Kennametal Reports Fiscal 2022 and Fourth Quarter Results

• FY22 sales increased 9 percent year-over-year to $2.0 billion; 11 percent on an organic basis
• Strong full-year operating leverage drove significant improvement in annual operating margin
• FY22 earnings per diluted share (EPS) of $1.72 and adjusted EPS of $1.78 versus $0.65 and $1.04, respectively, in FY21
• Returned $152 million to shareholders in FY22; $85 million in share repurchases and $67 million in dividends
• Q4 sales increased 3 percent year-over-year to $530 million; 7 percent on an organic basis

PITTSBURGH, Aug. 1, 2022 /PRNewswire/ -- Kennametal Inc. (NYSE: KMT) (the "Company") today announced fourth quarter and fiscal 2022 results. For the fourth quarter, the Company reported earnings per diluted share (EPS) of $0.50, compared with $0.41 in the prior year quarter. The current quarter adjusted EPS was $0.53, compared with $0.53 in the prior year quarter. For fiscal 2022, the Company reported EPS of $1.72, compared with $0.65 in the prior year. Adjusted EPS was $1.78 in the current year, compared with $1.04 in the prior year.

"We posted solid results this year with strong full-year operating leverage delivering over 300 basis points of year-over-year adjusted operating margin improvement. These results demonstrate continued success in executing our Operational and Commercial Excellence initiatives, including timely pricing actions to cover inflationary pressures," said Christopher Rossi, President and CEO.

Rossi continued, "Given our demonstrated ability to operate successfully in an uncertain macroeconomic environment, while maintaining a strong balance sheet, returning cash to shareholders and investing in the business, I am confident our strategic initiatives will continue to drive growth and improved profitability over the long-term."

Fiscal 2022 Fourth Quarter Key Developments

Sales were $530 million compared with $516 million in the same quarter last year. Sales increased by 3 percent, driven by 7 percent organic growth, partially offset by an unfavorable currency exchange effect of 4 percent.

Operating income was $63 million, or 11.8 percent margin, compared with $61 million, or 11.8 percent margin, in the same quarter last year. The increase in operating income was due primarily to organic sales growth, favorable pricing, lower incentive compensation costs and restructuring and related charges of $2 million compared to $5 million in the prior year quarter, partially offset by higher raw material costs of approximately $22 million and certain manufacturing inefficiencies including higher depreciation. Adjusted operating income was $65 million, or 12.3 percent margin, compared with $66 million, or 12.8 percent margin, in the prior year quarter.

The reported effective tax rate (ETR) was 27.8 percent and the adjusted ETR was 27.6 percent, compared to a reported ETR of 31.4 percent and an adjusted ETR of 24.3 percent in the prior year quarter. The year-over-year change in both the reported and adjusted ETR's was primarily due to higher pretax income in the current year, a non-recurring favorable adjustment in the prior year associated with a tax rate change in the U.K. and geographical mix.

Reported EPS in the current quarter includes restructuring and related charges of $0.02 per share and charges related to Russian and Ukrainian operations of $0.01 per share. Reported EPS in the prior year quarter includes restructuring and related charges of $0.05 per share, the partial annuitization of Canadian pension plans of $0.02 per share and differences in projected annual tax rates of $0.05 per share.

During the current quarter, the Company repurchased 1.3 million shares of Kennametal common stock for $35 million under its share repurchase program. Year-to-date the Company has repurchased 2.7 million shares of common stock for $85 million under the $200 million three-year program.

Fiscal 2022 Key Developments

Sales of $2,012 million increased from $1,841 million in the prior year. Sales increased by 9 percent, driven by 11 percent organic growth, partially offset by an unfavorable currency exchange effect of 2 percent.

Operating income was $218 million, or 10.8 percent margin, compared with $102 million, or 5.5 percent margin, in the prior year. The increase in operating income was due primarily to organic sales growth, restructuring and related charges of $4 million compared to $40 million in the prior year, favorable pricing, lower incentive compensation costs, favorable product mix and approximately $14 million of incremental simplification/modernization benefits, partially offset by higher raw material costs of approximately $49 million, certain manufacturing inefficiencies including higher depreciation and approximately $25 million due to the restoration of salaries and other cost-control measures that were taken in the prior year. Adjusted operating income was $224 million, or 11.1 percent margin, compared with $143 million, or 7.7 percent margin, in the prior year.

Net cash flow provided by operating activities in fiscal 2022 was $181 million compared to $236 million in the prior year. The change in net cash flow provided by operating activities was driven primarily by working capital adjustments in part due to increased safety stock for potential supply chain disruptions and higher raw material costs, partially offset by higher net income. Free operating cash flow (FOCF) was $85 million compared to $113 million in the prior year. The change in FOCF was driven primarily by working capital adjustments in part due to increased safety stock for potential supply chain disruptions and higher raw material costs, partially offset by higher net income and lower capital expenditures.

In fiscal 2022, Kennametal continued its focus on delivering shareholder value by returning $152 million to the shareholders through $85 million in share repurchases and $67 million in dividends, while investing $96 million in net capital expenditures.

Outlook

The Company's expectations for the first quarter of fiscal 2023 and the full year are as follows:

Quarterly Outlook:

• Sales expected to be $480 - $500 million; USD strength expected to be a $25 - $30 million headwind compared to the first quarter of fiscal 2022
• Adjusted operating income expected to be at least $45 million

Annual Outlook:

• Pricing actions expected to offset raw material costs, wage and general inflation
• Free operating cash flow at approximately 100 percent of adjusted net income
• Primary working capital as a percent of sales maintained at 31 - 33 percent throughout the year
• Capital spending expected to be $100 - $120 million
• Adjusted ETR is expected to be 26 - 28 percent
• $200 million three-year share repurchase program to continue

The Company will provide more details regarding its fiscal 2023 assumptions during its quarterly earnings conference call.

Fiscal 2022 Fourth Quarter Segment Results

Metal Cutting sales of $316 million increased 1 percent from $312 million in the prior year quarter due to organic sales growth of 7 percent, partially offset by an unfavorable currency exchange effect of 6 percent. Operating income was $34 million, or 10.8 percent margin, compared to $33 million, or 10.6 percent margin, in the prior year quarter. The increase in operating income was due primarily to organic sales growth, favorable pricing, lower incentive compensation costs and restructuring and related charges of $1 million compared to $4 million in the prior year quarter, partially offset by certain manufacturing inefficiencies including higher depreciation and higher raw material costs of approximately $6 million. Adjusted operating income was $36 million, or 11.3 percent margin, compared to $37 million, or 11.7 percent margin, in the prior year quarter.

Infrastructure sales of $214 million increased 5 percent from $204 million in the prior year quarter driven by organic sales growth of 7 percent, partially offset by an unfavorable currency exchange effect of 2 percent. Operating income was $29 million, or 13.7 percent margin, compared to $28 million, or 13.5 percent margin, in the prior year quarter. The increase in operating income was due primarily to organic sales growth, favorable pricing and lower incentive compensation costs, partially offset by higher raw material costs of approximately $16 million and certain manufacturing inefficiencies including higher depreciation. Adjusted operating income was $30 million, or 14.0 percent margin, compared to $30 million, or 14.5 percent margin, in the prior year quarter.

Dividend Declared

Kennametal also announced that its Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable on August 23, 2022 to shareholders of record as of the close of business on August 9, 2022.

The Company will discuss its fiscal 2022 fourth quarter and full year results in a live webcast at 8:00 a.m. Eastern Time, Tuesday, August 2, 2022. The conference call will be broadcast via real-time audio on Kennametal's investor relations website at https://investors.kennametal.com/ - click "Event" (located in the blue Quarterly Earnings block).

This earnings release contains non-GAAP financial measures. Reconciliations and descriptions of all non-GAAP financial measures are set forth in the tables that follow.

Certain statements in this release may be forward-looking in nature, or "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements that do not relate strictly to historical or current facts. For example, statements about Kennametal's outlook for earnings, sales volumes, cash flow, capital expenditures, working capital and effective tax rate for fiscal year 2023 and our expectations regarding future growth and financial performance are forward-looking statements. Any forward-looking statements are based on current knowledge, expectations and estimates that involve inherent risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: uncertainties related to changes in macroeconomic and/or global conditions, including as a result of increased inflation and Russia's invasion of Ukraine and the resulting sanctions on Russia; uncertainties related to the effects of the ongoing COVID-19 pandemic, including the emergence of more contagious or virulent strains of the virus, its impacts on our business operations, financial results and financial position and on the industries in which we operate and the global economy generally, including as a result of travel restrictions, business and workforce disruptions associated with the pandemic; other economic recession; our ability to achieve all anticipated benefits of restructuring, simplification and modernization initiatives; our foreign operations and international markets, such as currency exchange rates, different regulatory environments, trade barriers, exchange controls, and social and political instability, including the conflict in Ukraine; changes in the regulatory environment in which we operate, including environmental, health and safety regulations; potential for future goodwill and other intangible asset impairment charges; our ability to protect and defend our intellectual property; continuity of information technology infrastructure; competition; our ability to retain our management and employees; demands on management resources; availability and cost of the raw materials we use to manufacture our products; product liability claims; integrating acquisitions and achieving the expected savings and synergies; global or regional catastrophic events; demand for and market acceptance of our products; business divestitures; energy costs; commodity prices; labor relations; and implementation of environmental remediation matters. Many of these risks and other risks are more fully described in Kennametal's latest annual report on Form 10-K and its other periodic filings with the Securities and Exchange Commission. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.

About Kennametal

With over 80 years as an industrial technology leader, Kennametal Inc. delivers productivity to customers through materials science, tooling and wear-resistant solutions. Customers across aerospace, earthworks, energy, general engineering and transportation turn to Kennametal to help them manufacture with precision and efficiency. Every day approximately 8,700 employees are helping customers in more than 60 countries stay competitive. Kennametal generated $2 billion in revenues in fiscal 2022. Learn more at www.kennametal.com. Follow @Kennametal: Twitter, Instagram, Facebook, LinkedIn and YouTube.

NON-GAAP RECONCILIATIONS (UNAUDITED)

In addition to reported results under generally accepted accounting principles in the United States of America (GAAP), the following financial highlight tables include, where appropriate, a reconciliation of adjusted results including: operating income and margin; ETR; net income attributable to Kennametal; diluted EPS; Metal Cutting operating income and margin; Infrastructure operating income and margin; FOCF; and consolidated and segment organic sales growth (all of which are non-GAAP financial measures), to the most directly comparable GAAP financial measures. Adjustments for the three months ended June 30, 2022 include restructuring and related charges, charges related to Russian and Ukrainian operations and differences in projected annual tax rates. Adjustments for the three months ended June 30, 2021 include restructuring and related charges, the partial annuitization of Canadian pension plans and differences in projected annual tax rates. Adjustments for the twelve months ended June 30, 2022 include restructuring and related charges, charges related to Russian and Ukrainian operations, and a gain on the New Castle divestiture. Adjustments for the twelve months ended June 30, 2021 include restructuring and related charges, a discrete tax benefit, the effects from the early extinguishment of debt, and the partial annuitization of Canadian pension plans. For those adjustments that are presented 'net of tax', the tax effect of the adjustment can be derived by calculating the difference between the pre-tax and the post-tax adjustments presented. The tax effect on adjustments is calculated by preparing an overall tax calculation including the adjustments and then a tax calculation excluding the adjustments. The difference between these calculations results in the tax impact of the adjustments.

Management believes that presentation of these non-GAAP financial measures provides useful information about the results of operations of the Company for the current and past periods. Management believes that investors should have available the same information that management uses to assess operating performance, determine compensation and assess the capital structure of the Company. These non-GAAP financial measures should not be considered in isolation or as a substitute for the most comparable GAAP financial measures. Investors are cautioned that non-GAAP financial measures used by management may not be comparable to non-GAAP financial measures used by other companies. Reconciliations and descriptions of all non-GAAP financial measures are set forth in the disclosures below.

Reconciliations to the most directly comparable GAAP financial measures for the following forward-looking non-GAAP financial measures for the first quarter and full fiscal year of 2023 have not been provided, including but not limited to:  FOCF, adjusted operating income, adjusted net income, adjusted ETR and primary working capital. The most comparable GAAP financial measures are net cash flow from operating activities, operating income, net income attributable to Kennametal, ETR and working capital (defined as current assets less current liabilities), respectively. Primary working capital is defined as accounts receivable, net plus inventories, net minus accounts payable. Because the non-GAAP financial measures on a forward-looking basis are subject to uncertainty and variability as they are dependent on many factors - including, but not limited to, the effect of foreign currency exchange fluctuations, impacts from potential acquisitions or divestitures, gains or losses on the potential sale of businesses or other assets, restructuring costs, asset impairment charges, gains or losses from early extinguishment of debt, the tax impact of the items above and the impact of tax law changes or other tax matters - reconciliations to the most directly comparable forward-looking GAAP financial measures are not available without unreasonable effort.

Free Operating Cash Flow (FOCF)

FOCF is a non-GAAP financial measure and is defined by the Company as cash provided by operations (which is the most directly comparable GAAP financial measure) less capital expenditures plus proceeds from disposals of fixed assets. Management considers FOCF to be an important indicator of the Company's cash generating capability because it better represents cash generated from operations that can be used for dividends, debt repayment, strategic initiatives (such as acquisitions) and other investing and financing activities.

Organic Sales Growth

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

SOURCE Kennametal Inc.