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Aug. 10, 2021, 4:30 p.m. EDT


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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. Our standard and custom product offering spans metal cutting and wear applications including turning, milling, hole making, tooling systems and services, as well as specialized wear components and metallurgical powders. End users of the Company's metal cutting products include manufacturers engaged in a diverse array of industries including: the manufacturers of transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation. The Company's wear and metallurgical powders are used by producers and suppliers in equipment-intensive operations such as road construction, mining, quarrying, and oil and gas exploration, refining, production and supply. Throughout Management's Discussion and Analysis of Financial Condition and Results of Operations (the MD&A), we refer to measures used by management to evaluate performance. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth (decline), constant currency regional sales growth (decline) and constant currency end market sales growth (decline). The explanation at the end of the MD&A provides the definition of these non-GAAP financial measures as well as details on their use and a reconciliation to the most directly comparable GAAP financial measures. Our sales of $1,841.4 million for the year ended June 30, 2021 decreased 2 percent year-over-year, reflecting 4 percent organic sales decline and a 2 percent favorable currency exchange effect. Despite the challenging macro-economic environment due to the COVID-19 pandemic, the Company continued to have success with sequential sales improvement each quarter throughout the year. Operating income was $102.2 million in 2021 compared to $22.3 million in the prior year. The increase in operating income was primarily due to incremental simplification/modernization benefits of $85.0 million, lower raw material costs and $40.4 million of pre-tax restructuring and related charges compared to $83.3 million in the prior year, partially offset by increased variable compensation expense, organic sales decline and associated volume-related manufacturing inefficiencies and unfavorable geographical and product mix. Operating margin in 2021 was 5.5 percent compared to 1.2 percent in the prior year. In 2021, the Metal Cutting and Infrastructure segments had operating margins of 4.0 percent and 8.6 percent, respectively. 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, 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 future developments, including the duration of the outbreak, the emergence of more contagious or virulent strains of the virus, travel restrictions, business and workforce disruptions, the availability, update and efficacy of vaccines and the effectiveness of other actions taken to contain and treat the disease. The Company's cost structure benefited from our simplification/modernization initiative including the FY21 Restructuring Actions which have resulted in annualized savings of $68.0 million and pre-tax charges of $82.2 million inception to date. We recorded $40.4 million of pre-tax restructuring and related charges in 2021. Total benefits from our simplification/modernization efforts, including restructuring initiatives, were approximately $85.0 million in 2021, and we achieved total savings from simplification/modernization of approximately $186.0 million since inception. At the end of fiscal 2021 we consider the capital investment and restructuring from simplification/modernization to be substantially complete. Table of Contents

We reported earnings per diluted share (EPS) of $0.65 for fiscal 2021. EPS for the year was unfavorably affected by restructuring and related charges of $0.40 per share, effects from the early extinguishment of debt of $0.08 per share and partial annuitization of the Canadian pension plans of $0.02 per share, partially offset by a discrete tax benefit of $0.11 per share. Loss per diluted share in the prior year of $0.07 was unfavorably affected by restructuring and related charges of $0.88 per share, goodwill and other intangible asset impairment charges of $0.33 per share and loss on divestiture of $0.06 per share, partially offset by discrete benefits from Swiss tax reform of $0.17 per share, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of $0.08 per share and other tax matters of $0.01 per share.


              (in percentages)                              Reported    Constant Currency
              End market sales (decline) growth:
              Energy                                          (10)%           (11)%
              Transportation                                    7               4
              General engineering                               1              (1)
              Aerospace                                       (33)            (34)
              Earthworks                                       (1)             (3)
              Regional sales (decline) growth:
              Americas                                        (9)%            (9)%
              Europe, the Middle East and Africa (EMEA)         2              (3)
              Asia Pacific                                     10               6

GROSS PROFIT Gross profit increased $23.0 million to $552.5 million in 2021 from $529.5 million in 2020. This increase was primarily due to incremental simplification/modernization benefits, partially offset by an organic sales decline and unfavorable labor and fixed cost absorption due to lower volumes. The gross profit margin for 2021 was 30.0 percent compared to 28.1 percent in 2020.

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As of June 30, 2021, we have $26.3 million of U.S. net deferred tax assets. Within this amount is $57.0 million 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 in two reportable operating segments consisting of Metal Cutting 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.

                       (in thousands)                    2021             2020
                       Metal Cutting                 $ 1,150,746      $ 1,178,053
                       Infrastructure                    690,695          707,252
                       Total sales                   $ 1,841,441      $ 1,885,305
                       Operating income:
                       Metal Cutting                 $    45,855      $       985
                       Infrastructure                     59,461           23,113
                       Corporate                          (3,148)          (1,846)
                       Total operating income            102,168           22,252
                       Interest expense                   46,375           35,154
                       Other income, net                  (8,867)         (14,862)
                       Income before income taxes    $    64,660      $     1,960

        (in thousands)          2021              2020
        Sales              $ 1,150,746       $ 1,178,053
        Operating income        45,855               985
        Operating margin           4.0  %            0.1  %

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                             (in percentages)                     2021
                             Organic sales decline                (4)%
                             Foreign currency exchange effect      2
                             Sales decline                        (2)%
              (in percentages)                        As Reported        Constant Currency
              End market sales growth (decline):
              Transportation                               7%                    4%
              General engineering                          1                    (1)
              Aerospace                                   (33)                  (34)
              Energy                                      (10)                  (12)
              Regional sales growth (decline):
              EMEA                                         2%                   (3)%
              Americas                                    (11)                  (10)
              Asia Pacific                                 6                     3

In 2021, Metal Cutting sales of $1,150.7 million decreased by $27.3 million, or 2 percent, from 2020. Aerospace end market sales declined in all regions due to a significant reduction in airplane manufacturing. Energy sales decreased primarily due to a decline in oil and gas drilling in the Americas, partially offset by strength in wind power generation in China. Sales in our general engineering end market declined in all regions except for Asia Pacific. The general engineering end market was impacted by lower manufacturing activity related to the COVID-19 pandemic. Transportation end market sales increased in the Americas and EMEA due to improving automotive manufacturing levels. On a regional basis, the sales increase in Asia Pacific was driven by the general engineering and energy end markets, partially offset by a decline in the aerospace end market. The sales decline in EMEA was primarily due to the aerospace end market, partially offset by an increase in the transportation end market. The sales decrease in the Americas was driven by declines in the aerospace, energy, and general engineering end markets, partially offset by an increase in sales in the transportation end market.

        (in thousands)         2021            2020
        Sales              $ 690,695       $ 707,252
        Operating income      59,461          23,113
        Operating margin         8.6  %          3.3  %
                             (in percentages)                     2021
                             Organic sales decline                (3)%
                             Foreign currency exchange effect      2
                             Divestiture effect                   (1)
                             Sales decline                        (2)%

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              (in percentages)                        As Reported        Constant Currency
              End market sales (decline) growth:
              Energy                                     (10)%                 (11)%
              General engineering                          2                     -
              Earthworks                                  (1)                   (3)
              Regional sales (decline) growth:
              Americas                                    (8)%                  (8)%
              Asia Pacific                                 15                    11
              EMEA                                         3                    (2)

In 2021, Infrastructure sales of $690.7 million decreased by $16.6 million, or 2 percent, from 2020. The reduction in U.S. oil and gas drilling activity drove year-over-year decline in the energy market. Earthworks end market sales were down year-over-year due to softness in the Americas underground mining and construction, partially offset by EMEA construction. In general engineering the increase in sales was driven by Asia Pacific and the Americas. On a regional basis, the sales decrease in the Americas was driven by declines in the energy and earthworks end markets, partially offset by an increase in the general engineering end market. The sales decrease in EMEA was primarily driven by a decline in general engineering, partly offset by an increase in the earthworks end market. The increase in sales in Asia Pacific was primarily driven by growth in the general engineering end market.

In 2021, Corporate expense increased $1.3 million from 2020.

LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the primary source of funding for our capital expenditures. During the year ended June 30, 2021, cash flow provided by operating activities was $235.7 million.

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Other lines of credit and notes payable were $8.4 million and $0.4 million at June 30, 2021 and 2020, respectively. The lines of credit represented short-term . . .

Aug 10, 2021


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