years.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We sponsor several defined benefit pension plans. Additionally, we provide varying levels of postretirement health care and life insurance benefits to some U.S. employees.
8. PENSION AND OTHER POSTRETIREMENT BENEFITS
The table below summarizes the components of net periodic pension income:
| | | | Three Months Ended December 31, | | Six Months Ended December 31, | | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 | (in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Service cost | $ | 406 |
| | $ | 727 |
| | $ | 810 |
| | $ | 1,460 |
| Service cost | $ | 281 | | | $ | 419 | | | $ | 567 | | | $ | 836 | |
| Interest cost | 7,678 |
| | 7,770 |
| | 15,335 |
| | 15,579 |
| Interest cost | 5,641 | | | 5,783 | | | 11,300 | | | 11,557 | |
| Expected return on plan assets | (14,132 | ) | | (14,672 | ) | | (28,221 | ) | | (29,429 | ) | Expected return on plan assets | (12,999) | | | (13,365) | | | (26,035) | | | (26,711) | |
| Amortization of transition obligation | 23 |
| | 22 |
| | 46 |
| | 45 |
| Amortization of transition obligation | 24 | | | 23 | | | 48 | | | 45 | |
| Amortization of prior service (credit) cost | (41 | ) | | (113 | ) | | 132 |
| | (226 | ) | |
| Amortization of prior service cost | | Amortization of prior service cost | 3 | | | 8 | | | 5 | | | 17 | |
| Recognition of actuarial losses | 1,718 |
| | 2,088 |
| | 3,428 |
| | 4,200 |
| Recognition of actuarial losses | 2,941 | | | 3,386 | | | 5,911 | | | 6,758 | |
| | Net periodic pension income | $ | (4,348 | ) | | $ | (4,178 | ) | | $ | (8,470 | ) | | $ | (8,371 | ) | Net periodic pension income | $ | (4,109) | | | $ | (3,746) | | | $ | (8,204) | | | $ | (7,498) | |
The table below summarizes the components of net periodic other postretirement benefit cost:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| Interest cost | $ | 72 | | | $ | 76 | | | $ | 144 | | | $ | 153 | |
| Amortization of prior service credit | (69) | | | (69) | | | (138) | | | (138) | |
| Recognition of actuarial loss | 74 | | | 77 | | | 148 | | | 154 | |
| Net periodic other postretirement benefit cost | $ | 77 | | | $ | 84 | | | $ | 154 | | | $ | 169 | |
The service cost component of net periodic pension income is reported as a component of cost of goods sold and operating expense. All other components of net periodic pension income and net periodic other postretirement benefit cost are reported as a component of other income, net.
9. INVENTORIES
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Interest cost | $ | 157 |
| | $ | 168 |
| | $ | 314 |
| | $ | 337 |
|
| Amortization of prior service credit | (6 | ) | | (6 | ) | | (11 | ) | | (11 | ) |
| Recognition of actuarial loss | 70 |
| | 89 |
| | 140 |
| | 177 |
|
| Net periodic other postretirement benefit cost | $ | 221 |
| | $ | 251 |
| | $ | 443 |
| | $ | 503 |
|
We used the last-in, first-out (LIFO) method of valuing inventories for 4138 percent and 4339 percent of total inventories at December 31, 20172021 and June 30, 2017,2021, respectively. Since inventoryInventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year,year; therefore, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs. Therefore, the interim financial resultscosts and are subject to any final year-end LIFO inventory adjustments.
Inventories consisted of the following:
| | | | | | | | | | | |
| (in thousands) | December 31, 2021 | | June 30, 2021 |
| Finished goods | $ | 319,682 | | | $ | 302,524 | |
| Work in process and powder blends | 191,149 | | | 173,671 | |
| Raw materials | 98,528 | | | 72,551 | |
| Inventories at current cost | 609,359 | | | 548,746 | |
| Less: LIFO valuation | (76,343) | | | (72,401) | |
| Total inventories | $ | 533,016 | | | $ | 476,345 | |
10. LONG-TERM DEBT
Fixed rate debt had a fair market value of $636.5 million and $644.2 million at December 31, 2021 and June 30, 2021, respectively. The Level 2 fair value is determined based on the quoted market prices for similar debt instruments as of December 31, 2021 and June 30, 2021, respectively.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. REVOLVING AND OTHER LINES OF CREDIT AND NOTES PAYABLE
Inventories consisted
During the three months ended September 30, 2020, we entered into the First Amendment (the Amendment) to the Fifth Amended and Restated Credit Agreement dated as of June 21, 2018 (as amended by the following:
|
| | | | | | | |
| (in thousands) | December 31, 2017 | | June 30, 2017 |
| Finished goods | $ | 283,812 |
| | $ | 290,817 |
|
| Work in process and powder blends | 210,265 |
| | 166,857 |
|
| Raw materials | 86,944 |
| | 87,627 |
|
| Inventories at current cost | 581,021 |
| | 545,301 |
|
| Less: LIFO valuation | (73,559 | ) | | (57,620 | ) |
| Total inventories | $ | 507,462 |
| | $ | 487,681 |
|
OurAmendment, the Credit Agreement). The Credit Agreement is a five-year, multi-currency, revolving credit facility that we use to augment our cash from operations and as amended and restated in April 2016 (Credit Agreement),an additional source of funds. The Credit Agreement provides for revolving credit loans of up to $600$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 and, as added by the Amendment, sixty percent of the unrestricted cash held outside of the 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 from September 30, 2020 through and including December 31, 2021), adjusted for certain non-cash expenses, and which may be further adjusted, at our discretion, to include up to $120 million (increased from $80 million pursuant to the Amendment) 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 thosethe aforementioned terms are defined in the Credit Agreement). We were in compliance with all such covenants as of December 31, 2017. We had no borrowings outstanding under the Credit Agreement as of December 31, 2017 and June 30, 2017. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries. The
As of December 31, 2021, we were in compliance with all the covenants of the Credit Agreement matures in Apriland we had $9.0 million of borrowings outstanding and $691.0 million of additional availability. There were no borrowings outstanding as of June 30, 2021.
Fixed rate debt had a fair market valueOther lines of $702.1credit and notes payable were $3.2 million and $704.0$8.4 million at December 31, 20172021 and June 30, 2017, respectively. The Level 2 fair value is determined based on the quoted market price of this debt as of December 31, 2017 and June 30, 2017,2021, respectively.
12. ENVIRONMENTAL MATTERS
The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain of our locations.
We establish and maintain accruals for certain potential environmental liabilities. At December 31, 2021, the balance of these accruals was $14.6 million, of which $2.5 million was current. At June 30, 2021, the balance was $14.7 million, of which $2.6 million was current. These accruals represent anticipated costs associated with potential remedial requirements and are generally not discounted.
The accruals we have established for potential environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the United States Environmental Protection Agency (USEPA), other governmental agencies and by the Potentially Responsible Party (PRP) groups in which we are participating. Although our accruals currently appear to be sufficient to cover these potential environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The accrued liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.
Superfund Sites Among other environmental laws, we are subject to the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), under which we have been designated by the United States Environmental Protection Agency (USEPA)USEPA as a Potentially Responsible Party (PRP)PRP with respect to environmental remedial costs at certain Superfund sites. We have evaluated our claims and liabilities associated with these Superfund sites based upon best currently available information. We believe our environmental accruals are adequate to cover our portion of the environmental remedial costs at the Superfund sites where we have been designated a PRP, to the extent these expenses are probable and reasonably estimable.
Other Environmental Matters We establish and maintain reserves for other potential environmental issues. At December 31, 2017 and June 30, 2017, the balances of these reserves were $12.7 million and $12.4 million, respectively. These reserves represent anticipated costs associated with the remediation of these issues.
The reserves we have established for environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the USEPA, other governmental agencies and by the PRP groups in which we are participating. Although the reserves currently appear to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The reserved and unreserved liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We maintain a Corporate Environmental Health and Safety (EHS) Department to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS analysts who are responsible for each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EHS Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly basis, we review financial provisions and reserves for environmental contingencies and adjust these reserves when appropriate.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law in the U.S. TCJA amends the Internal Revenue Code of 1986 to reduce tax rates and modify policies, credits and deductions for individuals and corporations. For corporations, TCJA reduces the federal tax rate from a maximum of 35.0 percent to a flat 21.0 percent rate and transitions from a worldwide tax system to a territorial tax system. TCJA also adds many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (GILTI), the base erosion anti-abuse tax (BEAT) and a deduction for foreign-derived intangible income (FDII). We are assessing the impact of certain provisions, including the tax on GILTI, the BEAT and the deduction for FDII, which do not apply to the Company until fiscal 2019. This assessment includes the evaluation of our accounting election relative to GILTI as either a period cost or an adjustment to deferred tax assets or liabilities of our foreign subsidiaries for the new tax. The two material items that effect the Company for fiscal 2018 are the reduction in the tax rate and a one-time tax that is imposed on our unremitted foreign earnings (toll tax).
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (SAB 118) that includes additional guidance allowing companies to use a measurement period, similar to that used in business combinations, to account for the impacts of TCJA in their financial statements. We have accounted for the impacts of TCJA to the extent a reasonable estimate could be made during the three months ended December 31, 2017. We will continue to refine our estimates throughout the measurement period, which will not extend beyond 12 months from the enactment of TCJA, or until the accounting is complete.
The U.S. federal tax rate reduction is effective as of January 1, 2018. As a June 30 fiscal year-end taxpayer, our 2018 fiscal year U.S. federal statutory tax rate is expected to be a blended rate of 28.1 percent. We expect our U.S. federal statutory tax rate to be 21.0 percent in 2019.
As a result of the reduction in the U.S. corporate income tax rate from 35.0 percent to 21.0 percent under TCJA, we recorded a provisional reduction to our net deferred tax assets with a corresponding decrease to the valuation allowance prior to its release on December 31, 2017. The result of this reduction had no impact on our condensed consolidated statement of income for the six months ended December 31, 2017. The revaluation of our deferred tax assets and liabilities are subject to further adjustments during the measurement period due to the complexity of determining our net deferred tax liability as of the enactment date. Some of the information necessary to determine the accounting impacts of the tax rate change includes final calculations related to our 2017 tax return as well as refining the analysis of which existing deferred balances at the enactment date will reverse in 2018 at the 28.1 percent tax rate and which deferred balances will reverse after 2018 at the 21.0 percent tax rate.
We have estimated the toll tax charge to be $77 million after available foreign tax credits. The toll tax charge consumed our entire U.S. federal net operating loss carryforward and other credit carryforwards, which represent a significant portion of our previously available deferred tax assets, and was offset by the release of the valuation allowance associated with these assets. As a result, we do not expect to make a cash payment associated with the toll charge. The toll tax charge is preliminary, and subject to finalization of collecting all information and analyzing the calculation in reasonable detail to complete the accounting.
During the three months ended December 31, 2017, we released a valuation allowance of $3.9 million that was previously recorded against our net deferred tax assets in the U.S. A benefit of $6.8 million would have been recorded in the provision for income taxes; however, because of a current period charge of $2.9 million due to an out of period adjustment, a $3.9 million benefit was recorded in the provision for income taxes. The valuation allowance release was driven by utilization of a significant portion of our deferred tax assets to satisfy the toll tax provision in TCJA. Along with expected full-year income in the U.S. in fiscal 2018, we anticipate our domestic deferred taxes to be in a net liability position by June 30, 2018.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We consider substantially all of the unremitted earnings of our non-U.S. subsidiaries that have not previously been taxed in the U.S. to be permanently reinvested. As a result of TCJA, which among other provisions allows for a 100% dividends received deduction from controlled foreign subsidiaries, we will re-evaluate our assertion with respect to permanent reinvestment. As part of this evaluation, we will consider our global working capital and capital investment requirements, among other considerations including the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent. If we determine that an entity should no longer remain subject to the permanent reinvestment assertion, we will accrue additional tax charges, including but not limited to state income taxes, withholding taxes and other relevant foreign taxes in the period the conclusion is determined. In accordance with SAB 118, we expect to complete our evaluation by December 22, 2018.
The effective income tax rates for the three months ended December 31, 20172021 and 20162020 were 29.325.9 percent (provision on income) and 50.939.0 percent (benefit on income), respectively. The year-over-year change is primarily due to the effects of changes in projected pre-tax income in the prior period, higher projected pre-tax income in the current year and geographical mix.
The effective income tax raterates for the six months ended December 31, 2017 was 24.92021 and 2020 were 26.5 percent (provision on income) and 93.3 percent (benefit on a loss), respectively. The year-over-year change is primarily due to the effectiveeffects of higher projected pre-tax income in the current period and geographical mix.
As of December 31, 2021, we have $25.5 million of U.S. net deferred tax assets, of which $57.0 million is related to net operating loss, tax credit, and other carryforwards that can be used to offset future U.S. taxable income. Certain of these carryforwards will expire if they are not used within a specified timeframe. At this time, we consider it more likely than not that we will have sufficient U.S. taxable income in the future that will allow us to realize these net deferred tax assets. However, it is possible that some or all of these tax attributes could ultimately expire unused, especially if our end markets do not continue to recover from the COVID-19 global pandemic. Therefore, if we are unable to generate sufficient U.S. taxable income from our operations, a valuation allowance to reduce the U.S. net deferred tax assets may be required, which would materially increase income tax rate forexpense in the six months ended December 31, 2016 was not meaningful as the prior year loss before income taxes was negligible. The changeperiod in both periods was primarily driven by prior year U.S. losses not being tax-effected and current year U.S. income being subject to tax. This is the result ofwhich the valuation allowance originally recorded inis recorded.
Swiss tax reform
Swiss tax reform legislation was effectively enacted during the fourthDecember quarter of fiscal 2016, being released2020 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 multi-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 current quarter.
Duringtransitional 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 three months ended December 31, 2017, we identified an error related to the tax rate that had historically been used to calculate2020. We consider the deferred tax chargeasset from Swiss tax reform to be an estimate based on intra-entity product transfers. This resulted in an overstatementour 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. We anticipate finalization of the deferred tax assets of $8.2 million as of June 30, 2017. Duringasset during the current quarter, $2.9 million of this amount was corrected in connection with the release of the U.S. valuation allowance. Therefore, the out of period adjustment recorded resulted in a further increase of $5.3 million to the provision for income taxes for the three and six months ended December 31, 2017. The remaining balance related to this item has been reclassified and included in other current assets as of December 31, 2017. The impact to the effective tax rate was 8.9 percent and 4.9 percent for the three and six months ended December 31, 2017, respectively. After evaluation, we determined that the impact of the adjustment was not material to the previously issued financial statements, nor are the out of period adjustments material to the estimated results of this fiscal year.
14. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of shares outstanding during the period, while diluted earnings per share is calculated to reflect the potential dilution that would occur related to the issuance of capital stock under stock option grants, performance awards and restricted stock units. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options, performance awards and restricted stock units.
For purposes of determining the number of diluted shares outstanding, weighted average shares outstanding for basic earnings per share calculations were increased due solely to the dilutive effect of unexercised capital stock options, unvested performance awards and unvested restricted stock units by 1.3 million shares and 0.8 million shares for the three months ended December 31, 2017 and 2016, respectively, and 1.2 million shares forDuring the six months ended December 31, 2017. Unexercised capital stock options, performance awards and restricted stock units of 0.2 million shares and 1.7 million shares for the three months ended December 31, 2017 and 2016, respectively, and 0.5 million shares for the six months ended December 31, 2017, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price, and therefore the inclusion would have been anti-dilutive. For the six months ended December 31, 2016,2020, the effect of unexercised capital stock options, unvested performance awards and unvested restricted stock units was anti-dilutive as a result of a net loss in the period and therefore has been excluded from diluted shares outstanding as well as from the diluted earnings per share calculation.
The following table provides the computation of diluted shares outstanding for the three months ended December 31, 2021, the three months ended December 31, 2020, and the six months ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months Ended December 31, 2021 | | | | Three Months Ended
December 31, 2020 | | Six Months Ended
December 31, 2021 |
| | | | | | | | |
| Weighted-average shares outstanding during period | | 83,637 | | | | | 83,582 | | | 83,759 | |
| Add: Unexercised stock options and unvested restricted stock units | | 737 | | | | | 615 | | | 743 | |
| Number of shares on which diluted earnings per share is calculated | | 84,374 | | | | | 84,197 | | | 84,502 | |
| Unexercised stock options with an exercise price greater than the average market price and restricted stock units not included in the computation because they were anti-dilutive | | 145 | | | | | 386 | | | 183 | |
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. EQUITY
A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests as offor the three months ending December 31, 20172021 and 20162020 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Kennametal Shareholders’ Equity | | | | |
| (in thousands) | Capital
stock | | Additional
paid-in
capital | | Retained
earnings | | Accumulated
other
comprehensive loss | | Non-
controlling
interests | | Total equity |
| Balance as of June 30, 2017 | $ | 100,832 |
| | $ | 474,547 |
| | $ | 765,607 |
| | $ | (323,692 | ) | | $ | 35,359 |
| | $ | 1,052,653 |
|
| Net income | — |
| | — |
| | 80,785 |
| | — |
| | 1,011 |
| | 81,796 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | 33,876 |
| | 1,173 |
| | 35,049 |
|
| Dividend reinvestment | 3 |
| | 106 |
| | — |
| | — |
| | — |
| | 109 |
|
Capital stock issued under employee benefit and stock plans(3) | 1,065 |
| | 25,841 |
| | — |
| | — |
| | — |
| | 26,906 |
|
| Purchase of capital stock | (3 | ) | | (106 | ) | | — |
| | — |
| | — |
| | (109 | ) |
| Cash dividends paid | — |
| | — |
| | (32,456 | ) | | — |
| | — |
| | (32,456 | ) |
| Balance as of December 31, 2017 | $ | 101,897 |
| | $ | 500,388 |
| | $ | 813,936 |
| | $ | (289,816 | ) | | $ | 37,543 |
| | $ | 1,163,948 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Kennametal Shareholders’ Equity | | | | |
| (in thousands, except per share amounts) | Capital stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Non-controlling interests | | Total equity |
| Balance as of September 30, 2021 | $ | 104,527 | | | $ | 550,790 | | | $ | 1,012,055 | | | $ | (342,421) | | | $ | 39,696 | | | $ | 1,364,647 | |
| Net income | — | | | — | | | 31,421 | | | — | | | 1,304 | | | 32,725 | |
| Other comprehensive loss | — | | | — | | | — | | | (6,747) | | | (449) | | | (7,196) | |
| Dividend reinvestment | 1 | | | 46 | | | — | | | — | | | — | | | 47 | |
Capital stock issued under employee benefit and stock plans(3) | 65 | | | 5,604 | | | — | | | — | | | — | | | 5,669 | |
| Purchase of capital stock | (751) | | | (21,848) | | | — | | | — | | | — | | | (22,599) | |
| Cash dividends ($0.20 per share) | — | | | — | | | (16,720) | | | — | | | — | | | (16,720) | |
| Cash dividends to non-controlling interests | — | | | — | | | — | | | — | | | — | | | — | |
| Other | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Total equity, December 31, 2021 | $ | 103,842 | | | $ | 534,592 | | | $ | 1,026,756 | | | $ | (349,168) | | | $ | 40,551 | | | $ | 1,356,573 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Kennametal Shareholders’ Equity | | | | |
| (in thousands, except per share amounts) | Capital stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Non-controlling interests | | Total equity |
| Balance as of September 30, 2020 | $ | 104,064 | | | $ | 540,374 | | | $ | 966,596 | | | $ | (385,648) | | | $ | 40,996 | | | $ | 1,266,382 | |
| Net income | — | | | — | | | 19,388 | | | — | | | 862 | | | 20,250 | |
| Other comprehensive income | — | | | — | | | — | | | 43,417 | | | 1,357 | | | 44,774 | |
| Dividend reinvestment | 2 | | | 48 | | | — | | | — | | | — | | | 50 | |
Capital stock issued under employee benefit and stock plans(3) | 266 | | | 7,691 | | | — | | | — | | | — | | | 7,957 | |
| Purchase of capital stock | (2) | | | (48) | | | — | | | — | | | — | | | (50) | |
| Cash dividends ($0.20 per share) | — | | | — | | | (16,683) | | | — | | | — | | | (16,683) | |
| Cash dividends to non-controlling interests | — | | | — | | | — | | | — | | | (1,361) | | | (1,361) | |
| Other | — | | | (311) | | | — | | | | | (1,319) | | | (1,630) | |
| Total equity, December 31, 2020 | $ | 104,330 | | | $ | 547,754 | | | $ | 969,301 | | | $ | (342,231) | | | $ | 40,535 | | | $ | 1,319,689 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Kennametal Shareholders’ Equity | | | | |
| (in thousands) | Capital stock | | Additional paid-in capital | | Retained earnings | | Accumulated
other
comprehensive
loss | | Non- controlling interests | | Total equity |
| Balance as of June 30, 2016 | $ | 99,618 |
| | $ | 436,617 |
| | $ | 780,597 |
| | $ | (352,509 | ) | | $ | 31,478 |
| | $ | 995,801 |
|
| Net (loss) income | — |
| | — |
| | (14,394 | ) | | — |
| | 1,108 |
| | (13,286 | ) |
| Other comprehensive income | — |
| | — |
| | — |
| | (29,645 | ) | | (639 | ) | | (30,284 | ) |
| Dividend reinvestment | 5 |
| | 122 |
| | — |
| | — |
| | — |
| | 127 |
|
Capital stock issued under employee benefit and stock plans(3) | 464 |
| | 14,028 |
| | — |
| | — |
| | — |
| | 14,492 |
|
| Purchase of capital stock | (5 | ) | | (122 | ) | | — |
| | — |
| | — |
| | (127 | ) |
| Cash dividends paid | — |
| | — |
| | (31,970 | ) | | — |
| | (72 | ) | | (32,042 | ) |
| Balance as of December 31, 2016 | $ | 100,082 |
| | $ | 450,645 |
| | $ | 734,233 |
| | $ | (382,154 | ) | | $ | 31,875 |
| | $ | 934,681 |
|
(3) Net of restricted stock units delivered upon vesting to satisfy tax withholding requirements.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests for the six months ending December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Kennametal Shareholders’ Equity | | | | |
| (in thousands, except per share amounts) | Capital stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Non-controlling interests | | Total equity |
| Balance as of June 30, 2021 | $ | 104,518 | | | $ | 562,820 | | | $ | 992,597 | | | $ | (330,327) | | | $ | 38,597 | | | $ | 1,368,205 | |
| Net income | — | | | — | | | 67,619 | | | — | | | 2,858 | | | 70,477 | |
| Other comprehensive loss | — | | | — | | | — | | | (18,841) | | | (904) | | | (19,745) | |
| Dividend reinvestment | 3 | | | 92 | | | — | | | — | | | — | | | 95 | |
Capital stock issued under employee benefit and stock plans(3) | 512 | | | 5,997 | | | — | | | — | | | — | | | 6,509 | |
| Purchase of capital stock | (1,191) | | | (34,317) | | | — | | | — | | | — | | | (35,508) | |
| Cash dividends ($0.40 per share) | — | | | — | | | (33,460) | | | — | | | — | | | (33,460) | |
| Cash dividends to non-controlling interests | — | | | — | | | — | | | — | | | — | | | — | |
| Other | — | | | 0 | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Total equity, December 31, 2021 | $ | 103,842 | | | $ | 534,592 | | | $ | 1,026,756 | | | $ | (349,168) | | | $ | 40,551 | | | $ | 1,356,573 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Kennametal Shareholders’ Equity | | | | |
| (in thousands, except per share amounts) | Capital stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Non-controlling interests | | Total equity |
| Balance as of June 30, 2020 | $ | 103,654 | | | $ | 538,575 | | | $ | 1,004,898 | | | $ | (417,242) | | | $ | 38,903 | | | $ | 1,268,788 | |
| Net (loss) income | — | | | — | | | $ | (2,287) | | | — | | | 1,677 | | | (610) | |
| Other comprehensive income | — | | | — | | | — | | | 75,011 | | | 2,635 | | | 77,646 | |
| Dividend reinvestment | 4 | | | 97 | | | — | | | — | | | — | | | 101 | |
Capital stock issued under employee benefit and stock plans(3) | 676 | | | 9,490 | | | — | | | — | | | — | | | 10,166 | |
| Purchase of capital stock | (4) | | | (97) | | | — | | | — | | | — | | | (101) | |
| Cash dividends ($0.40 per share) | — | | | — | | | (33,310) | | | — | | | — | | | (33,310) | |
| Cash dividends to non-controlling interests | — | | | — | | | — | | | — | | | (1,361) | | | (1,361) | |
| Other | — | | | (311) | | | — | | | — | | | (1,319) | | | (1,630) | |
| Total equity, December 31, 2020 | $ | 104,330 | | | $ | 547,754 | | | $ | 969,301 | | | $ | (342,231) | | | $ | 40,535 | | | $ | 1,319,689 | |
(3) Net of restricted stock units delivered upon vesting to satisfy tax withholding requirements.
The amounts of comprehensive lossincome attributable to Kennametal Shareholders and noncontrolling interests are disclosed in the condensed consolidated statements of comprehensive income.
| |
16. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
Total accumulated other comprehensive loss (AOCL) consists of net income (loss) and other changes in equity from transactions and other events from sources other than shareholders. It includes postretirement benefit plan adjustments, currency translation adjustments and unrealized gains and losses from derivative instruments designated as cash flow hedges.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of, and changes in, accumulated other comprehensive loss (AOCL) were as follows, net of tax, for the six months ended December 31, 2021:
| | | | | | | | | | | | | | |
| (in thousands) | Pension and other postretirement benefits | Currency translation adjustment | Derivatives | Total |
| Attributable to Kennametal: | | | | |
| Balance, June 30, 2021 | $ | (213,172) | | $ | (122,428) | | $ | 5,273 | | $ | (330,327) | |
| Other comprehensive income (loss) before reclassifications | 2,781 | | (25,653) | | — | | (22,872) | |
| Amounts reclassified from AOCL | 4,416 | | — | | (385) | | 4,031 | |
| Net current period other comprehensive income (loss) | 7,197 | | (25,653) | | (385) | | (18,841) | |
| AOCL, December 31, 2021 | $ | (205,975) | | $ | (148,081) | | $ | 4,888 | | $ | (349,168) | |
| | | | |
| Attributable to noncontrolling interests: | | | | |
| Balance, June 30, 2021 | $ | — | | $ | (3,982) | | $ | — | | $ | (3,982) | |
| Other comprehensive income before reclassifications | — | | (904) | | — | | (904) | |
| Net current period other comprehensive income | — | | (904) | | — | | (904) | |
| AOCL, December 31, 2021 | $ | — | | $ | (4,886) | | $ | — | | $ | (4,886) | |
The components of, and changes in, AOCL were as follows, net of tax, for the six months ended December 31, 2017 (in thousands):2020:
| | | | | | | | | | | | | | |
| (in thousands) | Pension and other postretirement benefits | Currency translation adjustment | Derivatives | Total |
| Attributable to Kennametal: | | | | |
| Balance, June 30, 2020 | $ | (232,634) | | $ | (181,027) | | $ | (3,581) | | $ | (417,242) | |
| Other comprehensive (loss) income before reclassifications | (7,521) | | 71,912 | | 4,501 | | 68,892 | |
| Amounts reclassified from AOCL | 5,179 | | — | | 940 | | 6,119 | |
| Net current period other comprehensive (loss) income | (2,342) | | 71,912 | | 5,441 | | 75,011 | |
| AOCL, December 31, 2020 | $ | (234,976) | | $ | (109,115) | | $ | 1,860 | | $ | (342,231) | |
| | | | |
| Attributable to noncontrolling interests: | | | | |
| Balance, June 30, 2020 | $ | — | | $ | (5,909) | | $ | — | | $ | (5,909) | |
| Other comprehensive income before reclassifications | — | | 2,635 | | — | | 2,635 | |
| Net current period other comprehensive income | — | | 2,635 | | — | | 2,635 | |
| AOCL, December 31, 2020 | $ | — | | $ | (3,274) | | $ | — | | $ | (3,274) | |
|
| | | | | | | | | | | | |
| Attributable to Kennametal: | Postretirement benefit plans | Currency translation adjustment | Derivatives | Total |
| Balance, June 30, 2017 | $ | (189,038 | ) | $ | (126,606 | ) | $ | (8,048 | ) | $ | (323,692 | ) |
| Other comprehensive income before reclassifications | (2,590 | ) | 32,620 |
| (905 | ) | 29,125 |
|
| Amounts reclassified from AOCL | 3,348 |
| — |
| 1,403 |
| 4,751 |
|
Net current period other comprehensive income | 758 |
| 32,620 |
| 498 |
| 33,876 |
|
| AOCL, December 31, 2017 | $ | (188,280 | ) | $ | (93,986 | ) | $ | (7,550 | ) | $ | (289,816 | ) |
| | | | | |
| Attributable to noncontrolling interests: | | | | |
| Balance, June 30, 2017 | $ | — |
| $ | (2,164 | ) | $ | — |
| $ | (2,164 | ) |
Other comprehensive income before reclassifications | — |
| 1,173 |
| — |
| 1,173 |
|
Net current period other comprehensive income | — |
| 1,173 |
| — |
| 1,173 |
|
| AOCL, December 31, 2017 | $ | — |
| $ | (991 | ) | $ | — |
| $ | (991 | ) |
The components of, and changes in, AOCL were as follows, net of tax, for the six months ended December 31, 2016 (in thousands):
|
| | | | | | | | | | | | |
| Attributable to Kennametal: | Postretirement benefit plans | Currency translation adjustment | Derivatives | Total |
| Balance, June 30, 2016 | $ | (212,163 | ) | $ | (131,212 | ) | $ | (9,134 | ) | $ | (352,509 | ) |
| Other comprehensive income before reclassifications | 4,101 |
| (39,625 | ) | 1,480 |
| (34,044 | ) |
| Amounts reclassified from AOCL | 3,630 |
| — |
| 769 |
| 4,399 |
|
Net current period other comprehensive income | 7,731 |
| (39,625 | ) | 2,249 |
| (29,645 | ) |
| AOCL, December 31, 2016 | $ | (204,432 | ) | $ | (170,837 | ) | $ | (6,885 | ) | $ | (382,154 | ) |
| | | | | |
| Attributable to noncontrolling interests: | | | | |
| Balance, June 30, 2016 | $ | — |
| $ | (3,446 | ) | $ | — |
| $ | (3,446 | ) |
Other comprehensive income before reclassifications | — |
| (639 | ) | — |
| (639 | ) |
Net current period other comprehensive income | — |
| (639 | ) | — |
| (639 | ) |
| AOCL, December 31, 2016 | $ | — |
| $ | (4,085 | ) | $ | — |
| $ | (4,085 | ) |
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications out of AOCL for the three and six months ended December 31, 20172021 and 20162020 consisted of the following (in thousands):following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | Six Months Ended December 31, | | |
| (in thousands) | 2021 | | 2020 | 2021 | | 2020 | | Affected line item in the Income Statement |
| Losses and (gains) on cash flow hedges: | | | | | | | | |
| Forward starting interest rate swaps | $ | (255) | | | $ | 635 | | $ | (511) | | | $ | 1,269 | | | Interest expense |
| Currency exchange contracts | — | | | (1) | | — | | | (24) | | | Cost of goods sold and other income, net |
| Total before tax | (255) | | | 634 | | (511) | | | 1,245 | | | |
| Tax impact | 63 | | | (155) | | 126 | | | (305) | | | Provision for income taxes |
| Net of tax | $ | (192) | | | $ | 479 | | $ | (385) | | | $ | 940 | | | |
| | | | | | | | |
| Pension and other postretirement benefits: | | | | | | | | |
| Amortization of transition obligations | $ | 24 | | | $ | 23 | | $ | 48 | | | $ | 45 | | | Other income, net |
| Amortization of prior service credit | (66) | | | (61) | | (133) | | | (121) | | | Other income, net |
| Recognition of actuarial losses | 3,015 | | | 3,463 | | 6,059 | | | 6,912 | | | Other income, net |
| Total before tax | 2,973 | | | 3,425 | | 5,974 | | | 6,836 | | | |
| Tax impact | (772) | | | (811) | | (1,558) | | | (1,657) | | | Provision for income taxes |
| Net of tax | $ | 2,201 | | | $ | 2,614 | | $ | 4,416 | | | $ | 5,179 | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | Six Months Ended December 31, | | |
| Details about AOCL components | 2017 | | 2016 | 2017 | | 2016 | | Affected line item in the Income Statement |
| Gains and losses on cash flow hedges: | | | | | | | | |
| Forward starting interest rate swaps | $ | 566 |
| | $ | 545 |
| $ | 1,132 |
| | $ | 1,090 |
| | Interest expense |
| Currency exchange contracts | 768 |
| | (163 | ) | 726 |
| | (321 | ) | | Other expense, net |
| Total before tax | 1,334 |
| | 382 |
| 1,858 |
| | 769 |
| | |
| Tax impact | (327 | ) | | — |
| (455 | ) | | — |
| | Provision for income taxes |
| Net of tax | $ | 1,007 |
| | $ | 382 |
| $ | 1,403 |
| | $ | 769 |
| | |
| | | | | | | | | |
| Postretirement benefit plans: | | | | | | | | |
| Amortization of transition obligations | $ | 23 |
| | $ | 22 |
| $ | 46 |
| | $ | 45 |
| | See note 9 for further details |
| Amortization of prior service (credit) cost | (47 | ) | | (119 | ) | 121 |
| | (237 | ) | | See note 9 for further details |
| Recognition of actuarial losses | 1,788 |
| | 2,177 |
| 3,568 |
| | 4,377 |
| | See note 9 for further details |
| Total before tax | 1,764 |
| | 2,080 |
| 3,735 |
| | 4,185 |
| | |
| Tax impact | (195 | ) | | (284 | ) | (387 | ) | | (555 | ) | | Provision for income taxes |
| Net of tax | $ | 1,569 |
| | $ | 1,796 |
| $ | 3,348 |
| | $ | 3,630 |
| | |
The amount of income tax allocated to each component of other comprehensive (loss) income (loss) for the three months ended December 31, 20172021 and 2016:2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | | | | 2020 | |
| (in thousands) | Pre-tax | Tax impact | Net of tax | | | Pre-tax | Tax impact | Net of tax |
| Unrealized gain on derivatives designated and qualified as cash flow hedges | $ | — | | $ | — | | $ | — | | | | $ | 4,359 | | $ | (1,068) | | $ | 3,291 | |
| Reclassification of unrealized (gain) loss on derivatives designated and qualified as cash flow hedges | (255) | | 63 | | (192) | | | | 634 | | (155) | | 479 | |
| Unrecognized net pension and other postretirement benefit gain (loss) | 1,232 | | (356) | | 876 | | | | (5,272) | | 1,061 | | (4,211) | |
| Reclassification of net pension and other postretirement benefit loss | 2,973 | | (772) | | 2,201 | | | | 3,425 | | (811) | | 2,614 | |
| Foreign currency translation adjustments | (10,062) | | (19) | | (10,081) | | | | 41,671 | | 930 | | 42,601 | |
| | | | | | | | |
| Other comprehensive (loss) income | $ | (6,112) | | $ | (1,084) | | $ | (7,196) | | | | $ | 44,817 | | $ | (43) | | $ | 44,774 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | | | | 2016 | |
| (in thousands) | Pre-tax | Tax impact | Net of tax | | | Pre-tax | Tax impact | Net of tax |
| Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges | $ | (379 | ) | $ | 93 |
| $ | (286 | ) | | | $ | 1,606 |
| $ | — |
| $ | 1,606 |
|
| Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges | 1,334 |
| (327 | ) | 1,007 |
| | | 382 |
| — |
| 382 |
|
| Unrecognized net pension and other postretirement benefit (loss) gain | (834 | ) | 209 |
| (625 | ) | | | 4,639 |
| (1,168 | ) | 3,471 |
|
| Reclassification of net pension and other postretirement benefit loss | 1,764 |
| (195 | ) | 1,569 |
| | | 2,080 |
| (284 | ) | 1,796 |
|
| Foreign currency translation adjustments | 13,996 |
| (72 | ) | 13,924 |
| | | (41,428 | ) | — |
| (41,428 | ) |
| Other comprehensive income (loss) | $ | 15,881 |
| $ | (292 | ) | $ | 15,589 |
| | | $ | (32,721 | ) | $ | (1,452 | ) | $ | (34,173 | ) |
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amount of income tax allocated to each component of other comprehensive (loss) income (loss) for the six months ended December 31, 20172021 and 2016:2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | | | | 2020 | |
| (in thousands) | Pre-tax | Tax impact | Net of tax | | | Pre-tax | Tax impact | Net of tax |
| Unrealized gain on derivatives designated and qualified as cash flow hedges | $ | — | | $ | — | | $ | — | | | | $ | 5,962 | | $ | (1,461) | | $ | 4,501 | |
| Reclassification of unrealized (gain) loss on derivatives designated and qualified as cash flow hedges | (511) | | 126 | | (385) | | | | 1,245 | | (305) | | 940 | |
| Unrecognized net pension and other postretirement benefit gain (loss) | 3,831 | | (1,050) | | 2,781 | | | | (9,654) | | 2,133 | | (7,521) | |
| Reclassification of net pension and other postretirement benefit loss | 5,974 | | (1,558) | | 4,416 | | | | 6,836 | | (1,657) | | 5,179 | |
| Foreign currency translation adjustments | (26,519) | | (38) | | (26,557) | | | | 73,777 | | 770 | | 74,547 | |
| | | | | | | | |
| Other comprehensive (loss) income | $ | (17,225) | | $ | (2,520) | | $ | (19,745) | | | | $ | 78,166 | | $ | (520) | | $ | 77,646 | |
17. GOODWILL AND OTHER INTANGIBLE ASSETS
|
| | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | | | | 2016 | |
| (in thousands) | Pre-tax | Tax impact | Net of tax | | | Pre-tax | Tax impact | Net of tax |
| Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges | $ | (1,199 | ) | $ | 294 |
| $ | (905 | ) | | | $ | 1,480 |
| $ | — |
| $ | 1,480 |
|
| Reclassification of unrealized loss on expired derivatives designated and qualified as cash flow hedges | 1,858 |
| (455 | ) | 1,403 |
| | | 769 |
| — |
| 769 |
|
| Unrecognized net pension and other postretirement benefit (loss) gain | (3,434 | ) | 844 |
| (2,590 | ) | | | 5,401 |
| (1,300 | ) | 4,101 |
|
| Reclassification of net pension and other postretirement benefit loss | 3,735 |
| (387 | ) | 3,348 |
| | | 4,185 |
| (555 | ) | 3,630 |
|
| Foreign currency translation adjustments | 34,058 |
| (265 | ) | 33,793 |
| | | (40,264 | ) | — |
| (40,264 | ) |
| Other comprehensive income (loss) | $ | 35,018 |
| $ | 31 |
| $ | 35,049 |
| | | $ | (28,429 | ) | $ | (1,855 | ) | $ | (30,284 | ) |
| |
17. | GOODWILL AND OTHER INTANGIBLE ASSETS |
Goodwill represents the excess of cost over the fair value of the net assets of acquired companies. Goodwill and other intangible assets with indefinite lives are tested at least annually for impairment. We perform our annual impairment tests during the June quarter in connection with our annual planning process, unless there are impairment indicators based on the results of an ongoing cumulative qualitative assessment that warrant a test prior to that. We evaluate the recoverability of goodwill for each of our reporting units by comparing the fair value of each reporting unit with its carrying value. The fair values of our reporting units are determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit. We evaluate the recoverability of indefinite-lived intangible assets using a discounted cash flow analysis based on projected financial information. This evaluation is sensitive to changes in market interest rates and other external factors.
Identifiable assets with finite lives are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable.
A summary of the carrying amount of goodwill attributable to each segment, as well as the changes in such carrying amounts, is as follows:
|
| | | | | | | | | | | | | | | |
| (in thousands) | Industrial | | Widia | | Infrastructure | | Total |
| Gross goodwill | $ | 410,694 |
| | $ | 41,515 |
| | $ | 633,211 |
| | $ | 1,085,420 |
|
| Accumulated impairment losses | (137,204 | ) | | (13,638 | ) | | (633,211 | ) | | (784,053 | ) |
| Balance as of June 30, 2017 | $ | 273,490 |
| | $ | 27,877 |
| | $ | — |
| | $ | 301,367 |
|
| | | | | | | | |
| Activity for the six months ended December 31, 2017: | | | | | | | |
| Change in gross goodwill due to translation | 4,382 |
| | 398 |
| | — |
| | 4,780 |
|
| | | | | | | | |
| Gross goodwill | 415,076 |
| | 41,913 |
| | 633,211 |
| | 1,090,200 |
|
| Accumulated impairment losses | (137,204 | ) | | (13,638 | ) | | (633,211 | ) | | (784,053 | ) |
| Balance as of December 31, 2017 | $ | 277,872 |
| | $ | 28,275 |
| | $ | — |
| | $ | 306,147 |
|
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | | | | | | | | | | | | | |
| (in thousands) | Metal Cutting | | Infrastructure | | Total |
| Gross goodwill | $ | 455,276 | | | $ | 633,211 | | | $ | 1,088,487 | |
| Accumulated impairment losses | (177,661) | | | (633,211) | | | (810,872) | |
| Balance as of June 30, 2021 | $ | 277,615 | | | $ | — | | | $ | 277,615 | |
| | | | | |
| Activity for the six months ended December 31, 2021: | | | | | |
| Change in gross goodwill due to translation | (4,296) | | | — | | | (4,296) | |
| | | | | |
| | | | | |
| | | | | |
| Gross goodwill | 450,980 | | | 633,211 | | | 1,084,191 | |
| Accumulated impairment losses | (177,661) | | | (633,211) | | | (810,872) | |
| Balance as of December 31, 2021 | $ | 273,319 | | | $ | — | | | $ | 273,319 | |
The components of our other intangible assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Estimated
Useful Life
(in years) | | December 31, 2021 | June 30, 2021 |
| (in thousands) | | Gross Carrying
Amount | | Accumulated
Amortization | | | Gross Carrying
Amount | | Accumulated
Amortization |
| | | | | | | | | | |
| Technology-based and other | 4 to 20 | | $ | 33,180 | | | $ | (24,360) | | | | $ | 33,632 | | | $ | (24,413) | |
| Customer-related | 10 to 21 | | 182,559 | | | (102,425) | | | | 183,338 | | | (98,901) | |
| Unpatented technology | 10 to 30 | | 32,013 | | | (21,851) | | | | 31,957 | | | (20,575) | |
| Trademarks | 5 to 20 | | 13,163 | | | (10,527) | | | | 13,268 | | | (10,083) | |
| Trademarks | Indefinite | | 11,257 | | | — | | | | 11,818 | | | — | |
| Total | | | $ | 272,172 | | | $ | (159,163) | | | | $ | 274,013 | | | $ | (153,972) | |
|
| | | | | | | | | | | | | | | | | | |
| | Estimated Useful Life (in years) | | December 31, 2017 | June 30, 2017 |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | | Gross Carrying Amount | | Accumulated Amortization |
| Contract-based | 3 to 15 | | $ | 7,070 |
| | $ | (7,033 | ) | | | $ | 7,064 |
| | $ | (7,014 | ) |
| Technology-based and other | 4 to 20 | | 47,032 |
| | (30,497 | ) | | | 46,461 |
| | (29,061 | ) |
| Customer-related | 10 to 21 | | 207,102 |
| | (80,872 | ) | | | 205,502 |
| | (74,669 | ) |
| Unpatented technology | 10 to 30 | | 31,924 |
| | (11,888 | ) | | | 31,754 |
| | (10,589 | ) |
| Trademarks | 5 to 20 | | 12,530 |
| | (8,912 | ) | | | 12,401 |
| | (8,648 | ) |
| Trademarks | Indefinite | | 18,067 |
| | — |
| | | 17,326 |
| | — |
|
| Total | | | $ | 323,725 |
| | $ | (139,202 | ) | | | $ | 320,508 |
| | $ | (129,981 | ) |
During the six months ended December 31, 2017 and 2016, we recorded amortization expense of $7.3 million and $8.4 million, respectively, related to our other intangible assets.
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Kennametal delivers productivity to customers seeking peak performance
18. SEGMENT DATA
We operate in demanding environments by providing innovative customtwo reportable segments consisting of Metal Cutting and standard wear-resistant solutions. To provide these solutions, we harness our knowledge of advanced materials and application development with a commitment to environmental sustainability. Our product offering includes a wide selection of standard and customized technologies for metalworking, such as sophisticated metal cutting tools, tooling systems and services, as well as advanced, high-performance materials, such as cemented tungsten carbide products, super alloys, coatings and investment castings to address customer demands. We offer these products through a variety of channels to meet customer-specified needs.
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, and strategic initiatives, as well asand certain other costs and report them in Corporate. None of our threeOur reportable operating segments do not represent the aggregation of two or more operating segments.
METAL CUTTINGThe IndustrialMetal Cutting segment generally serves customers that operate in industrialdevelops and manufactures high performance tooling and metal cutting products and services and offers an assortment of standard and custom metal cutting solutions to diverse end markets, such as transportation,including aerospace, general engineering, aerospaceenergy and defense market sectors, as well as the machine tool industry, delivering high performance metalworking tools for specified purposes. Our customers in these end markets use ourtransportation. The products include milling, hole making, turning, threading and servicestoolmaking systems used in the manufacture of airframes, aero engines, airframes,trucks and automobiles, trucks, ships and other various types of industrial equipment. The technologyWe leverage advanced manufacturing capabilities in combination with varying levels of customization to solve our customers’ toughest challenges and customization requirements we provide vary by customer, application and industry. Industrial goes to marketdeliver improved productivity for a wide range of applications. Metal Cutting markets its products under the Kennametal® brand, WIDIA®, WIDIA Hanita® and WIDIA GTD® brands through its direct sales force, a network of independent and national chain distributors, integrated supplier channels and via the Internet. Application engineers and technicians are critical to the sales process and directly assist our customers with specified product design, selection, application and support.
The WidiaINFRASTRUCTURE Our Infrastructure segment offers a focused assortment of standard custom metal cutting solutions toproduces engineered tungsten carbide and ceramic components, earth-cutting tools, and advanced metallurgical powders, primarily for the energy, earthworks and general engineering aerospace, energyend markets. These wear-resistant products include compacts, nozzles, frac seats and transportation customers. We serve our customers primarily through a network of value added resellers, integrated supplier channels and via the Internet. Widia markets its products under the WIDIA®, WIDIA Hanita® and WIDIA GTD® brands.
The Infrastructure segment generally serves customers that operatecustom components used in the energy and earthworks market sectors that support primary industries such as oil and gas power generation and chemicals;petrochemical industries; rod blanks and abrasive water jet nozzles for general industries; earth cutting tools and systems used in underground surfacemining, trenching and hard-rock mining; highway constructionfoundation drilling and road maintenance;milling; tungsten carbide powders for the oil and gas, aerospace and process industries such as foodindustries; and feed. Our success is determinedceramics used by our ability to gain an in-depth understandingthe packaging industry for metallization of our customers’films and papers. We combine deep metallurgical and engineering and development needs, to provide complete system solutions and high-performanceexpertise with advanced manufacturing capabilities to optimize and add value to their operations.deliver solutions that drive improved productivity for our customers. Infrastructure markets its products primarily under the Kennametal® brand and sells through a direct sales force as well as through distributors.
Our sales and operating income (loss) by segment are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Sales: | | | | | | | |
| Metal Cutting | $ | 298,581 | | | $ | 282,917 | | | $ | 597,011 | | | $ | 530,793 | |
| Infrastructure | 188,092 | | | 157,590 | | | 373,171 | | | 310,019 | |
| Total sales | $ | 486,673 | | | $ | 440,507 | | | $ | 970,182 | | | $ | 840,812 | |
| Operating income (loss): | | | | | | | |
| Metal Cutting | $ | 27,895 | | | $ | 13,693 | | | $ | 57,059 | | | $ | (9,933) | |
| Infrastructure | 19,971 | | | 6,265 | | | 46,007 | | | 13,533 | |
| Corporate | (361) | | | (924) | | | (955) | | | (1,743) | |
| Total operating income | 47,505 | | | 19,034 | | | 102,111 | | | 1,857 | |
| Interest expense | 6,460 | | | 8,317 | | | 12,781 | | | 18,896 | |
| Other income, net | (3,142) | | | (3,857) | | | (6,601) | | | (7,875) | |
| Income (loss) from continuing operations before income taxes | $ | 44,187 | | | $ | 14,574 | | | $ | 95,931 | | | $ | (9,164) | |
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents Kennametal's revenue disaggregated by geography:
Our sales and operating income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31, 2021 | | December 31, 2020 |
| (in thousands) | Metal Cutting | | Infrastructure | | Total Kennametal | | Metal Cutting | | Infrastructure | | Total Kennametal |
| Americas | 40% | | 57% | | 47% | | 38% | | 56% | | 44% |
| EMEA | 38 | | 17 | | 30 | | 38 | | 18 | | 31 |
| Asia Pacific | 22 | | 26 | | 23 | | 24 | | 26 | | 25 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended |
| December 31, 2021 | | December 31, 2020 |
| (in thousands) | Metal Cutting | | Infrastructure | | Total Kennametal | | Metal Cutting | | Infrastructure | | Total Kennametal |
| Americas | 40% | | 57% | | 47% | | 38% | | 55% | | 44% |
| EMEA | 38 | | 19 | | 30 | | 38 | | 20 | | 31 |
| Asia Pacific | 22 | | 24 | | 23 | | 24 | | 25 | | 25 |
The following tables presents Kennametal's revenue disaggregated by
segment are as follows:end market: |
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Sales: | | | | | | | |
| Industrial | $ | 312,448 |
| | $ | 267,492 |
| | $ | 609,912 |
| | $ | 536,536 |
|
| Widia | 47,744 |
| | 42,874 |
| | 92,987 |
| | 83,888 |
|
| Infrastructure | 211,153 |
| | 177,207 |
| | 410,900 |
| | 344,289 |
|
| Total sales | $ | 571,345 |
| | $ | 487,573 |
| | $ | 1,113,799 |
| | $ | 964,713 |
|
| Operating income (loss): | | | | | | | |
| Industrial | $ | 43,292 |
| | $ | 18,067 |
| | $ | 78,104 |
| | $ | 23,603 |
|
| Widia | 856 |
| | (2,666 | ) | | 918 |
| | (8,403 | ) |
| Infrastructure | 25,511 |
| | 10,274 |
| | 47,580 |
| | 2,687 |
|
| Corporate | (1,485 | ) | | (1,662 | ) | | (1,952 | ) | | (3,085 | ) |
| Total operating income | 68,174 |
| | 24,013 |
| | 124,650 |
| | 14,802 |
|
| Interest expense | 7,231 |
| | 7,151 |
| | 14,379 |
| | 14,144 |
|
| Other expense, net | 1,313 |
| | 726 |
| | 1,401 |
| | 844 |
|
| Income (loss) from continuing operations before income taxes | $ | 59,630 |
| | $ | 16,136 |
| | $ | 108,870 |
| | $ | (186 | ) |
| | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2021 |
| (in thousands) | Metal Cutting | | Infrastructure | | Total Kennametal |
| General engineering | 57% | | 36% | | 48% |
| Transportation | 26 | | — | | 16 |
| Aerospace | 9 | | — | | 6 |
| Energy | 8 | | 28 | | 16 |
| Earthworks | — | | 36 | | 14 |
| | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2020 |
| (in thousands) | Metal Cutting | | Infrastructure | | Total Kennametal |
| General engineering | 53% | | 36% | | 47% |
| Transportation | 31 | | — | | 20 |
| Aerospace | 8 | | — | | 5 |
| Energy | 8 | | 25 | | 14 |
| Earthworks | — | | 39 | | 14 |
| | | | | | | | | | | | | | | | | |
| Six Months Ended December 31, 2021 |
| (in thousands) | Metal Cutting | | Infrastructure | | Total Kennametal |
| General engineering | 56% | | 35% | | 48% |
| Transportation | 27 | | — | | 17 |
| Aerospace | 9 | | — | | 5 |
| Energy | 8 | | 29 | | 16 |
| Earthworks | — | | 36 | | 14 |
KENNAMETAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | | | | | | | | | | | | | |
| Six Months Ended December 31, 2020 |
| (in thousands) | Metal Cutting | | Infrastructure | | Total Kennametal |
| General engineering | 54% | | 35% | | 47% |
| Transportation | 30 | | — | | 19 |
| Aerospace | 8 | | — | | 5 |
| Energy | 8 | | 25 | | 14 |
| Earthworks | — | | 40 | | 15 |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
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. From this beginning,tooling and was listed on the New York Stock Exchange (NYSE) in 1967. With more than 80 years of materials expertise, the Company has grown intois a global industrial technology leader, inhelping 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 mission-criticalextreme wear applications to combat extremekeep customers up and running longer against conditions associated with wear fatigue,such as corrosion and high temperatures. The Company's reputation for material technology,
Our standard and custom product offerings span metal cutting application knowledge, as well as expertise and innovation in the development of custom solutions and services, contributes to its leading position in its primary markets.
Our product offering includes a wide selection of standard and customized technologies for metalworkingwear applications such asincluding turning, milling, hole making, tooling systems and services.services, as well as specialized wear components and metallurgical powders. End users of the Company's metalworkingour 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.
We also produce specialized Our wear components and metallurgical powders that are used for custom-engineered and challenging applications. End users of the Company's products includeby producers and suppliers in equipment-intensive operations such as coal mining, road construction, mining, quarrying, oil and gas exploration, refining, production and supply.
For the second quarter of fiscal year 2018 Kennametal has reported another strong operating quarter. The markets are continuing to show strength, and our growth initiatives are taking hold. On a consolidated basis, sales increased 17.2 percent, reflecting sales growth in all segments, regions and end markets. By working on our simplification initiatives, we have put the foundation in place for our modernization program to generate further margin improvement. Operating margin improved significantly to 11.9 percent from 4.9 percent in the prior year quarter reflecting improvement in both gross margin and operating expense as a percentage of sales.
Our sales of $571.3 million for the quarter ended December 31, 2017 increased 17.2 percent compared to sales for the quarter ended December 31, 2016, driven by organic sales growth of 15 percent and favorable currency exchange impact of 3 percent, partially offset by fewer business days impact of 1 percent compared to the prior year quarter. Every segment and every region reported increased sales and improved profitability. The Industrial, Infrastructure and Widia segments posted operating margins of 13.9 percent, 12.1 percent and 1.8 percent, respectively.
Operating income was $68.2 million, compared to a $24.0 million in the prior year quarter. Year-over-year comparative operating results reflect organic sales growth, incremental restructuring benefits of approximately $17 million, $10.3 million less restructuring and related charges in the current period, higher productivity and fixed cost absorption and favorable mix, partially offset by higher compensation expense and more overtime costs.
While end market demand has trended higher than previously anticipated, our effective tax rate for the full fiscal year is likely to be higher than previously anticipated. This increase in taxes is due primarily to the ongoing effects of no longer having a valuation allowance on U.S. deferred tax assets. The release of the valuation allowance was triggered by the application of the toll tax provision in the Tax Cuts and Jobs Act of 2017 (TCJA). Along with expected full-year income in the U.S. in fiscal 2018, we anticipate our domestic deferred taxes to be in a net liability position by June 30, 2018. In addition to the discrete items discussed below, current period earnings per share included additional tax expense of approximately $0.08 per share resulting from U.S. income now being subject to taxes as a result of the release of the valuation allowance. As a result of TCJA, we anticipate the long-term, beyond fiscal 2018, tax rate will decrease from mid-20s to low-20s.
We reported current quarter earnings per diluted share of $0.50, which include a charge of $0.07 per share from the impact of recording an out of period charge to provision for income taxes and a one-time benefit of $0.05 per share from releasing the U.S. deferred tax valuation allowance. The earnings per diluted share of $0.09 in the prior year quarter included $0.13 per share of restructuring and related charges and $0.02 per share associated with recording a valuation allowance related to deferred tax assets in Australia.
We substantially completed our existing restructuring programs in the previous quarter. Pre-tax benefits from these restructuring actions were approximately $41 million in the current quarter, of which approximately $17 million were incremental to the prior year quarter. Please see the Results of Continuing Operations section of Item 2 for further discussion and analysis of our restructuring programs.
The cost savings we achieved through our existing restructuring programs do not include the anticipated benefits from our modernization initiative. The results of those programs are anticipated to accrue to the Company over the next few years.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
We had a net cash inflow from operating activities of $66.8 million during the six months ended December 31, 2017 compared to $48.7 million during the prior year quarter. The increase is due primarily to higher cash from operations before changes in certain other assets and liabilities and lower restructuring payments, partially offset by higher working capital. Capital expenditures were $85.2 million and $70.6 million during the six months ended December 31, 2017 and 2016, respectively.
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 $9.5 million for the three months ended December 31, 2017.
Throughout the MD&A, we refer to measures used by management to evaluate performance. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, constant currency regional sales growth (decline) and constant currency end market sales growth. The explanationgrowth (decline). We provide the definitions of these non-GAAP financial measures at the end of the MD&A provides the definition of these non-GAAP financial measuressection as well as details on the use and the derivation of these financial measures.
Our sales of $486.7 million for the quarter ended December 31, 2021 increased 10 percent year-over-year, reflecting 11 percent organic sales growth, partially offset by an unfavorable business days effect of 1 percent.
Operating income was $47.5 million compared to $19.0 million in the prior year quarter. The year-over-year change of $28.5 million was due primarily to organic sales growth, $1.7 million of net benefit from the reversal of restructuring and related charges compared to charges of $4.2 million in the prior year quarter, favorable pricing, favorable product mix and approximately $4 million of incremental simplification/modernization benefits, partially offset by higher raw material costs of approximately $12 million and approximately $10 million due to the restoration of salaries and other cost-control measures that were taken in the prior year quarter. Operating margin was 9.8 percent compared to 4.3 percent in the prior year quarter. The Metal Cutting and Infrastructure segments had operating margins of 9.3 percent and 10.6 percent, respectively, for the quarter ended December 31, 2021.
On March 11, 2020, the World Health Organization declared the Coronavirus Disease 2019 (COVID-19) a pandemic bringing significant uncertainty in our end markets and operations. Since then, national, regional and local governments have taken steps at various times since the pandemic began to limit the spread of the virus through stay-at-home, social distancing, and various other orders and guidelines. Although some jurisdictions have relaxed these measures, particularly as more and more people are vaccinated, others have not or have reinstated them as COVID-19 cases surge and variants emerge. The imposition of these measures has created significant operating constraints on our business. Throughout the pandemic, based on the guidance provided by the U.S. Centers for Disease Control and other relevant authorities, we have deployed safety protocols and processes to keep our employees safe while continuing to serve our customers. 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 or financial condition in the future will depend on a number of factors, including the duration and spread of the pandemic, the emergence of more contagious or virulent strains of the virus, travel restrictions, business and workforce disruptions associated with the pandemic, including the availability of critical materials and resources, the success of preventative measures to contain or mitigate the spread of the virus and emerging variants, and the effectiveness of the distribution and acceptance of COVID-19 vaccines.
We recorded a net benefit of $1.7 million from the reversal of pre-tax restructuring and related charges in the quarter. Total restructuring and related charges since inception of $81.8 million were recorded through December 31, 2021 for the FY21 Restructuring Actions. The expected pre-tax charges for this program are approximately $85 million. Inception to date, we have achieved annualized savings of approximately $68 million.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Current quarter earnings per diluted share (EPS) of $0.37 was favorably affected by the net benefit from the reversal of restructuring and related charges of $0.02 per share and the gain on the New Castle divestiture of $0.01 per share, partially offset by differences in annual projected tax rates of $0.01 per share. The earnings per diluted share (EPS) of $0.23 in the prior year quarter was unfavorably affected by restructuring and related charges of $0.04 per share, offset by differences in annual projected tax rates of $0.11 per share.
We generated net cash flows from operating activities of $57.8 million during the six months ended December 31, 2021 compared to $67.4 million during the prior year quarter. Capital expenditures were $37.7 million and $68.6 million during the six months ended December 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 ended December 31, 20172021 were $571.3$486.7 million,, an increase of $83.8$46.2 million, or 17.210 percent, from $487.6$440.5 million in the prior year quarter. The increase in sales was driven by a 15organic growth of 11 percent, organic sales growth and a 3 percent favorable currency exchange impact, partially offset by aan unfavorable business days effect of 1 percent decrease due to fewer business days. Constant currency end market sales growth was approximately 23 percent in energy, 14 percent in transportation, 12 percent in general engineering, 11 percent in earthworks and 9 percent in aerospace and defense. Constant currency regional sales growth was approximately 19 percent in Asia Pacific, 15 percent in the Americas and 9 percent in Europe, the Middle East and Africa (EMEA).percent.
Sales for the six months ended December 31, 20172021 were $1,113.8$970.2 million, an increase of $149.1$129.4 million, or 15.515 percent, from $964.7$840.8 million in the prior year period. The increase in sales was driven by a 14organic growth of 15 percent organic sales growth and a 2 percent favorable currency exchange impact,effect of 1 percent, partially offset by aan unfavorable business days effect of 1 percent decrease due to fewer business days. Constant currency end market sales growth was approximately 24 percent in energy, 12 percent in earthworks, 10 percent in general engineering, 11 percent in transportation and 8 percent in aerospace and defense. Constant currency regional sales growth was approximately 17 percent in Asia Pacific, 14 percent in the Americas and 9 percent in EMEA.percent.
| | | | | | | | | | | | | | |
| Three Months Ended December 31, 2021 | Six Months Ended December 31, 2021 |
| (in percentages) | As Reported | Constant Currency | As
Reported | Constant Currency |
| End market sales growth (decline): | | | | |
| Aerospace | 24% | 24% | 22% | 21% |
| Energy | 24 | 24 | 24 | 23 |
| General engineering | 14 | 14 | 19 | 18 |
| Earthworks | 12 | 11 | 10 | 7 |
| Transportation | (11) | (10) | 2 | 1 |
| Regional sales growth: | | | | |
| Americas | 16% | 16% | 21% | 20% |
| Europe, the Middle East and Africa (EMEA) | 7 | 9 | 14 | 13 |
| Asia Pacific | 4 | 3 | 8 | 5 |
GROSS PROFIT
Gross profit for the three months ended December 31, 20172021 was $192.5$153.0 million,, an increase of $44.9$31.4 million from $147.6$121.5 million in the prior year quarter. The increase was primarily due to organic sales growth, favorable pricing, favorable product mix, and incremental restructuringsimplification/modernization benefits of approximately $13$4 million, favorable foreign currency exchange impact of $5.3 million, higher productivity and fixed cost absorption, favorable mix and $1.2 million less restructuring-related charges, partially offset by higher compensation expenseraw material costs of approximately $12 million and more overtime costs. The grossthe restoration of salaries and other cost control measures that were taken in the prior year quarter. Gross profit margin for the three months ended December 31, 20172021 was 33.731.4 percent, as compared to 30.327.6 percent in the prior year quarter.
Gross profit for the six months ended December 31, 20172021 was $377.5$313.7 million, an increase of $86.4$87.1 million from $291.2$226.6 million in the prior year period. The increase was primarily due to organic sales growth, favorable pricing, favorable product mix, and incremental restructuringsimplification/modernization benefits of approximately $28$7 million, favorable mix, favorable foreign currency exchange impact of $8.3 million and $1.9 million less restructuring-related charges, partially offset by higher compensation expense, overtime costs and raw material costs. The grosscosts of approximately $14 million and the restoration of salaries and other cost control measures that were taken in the prior year period. Gross profit margin for the six months ended December 31, 20172021 was 33.932.3 percent, as compared to 30.227.0 percent in the prior year period.
OPERATING EXPENSE
Operating expense for the three months ended December 31, 2017 increased to $120.6 million compared to $111.0 million for the three months ended December 31, 2016. The increase was primarily due to higher compensation expense and an unfavorable foreign currency exchange impact of $2.9 million, partially offset by incremental restructuring benefits of approximately $5 million and $0.7 million less in restructuring-related charges.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSE
Operating expense for the three months ended December 31, 2021 was $106.7 million compared to $97.8 million for the three months ended December 31, 2020. Operating expense for the six months ended December 31, 2017 increased to $240.02021 was $209.3 million compared to $230.9$191.1 million for the six months ended December 31, 2016. The increase was2020. Both increases were primarily due to higher compensationthe restoration of previously reduced salaries and other cost-control measures that were taken in the prior year.
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 and an unfavorable foreign currency exchange impact of $4.5 million, partially offset by incremental restructuring benefits of approximately $12totaled $10.5 million and $1.6$9.3 million less in restructuring-related charges.
for the three months ended December 31, 2021 and 2020, respectively, and $20.7 million and $18.1 million for the six months ended December 31, 2021 and 2020, respectively.
RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES
FY21 Restructuring Actions
In prior years, we implemented restructuring actions to streamline the Company's cost structure. The purpose of these initiatives was to improve the alignment of our cost structure with the current operating environment through employment reductions, as well as rationalization and consolidation of certain manufacturing facilities. These restructuring actions were substantially completed in the firstSeptember quarter of fiscal 2018,2020, we announced the initiation of restructuring actions in Germany associated with our simplification/modernization initiative to reduce structural costs. Subsequently, we also announced the acceleration of our other structural cost reduction plans including the closure of the Johnson City, Tennessee facility. Expected pre-tax charges for the FY21 Restructuring Actions are approximately $85 million. Total restructuring and related charges since inception of $81.8 million were mostly cash expendituresrecorded for this program through December 31, 2021, consisting of: $74.1 million in Metal Cutting and achieved annual run rate ongoing pre-tax savings of approximately $165 million.$7.7 million in Infrastructure. The remaining charges related to the FY21 Restructuring Actions are expected to be within the Metal Cutting segment.
Restructuring and Related Charges Recorded
We recorded restructuring and related benefits from the reversal of charges of $1.5 million and $11.8$1.7 million for the three months ended December 31, 20172021, which consisted of benefits of $1.7 million in Metal Cutting and 2016, respectively.an immaterial amount in Infrastructure. Of these amounts,this amount, restructuring benefits were $3.5 million and restructuring-related charges were less than $0.1$1.8 million (included in cost of goods sold), for the three months ended December 31, 20172021. For the three months ended December 31, 2020, we recorded restructuring and related charges of $4.2 million which consisted of charges of $3.5 million in Metal Cutting and $0.7 million in Infrastructure. Of this amount, restructuring charges totaled $8.8$1.8 million of which $0.4 million was included in cost of goods sold for the three months ended December 31, 2016, of which expense of $0.3 million was related to inventory and was recorded in cost of good sold.2020. Restructuring-related charges of $1.3 million and $2.1$2.4 million were recorded in cost of goods sold and $0.2 million and $0.9 million in operating expense for the three months ended December 31, 2017 and 2016, respectively.2020.
We recorded restructuring and related benefits from the reversal of charges of $8.4 million and $43.4$0.4 million for the six months ended December 31, 20172021, which consisted of benefits of $0.4 million in Metal Cutting and 2016, respectively.an immaterial amount in Infrastructure. Of these amounts,this amount, restructuring charges totaled $5.6benefits were $3.3 million, and $37.3restructuring-related charges were $2.8 million respectively,(included in cost of which expense of $0.3 milliongoods sold) for the six months ended December 31, 20162021. For the six months ended December 31, 2020, we recorded restructuring and related charges of $32.9 million which consisted of charges of $29.5 million in Metal Cutting and $3.3 million in Infrastructure. Of this amount, restructuring charges were $27.4 million, of which $0.4 million was related to inventory and was recordedincluded in cost of goods sold. Restructuring-related charges of $2.5 million and $4.1$5.5 million were recorded in cost of goods sold and $0.3 million and $2.0 million in operating expense for the six months ended December 31, 20172020.
GAIN ON DIVESTITURE
During the year ended June 30, 2020, we completed the sale of certain assets of the non-core specialty alloys and 2016, respectively.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.
Total restructuringThe 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 charges sinceto our simplification/modernization efforts. During the inception of our restructuring plans through December 31, 2017 were $156.0 million. See Note 7 in our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q (Note 7).
INTEREST EXPENSE
Interest expense for the three monthsquarter ended December 31, 2017 and 2016 was $7.2 million. Interest expense for2021, we recorded a gain of $1.0 million on the six months ended December 31, 2017 and 2016 was $14.4 million and $14.1 million, respectively.
OTHER EXPENSE, NET
Other expense for the three months ended December 31, 2017 increased to $1.3 million compared to $0.7 million for the three months ended December 31, 2016 primarilyNew Castle divestiture due to prior year income from transition services provided related to a prior divestiture.
Other expense for the six months ended December 31, 2017 increased to $1.4 million compared to $0.8 million for the six months ended December 31, 2016 primarily due to prior year income from transition services provided related to a prior divestiture, partially offset by foreign currency transaction gainsproceeds held in the current period.
INCOME TAXES
The effective income tax rates for the three months ended December 31, 2017 and 2016 were 29.3 percent and 50.9 percent, respectively. The effective income tax rate for the six months ended December 31, 2017 was 24.9 percent, and the effective income tax rate for the six months ended December 31, 2016 was not meaningful as the prior year loss before income taxes was negligible. The change in both periods was primarily driven by prior year U.S. losses not being tax-effected and current year U.S. income being subject to tax. This is the result of the valuation allowance, originally recorded in the fourth quarter of fiscal 2016, being released in the current quarter.
escrow until November 2021.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST EXPENSE
Interest expense for the three months ended December 31, 2021 decreased to $6.5 million compared to $8.3 million for the three months ended December 30, 2020. Interest expense for the six months ended December 31, 2021 decreased to $12.8 million compared to $18.9 million for the six months ended December 31, 2020. Both decreases were primarily related to the amounts outstanding under the Credit Agreement in the prior year and the refinancing of long-term debt at a lower interest rate during fiscal 2021.
OTHER INCOME, NET
Other income for the three months ended December 31, 2021 decreased to $3.1 million from $3.9 million during the three months ended December 31, 2020. Other income for the six months ended December 31, 2021 decreased to $6.6 million from $7.9 million during the six months ended December 31, 2020.
PROVISION FOR INCOME TAXES
The effective income tax rates for the three months ended December 31, 2021 and 2020 were 25.9 percent (provision on income) and 39.0 percent (benefit on income), respectively. The year-over-year change is primarily due to the effects of changes in projected pre-tax income in the prior period, higher projected pre-tax income in the current year and geographical mix.
The effective income tax rates for the six months ended December 31, 2021 and 2020 were 26.5 percent (provision on income) and 93.3 percent (benefit on a loss), respectively. The year-over-year change is primarily due to the effects of higher projected pre-tax income in the current period and geographical mix.
As of December 31, 2021, we have $25.5 million of U.S. net deferred tax assets, of which $57.0 million is related to net operating loss, tax credit, and other carryforwards that can be used to offset future U.S. taxable income. Certain of these carryforwards will expire if they are not used within a specified timeframe. At this time, we consider it more likely than not that we will have sufficient U.S. taxable income in the future that will allow us to realize these net deferred tax assets. However, it is possible that some or all of these tax attributes could ultimately expire unused, especially if our end markets do not continue to recover from the COVID-19 global pandemic. Therefore, if we are unable to generate sufficient U.S. taxable income from our operations, a valuation allowance to reduce the U.S. net deferred tax assets may be required, which would materially increase income tax expense in the period in which the valuation allowance is recorded.
BUSINESS SEGMENT REVIEW
We operate threein two reportable segments consisting of Industrial, WidiaMetal Cutting and Infrastructure. Expenses that are not allocated are reportedOur reportable operating segments have been determined in Corporate. Segment determinationaccordance with our internal management structure, which is organized based uponon 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.
Our sales and operating income (loss) by segment are as follows: |
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Sales: | | | | | | | |
| Industrial | $ | 312,448 |
| | $ | 267,492 |
| | $ | 609,912 |
| | $ | 536,536 |
|
| Widia | 47,744 |
| | 42,874 |
| | 92,987 |
| | 83,888 |
|
| Infrastructure | 211,153 |
| | 177,207 |
| | 410,900 |
| | 344,289 |
|
| Total sales | $ | 571,345 |
| | $ | 487,573 |
| | $ | 1,113,799 |
| | $ | 964,713 |
|
| Operating income (loss): | | | | | | | |
| Industrial | $ | 43,292 |
| | $ | 18,067 |
| | $ | 78,104 |
| | $ | 23,603 |
|
| Widia | 856 |
| | (2,666 | ) | | 918 |
| | (8,403 | ) |
| Infrastructure | 25,511 |
| | 10,274 |
| | 47,580 |
| | 2,687 |
|
| Corporate | (1,485 | ) | | (1,662 | ) | | (1,952 | ) | | (3,085 | ) |
| Total operating income | 68,174 |
| | 24,013 |
| | 124,650 |
| | 14,802 |
|
| Interest expense | 7,231 |
| | 7,151 |
| | 14,379 |
| | 14,144 |
|
| Other expense, net | 1,313 |
| | 726 |
| | 1,401 |
| | 844 |
|
| Income (loss) from continuing operations before income taxes | $ | 59,630 |
| | $ | 16,136 |
| | $ | 108,870 |
| | $ | (186 | ) |
INDUSTRIAL
For the three months ended December 31, 2017, Industrial sales increased 17 percent from the prior year quarter. General engineering sales experienced growth from global sales in the indirect channel and in the light and general engineering sector. Growth in transportation sales in Asia Pacific and EMEA to tier suppliers and OEMs were dampened by lower sales to OEMs in the Americas. Oil and gas drilling sales in the Americas continues to provide overall growth in energy, coupled with increases in power generation sales primarily in Asia Pacific. Conditions continue to be favorable in the aerospace sector, with global sales We do not allocate certain corporate expenses related to engine growth being supplemented by increasing demand related to framesexecutive 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 Americas. The sales increases in Asia Pacific and EMEA were primarily driven by the transportation and general engineering end markets. The sales increase in the Americas was primarily driven by the performance in the general engineering, energy and aerospace and defense end markets.
For the three months ended December 31, 2017, Industrialaggregation of two or more operating income increased by $25.2 million, driven primarily by organic sales growth, incremental restructuring benefits of approximately $10 million, $5.9 million less restructuring and related charges in the current quarter and higher productivity and fixed cost absorption, partially offset by higher compensation expense. Industrial operating margin was 13.9 percent compared with 6.8 percent in the prior year.
For the six months ended December 31, 2017, Industrial sales increased 14 percent from the prior year period. General engineering sales experienced growth from sales in the indirect channel across all regions and positive performance in the light and general engineering sector in EMEA and the Americas. Transportation sales to tier suppliers globally increased in the period as well as to OEMs in EMEA and Asia Pacific. This was offset slightly by lower sales to OEMs in the Americas. Oil and gas drilling sales in the Americas continue to provide overall growth in energy, coupled with increases in renewable power generation sales globally. Conditions continue to be favorable in the aerospace sector, with increasing global sales related to engine growth being supplemented by increasing demand related to frames in the Americas and EMEA. The sales increases in Asia Pacific and EMEA were primarily driven by the transportation and general engineering end markets. The sales increase in the Americas was primarily driven by the performance in the energy, general engineering and aerospace and defense end markets.
segments.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the six months ended December 31, 2017, IndustrialOur sales and operating income increased(loss) by $54.5 million, driven primarily by organic sales growth, incremental restructuring benefits of approximately $24 million and $20.6 million less restructuring and related charges in the current quarter, partially offset by higher compensation expense and unfavorable mix. Industrial operating margin was 12.8 percent compared with 4.4 percent in the prior year period.segment are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Sales: | | | | | | | |
| Metal Cutting | $ | 298,581 | | | $ | 282,917 | | | $ | 597,011 | | | $ | 530,793 | |
| Infrastructure | 188,092 | | | 157,590 | | | 373,171 | | | 310,019 | |
| Total sales | $ | 486,673 | | | $ | 440,507 | | | $ | 970,182 | | | $ | 840,812 | |
| Operating income (loss): | | | | | | | |
| Metal Cutting | $ | 27,895 | | | $ | 13,693 | | | $ | 57,059 | | | $ | (9,933) | |
| Infrastructure | 19,971 | | | 6,265 | | | 46,007 | | | 13,533 | |
| Corporate | (361) | | | (924) | | | (955) | | | (1,743) | |
| Total operating income | 47,505 | | | 19,034 | | | 102,111 | | | 1,857 | |
| Interest expense | 6,460 | | | 8,317 | | | 12,781 | | | 18,896 | |
| Other income, net | (3,142) | | | (3,857) | | | (6,601) | | | (7,875) | |
| Income (loss) before income taxes | $ | 44,187 | | | $ | 14,574 | | | $ | 95,931 | | | $ | (9,164) | |
METAL CUTTING
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands, except operating margin) | 2021 | | 2020 | | 2021 | | 2020 |
| Sales | $ | 298,581 | | | $ | 282,917 | | | $ | 597,011 | | | $ | 530,793 | |
| Operating income (loss) | 27,895 | | | 13,693 | | | 57,059 | | | (9,933) | |
| Operating margin | 9.3 | % | | 4.8 | % | | 9.6 | % | | (1.9) | % |
| | | | | | | | | | | |
| Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
| (in percentages) |
| Organic sales growth | 7% | | 12% |
Foreign currency exchange effect(1) | — | | 1 |
Business days effect(2) | (1) | | (1) |
| | | |
| | | |
| Sales growth | 6% | | 12% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
| (in percentages) | As Reported | | Constant Currency | | As Reported | | Constant Currency |
| End market sales growth (decline): | | | | | | | |
| Aerospace | 24% | | 24% | | 22% | | 21% |
| General engineering | 12 | | 13 | | 18 | | 17 |
| Energy | 7 | | 7 | | 5 | | 4 |
| Transportation | (11) | | (10) | | 2 | | 1 |
| Regional sales growth (decline): | | | | | | | |
| Americas | 11% | | 11% | | 17% | | 16% |
| EMEA | 5 | | 8 | | 13 | | 14 |
| Asia Pacific | (3) | | (4) | | 4 | | 1 |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands, except operating margin) | 2017 | | 2016 | | 2017 | | 2016 |
| Sales | $ | 312,448 |
| | $ | 267,492 |
| | $ | 609,912 |
| | $ | 536,536 |
|
| Operating income | 43,292 |
| | 18,067 |
| | 78,104 |
| | 23,603 |
|
| Operating margin | 13.9 | % | | 6.8 | % | | 12.8 | % | | 4.4 | % |
|
| | | | | | |
| | | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 |
| | | |
| In percentages | | |
| Organic sales growth | | 14 | % | | 12 | % |
Foreign currency exchange impact(1) | | 4 |
| | 3 |
|
Business days impact(2) | | (1 | ) | | (1 | ) |
Divestiture impact(3) | | — |
| | — |
|
Acquisition impact(4) | | — |
| | — |
|
| Sales growth | | 17 | % | | 14 | % |
|
| | | | | | |
| | | Constant Currency Regional Sales Growth |
| | | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 |
| Asia Pacific | | 20 | % | | 17 | % |
| EMEA | | 11 |
| | 9 |
|
| Americas | | 11 |
| | 10 |
|
|
| | | | | | |
| | | Constant Currency End Market Sales Growth |
| | | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 |
| Energy | | 19 | % | | 20 | % |
| Transportation | | 14 |
| | 11 |
|
| General engineering | | 11 |
| | 9 |
|
| Aerospace and defense | | 9 |
| | 8 |
|
WIDIA
For the three months ended December 31, 2017, Widia sales increased 11 percent from the prior year quarter. Widia organic sales growth continues to be positively impacted by the reorganization of distribution in Europe, growth in India related to higher demand trends, in addition to increasing demand in the U.S. energy markets and higher growth rates in emerging markets.
For the three months ended December 31, 2017, Widia operating income was $0.9 million compared to an operating loss of $2.7 million for the prior year quarter. The year-over-year change of $3.5 million was driven primarily by $1.8 million less restructuring and related charges and organic sales growth. Widia operating income margin was 1.8 percent compared with operating loss margin of 6.2 percent in the prior year quarter.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three months ended December 31, 2021, Metal Cutting sales increased 6 percent from the prior year quarter. Aerospace end market sales increased in all regions as airplane manufacturing continues to recover. Sales in our general engineering end market increased in all regions, as manufacturing activity continues to recover from the effects of the COVID-19 pandemic. Energy sales increased in Americas as oil and gas drilling improved, partially offset by a decline in Asia Pacific driven by lower activity in China wind power. Transportation end market sales decreased in all regions due to the ongoing semiconductor related supply chain challenges. On a regional basis, the sales increases in the Americas was driven by an increase in the aerospace, energy, and general engineering end markets, partially offset by a decline in the transportation end market. The sales increase in EMEA was driven by increases in the aerospace and general engineering end markets, partially offset by a decrease in the energy and transportation end markets. The sales decrease in Asia Pacific was primarily driven by declines in the energy and transportation end markets, partially offset by increases in sales in the general engineering and aerospace end markets.
For the three months ended December 31, 2021, Metal Cutting operating income was $27.9 million compared to $13.7 million in the prior year quarter. The year-over-year change was due primarily to organic sales growth, $2 million of net benefit from the reversal of restructuring and related charges compared to charges of $4 million in the prior year quarter, favorable pricing, approximately $4 million of incremental simplification/modernization benefits and favorable product mix, partially offset by approximately $8 million due to the restoration of salaries and other cost-control measures that were taken in the prior year quarter.
For the six months ended December 31, 2017, Widia2021, Metal Cutting sales increased 1112 percent from the prior year period. Widia organicAerospace end market sales growthincreased in all regions as airplane manufacturing continues to be positively impactedrecover. Energy sales increased in Americas as oil and gas drilling improved, partially offset by declines in Asia Pacific driven by lower wind power activity in China. Sales in our general engineering end market increased in all regions, as manufacturing activity continues to recover from the reorganization of distribution in Europe, growth in India related to higher demand trends, in addition to increasing demandCOVID-19 pandemic. Transportation end market sales increased in the U.S.Americas due to improved automotive manufacturing levels, partially offset by declines in EMEA and Asia Pacific due to supply chain challenges. On a regional basis, the sales increase in the Americas was driven by increases in all end markets. The sales increase in EMEA was primarily driven by increases in the aerospace, energy and general engineering end markets, partially offset by a decline in the transportation end market. The sales increase in Asia Pacific was primarily driven by increases in the aerospace, and higher growth ratesgeneral engineering end markets, partially offset by a decline in emergingthe energy and transportation end markets.
For the six months ended December 31, 2017, Widia2021, Metal Cutting operating income was $0.9$57.1 million compared to an operating loss of $8.4$9.9 million forin the prior year period. The year-over-year change was due primarily to organic sales growth, $0.4 million of $9.3 million was driven primarily by $4.0 million lessnet benefit from the reversal of restructuring and related charges organic sales growth, higher productivity and fixed cost absorption and incremental restructuring benefits of approximately $1 million. Widia operating income margin was 1.0 percent compared with operating loss margin of 10.0 percent in the prior year.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Sales | $ | 47,744 |
| | $ | 42,874 |
| | $ | 92,987 |
| | $ | 83,888 |
|
| Operating income (loss) | 856 |
| | (2,666 | ) | | 918 |
| | (8,403 | ) |
| Operating margin | 1.8 | % | | (6.2 | )% | | 1.0 | % | | (10.0 | )% |
|
| | | | | | |
| | | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 |
| | | |
| In percentages | | |
| Organic sales growth | | 9 | % | | 9 | % |
Foreign currency exchange impact(1) | | 2 |
| | 2 |
|
Business days impact(2) | | — |
| | — |
|
Divestiture impact(3) | | — |
| | — |
|
Acquisition impact(4) | | — |
| | — |
|
| Sales growth | | 11 | % | | 11 | % |
|
| | | | | | |
| | | Constant Currency
Regional Sales Growth |
| | | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 |
| EMEA | | 16 | % | | 18 | % |
| Americas | | 8 |
| | 7 |
|
| Asia Pacific | | 4 |
| | 6 |
|
INFRASTRUCTURE
For the three months ended December 31, 2017, Infrastructure sales increased by 19 percent from the prior year quarter. The U.S. oil and gas market continues to stabilize, manifesting in high year-over-year growth in energy with average U.S. land rig counts up over 60 percent compared to the prior year quarter. In the earthworks market, underground mining continues to show signscharges of improvement, while construction sales improved in part due to stronger demand in road rehabilitation. The sales increase in Asia Pacific was driven primarily by the performance in the earthworks and general engineering end markets. Growth in the Americas was primarily driven by the oil and gas, general engineering and earthworks end markets.
For the three months ended December 31, 2017, Infrastructure operating income increased by $15.2$29.5 milliondriven primarily by organic sales growth, incremental restructuring program benefits of approximately $6 million, $2.6 million less restructuring and related charges in the current period and favorable mix, partially offset by higher compensation expense, raw material costs and overtime costs. Infrastructure operating margin was 12.1 percent compared with 5.8 percent in the prior year quarter.period, favorable pricing, approximately $4 million of incremental simplification/modernization benefits and favorable product mix, partially offset by approximately $19 million due to the restoration of salaries and other cost-control measures that were taken in the prior year period.
INFRASTRUCTURE
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Sales | $ | 188,092 | | | $ | 157,590 | | | $ | 373,171 | | | $ | 310,019 | |
| Operating income | 19,971 | | | 6,265 | | | 46,007 | | | 13,533 | |
| Operating margin | 10.6 | % | | 4.0 | % | | 12.3 | % | | 4.4 | % |
| | | | | | | | | | | |
| Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
| (in percentages) |
| Organic sales growth | 18% | | 18% |
Foreign currency exchange effect(1) | 1 | | 2 |
| | | |
| | | |
| | | |
| Sales growth | 19% | | 20% |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2021 | | Six Months Ended December 31, 2021 |
| (in percentages) | As Reported | | Constant Currency | | As Reported | | Constant Currency |
| End market sales growth: | | | | | | | |
| Energy | 33% | | 33% | | 36% | | 35% |
| General engineering | 17 | | 17 | | 21 | | 20 |
| Earthworks | 12 | | 11 | | 10 | | 7 |
| Regional sales growth: | | | | | | | |
| Americas | 22% | | 22% | | 25% | | 25% |
| EMEA | 15 | | 15 | | 15 | | 11 |
| Asia Pacific | 17 | | 14 | | 15 | | 10 |
For the sixthree months ended December 31, 2017,2021, Infrastructure sales increased by 19 percent from the prior year period.quarter. The U.S. oiloil and gas market continues to stabilize, manifestingdrove a year-over-year increase in high year-over-year growth inthe energy with averagemarket as U.S. land rig counts up over 75 percentcontinued to increase. Sales in our earthworks end market increased primarily due to growth in the construction end markets and higher underground mine output. In general engineering, the increase in sales was across all regions reflecting continued strength of the global manufacturing economy. On a regional basis, the sales increases in the Americas, EMEA and Asia Pacific were all driven by increases in all end markets.
For the three months ended December 31, 2021, Infrastructure operating income was $20.0 million compared to $6.3 million in the prior year period. On a year-to-date basis, we are seeing improvements in all end markets, including underground miningquarter. The year-over-year change was due primarily to organic sales growth, favorable pricing and construction. The sales increase in Asia Pacific was driven primarilyfavorable product mix, partially offset by higher raw material costs of approximately $11 million and approximately $2 million due to the performancerestoration of salaries and other cost-control measures that were taken in the earthworks and general engineering end markets. Growth in the Americas was primarily driven by the oil and gas, earthworks and general engineering end markets. The sales increase in EMEA was primarily driven by performance in the earthworks end market.prior year quarter.
For the six months ended December 31, 2017,2021, Infrastructure sales increased by 20 percent from the prior year period. The U.S. oil and gas market drove a year-over-year increase in the energy market. Sales in our earthworks end market increased primarily due to growth in the mining end market. In general engineering, the increase in sales was across all regions. On a regional basis, the sales increases in the Americas, EMEA and Asia Pacific were all driven by increases in all end markets.
For the six months ended December 31, 2021, Infrastructure operating income increased by $44.9was $46.0 million drivencompared to $13.5 million in the prior year period. The year-over-year change was due primarily byto organic sales growth, incremental restructuring program benefits of approximately $14 million, $10.4 million less restructuring favorable pricing and related charges in the current period, favorable product mix, and higher fixed cost absorption and productivity, partially offset by higher raw material costs of approximately $14 million and overtime costsapproximately $5 million due to the restoration of salaries and higher compensation expense. Infrastructure operating margin was 11.6 percent compared with 0.8 percentother cost-control measures that were taken in the prior year period.
CORPORATE
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Corporate expense | $ | (361) | | | $ | (924) | | | $ | (955) | | | $ | (1,743) | |
For the three months ended December 31, 2021, Corporate expense decreased by $0.6 million from the prior year quarter. For the six months ended December 31, 2021 Corporate expense decreased by $0.8 million from the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is the primary source of funding for our capital expenditures. For the six months ended December 31, 2021, cash flow provided by operating activities was $57.8 million.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Sales | $ | 211,153 |
| | $ | 177,207 |
| | $ | 410,900 |
| | $ | 344,289 |
|
| Operating income | 25,511 |
| | 10,274 |
| | 47,580 |
| | 2,687 |
|
| Operating margin | 12.1 | % | | 5.8 | % | | 11.6 | % | | 0.8 | % |
|
| | | | | | |
| | | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 |
| | | |
| In percentages | | |
| Organic sales growth | | 18 | % | | 19 | % |
Foreign currency exchange impact(1) | | 2 |
| | 1 |
|
Business days impact(2) | | (1 | ) | | (1 | ) |
Divestiture impact(3) | | — |
| | — |
|
Acquisition impact(4) | | — |
| | — |
|
| Sales growth | | 19 | % | | 19 | % |
|
| | | | | | |
| | | Constant Currency
Regional Sales Growth |
| | | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 |
| Asia Pacific | | 24 | % | | 22 | % |
| Americas | | 20 |
| | 20 |
|
| EMEA | | 1 |
| | 5 |
|
|
| | | | | | |
| | | Constant Currency
End Market Sales Growth |
| | | Three Months Ended December 31, 2017 | | Six Months Ended December 31, 2017 |
| Energy | | 25 | % | | 26 | % |
| General engineering | | 20 |
| | 15 |
|
| Earthworks | | 11 |
| | 12 |
|
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CORPORATE
ForDuring the three months ended December 31, 2017, Corporate unallocated expense decreased $0.2 million, or 10.6 percent, fromSeptember 30, 2020, we entered into the prior year quarter. For the six months ended December 31, 2017, Corporate unallocated expense decreased $1.1 million, or 36.7 percent, from the prior year period.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| (in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Corporate unallocated expense | $ | (1,485 | ) | | $ | (1,662 | ) | | $ | (1,952 | ) | | $ | (3,085 | ) |
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is the primary source of funding for capital expenditures. Year to date December 31, 2017 cash flow provided by operating activities was $66.8 million, primarily dueFirst Amendment (the Amendment) to the net inflow from net income with adjustments for non-cash items, partially offsetFifth Amended and Restated Credit Agreement dated as of June 21, 2018, (as amended by the Amendment, the Credit Agreement). The Credit Agreement is a net outflow from changes in other assets and liabilities.
Our five-year, multi-currency, revolving credit facility as amended and restated in April 2016 (Credit Agreement),that is used to augment our cash from operations and isas an additional source of funds. The Credit Agreement provides for revolving credit loans of up to $600.0$700.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement allows for borrowings in U.S. dollars, euro,euros, Canadian dollars, poundpounds sterling and Japanese yen. Interest payable under the Credit Agreement is based upon the type of borrowing under the facility and may be (1) LIBOR plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us. The Credit Agreement matures in April 2021. We had no borrowings outstanding on our Credit Agreement as of December 31, 2017.June 2023.
The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including two financial covenants: (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 of the 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 from September 30, 2020 through and including December 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 through December 31, 2021; and (2) a minimum consolidated interest coverage ratio of EBITDA to interest of 3.5 times (as thosethe aforementioned terms are defined in the Credit Agreement). We were in compliance with all such covenants as of December 31, 2017. For the six months ended December 31, 2017, average daily borrowings outstanding under the Credit Agreement were approximately $1.9 million. Borrowings under the Credit Agreement are guaranteed by our significant domestic subsidiaries.
As of December 31, 2021, we were in compliance with all the covenants of the Credit Agreement. For the six months ended December 31, 2021, average daily borrowings outstanding under the Credit Agreement were approximately $9.4 million. We had $9.0 million of borrowings outstanding under the Credit Agreement and $691.0 million of additional availability as of December 31, 2021. There were no borrowings outstanding as of June 30, 2021.
We consider substantially allthe majority of the unremitted earnings of our non-U.S. subsidiaries that have not previously been taxed in the U.S. to be permanently reinvested. As a result of TCJA, which among other provisions allows for a 100% dividends received deduction from controlled foreign subsidiaries,With regard to these unremitted earnings, we will re-evaluate our assertion with respect to permanent reinvestment. As part of this evaluation, we will consider our global working capital and capital investment requirements, among other considerations including the potential tax liabilities that would be incurred if the non-U.S. subsidiaries distribute cash to the U.S. parent. If we determine that an entity should no longer remain subject to the permanent reinvestment assertion, we will accrue additional tax charges, including but not limited to state income taxes, withholding taxes and other relevant foreign taxes in the period the conclusion is determined. In accordance with SEC guidance in Staff Accounting Bulletin 118, we expect to complete our evaluation by December 22, 2018. We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, orincluding liquidity needs associated with our domestic debt service requirements. 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.
DuringIn 2012, we received an assessment from the three months ended December 31, 2017, we recordedItalian tax authority that denied certain tax deductions primarily related to our 2008 tax return. Attempts at negotiating a $77 million provisionalreasonable settlement with the tax chargeauthority were unsuccessful; and as a result, we decided to litigate the matter. While the outcome of a new U.S.the litigation is still pending, the tax lawauthority served notice in the Tax CutsSeptember quarter of fiscal 2020 requiring payment in the amount of €36 million. Accordingly, we requested and Jobs Act of 2017’s provision requiringwere granted a one-time transition tax on previously untaxed accumulated earningsstay and profits of certain non-U.S. companies. The toll tax charge consumed our entire U.S. federal net operating loss carryforward and other credit carryforwards, which represent a significant portion of our previously available deferred tax assets, and was offset by the release of the valuation allowance associated with these assets. As a result, we doare not expectcurrently required to make a cash payment associatedin connection with this assessment. We continue to believe that the toll charge.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 €36.3 million, or $41.1 million, including penalties and interest of €21.6 million, or $24.4 million. A trial date has not yet been set by the Italian court.
At December 31, 2017,2021, cash and cash equivalents were $159.9$101.8 million, Total Kennametal Shareholders' equity was $1,126.4$1,316.0 million and total debt was $697.1$605.0 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 since June 30, 2017.
2021 other than the temporary provisions provided under the Amendment to the Credit Agreement (as outlined above) that expired subsequent to December 31,
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2021.
Cash Flow Provided by Operating Activities
During the six months ended December 31, 2017,2021, cash flow provided by operating activities was $66.8$57.8 million, compared to $48.7$67.4 million for the prior year period. Cash flow provided by operating activities for the current year period consisted of net income and non-cash items amounting to an inflow of $161.1$144.5 million and changes in certain assets and liabilities netting to an outflow of $94.3$86.7 million. Contributing to the changes in certain assets and liabilities were an increase in inventories of $67.0 million and a decrease ofin accounts payable and accrued liabilities of $66.6 million,$36.6 million. Partially offsetting these cash outflows was a decrease in accrued pension and postretirement benefitsaccounts receivable of $13.8 million and an increase in inventories$23.0 million.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the six months ended December 31, 2016,2020, cash flow provided by operating activities consisted of net lossincome and non-cash items amounting to an inflow of $53.7$80.0 million and changes in certain assets and liabilities netting to an outflow of $5.0$12.7 million. Contributing to the changes in certain assets and liabilities were a decrease in accrued income taxes of $24.5 million, an increase in accounts receivable of $22.5 million and a decrease in accrued pension and postretirement benefits of $11.3 million and a net decrease of accounts payable and accrued liabilities of $5.5 million primarily driven by lower accrued compensation.$13.4 million. Partially offsetting these cash outflows was a decrease in accounts receivableinventories of $20.4 million due to lower sales volume.$46.7 million.
Cash Flow Used for Investing Activities
Cash flow used for investing activities was $84.1$36.1 million for the six months ended December 31, 2017,2021, compared to $67.0$67.6 million for the prior year period. During the current year period, cash flow used for investing activities primarily included capital expenditures, net of $84.4$37.1 million, which consisted primarily of expenditures related to our simplification/modernization initiatives and equipment upgrades.upgrades, partially offset by the $1.0 million in proceeds from the New Castle divestiture.
For the six months ended December 31, 2016,2020, cash flow used for investing activities included capital expenditures, net of $67.1$67.7 million, which consisted primarily of expenditures related to our simplification/modernization initiatives and equipment upgrades.
Cash Flow Used for Financing Activities
Cash flow used for financing activities was $17.3$72.5 million for the six months ended December 31, 20172021 compared to $36.8$512.0 million in the prior year period. During the current year period, cash flow used for financing activities included $32.5$35.5 million in common shares repurchased, $33.5 million of cash dividends paid to Kennametal Shareholders, partially offset by $15.0$6.8 million of dividend reinvestment and the effect of employee benefit and stock plans.
For the six months ended December 31, 2016, cash flow used for financing activities included $32.0 million of cash dividends paid to Shareholders and a $6.6 million payment on the remaining contingent consideration related to a prior acquisition. These cash outflows were partially offset by $1.3 million of dividend reinvestment and the effect of employee benefit and stock plans and $0.6dividend reinvestment, and $5.1 million decrease in notes payable, partially offset by $9 million from the borrowings under the Credit Agreement.
For the six months ended December 31, 2020, cash flow used for financing activities included $475.5 million of a net increasedecrease in borrowings.the revolving and other lines of credit and $33.3 million of cash dividends paid to Kennametal Shareholders.
FINANCIAL CONDITION
Working capital was $720.8$573.2 million at December 31, 2017,2021, an increase of $68.3$5.8 million from $652.4$567.4 million at June 30, 2017.2021. The increase in working capital was primarily driven by a decrease in accounts payable of $25.1 million, a decrease in accrued expenses of $21.1 million driven by payroll timing and lower accrued vacation pay, an increase in inventories of $19.8$56.7 million due in part to increasing volumes,and a decrease in other current liabilities of $19.3$31.8 million, due primarily to restructuring payments and bonus payments, and increase in other current assets of $12.9 million due in part to reclassification of tax assets from deferred income taxes to other current assets related to out of period adjustment and an increase in accounts receivable of $12.5 million due in part to increasing volumes. Partially offsetting these items waspartially offset by a decrease in cash and cash equivalents of $30.7$52.2 million and an increasea decrease in accrued income taxesaccounts receivable of $11.2 million due primarily to increased taxable income in taxpaying jurisdictions.$30.4 million. Currency exchange rate effects increaseddecreased working capital by a total of $16.3approximately $13.6 million, the impact of which is included in the aforementioned changes.
Property, plant and equipment, net increased $35.3decreased $32.4 million from $744.4$1,055.1 million at June 30, 20172021 to $779.7$1,022.8 million at December 31, 2017,2021, primarily due to depreciation expense of $58.2 million and unfavorable currency effects of $10.9 million, partially offset by net capital additions of $73.7 million and a positive currency exchange impact of $12.0 million during the current period. This increase was partially offset by depreciation expense of $46.1 million, impairment related to restructuring programs of $2.3 million and disposal of $0.8$37.1 million.
At December 31, 2017,2021, other assets were $567.8$603.9 million, an increasea decrease of $10.6$1.9 million from $557.2$605.8 million at June 30, 2017.2021. The primary drivers fordecrease was primarily due to amortization of intangibles of $6.5 million, a decrease in goodwill of $4.3 million due to currency exchange effects, and a decrease in the increase wereoperating lease right-of-use asset of $4.7 million, partially offset by an increase in other assets of $17.9$15.8 million.
Kennametal Shareholders' equity was $1,316.0 million at December 31, 2021, a decrease of $13.6 million from $1,329.6 million at June 30, 2021. The decrease was primarily due to an increase in pension plan assetsthe repurchase of capital stock of $35.5 million primarily under the share repurchase program that was initiated during fiscal 2022, cash dividends paid to Kennametal Shareholders of $33.5 million, and an increase in goodwillother comprehensive loss of $4.8$18.8 million, due to favorable currency exchange effects. This increase was partially offset by a $6.7 million decrease in deferrednet income taxes primarily dueattributable to outKennametal of period adjustment related$67.6 million.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
There have been no changes to tax assets recorded on intra-entity inventory transfers, partially offset by release of the valuation allowance on U.S. deferred tax assets, in addition to a $6.0 million decrease in other intangible assets, which was due primarily to amortization expense.our critical accounting policies since June 30, 2021.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Long-term debt and capital leases increased by $0.7 million to $695.7 million at December 31, 2017 from $695.0 million at June 30, 2017.
Kennametal Shareholders' equity was $1,126.4 million at December 31, 2017, an increase of $109.1 million from $1,017.3 million at June 30, 2017. The increase was primarily due to net income attributable to Kennametal of $80.8 million, favorable currency exchange of $32.6 million, capital stock issued under employee benefit and stock plans of $26.9 million and reclassification of net pension and other postretirement benefit loss of $3.3 million, partially offset by cash dividends paid to Shareholders of $32.5 million and unrecognized net pension and other postretirement benefit loss of $2.6 million.
ENVIRONMENTAL MATTERS
The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain of our locations.
Superfund Sites Among other environmental laws, we are subject to the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), under which we have been designated by the United States Environmental Protection Agency (USEPA) as a Potentially Responsible Party (PRP) with respect to environmental remedial costs at certain Superfund sites. We have evaluated our claims and liabilities associated with these Superfund sites based upon best currently available information. We believe our environmental accruals are adequate to cover our portion of the environmental remedial costs at the Superfund sites where we have been designated a PRP, to the extent these expenses are probable and reasonably estimable.
Other Environmental Matters We establish and maintain reserves for other potential environmental issues. At December 31, 2017 and June 30, 2017, the balances of these reserves were $12.7 million and $12.4 million, respectively. These reserves represent anticipated costs associated with the remediation of these issues.
The reserves we have established for environmental liabilities represent our best current estimate of the costs of addressing all identified environmental situations, based on our review of currently available evidence, and taking into consideration our prior experience in remediation and that of other companies, as well as public information released by the USEPA, other governmental agencies, and by the PRP groups in which we are participating. Although the reserves currently appear to be sufficient to cover these environmental liabilities, there are uncertainties associated with environmental liabilities, and we can give no assurance that our estimate of any environmental liability will not increase or decrease in the future. The reserved and unreserved liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government on these matters.
We maintain a Corporate Environmental Health and Safety (EHS) Department, to monitor compliance with environmental regulations and to oversee remediation activities. In addition, we have designated EHS analysts who are responsible for each of our global manufacturing facilities. Our financial management team periodically meets with members of the Corporate EHS Department and the Corporate Legal Department to review and evaluate the status of environmental projects and contingencies. On a quarterly basis, we review financial provisions and reserves for environmental contingencies and adjust these reserves when appropriate.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Effective July 1, 2017 with the adoption of new Financial Accounting Standards Board (FASB) guidance on subsequent measurement of inventory, non-LIFO inventories are now stated at the lower of cost or net realizable value. LIFO inventories continue to be stated at the lower of cost or market.
There have been no other changes to our critical accounting policies since June 30, 2017.
NEW ACCOUNTING STANDARDS
See Note 3 to our condensed consolidated financial statements set forth in Part I Item 1 of this Quarterly Report on Form 10-Q for a description of new accounting standards.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BY U.S. GAAP
In accordance with SEC rules, below are the SEC's Regulation G, the following provides definitions of the non-GAAP financial measures we use in this report and the reconciliation of these measures to the most closely related GAAP financial measure.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. TheseWe 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 Organic sales growth is a non-GAAP financial measure of sales growth (which is the most directly comparable GAAP measure) excluding the impactseffects of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. Also, we report organic sales growth at the consolidated and segment levels.
Constant currency end market sales growth (decline) Constant currency end market sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by end market excluding the impactseffects 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 impacteffect of business days. We believe this measure provides investors with a supplemental understanding of underlying end market trends by providing end market sales growth (decline) on a consistent basis. Also, we report constant currency end market sales growth (decline) at the consolidated and segment levels. Widia sales are reported only in the general engineering end market. Therefore, we do not provide constant currency end market sales growth for the Widia segment and, thus, do not include a reconciliation for that metric.
Constant currency regional sales growth (decline) Constant currency regional sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by region excluding the impactseffects 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 impacteffect of business days. We believe this measure provides investors with a supplemental understanding of underlying regional trends by providing regional sales growth (decline) on a consistent basis. Also, we report constant currency regional sales growth (decline) at the consolidated and segment levels.
Reconciliations of organic sales growth to sales growth are as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, 2021 | | Metal Cutting | | | Infrastructure | | Total |
| Organic sales growth | | 7% | | | 18% | | 11% |
Foreign currency exchange effect(1) | | — | | | 1 | | — |
Business days effect(2) | | (1) | | | — | | (1) |
| | | | | | | |
| | | | | | | |
| Sales growth | | 6% | | | 19% | | 10% |
|
| | | | | | | | |
| Three Months Ended December 31, 2017 | | Industrial | | Widia | | Infrastructure | | Total |
| Organic sales growth | | 14% | | 9% | | 18% | | 15% |
Foreign currency exchange impact(1) | | 4 | | 2 | | 2 | | 3 |
Business days impact(2) | | (1) | | — | | (1) | | (1) |
Divestiture impact(3) | | — | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — | | — |
| Sales growth | | 17% | | 11% | | 19% | | 17% |
| | | | | | | | | | | | | | | |
| Six Months Ended December 31, 2021 | | Metal Cutting | | | Infrastructure | | Total |
| Organic sales growth | | 12% | | | 18% | | 15% |
Foreign currency exchange effect(1) | | 1 | | | 2 | | 1 |
Business days effect(2) | | (1) | | | — | | (1) |
| | | | | | | |
| | | | | | | |
| Sales growth | | 12% | | | 20% | | 15% |
|
| | | | | | | | |
| Six Months Ended December 31, 2017 | | Industrial | | Widia | | Infrastructure | | Total |
| Organic sales growth | | 12% | | 9% | | 19% | | 14% |
Foreign currency exchange impact(1) | | 3 | | 2 | | 1 | | 2 |
Business days impact(2) | | (1) | | — | | (1) | | (1) |
Divestiture impact(3) | | — | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — | | — |
| Sales growth | | 14% | | 11% |
| 19% |
| 15% |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Reconciliations of constant currency end market sales growth (decline) to end market sales growth(5), (decline)(3) are as follows:
| | | | | | | | | | | | | | | | | | |
| Metal Cutting | | | | | | | | |
| Three Months Ended December 31, 2021 | | General engineering | | Transportation | | Aerospace | | Energy |
| Constant currency end market sales growth (decline) | | 13% | | (10)% | | 24% | | 7% |
Foreign currency exchange effect(1) | | (1) | | (1) | | — | | — |
| | | | | | | | |
| | | | | | | | |
End market sales growth (decline)(3) | | 12% | | (11)% | | 24% | | 7% |
| | | | | | | | | | | | | | |
| Infrastructure | | | | | | |
| Three Months Ended December 31, 2021 | | Energy | | Earthworks | | General engineering |
| Constant currency end market sales growth | | 33% | | 11% | | 17% |
Foreign currency exchange effect(1) | | — | | 1 | | — |
| | | | | | |
| | | | | | |
End market sales growth(3) | | 33% | | 12% | | 17% |
| | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | |
| Three Months Ended December 31, 2021 | | General engineering | | Transportation | | Aerospace | | Energy | | Earthworks |
| Constant currency end market sales growth (decline) | | 14% | | (10)% | | 24% | | 24% | | 11% |
Foreign currency exchange effect(1) | | — | | (1) | | — | | — | | 1 |
| | | | | | | | | | |
| | | | | | | | | | |
End market sales growth (decline)(3) | | 14% | | (11)% | | 24% | | 24% | | 12% |
| | | | | | | | | | | | | | | | | | |
| Metal Cutting | | | | | | | | |
| Six Months Ended December 31, 2021 | | General engineering | | Transportation | | Aerospace | | Energy |
| Constant currency end market sales growth | | 17% | | 1% | | 21% | | 4% |
Foreign currency exchange effect(1) | | 1 | | 1 | | 1 | | 1 |
| | | | | | | | |
| | | | | | | | |
End market sales growth(3) | | 18% | | 2% | | 22% | | 5% |
| | | | | | | | | | | | | | |
| Infrastructure | | | | | | |
| Six Months Ended December 31, 2021 | | Energy | | Earthworks | | General engineering |
| Constant currency end market sales growth | | 35% | | 7% | | 20% |
Foreign currency exchange effect(1) | | 1 | | 3 | | 1 |
| | | | | | |
| | | | | | |
End market sales growth(3) | | 36% | | 10% | | 21% |
| | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | |
| Six Months Ended December 31, 2021 | | General engineering | | Transportation | | Aerospace | | Energy | | Earthworks |
| Constant currency end market sales growth | | 18% | | 1% | | 21% | | 23% | | 7% |
Foreign currency exchange effect(1) | | 1 | | 1 | | 1 | | 1 | | 3 |
| | | | | | | | | | |
| | | | | | | | | | |
End market sales growth (3) | | 19% | | 2% | | 22% | | 24% | | 10% |
|
| | | | | | | | |
| Industrial | | | | | | | | |
| Three Months Ended December 31, 2017 | | General engineering | | Transportation | | Aerospace and defense | | Energy |
| Constant currency end market sales growth | | 11% | | 14% | | 9% | | 19% |
Foreign currency exchange impact(1) | | 4 | | 4 | | 2 | | 3 |
Divestiture impact(3) | | — | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — | | — |
End market sales growth(5) | | 15% | | 18% | | 11% | | 22% |
|
| | | | | | |
| Infrastructure | | | | | | |
| Three Months Ended December 31, 2017 | | Energy | | Earthworks | | General engineering |
| Constant currency end market sales growth | | 25% | | 11% | | 20% |
Foreign currency exchange impact(1) | | 1 | | 2 | | 2 |
Divestiture impact(3) | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — |
End market sales growth(5) | | 26% | | 13% | | 22% |
|
| | | | | | | | | | |
| Total | | | | | | | | | | |
| Three Months Ended December 31, 2017 | | General engineering | | Transportation | | Aerospace and defense | | Energy | | Earthworks |
| Constant currency end market sales growth | | 12% | | 14% | | 9% | | 23% | | 11% |
Foreign currency exchange impact(1) | | 3 | | 4 | | 2 | | 2 | | 2 |
Divestiture impact(3) | | — | | — | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — | | — | | — |
End market sales growth(5) | | 15% | | 18% | | 11% | | 25% | | 13% |
|
| | | | | | | | |
| Industrial | | | | | | | | |
| Six Months Ended December 31, 2017 | | General engineering | | Transportation | | Aerospace and defense | | Energy |
| Constant currency end market sales growth | | 9% | | 11% | | 8% | | 20% |
Foreign currency exchange impact(1) | | 3 | | 2 | | 2 | | 3 |
Divestiture impact(3) | | — | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — | | — |
End market sales growth(5) | | 12% | | 13% | | 10% | | 23% |
|
| | | | | | |
| Infrastructure | | | | | | |
| Six Months Ended December 31, 2017 | | Energy | | Earthworks | | General engineering |
| Constant currency end market sales growth | | 26% | | 12% | | 15% |
Foreign currency exchange impact(1) | | 1 | | 2 | | 1 |
Divestiture impact(3) | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — |
End market sales growth(5) | | 27% | | 14% | | 16% |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
| | | | | | | | | | |
| Total | | | | | | | | | | |
| Six Months Ended December 31, 2017 | | General engineering | | Transportation | | Aerospace and defense | | Energy | | Earthworks |
| Constant currency end market sales growth | | 10% | | 11% | | 8% | | 24% | | 12% |
Foreign currency exchange impact(1) | | 2 | | 2 | | 2 | | 2 | | 2 |
Divestiture impact(3) | | — | | — | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — | | — | | — |
End market sales growth(5) | | 12% | | 13% | | 10% | | 26% | | 14% |
Reconciliations of constant currency regional sales growth (decline) to reported regional sales growth(6), (decline)(4) are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
December 31, 2021 | | Six Months Ended
December 31, 2021 |
| | Americas | | EMEA | | Asia Pacific | | Americas | | EMEA | | Asia Pacific |
| Metal Cutting | | | | | | | | | | | | |
| Constant currency regional sales growth (decline) | | 11% | | 8% | | (4)% | | 16% | | 14% | | 1% |
Foreign currency exchange effect(1) | | — | | (3) | | 1 | | 1 | | (1) | | 3 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth (decline)(4) | | 11% | | 5% | | (3)% | | 17% | | 13% | | 4% |
| | | | | | | | | | | | |
| Infrastructure | | | | | | | | | | | | |
| Constant currency regional sales growth | | 22% | | 15% | | 14% | | 25% | | 11% | | 10% |
Foreign currency exchange effect(1) | | — | | — | | 3 | | — | | 4 | | 5 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth(4) | | 22% | | 15% | | 17% | | 25% | | 15% | | 15% |
| | | | | | | | | | | | |
| Total | | | | | | | | | | | | |
| Constant currency regional sales growth | | 16% | | 9% | | 3% | | 20% | | 13% | | 5% |
Foreign currency exchange effect(1) | | — | | (2) | | 1 | | 1 | | 1 | | 3 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Regional sales growth(4) | | 16% | | 7% | | 4% | | 21% | | 14% | | 8% |
|
| | | | | | |
| Industrial | | | | | | |
| Three Months Ended December 31, 2017 | | Americas | | EMEA | | Asia Pacific |
| Constant currency regional sales growth | | 11% | | 11% | | 20% |
Foreign currency exchange impact(1) | | 1 | | 8 | | 3 |
Divestiture impact(3) | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — |
Regional sales growth(6) | | 12% | | 19% | | 23% |
|
| | | | | | |
| Widia | | | | | | |
| Three Months Ended December 31, 2017 | | Americas | | EMEA | | Asia Pacific |
| Constant currency regional sales growth | | 8% | | 16% | | 4% |
Foreign currency exchange impact(1) | | 1 | | 6 | | 3 |
Divestiture impact(3) | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — |
Regional sales growth(6) | | 9% | | 22% | | 7% |
|
| | | | | | |
| Infrastructure | | | | | | |
| Three Months Ended December 31, 2017 | | Americas | | EMEA | | Asia Pacific |
| Constant currency regional sales growth | | 20% | | 1% | | 24% |
Foreign currency exchange impact(1) | | 1 | | 5 | | 2 |
Divestiture impact(3) | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — |
Regional sales growth(6) | | 21% | | 6% | | 26% |
|
| | | | | | |
| Total | | | | | | |
| Three Months Ended December 31, 2017 | | Americas | | EMEA | | Asia Pacific |
| Constant currency regional sales growth | | 15% | | 9% | | 19% |
Foreign currency exchange impact(1) | | 1 | | 7 | | 3 |
Divestiture impact(3) | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — |
Regional sales growth(6) | | 16% | | 16% | | 22% |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
|
| | | | | | |
| Industrial | | | | | | |
| Six Months Ended December 31, 2017 | | Americas | | EMEA | | Asia Pacific |
| Constant currency regional sales growth | | 10% | | 9% | | 17% |
Foreign currency exchange impact(1) | | — | | 6 | | 2 |
Divestiture impact(3) | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — |
Regional sales growth(6) | | 10% | | 15% | | 19% |
|
| | | | | | |
| Widia | | | | | | |
| Six Months Ended December 31, 2017 | | Americas | | EMEA | | Asia Pacific |
| Constant currency regional sales growth | | 7% | | 18% | | 6% |
Foreign currency exchange impact(1) | | — | | 4 | | 2 |
Divestiture impact(3) | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — |
Regional sales growth(6) | | 7% | | 22% | | 8% |
|
| | | | | | |
| Infrastructure | | | | | | |
| Six Months Ended December 31, 2017 | | Americas | | EMEA | | Asia Pacific |
| Constant currency regional sales growth | | 20% | | 5% | | 22% |
Foreign currency exchange impact(1) | | 1 | | 6 | | 2 |
Divestiture impact(3) | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — |
Regional sales growth(6) | | 21% | | 11% | | 24% |
|
| | | | | | |
| Total | | | | | | |
| Six Months Ended December 31, 2017 | | Americas | | EMEA | | Asia Pacific |
| Constant currency regional sales growth | | 14% | | 9% | | 17% |
Foreign currency exchange impact(1) | | 1 | | 5 | | 2 |
Divestiture impact(3) | | — | | — | | — |
Acquisition impact(4) | | — | | — | | — |
Regional sales growth(6) | | 15% | | 14% | | 19% |
(1) Foreign currency exchange impacteffect is calculated by dividing the difference between current period sales and current period sales at prior period foreign exchange rates and prior period sales by prior period sales.
(2) Business days impacteffect is calculated by dividing the year-over-year change in weighted average working days (based on mix of sales by country) by prior period weighted average working days.
(3) Divestiture impact is calculated by dividing prior period sales attributable to divested businesses by prior period sales.
(4) Acquisition impact is calculated by dividing current period sales attributable to acquired businesses by prior period sales.
(5) Aggregate sales for all end markets sum to the sales amount presented on Kennametal's financial statements.
(6)(4) Aggregate sales for all regions sum to the sales amount presented on Kennametal's financial statements.
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| |
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes to our market risk exposures since June 30, 2017.2021.
|
| |
| ITEM 4. CONTROLS AND PROCEDURES |
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company's management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). The Company's disclosure controls were designed to provide a reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls' stated goals. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance at December 31, 2017 to ensure2021 that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
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| |
| ITEM 1. LEGAL PROCEEDINGS |
From time to time, we are party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible or intellectual property. Although certain of these types of actions are currently pending, we do not believe that any individual proceeding is material or that our pending legal proceedings in the aggregate are material to Kennametal. See "Note 12. Environmental Matters" for a discussion of our exposure to certain environmental liabilities.
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| |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ISSUER PURCHASES OF EQUITY SECURITIES
|
| | | | | | | | | | | | |
| Period | Total Number of Shares Purchased (1) |
| | Average Price Paid per Share |
| | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
|
| October 1 through October 31, 2017 | — |
| | $ | — |
| | — |
| | 10,100,100 |
|
| November 1 through November 30, 2017 | 1,321 |
| | 45.48 |
| | — |
| | 10,100,100 |
|
| December 1 through December 31, 2017 | 3,679 |
| | 46.54 |
| | — |
| | 10,100,100 |
|
| Total | 5,000 |
| | $ | 46.26 |
| | — |
| | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of Shares Purchased (1) | | Average Price
Paid per Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Approximate Dollar Value of of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
| October 1 through October 31, 2021 | 15,878 | | | $ | 35.28 | | | — | | | $ | 187,200,000 | |
| November 1 through November 30, 2021 | 262,915 | | | 39.13 | | | 260,000 | | | 177,000,000 | |
| December 1 through December 31, 2021 | 341,183 | | | 36.42 | | | 340,000 | | | 164,600,000 | |
| Total | 619,976 | | | $ | 37.54 | | | 600,000 | | | |
| |
(1) | During the current period, 1,202 shares were purchased on the open market on behalf of Kennametal to fund the Company’s dividend reinvestment program. Also, during the current period employees delivered 3,798 shares of restricted stock to Kennametal, upon vesting, to satisfy tax withholding requirements. |
| |
(2) | On July 25, 2013, the Company publicly announced an amended repurchase program for up to 17 million shares of its outstanding capital stock outside of the Company's dividend reinvestment program. |
(1)During the current period, 1,182 shares were purchased on the open market on behalf of Kennametal to fund the Company’s dividend reinvestment program. Also, during the current period employees delivered 18,794 shares of restricted stock to Kennametal, upon vesting, to satisfy tax withholding requirements.
(2)On July 27, 2021, the Board of Directors of the Company approved a share repurchase program authorizing the Company to purchase up to $200 million of the Company's common stock over a three-year period outside of the Company's dividend reinvestment program.
UNREGISTERED SALES OF EQUITY SECURITIES
None.
| | | | | | | | | | | | | | |
| | | | |
(10) | | Material Contracts | | |
(10.1) | | | | Exhibit 10.1 of the Form 8-K filed January 31, 2018 (File No. 001-05318) is incorporated herein by reference. |
(31) | | | | |
| | | | |
| | | | |
| | | | |
| 31 | | Rule 13a-14(a)/15d-14(a) Certifications | | |
(31.1)31.1 | | | | Filed herewith. |
(31.2)31.2 | | | | Filed herewith. |
(32)32 | | Section 1350 Certifications | | |
(32.1)32.1 | | | | Filed herewith. |
(101)101 | | XBRL | | |
(101.INS)101.INS (3) | | XBRL Instance Document | | Filed herewith. |
(101.SCH)101.SCH (4) | | XBRL Taxonomy Extension Schema Document | | Filed herewith. |
(101.CAL)101.CAL (4) | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith. |
(101.DEF)101.DEF (4) | | XBRL Taxonomy Definition Linkbase | | Filed herewith. |
(101.LAB)101.LAB (4) | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith. |
(101.PRE)101.PRE (4) | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith. |
(3)The instance document does not appear in the Interactive Data File because its XBRL (Extensible Business Reporting Language) tags are embedded within the Inline XBRL document.
(4)Attached as Exhibit 101 to this report are the following documents formatted in Inline XBRL: (i) the Condensed Consolidated Statements of Income for the three and six months ended December 31, 2021 and 2020, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2021 and 2020, (iii) the Condensed Consolidated Balance Sheets at December 31, 2021 and June 30, 2021, (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2021 and 2020 and (v) Notes to Condensed Consolidated Financial Statements for the three and six months ended December 31, 2021 and 2020.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | | | | | | | | | | |
| KENNAMETAL INC. |
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| Date: | February 6, 20189, 2022 | By: | | /s/ Patrick S. Watson |
| Patrick S. Watson
Vice President Finance and Corporate Controller
|