kmt-20231231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 1-5318

KENNAMETAL INC.

(Exact name of registrant as specified in its charter)


Pennsylvania		25-0900168
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

525 William Penn Place
Suite 3300
Pittsburgh,	Pennsylvania	15219
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (412) 248-8000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Capital Stock, par value $1.25 per share	KMT	New York Stock Exchange
Preferred Stock Purchase Rights		New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of January 31, 2024, 79,269,782 shares of the Registrant’s Capital Stock, par value $1.25 per share, were outstanding.

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KENNAMETAL INC.

FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2023

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Item No.		Page No.

PART I - FINANCIAL INFORMATION

1.	Financial Statements

	Condensed Consolidated Statements of Income (Unaudited) Three and six months ended December 31, 2023 and 2022	4

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three and six months ended December 31, 2023 and 2022	4

	Condensed Consolidated Balance Sheets (Unaudited) December 31, 2023 and June 30, 2023	5

	Condensed Consolidated Statements of Cash Flow (Unaudited) Six months ended December 31, 2023 and 2022	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

3.	Quantitative and Qualitative Disclosures About Market Risk	33

4.	Controls and Procedures	33

5.	Other Information	33

PART II - OTHER INFORMATION
1.	Legal Proceedings	34

2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	34



6.	Exhibits	35

Signatures		36

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FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements that do not relate strictly to historical or current facts. You can identify forward-looking statements by words such as “should,” “anticipate,” “estimate,” “approximate,” “expect,” “may,” “will,” “project,” “intend,” “plan,” “believe” and other words of similar meaning and expression in connection with any discussion of future operating or financial performance or events. We have also included forward-looking statements in this Quarterly Report on Form 10-Q concerning, among other things, our strategy, goals, plans and projections regarding our financial position, liquidity and capital resources, results of operations, market position and product development. These statements are based on current estimates that involve inherent risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: 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; the adverse effects of the COVID-19 pandemic and its impacts on our business operations, financial results and financial position and on the industries in which we operate and the global economy generally; other economic recession; our ability to achieve all anticipated benefits of restructuring, simplification and modernization initiatives; Commercial Excellence growth initiatives, Operational Excellence 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 conflicts in Ukraine and Gaza; 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 our Annual Report on Form 10-K and in other periodic reports we file from time to time with the Securities and Exchange Commission. We can give no assurance that any goal or plan set forth in our forward-looking statements will be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. Except as required by law, we do not intend to release publicly any revisions to forward-looking statements as a result of future events or developments.

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KENNAMETAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands, except per share amounts)	2023		2022		2023		2022
Sales	$	495,320	$	497,121	$	987,796	$	991,913
Cost of goods sold	355,723		354,231		685,301		689,055
Gross profit	139,597		142,890		302,495		302,858
Operating expense	107,342		105,756		218,991		214,035
Restructuring and other charges, net (Note 6)	1,033		(1,505)		4,119		(1,505)

Amortization of intangibles	2,743		3,148		5,788		6,312
Operating income	28,479		35,491		73,597		84,016
Interest expense	6,847		7,015		13,447		13,652
Other (income) expense, net	(687)		588		(597)		1,597
Income before income taxes	22,319		27,888		60,747		68,767
(Benefit from) provision for income taxes	(2,009)		4,964		6,050		16,206
Net income	24,328		22,924		54,697		52,561
Less: Net income attributable to noncontrolling interests	1,220		1,025		1,532		2,466
Net income attributable to Kennametal	$	23,108	$	21,899	$	53,165	$	50,095
PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS
Basic earnings per share	$	0.29	$	0.27	$	0.67	$	0.62
Diluted earnings per share	$	0.29	$	0.27	$	0.66	$	0.61
Basic weighted average shares outstanding	79,700		80,737		79,863		81,141
Diluted weighted average shares outstanding	80,114		81,237		80,395		81,677

KENNAMETAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands)	2023		2022		2023		2022
Net income	$	24,328	$	22,924	$	54,697	$	52,561
Other comprehensive income, net of tax
Unrealized loss on derivatives designated and qualified as cash flow hedges	(59)		—		(59)		—
Reclassification of unrealized gain on derivatives designated and qualified as cash flow hedges	(192)		(192)		(385)		(385)
Unrecognized net pension and other postretirement benefit plans loss	(1,752)		(3,371)		(235)		(47)
Reclassification of net pension and other postretirement benefit plans loss	1,071		832		2,125		1,639
Foreign currency translation adjustments	31,791		52,819		11,604		(130)

Total other comprehensive income, net of tax	30,859		50,088		13,050		1,077
Total comprehensive income	55,187		73,012		67,747		53,638
Less: comprehensive income attributable to noncontrolling interests	1,888		2,092		1,560		1,768
Comprehensive income attributable to Kennametal Shareholders	$	53,299	$	70,920	$	66,187	$	51,870

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KENNAMETAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(in thousands, except per share data)	December 31, 2023		June 30, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	90,735	$	106,021
Accounts receivable, less allowance for doubtful accounts of $8,616 and $8,759, respectively	290,547		307,313
Inventories (Note 9)	570,785		557,630


Other current assets	57,753		55,825
Total current assets	1,009,820		1,026,789
Property, plant and equipment:
Land and buildings	416,804		416,291
Machinery and equipment	1,999,244		1,951,535
Less accumulated depreciation	(1,454,652)		(1,398,758)
Property, plant and equipment, net	961,396		969,068
Other assets:
Goodwill (Note 17)	275,916		269,551
Other intangible assets, less accumulated amortization of $179,863 and $173,346, respectively (Note 17)	87,598		93,164
Operating lease right-of-use assets	47,294		43,036
Deferred income taxes	74,491		65,519
Other	87,837		80,107
Total other assets	573,136		551,377
Total assets	$	2,544,352	$	2,547,234
LIABILITIES
Current liabilities:

Revolving and other lines of credit and notes payable (Note 11)	$	23,315	$	689
Current operating lease liabilities	12,301		11,379
Accounts payable	193,002		203,341
Accrued income taxes	14,680		25,143
Accrued expenses	42,128		55,635


Other current liabilities	128,682		137,788
Total current liabilities	414,108		433,975
Long-term debt, less current maturities (Note 10)	595,576		595,172
Operating lease liabilities	35,014		32,178
Deferred income taxes	32,376		32,062
Accrued pension and postretirement benefits	116,655		115,536
Accrued income taxes	1,507		1,446
Other liabilities	21,012		22,697
Total liabilities	1,216,248		1,233,066
Commitments and contingencies
EQUITY (Note 15)
Kennametal Shareholders’ Equity:
Preferred stock, no par value; 5,000 shares authorized; none issued	—		—
Capital stock, $1.25 par value; 120,000 shares authorized; 79,257 and 79,835 shares issued, respectively	99,071		99,794
Additional paid-in capital	444,162		465,406
Retained earnings	1,145,911		1,124,590
Accumulated other comprehensive loss	(401,321)		(414,343)
Total Kennametal Shareholders’ Equity	1,287,823		1,275,447
Noncontrolling interests	40,281		38,721
Total equity	1,328,104		1,314,168
Total liabilities and equity	$	2,544,352	$	2,547,234

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KENNAMETAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)


	Six Months Ended December 31,
(in thousands)	2023		2022
OPERATING ACTIVITIES
Net income	$	54,697	$	52,561
Adjustments to reconcile to cash from operations:
Depreciation	60,500		60,932
Amortization	5,788		6,312
Stock-based compensation expense	14,652		13,909
Restructuring and other charges, net (Note 6)	4,119		(1,505)
Deferred income taxes	(7,726)		(2,649)


Other	11,279		1,769
Changes in certain assets and liabilities:
Accounts receivable	20,447		3,961
Inventories	(9,471)		(32,901)
Accounts payable and accrued liabilities	(36,220)		(52,835)
Accrued income taxes	(17,259)		1,223
Accrued pension and postretirement benefits	(5,497)		(4,475)
Other	(7,001)		6,207
Net cash flow provided by operating activities	88,308		52,509
INVESTING ACTIVITIES
Purchases of property, plant and equipment	(57,487)		(50,622)
Disposals of property, plant and equipment	5,208		2,466
Business acquisitions	(4,010)		—

Other	(117)		88
Net cash flow used in investing activities	(56,406)		(48,068)
FINANCING ACTIVITIES
Net increase (decrease) in notes payable	2,112		(7)
Net increase in revolving and other lines of credit	20,500		57,800




Purchase of capital stock	(28,754)		(30,068)
The effect of employee benefit and stock plans and dividend reinvestment	(7,864)		(5,753)
Cash dividends paid to Shareholders	(31,844)		(32,371)
Other	(658)		(755)
Net cash flow used in financing activities	(46,508)		(11,154)
Effect of exchange rate changes on cash and cash equivalents	(680)		(2,089)
CASH AND CASH EQUIVALENTS
Net decrease in cash and cash equivalents	(15,286)		(8,802)
Cash and cash equivalents, beginning of period	106,021		85,586
Cash and cash equivalents, end of period	$	90,735	$	76,784

The accompanying notes are an integral part of these condensed consolidated financial statements.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.BASIS OF PRESENTATION

The condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q, which include our accounts and those of our subsidiaries in which we have a controlling interest, should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 (the “2023 Annual Report”). The condensed consolidated balance sheet as of June 30, 2023 was derived from the audited balance sheet included in our 2023 Annual Report. The interim statements are unaudited; however, we believe that all adjustments necessary for a fair statement of the results of the interim periods were made and all adjustments are normal recurring adjustments. The results for the six months ended December 31, 2023 are not necessarily indicative of the results to be expected for a full fiscal year. Unless otherwise specified, any reference to a “year” is to a fiscal year ended June 30. For example, a reference to 2024 is to the fiscal year ending June 30, 2024. When used in this Quarterly Report on Form 10-Q, unless the context requires otherwise, the terms “the Company,” “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

2.SUPPLEMENTAL CASH FLOW DISCLOSURES


	Six Months Ended December 31,
(in thousands)	2023		2022
Cash paid during the period for:
Interest	$	13,305	$	13,430
Income taxes	24,506		17,631
Supplemental disclosure of non-cash information:
Changes in accounts payable related to purchases of property, plant and equipment	(4,466)		(7,226)

3. SUPPLIER FINANCE PROGRAM

We have a supplier finance program managed through two global financial institutions under which we agree to pay the financial institutions the stated amount of confirmed invoices from our participating suppliers on the invoice due date. We, or the global financial institutions, may terminate our agreements at any time upon 30 days written notice. We do not provide any forms of guarantees under these agreements. Supplier participation in the program is solely up to the supplier. We have no economic interest in a supplier’s decision to participate in the program, and their participation has no bearing on our payment terms or amounts due. The payment terms that we have with our suppliers under this program are considered commercially reasonable. As of December 31, 2023 and June 30, 2023, the obligations outstanding that the Company has confirmed as valid to the financial institutions under the program were $24.2 million and $20.7 million, respectively, and were recorded within trade accounts payable.

4. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of three levels to prioritize the inputs used in valuations, as defined below:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Inputs that are unobservable.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 2023, the fair values of our financial assets and financial liabilities are categorized as follows:


(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Derivatives (1)	$	—	$	100	$	—	$	100
Total assets at fair value	$	—	$	100	$	—	$	100

Liabilities:
Derivatives (1)	$	—	$	36	$	—	$	36
Total liabilities at fair value	$	—	$	36	$	—	$	36

As of June 30, 2023, the fair values of our financial assets and financial liabilities are categorized as follows:


(in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Derivatives (1)	$	—	$	68	$	—	$	68
Total assets at fair value	$	—	$	68	$	—	$	68

Liabilities:
Derivatives (1)	$	—	$	100	$	—	$	100
Total liabilities at fair value	$	—	$	100	$	—	$	100

(1) Currency derivatives are valued based on observable market spot and forward rates and are classified within Level 2 of the fair value hierarchy.

There have been no changes in classification and transfers between levels in the fair value hierarchy in the current period.

5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

As part of our financial risk management program, we use certain derivative financial instruments. We do not enter into derivative transactions for speculative purposes and, therefore, we do not hold any derivative instruments for trading purposes. We account for derivative instruments as a hedge of the related asset, liability, firm commitment or anticipated transaction, when the derivative is specifically designated and qualifies as a hedge of such items. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow. We measure hedge effectiveness by assessing the changes in the fair value or expected future cash flows of the hedged item.

The fair value of derivatives designated and not designated as hedging instruments in the condensed consolidated balance sheets are as follows:


(in thousands)	December 31, 2023		June 30, 2023
Derivatives designated as hedging instruments
Other current assets - range forward contracts	$	80	$	—
Other current liabilities - range forward contracts	(1)		—


Total derivatives designated as hedging instruments	79		—
Derivatives not designated as hedging instruments
Other current assets - currency forward contracts	$	20	$	68
Other current liabilities - currency forward contracts	(35)		(100)
Total derivatives not designated as hedging instruments	(15)		(32)
Total derivatives	$	64	$	(32)

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Certain currency forward contracts that hedge significant cross-border intercompany loans are considered as other derivatives and therefore do not qualify for hedge accounting. These contracts are recorded at fair value in the condensed consolidated balance sheets, with the offset to other (income) expense, net. (Gains) losses related to derivatives not designated as hedging instruments have been recognized as follows:


	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands)	2023		2022		2023		2022
Other (income) expense, net - currency forward contracts	$	(93)	$	(197)	$	29	$	(503)

CASH FLOW HEDGES

Range forward contracts (a transaction where both a put option is purchased and a call option is sold) are designated as cash flow hedges and hedge anticipated cash flows from cross-border intercompany sales of products and services. Gains and losses realized on these contracts are recorded in accumulated other comprehensive loss and are recognized as a component of cost of goods sold and other (income) expense, net when the underlying sale of products or services is recognized into earnings. The notional amount of the contracts translated into U.S. dollars at December 31, 2023 was $35.4 million. There were no such contracts outstanding as of June 30, 2023. The time value component of the fair value of range forward contracts is excluded from the assessment of hedge effectiveness.

The following represents losses, net of tax, related to cash flow hedges:


	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands)	2023		2022		2023		2022
Losses recognized in other comprehensive income	$	(59)	$	—	$	(59)	$	—

No portion of the gains or losses recognized in earnings was due to ineffectiveness and no amounts were excluded from our effectiveness testing for the three months ended December 31, 2023 and 2022.

NET INVESTMENT HEDGES

As of December 31, 2023, we had certain foreign currency-denominated intercompany loans payable with total aggregate principal amounts of €10.1 million and ¥109.9 million, designated as net investment hedges to hedge the foreign exchange exposure of our net investment in our Euro-based and China-based subsidiaries. As of June 30, 2023, we had no foreign currency-denominated intercompany loans payable designated as net investment hedges. A loss of $0.3 million and $0.4 million were recorded as a component of foreign currency translation adjustments in other comprehensive income for the three months ended December 31, 2023 and 2022, respectively. A loss of $0.3 million and a gain $1.3 million were recorded as a component of foreign currency translation adjustments in other comprehensive income for the six months ended December 31, 2023 and 2022, respectively.

As of December 31, 2023, the foreign currency-denominated intercompany loans payable designated as net investment hedges consisted of:


Instrument	Notional (EUR and CNY in thousands)(2)		Notional (USD in thousands)(2)		Maturity
Foreign currency-denominated intercompany loan payable	€	10,058	$	11,113	June 2024
Foreign currency-denominated intercompany loan payable	¥	109,878	$	15,472	November 2024

(2) Includes principal and accrued interest.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. RESTRUCTURING AND OTHER CHARGES, NET

In the June quarter of fiscal 2023, we announced an initiative to streamline our cost structure while continuing to invest in our high-return commercial and operational excellence initiatives. Total restructuring and related charges for this program of $12.1 million, compared to a target of approximately $25 million, up from $20 million, were recorded through December 31, 2023, consisting of $9.2 million in Metal Cutting and $2.9 million in Infrastructure. The majority of the remaining charges are expected to be recognized in fiscal 2024.

We recorded restructuring and related charges of $1.0 million for the three months ended December 31, 2023, which consisted of $0.7 million in Metal Cutting and $0.3 million in Infrastructure.

We recorded restructuring and related charges of $4.7 million for the six months ended December 31, 2023, which consisted of $3.2 million in Metal Cutting and $1.5 million in Infrastructure. Also included in other charges, net during the six months ended December 31, 2023 is a net benefit of $0.6 million primarily due to the sale of property.

We recorded no restructuring and related charges for the three and six months ended December 31, 2022. Included in other charges, net for the three and six months ended December 31, 2022 is a net benefit of $1.5 million, primarily due to the sale of property.

As of December 31, 2023, $6.5 million and $2.2 million of the restructuring accrual was recorded in other current liabilities and other liabilities, respectively, in our condensed consolidated balance sheet. As of June 30, 2023, $9.4 million and $0.5 million of the restructuring accrual was recorded in other current liabilities and other liabilities, respectively. The amounts are as follows:


(in thousands)	June 30, 2023		Expense		Translation		Cash Expenditures		December 31, 2023
Severance	$	9,885	$	4,726	$	105	$	(6,049)	$	8,667


Total	$	9,885	$	4,726	$	105	$	(6,049)	$	8,667

7. STOCK-BASED COMPENSATION

Stock Options

Changes in our stock options for the six months ended December 31, 2023 were as follows:


	Options	Weighted Average Exercise Price		Weighted Average Remaining Life (years)	Aggregate Intrinsic value (in thousands)
Options outstanding, June 30, 2023	217,614	$	37.29

Exercised	—	—
Lapsed or forfeited	(52,304)	45.24
Options outstanding, December 31, 2023	165,310	$	34.78	1.3	$	69
Options vested, December 31, 2023	165,310	$	34.78	1.3	$	69
Options exercisable, December 31, 2023	165,310	$	34.78	1.3	$	69

As of December 31, 2023 and June 30, 2023, there was no unrecognized compensation cost related to options outstanding, and all options were fully vested as of December 31, 2023 and June 30, 2023.

There was no cash received from the exercise of options during the six months ended December 31, 2023 and 2022. The total intrinsic value of options exercised during the six months ended December 31, 2023 and 2022 was zero.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Restricted Stock Units – Performance Vesting and Time Vesting

Changes in our performance vesting and time vesting restricted stock units for the six months ended December 31, 2023 were as follows:


	Performance Vesting Stock Units	Performance Vesting Weighted Average Fair Value		Time Vesting Stock Units	Time Vesting Weighted Average Fair Value
Unvested, June 30, 2023	483,481	$	31.68	1,207,442	$	30.26
Granted	270,911	25.99		711,635	25.84
Vested	(176,508)	51.12		(599,580)	31.14
Performance metric adjustments, net	37,378	38.45		—	—
Forfeited	(56,946)	46.26		(24,070)	27.85
Unvested, December 31, 2023	558,316	$	21.74	1,295,427	$	27.47

During the six months ended December 31, 2023 and 2022, compensation expense related to time vesting and performance vesting restricted stock units was $14.0 million and $13.1 million, respectively. Performance vesting stock units were adjusted by 37,378 units during the six months ended December 31, 2023 related to the fiscal 2023 performance year. As of December 31, 2023, the total unrecognized compensation cost related to unvested time vesting and performance vesting restricted stock units was $33.7 million and is expected to be recognized over a weighted average period of 1.8 years.

8. PENSION AND OTHER POSTRETIREMENT BENEFITS

The table below summarizes the components of net periodic pension income:


	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands)	2023		2022		2023		2022
Service cost	$	293	$	235	$	590	$	474
Interest cost	8,857		8,002		17,764		16,042
Expected return on plan assets	(11,125)		(9,983)		(22,286)		(20,008)
Amortization of transition obligation	19		20		38		41
Amortization of prior service (credit) cost	(1)		2		(2)		4
Recognition of actuarial losses	1,428		1,092		2,872		2,197


Net periodic pension income	$	(529)	$	(632)	$	(1,024)	$	(1,250)

The table below summarizes the components of net periodic other postretirement benefit cost:


	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands)	2023		2022		2023		2022

Interest cost	$	106	$	104	$	212	$	209
Amortization of prior service credit	(63)		(68)		(127)		(136)
Recognition of actuarial loss	35		48		71		96
Net periodic other postretirement benefit cost	$	78	$	84	$	156	$	169

The service cost component of net periodic pension income is reported as a component of cost of goods sold and operating expense. All other components of net periodic pension income and net periodic other postretirement benefit cost are reported as a component of other (income) expense, net.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. INVENTORIES

We used the last-in, first-out (LIFO) method of valuing inventories for 32 percent and 33 percent of total inventories at December 31, 2023 and June 30, 2023, respectively. Inventory valuations under the LIFO method are based on an annual determination of quantities and costs as of June 30 of each year; therefore, the interim LIFO valuations are based on our projections of expected year-end inventory levels and costs and are subject to any final year-end LIFO inventory adjustments.

Inventories consisted of the following:


(in thousands)	December 31, 2023		June 30, 2023
Finished goods	$	353,254	$	328,094
Work in process and powder blends	221,872		233,346
Raw materials	80,746		81,552
Inventories at current cost	655,872		642,992
Less: LIFO valuation	(85,087)		(85,362)
Total inventories	$	570,785	$	557,630

10. LONG-TERM DEBT

Fixed rate debt had a fair market value of $546.4 million and $527.4 million at December 31, 2023 and June 30, 2023, respectively. The Level 2 fair value is determined based on the quoted market prices for similar debt instruments as of December 31, 2023 and June 30, 2023, respectively.

11. REVOLVING AND OTHER LINES OF CREDIT AND NOTES PAYABLE

During fiscal 2022, we entered into the Sixth Amended and Restated Credit Agreement dated as of June 14, 2022 (the Credit Agreement). The Credit Agreement is a five-year, multi-currency, revolving credit facility, which we use 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 of borrowing under the facility and may be (1) Euro Interbank Offered Rate (EURIBOR), Sterling Overnight Index Average (SONIA), Tokyo Interbank Offered Rate (TIBOR), Secured Overnight Financing Rate (SOFR), and Canadian Dollar Offered Rate (CDOR) for any borrowings in euros, pounds sterling, yen, U.S. dollars and Canadian dollars, respectively, plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us. The Credit Agreement matures in June 2027.

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 December 31, 2023, we were in compliance with all the covenants of the Credit Agreement, and there were $20.5 million of borrowings outstanding and $679.5 million of additional availability. There were no borrowings outstanding as of June 30, 2023.

Borrowings on other lines of credit and notes payable were $2.8 million and $0.7 million at December 31, 2023 and June 30, 2023, respectively.

12. ENVIRONMENTAL MATTERS

The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain sites associated with our current or former operations.

We establish and maintain accruals for estimated liabilities associated with certain environmental matters. At December 31, 2023, the balance of such accruals was $11.3 million, of which $1.5 million was current. At June 30, 2023, the balance was $12.0 million, of which $1.7 million was current.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

We record a loss contingency when the available information indicates it is probable that we have incurred a liability and the amount of the loss is reasonably estimable. The likelihood of a loss with respect to a particular environmental matter is often difficult to predict, and determining a meaningful estimate of the loss or a range of loss may not be practicable based on information available. When a material loss contingency is probable but a reasonable estimate cannot be made, or when a material loss contingency is at least reasonably possible, disclosure is provided. The accruals we have established for estimated environmental liabilities 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. The accrued liabilities for all environmental concerns could change substantially due to factors such as the nature and extent of contamination, changes in remedial requirements, technological changes, discovery of new information, the financial strength of other PRPs, the identification of new PRPs and the involvement of and direction taken by the government or the courts on these matters.

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

13. INCOME TAXES

The effective income tax rates for the three months ended December 31, 2023 and 2022 were 9.0 percent (benefit on income) and 17.8 percent (provision on income), respectively. The year-over-year change is primarily due to a $7.8 million benefit related to a tax rate change in Switzerland that was enacted during the three months ended December 31, 2023, a $2.2 million benefit recorded in the three months ended December 31, 2022 to adjust a deferred tax asset associated with tax reform in Switzerland, and geographical mix.

The effective income tax rates for the six months ended December 31, 2023 and 2022 were 10.0 percent and 23.6 percent (both provisions on income), respectively. The year-over-year change is primarily due to adjustments for the six months ended December 31, 2023 that include a $7.8 million benefit related to a tax rate change enacted in Switzerland, a $6.2 million benefit associated with a change in unrecognized tax benefits and a $2.9 million charge to settle tax litigation in Italy, coupled with a $2.2 million benefit in the six months ended December 31, 2022 to adjust a deferred tax asset associated with tax reform in Switzerland, and geographical mix.

14. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of shares outstanding during the period, while diluted earnings per share is calculated to reflect the potential dilution that would occur related to the issuance of capital stock under stock option grants, performance awards and restricted stock units. The difference between basic and diluted earnings per share relates solely to the effect of capital stock options, performance awards and restricted stock units.

The following table provides the computation of diluted shares outstanding for the three and six months ended December 31, 2023 and 2022:


	Three Months Ended December 31,		Six Months Ended December 31,
(in thousands)	2023	2022	2023	2022
Weighted-average shares outstanding during the period	79,700	80,737	79,863	81,141
Add: Unexercised stock options and unvested restricted stock units	414	500	532	536
Number of shares on which diluted earnings per share is calculated	80,114	81,237	80,395	81,677
Unexercised stock options with an exercise price greater than the average market price and restricted stock units not included in the computation because they were anti-dilutive	588	1,388	472	1,373

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. EQUITY

A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests for the three months ended December 31, 2023 and 2022 is as follows:


	Kennametal Shareholders’ Equity
(in thousands, except per share amounts)	Capital stock		Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Non-controlling interests		Total equity
Balance as of September 30, 2023	$	99,773	$	453,385	$	1,138,712	$	(431,512)	$	38,393	$	1,298,751
Net income	—		—		23,108				1,220		24,328
Other comprehensive income	—		—		—		30,191		668		30,859
Dividend reinvestment	2		43		—						45
Capital stock issued under employee benefit and stock plans(3)	80		4,979		—						5,059
Purchase of capital stock	(784)		(14,245)		—						(15,029)
Cash dividends ($0.20 per share)	—		—		(15,909)		—		—		(15,909)



Total equity, December 31, 2023	$	99,071	$	444,162	$	1,145,911	$	(401,321)	$	40,281	$	1,328,104


	Kennametal Shareholders’ Equity
(in thousands, except per share amounts)	Capital stock		Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Non-controlling interests		Total equity
Balance as of September 30, 2022	$	101,095	$	478,930	$	1,082,575	$	(461,197)	$	36,942	$	1,238,345
Net income	—		—		21,899		—		1,025		22,924
Other comprehensive income	—		—		—		49,021		1,067		50,088
Dividend reinvestment	2		45		—		—		—		47
Capital stock issued under employee benefit and stock plans(3)	131		4,453		—		—		—		4,584
Purchase of capital stock	(587)		(10,105)		—		—		—		(10,692)
Cash dividends ($0.20 per share)	—		—		(16,095)		—		—		(16,095)


Total equity, December 31, 2022	$	100,641	$	473,323	$	1,088,379	$	(412,176)	$	39,034	$	1,289,201

(3) Net of restricted stock units delivered upon vesting to satisfy tax withholding requirements.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of the changes in the carrying amounts of total equity, Kennametal Shareholders’ equity and equity attributable to noncontrolling interests for the six months ended December 31, 2023 and 2022 is as follows:


	Kennametal Shareholders’ Equity
(in thousands, except per share amounts)	Capital stock		Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Non-controlling interests		Total equity
Balance as of June 30, 2023	$	99,794	$	465,406	$	1,124,590	$	(414,343)	$	38,721	$	1,314,168
Net income	—		—		$	53,165	—		1,532		54,697
Other comprehensive income	—		—		—		13,022		28		13,050
Dividend reinvestment	5		85		—		—		—		90
Capital stock issued under employee benefit and stock plans(3)	689		6,008		—		—		—		6,697
Purchase of capital stock	(1,417)		(27,337)		—		—		—		(28,754)
Cash dividends ($0.40 per share)	—		—		(31,844)		—				(31,844)



Total equity, December 31, 2023	$	99,071	$	444,162	$	1,145,911	$	(401,321)	$	40,281	$	1,328,104


	Kennametal Shareholders’ Equity
(in thousands, except per share amounts)	Capital stock			Additional paid-in capital		Retained earnings		Accumulated other comprehensive loss		Non-controlling interests		Total equity
Balance as of June 30, 2022	$	101,671		$	494,202	$	1,070,655	$	(413,951)	$	38,670	$	1,291,247
Net income	—			—		$	50,095	—		2,466		52,561
Other comprehensive income (loss)	—			—		—		1,775		(698)		1,077
Dividend reinvestment	4		—	89		—		—		—		93
Capital stock issued under employee benefit and stock plans(3)	585			7,481		—		—		—		8,066
Purchase of capital stock	(1,619)			(28,449)		—		—		—		(30,068)
Cash dividends ($0.40 per share)	—			—		(32,371)		—		—		(32,371)
Cash dividends to non-controlling interests	—			—		—		—		(1,404)		(1,404)

Total equity, December 31, 2022	$	100,641		$	473,323	$	1,088,379	$	(412,176)	$	39,034	$	1,289,201

(3) Net of restricted stock units delivered upon vesting to satisfy tax withholding requirements.

The amounts of comprehensive income attributable to Kennametal Shareholders and noncontrolling interests are disclosed in the condensed consolidated statements of comprehensive income.

On February 2, 2024, the Board of Directors of the Company authorized an additional share repurchase program. The Company intends to repurchase up to an additional $200 million of Kennametal common stock over a three-year period. The Company expects to fund repurchases through cash generated from operations.

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of, and changes in, accumulated other comprehensive loss (AOCL) were as follows, net of tax, for the six months ended December 31, 2023:


(in thousands)	Pension and other postretirement benefits		Currency translation adjustment		Derivatives		Total
Attributable to Kennametal:
Balance, June 30, 2023	$	(215,435)	$	(202,641)	$	3,733	$	(414,343)
Other comprehensive (loss) income before reclassifications	(235)		11,576		(59)		11,282
Amounts reclassified from AOCL	2,125				(385)		1,740
Net other comprehensive income (loss)	1,890		11,576		(444)		13,022
AOCL, December 31, 2023	$	(213,545)	$	(191,065)	$	3,289	$	(401,321)

Attributable to noncontrolling interests:
Balance, June 30, 2023	$	—	$	(8,139)	$	—	$	(8,139)
Other comprehensive income before reclassifications	—		28		—		28
Net other comprehensive income	—		28		—		28
AOCL, December 31, 2023	$	—	$	(8,111)	$	—	$	(8,111)

The components of, and changes in, AOCL were as follows, net of tax, for the six months ended December 31, 2022:


(in thousands)	Pension and other postretirement benefits		Currency translation adjustment		Derivatives		Total
Attributable to Kennametal:
Balance, June 30, 2022	$	(208,406)	$	(210,048)	$	4,503	$	(413,951)
Other comprehensive (loss) income before reclassifications	(47)		568		—		521
Amounts reclassified from AOCL	1,639		—		(385)		1,254
Net other comprehensive income (loss)	1,592		568		(385)		1,775
AOCL, December 31, 2022	$	(206,814)	$	(209,480)	$	4,118	$	(412,176)

Attributable to noncontrolling interests:
Balance, June 30, 2022	$	—	$	(7,547)	$	—	$	(7,547)
Other comprehensive loss before reclassifications	—		(698)		—		(698)
Net other comprehensive loss	—		(698)		—		(698)
AOCL, December 31, 2022	$	—	$	(8,245)	$	—	$	(8,245)

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Reclassifications out of AOCL for the three and six months ended December 31, 2023 and 2022 consisted of the following:


	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands)	2023		2022		2023		2022		Affected line item in the Income Statement
Gains on cash flow hedges:
Forward starting interest rate swaps	$	(255)	$	(255)	$	(511)	$	(511)	Interest expense

Total before tax	(255)		(255)		(511)		(511)
Tax impact	63		63		126		126		Provision for income taxes
Net of tax	$	(192)	$	(192)	$	(385)	$	(385)

Pension and other postretirement benefits:
Amortization of transition obligations	$	19	$	20	$	38	$	41	Other (income) expense, net
Amortization of prior service credit	(64)		(66)		(129)		(132)		Other (income) expense, net
Recognition of actuarial losses	1,463		1,140		2,943		2,293		Other (income) expense, net
Total before tax	1,418		1,094		2,852		2,202
Tax impact	(347)		(262)		(727)		(563)		Provision for income taxes
Net of tax	$	1,071	$	832	$	2,125	$	1,639

The amount of income tax allocated to each component of other comprehensive income for the three months ended December 31, 2023 and 2022 were as follows:


			2023						2022
(in thousands)	Pre-tax		Tax impact		Net of tax		Pre-tax		Tax impact		Net of tax
Unrealized loss on derivatives designated and qualified as cash flow hedges	$	(78)	$	19	$	(59)	$	—	$	—	$	—
Reclassification of unrealized gain on derivatives designated and qualified as cash flow hedges	(255)		63		(192)		(255)		63		(192)
Unrecognized net pension and other postretirement benefit plans loss	(2,378)		626		(1,752)		(4,564)		1,193		(3,371)
Reclassification of net pension and other postretirement benefit plans loss	1,418		(347)		1,071		1,094		(262)		832
Foreign currency translation adjustments	31,681		110		31,791		52,675		144		52,819

Other comprehensive income	$	30,388	$	471	$	30,859	$	48,950	$	1,138	$	50,088

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The amount of income tax allocated to each component of other comprehensive income for the six months ended December 31, 2023 and 2022 were as follows:


			2023						2022
(in thousands)	Pre-tax		Tax impact		Net of tax		Pre-tax		Tax impact		Net of tax
Unrealized loss on derivatives designated and qualified as cash flow hedges	$	(78)	$	19	$	(59)	$	—	$	—	$	—
Reclassification of unrealized gain on derivatives designated and qualified as cash flow hedges	(511)		126		(385)		(511)		126		(385)
Unrecognized net pension and other postretirement benefit plans loss	(331)		96		(235)		(85)		38		(47)
Reclassification of net pension and other postretirement benefit plans loss	2,852		(727)		2,125		2,202		(563)		1,639
Foreign currency translation adjustments	11,494		110		11,604		(124)		(6)		(130)

Other comprehensive income	$	13,426	$	(376)	$	13,050	$	1,482	$	(405)	$	1,077

17. GOODWILL AND OTHER INTANGIBLE ASSETS

During the three months ended December 31, 2023, the Company completed an immaterial business combination for total consideration of approximately $6.5 million. Goodwill of approximately $3.6 million was recorded in the Metal Cutting segment as a result of the acquisition. A summary of the carrying amount of goodwill attributable to each segment, as well as the changes in such carrying amounts, is as follows:


(in thousands)	Metal Cutting		Infrastructure		Total
Gross goodwill	$	447,212	$	633,211	$	1,080,423
Accumulated impairment losses	(177,661)		(633,211)		(810,872)
Balance as of June 30, 2023	$	269,551	$	—	$	269,551

Activity for the six months ended December 31, 2023:
Acquisition	3,639		—		3,639
Change in gross goodwill due to translation	2,726		—		2,726


Gross goodwill	453,577		633,211		1,086,788
Accumulated impairment losses	(177,661)		(633,211)		(810,872)
Balance as of December 31, 2023	$	275,916	$	—	$	275,916

The components of our other intangible assets were as follows:


	Estimated Useful Life (in years)	December 31, 2023				June 30, 2023
(in thousands)		Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization

Technology-based and other	4 to 20	$	32,038	$	(24,411)		$	31,872	$	(23,838)
Customer-related	10 to 21	180,414		(117,181)			179,889		(112,890)
Unpatented technology	10 to 30	31,571		(26,344)			31,487		(25,177)
Trademarks	5 to 20	12,457		(11,927)			12,426		(11,441)
Trademarks	Indefinite	10,981		—			10,836		—
Total		$	267,461	$	(179,863)		$	266,510	$	(173,346)

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. SEGMENT DATA

We operate in two reportable segments consisting of Metal Cutting and Infrastructure. Our reportable operating segments have been determined in accordance with our internal management structure, which is organized based on operating activities, the manner in which we organize segments for allocating resources, making operating decisions and assessing performance and the availability of separate financial results. We do not allocate certain corporate expenses related to executive retirement plans, our Board of Directors, strategic initiatives, and certain other costs and report them in Corporate. Our reportable operating segments do not represent the aggregation of two or more operating segments.

METAL CUTTING The Metal Cutting segment develops and manufactures high performance tooling and metal cutting products and services and offers an assortment of standard and custom metal cutting solutions to diverse end markets, including aerospace and defense, general engineering, energy and transportation. The products include milling, hole making, turning, threading and toolmaking systems used in the manufacture of airframes, aero engines, trucks and automobiles, ships and various types of industrial equipment. We leverage advanced manufacturing capabilities in combination with varying levels of customization to solve our customers’ toughest challenges and deliver improved productivity for a wide range of applications. Metal Cutting markets its products under the Kennametal®, WIDIA®, WIDIA Hanita® and WIDIA GTD® brands through its direct sales force, a network of independent and national distributors, integrated supplier channels and via the Internet. Application engineers and technicians are critical to the sales process and directly assist our customers with specified product design, selection, application and support.

INFRASTRUCTURE Our Infrastructure segment produces engineered tungsten carbide and ceramic components, earth-cutting tools, and advanced metallurgical powders, primarily for the aerospace and defense, energy, earthworks and general engineering end markets. These wear-resistant products include compacts, nozzles, frac seats and custom components used in oil and gas and petrochemical industries; rod blanks and abrasive water jet nozzles for general industries; earth cutting tools and systems used in underground mining, trenching and foundation drilling and road milling; tungsten carbide powders for the oil and gas, aerospace and process industries; high temperature critical wear components, tungsten penetrators and armor solutions for aerospace and defense; and ceramics used by the packaging industry for metallization of films and papers. We combine deep metallurgical and engineering expertise with advanced manufacturing capabilities, such as 3D printing, to deliver solutions that drive improved productivity for our customers. Infrastructure markets its products primarily under the Kennametal® brand and sells through a direct sales force as well as through distributors.

Our sales and operating income by segment are as follows:


	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands)	2023		2022		2023		2022
Sales:
Metal Cutting	$	311,445	$	299,469	$	619,675	$	599,405
Infrastructure	183,875		197,652		368,121		392,508
Total sales	$	495,320	$	497,121	$	987,796	$	991,913
Operating income:
Metal Cutting	$	25,527	$	26,222	$	57,644	$	54,828
Infrastructure	3,236		10,097		16,880		30,884
Corporate	(284)		(828)		(927)		(1,696)
Total operating income	28,479		35,491		73,597		84,016
Interest expense	6,847		7,015		13,447		13,652
Other (income) expense, net	(687)		588		(597)		1,597
Income before income taxes	$	22,319	$	27,888	$	60,747	$	68,767

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table presents Kennametal's revenue disaggregated by geography:


	Three Months Ended
	December 31, 2023			December 31, 2022
(in percentages)	Metal Cutting	Infrastructure	Total Kennametal	Metal Cutting	Infrastructure	Total Kennametal
Americas	43%	57%	48%	44%	60%	50%
Europe, the Middle East and Africa (EMEA)	38	19	31	36	18	29
Asia Pacific	19	24	21	20	22	21


	Six Months Ended
	December 31, 2023			December 31, 2022
(in percentages)	Metal Cutting	Infrastructure	Total Kennametal	Metal Cutting	Infrastructure	Total Kennametal
Americas	44%	58%	49%	44%	61%	51%
EMEA	37	19	31	35	17	27
Asia Pacific	19	23	20	21	22	22

To better align with the Company's strategic goals and initiatives, certain of the end markets that are reported externally and used to analyze sales performance were redefined beginning in the fourth quarter of fiscal 2023. The changes include 1.) defense sales were moved from general engineering and are now combined with aerospace sales for a new "aerospace and defense" end market, 2.) certain Metal Cutting sales have been reclassified from general engineering to the aerospace and defense end market, and 3.) Infrastructure's ceramics sales have been reclassified from energy to the general engineering end market. The fiscal 2023 period has been retrospectively restated to align with the new end markets.

The following tables presents Kennametal's revenue disaggregated by end market:


	Three Months Ended December 31, 2023
(in percentages)	Metal Cutting	Infrastructure	Total Kennametal
General engineering	54%	34%	47%
Transportation	27	—	17
Aerospace & Defense	12	6	10
Energy	7	23	13
Earthworks	—	37	13


	Three Months Ended December 31, 2022
(in percentages)	Metal Cutting	Infrastructure	Total Kennametal
General engineering	55%	35%	47%
Transportation	27	—	16
Aerospace & Defense	11	7	9
Energy	7	22	14
Earthworks	—	36	14

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KENNAMETAL INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


	Six Months Ended December 31, 2023
(in percentages)	Metal Cutting	Infrastructure	Total Kennametal
General engineering	54%	34%	47%
Transportation	27	—	17
Aerospace & Defense	12	6	9
Energy	7	23	13
Earthworks	—	37	14


	Six Months Ended December 31, 2022
(in percentages)	Metal Cutting	Infrastructure	Total Kennametal
General engineering	55%	35%	47%
Transportation	27	—	16
Aerospace & Defense	11	5	9
Energy	7	24	14
Earthworks	—	36	14

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

OVERVIEW

Kennametal Inc. was founded based on a tungsten carbide technology breakthrough in 1938. The Company was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling 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 and defense, 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, oil and gas exploration, refining, production and supply, and for aerospace and defense.

Throughout 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). We provide the definitions of these non-GAAP financial measures at the end of the MD&A section as well as details on the use and derivation of these financial measures.

Our sales of $495.3 million for the three months ended December 31, 2023 were flat from the prior year quarter, reflecting an organic sales decline of 3 percent, offset by a favorable business days effect of 2 percent and a favorable currency exchange effect of 1 percent.

Operating income for the three months ended December 31, 2023 was $28.5 million compared to $35.5 million in the prior year quarter. The year-over-year decrease of $7.0 million was primarily due to lower volumes, higher wages and general inflation and the unfavorable timing of pricing compared to raw material costs in the Infrastructure segment. These factors were partially offset by higher price realization in the Metal Cutting segment and restructuring savings of approximately $5 million.

Operating margin for the three months ended December 31, 2023 was 5.7 percent compared to 7.1 percent in the prior year quarter. The Metal Cutting and Infrastructure segments had operating margins of 8.2 percent and 1.8 percent, respectively, for the three months ended December 31, 2023.

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. Although COVID-19 is no longer considered a global emergency, the slow recovery in China and other supply chain challenges continue to negatively affect our business.

Russia's invasion of Ukraine in February 2022 resulted in the imposition of economic sanctions on Russia by the United States, Canada, the European Union and other countries. We have experienced increased costs for energy and raw materials and other supply chain issues due, in part, to the negative impact of the conflict on the global economy. During the March quarter of 2022, the Company ceased operations in Russia and subsequently decided to liquidate its legal entity in Russia, which is expected to be completed during fiscal 2024. Similarly, the conflict in Gaza that began in October 2023 could negatively impact the Company's financial condition or results of operations. To date, the conflict in Gaza has not significantly affected the Company's business activities or results of operations.

Our business has also been negatively affected by inflationary headwinds. We have been able to partially mitigate the effects of inflation and other disruptions through price increases on our products. We cannot predict the ultimate effect of these issues on our business, operating results or financial condition, but we will continue to monitor macroeconomic conditions and attempt to mitigate the negative effect to the extent possible.

For the three months ended December 31, 2023, earnings per diluted share (EPS) was $0.29 compared to EPS of $0.27 in the prior year quarter. EPS for the three months ended December 31, 2023 was unfavorably affected by restructuring and related charges of $0.01 per share.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Cash flow provided by operating activities was $88.3 million during the six months ended December 31, 2023 compared to $52.5 million during the prior year period. Capital expenditures were $57.5 million and $50.6 million during the six months ended December 31, 2023 and 2022, respectively. During the six months ended December 31, 2023, the Company returned approximately $61 million to shareholders through $29 million in share repurchases and $32 million in dividends. The Company has a long history of consistently paying dividends to shareholders since its listing on the New York Stock Exchange in 1967.

RESULTS OF CONTINUING OPERATIONS

SALES

Sales for the three months ended December 31, 2023 were $495.3 million, a decrease of $1.8 million, or 0 percent, from $497.1 million in the prior year quarter, reflecting an organic sales decline of 3 percent, offset by a favorable business days effect of 2 percent and a favorable currency exchange effect of 1 percent.

Sales for the six months ended December 31, 2023 were $987.8 million, a decrease of $4.1 million, or 0 percent, from $991.9 million in the prior year period. The decrease in sales was driven by an organic sales decline of 1 percent, offset by a favorable currency exchange effect of 1 percent.

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


	Three Months Ended December 31, 2023		Six Months Ended December 31, 2023
(in percentages)	As Reported	Constant Currency	As Reported	Constant Currency
End market sales growth (decline):
Aerospace & Defense	2%	—%	10%	8%
Energy	(2)	(3)	(7)	(8)
Earthworks	(6)	(5)	(4)	(3)
General engineering	(1)	(2)	(1)	(2)
Transportation	6	4	4	2
Regional sales growth (decline):
Americas	(5)%	(5)%	(4)%	(4)%
Europe, the Middle East and Africa (EMEA)	7	3	10	6
Asia Pacific	(1)	—	(7)	(4)

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

GROSS PROFIT Gross profit for the three months ended December 31, 2023 was $139.6 million, a decrease of $3.3 million from $142.9 million in the prior year quarter. The decrease was primarily due to lower volumes, higher wages and general inflation and the unfavorable timing of pricing compared to raw material costs in the Infrastructure segment. These factors were partially offset by higher price realization in the Metal Cutting segment and restructuring savings. Gross profit margin for the three months ended December 31, 2023 was 28.2 percent, as compared to 28.7 percent in the prior year quarter.

Gross profit for the six months ended December 31, 2023 was $302.5 million, a decrease of $0.4 million from $302.9 million in the prior year period. The decrease was primarily due to lower volumes, higher wages and general inflation and the unfavorable timing of pricing compared to raw material costs in the Infrastructure segment. These factors were partially offset by higher price realization in the Metal Cutting segment and restructuring savings. Gross profit margin for the six months ended December 31, 2023 was 30.6 percent, as compared to 30.5 percent in the prior year period.

OPERATING EXPENSE Operating expense for the three months ended December 31, 2023 was $107.3 million compared to $105.8 million for the three months ended December 31, 2022. Operating expense for the six months ended December 31, 2023 was $219.0 million compared to $214.0 million for the six months ended December 31, 2022. The increase in operating expense for the three and six months ended December 31, 2023 was primarily due to higher wages and general inflation, partially offset by restructuring savings.

Research and development expenses included in operating expense totaled $11.0 million and $10.7 million for the three months ended December 31, 2023 and 2022, respectively, and $22.0 million and $21.3 million for the six months ended December 31, 2023 and 2022, respectively.

RESTRUCTURING AND OTHER CHARGES, NET In the June quarter of fiscal 2023, we announced an initiative to streamline our cost structure while continuing to invest in our high-return commercial and operational excellence initiatives. During the three months ended December 31, 2023, we achieved restructuring savings of approximately $5 million from this action. This action has been enlarged and is currently expected to deliver annualized run rate pre-tax savings of approximately $35 million, up from the previous estimate of $20 million, by the end of fiscal 2024. Total restructuring and related charges for this program of $12.1 million, compared to a target of approximately $25 million, up from $20 million, were recorded through December 31, 2023, consisting of $9.2 million in Metal Cutting and $2.9 million in Infrastructure. The majority of the remaining charges are expected to be recognized in fiscal 2024. We recorded restructuring and related charges of $1.0 million for the three months ended December 31, 2023, which consisted of $0.7 million in Metal Cutting and $0.3 million in Infrastructure.

We recorded restructuring and related charges of $4.7 million for the six months ended December 31, 2023, which consisted of $3.2 million in Metal Cutting and $1.5 million in Infrastructure. Also included in restructuring and other charges, net during the six months ended December 31, 2023 is a net benefit of $0.6 million primarily due to the sale of property.

INTEREST EXPENSE Interest expense for the three months ended December 31, 2023 decreased to $6.8 million compared to $7.0 million for the three months ended December 31, 2022. Interest expense for the six months ended December 31, 2023 decreased to $13.4 million compared to $13.7 million for the six months ended December 31, 2022.

OTHER (INCOME) EXPENSE, NET Other income, net for the three months ended December 31, 2023 was $0.7 million compared to other expense, net of $0.6 million during the three months ended December 31, 2022. Other income, net for the six months ended December 31, 2023 was $0.6 million compared to other expense, net of $1.6 million during the six months ended December 31, 2022.

PROVISION FOR INCOME TAXES The effective income tax rates for the three months ended December 31, 2023 and 2022 were 9.0 percent (benefit on income) and 17.8 percent (provision on income), respectively. The year-over-year change is primarily due to a $7.8 million benefit related to a tax rate change in Switzerland that was enacted during the three months ended December 31, 2023, a $2.2 million benefit recorded in the three months ended December 31, 2022 to adjust a deferred tax asset associated with tax reform in Switzerland, and geographical mix.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

BUSINESS SEGMENT REVIEW

Our sales and operating income by segment are as follows:


	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands)	2023		2022		2023		2022
Sales:
Metal Cutting	$	311,445	$	299,469	$	619,675	$	599,405
Infrastructure	183,875		197,652		368,121		392,508
Total sales	$	495,320	$	497,121	$	987,796	$	991,913
Operating income:
Metal Cutting	$	25,527	$	26,222	$	57,644	$	54,828
Infrastructure	3,236		10,097		16,880		30,884
Corporate	(284)		(828)		(927)		(1,696)
Total operating income	28,479		35,491		73,597		84,016
Interest expense	6,847		7,015		13,447		13,652
Other (income) expense, net	(687)		588		(597)		1,597
Income before income taxes	$	22,319	$	27,888	$	60,747	$	68,767

METAL CUTTING


	Three Months Ended December 31,						Six Months Ended December 31,
(in thousands, except operating margin)	2023			2022			2023			2022
Sales	$	311,445		$	299,469		$	619,675		$	599,405
Operating income	25,527			26,222			57,644			54,828
Operating margin	8.2		%	8.8		%	9.3		%	9.1		%


	Three Months Ended December 31, 2023	Six Months Ended December 31, 2023
(in percentages)
Organic sales growth	—%	1%
Foreign currency exchange effect(1)	2	1
Business days effect(4)	2	1


Sales growth	4%	3%

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


	Three Months Ended December 31, 2023		Six Months Ended December 31, 2023
(in percentages)	As Reported	Constant Currency	As Reported	Constant Currency
End market sales growth (decline):
Aerospace & Defense	7%	6%	8%	7%
Transportation	6	4	4	2
General engineering	3	1	3	1
Energy	(1)	(3)	(1)	(3)
Regional sales growth (decline):
Americas	2%	1%	3%	2%
EMEA	9	4	11	6
Asia Pacific	(1)	—	(9)	(7)

For the three months ended December 31, 2023, Metal Cutting sales increased 4 percent compared to the prior year quarter. This was driven by a favorable foreign currency effect of 2 percent and a favorable business days effect of 2 percent. Aerospace & defense end market sales increased in the Americas and EMEA as a result of our focused execution on our strategic initiatives and a continuing expansion in global travel following the COVID-19 slowdown, the effects of which were partially offset by a decline in Asia Pacific due to lower economic activity in China. Sales in the general engineering end market increased in the Americas and Asia Pacific as manufacturing activity continues to recover from the COVID-19 pandemic and underlying economic activity expands, partially offset by a decline in EMEA due to lower economic activity. Energy end market sales declined in Asia Pacific due to market priority and disruption, the effects of which were partially offset by increased sales in the Americas and EMEA due to pricing efforts. Transportation end market sales increased in EMEA and Asia Pacific stemming from improving customer supply chains and hybrid/electric vehicle business in EMEA, the effects of which were partially offset by a decline in the Americas as a result of slowing customer demand and the effects of the recent strike of the U.S. United Auto Workers (UAW) members.

On a regional basis, sales in the Americas increased primarily due to general engineering, aerospace & defense and favorable foreign currency exchange. Sales growth in EMEA reflects execution on our strategic initiatives and favorable foreign currency exchange. Sales in Asia Pacific remained flat due to a slower recovery in China from COVID-related disruptions and unfavorable foreign currency exchange.

For the three months ended December 31, 2023, Metal Cutting operating income was $25.5 million compared to $26.2 million in the prior year quarter. Operating income was flat year over year primarily because higher price realization and restructuring savings of approximately $4 million were offset by lower volumes and higher wages and general inflation.

For the six months ended December 31, 2023, Metal Cutting sales increased 3 percent compared to the prior year period. This was driven by organic growth of 1 percent , a favorable foreign currency effect of 1 percent and a favorable business days effect of 1 percent. Aerospace & defense end market sales increased in the Americas and EMEA as a result of our focused execution on our strategic initiatives and a continuing expansion in global travel following the COVID-19 slowdown, the effects of which were partially offset by a decline in Asia Pacific due to lower economic activity in China. Sales in the general engineering end market increased in the Americas and EMEA as manufacturing activity continues to recover from the COVID-19 pandemic and underlying economic activity expands, the effects of which were partially offset by lower economic activity in China and impacts to the wider Asia Pacific region. Energy end market sales increased in the Americas and EMEA, the effects of which were partially offset by a decline in Asia Pacific due to market priority and disruption. Transportation end market sales increased in EMEA resulting from improving customer supply chains and hybrid/electric vehicle business in EMEA, partially offset by declines in Asia Pacific and the Americas as a result of slowing customer demand and the effects of the recent strike of the UAW members.

On a regional basis, sales in the Americas increased primarily due to general engineering, aerospace & defense and favorable foreign currency exchange. Sales growth in EMEA reflects the execution on our strategic initiatives and favorable foreign currency exchange. Sales in Asia Pacific decreased due to a slower recovery in China from COVID-related disruptions and unfavorable foreign currency exchange.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the six months ended December 31, 2023, Metal Cutting operating income was $57.6 million compared to $54.8 million in the prior year period. The increase in operating income was primarily due to higher price realization and restructuring savings of approximately $7 million. These factors were partially offset by higher wages and general inflation and lower volumes.

INFRASTRUCTURE


	Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2023			2022			2023			2022
Sales	$	183,875		$	197,652		$	368,121		$	392,508
Operating income	3,236			10,097			16,880			30,884
Operating margin	1.8		%	5.1		%	4.6		%	7.9		%


	Three Months Ended December 31, 2023	Six Months Ended December 31, 2023
(in percentages)
Organic sales decline	(8)%	(6)%
Foreign currency exchange effect(1)	1	—



Sales decline	(7)%	(6)%


	Three Months Ended December 31, 2023		Six Months Ended December 31, 2023
(in percentages)	As Reported	Constant Currency	As Reported	Constant Currency
End market sales (decline) growth:
Energy	(3)%	(4)%	(10)%	(10)%
Earthworks	(6)	(5)	(4)	(3)
General engineering	(10)	(10)	(9)	(9)
Aerospace & Defense	(10)	(14)	17	12
Regional sales (decline) growth:
Americas	(12)%	(12)%	(11)%	(11)%
EMEA	2	(1)	7	4
Asia Pacific	(1)	—	(3)	—

For the three months ended December 31, 2023, Infrastructure sales decreased by 7 percent from the prior year quarter. The decrease in sales was driven by an organic sales decline of 8 percent, partially offset by a favorable foreign currency effect of 1 percent. Sales in the general engineering end market decreased in the Americas due to declines in industrial activity year over year and order timing, partially offset by an increase in Asia Pacific. Earthworks end market sales decreased primarily due to construction in the Americas, and to a lesser extent, due to mining in Asia Pacific. Energy end market sales decreased primarily due to U.S. oil and gas activities as land rig counts decreased year over year, partially offset by focused execution on our strategic initiatives in EMEA. Aerospace & defense end market sales decreased primarily due to order timing.

On a regional basis, sales in the Americas were negatively affected by declines in industrial activity year over year and order timing. Sales in EMEA decreased, excluding the favorable foreign currency effect, due to order timing in the aerospace & defense end market partially offset by an increase in the energy end market. Sales in Asia Pacific were flat, excluding the unfavorable foreign currency effect, due to increases in industrial activity year over year offset by a decline in mining activity.

For the three months ended December 31, 2023, Infrastructure operating income was $3.2 million compared to $10.1 million in the prior year quarter. The decrease in operating income was primarily due to lower volumes and the unfavorable timing of pricing compared to raw material costs. These factors were partially offset by restructuring savings of approximately $1 million.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the six months ended December 31, 2023, Infrastructure sales decreased by 6 percent from the prior year period. The decrease in sales was driven by an organic sales decline of 6 percent. Sales growth in the aerospace & defense end market reflects an increase in defense related activity in EMEA. General engineering end market sales decreased in the Americas and EMEA due to declines in manufacturing activity year over year, partially offset by an increase in Asia Pacific. Energy end market sales decreased primarily due to U.S. oil and gas activities as land rig counts decreased year over year, partially offset by focused execution on our strategic initiatives in EMEA. Earthworks end market sales decreased primarily due to construction in Americas and mining in Asia Pacific and EMEA.

On a regional basis, sales in EMEA increased due to defense related activity, and to a lesser extent, from the energy end market and favorable foreign currency effect. Sales in Asia Pacific were flat year over year, excluding the unfavorable foreign currency effect, due to increases in the general engineering end market, driven by increases in industrial activity year over year, offset with decreases in all other end markets. Sales in the Americas declined primarily due to the general engineering and energy end markets, and to a lesser extent, from the earthworks end market.

For the six months ended December 31, 2023, Infrastructure operating income was $16.9 million compared to $30.9 million in the prior year period. The decrease in operating income was primarily due to lower volumes and the unfavorable timing of pricing compared to raw material costs. These factors were partially offset by restructuring savings of approximately $2 million.

CORPORATE


	Three Months Ended December 31,				Six Months Ended December 31,
(in thousands)	2023		2022		2023		2022
Corporate expense	$	(284)	$	(828)	$	(927)	$	(1,696)

For the three months ended December 31, 2023, Corporate expense decreased by $0.5 million from the prior year quarter. For the six months ended December 31, 2023, Corporate expense decreased by $0.8 million from the prior year period.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations is the primary source of funding for our capital expenditures. For the six months ended December 31, 2023, cash flow provided by operating activities was $88.3 million.

We consider the majority of the unremitted earnings of our non-U.S. subsidiaries to be permanently reinvested. With regard to these unremitted earnings, we have not, nor do we anticipate the need to, repatriate funds to 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. 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.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

At December 31, 2023, cash and cash equivalents were $90.7 million. Total Kennametal Shareholders' equity was $1,287.8 million and total debt was $618.9 million. Our current senior credit ratings are at investment grade levels. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We believe that we have sufficient resources available to meet cash requirements for the next 12 months. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers. There have been no material changes in our contractual obligations and commitments since June 30, 2023.

Share Repurchase Program 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 the three and six months ended December 31, 2023, the Company repurchased $15 million and $29 million, respectively, of Kennametal common stock. Inception-to-date the Company has repurchased $163 million of Kennametal common stock under the $200 million three-year program.

Dividends During the six months ended December 31, 2023, the Company paid a total of $31.8 million in dividends to Kennametal Shareholders.

Cash Flow Provided by Operating Activities

During the six months ended December 31, 2023, cash flow provided by operating activities was $88.3 million, compared to $52.5 million for the prior year period. Cash flow provided by operating activities for the current year period consisted of net income and non-cash items amounting to an inflow of $143.3 million and changes in certain assets and liabilities netting to an outflow of $55.0 million. Contributing to the changes in certain assets and liabilities were a decrease in accounts payable and accrued liabilities of $36.2 million, a decrease in accrued income taxes of $17.3 million and an increase in inventories of $9.5 million. Partially offsetting these cash outflows was a decrease in accounts receivable of $20.4 million.

During the six months ended December 31, 2022, cash flow provided by operating activities was $52.5 million consisting of net income and non-cash items amounting to an inflow of $131.3 million and changes in certain assets and liabilities netting to an outflow of $78.8 million. Contributing to the changes in certain assets and liabilities were a decrease in accounts payable and accrued liabilities of $52.8 million, an increase in inventories of $32.9 million, and a decrease in accrued pension and postretirement benefits of $4.5 million. Partially offsetting these cash outflows was a decrease in accounts receivable of $4.0 million.

Cash Flow Used in Investing Activities

Cash flow used in investing activities was $56.4 million for the six months ended December 31, 2023, compared to $48.1 million for the prior year period. During the current year period, cash flow used in investing activities primarily included capital expenditures of $57.5 million, which consisted primarily of equipment upgrades, and the acquisition of a business for $4.0 million, partially offset by disposals of property, plant, and equipment of $5.2 million.

Cash flow used in investing activities was $48.1 million for the six months ended December 31, 2022 and primarily included capital expenditures, net of $48.2 million, which consisted primarily of equipment upgrades, partially offset by disposals of property, plant, and equipment of $2.5 million.

Cash Flow Used in Financing Activities

Cash flow used in financing activities was $46.5 million for the six months ended December 31, 2023 compared to $11.2 million in the prior year period. During the current year period, cash flow used in financing activities primarily included $31.8 million of cash dividends paid to Kennametal Shareholders, $28.8 million in common shares repurchased, and $7.9 million of the effect of employee benefit and stock plans and dividend reinvestment, partially offset by $20.5 million of borrowings under the Credit Agreement and an increase in notes payable of $2.1 million.

Cash flow used in financing activities was $11.2 million for the six months ended December 31, 2022 and primarily included $30.1 million in common shares repurchased, $32.4 million of cash dividends paid to Kennametal Shareholders and $5.8 million of the effect of employee benefit and stock plans and dividend reinvestment, partially offset by $57.8 million of borrowings under the Credit Agreement.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

FINANCIAL CONDITION

Working capital was $595.7 million at December 31, 2023, an increase of $2.9 million from $592.8 million at June 30, 2023. The increase in working capital was primarily driven by a decrease in accrued expenses of $13.5 million, an increase in inventories of $13.2 million, a decrease in accrued income taxes of $10.5 million, and a decrease in accounts payable of $10.3 million, partially offset by an increase in borrowings under the Credit Agreement and notes payable of $22.6 million, a decrease of accounts receivable of $16.8 million, and a decrease in cash and cash equivalents of $15.3 million. Currency exchange rate effects decreased working capital by a total of approximately $4 million.

Property, plant and equipment, net decreased $7.7 million from $969.1 million at June 30, 2023 to $961.4 million at December 31, 2023, primarily due to depreciation expense of $60.5 million, partially offset by net capital additions of $52.3 million. Currency exchange rate effects increased property, plant and equipment, net by approximately $5 million.

At December 31, 2023, other assets were $573.1 million, an increase of $21.8 million from $551.4 million at June 30, 2023. The increase was primarily due to an increase in deferred income taxes of $9.0 million, an increase in goodwill of $3.6 million due to a business acquisition and an increase in operating lease right-of-use assets of $4.3 million, partially offset by amortization of intangibles of $5.8 million. Currency exchange rate effects increased other assets by a total of approximately $9 million.

Kennametal Shareholders' equity was $1,287.8 million at December 31, 2023, an increase of $12.4 million from $1,275.4 million at June 30, 2023. The increase was primarily due to net income attributable to Kennametal of $53.2 million, other comprehensive income of $13.1 million and capital stock issued under employee benefit and stock plans of $6.7 million, partially offset by cash dividends paid to Kennametal Shareholders of $31.8 million and the repurchase of capital stock of $28.8 million primarily under the share repurchase program.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

There have been no changes to our critical accounting policies since June 30, 2023.

RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BY U.S. GAAP

In accordance with SEC rules, below are the definitions of the non-GAAP financial measures we use in this report and the reconciliation of these measures to the most closely related GAAP financial measures. We believe that these measures provide useful perspective on underlying business trends and results and provide a supplemental measure of year-over-year results. The non-GAAP financial measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes. We believe these measures may be useful to investors as they provide supplemental information about business performance and provide investors a view of our business results through the eyes of management. These non-GAAP financial measures are not intended to be considered by the user in place of the related GAAP financial measure, but rather as supplemental information to our business results. These non-GAAP financial measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted.

Organic sales growth (decline) Organic sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) excluding the effects of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth (decline) on a consistent basis. Also, we report organic sales growth (decline) at the consolidated and segment levels.

Constant currency end market sales growth (decline) Constant currency end market sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by end market excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth, constant currency end market sales growth does not exclude the effect of business days. We believe this measure provides investors with a supplemental understanding of underlying end market trends by providing end market sales growth (decline) on a consistent basis. Also, we report constant currency end market sales growth (decline) at the consolidated and segment levels.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Constant currency regional sales growth (decline) Constant currency regional sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by region excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth, constant currency regional sales growth does not exclude the effect of business days. We believe this measure provides investors with a supplemental understanding of underlying regional trends by providing regional sales growth (decline) on a consistent basis. Also, we report constant currency regional sales growth (decline) at the consolidated and segment levels.

Reconciliations of organic sales growth (decline) to sales growth (decline) are as follows:


Three Months Ended December 31, 2023	Metal Cutting	Infrastructure	Total
Organic sales growth (decline)	—%	(8)%	(3)%
Foreign currency exchange effect(1)	2	1	1
Business days effect(4)	2	—	2


Sales growth (decline)	4%	(7)%	—%


Six Months Ended December 31, 2023	Metal Cutting	Infrastructure	Total
Organic sales growth (decline)	1%	(6)%	(1)%
Foreign currency exchange effect(1)	1	—	1
Business days effect(4)	1	—	—


Sales growth (decline)	3%	(6)%	—%

Reconciliations of constant currency end market sales growth (decline) to end market sales growth (decline)(2) are as follows:


Metal Cutting
Three Months Ended December 31, 2023	General Engineering	Transportation	Aerospace & Defense	Energy
Constant currency end market sales growth (decline)	1%	4%	6%	(3)%
Foreign currency exchange effect(1)	2	2	1	2


End market sales growth (decline)(2)	3%	6%	7%	(1)%


Infrastructure
Three Months Ended December 31, 2023	Energy	Earthworks	General Engineering	Aerospace & Defense
Constant currency end market sales decline	(4)%	(5)%	(10)%	(14)%
Foreign currency exchange effect(1)	1	(1)	—	4


End market sales decline(2)	(3)%	(6)%	(10)%	(10)%


Total
Three Months Ended December 31, 2023	General Engineering	Transportation	Aerospace & Defense	Energy	Earthworks
Constant currency end market sales (decline) growth	(2)%	4%	—%	(3)%	(5)%
Foreign currency exchange effect(1)	1	2	2	1	(1)


End market sales (decline) growth(2)	(1)%	6%	2%	(2)%	(6)%

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Metal Cutting
Six Months Ended December 31, 2023	General Engineering	Transportation	Aerospace & Defense	Energy
Constant currency end market sales growth (decline)	1%	2%	7%	(3)%
Foreign currency exchange effect(1)	2	2	1	2
End market sales growth (decline)(2)	3%	4%	8%	(1)%


Infrastructure
Six Months Ended December 31, 2023	Energy	Earthworks	General Engineering	Aerospace & Defense
Constant currency end market sales (decline) growth	(10)%	(3)%	(9)%	12%
Foreign currency exchange effect(1)	—	(1)	—	5
End market sales (decline) growth(2)	(10)%	(4)%	(9)%	17%


Total
Six Months Ended December 31, 2023	General Engineering	Transportation	Aerospace & Defense	Energy	Earthworks
Constant currency end market sales (decline) growth	(2)%	2%	8%	(8)%	(3)%
Foreign currency exchange effect(1)	1	2	2	1	(1)
End market sales (decline) growth(2)	(1)%	4%	10%	(7)%	(4)%

Reconciliations of constant currency regional sales growth (decline) to reported regional sales growth (decline)(3) are as follows:


	Three Months Ended December 31, 2023			Six Months Ended December 31, 2023
	Americas	EMEA	Asia Pacific	Americas	EMEA	Asia Pacific
Metal Cutting
Constant currency regional sales growth (decline)	1%	4%	—%	2%	6%	(7)%
Foreign currency exchange effect(1)	1	5	(1)	1	5	(2)


Regional sales growth (decline)(3)	2%	9%	(1)%	3%	11%	(9)%

Infrastructure
Constant currency regional sales (decline) growth	(12)%	(1)%	—%	(11)%	4%	—%
Foreign currency exchange effect(1)	—	3	(1)	—	3	(3)


Regional sales (decline) growth(3)	(12)%	2%	(1)%	(11)%	7%	(3)%

Total
Constant currency regional sales (decline) growth	(5)%	3%	—%	(4)%	6%	(4)%
Foreign currency exchange effect(1)	—	4	(1)	—	4	(3)


Regional sales (decline) growth(3)	(5)%	7%	(1)%	(4)%	10%	(7)%

(1) Foreign currency exchange effect is calculated by dividing the difference between current period sales and current period sales at prior period foreign exchange rates by prior period sales.

(2) Aggregate sales for all end markets sum to the sales amount presented on Kennametal's financial statements.

(3) Aggregate sales for all regions sum to the sales amount presented on Kennametal's financial statements.

(4) Business days effect is calculated by dividing the year-over-year change in weighted average working days (based on mix of sales by country) by prior period weighted average working days.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our market risk exposures since June 30, 2023.


ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company's management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). The Company's disclosure controls were designed to provide a reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, the controls have been designed to provide reasonable assurance of achieving the controls' stated goals. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance at December 31, 2023 that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


ITEM 5. OTHER INFORMATION

Rule 10b5-1 Trading Arrangements

In the quarter ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, modified or terminated a plan for the purchase or sale of our securities intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or a non-Rule 10b5-1 trading arrangement for the purchase or sale of our securities, within the meaning of Item 408 of Regulation S-K.

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PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

From time to time, we are party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible or intellectual property. Although certain of these types of actions are currently pending, we do not believe that any individual proceeding is material or that our pending legal proceedings in the aggregate are material to Kennametal. See "Note 12. Environmental Matters" for a discussion of our exposure to certain environmental liabilities.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

ISSUER PURCHASES OF EQUITY SECURITIES


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of of Shares that May Yet Be Purchased Under the Plans or Programs (2)
October 1 through October 31, 2023	254,619	$	23.96	250,220	$	45,900,000
November 1 through November 30, 2023	213,588	23.24		210,775	41,000,000
December 1 through December 31, 2023	186,992	24.84		164,210	36,900,000
Total	655,199	$	23.98	625,205

(1)During the current period, 1,953 shares were purchased on the open market on behalf of Kennametal to fund the Company’s dividend reinvestment program. Also, during the current period employees delivered 28,041 shares of restricted stock to Kennametal, upon vesting, to satisfy tax withholding requirements.

(2)On July 27, 2021, the Board of Directors of the Company approved a share repurchase program authorizing the Company to purchase up to $200 million of the Company's common stock over a three-year period outside of the Company's dividend reinvestment program. On February 2, 2024, the Board of Directors of the Company authorized an additional share repurchase program. The Company intends to repurchase up to an additional $200 million of Kennametal common stock over a three-year period. The Company expects to fund repurchases through cash generated from operations.

UNREGISTERED SALES OF EQUITY SECURITIES

None.

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ITEM 6. EXHIBITS

Rule 13a-14(a)/15d-14(a) Certifications

31.1

Certification executed by Christopher Rossi, President and Chief Executive Officer of Kennametal Inc.

Filed herewith.

31.2

Certification executed by Patrick S. Watson, Vice President and Chief Financial Officer of Kennametal Inc.

Filed herewith.

Section 1350 Certifications

32.1

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Christopher Rossi, President and Chief Executive Officer of Kennametal Inc., and Patrick S. Watson, Vice President and Chief Financial Officer of Kennametal Inc.

Filed herewith.

101

XBRL

101.INS (3)

XBRL Instance Document

Filed herewith.

101.SCH (4)

XBRL Taxonomy Extension Schema Document

Filed herewith.

101.CAL (4)

XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith.

101.DEF (4)

XBRL Taxonomy Definition Linkbase

Filed herewith.

101.LAB (4)

XBRL Taxonomy Extension Label Linkbase Document

Filed herewith.

101.PRE (4)

XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith.

(3)The instance document does not appear in the Interactive Data File because its XBRL (Extensible Business Reporting Language) tags are embedded within the Inline XBRL document.

(4)Attached as Exhibit 101 to this report are the following documents formatted in Inline XBRL: (i) the Condensed Consolidated Statements of Income for the three and six months ended December 31, 2023 and 2022, (ii) the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended December 31, 2023 and 2022, (iii) the Condensed Consolidated Balance Sheets at December 31, 2023 and June 30, 2023, (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2023 and 2022 and (v) Notes to Condensed Consolidated Financial Statements for the three and six months ended December 31, 2023 and 2022.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

KENNAMETAL INC.

Date:

February 7, 2024

By:

/s/ John W. Witt

John W. Witt
Vice President Finance and Corporate Controller