Kennametal Inc: Form 10-Q for the period ended Dec 31, 2023

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

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

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

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

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

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

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

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

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

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

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

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