Kennametal (KMT) 10-K2022 FY Annual report

FORWARD-LOOKING INFORMATION

Statements and financial discussion and analysis contained herein and in the documents incorporated by reference herein that are not historical facts are "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, as amended (the "Exchange Act"). For example, statements about Kennametal's outlook for earnings, sales volumes, cash flow, and capital expenditures for its fiscal year 2023, its expectations regarding future growth and any statements regarding future operating or financial performance or events are forward-looking. We have also included forward-looking statements in this Annual Report on Form 10-K ("Annual Report") 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. Any forward-looking statements are based on current knowledge, expectations and 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: uncertainties related to changes in macroeconomic and/or global conditions, including as a result of increased inflation and Russia's invasion of Ukraine and the resulting sanctions on Russia; uncertainties related to the effects of the ongoing COVID-19 pandemic, including 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 and workforce disruptions associated with the pandemic; other economic recession; our ability to achieve all anticipated benefits of restructuring, simplification and modernization initiatives; our foreign operations and international markets, such as currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability, including the conflict in Ukraine; 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 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 this Annual Report. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.

PART I

ITEM 1 - BUSINESS

The Company's core 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. We bring together material science, technical expertise, innovation and customer service in a way that allows us to anticipate customers' needs and help them overcome problems and achieve their manufacturing objectives.

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: 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.

Unless otherwise specified, any reference to a “year” refers to our fiscal year ending on June 30. Unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

Our international sales and long-lived assets are presented in Note 21 of the Company’s consolidated financial statements, set forth in Item 8 of this Annual Report. Further information about the effects and risks of currency exchange rates are presented in the Quantitative and Qualitative Disclosures About Market Risk section, set forth in Item 7A of this Annual Report.

Sales in 2022 of $2,012.5 million increased from $1,841.4 million in 2021, reflecting a 9 percent increase of which 11 percent was due to organic sales growth, partially offset by 2 percent from an unfavorable currency exchange effect.

We hold a number of patents and trademarks which, in the aggregate, are material to the operation of our businesses. The duration of our patent protection varies throughout the world by jurisdiction.

The principal competitive differentiators in our businesses include customer focused support and application expertise, custom and standard product innovation, product performance and quality and our brand recognition. We derive competitive advantage from our premium brand positions, global presence, application expertise and ability to address unique customer needs with new and improved tools, innovative surface and wear-resistant solutions, highly engineered components, consistent quality, traditional and digital customer service and technical assistance capabilities, state-of-the-art manufacturing and multiple sales channels. With these strengths, we are able to sell products based on the value-added productivity we deliver to our customers, rather than competing solely on price.

Compliance with government laws and regulations pertaining to the discharge of materials or pollutants into the environment or otherwise relating to the protection of the environment did not have a material effect on our capital expenditures or competitive position for the years covered by this Annual Report, nor is such compliance expected to have a material effect on us in the future.

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 sites associated with our current or former operations.

We establish and maintain accruals for certain potential environmental obligations. At June 30, 2022 and 2021, the balances of these accruals were $12.5 million and $14.7 million, respectively. These accruals represent anticipated costs associated with the remediation of these issues and are generally not discounted.

The accruals we have established for environmental obligations represent our best current estimate of the probable and reasonably estimable costs of addressing 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 the accruals currently appear to be sufficient to cover these environmental obligations, 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 recorded and unrecorded 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.

Among other environmental laws, we are subject to the Comprehensive Environmental Response Compensation and Liability Act of 1980, under which we have been identified by the USEPA or other third party as a PRP with respect to environmental remedial costs at certain sites. We have evaluated our claims and potential liability associated with these sites based upon the best information currently available to us. We believe our environmental accruals will be adequate to cover our portion of the environmental remedial costs at those sites where we have been designated a PRP, to the extent these expenses are probable and reasonably estimable.

We employed 8,732 people, including approximately 8,600 full-time employees, as of June 30, 2022. Approximately 2,900 employees were located in the U.S. and 5,800 were located in other parts of the world, principally Germany, India and China. At June 30, 2022, approximately 2,500 of our employees were represented by labor unions. We consider our labor relations to be generally good.

We continue to deploy our strategy and supporting infrastructure to elevate and advance diversity and inclusion (D&I) across our global organization and instill accountability for our performance. The enhanced D&I strategy focuses on four strategic pillars – awareness, acquisition, development and community. To drive action and accountability, each pillar is led by a senior Kennametal executive who is known as an accountability partner and is responsible for developing strategic initiatives in partnership with our People & Culture team.

Our Global Inclusion Council, which consists of cross-functional global leaders, champions the strategic initiatives and provides guidance and support. Four regional inclusion councils covering the Americas, Asia Pacific, EMEA and India execute the strategies and provide a global perspective.

As part of our awareness initiatives in 2022, we continued to enhance the D&I sections of the Company’s intranet and our external website. We expanded our Employee Resource Groups (ERGs) to foster communication and mentorship among diverse groups within the Company, such as the APAC Women’s Club, U.S. Women’s Mentoring, and U.S. Young Professionals groups. Our facilities around the world held events in March 2022 to celebrate International Women’s Day and recognize the achievements of female colleagues and participate in activities and discussions.

The tables below show the percentage of our employees who are women and the percentage of leadership roles at the Company held by women as of the dates indicated.

Safety, including the health of our employees, is one of our core values and a priority across our global operations. We are committed to developing a world-class health and safety culture to target zero injuries and illnesses. Our health and safety strategy is designed to focus all employees on proactively identifying, mitigating and eliminating high-risk conditions that could result in a serious injury or fatality. The strategy consists of three pillars – fatality and serious injury (FSI) prevention, incident prevention, and leadership development and compliance culture.

Our recordable cases and total recordable incident rate (TRIR) decreased 14 percent to 0.32 in 2022 compared to 0.37 in 2021.

In fiscal 2022, we launched an enhanced electronic Environmental, Health and Safety (EHS) Management System, including an extensive list of apps to enable streamlined collection, tracking and dissemination of key data. The apps include incident management, internal corporate EHS verification/audit and self-assessment, action tracking, compliance calendar, inspection tool, job safety analysis, FSI risk assessment, industrial hygiene and sustainability data collection. There are additional apps planned for fiscal 2023 including management of change and document control.

As part of our commitment to continuous improvement of our EHS programs, Kennametal has focused on the creation of new company-wide Global EHS Standards to strengthen our compliance management across the organization. These standards include:

Along with each standard, we have developed a self-assessment used to evaluate performance and develop action plans needed to meet tier levels aligning with the EHS roadmap. As discussed above, in 2022 we launched a new app as part of our EHS Management System to process electronic self-assessments, which capture each location’s level of compliance and create action plans.

For the Company to grow, our employees must grow and develop continuously. We offer learning and development opportunities for all employees. In 2022, this included training for senior, mid-level and emerging leaders in role- and function-specific skills, such as project management, process improvement and sales effectiveness. We also offered our operational employees technical training through the Kennametal Knowledge Center.

Supporting our learning and development efforts is our OneTeam learning management system. Available in multiple languages, OneTeam offers more than 10,000 online courses in an easy-to-use interface. While this is not the only training delivery platform we use, our employees completed over 4,000 hours of training using this system in 2022.

We also continue to design and deliver development programs, focusing on the following:

RISK FACTORS

This section describes material risks to our business that are currently known to us. Our business, financial condition or results of operations may be materially affected by a number of factors. Our management regularly monitors the risks inherent in our business, with input from our Enterprise Risk Management process. In addition to real time monitoring, we periodically conduct a formal enterprise-wide risk assessment to identify factors and circumstances that might present significant risk to the Company. Many of these risks are discussed throughout this report. The risks below, however, are not exhaustive. We operate in a rapidly changing environment. Other risks that we currently believe to be immaterial could become material in the future. We are also subject to legal and regulatory changes. New factors could emerge, and it is not possible to predict the outcome of all such risk factors on our business, financial condition or results of operations. The following discussion details the material risk factors and uncertainties that we believe could cause Kennametal’s actual results to differ materially from those projected in any forward-looking statements.

Changes in the regulatory environment, including environmental, health and safety regulations, could subject us to increased compliance and manufacturing costs, which could have a material adverse effect on our business.

Any interruption of our workforce, including interruptions due to our restructuring initiatives, unionization efforts, changes in labor relations or shortages of appropriately skilled individuals could affect our business.

In addition, we could be subject to liability if confidential information relating to customers, employees, vendors and the extended supply chain or other parties is misappropriated from our computer system. We cannot assure that our ongoing focus on system improvements will be sufficient to prevent or limit the damage from any cyber attack or network disruption. We do not believe we have been the target of a material successful cyber attack.

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

ITEM 2 – PROPERTIES

Our principal executive offices are located at 525 William Penn Place, Suite 3300, Pittsburgh, Pennsylvania, 15219. We also have corporate offices in Neuhausen, Switzerland, Bangalore, India and Singapore. Our technology center is located at 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania, 15650. A summary of our principal manufacturing facilities and other materially important properties is as follows:

We also have a network of customer service centers located throughout North America, Europe, India, Asia Pacific and Latin America, a significant portion of which are leased. The majority of our research and development efforts are conducted at our technology center located in Latrobe, Pennsylvania, U.S., as well as at our facilities in Rogers, Arkansas, U.S.; Fürth, Germany and Bangalore, India.

We use all of our significant properties in the businesses of powder metallurgy, tools, tooling systems, engineered components and advanced materials. Our production capacity is adequate for our present needs. We believe that our properties have been adequately maintained, are generally in good condition and are suitable for our business as presently conducted.

ITEM 3 - LEGAL PROCEEDINGS

The information set forth in Part I, Item 1, of this Annual Report under the caption “Regulation” is incorporated by reference into this Item 3. 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 assets. Although we currently believe that the amount of ultimate liability, if any, we may face with respect to these actions will not materially affect our financial position, results of operations or liquidity, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur or if protracted litigation were to ensue, the effect on us could be material.

ITEM 4 - MINE SAFETY DISCLOSURES

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference into this Part I is the information set forth in Part III, Item 10 of this Annual Report under the caption “Information About Our Executive Officers.”

PART II

ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our capital stock is traded on the New York Stock Exchange under the symbol "KMT." The number of shareholders of record as of July 29, 2022 was 1,333.

The information incorporated by reference into Part III, Item 12 of this Annual Report from our 2022 Proxy Statement under the heading “Equity Compensation Plans – Equity Compensation Plan Information” is hereby incorporated by reference into this Item 5.

The following graph compares cumulative total shareholder return on our capital stock with the cumulative total shareholder return on the common stock of the companies in the Standard & Poor’s Mid-Cap 400 Market Index (S&P Midcap 400), the Standard & Poor’s 400 Capital Goods (S&P 400 Capital Goods), the Standard & Poor's Global 1200 Industrials Index (S&P Global 1200 Industrials) and the peer group of companies determined by us (Peer Group) for the period from June 30, 2017 to June 30, 2022.

The Peer Group consists of the following companies: Altra Industrial Motion Corp.; Barnes Group Inc.; Crane Co.; Curtiss-Wright Corporation; Enovis Corp.; EnPro Industries, Inc.; Flowserve Corporation; Graco Inc.; ITT Inc.; Lincoln Electric Holdings, Inc.; Nordson Corporation; Simpson Manufacturing Co., Inc.; SPX Corporation; The Timken Company; Watts Water Technologies, Inc.; Woodward, Inc.; and Zurn Water Solutions Corporation.

None.

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.

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, 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 $2,012.5 million for the year ended June 30, 2022 increased 9 percent year-over-year, reflecting 11 percent organic sales growth, partially offset by a 2 percent unfavorable currency exchange effect.

Operating income was $218.1 million in 2022 compared to $102.2 million in the prior year. The increase in operating income was due primarily to organic sales growth, restructuring and related charges of $4 million compared to $40 million in the prior year, favorable pricing in excess of raw material costs, lower incentive compensation costs, favorable product mix and approximately $14 million of incremental simplification/modernization benefits, partially offset by higher raw material costs of approximately $49 million, certain manufacturing inefficiencies including higher depreciation and approximately $25 million due to the restoration of salaries and other cost-control measures that were taken in the prior year. Operating margin in 2022 was 10.8 percent compared to 5.5 percent in the prior year. In 2022, the Metal Cutting and Infrastructure segments had operating margins of 9.9 percent and 12.6 percent, respectively.

In July 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. During 2022, the Company repurchased a total of 2.7 million shares of common stock for $85 million.

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 during the course of the continuing pandemic 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 at times when COVID-19 cases are surging or new variants emerge. The imposition of these measures, including the lockdowns in China, has created significant operating constraints on our business. Throughout the pandemic we have deployed safety protocols and processes to keep our employees safe while continuing to serve our customers, based on the guidance provided by the U.S. Centers for Disease Control and other relevant authorities. Late in the March quarter of 2022, our manufacturing and distribution operations in Shanghai were affected by COVID-19 lockdowns and have since reopened. The extent to which the ongoing 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 and spread 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.

Russia's invasion of Ukraine in February 2022 has resulted in the imposition of economic sanctions on Russia by the United States, Canada, the European Union and other countries. We are monitoring and evaluating the broader economic impact, including the sanctions imposed, the potential for additional sanctions and any responses from Russia, including limiting the supply of natural gas and other resources to Europe, which could directly affect the Company's operations, business partners, customers or supply chain. To date, the conflict between Russia and Ukraine has not had a material impact on the Company's financial condition or results of operations. During the March quarter of 2022, the Company ceased operations in Russia and subsequently decided to liquidate its legal entity in Russia. Total charges of $2.7 million were recorded in 2022 related to liquidation activities, the expected risk of loss related to accounts receivables and the impairment of inventory associated with the Company's Russian and Ukrainian operations.

The Company's cost structure benefited from its simplification/modernization initiative including the FY21 Restructuring Actions which have resulted in annualized savings of $71.0 million and pre-tax charges of $86.4 million inception to date. We recorded $4.2 million of pre-tax restructuring and related charges in 2022.

We reported earnings per diluted share (EPS) of $1.72 for 2022. EPS for the year was unfavorably affected by restructuring and related charges of $0.03 per share and charges related to Russian and Ukrainian operations of $0.03 per share. EPS in the prior year of $0.65 was unfavorably affected by restructuring and related charges of $0.40 per share, the effects from the early extinguishment of debt of $0.08 per share and the partial annuitization of the Canadian pension plans of $0.02 per share, partially offset by a discrete tax benefit of $0.11 per share.

We generated cash flow from operating activities of $181.4 million in 2022 compared to $235.7 million during the prior year. Capital expenditures were $96.9 million and $127.3 million during 2022 and 2021, respectively. During 2022, the Company returned a total of $152 million to the shareholders through $85.4 million in share repurchases under the three-year share repurchase program and $66.6 million in dividends. In 2021, the Company returned $66.7 million to shareholders through dividends.

For a discussion related to the results of operations, changes in financial condition and liquidity and capital resources for fiscal 2020 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2021 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commission on August 10, 2021.

RESULTS OF CONTINUING OPERATIONS

Our sales growth (decline) by end market and region are as follows:

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 $42.1 million and $39.5 million for 2022 and 2021, respectively.

RESTRUCTURING AND RELATED CHARGES AND ASSET IMPAIRMENT CHARGES

In the September quarter of fiscal 2020, we announced the initiation of restructuring actions in Germany associated with our simplification/modernization initiative to reduce structural costs. Subsequently, we agreed with local employee representatives to downsize our Essen, Germany operations instead of the previously proposed closure. During the fourth quarter of fiscal 2020, we also announced the acceleration of our other structural cost reduction plans.

Total restructuring and related charges since inception of $86.4 million, compared to a target of approximately $85 million, were recorded for this program through June 30, 2022, consisting of: $78.1 million in Metal Cutting and $8.3 million in Infrastructure. Inception to date, we have achieved annualized savings of approximately $71 million. The FY21 Restructuring Actions are considered substantially complete.

During 2021, we recorded restructuring and related charges of $40.4 million, which consisted of $35.6 million in Metal Cutting and $4.8 million in Infrastructure. Of this amount, restructuring charges totaled $29.6 million, of which $0.5 million was related to inventory and was recorded in cost of goods sold. Restructuring-related charges of $10.8 million were included in cost of goods sold.

The net book value of these assets at closing was $29.5 million, and the pre-tax loss on divestiture recognized during the year ended June 30, 2020 was $6.5 million. Transaction proceeds were primarily used for capital expenditures related to our simplification/modernization efforts. During the year ended June 30, 2022, we recorded a pre-tax gain of $1.0 million on the New Castle divestiture due to proceeds held in escrow until November 2021.

As of June 30, 2022, we have $25.9 million of U.S. net deferred tax assets. Within this amount is $46.2 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. 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.

In 2012, we received an assessment from the Italian tax authority that denied certain tax deductions primarily related to our 2008 tax return. Attempts at negotiating a reasonable settlement with the tax authority were unsuccessful; and as a result, we decided to litigate the matter. While the outcome of the litigation is still pending, the tax authority served notice in the September quarter of fiscal 2020 requiring payment in the amount of €36.0 million. Accordingly, we requested and were granted a stay and are not currently required to make a payment in connection with this assessment. We continue to believe that the assessment is baseless and accordingly, no income tax liability has been recorded in connection with this assessment in any period. However, if the Italian tax authority were to be successful in litigation, settlement of the amount alleged by the Italian tax authority would result in an increase to income tax expense for as much as €36.6 million, or $38.0 million, of which penalties and interest is €21.8 million, or $22.7 million.

Our sales and operating income by segment are as follows:

METAL CUTTING

In 2022, Metal Cutting sales of $1,227.3 million increased by $76.5 million, or 7 percent, from 2021. Aerospace end market sales increased in all regions as global travel levels and airplane manufacturing continue to recover, despite increasing supply chain issues on certain components. Energy sales increased in the Americas and EMEA as oil and gas drilling and power generation improved as countries develop alternative supply chains in response to the Russia sanctions, partially offset by declines in Asia Pacific and the impact of COVID-19 lockdowns. Sales in our general engineering end market increased in all regions, as manufacturing activity continues to recover from the COVID-19 pandemic and strong underlying demand continues, though inflation and supply chain challenges mitigated growth. Transportation end market sales increased in the Americas due to improved automotive manufacturing levels and continued strong underlying demand. The increase was more than offset by declines in EMEA and Asia Pacific driven by ongoing supply chain challenges accelerated by Russia's conflict in Ukraine and COVID-19 lockdowns in China. On a regional basis, the sales increase in the Americas was driven by increases in all end markets supported by the easing of COVID-19 restrictions and strong underlying demand. The sales increase in EMEA was driven by the general engineering, aerospace, and energy end markets, partially offset by a decline in the transportation end market. The sales decrease in Asia Pacific was driven by declines in the energy and transportation end markets, partially offset by an increase in sales in the general engineering and aerospace end markets.

In 2022, Metal Cutting operating income was $121.4 million, a $75.5 million increase from 2021. The primary drivers for the increase were organic sales growth, favorable pricing in excess of raw material costs, restructuring and related charges of $4 million compared to $34 million in the prior year, incremental simplification/modernization benefits of approximately $12 million, lower incentive compensation costs and favorable product mix. These benefits were partially offset by certain manufacturing inefficiencies including higher depreciation, the restoration of salaries and other cost-control measures of approximately $19 million that were taken in the prior year and higher raw material costs of approximately $9 million.

In 2022, Infrastructure operating income was $98.9 million, a $39.4 million increase from 2021. The primary drivers for the increase were organic sales growth, favorable pricing in excess of raw material costs, favorable product mix and restructuring and related charges of $1 million compared to $5 million in the prior year. These benefits were partially offset by higher raw material costs of approximately $41 million, the restoration of salaries and other cost-control measures of approximately $5 million taken in the prior year and certain manufacturing inefficiencies including higher depreciation.

CORPORATE

In 2022, Corporate expense decreased $1.0 million from 2021.

The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including one financial covenant: 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 3.75 times trailing twelve months EBITDA, adjusted for certain non-cash expenses.

As of June 30, 2022, we were in compliance with all covenants of the Credit Agreement and we had $19.0 million of borrowings outstanding and $681.0 million of availability. There were no borrowings outstanding as of June 30, 2021.

Borrowings on other lines of credit and notes payable were $2.2 million and $8.4 million at June 30, 2022 and 2021, respectively. The lines of credit represented short-term borrowings under credit lines with commercial banks in the various countries in which we operate. The availability of the credit lines, translated into U.S. dollars at June 30, 2022 exchange rates, totaled $60.7 million.

For the year ended June 30, 2022, average daily borrowings outstanding under the Credit Agreement were approximately $24.0 million. The weighted average interest rate on borrowings under the Credit Agreement was 1.4 percent for the year ended June 30, 2022.

Based upon our debt structure at June 30, 2022, 3 percent of our debt was exposed to variable rates of interest. At June 30, 2021, less than 1 percent was exposed to variable rates of interest.

We consider the majority of the $1.5 billion unremitted earnings of our non-U.S. subsidiaries to be permanently reinvested. With regard to these unremitted earnings, we have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested earnings is not practicable due to our legal entity structure and the complexity of U.S. and local tax laws. With regard to the small portion of unremitted earnings that are not indefinitely reinvested, we maintain a deferred tax liability for foreign withholding and U.S. state income taxes. The deferred tax liability associated with unremitted earnings of our non-U.S. subsidiaries not permanently reinvested is $7.2 million as of June 30, 2022.

At June 30, 2022, we had cash and cash equivalents of $85.6 million. Total Kennametal Shareholders’ equity was $1,252.6 million and total debt was $615.6 million. Our current senior credit ratings are considered investment grade. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers.

Cash generated from operations is expected to meet our planned capital expenditures of approximately $100 million to $120 million and expected dividend payments of approximately $67 million in fiscal 2023. There can be no assurance, however, that we will generate cash from operations in line with our expectations, or that these projections will remain constant throughout fiscal 2023. If cash generated from operations is not sufficient to support these activities, we may be required to use existing cash and cash equivalents, reduce capital expenditures or borrow under the Credit Agreement. We believe that our cash and cash equivalents, cash flow from operations, and available borrowings are sufficient to meet both the short-term and long-term capital needs of the Company.

The following is a summary of our contractual obligations and other commercial commitments as of June 30, 2022:

The standby letters of credit relate to insurance and other activities. The guarantees are non-debt guarantees with financial institutions, which are required primarily for security deposits, product performance guarantees and advances.

During 2022, cash flow provided by operating activities was $181.4 million, compared to $235.7 million in 2021. During 2022, cash flow provided by operating activities consisted of net income and non-cash items amounting to $310.2 million and changes in certain assets and liabilities netting to an outflow of $128.7 million. Contributing to the change in certain assets and liabilities were an increase in inventories of $127.4 million in part due to increased safety stock for potential supply chain disruptions and higher raw material costs, a decrease in accrued pension and postretirement benefits of $24.2 million and an increase in accounts receivable of $14.4 million, partially offset by an increase in accounts payable and accrued liabilities of $32.0 million and an increase in accrued income taxes of $10.2 million.

Cash flow provided by operating activities was $235.7 million for 2021. During 2021, cash flow provided by operating activities consisted of net income and non-cash items amounting to $210.0 million and changes in certain assets and liabilities netting to an inflow of $25.7 million. Contributing to the changes in certain assets and liabilities were an increase in accounts payable and accrued liabilities of $46.8 million and a decrease in inventories of $61.3 million, partially offset by an increase in accounts receivable of $53.3 million, a decrease in accrued pension and postretirement benefits of $31.6 million and a decrease in accrued income taxes of $18.3 million.

Cash flow used for investing activities was $94.9 million for 2022, a decrease of $28.0 million, compared to $123.0 million in 2021. During 2022, cash flow used for investing activities included capital expenditures, net of $96.0 million, which consisted primarily of equipment upgrades, partially offset by proceeds of $1.0 million from the New Castle divestiture.

Cash flow used for investing activities was $123.0 million for 2021. During 2021, cash flow used for investing activities included capital expenditures, net of $122.9 million, which consisted primarily of expenditures related to our simplification/modernization initiatives.

Cash flow used for financing activities was $150.7 million for 2022, compared to $574.2 million in 2021. During 2022, cash flow used for financing activities included $85.5 million in common shares repurchased, primarily under the share repurchase program, $66.6 million of cash dividends paid to shareholders, $6.9 million of the effect of employee benefit and stock plans and dividend reinvestment and $6.1 million of a decrease in notes payable, partially offset by $19.0 million from borrowings under the Credit Agreement.

Cash flow used for financing activities was $574.2 million for 2021. During 2021, cash flow used for financing activities included $500.0 million of a net decrease in the revolving and other lines of credit, the debt refinancing (see Note 11. "Long-Term Debt" to our consolidated financial statements set forth in Part II, Item 8 of this Annual Report on Form 10-K for further discussion) and $66.7 million of cash dividends paid to shareholders.

Working capital was $539.1 million at June 30, 2022, a decrease of $28.4 million from $567.4 million at June 30, 2021. The decrease in working capital was primarily driven by a decrease in cash of $68.5 million, an increase in accounts payable of $50.2 million, and an increase in revolving and other lines of credit and notes payable of $12.8 million. Partially offsetting these items were an increase in inventories of $94.5 million and a decrease in other current liabilities of $19.2 million. Currency exchange rate effects decreased working capital by a total of approximately $48.0 million, the effects of which are included in the aforementioned changes.

Property, plant and equipment, net decreased $53.1 million from $1,055.1 million at June 30, 2021 to $1,002.0 million at June 30, 2022, primarily due to depreciation of $118.7 million and an unfavorable currency exchange effect of approximately $36.3 million, partially offset by capital additions of $96.9 million.

At June 30, 2022, other assets were $546.8 million, a decrease of $59.0 million from $605.8 million at June 30, 2021. The primary drivers for the decrease were an unfavorable currency exchange effect, a decrease in long-term prepaid pension benefit of $22.8 million as well as amortization of $13.0 million.

Kennametal Shareholders’ equity was $1,252.6 million at June 30, 2022, a decrease of $77.0 million from $1,329.6 million in the prior year. The decrease was primarily due to the repurchase of capital stock of $85.5 million primarily under the share repurchase program that was initiated during fiscal 2022, cash dividends paid to Kennametal Shareholders of $66.6 million, and other comprehensive loss of $87.2 million, partially offset by net income attributable to Kennametal of $144.6 million.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Amounts billed and due from our customers are classified as accounts receivable, less allowance for doubtful accounts on the consolidated balance sheets. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract. Variable consideration primarily includes volume incentive rebates, which are based on achieving a certain level of purchases and other performance criteria as established by our distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned. The majority of our products are consumed by our customers or end users in the manufacture of their products. Historically, we have experienced very low levels of returned products and do not consider the effect of returned products to be material. We have recorded an estimated returned goods allowance to provide for any potential returns.

We warrant that products sold are free from defects in material and workmanship under normal use and service when correctly installed, used and maintained. This warranty terminates 30 days after delivery of the product to the customer and does not apply to products that have been subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be returned to Kennametal only after inspection and approval by Kennametal and upon receipt by the customer of shipping instructions from Kennametal. We have included an estimated allowance for warranty returns in our returned goods allowance discussed above.

The Company records a contract asset when it has a right to payment from a customer that is conditioned on events that have occurred other than the passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material remaining performance obligations, contract assets or liabilities as of June 30, 2022 and 2021.

The Company pays sales commissions related to certain contracts, which qualify as incremental costs of obtaining a contract. However, the Company applies the practical expedient that allows an entity to recognize incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would have been recognized is one year or less. These costs are recorded within operating expense in our consolidated statements of income.

As of June 30, 2022, there is no goodwill allocated to the Infrastructure reporting unit. As of June 30, 2022, $264.2 million of goodwill was allocated to the Metal Cutting reporting unit. We completed an annual quantitative test of goodwill impairment and determined that the fair value of the reporting unit substantially exceeded the carrying value and, therefore, no impairment was recorded during 2022.

Further, an indefinite-lived trademark intangible asset of $10.4 million in the Metal Cutting reporting unit had a fair value that exceeded its carrying value as of the date of the annual impairment test and, therefore, no impairment was recorded during 2022. To determine fair value, we assumed revenue growth rates inclusive of macroeconomic uncertainties and a residual period growth rate of 3 percent. We assumed a royalty rate of 1 percent, and the future period cash flows were discounted at 20 percent per annum.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill and indefinite-lived intangible impairment test will prove to be an accurate prediction of the future. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately affect the estimated fair values of the Metal Cutting reporting unit and of the indefinite-lived trademark may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures, including those related to the COVID-19 pandemic and the broader economic effects from Russia's conflict in Ukraine, adversely affecting our long-term sales trends and (ii) inability to achieve the sales from our strategic growth initiatives.

In the valuation of our pension and other postretirement benefit liabilities, management utilizes various assumptions. Our discount rates are derived by identifying a theoretical settlement portfolio of high quality corporate bonds sufficient to provide for a plan’s projected benefit payments. This rate can fluctuate based on changes in the corporate bond yields. At June 30, 2022, a hypothetical 25 basis point increase or decrease in our discount rates would be immaterial to our pre-tax income.

The long-term rate of return on plan assets is estimated based on an evaluation of historical returns for each asset category held by the plans, coupled with the current and short-term mix of the investment portfolio. The historical returns are adjusted for expected future market and economic changes. This return will fluctuate based on actual market returns and other economic factors.

The rate of future health care cost increases is based on historical claims and enrollment information projected over the next fiscal year and adjusted for administrative charges. This rate is expected to decrease until 2027. At June 30, 2022, a hypothetical 1 percent increase or decrease in our health care cost trend rates would be immaterial to our pre-tax income.

Future compensation rates, withdrawal rates and participant retirement age are determined based on historical information. These assumptions are not expected to significantly change. Mortality rates are determined based on a review of published mortality tables.

We expect to contribute approximately $8 million and $1 million to our pension and other postretirement benefit plans, respectively, in 2023. Expected pension contributions in 2023 are primarily for international plans.

Legislation was effectively enacted during the December quarter of fiscal 2020 when the Canton of Schaffhausen approved the Federal Act on Tax Reform and AHV Financing on October 8, 2019 (Swiss tax reform). Significant changes from Swiss tax reform include the abolishment of certain favorable tax regimes and the creation of a 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 transitional period. To reflect the federal and cantonal transitional provisions, as they apply to us, we recorded a deferred tax asset of $14.5 million during the December quarter of fiscal 2020. We consider the deferred tax asset from Swiss tax reform to be an estimate based on our current interpretation of the legislation, which is subject to change based on further legislative guidance, review with the Swiss federal and cantonal authorities and modifications to the underlying valuation. We anticipate finalization of the deferred tax asset within the next six months.

NEW ACCOUNTING STANDARDS

The Company did not adopt any new accounting standards during 2022 that have had or are expected to have a material impact on the Company's consolidated financial statements or disclosures.

Reconciliations of organic sales growth to sales growth are as follows:

Reconciliations of constant currency end market sales growth (decline) to end market sales growth (decline), are as follows:

Reconciliations of constant currency regional sales growth (decline) to reported regional sales growth (decline), are as follows:

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to counterparty credit risk for nonperformance of derivative contracts and, in the event of nonperformance, to market risk for changes in interest and currency exchange rates, as well as settlement risk. We manage exposure to counterparty credit risk through credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. We do not anticipate nonperformance by any of the counterparties.

Included below is a sensitivity analysis that is based upon a hypothetical 10 percent change on the effective interest rates under our current borrowing arrangements as of June 30, 2022. We compared our borrowing arrangements in effect at June 30, 2022 to the hypothetical interest rates in the sensitivity analysis to determine the effect on interest expense, pre-tax income and accumulated other comprehensive loss.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

We have audited the accompanying consolidated balance sheets of Kennametal Inc. and its subsidiaries (the “Company”) as of June 30, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended June 30, 2022, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Provision for Income Taxes

As described in Notes 2 and 13 to the consolidated financial statements, the Company recorded a provision for income taxes of $56.5 million for the year ended June 30, 2022. The Company’s provision for income taxes is calculated based on income and statutory tax rates in the various jurisdictions in which the Company operates and requires the use of management’s estimates and judgments. Management judgment is required in determining the Company’s worldwide provision for income taxes and recording the related assets and liabilities, including accruals for unrecognized tax benefits and assessing the need for valuation allowances on deferred tax assets.

The principal considerations for our determination that performing procedures relating to the provision for income taxes is a critical audit matter are (i) a high degree of auditor effort in performing procedures and evaluating management’s provision for income taxes and the related assets and liabilities, including the accruals for unrecognized tax benefits, as well as management’s assessment of the need for valuation allowances on deferred tax assets and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the provision for income taxes, including controls over accruals for unrecognized tax benefits and valuation allowances on deferred tax assets. These procedures also included, among others (i) testing the accuracy of the provision for income taxes, which included the effective tax rate reconciliation and permanent and temporary differences, (ii) evaluating whether the data utilized in the calculations of the provision for income taxes and deferred tax assets and liabilities were appropriate and consistent with evidence obtained in other areas of the audit, (iii) evaluating the identification of accruals for unrecognized tax benefits and the reasonableness of the more likely than not determination in consideration of court decisions, legislative actions, statutes of limitations, and developments in tax examinations by jurisdiction, and (iv) evaluating the reasonableness of management’s assessment of the realizability of its deferred tax assets based on expectations of the ability to utilize its tax attributes through testing of historical and estimated future taxable income. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of management’s judgments and estimates related to the application of foreign and domestic tax laws and regulations.

CONSOLIDATED STATEMENTS OF INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY