UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
FOR THE FISCAL YEAR ENDED June 30, 2024
OR
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
(Exact name of registrant as specified in its charter)
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Registrant’s telephone number, including area code: (412 ) 248-8000
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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, a 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.
| ☒ | 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of December 29, 2023, the aggregate market value of the registrant’s Capital Stock held by non-affiliates of the registrant, estimated solely for the purposes of this Form 10-K, was approximately $961,400,000 . For purposes of the foregoing calculation only, all directors and executive officers of the registrant and each person who may be deemed to own beneficially more than 5% of the registrant’s Capital Stock have been deemed affiliates.
As of July 31, 2024, there were 77,900,791 shares of the Registrant’s Capital Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2024 Annual Meeting of Shareholders are incorporated by reference into Part III.
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FORWARD-LOOKING INFORMATION
Statements and financial discussion and analysis contained herein and in the documents incorporated by reference herein that are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For example, statements about Kennametal's expectations regarding future growth and any statements regarding future operating or financial performance or events are forward-looking. We have also included forward-looking statements in this Annual Report on Form 10-K ("Annual Report") concerning, among other things, our strategy, goals, plans and projections regarding our financial position, liquidity and capital resources, results of operations, market position, and product development. Any forward-looking statements are based on current knowledge, expectations and estimates that involve inherent risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, our actual results could vary materially from our current expectations. There are a number of factors that could cause our actual results to differ from those indicated in the forward-looking statements. They include: uncertainties related to changes in macroeconomic and/or global conditions, including as a result of increased inflation and Russia's invasion of Ukraine and the resulting sanctions on Russia, the conflict between Israel and Gaza; 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 this Annual Report. We can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of future events or developments.
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PART I
ITEM 1 - BUSINESS
OVERVIEW With more than 85 years of materials expertise, Kennametal Inc. (the Company) is a global industrial technology leader, that helps customers across the Aerospace & Defense, Earthworks, Energy, General Engineering and Transportation end markets build their products with precision and efficiency. The Company was founded based on a tungsten carbide technology breakthrough in 1938 and was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling. In 1967, it was listed on the New York Stock Exchange (NYSE) with the stock ticker KMT.
The Company's core expertise includes the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and extreme wear applications to keep customers up and running longer against conditions such as corrosion and high temperatures. We bring together material science, technical expertise, innovation and customer service in a way that allows us to anticipate customers' needs and help them overcome problems and achieve their manufacturing objectives.
Our standard and custom product offering spans metal cutting and wear applications including turning, milling, hole making, tooling systems and services, as well as specialized wear components and metallurgical powders. End users of the Company's metal cutting products include manufacturers engaged in a diverse array of industries including: transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation. The Company’s wear and metallurgical powders are used by producers and suppliers in equipment-intensive operations such as road construction, mining, quarrying, oil and gas exploration, refining, production and supply, and for aerospace and defense.
Unless otherwise specified, any reference to a “year” refers to our fiscal year ending on June 30. Unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
BUSINESS SEGMENT REVIEW Kennametal operates in two segments: Metal Cutting and Infrastructure. The Company's reportable operating segments have been determined in accordance with the Company's internal management structure, which is organized based on operating activities, the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results. Sales and operating income by segment are presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 of this Annual Report (MD&A). Additional segment data is provided in Note 21 of our consolidated financial statements set forth in Item 8 of this Annual Report.
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 & 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 digitally. 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 & 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.
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INTERNATIONAL OPERATIONS During 2024, we generated 60 percent of our consolidated sales in markets outside of the United States of America (U.S.), with principal international operations in Western Europe, China and India. We also operate manufacturing and distribution facilities in Israel, Latin America, South Africa and Vietnam, while serving customers through sales offices, agents and distributors in Europe and other parts of the world. While geographic diversification helps to minimize the sales and earnings effect of demand changes in any one particular region, our international operations are subject to normal risks of doing business globally, including fluctuations in currency exchange rates and changes in social, political and economic environments.
Our international sales and long-lived assets are presented in Note 21 of the Company’s consolidated financial statements, set forth in Item 8 of this Annual Report. Further information about the effects and risks of currency exchange rates are presented in the Quantitative and Qualitative Disclosures About Market Risk section, set forth in Item 7A of this Annual Report.
ACQUISITIONS AND DIVESTITURES We continually evaluate new opportunities to expand into new market areas, and to introduce new and/or complementary product offerings into new or existing areas where appropriate. We expect to continue to grow our business and further enhance our market position through the investment opportunities that exist within our core businesses, including potential acquisitions in the near term. In 2024, the Company completed an immaterial business combination for total consideration of approximately $6.5 million. Goodwill of approximately $3.8 million was recorded in the Metal Cutting segment as a result of the acquisition.
RAW MATERIALS AND SUPPLIES Our major metallurgical raw materials consist of tungsten ore concentrates and scrap carbide, which are used to make tungsten oxide, as well as compounds and secondary materials such as cobalt. Although an adequate supply of these raw materials currently exists, our major sources for raw materials are located abroad and prices fluctuate at times. We exercise great care in selecting, purchasing and managing the availability of raw materials utilizing a mix of long-term supply agreements coupled with spot purchases. Additionally, our internal tungsten recycling capability provides us access to additional sources of tungsten, and therefore, helps to mitigate our reliance on third parties. We also purchase steel bars and forgings for making toolholders and other tool parts, as well as for producing mining tools, rotary cutting tools and accessories. We purchase products for use in manufacturing processes and for resale from thousands of suppliers located in the U.S. and abroad.
RESEARCH AND DEVELOPMENT (R&D) Our R&D efforts focus on delivering innovations to our customers from both new product and process technology development. New product development provides solutions to our customers’ manufacturing challenges and productivity requirements. New process technology is developed and implemented in support of operational excellence to enhance product quality and efficiency at our plant sites. We use a disciplined framework, and have established “stage-gates,” or sequential tests to remove inefficiencies and accelerate commercial success. This framework is designed to accelerate and streamline development into a series of actions and decision points, integrating resource tasks to implement new and enhanced products and process technologies faster. Our stage-gate process ensures a strong linkage between verified customer requirements and corporate strategy and enables us to gain the full benefits of our investment in development work.
We hold a number of patents and trademarks which, in the aggregate, are material to the operation of our businesses. The duration of our patent protection varies throughout the world by jurisdiction.
SEASONALITY Our business is affected by seasonal variations to varying degrees by summer road construction, traditional summer vacation shutdowns of customers’ plants and holiday shutdowns that affect our sales levels during the first and second quarters of our fiscal year.
BACKLOG Our backlog of standard orders generally is not significant to our operations.
COMPETITION As one of the world’s leading producers of tooling and metal cutting products, specialty wear-resistant components and ceramics, earth cutting tools and advanced metallurgical powders, we maintain a competitive position in major markets worldwide. We actively compete in the sale of all our products with several large global competitors and with many smaller niche businesses offering various capabilities to customers around the world. While several of our competitors are divisions of larger corporations, our industry remains largely fragmented, containing several hundred fabricators, toolmakers and niche specialty coating businesses. Many of our competitors operate relatively small facilities, producing a limited selection of tools while buying cemented tungsten carbide components from original producers of cemented tungsten carbide products, including Kennametal. We also supply coated solutions and other engineered wear-resistant products to both larger corporations and smaller niche businesses. Given the fragmentation, opportunities for consolidation exist from both U.S.-based and internationally-based firms, as well as among thousands of industrial supply distributors.
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The principal competitive differentiators in our businesses include customer focused support and application expertise, custom and standard product innovation, product performance and quality, and our brand recognition. We derive competitive advantage from our premium brand positions, global presence, application expertise and ability to address unique customer needs with new and improved tools, innovative surface and wear-resistant solutions, highly engineered components, consistent quality, traditional and digital customer service and technical assistance capabilities, state-of-the-art manufacturing and multiple sales channels. With these strengths, we are able to sell products based on the value-added productivity we deliver to our customers, rather than competing solely on price.
REGULATION From time to time, we are a party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible or intellectual property assets. While we currently believe that the amount of ultimate liability, if any, we may face with respect to these actions will not materially affect our financial position, results of operations or liquidity, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur or if protracted litigation were to ensue, the effect on us could be material.
Compliance with government laws and regulations pertaining to the discharge of materials or pollutants into the environment or otherwise relating to the protection of the environment did not have a material effect on our capital expenditures or competitive position for the years covered by this Annual Report, nor is such compliance expected to have a material effect on us in the future.
The operation of our business has exposed us to certain liabilities and compliance costs related to environmental matters. We are involved in various environmental cleanup and remediation activities at certain sites associated with our current or former operations.
We establish and maintain accruals for estimated liabilities associated with certain environmental matters. As of June 30, 2024 and 2023, the balances of these accruals were $11.0 million and $12.0 million, respectively. These accruals represent anticipated costs associated with the remediation of these issues and are generally not discounted.
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.
HUMAN CAPITAL RESOURCES
Employee Profile
We employed 8,447 people, including approximately 8,400 full-time employees, as of June 30, 2024. Approximately 2,700 employees were located in the U.S. and 5,700 were located in other parts of the world, principally Germany, India and China. As of June 30, 2024, approximately 2,300 of our employees were represented by labor unions. We consider our labor relations to be generally good.
Diversity and Inclusion
We value diversity in all forms and are fully committed to inclusion in the workplace.
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We continue to deploy our strategy and supporting infrastructure to elevate and advance diversity and inclusion (D&I) across our global organization and instill accountability for our performance. Our D&I initiatives are guided by our D&I Steering Team, which was formed in fiscal 2023. The Steering Team is led by four senior executives who are responsible for one of our D&I strategic pillars – awareness, acquisition, development and community.
Our D&I strategy is also championed by the Global Inclusion Council, which consists of cross-functional global leaders. Four regional inclusion councils covering the Americas, Asia Pacific, EMEA and India execute the strategies and provide a global perspective. We track key metrics to monitor the progress of our D&I strategy and goals, focusing on diverse representation and identifying areas for improvement across all levels of the organization.
As part of our awareness initiatives in 2024, we continued to enhance the D&I sections of the Company’s intranet and intend to redesign our external website in 2025. We expanded our Employee Resource Groups (ERGs) to foster communication and mentorship among diverse groups within the Company. We currently have five official ERGs; Women at Work (W@W) in the Americas, the Women's Excellence Forum in India, the Women's Business Council in EMEA, the Black Excellence Network (BXN), focused on supporting our Black and African American employees in the Americas, and the Different Abilities ERG in EMEA, supporting employees with disabilities in Germany. We expect to launch additional ERGs in the future and have developed a toolkit to help ERGs set goals aligned with our business objectives.
BXN hosted an educational, month-long celebration of Black History Month in February 2024 that all employees had an opportunity to engage in through our internal social media platform. Our facilities around the world held events in March 2024 to celebrate Women’s History Month and International Women’s Day; recognizing the achievements of female colleagues and participating in activities and discussions. Lastly, we incorporated global recognition and educational opportunities for Mental Health Awareness Month in May 2024, reinforcing our ongoing commitment to the well-being of our employees.
We continue to focus globally on increasing the number of women in professional roles. The tables below show the percentage of our employees who are women and the percentage of leadership roles at the Company held by women as of the dates indicated.
| Number of Employees | |||||||||||||||||
| Female | Male | ||||||||||||||||
| As of June 30, | Number | Percent | Number | Percent | Total | ||||||||||||
| 2024 | 1,572 | 18.6 | % | 6,875 | 81.4 | % | 8,447 | ||||||||||
| 2023 | 1,623 | 18.6 | 7,116 | 81.4 | 8,739 | ||||||||||||
| Women in Leadership Roles (in percentages) | ||||||||||||||
| As of June 30, | Board of Directors | Executive | Senior Leadership | Senior Management | ||||||||||
| 2024 | 20.0 | % | 50.0 | % | 20.8 | % | 18.0 | % | ||||||
| 2023 | 20.0 | 42.9 | 23.1 | 18.8 | ||||||||||
Health and Safety
Safety, including the health of our employees and contractors, is one of our core values and a priority across our global operations. We are committed to developing a world-class health and safety culture aimed at achieving zero injuries and illnesses. The long-term vision to achieving our world-class health and safety culture is formalized and communicated in our Environmental, Health and Safety (EHS) Roadmap that consists of four focus areas – fatality and serious injury (FSI) prevention, incident prevention, leadership development and culture and environmental compliance and sustainability.
The Company uses our EHS Management System, including an extensive list of apps, to enable streamlined collection, tracking and dissemination of key data related to our EHS standards and requirements. Along with each standard, we have developed a self-assessment used to evaluate performance and develop action plans for advancing on the EHS Roadmap.
In 2024, we continued to achieve positive results in proactive risk identification and closure programs which drive our culture of eliminating hazards prior to potential incidents. Our total recordable incident rate (TRIR) performance was 0.34 in 2024 compared to 0.42 in 2023.
Employee Development and Training
For the Company to grow, our employees must grow and develop continuously. We offer learning and development opportunities for all employees. In 2024, this included training for senior, mid-level and emerging leaders in role- and function-specific skills, such as change management, process improvement and sales training. We also offered our operational employees technical training through the Kennametal Knowledge Center.
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Supporting our learning and development efforts is our OneTeam learning management system (LMS). Available in multiple languages, OneTeam offers more than 5,000 online courses in an easy-to-use interface. Throughout 2024, over 3,400 employees accessed the LMS and completed over 14,500 courses. Training is offered to our employees in many different formats. Although not all training hours are tracked through OneTeam, over 10,200 hours of completed training were recorded in the system during 2024.
Compensation and Benefits
The Company offers competitive compensation and benefits packages to build a qualified and motivated workforce and to meet their health and wellness needs. Our overall executive compensation philosophy is designed to attract, incentivize and retain high-performing talent. Executive compensation includes a mix of base salary, annual cash-based incentives under our Annual Incentive Plan (AIP) and our equity-based Long-Term Incentive Plan (LTIP).
The AIP, which is based on the Company’s achievement of short-term financial and strategic goals, includes important Environmental, Social and Governance (ESG) goals for all executive leadership team members and other key senior leaders. These goals are tied to worker safety and D&I and represent an important step in advancing accountability on ESG strategies.
Employee Engagement
To measure the effectiveness of our employee engagement strategy, we track key performance indicators such as our voluntary turnover rate. Our voluntary turnover rate was 7.9 percent in 2024 compared to 8.1 percent in 2023. We also conduct annual “Be Heard” employee engagement surveys to gather input and feedback on a wide range of categories including teamwork, diversity and inclusion, health and safety, ethical behavior and decision-making. We use the survey results, which are shared with employees, to refine employee engagement programs and develop new initiatives. In our most recent survey launched in April 2024, we had a response rate of 82 percent and showed improvement in engagement scores across our global production and professional workforce. Our average engagement score was 71 in 2024, up from 69 in 2023.
AVAILABLE INFORMATION Our internet address is www.kennametal.com. On the SEC Filings page of our website, which is accessible under the "About Us" tab, under Investor Relations and then the "Financials" tab, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC): our annual reports on Form 10-K, our annual proxy statements, our annual conflict minerals disclosure and reports on Form SD, our annual reports on Form 11-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. The SEC Filings page of our website also includes Forms 3, 4 and 5 filed pursuant to Section 16(a) of the Exchange Act. All filings posted on our SEC Filings page are available to be viewed on our website free of charge. On the Corporate Governance page of our website, which is accessible under the "About Us" tab, under Investor Relations, we post the following charters and guidelines: Audit Committee Charter, Compensation and Human Capital Committee Charter, Nominating/Corporate Governance Committee Charter, Kennametal Inc. Corporate Governance Guidelines and Kennametal Inc. Stock Ownership Guidelines. On the Ethics and Compliance page of our website, which is under the "About Us" tab, we post our Code of Conduct. All charters and guidelines posted on our website are available to be viewed free of charge. Information contained on our website is not part of this Annual Report or our other filings with the SEC. Copies of this Annual Report and those items disclosed on the Corporate Governance and Ethics and Compliance pages of our website are available without charge upon written request to: Investor Relations, Kennametal Inc., 525 William Penn Place, Suite 3300, Pittsburgh, Pennsylvania 15219-2706. The SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers, including Kennametal that file electronically with the SEC.
RISK FACTORS
This section describes material risks to our business that are currently known to us. Our business, financial condition or results of operations may be materially affected by a number of factors. Our management regularly monitors the risks inherent in our business, with input from our Enterprise Risk Management process. In addition to real time monitoring, we periodically conduct a formal enterprise-wide risk assessment to identify factors and circumstances that might present significant risk to the Company. Many of these risks are discussed throughout this report. The risks below, however, are not exhaustive. We operate in a rapidly changing environment. Other risks that we currently believe to be immaterial could become material in the future. We are also subject to legal and regulatory changes. New factors could emerge, and it is not possible to predict the outcome of all such risk factors on our business, financial condition or results of operations. The following discussion details the material risk factors and uncertainties that we believe could cause Kennametal’s actual results to differ materially from those projected in any forward-looking statements.
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Global Operational Risks:
Russia’s invasion of Ukraine, the sanctions and actions taken against Russia and Russia's response to such actions could adversely affect our business. The Russian invasion of Ukraine in February 2022 and the resulting sanctions and actions taken against Russia by the United States, Canada, the European Union and other countries have restricted our ability to sell certain products in Russia and Ukraine. In 2022, the Company ceased operations in Russia and subsequently decided to liquidate its legal entity in Russia which is expected to be completed in 2025. A significant escalation or expansion of the conflict beyond its current geographic, political and economic scope and scale could have a material adverse effect on our business, results of operations and financial condition and could exacerbate other risks. Such risks include, but are not limited to: an energy shortage in Europe as Russia has limited natural gas and other supplies into Europe, an increase in the frequency and severity of the cybersecurity threats we and various third parties with whom we do business experience, unfavorable changes in exchange rates, further shortages, delivery delays and price inflation in a wide variety of raw materials and components, widespread reductions in customer demand and increased logistical challenges.
Public health threats or outbreaks of communicable diseases could have a material adverse effect on our operations and financial results. We face risks related to public health threats or outbreaks of communicable diseases. A widespread healthcare crisis, such as an outbreak of a communicable disease could adversely affect the global economy and our business, our suppliers and our customers’ ability to conduct business for an indefinite period of time. For example, the global Coronavirus Disease 2019 (COVID-19) pandemic negatively affected the global economy, disrupted financial markets, international trade, impacted qualified personnel availability, and significantly affected global supply chains, all of which had an effect on the Company and our end markets. The extent to which our business may be affected by public health threats or outbreaks in the future will depend on a variety of factors, many of which are outside of our control, including the duration of a pandemic or outbreak, impacts on economic activity, and the possibility of recession or financial market instability.
Downturns in the business cycle could adversely affect our sales and profitability. Our business has historically been cyclical and subject to significant effect from economic downturns. Global economic downturns coupled with global financial and credit market disruptions have had a negative effect on our sales and profitability historically. These events could contribute to weak end markets, a sharp drop in demand for our products and services, higher energy costs and commodity prices, and higher costs of borrowing and/or diminished credit availability. Although we believe that the long-term prospects for our business remain positive, we are unable to predict the future course of industry variables or the strength and pace or sustainability of economic development.
Our international operations pose certain risks that may adversely affect sales and earnings. We have manufacturing operations and assets located outside of the U.S., including but not limited to those in Western Europe, Brazil, Canada, China, India, Israel, South Africa and Vietnam. We also sell our products to customers and distributors located outside of the U.S. During the year ended June 30, 2024, 60 percent of our consolidated sales were derived from non-U.S. markets. These international operations are subject to a number of special risks, in addition to the risks that affect our domestic operations, including currency exchange rate fluctuations, differing protections of intellectual property, trade barriers, exchange controls, regional economic uncertainty, overlap of different tax regimens, differing (and possibly more stringent) labor regulations, labor unrest, risk of governmental expropriation, domestic and foreign customs and tariffs, current and changing regulatory environments (including, but not limited to, the risks associated with the importation and exportation of products and raw materials), risk of failure of our foreign employees to comply with both U.S. and foreign laws, including antitrust laws, trade regulations and the Foreign Corrupt Practices Act, difficulty in obtaining distribution support, difficulty in staffing and managing widespread operations, differences in the availability and terms of financing, social and political instability and unrest and risks of increased taxes and/or adverse tax consequences. Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met. To the extent we are unable to effectively manage our international operations and these risks, our international sales may be adversely affected, we may be subject to additional and unanticipated costs, and we may be subject to litigation or regulatory action. As a consequence, our business, financial condition and results of operations could be seriously harmed.
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Additional tax expense or exposures could affect our financial condition and results of operations. We are subject to various taxes in the U.S. and numerous other jurisdictions. Our future results of operations could be adversely affected by changes in our effective tax rate as a result of a change in the mix of earnings between U.S. and non-U.S. jurisdictions or among jurisdictions with differing statutory tax rates, changes in tax laws or treaties, or in their application or interpretation, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, changes in the amount of earnings indefinitely reinvested in certain non-U.S. jurisdictions, and the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures.
Implementation of tariffs and changes to or uncertainties related to tariffs and trade agreements could adversely affect our business. The U.S. government has imposed tariffs on certain foreign goods from a variety of countries and regions, most notably China, that it perceives as engaging in unfair trade practices, and previously raised the possibility of imposing significant, additional tariff increases or expanding the tariffs to capture other types of goods from other countries. In response, many of these foreign governments have imposed retaliatory tariffs on goods that their countries import from the U.S. Uncertainties with respect to tariffs, trade agreements or any potential trade wars could negatively affect the global economy and could affect demand for our products and could have a material adverse effect on our financial condition, results of operations and cash flows. Changes in tariffs and trade barriers could also result in adverse changes in the cost and availability of our raw materials, and our ability to manufacture globally to support global sales which could lead to increased costs that we may not be able to effectively pass on to customers, each of which could materially adversely affect our operating margins, results of operations and cash flows.
Natural disasters or other global or regional catastrophic events could disrupt our operations and adversely affect results. Despite our concerted effort to minimize risk to our production capabilities and corporate information systems and to reduce the effect of unforeseen interruptions to us through business continuity planning, we still may be exposed to interruptions due to catastrophe, natural disaster, pandemic, terrorism or acts of war, which are beyond our control. Disruptions to our facilities or systems, or to those of our key suppliers, could also interrupt operational processes and adversely affect our ability to manufacture our products and provide services and support to our customers. As a result, our business, our results of operations, financial position, cash flows and stock price could be adversely affected.
Changes in the regulatory environment, including environmental, health and safety regulations, could subject us to increased compliance and manufacturing costs, which could have a material adverse effect on our business.
Health and safety regulations. Certain of our products contain hard metals, including tungsten and cobalt. Hard metal dust is being studied for potential adverse health effects by organizations in several regions throughout the world, including the U.S., Europe and Japan. Future studies on the health effects of hard metals may result in our products being classified as hazardous to human health, which could lead to new regulations in countries in which we operate that may restrict or prohibit the use of, and/or exposure to, hard metal dust. New regulation of hard metals could require us to change our operations, and these changes could affect the quality of our products and materially increase our costs.
Environmental regulations. We are subject to various environmental laws, and any violation of, or our liabilities under, these laws could adversely affect us. Our operations necessitate the use and handling of hazardous materials and, as a result, we are subject to various federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. These laws impose penalties, fines and other sanctions for noncompliance and liability for response costs, property damages and personal injury resulting from past and current spills, disposals or other releases of, or exposure to, hazardous materials. We could incur substantial costs as a result of noncompliance with or liability for cleanup or other costs or damages under these laws. We may be subject to more stringent environmental laws in the future. If more stringent environmental laws are enacted in the future, these laws could have a material adverse effect on our business, financial condition and results of operations.
Regulations affecting the mining and drilling industries, utilities industry or the use of fossil fuels. Some of our principal customers are mining and drilling companies that supply coal, oil, gas or other fuels as a source of energy to utility companies or for transportation. The operations of these mining and drilling companies are geographically diverse and are subject to or affected by a wide array of regulations in the jurisdictions where they operate. As a result of changes in regulations and laws relating to these industries, including, without limitation, actions to limit or reduce greenhouse gas emissions from the use of fossil fuels, our customers’ operations could be disrupted or curtailed by governmental authorities. The high cost of compliance with these regulations may also induce customers to discontinue or limit their operations and may discourage companies from developing new opportunities. As a result of these factors, demand for our mining- and drilling-related products could be substantially affected by regulations adversely affecting the mining and drilling industries or altering the fuel choices of utilities or in transportation. Our principal customers also include transportation original equipment manufacturers and tier suppliers engaged in the production of internal combustion engines. As a result of breakthrough technologies, changing consumer preferences or regulations designed to limit or reduce greenhouse gas emissions from the use of fossil fuels in transportation, demand for our products could be negatively affected.
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Climate change and resulting legal or regulatory responses. There is growing concern that a gradual increase in global average temperatures may cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Such climate change may impair our production capabilities, disrupt our supply chain or impact demand for our products. Growing concern over climate change also may result in additional legal or regulatory requirements designed to reduce or mitigate the effects of carbon dioxide and other greenhouse gas emissions on the environment. Increased energy or compliance costs and expenses as a result of increased legal or regulatory requirements may cause disruptions in, or an increase in the costs associated with, the manufacturing and distribution of our products. The impacts of climate change and legal or regulatory initiatives to address climate change could have a long-term adverse impact on our business, financial condition and results of operations.
Product liability claims could have a material adverse effect on our business. The sale of metal cutting, mining, highway construction and other tools and related products as well as engineered components and advanced materials entails an inherent risk of product liability claims. We cannot give any assurances that the coverage limits of our insurance policies will be adequate or that our policies will cover any particular loss. Insurance can be expensive, and we may not always be able to purchase insurance on commercially acceptable terms, if at all. Claims brought against us that are not covered by insurance or that result in recoveries in excess of our insurance coverage could have a material adverse effect on our business, financial condition and results of operations.
Business Strategy Risks:
Our restructuring efforts may not have the intended effects. We have implemented restructuring and other actions to reduce structural costs, improve operational efficiency and position the Company for long-term profitable growth. However, there is no assurance that these efforts, or that any other actions that we have taken or may take in the future, will be sufficient to counter any future economic or industry disruptions. We cannot provide assurance that we will not incur future restructuring charges or impairment charges, or that we will achieve all of the anticipated benefits from the restructuring actions we have taken or plan to take in the future.
We may not be able to complete, manage or integrate acquisitions successfully. We may evaluate acquisition opportunities that have the potential to strengthen or expand our business. We can give no assurances, however, that any acquisition opportunities will arise or if they do, that they will be consummated, or that additional financing, if needed, will be available on satisfactory terms. In addition, acquisitions involve inherent risks that the businesses acquired will not perform in accordance with our expectations. We may not be able to achieve the synergies and other benefits we expect from the integration of acquisitions as successfully or rapidly as projected, if at all. Our failure to consummate an acquisition or effectively integrate newly acquired operations could prevent us from realizing our expected strategic growth and rate of return on an acquired business and could have a material and adverse effect on our results of operations and financial condition.
Impairment of goodwill could result in a negative effect on our financial condition and results of operations. At June 30, 2024, goodwill totaled $271.6 million, or 11 percent of our total assets. Goodwill results from acquisitions, representing the excess of cost over the fair value of the net tangible and other identifiable intangible assets we have acquired. We assess at least annually whether there has been impairment in the value of our goodwill. If future operating performance at our Metal Cutting reporting unit were to fall significantly below current levels, we could record, under current applicable accounting rules, a non-cash impairment charge for goodwill. Any determination requiring the impairment of a significant portion of goodwill would negatively affect our financial condition and results of operations.
Our continued success depends on our ability to protect and defend our intellectual property. Our future success depends in part upon our ability to protect and defend our intellectual property. We rely principally on nondisclosure agreements and other contractual arrangements and trade secret laws and, to a lesser extent, trademark and patent laws, to protect our intellectual property. However, these measures may be inadequate to protect our intellectual property from infringement by others or prevent misappropriation of our proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do U.S. laws. If one of our patents is infringed upon by a third party, we may need to devote significant time and financial resources to defend our rights with respect to such patent. We may not be successful in defending our patents. Similarly, while we do not knowingly infringe on the patents, copyrights or other intellectual property rights of others, we may be required to spend a significant amount of time and financial resources to resolve any infringement claims against us, and we may not be successful in defending our position or negotiating alternative remedies. Our inability to protect our proprietary information and enforce or defend our intellectual property rights in proceedings initiated by us or brought against us could have a material adverse effect on our business, financial condition and results of operations.
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If we are unable to retain our qualified management and employees, our business may be negatively affected. Our ability to provide high quality products and services depends in part on our ability to retain our skilled personnel in the areas of management, product engineering, servicing and sales. Competition for such personnel is intense, and our competitors can be expected to attempt to hire our management and skilled employees from time to time. In addition, our restructuring activities and strategies for growth have placed, and are expected to continue to place, increased demands on our management’s skills and resources. If we are unable to retain our management team and professional personnel, our customer relationships and level of technical expertise could be negatively affected, which may materially and adversely affect our business.
Any interruption of our workforce, including interruptions due to our restructuring initiatives, unionization efforts, changes in labor relations or shortages of appropriately skilled individuals could affect our business.
We operate in a highly competitive environment. Our domestic and foreign operations are subject to significant competitive pressures. We compete directly and indirectly with other manufacturers and suppliers of metal cutting tools, engineered components and advanced materials. Some of our competitors are larger than we are and may have greater access to financial resources or be less leveraged than us. In addition, the industry in which our products are used is a large, fragmented industry that is highly competitive.
Cybersecurity Risks:
Failure of, or a breach in security of, our information technology systems could adversely affect our business. We rely on information technology infrastructure (both on-premises and third-party managed) to achieve our business objectives. Despite security measures taken by us, our information technology systems may be vulnerable to computer viruses or attacks by hackers or breached due to employee error, supplier error, programming errors, malfeasance or other disruptions. Any disruption of our infrastructure could negatively affect our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any disruption could cause us to lose customers or revenue and could require us to incur significant expense to remediate. Increased global information technology threats, vulnerabilities, and a rise in sophisticated and targeted international computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Any such breach in security could expose the Company and its employees, customers and suppliers to risks of misuse of confidential information, manipulation and destruction of data, production downtimes, litigation and operational disruptions, which in turn could adversely affect the Company's reputation, competitive position, business or results of operations.
In addition, we could be subject to liability if confidential information relating to customers, employees, vendors and the extended supply chain or other parties is misappropriated from our computer system. We cannot assure that our ongoing focus on system improvements will be sufficient to prevent or limit the damage from any cyber-attack or network disruption. We do not believe we have been the target of a material successful cyber-attack.
Raw Material Risks:
Our future operating results may be affected by fluctuations in the prices and availability of raw materials. The raw materials we use for our products include tungsten ore concentrates and scrap carbide, which are used to make tungsten oxide, as well as compounds and secondary materials such as cobalt. We also purchase steel bars and forgings for making toolholders and other tool parts, as well as for producing mining tools, rotary cutting tools and accessories. A significant portion of our raw materials is supplied by sources outside of the U.S. The raw materials extraction industry is highly cyclical and at times pricing and supply can be volatile due to a number of factors beyond our control, including natural disasters, pandemics or public health issues, general economic and political conditions, labor costs, competition, import duties, tariffs and currency exchange rate fluctuations. This volatility can significantly affect our raw material costs. In an environment of increasing raw material prices, competitive conditions can affect how much of these price increases we can recover in the form of higher sales prices for our products. To the extent we are unable to pass on any raw material price increases to our customers, our profitability could be adversely affected. Furthermore, restrictions in the supply of tungsten, cobalt and other raw materials could adversely affect our operating results. If the prices for our raw materials increase or we are unable to secure adequate supplies of raw materials on favorable terms, our profitability could be impaired. If the prices for our raw materials decrease, we could face product pricing challenges.
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Capital and Credit-Related Risks:
Restrictions contained in our revolving credit facility and other debt agreements may limit our ability to incur additional indebtedness. Our existing revolving credit facility and other debt agreements (each a “Debt Facility” and collectively, “Debt Facilities”) contain restrictive covenants, including restrictions on our ability to incur indebtedness. These restrictions could limit our ability to effectuate future acquisitions, limit our ability to pay dividends, limit our ability to make capital expenditures or restrict our financial flexibility. Our revolving credit facility contains covenants requiring us to achieve certain financial and operating results and maintain compliance with a specified financial ratio. Our ability to meet the financial covenant or requirements in our revolving credit facility may be affected by events beyond our control, and we may not be able to satisfy such covenants and requirements. A breach of these covenants or our inability to comply with the financial ratio, tests or other restrictions contained in a Debt Facility could result in an event of default under one or more of our other Debt Facilities. Upon the occurrence of an event of default under a Debt Facility, and the expiration of any grace periods, the lenders could elect to declare all amounts outstanding under one or more of our other Debt Facilities, together with accrued interest, to be immediately due and payable. If this were to occur, our assets may not be sufficient to fully repay the amounts due under our Debt Facilities or our other indebtedness.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
ITEM 1C – CYBERSECURITY
Risk Management and Strategy
We assess, identify and manage cybersecurity risks through a structured process. We rely on the National Institute of Standards and Technology (“NIST”) Cybersecurity Framework to guide our approach; covering risk identification, analysis, prioritization and treatment. We continuously monitor and mitigate identified risks, particularly those deemed significant to the Company, including, but not limited to: operational risk (i.e., disruption of business operations); intellectual property theft; fraud; extortion; harm to employees or customers; violation of privacy laws and other litigation and legal risk; and reputational risk, which are tracked through our enterprise risk management program.
We closely oversee risks associated with using third-party service providers. This involves evaluating their adherence to our security requirements, conducting technical assessments, monitoring their operational performance and establishing incident reporting protocols when our information is impacted by cyber incidents.
Despite our efforts, we acknowledge the potential impact of cyber threats on our operations and business. While the Company has not experienced any significant risks from cyber threats to date, we recognize the potential consequences, including operational disruptions, legal costs, damage to our reputation and financial impacts. We remain vigilant and proactive in managing these risks. We deploy state-of-the-art technologies and services to help us identify and respond to security incidents, manage a 24/7 Security Operations Center and regularly test our preparedness for cyber incidents. These efforts enable us to effectively recognize and respond to low-impact incidents, avoiding their escalation to more problematic situations.
Governance
The Board of Directors of the Company maintains oversight of cybersecurity risks, ensuring the effectiveness of our risk management processes. The Audit Committee is specifically tasked with monitoring cybersecurity risks, evaluating our approach to cybersecurity, assessing emerging threats and ensuring appropriate measures are in place to mitigate risks.
Management, led by the Chief Information Security Officer (the “CISO”), plays a crucial role in assessing and managing cybersecurity risks. The CISO holds a Master of Science in Information Security and Assurance along with other technical certifications, has over 20 years of experience in cybersecurity and has extensive experience managing cybersecurity programs in multinational manufacturing companies. The IT Risk Management Committee, under guidance of the CISO, oversees the assessment and mitigation of identified risk. Regular reporting mechanisms keep the Board of Directors of the Company informed about our cybersecurity posture and emerging risks; enabling informed decision-making regarding cybersecurity strategy and resource allocation.
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ITEM 2 – PROPERTIES
Our principal executive offices are located at 525 William Penn Place, Suite 3300, Pittsburgh, Pennsylvania, 15219. We also have corporate offices in Neuhausen, Switzerland, Bangalore, India and Singapore. Our technology center is located at 1600 Technology Way, P.O. Box 231, Latrobe, Pennsylvania, 15650. A summary of our principal manufacturing facilities and other materially important properties is as follows:
| Primary Segment | |||||||||||||||||
| Location | Owned/Leased | Principal Products | MC(1) | INF(2) | |||||||||||||
| United States: | |||||||||||||||||
| Gurley, Alabama | Owned | Metallurgical Powders | X | ||||||||||||||
| Huntsville, Alabama | Owned | Metallurgical Powders | X | ||||||||||||||
| Rogers, Arkansas | Owned/Leased | Carbide Products, Pelletizing Die Plates and Downhole Drilling Carbide Components | X | ||||||||||||||
| Goshen, Indiana | Leased | Powders; Welding Rods, Wires and Machines | X | ||||||||||||||
| New Albany, Indiana | Leased | High Wear Coating for Steel Parts | X | ||||||||||||||
| Greenfield, Massachusetts | Owned | High-Speed Steel Taps | X | ||||||||||||||
| Traverse City, Michigan | Owned | Wear Parts | X | ||||||||||||||
| Fallon, Nevada | Owned | Metallurgical Powders | X | ||||||||||||||
| Asheboro, North Carolina | Owned | Carbide Round Tools | X | ||||||||||||||
| Henderson, North Carolina | Owned | Metallurgical Powders | X | ||||||||||||||
| Roanoke Rapids, North Carolina | Owned | Metal Cutting Inserts | X | ||||||||||||||
| Cleveland, Ohio | Leased | Distribution | X | ||||||||||||||
| Orwell, Ohio | Owned | Metal Cutting Inserts | X | ||||||||||||||
| Solon, Ohio | Owned | Metal Cutting Toolholders | X | ||||||||||||||
| Whitehouse, Ohio | Owned/Leased | Metal Cutting Inserts and Round Tools | X | ||||||||||||||
| Bedford, Pennsylvania | Owned/Leased | Mining and Construction Tools, Wear Parts and Distribution | X | ||||||||||||||
| La Vergne, Tennessee | Owned | Metal Cutting Inserts | X | ||||||||||||||
| New Market, Virginia | Owned | Metal Cutting Toolholders | X | ||||||||||||||
| International: | |||||||||||||||||
| La Paz, Bolivia | Owned | Tungsten Concentrate | X | ||||||||||||||
| Indaiatuba, Brazil | Leased | Metal Cutting Carbide Drills and Toolholders | X | ||||||||||||||
| Belleville, Canada | Owned | Casting Components, Coatings and Powder Metallurgy Components | X | ||||||||||||||
| Victoria, Canada | Owned | Wear Parts | X | ||||||||||||||
| Fengpu, China | Owned | Intermetallic Composite Ceramic Powders and Parts | X | ||||||||||||||
| Shanghai, China | Owned | Powders, Welding Rods and Wires and Cast Components | X | ||||||||||||||
| Shanghai, China | Leased | Distribution | X | ||||||||||||||
| Tianjin, China | Owned | Metal Cutting Inserts, Carbide Round Tools and Metallurgical Powders | X | X | |||||||||||||
| Xuzhou, China | Leased | Mining Tools | X | ||||||||||||||
| Ebermannstadt, Germany | Owned | Metal Cutting Inserts | X | ||||||||||||||
| Essen, Germany | Owned/Leased | Metal Cutting Inserts | X | ||||||||||||||
| Königsee, Germany | Leased | Metal Cutting Carbide Drills | X | ||||||||||||||
| Mistelgau, Germany | Owned | Wear Parts and Metallurgical Powders | X | ||||||||||||||
| Nabburg, Germany | Owned | Metal Cutting Toolholders and Metal Cutting Round Tools, Drills and Mills | X | ||||||||||||||
| Schongau, Germany | Owned | Ceramic Vaporizer Boats | X | ||||||||||||||
| Vohenstrauss, Germany | Owned | Metal Cutting Carbide Drills | X | ||||||||||||||
| Bangalore, India | Owned | Metal Cutting Inserts, Toolholders and Wear Parts | X | X | |||||||||||||
| Shlomi, Israel | Owned | High-Speed Steel and Carbide Round Tools | X | ||||||||||||||
| Zory, Poland | Leased | Metal Cutting Carbide Drills | X | ||||||||||||||
| Boksburg, South Africa | Leased | Mining and Construction Conicals | X | ||||||||||||||
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| Primary Segment | |||||||||||||||||
| Location | Owned/Leased | Principal Products | MC(1) | INF(2) | |||||||||||||
| Barcelona, Spain | Leased | Metal Cutting Tools | X | ||||||||||||||
| Kingswinford, United Kingdom | Leased | Distribution | X | ||||||||||||||
| Newport, United Kingdom | Owned | Intermetallic Composite Powders | X | ||||||||||||||
| Hanoi, Vietnam | Owned/Leased | Carbide and PCD Round Tools | X | ||||||||||||||
(1)Metal Cutting segment
(2)Infrastructure segment
We also have a network of customer service centers located throughout North America, Europe, India, Asia Pacific and Latin America, a significant portion of which are leased. The majority of our research and development efforts are conducted at our technology center located in Latrobe, Pennsylvania, U.S., as well as at our facilities in Rogers, Arkansas, U.S.; Fürth, Germany and Bangalore, India.
We use all of our significant properties in the businesses of powder metallurgy, tools, tooling systems, engineered components and advanced materials. Our production capacity is adequate for our present needs. We believe that our properties have been adequately maintained, are generally in good condition and are suitable for our business as presently conducted.
ITEM 3 - LEGAL PROCEEDINGS
The information set forth in Part I, Item 1, of this Annual Report under the caption “Regulation” is incorporated by reference into this Item 3. From time to time, we are party to legal claims and proceedings that arise in the ordinary course of business, which may relate to our operations or assets, including real, tangible or intellectual property assets. Although we currently believe that the amount of ultimate liability, if any, we may face with respect to these actions will not materially affect our financial position, results of operations or liquidity, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur or if protracted litigation were to ensue, the effect on us could be material.
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference into this Part I is the information set forth in Part III, Item 10 of this Annual Report under the caption “Information About Our Executive Officers.”
PART II
ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our capital stock is traded on the New York Stock Exchange under the symbol "KMT." The number of shareholders of record as of July 31, 2024 was 1,252.
The information incorporated by reference into Part III, Item 12 of this Annual Report from our 2024 Proxy Statement under the heading “Equity Compensation Plans – Equity Compensation Plan Information” is hereby incorporated by reference into this Item 5.
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PERFORMANCE GRAPH
The following graph compares cumulative total shareholder return on our capital stock with the cumulative total shareholder return on the common stock of the companies in the Standard & Poor’s Mid-Cap 400 Market Index (S&P Midcap 400), the Standard & Poor’s 400 Capital Goods (S&P 400 Capital Goods), the Standard & Poor's Global 1200 Industrials Index (S&P Global 1200 Industrials), the Standard & Poor's Composite 1500 Index (S&P Composite 1500) and the peer group of companies determined by us (New Peer Group and Old Peer Group) for the period from July 1, 2019 to June 30, 2024.
In fiscal 2024, we established a New Peer Group in order to align with how we evaluate our executive compensation, and we believe this group is representative of Kennametal's peers. We have included both this New Peer Group as well as the Old Peer Group in the comparisons below.
The New Peer Group consists of the following companies: Alamo Group, Inc.; Barnes Group Inc.; Carpenter Technologies; Crane Co.; Curtiss-Wright Corporation; EnPro Industries, Inc.; ESAB Corporation; Flowserve Corporation; Franklin Electric; Graco Inc.; ITT Inc.; Lincoln Electric Holdings, Inc.; Mueller Water Products, Inc.; Nordson Corporation; Simpson Manufacturing Co., Inc.; SPX Corporation; The Timken Company; Watts Water Technologies, Inc.; Woodward, Inc.; and Zurn Water Solutions Corporation.
The Old Peer Group consists of the following companies: Alamo Group, Inc., Altra Industrial Motion Corp.; Barnes Group Inc.; Carpenter Technologies, Crane Co., Crane NXT Co.; Curtiss-Wright Corporation; Enovis Corp.; EnPro Industries, Inc.; Flowserve Corporation; Franklin Electric; Graco Inc.; ITT Inc.; Lincoln Electric Holdings, Inc.; Nordson Corporation; Simpson Manufacturing Co., Inc.; SPX Corporation; The Timken Company; Watts Water Technologies, Inc.; Woodward, Inc.; and Zurn Water Solutions Corporation.
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Assumes $100 Invested on July 1, 2019 and All Dividends Reinvested
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | |||||||||||||||
| Kennametal | $ | 100.00 | $ | 79.80 | $ | 102.15 | $ | 67.68 | $ | 85.23 | $ | 72.93 | ||||||||
| New Peer Group Index | 100.00 | 91.67 | 137.77 | 114.87 | 164.47 | 192.78 | ||||||||||||||
| Old Peer Group Index | 100.00 | 90.70 | 138.55 | 112.19 | 163.01 | 187.35 | ||||||||||||||
| S&P Composite 1500 Index | 100.00 | 106.08 | 150.76 | 134.15 | 159.96 | 197.59 | ||||||||||||||
| S&P Midcap 400 | 100.00 | 93.30 | 142.98 | 122.05 | 143.54 | 163.02 | ||||||||||||||
| S&P 400 Capital Goods | 100.00 | 93.81 | 152.98 | 125.37 | 183.45 | 217.73 | ||||||||||||||
| S&P Global 1200 Industrials | 100.00 | 92.82 | 135.71 | 111.83 | 142.87 | 164.05 | ||||||||||||||
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 Shares that May Yet Be Purchased Under the Plans or Programs (2) | |||||||||||||||||||
| April 1 through April 30, 2024 | 1,433 | $ | 24.84 | — | $ | 221,900,000 | |||||||||||||||||
| May 1 through May 31, 2024 | 501,493 | 25.76 | 498,958 | 208,900,000 | |||||||||||||||||||
| June 1 through June 30, 2024 | 413,471 | 24.95 | 358,256 | 200,000,000 | |||||||||||||||||||
| Total | 916,397 | $ | 25.39 | 857,214 | |||||||||||||||||||
(1)During the current period, 1,682 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 57,501 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. The initial share repurchase program was completed as of June 30, 2024. In February 2024, the Board of Directors of the Company authorized an additional $200 million, three-year share repurchase program that is in place for fiscal 2025.
UNREGISTERED SALES OF EQUITY SECURITIES
None.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in connection with the consolidated financial statements of Kennametal Inc. and the related financial statement notes included in Item 8 of this Annual Report. Unless otherwise specified, any reference to a “year” is to our fiscal year ended June 30. Additionally, when used in this Annual Report, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.
OVERVIEW Kennametal Inc. was founded based on a tungsten carbide technology breakthrough in 1938. The Company was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling and was listed on the New York Stock Exchange (NYSE) in 1967. With more than 85 years of materials expertise, the Company is a global industrial technology leader, helping customers across Aerospace & Defense, Earthworks, Energy, General Engineering and Transportation 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 Management's Discussion and Analysis of Financial Condition and Results of Operations (the MD&A), we refer to measures used by management to evaluate performance. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth (decline), constant currency regional sales growth (decline) and constant currency end market sales growth (decline). The explanation at the end of the MD&A provides the definition of these non-GAAP financial measures as well as details on their use and a reconciliation to the most directly comparable GAAP financial measures.
Sales of $2,046.9 million in 2024 decreased 2 percent from $2,078.2 million in 2023, reflecting an organic sales decline of 1 percent and an unfavorable currency exchange effect of 1 percent.
Operating income was $170.2 million, or 8.3 percent margin, compared with $192.4 million, or 9.3 percent margin, in the prior year. The decrease in operating income was primarily due to lower sales and production volumes, higher wages and general inflation, higher restructuring and related charges of approximately $6 million, charges of approximately $4 million, consisting of repairs and impairments of fixed assets and inventory due to the tornado that affected the Company's Rogers, Arkansas facility during the fourth quarter, and unfavorable foreign currency exchange of approximately $2 million. These factors were partially offset by pricing, restructuring benefits of approximately $21 million and lower raw material costs. In 2024, the Metal Cutting and Infrastructure segments had operating margins of 10.4 percent and 5.2 percent, respectively.
In July 2021, the Board of Directors of the Company approved a share repurchase program authorizing the Company to purchase up to $200 million of the Company's common stock over a three-year period. During 2024, the Company repurchased a total of 2.6 million shares of common stock for $65 million, completing the initial share repurchase program. In February 2024, the Board of Directors of the Company authorized an additional $200 million, three-year share repurchase program that is in place for fiscal 2025.
On May 26, 2024, the Company's production facility in Rogers, AR, sustained damage from a tornado. At the time of the storm, the facility was shut down for the Memorial Day weekend and no employees were onsite. The Company resumed operations at the facility after a two-week shutdown. Charges of approximately $4 million were recorded during the June quarter of fiscal 2024, consisting of repairs and impairments of fixed assets and inventory. The Company is continuing to work with its insurance provider to finalize a claim for insurance recoveries related to the tornado.
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 currently expected to be completed during fiscal 2025. 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.
18
In addition, our business has been negatively affected by foreign currency exchange and inflationary headwinds. We have been able to partially mitigate the effects of inflation, foreign currency exchange headwinds 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.
We reported earnings per diluted share (EPS) of $1.37 for 2024. EPS for the year was unfavorably affected by restructuring and related charges of $0.13 per share. EPS in the prior year of $1.46 was unfavorably affected by restructuring and related charges of $0.06 per share.
We generated cash flow from operating activities of $277.1 million in 2024 compared to $257.9 million during the prior year. Capital expenditures were $107.6 million and $94.4 million during 2024 and 2023, respectively. During 2024, the Company returned a total of $129 million to the shareholders through $65.4 million in share repurchases under the initial $200 million, three-year program and $63.4 million in dividends.
For a discussion related to the results of operations, changes in financial condition and liquidity and capital resources for fiscal 2022 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2023 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commission on August 9, 2023.
RESULTS OF CONTINUING OPERATIONS
SALES Sales of $2,046.9 million in 2024 decreased 2 percent from $2,078.2 million in 2023, reflecting an organic sales decline of 1 percent and an unfavorable currency exchange effect of 1 percent.
Our sales growth (decline) by end market and region are as follows:
| 2024 | ||||||||
| (in percentages) | As Reported | Constant Currency | ||||||
| End market sales growth (decline): | ||||||||
| Aerospace & Defense | 13% | 13% | ||||||
| Energy | (9) | (9) | ||||||
| General Engineering | (2) | (1) | ||||||
| Transportation | 1 | 1 | ||||||
| Earthworks | (5) | (4) | ||||||
| Regional sales (decline) growth: | ||||||||
| Americas | (3)% | (3)% | ||||||
| Europe, the Middle East and Africa (EMEA) | 4 | 2 | ||||||
| Asia Pacific | (5) | (3) | ||||||
GROSS PROFIT Gross profit decreased $19.3 million to $627.1 million in 2024 from $646.4 million in 2023. The decrease in gross profit was primarily due to lower sales and production volumes, higher wages and general inflation, charges of approximately $4 million, consisting of repairs and impairments of fixed assets and inventory due to the tornado that affected our Rogers, Arkansas facility during the fourth quarter, and unfavorable foreign currency exchange of approximately $2 million. These factors were partially offset by pricing, lower raw material costs and restructuring benefits. The gross profit margin for 2024 was 30.6 percent compared to 31.1 percent in 2023.
OPERATING EXPENSE Operating expense in 2024 was $433.2 million, a decrease of $4.1 million, or 0.9 percent, from $437.3 million in 2023.
We invested further in technology and innovation to continue delivering high quality products to our customers. Research and development expenses included in operating expense totaled $44.2 million and $43.1 million for 2024 and 2023, respectively.
19
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 $20.1 million, compared to a target of approximately $25 million, were recorded through June 30, 2024, consisting of $14.8 million in Metal Cutting and $5.3 million in Infrastructure. The majority of the remaining charges are expected to be recognized in fiscal 2025. This action delivered annualized run rate pre-tax savings of approximately $33 million at the end of fiscal 2024.
During 2024, we recorded restructuring and related charges of $12.4 million, which consisted of $8.5 million in Metal Cutting and $3.9 million in Infrastructure. These amounts are inclusive of a reversal of restructuring and related charges of $1.1 million related to prior actions, including $0.4 million in operating expense. Also included in restructuring and other charges, net during 2024 is a net benefit of $0.6 million primarily due to the sale of properties.
AMORTIZATION OF INTANGIBLES Amortization expense was $11.6 million and $12.6 million in 2024 and 2023, respectively.
INTEREST EXPENSE Interest expense in 2024 was $26.5 million, a decrease of $2.0 million, compared to $28.5 million in 2023. The portion of our debt subject to variable rates of interest was less than 1 percent at June 30, 2024 and 2023. There were no borrowings outstanding under the Credit Agreement as of June 30, 2024 and 2023.
OTHER (INCOME) EXPENSE, NET In 2024, other (income) expense, net was $0.7 million of other (income), net compared to other expense, net of $4.3 million in 2023. The increase of $5.0 million in other (income), net was primarily due to a loss of $3 million recognized in 2023 due to a litigation settlement related to legacy operations that did not repeat in 2024.
INCOME TAXES The effective tax rate for 2024 was 21.3 percent compared to 22.7 percent for 2023. The year-over-year change in the effective tax rate is primarily due to current year adjustments that include a $7.8 million benefit related to a tax rate change in Switzerland, a $6.2 million benefit related to a change in unrecognized tax benefits, a $3.1 million charge to settle the Italian tax litigation, prior year adjustments for the release of a valuation allowance related to net deferred tax assets in Brazil, a benefit to adjust a deferred tax asset associated with tax reform in Switzerland, and geographical mix.
Italian Income Tax Litigation Settlement
In 2012, we received an assessment from the Italian tax authority that denied certain tax deductions primarily related to our 2008 tax return. Attempts at negotiating a reasonable settlement with the tax authority were unsuccessful; and as a result, we decided to litigate the matter which was eventually settled during 2024. We continue to believe the assessment was baseless and that our 2008 tax return was compliant, in all material respects, with Italian income tax rules and regulations. Accordingly, no income tax liability had been recorded in connection with this assessment in any period. During fiscal 2023, the Italian government launched a tax amnesty program aimed at reducing the number of tax disputes pending before the Italian courts. Pursuant to program guidelines, payments made to successfully resolve a dispute had to be received by the Italian government no later than September 30, 2023. Due to the prolonged amount of time the case had been pending, and the inherent costs and risks of further litigating the matter, we decided to negotiate a settlement with the Italian tax authority that resulted in an income tax charge of $3.1 million during fiscal 2024. With this settlement, the matter is officially closed.
NET INCOME ATTRIBUTABLE TO KENNAMETAL Net income attributable to Kennametal was $109.3 million, or $1.37 of earnings per diluted share (EPS) in 2024, compared to $118.5 million, or EPS of $1.46 in 2023. The decrease is a result of the factors previously discussed.
BUSINESS SEGMENT REVIEW We operate in two reportable operating segments consisting of Metal Cutting and Infrastructure. Corporate expenses that are not allocated are reported in Corporate. Segment determination is based upon internal organizational structure, the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results. See Note 21 of our consolidated financial statements set forth in Item 8 of this Annual Report.
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Our sales and operating income by segment are as follows:
| (in thousands) | 2024 | 2023 | |||||||||
| Sales: | |||||||||||
| Metal Cutting | $ | 1,280,781 | $ | 1,269,765 | |||||||
| Infrastructure | 766,118 | 808,419 | |||||||||
| Total sales | $ | 2,046,899 | $ | 2,078,184 | |||||||
| Operating income: | |||||||||||
| Metal Cutting | $ | 132,573 | $ | 135,763 | |||||||
| Infrastructure | 39,857 | 59,757 | |||||||||
| Corporate | (2,207) | (3,103) | |||||||||
| Total operating income | 170,223 | 192,417 | |||||||||
| Interest expense | 26,472 | 28,496 | |||||||||
| Other (income) expense, net | (699) | 4,300 | |||||||||
| Income before income taxes | $ | 144,450 | $ | 159,621 | |||||||
METAL CUTTING
| (in thousands) | 2024 | 2023 | |||||||||
| Sales | $ | 1,280,781 | $ | 1,269,765 | |||||||
| Operating income | 132,573 | 135,763 | |||||||||
| Operating margin | 10.4 | % | 10.7 | % | |||||||
| (in percentages) | 2024 | ||||
| Organic sales growth | 1 | % | |||
| Sales growth | 1 | % | |||
| 2024 | |||||||||||
| (in percentages) | As Reported | Constant Currency | |||||||||
| End market sales growth (decline): | |||||||||||
| Aerospace & Defense | 8% | 8% | |||||||||
| General Engineering | — | — | |||||||||
| Transportation | 1 | 1 | |||||||||
| Energy | (3) | (4) | |||||||||
| Regional sales growth (decline): | |||||||||||
Americas | 2% | 3% | |||||||||
EMEA | 4 | 2 | |||||||||
Asia Pacific | (7) | (4) | |||||||||
In 2024, Metal Cutting sales of $1,280.8 million increased by $11.0 million, or 1 percent, from 2023. This was driven by organic sales growth of 1 percent. Aerospace & Defense end market sales increased in EMEA and the Americas as a result of our focused execution on our strategic initiatives, 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 were flat compared to the prior year as increases in the Americas were offset by a decrease in Asia Pacific and EMEA due to lower economic activity. Energy end market sales declined in Asia Pacific due to delays in wind energy projects and the Americas as a result of the slower oil and gas market, partially offset by an increase of sales in EMEA. Transportation end market sales increased in EMEA due to improving hybrid/electric vehicle business, partially offset by declines in Asia Pacific and the Americas resulting from slowing customer demand.
On a regional basis, sales in the Americas increased primarily due to General Engineering and Aerospace & Defense. Growth in EMEA reflects execution on our strategic initiatives. Sales decreased in Asia Pacific due to lower economic activity in China.
21
In 2024, Metal Cutting operating income was $132.6 million, a $3.2 million decrease from 2023. The decrease in operating income was primarily due to lower sales and production volumes, higher wages and general inflation, and higher restructuring charges of approximately $3 million. These factors were partially offset by pricing and restructuring benefits of approximately $17 million. Metal Cutting operating margin in 2024 was 10.4 percent compared to 10.7 percent in the prior year.
INFRASTRUCTURE
| (in thousands) | 2024 | 2023 | |||||||||
| Sales | $ | 766,118 | $ | 808,419 | |||||||
| Operating income | 39,857 | 59,757 | |||||||||
| Operating margin | 5.2 | % | 7.4 | % | |||||||
| (in percentages) | 2024 | ||||
| Organic sales decline | (4) | % | |||
| Foreign currency exchange effect | (1) | ||||
| Sales decline | (5) | % | |||
| 2024 | |||||||||||
| (in percentages) | As Reported | Constant Currency | |||||||||
| End market sales growth (decline): | |||||||||||
Energy | (11)% | (12)% | |||||||||
| General Engineering | (6) | (6) | |||||||||
Earthworks | (5) | (4) | |||||||||
| Aerospace & Defense | 28 | 26 | |||||||||
| Regional sales growth (decline): | |||||||||||
Americas | (9)% | (9)% | |||||||||
| EMEA | 4 | 3 | |||||||||
Asia Pacific | (3) | — | |||||||||
In 2024, Infrastructure sales of $766.1 million decreased by $42.3 million, or 5 percent, from 2023. This was driven by organic sales decline of 4 percent and an unfavorable foreign currency exchange effect of 1 percent. Energy end market sales decreased primarily due to U.S. oil and gas activities as land rig counts decreased year over year. Sales in the General Engineering end market decreased in the Americas as a result of declines in industrial activity year over year and ore inventory sales in the prior year that did not repeat, partially offset by growth in Asia Pacific and EMEA. Earthworks end market sales decreased due to construction in the Americas, lower snowplow blades in the Americas due to a milder winter and underground mining in Asia Pacific. Aerospace & Defense end market sales increased due to the execution of our growth initiatives and order timing.
On a regional basis, sales in the Americas decreased primarily due to lower U.S. oil and gas and industrial activity year over year. Sales increased in EMEA primarily as a result of defense related activity in EMEA. Sales were flat in Asia Pacific, excluding the unfavorable foreign currency effect, due to a decline in underground mining offset by increases in the General Engineering end market and construction.
In 2024, Infrastructure operating income was $39.9 million, a $19.9 million decrease from 2023. The decrease in operating income was primarily due to lower sales and production volumes, higher wages and general inflation, charges of approximately $4 million, consisting of repairs and impairments of fixed assets and inventory due to the tornado that affected the Company's Rogers, Arkansas facility during the fourth quarter, and higher restructuring charges of approximately $3 million. These factors were partially offset by restructuring benefits of approximately $5 million. Infrastructure operating margin in 2024 was 5.2 percent compared to 7.4 percent in the prior year.
22
CORPORATE
| (in thousands) | 2024 | 2023 | ||||||||||||
| Corporate expense | $ | (2,207) | $ | (3,103) | ||||||||||
In 2024, Corporate expense decreased $0.9 million from 2023.
LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the primary source of funding for working capital requirements, reinvesting in our business through capital expenditures and returning value to shareholders through dividends and share repurchases. During the year ended June 30, 2024, cash flow provided by operating activities was $277.1 million.
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, 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), and Secured Overnight Financing Rate (SOFR) for any borrowings in euros, pounds sterling, yen, and U.S. 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 June 30, 2024, we were in compliance with all covenants of the Credit Agreement and we had no borrowings outstanding and $700.0 million of availability. There were no of borrowings outstanding as of June 30, 2023.
Borrowings on other lines of credit and notes payable were $1.4 million and $0.7 million at June 30, 2024 and 2023, respectively. The lines of credit represented short-term borrowings under credit lines with commercial banks in the various countries in which we operate. The availability of the credit lines, translated into U.S. dollars at June 30, 2024 exchange rates, totaled $56.2 million.
For the year ended June 30, 2024, average daily borrowings outstanding under the Credit Agreement were approximately $26.1 million. The weighted average interest rate on borrowings under the Credit Agreement was 6.3 percent for the year ended June 30, 2024. Based upon our debt structure at June 30, 2024 and 2023, less than 1 percent of our debt was exposed to variable rates of interest.
We consider the majority of the $1.6 billion unremitted earnings of our non-U.S. subsidiaries to be permanently reinvested. With regard to these unremitted earnings, we have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested earnings is not practicable due to our legal entity structure and the complexity of U.S. and local tax laws. With regard to the small portion of unremitted earnings that are not indefinitely reinvested, we maintain a deferred tax liability for foreign withholding and U.S. state income taxes. The deferred tax liability associated with unremitted earnings of our non-U.S. subsidiaries not permanently reinvested is $6.9 million as of June 30, 2024.
At June 30, 2024, we had cash and cash equivalents of $128.0 million. Total Kennametal Shareholders’ equity was $1,249.9 million and total debt was $597.4 million. Our current senior credit ratings are considered investment grade. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers.
Cash generated from operations is expected to meet our planned capital expenditures of approximately $110 million and expected dividend payments in fiscal 2025. There can be no assurance, however, that we will generate cash from operations in line with our expectations, or that these projections will remain constant throughout fiscal 2025. If cash generated from operations is not sufficient to support these activities, we may be required to use existing cash and cash equivalents, reduce capital expenditures or borrow under the Credit Agreement. We believe that our cash and cash equivalents, cash flow from operations and available borrowings are sufficient to meet both the short-term and long-term capital needs of the Company.
23
The following is a summary of our contractual obligations and other commercial commitments as of June 30, 2024:
| Contractual Obligations (in thousands) | Total | 2025 | 2026-2027 | 2028-2029 | Thereafter | |||||||||||||||||||||||||||||||||
| Long-term debt, including current maturities | (1) | $ | 714,300 | $ | 22,275 | $ | 44,550 | $ | 330,675 | $ | 316,800 | |||||||||||||||||||||||||||
| Other lines of credit and notes payable | 1,377 | 1,377 | — | — | — | |||||||||||||||||||||||||||||||||
| Pension benefit payments | (2) | 57,635 | 111,457 | 108,811 | (2) | |||||||||||||||||||||||||||||||||
| Postretirement benefit payments | (2) | 1,034 | 1,826 | 1,548 | (2) | |||||||||||||||||||||||||||||||||
| Operating leases | 55,574 | 14,409 | 18,695 | 7,751 | 14,719 | |||||||||||||||||||||||||||||||||
| Purchase obligations | (3) | 21,244 | 21,244 | — | — | — | ||||||||||||||||||||||||||||||||
| Unrecognized tax benefits | (4) | 1,484 | 165 | 881 | 438 | — | ||||||||||||||||||||||||||||||||
| Total | $ | 118,139 | $ | 177,409 | $ | 449,223 | ||||||||||||||||||||||||||||||||
(1)Long-term debt includes interest obligations of $114.3 million and excludes debt issuance costs of $3.0 million.
(2)Annual payments are expected to continue into the foreseeable future at the amounts noted in the table.
(3)Purchase obligations consist of purchase commitments for materials, supplies and machinery and equipment as part of the ordinary conduct of business. Purchase obligations with variable price provisions were determined assuming market prices as of June 30, 2024 remain constant.
(4)Unrecognized tax benefits are positions taken or expected to be taken on an income tax return that may result in additional payments to tax authorities. These amounts include interest of $0.1 million and a penalty of $0.1 million accrued related to such positions as of June 30, 2024. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary.
| Other Commercial Commitments (in thousands) | Total | 2025 | 2026-2027 | 2028-2029 | Thereafter | |||||||||||||||||||||||||||
| Standby letters of credit | $ | 4,433 | $ | 3,353 | $ | 1,080 | $ | — | $ | — | ||||||||||||||||||||||
| Guarantees | 10,542 | 10,060 | 423 | 59 | — | |||||||||||||||||||||||||||
| Total | $ | 14,975 | $ | 13,413 | $ | 1,503 | $ | 59 | $ | — | ||||||||||||||||||||||
The standby letters of credit relate to insurance and other activities. The guarantees are non-debt guarantees with financial institutions, which are required primarily for security deposits, product performance guarantees and advances.
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 2024, the Company repurchased 2.6 million shares of common stock for $65 million, completing the initial share repurchase program. In February 2024, the Board of Directors of the Company authorized an additional $200 million, three-year share repurchase program that is in place for fiscal 2025.
Dividends In fiscal 2024, the Board of Directors of the Company declared a dividend of $0.20 per share in each quarter for a total of $63 million in dividends returned to the shareholders.
Cash Flow Provided by Operating Activities
During 2024, cash flow provided by operating activities was $277.1 million, compared to $257.9 million in 2023. During 2024, cash flow provided by operating activities consisted of net income and non-cash items amounting to $278.2 million and changes in certain assets and liabilities netting to an outflow of $1.1 million. Contributing to the change in certain assets and liabilities were a decrease in accrued income taxes of $16.2 million, a decrease in accrued pension and postretirement benefits of $9.5 million, a decrease in accounts payable and accrued liabilities of $6.1 million and an increase in accounts receivable of $2.6 million, partially offset by a decrease in inventories of $36.8 million.
During 2023, cash flow provided by operating activities was $257.9 million consisting of net income and non-cash items amounting to $284.0 million and changes in certain assets and liabilities netting to an outflow of $26.1 million. Contributing to the change in certain assets and liabilities were a decrease in accounts payable and accrued liabilities of $32.5 million, an increase in accounts receivable of $11.5 million and a decrease in accrued pension and postretirement benefits of $10.1 million, partially offset by a decrease in inventories of $17.6 million.
Cash Flow Used for Investing Activities
Cash flow used for investing activities was $109.4 million for 2024, an increase of $20.2 million, compared to $89.2 million in 2023. During 2024, cash flow used for investing activities included capital expenditures, net of $102.1 million, which consisted primarily of equipment upgrades, the acquisition of a business for $4.0 million and an investment in a strategic partnership.
Cash flow used for investing activities was $89.2 million for 2023 and included capital expenditures, net of $89.4 million, which consisted primarily of equipment upgrades.
24
Cash Flow Used for Financing Activities
Cash flow used for financing activities was $141.7 million for 2024 compared to $143.1 million in 2023. During 2024, cash flow used for financing activities primarily included $65.6 million in common shares repurchased, primarily under the share repurchase program, $63.4 million of cash dividends paid to shareholders and $10.0 million of the effect of employee benefit and stock plans and dividend reinvestment.
Cash flow used for financing activities was $143.1 million for 2023 and included $64.5 million of cash dividends paid to shareholders, $49.3 million in common shares repurchased, primarily under the share repurchase program, $19.0 million from the repayment of borrowings under the Credit Agreement and $6.0 million of the effect of employee benefit and stock plans and dividend reinvestment.
FINANCIAL CONDITION At June 30, 2024, total assets were $2,503.8 million, a decrease of $43.5 million from $2,547.2 million at June 30, 2023. Total liabilities decreased $17.9 million from $1,233.1 million at June 30, 2023 to $1,215.2 million at June 30, 2024.
Working capital was $586.6 million at June 30, 2024, a decrease of $6.2 million from $592.8 million at June 30, 2023. The decrease in working capital was primarily driven by a decrease in inventories of $43.0 million, an increase in other current liabilities of $6.3 million and a decrease in accounts receivable of $4.5 million. Partially offsetting these items was an increase in cash and cash equivalents of $22.0 million, a decrease in accrued income taxes of $12.0 million and a decrease in accounts payable of $11.8 million. Currency exchange rate effects decreased working capital by a total of approximately $7.5 million, the effects of which are included in the aforementioned changes.
Property, plant and equipment, net decreased $31.0 million from $969.1 million at June 30, 2023 to $938.1 million at June 30, 2024, primarily due to depreciation of $123.1 million, disposals of $5.4 million, and an unfavorable currency exchange effect of approximately $5.5 million, partially offset by capital additions of $107.6 million.
At June 30, 2024, other assets were $563.1 million, an increase of $11.7 million from $551.4 million at June 30, 2023. The primary drivers for the increase were an increase in deferred income taxes of $13.8 million, an increase in operating right-of-use assets of $5.1 million and an investment in a strategic partnership. Partially offsetting these items was amortization of $11.6 million. Currency exchange rate effects decreased other assets by a total of approximately $4.1 million, the effects of which are included in the aforementioned changes.
Kennametal Shareholders’ equity was $1,249.9 million at June 30, 2024, a decrease of $25.6 million from $1,275.4 million in the prior year. The decrease was primarily due to the repurchase of capital stock of $65.6 million primarily under the share repurchase program, cash dividends paid to Kennametal Shareholders of $63.4 million and other comprehensive loss attributable to Kennametal of $20.2 million, partially offset by net income attributable to Kennametal of $109.3 million and capital stock issued under employee benefit and stock plans of $13.4 million,
EFFECTS OF INFLATION Rising costs, including the cost of certain raw materials, continue to affect our operations throughout the world. We experienced higher levels of inflation in 2024 and expect inflation will continue to be a challenge in fiscal 2025. We will strive to minimize the effects through cost containment, productivity improvements and price increases.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the U.S., we make judgments and estimates about the amounts reflected in our consolidated financial statements. As part of our financial reporting process, our management collaborates to determine the necessary information on which to base our judgments and develops estimates used to prepare the consolidated financial statements. We use relevant information available at the end of each period to make these judgments and estimates. Our significant accounting policies are described in Note 2 of our consolidated financial statements, which are included in Item 8 of this Annual Report. We believe that the following discussion addresses our critical accounting policies.
25
Revenue Recognition The Company's contracts with customers are comprised of purchase orders, and for larger customers, may also include long-term agreements. We account for a contract when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. These contracts with customers typically relate to the manufacturing of products, which represent single performance obligations that are satisfied when control of the product passes to the customer. The Company considers the timing of right to payment, transfer of risk and rewards, transfer of title, transfer of physical possession and customer acceptance when determining when control transfers to the customer. As a result, revenue is generally recognized at a point in time - either upon shipment or delivery - based on the specific shipping terms in the contract. The shipping terms vary across all businesses and depend on the product, customary local commercial terms and the type of transportation. Shipping and handling activities are accounted for as activities to fulfill a promise to transfer a product to a customer and as such, costs incurred are recorded when the related revenue is recognized. Payment for products is due within a limited time period after shipment or delivery, typically within 30 to 90 calendar days of the respective invoice dates. The Company does not generally offer extended payment terms.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Amounts billed and due from our customers are classified as accounts receivable, less allowance for doubtful accounts on the consolidated balance sheets. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract. Variable consideration primarily includes volume incentive rebates, which are based on achieving a certain level of purchases and other performance criteria as established by our distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned. The majority of our products are consumed by our customers or end users in the manufacture of their products. Historically, we have experienced very low levels of returned products and do not consider the effect of returned products to be material. We have recorded an estimated returned goods allowance to provide for any potential returns.
We warrant that products sold are free from defects in material and workmanship under normal use and service when correctly installed, used and maintained. This warranty terminates 30 days after delivery of the product to the customer and does not apply to products that have been subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be returned to Kennametal only after inspection and approval by Kennametal and upon receipt by the customer of shipping instructions from Kennametal. We have included an estimated allowance for warranty returns in our returned goods allowance discussed above.
The Company records a contract asset when it has a right to payment from a customer that is conditioned on events that have occurred other than the passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material remaining performance obligations, contract assets or liabilities as of June 30, 2024 and 2023.
The Company pays sales commissions related to certain contracts, which qualify as incremental costs of obtaining a contract. However, the Company applies the practical expedient that allows an entity to recognize incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would have been recognized is one year or less. These costs are recorded within operating expense in our consolidated statements of income.
Stock-Based Compensation We recognize stock-based compensation expense for all stock options, restricted stock awards and restricted stock units over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service (substantive vesting period). Forfeitures are recorded as incurred. We utilize the Black-Scholes valuation method to establish the fair value of all stock option awards. Time vesting stock units are valued at the market value of the stock on the grant date. Performance vesting stock units with a market condition are valued using a Monte Carlo model.
Accounting for Contingencies We accrue for contingencies when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment in both assessing whether or not a liability or loss has been incurred and estimating the amount of probable loss. The significant contingencies affecting our consolidated financial statements include environmental, health and safety matters and litigation.
Long-Lived Assets We evaluate the recoverability of property, plant and equipment, operating lease right-of-use (ROU) assets and intangible assets that are amortized whenever events or changes in circumstances indicate the carrying amount of such assets may not be fully recoverable. Changes in circumstances include technological advances, changes in our business model, capital structure, economic conditions or operating performance. Our evaluation is performed at the asset group level, based upon, among other things, our assumptions about the estimated future undiscounted cash flows these assets are expected to generate. When the sum of the undiscounted cash flows is less than the carrying value, we will recognize an impairment loss to the extent that carrying value exceeds fair value. We apply our best judgment when performing these evaluations to determine if a triggering event has occurred, the undiscounted cash flows used to assess recoverability and the fair value of the asset group.
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Goodwill Goodwill represents the excess of cost over the fair value of the net assets of acquired companies. We evaluate the recoverability of goodwill of each of our reporting units by comparing the fair value of each reporting unit with its carrying value. Goodwill is tested at least annually for impairment. As of June 30, 2024, goodwill of $271.6 million was allocated to the Metal Cutting reporting unit and there is no goodwill allocated to the Infrastructure reporting unit. We perform our annual impairment test during the June quarter in connection with our annual planning process unless there are impairment indicators that warrant a test prior to that quarter. We can use a qualitative test, known as "Step 0," or a quantitative method to determine whether impairment has occurred.
Under the Step 0 test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the fair value of the reporting unit is less than the carrying value, then performing the Step 1 quantitative test is necessary.
Step 1 of the quantitative test requires comparison of the fair value of the reporting unit to the respective carrying value. If the carrying value of the reporting unit is less than the fair value, no impairment exists. Otherwise, the Company would recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to the reporting unit.
The fair value of a reporting unit is determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of the reporting unit. The discounted cash flow method is used to measure the fair value of our equity under the income approach. A terminal value utilizing a constant growth rate of cash flows is used to calculate a terminal value after the explicit projection period. The estimates and assumptions used in our calculations include revenue and gross margin growth rates, expected capital expenditures to determine projected cash flows, expected tax rates and an estimated discount rate to determine present value of expected cash flows. These estimates are based on historical experiences, our projections of future operating activity and our weighted average cost of capital (WACC). In order to determine the discount rate, the Company uses a market perspective WACC approach. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an effect on future calculations of estimated fair value.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be an accurate prediction of the future. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately affect the estimated fair values of the Metal Cutting reporting unit may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends and (ii) inability to achieve the sales from our strategic growth initiatives.
In 2024, we elected to implement Step 0 and were not required to conduct the quantitative analysis. In 2023 and 2022, we performed quantitative analyses using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. No impairment was recorded during 2024, 2023 and 2022.
Pension and Other Postretirement Benefits We sponsor pension and other postretirement benefit plans for certain employees and retirees. Accounting for the cost of these plans requires the estimation of the cost of the benefits to be provided well into the future and attributing that cost over either the expected work life of employees or over the average life of participants participating in these plans, depending on plan status and on participant population. This estimation requires our judgment about the discount rate used to determine these obligations, expected return on plan assets, rate of future compensation increases, withdrawal and mortality rates and participant retirement age. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans.
In the valuation of our pension and other postretirement benefit liabilities, management utilizes various assumptions. Our discount rates are derived by identifying a theoretical settlement portfolio of high quality corporate bonds sufficient to provide for a plan’s projected benefit payments. This rate can fluctuate based on changes in the corporate bond yields. At June 30, 2024, a hypothetical 25 basis point increase or decrease in our discount rates would be immaterial to our pre-tax income.
The long-term rate of return on plan assets is estimated based on an evaluation of historical returns for each asset category held by the plans, coupled with the current and short-term mix of the investment portfolio. The historical returns are adjusted for expected future market and economic changes. This return will fluctuate based on actual market returns and other economic factors.
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Future compensation rates, withdrawal rates and participant retirement age are determined based on historical information. These assumptions are not expected to significantly change. Mortality rates are determined based on a review of published mortality tables.
We expect to contribute approximately $10.0 million and $1.0 million to our pension and other postretirement benefit plans, respectively, in 2025. Expected pension contributions in 2025 are primarily for international plans.
Allowance for Doubtful Accounts We record allowances for estimated losses resulting from the inability of our customers to make required payments. We assess the creditworthiness of our customers based on multiple sources of information and analyze additional factors such as our historical bad debt experience, industry concentrations of credit risk, current economic trends, changes in customer payment terms and forward-looking information. This assessment requires significant judgment. If the financial condition of our customers was to deteriorate, additional allowances may be required, resulting in future operating losses that are not included in the allowance for doubtful accounts at June 30, 2024.
Inventories We use the last-in, first-out method for determining the cost of a significant portion of our U.S. inventories, and they are stated at the lower of cost or market. The cost of the remainder of our inventories is measured using approximate costs determined on the first-in, first-out basis or using the average cost method, and are stated at the lower of cost or net realizable value. When market conditions indicate an excess of carrying costs over market value, a lower of cost or net realizable value provision or a lower of cost or market provision, as applicable, is recorded. Once inventory is determined to be excess or obsolete, a new cost basis is established that is not subsequently written back up in future periods.
Income Taxes The Company’s provision for income taxes is calculated based on income and statutory tax rates in the various jurisdictions in which the Company operates and requires the use of management’s estimates and judgments. Management judgment is required in determining the Company’s worldwide provision for income taxes and recording the related assets and liabilities, including accruals for unrecognized tax benefits and assessing the need for valuation allowances on deferred tax assets. Realization of our deferred tax assets is primarily dependent on future taxable income, the timing and amount of which are uncertain. A valuation allowance is recognized if it is “more likely than not” that some or all of a deferred tax asset will not be realized. As of June 30, 2024, the deferred tax assets net of valuation allowances relate primarily to net operating loss and other carryforwards, pension benefits, accrued employee benefits and inventory. In the event that we were to determine that we would not be able to realize our deferred tax assets in the future, an increase in the valuation allowance would be required. In the event we were to determine that we are able to use our deferred tax assets for which a valuation allowance is recorded, a decrease in the valuation allowance would be required.
NEW ACCOUNTING STANDARDS
The Company did not adopt any new accounting standards during 2024 that have had or are expected to have a material impact on the Company's consolidated financial statements or disclosures.
RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BY U.S. GAAP In accordance with SEC rules, we are providing descriptions of the non-GAAP financial measures included in this Annual Report and reconciliations to the most closely related GAAP financial measures. We believe that these measures provide useful perspective on underlying business trends and results and 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 and may, therefore, also be useful to investors as they are 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. 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 (decline), constant currency end market sales growth (decline) 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. We report constant currency end market sales growth (decline) at the consolidated and segment levels.
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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 (decline), constant currency regional sales growth (decline) 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. 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:
Year ended June 30, 2024 | Metal Cutting | Infrastructure | Total | ||||||||
| Organic sales growth (decline) | 1% | (4)% | (1)% | ||||||||
Foreign currency exchange effect(5) | — | (1) | (1) | ||||||||
| Sales growth (decline) | 1% | (5)% | (2)% | ||||||||
Reconciliations of constant currency end market sales (decline) growth to end market sales (decline) growth, are as follows:
| Metal Cutting | ||||||||||||||
Year ended June 30, 2024 | Energy | General Engineering | Aerospace & Defense | Transportation | ||||||||||
| Constant currency end market sales (decline) growth | (4)% | —% | 8% | 1% | ||||||||||
Foreign currency exchange effect(5) | 1 | — | — | — | ||||||||||
End market sales (decline) growth(6) | (3)% | —% | 8% | 1% | ||||||||||
| Infrastructure | ||||||||||||||
Year ended June 30, 2024 | Energy | General Engineering | Aerospace & Defense | Earthworks | ||||||||||
| Constant currency end market sales (decline) growth | (12)% | (6)% | 26% | (4)% | ||||||||||
Foreign currency exchange effect(5) | 1 | — | 2 | (1) | ||||||||||
End market sales (decline) growth(6) | (11)% | (6)% | 28% | (5)% | ||||||||||
| Total | |||||||||||||||||
Year ended June 30, 2024 | Energy | General Engineering | Aerospace & Defense | Transportation | Earthworks | ||||||||||||
| Constant currency end market sales (decline) growth | (9)% | (1)% | 13% | 1% | (4)% | ||||||||||||
Foreign currency exchange effect(5) | — | (1) | — | — | (1) | ||||||||||||
End market sales (decline) growth(6) | (9)% | (2)% | 13% | 1% | (5)% | ||||||||||||
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Reconciliations of constant currency regional sales growth (decline) to reported regional sales growth (decline), are as follows:
Year Ended June 30, 2024 | ||||||||||||||||||||
| Americas | EMEA | Asia Pacific | ||||||||||||||||||
| Metal Cutting | ||||||||||||||||||||
| Constant currency regional sales growth (decline) | 3% | 2% | (4)% | |||||||||||||||||
Foreign currency exchange effect(5) | (1) | 2 | (3) | |||||||||||||||||
Regional sales growth (decline)(7) | 2% | 4% | (7)% | |||||||||||||||||
| Infrastructure | ||||||||||||||||||||
| Constant currency regional sales (decline) growth | (9)% | 3% | —% | |||||||||||||||||
Foreign currency exchange effect(5) | — | 1 | (3) | |||||||||||||||||
Regional sales (decline) growth(7) | (9)% | 4% | (3)% | |||||||||||||||||
| Total | ||||||||||||||||||||
| Constant currency regional sales (decline) growth | (3)% | 2% | (3)% | |||||||||||||||||
Foreign currency exchange effect(5) | — | 2 | (2) | |||||||||||||||||
Regional sales (decline) growth(7) | (3)% | 4% | (5)% | |||||||||||||||||
(5) 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.
(6) Aggregate sales for all end markets sum to the sales amount presented on Kennametal's consolidated financial statements.
(7) Aggregate sales for all regions sum to the sales amount presented on Kennametal's consolidated financial statements.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK We are exposed to certain market risks arising from transactions that are entered into in the normal course of business. As part of our financial risk management program, we use certain derivative financial instruments to manage these risks. We do not enter into derivative transactions for speculative purposes and, therefore, hold no derivative instruments for trading purposes. We may use derivative financial instruments to provide predictability to the effects of changes in foreign exchange rates on our consolidated results. Our objective in managing foreign exchange exposures with derivative instruments is to reduce volatility in cash flow, allowing us to focus more of our attention on business operations. See Notes 2 and 6 of our consolidated financial statements set forth in Item 8 of this Annual Report.
We are exposed to counterparty credit risk for nonperformance of derivative contracts and, in the event of nonperformance, to market risk for changes in currency exchange rates, as well as settlement risk. We manage exposure to counterparty credit risk through credit standards, diversification of counterparties and procedures to monitor concentrations of credit risk. We do not anticipate nonperformance by any of the counterparties.
Included below is a sensitivity analysis that is based upon a hypothetical 10 percent weakening or strengthening in the U.S. dollar and its effects on the June 30, 2024 currency exchange rates. We compared our contractual derivative arrangements in effect at June 30, 2024 to the hypothetical foreign exchange in the sensitivity analysis to determine the effect on pre-tax income and accumulated other comprehensive loss. Our analysis takes into consideration the different types of derivative instruments and the applicability of hedge accounting.
Also included below is a sensitivity analysis that is based upon a hypothetical 10 percent change on the effective interest rates under our current borrowing arrangements as of June 30, 2024. We compared our borrowing arrangements in effect at June 30, 2024 to the hypothetical interest rates in the sensitivity analysis to determine the effect on interest expense, pre-tax income and accumulated other comprehensive loss.
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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Certain currency forward contracts that hedge significant cross-border intercompany loans are considered as other derivatives and therefore do not qualify for hedge accounting. 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. At June 30, 2024, a hypothetical 10 percent strengthening or weakening of the U.S. dollar would have changed accumulated other comprehensive loss, net of tax, by $0.6 million and pre-tax income by an immaterial amount.
DEBT, REVOLVING AND OTHER LINES OF CREDIT AND NOTES PAYABLE At June 30, 2024 and 2023, we had $597.4 million and $595.9 million, respectively, of outstanding debt, including revolving and other lines of credit and notes payable. The effective interest rate was 3.7 percent as of June 30, 2024 and 2023, respectively. Based upon our debt structure at June 30, 2024 and 2023, less than 1 percent of our debt was exposed to variable rates of interest. A hypothetical change of 10 percent in market interest rates from June 30, 2024 levels would be immaterial.
CURRENCY EXCHANGE RATE FLUCTUATIONS Currency exchange rate fluctuations decreased diluted earnings per share by $0.11 in 2024 and decreased diluted earnings per share by $0.19 in 2023. Currency exchange rate fluctuations may have a material effect on future earnings in the short term and long term.
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management has conducted an assessment of the Company’s internal controls over financial reporting as of June 30, 2024 using the criteria in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of June 30, 2024, based on the criteria in Internal Control – Integrated Framework (2013) issued by the COSO. The effectiveness of the Company’s internal control over financial reporting as of June 30, 2024 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in this Annual Report on Form 10-K.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Kennametal Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Kennametal Inc. and its subsidiaries (the “Company”) as of June 30, 2024 and 2023, and the related consolidated statements of income, of comprehensive income, of shareholders’ equity and of cash flows for each of the three years in the period ended June 30, 2024, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of June 30, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2024 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2024, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Provision for Income Taxes
As described in Notes 2 and 13 to the consolidated financial statements, the Company recorded a provision for income taxes of $30.8 million for the year ended June 30, 2024. The Company’s provision for income taxes is calculated based on income and statutory tax rates in the various jurisdictions in which the Company operates and requires the use of management’s estimates and judgments. Management judgment is required in determining the Company’s worldwide provision for income taxes and recording the related assets and liabilities, including accruals for unrecognized tax benefits and assessing the need for valuation allowances on deferred tax assets.
The principal considerations for our determination that performing procedures relating to the provision for income taxes is a critical audit matter are (i) a high degree of auditor effort in performing procedures and evaluating management’s provision for income taxes and the related assets and liabilities, including the accruals for unrecognized tax benefits, as well as management’s assessment of the need for valuation allowances on deferred tax assets and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the provision for income taxes, including controls over accruals for unrecognized tax benefits and valuation allowances on deferred tax assets. These procedures also included, among others (i) testing the accuracy of the provision for income taxes, which included the effective tax rate reconciliation and permanent and temporary differences, (ii) evaluating whether the data utilized in the calculations of the provision for income taxes and deferred tax assets and liabilities were appropriate and consistent with evidence obtained in other areas of the audit, (iii) evaluating the identification of accruals for unrecognized tax benefits and the reasonableness of the more likely than not determination in consideration of court decisions, legislative actions, statutes of limitations, and developments in tax examinations by jurisdiction, and (iv) evaluating the reasonableness of management’s assessment of the realizability of its deferred tax assets based on expectations of the ability to utilize its tax attributes through testing of historical and estimated future taxable income. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of management’s judgments and estimates related to the application of foreign and domestic tax laws and regulations.
/s/ PricewaterhouseCoopers LLP
August 12, 2024
We have served as the Company’s auditor since 2002.
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CONSOLIDATED STATEMENTS OF INCOME
| Year ended June 30 (in thousands, except per share data) | 2024 | 2023 | 2022 | ||||||||||||||
| Sales | $ | $ | $ | ||||||||||||||
| Cost of goods sold | |||||||||||||||||
| Gross profit | |||||||||||||||||
| Operating expense | |||||||||||||||||
| Restructuring and other charges, net (Note 16) | ( | ||||||||||||||||
| Gain on divestiture | ( | ||||||||||||||||
| Amortization of intangibles | |||||||||||||||||
| Operating income | |||||||||||||||||
| Interest expense | |||||||||||||||||
| Other (income) expense, net | ( | ( | |||||||||||||||
| Income before income taxes | |||||||||||||||||
| Provision for income taxes (Note 13) | |||||||||||||||||
| Net income | |||||||||||||||||
| Less: Net income attributable to noncontrolling interests | |||||||||||||||||
| Net income attributable to Kennametal | $ | $ | $ | ||||||||||||||
| PER SHARE DATA ATTRIBUTABLE TO KENNAMETAL SHAREHOLDERS | |||||||||||||||||
| Basic earnings per share | $ | $ | $ | ||||||||||||||
| Diluted earnings per share | $ | $ | $ | ||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||
| Diluted weighted average shares outstanding | |||||||||||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year ended June 30 (in thousands) | 2024 | 2023 | 2022 | |||||||||||||||||
| Net income | $ | $ | ||||||||||||||||||
| Other comprehensive (loss) income, net of tax | ||||||||||||||||||||
| Unrealized loss on derivatives designated and qualified as cash flow hedges | ( | |||||||||||||||||||
| Reclassification of unrealized gain on expired derivatives designated and qualified as cash flow hedges | ( | ( | ( | |||||||||||||||||
| Unrecognized net pension and other postretirement benefit plans loss | ( | ( | ( | |||||||||||||||||
| Reclassification of net pension and other postretirement benefit plans loss | ||||||||||||||||||||
Foreign currency translation adjustments | ( | ( | ||||||||||||||||||
| Total other comprehensive loss, net of tax | ( | ( | ( | |||||||||||||||||
| Total comprehensive income | ||||||||||||||||||||
| Less: comprehensive income attributable to noncontrolling interests | ||||||||||||||||||||
| Comprehensive income attributable to Kennametal Shareholders | $ | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
| As of June 30 (in thousands, except per share data) | 2024 | 2023 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, less allowance for doubtful accounts of $ | |||||||||||
| Inventories (Note 7) | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment: | |||||||||||
| Land and buildings | |||||||||||
| Machinery and equipment | |||||||||||
| Less accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | |||||||||||
| Other assets: | |||||||||||
| Goodwill (Note 8) | |||||||||||
Other intangible assets, less accumulated amortization of $ | |||||||||||
| Operating lease right-of-use assets (Note 9) | |||||||||||
| Deferred income taxes (Note 13) | |||||||||||
| Long-term prepaid pension benefit (Note 14) | |||||||||||
| Other | |||||||||||
| Total other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES | |||||||||||
| Current liabilities: | |||||||||||
| Revolving and other lines of credit and notes payable (Note 12) | $ | $ | |||||||||
| Current operating lease liabilities (Note 9) | |||||||||||
| Accounts payable | |||||||||||
| Accrued income taxes | |||||||||||
| Accrued vacation pay | |||||||||||
| Accrued payroll | |||||||||||
| Other current liabilities (Note 10) | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, less current maturities (Note 11) | |||||||||||
| Operating lease liabilities (Note 9) | |||||||||||
| Deferred income taxes (Note 13) | |||||||||||
| Accrued postretirement benefits (Note 14) | |||||||||||
| Accrued pension benefits (Note 14) | |||||||||||
| Accrued income taxes | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 20) | |||||||||||
| EQUITY | |||||||||||
| Kennametal Shareholders’ Equity: | |||||||||||
Preferred stock, | |||||||||||
Capital stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss (Note 15) | ( | ( | |||||||||
| Total Kennametal Shareholders’ Equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended June 30 (in thousands) | 2024 | 2023 | 2022 | ||||||||||||||
| OPERATING ACTIVITIES | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Adjustments to reconcile to cash from operations: | |||||||||||||||||
| Depreciation | |||||||||||||||||
| Amortization | |||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||
| Restructuring and other charges, net (Note 16) | ( | ||||||||||||||||
| Deferred income taxes | ( | ( | |||||||||||||||
| Gain on divestiture | ( | ||||||||||||||||
| Other | ( | ||||||||||||||||
| Changes in certain assets and liabilities: | |||||||||||||||||
| Accounts receivable | ( | ( | ( | ||||||||||||||
| Inventories | ( | ||||||||||||||||
| Accounts payable and accrued liabilities | ( | ( | |||||||||||||||
| Accrued income taxes | ( | ||||||||||||||||
| Accrued pension and postretirement benefits | ( | ( | ( | ||||||||||||||
| Other | ( | ( | |||||||||||||||
| Net cash flow provided by operating activities | |||||||||||||||||
| INVESTING ACTIVITIES | |||||||||||||||||
| Purchases of property, plant and equipment | ( | ( | ( | ||||||||||||||
| Disposals of property, plant and equipment | |||||||||||||||||
| Proceeds from divestiture | |||||||||||||||||
| Business acquisitions | ( | ||||||||||||||||
| Other | ( | ||||||||||||||||
| Net cash flow used for investing activities | ( | ( | ( | ||||||||||||||
| FINANCING ACTIVITIES | |||||||||||||||||
| Net increase (decrease) in notes payable | ( | ( | |||||||||||||||
| Net (decrease) increase in revolving and other lines of credit | ( | ||||||||||||||||
| Purchase of capital stock | ( | ( | ( | ||||||||||||||
| The effect of employee benefit and stock plans and dividend reinvestment | ( | ( | ( | ||||||||||||||
| Cash dividends paid to Shareholders | ( | ( | ( | ||||||||||||||
| Other | ( | ( | ( | ||||||||||||||
| Net cash flow used for financing activities | ( | ( | ( | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | ( | ||||||||||||||
| CASH AND CASH EQUIVALENTS | |||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||||||||
| Cash and cash equivalents, beginning of year | |||||||||||||||||
| Cash and cash equivalents, end of year | $ | $ | $ | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| 2024 | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| Year ended June 30 (in thousands) | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
| CAPITAL STOCK | |||||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Dividend reinvestment | |||||||||||||||||||||||||||||||||||
| Capital stock issued under employee benefit and stock plans | |||||||||||||||||||||||||||||||||||
| Purchase of capital stock | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
| Balance at end of year | |||||||||||||||||||||||||||||||||||
| ADDITIONAL PAID-IN CAPITAL | |||||||||||||||||||||||||||||||||||
| Balance at beginning of year | |||||||||||||||||||||||||||||||||||
| Dividend reinvestment | |||||||||||||||||||||||||||||||||||
| Capital stock issued under employee benefit and stock plans | |||||||||||||||||||||||||||||||||||
| Purchase of capital stock | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Balance at end of year | |||||||||||||||||||||||||||||||||||
| RETAINED EARNINGS | |||||||||||||||||||||||||||||||||||
| Balance at beginning of year | |||||||||||||||||||||||||||||||||||
| Net income attributable to Kennametal | |||||||||||||||||||||||||||||||||||
Cash dividends ($ | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Balance at end of year | |||||||||||||||||||||||||||||||||||
| ACCUMULATED OTHER COMPREHENSIVE LOSS | |||||||||||||||||||||||||||||||||||
| Balance at beginning of year | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Unrealized loss on derivatives designated and qualified as cash flow hedges | ( | ||||||||||||||||||||||||||||||||||
| Reclassification of unrealized gain on expired derivatives designated and qualified as cash flow hedges | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Unrecognized net pension and other postretirement benefit plans loss | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Reclassification of net pension and other postretirement benefit plans loss | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Balance at end of year | ( | ( | ( | ||||||||||||||||||||||||||||||||
| NONCONTROLLING INTERESTS | |||||||||||||||||||||||||||||||||||
| Balance at beginning of year | |||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||