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Aug. 20, 2020, 4:59 p.m. EDT

10-K: KENNAMETAL INC

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(EDGAR Online via COMTEX) -- ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in connection with the consolidated financial statements of Kennametal Inc. and the related financial statement notes included in Item 8 of this Annual Report. Unless otherwise specified, any reference to a "year" is to our fiscal year ended June 30. Additionally, when used in this Annual Report, unless the context requires otherwise, the terms "we," "our" and "us" refer to Kennametal Inc. and its subsidiaries. OVERVIEW Kennametal Inc. was founded based on a tungsten carbide technology breakthrough in 1938. The Company was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling, and was listed on the New York Stock Exchange (NYSE) in 1967. With more than 80 years of materials expertise, the Company is a global industrial technology leader, helping customers across the aerospace, earthworks, energy, general engineering and transportation industries manufacture with precision and efficiency. This expertise includes the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and extreme wear applications to keep customers up and running longer against conditions such as corrosion and high temperatures.

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The FY20 Restructuring Actions, which are substantially complete, resulted in annualized savings of $33 million and pre-tax charges of $54 million. During the June quarter of fiscal 2020 the Company announced the acceleration of its structural cost reduction plans and increased the estimated annualized benefits of its FY21 Restructuring Actions to $65 million to $75 million from $25 million to $30 million and the expected pre-tax charges to $90 million to $100 million from $55 million to $60 million. As part of this acceleration, the Company is continuing our footprint rationalization and in August 2020 announced the closure of our manufacturing facility in Johnson City, Tennessee. The closure is expected to be completed in fiscal 2021.

RESULTS OF CONTINUING OPERATIONS







                                                              2020
        (in percentages)                          As Reported Constant Currency
        End market sales decline:
        Energy                                       (29)%          (28)%
        Transportation                               (25)           (23)
        General engineering                          (19)           (17)
        Aerospace                                    (17)           (16)
        Earthworks                                    (9)            (7)
        Regional sales decline:
        Americas                                     (23)%          (21)%
        Europe, the Middle East and Africa (EMEA)    (20)           (17)
        Asia Pacific                                 (17)           (15)
        


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GROSS PROFIT Gross profit decreased $302.0 million to $529.5 million in 2020 from $831.5 million in 2019. This decrease was primarily due to an organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes and simplification/modernization efforts in progress, greater restructuring and related charges of $12 million and unfavorable foreign currency exchange effect of approximately $11 million, partially offset by incremental simplification/modernization benefits. The gross profit margin for 2020 was 28.1 percent compared to 35.0 percent in 2019.

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OTHER INCOME, NET In 2020, other income, net was $14.9 million, a decrease of $0.5 million from $15.4 million in 2019.

BUSINESS SEGMENT REVIEW We operate in three reportable operating segments consisting of Industrial, Widia and Infrastructure. Corporate expenses that are not allocated are reported in Corporate. Segment determination is based upon internal organizational structure, the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results. See Note 21 of our consolidated financial statements set forth in Item 8 of this Annual Report.

Our sales and operating income by segment are as follows:







        (in thousands)                 2020            2019
        Sales:
        Industrial                 $ 1,015,058     $ 1,274,499
        Widia                          162,995         197,522
        Infrastructure                 707,252         903,213
        Total sales                $ 1,885,305     $ 2,375,234
        Operating income (loss):
        Industrial                 $    35,671     $   220,696
        Widia                          (34,686 )         2,882
        Infrastructure                  23,113         108,480
        Corporate                       (1,846 )        (3,208 )
        Total operating income          22,252         328,850
        Interest expense                35,154          32,994
        Other income, net              (14,862 )       (15,379 )
        Income before income taxes $     1,960     $   311,235
        








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


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        (in percentages)                 2020
        Organic sales decline            (19)%
        Foreign currency exchange effect  (1)
        Sales decline                    (20)%
                                               2020
        (in percentages)          As Reported   Constant Currency
        End market sales decline:
        Transportation               (25)%            (23)%
        General engineering          (19)             (18)
        Aerospace                    (17)             (16)
        Energy                       (13)             (12)
        Regional sales decline:
        EMEA                         (23)%            (21)%
        Americas                     (19)             (18)
        Asia Pacific                 (16)             (15)
        


In 2020, Industrial sales of $1,015.1 million decreased by $259.4 million, or 20 percent, from 2019. The sales decline was caused by lower manufacturing activity and challenging economic conditions across all end markets and regions. Transportation sales declined in all regions due to continued weakness in auto build rates and a slowdown in auto sales. Sales in our general engineering end market declined in all regions as a result of continued declines in manufacturing activity, partially related to the negative effects of COVID-19. Aerospace sales declined in all regions, primarily driven by lower OEM production rates on certain platforms as well as additional production cuts resulting from significantly less demand for air travel starting in the fourth quarter. Energy sales decreased primarily due to a decline in oil and gas drilling in the Americas, partially offset by continued strength in renewable energy in China. On a regional basis, the sales decrease in EMEA was due to declines in all end markets and was driven by the negative effects of COVID-19 and the associated effect on manufacturing production in the transportation, aerospace and general engineering end markets. The Americas also experienced sales declines in all end markets as manufacturing activity levels were significantly curtailed, especially in the fourth quarter. Additionally, the decline in oil and gas activity also affected the Americas energy end market sales as oil and gas drilling slowed. The sales decrease in Asia Pacific was driven by declines in all end markets except energy. The declines were largely due to slowing end market demand primarily driven by the negative effects of COVID-19; however, we continue to see positive sales growth related to renewable energy in China.







        WIDIA
        








        (in thousands)       2020          2019
        Sales            $ 162,995      $ 197,522
        Operating income   (34,686 )        2,882
        Operating margin     (21.3 )%         1.5 %
        (in percentages)                 2020
        Organic sales decline            (16)%
        Foreign currency exchange effect  (1)
        Sales decline                    (17)%
        


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                                             2020
        (in percentages)        As Reported   Constant Currency
        Regional sales decline:
        Asia Pacific               (28)%            (26)%
        EMEA                       (15)             (12)
        America                    (13)             (12)
        


In 2020, Widia sales of $163.0 million decreased by $34.5 million, or 17 percent, from 2019. The sales decrease in Asia Pacific was driven primarily by the overall weak market conditions, most notably in India and China. Sales in EMEA decreased primarily due to the increasingly difficult market environment which was significantly affected by the negative effects of COVID-19, partially offset by growth in products focused on aerospace applications, while the decrease in the Americas was primarily due to a slower U.S. manufacturing environment, partially offset by strength in Latin America.







        INFRASTRUCTURE
        (in thousands)      2020          2019
        Sales            $ 707,252     $ 903,213
        Operating income    23,113       108,480
        Operating margin       3.3 %        12.0 %
        (in percentages)                 2020
        Organic sales decline            (18)%
        Foreign currency exchange effect  (1)
        Divestiture effect                (3)
        Sales decline                    (22)%
                                               2020
        (in percentages)          As Reported   Constant Currency
        End market sales decline:
        Energy                       (35)%            (33)%
        General engineering          (21)             (15)
        Earthworks                    (9)              (7)
        Regional sales decline:
        Americas                     (27)%            (24)%
        Asia Pacific                 (14)             (11)
        EMEA                          (9)              (5)
        


In 2020, Infrastructure sales of $707.3 million decreased by $196.0 million, or 22 percent, from 2019. Sales declined in all regions and end markets, partly due to the effect of COVID-19. The U.S. oil and gas market drove the decline in the energy market as drilling activity declined due to falling commodity prices. In general engineering the lower level of manufacturing activity drove the decline in the Americas and Asia Pacific, partially offset by increased defense related activity in EMEA. Earthworks end market sales were down due to softness in mining in all regions and construction in Asia Pacific and EMEA, partially offset by growth in the Americas construction. On a regional basis, the sales decrease in the Americas was driven by declines in the energy and general engineering end markets, and to a lesser extent, a decline in the earthworks end market. The decrease in Asia Pacific was driven primarily by lower levels of manufacturing activity in the general engineering end market. The sales decrease in EMEA was driven primarily by declines in both the energy and earthworks end markets, partially offset by growth in general engineering.

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In 2020, Infrastructure operating income was $23.1 million, a $85.4 million decrease from 2019. The primary drivers for the decrease were organic sales decline, unfavorable labor and fixed cost absorption due to lower volumes and simplification/modernization efforts in progress, unfavorable mix, greater restructuring and related charges of $8.5 million and a loss on divestiture of $6.5 million, partially offset by incremental simplification/modernization benefits and lower variable compensation expense.

In 2020, Corporate expense decreased $1.4 million from 2019.

LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the primary source of funding for our capital expenditures. During the year ended June 30, 2020, cash flow provided by operating activities was $223.7 million. Our five-year, multi-currency, revolving credit facility, as amended and restated in June 2018 (Credit Agreement), is used to augment cash from operations and as an additional source of funds. The Credit Agreement provides for revolving credit loans of up to $700.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement allows for borrowings in U.S. dollars, euros, Canadian dollars, pounds sterling and Japanese yen. Interest payable under the Credit Agreement is based upon the type . . .

Aug 20, 2020

COMTEX_369764810/2041/2020-08-20T16:59:18

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